<PAGE>
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
( ) 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
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NORTECH SYSTEMS INCORPORATED
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(Exact name of registrant as specified in its chapter)
Minnesota 41-16810894
-------------------------------- ----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
641 East Lake St., Suite 244 Wayzata, MN 55391
---------------------------------------------- ---------
(Address of principal executive offices) (Zip code)
Registrant's telephone No., including area code: (612) 473-4102
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 per share par 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 of file such reports), and (2) has been subject to
such filing requirements for the
past 90 days.
YES X NO
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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 byreference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Based upon the $4.875 per share average of the closing bid and asked prices,
respectively, on February 28, 1997 for the shares of common stock of the
Company, the aggregate market value of the Company's common stock held by non-
affiliates as of such date was $6,297,847.
As of February 28, 1997 there were 2,362,262 shares of the Company's $.01 per
share par value common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the parts indicated of
the Annual Report on Form 10-K:
Parts of Annual Report Documents Incorporated
on Form 10-K by Reference
Part III
Item 10 Reference is made to the
11 Registrant's proxy statements
12 to be used in connection with
the 1996 Annual Shareholders'
meeting and filed with the
Securities and Exchange
Commission no later than April
30,1997.
Part IV
Item 14 Reference is made to the Asset
Purchase Agreement used in the
acquisition of the Zercom
Division. The agreement was
filed with Form 8-K report
date November 4, 1996 and
filed November 12, 1996.
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NORTECH SYSTEMS INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
PAGE
PART I
Item 1. Business 5-9
Item 2. Properties 9-10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10-11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
Item 8. Consolidated Financial Statements 16-38
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K 40-42
Signatures 43
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Nortech Systems Incorporated (the "Company") is a Minnesota corporation
organized in December 1990. Prior to December 1990, the Company operated as DSC
Nortech, Inc. , which filed a petition for reorganization under Chapter 11 of
the United States Bankruptcy Code during 1990. The business and assets of DSC
Nortech, Inc., were transferred to Nortech Systems Incorporated during 1990.
The Company's headquarters are in Wayzata, Minnesota, a suburb of Minneapolis,
Minnesota. The Company's maintains various manufacturing facilities in
Minnesota locations of Bemidji, Fairmont, Plymouth, Aitkin, and Merrifield as
well as Augusta, Wisconsin. The Company manufactures wire harnesses, cables,
electronic sub-assemblies and components as well as large-screen, high
resolution video monitors for radar, document and medical imaging. The Company
provides a full "turnkey" contract manufacturing service to its customers. A
majority of revenue is derived from products which are built to the customer's
design specifications. Nortech Medical Services, Inc., its wholly owned
subsidiary, provides service bureau and office management services to physicians
and clinics throughout Minnesota.
The Company believes it provides a high degree of manufacturing sophistication.
This includes the use of statistical process control to insure product quality,
state-of-the-art materials, management techniques allowing just-in-time (JIT)
delivery of products, and the systems necessary to effectively manage the
business. This level of sophistication enables the Company to attract major
original equipment manufacturers (OEM).
The strategy of the Company in that regard has been to expand its customer base,
and has added several new customers from various industries; including
Companies engaged in the production of medical products, super computers, mid-
size and micro computer business systems, defense industry product and
industrial products. The Company strategy is to develop a customer base
spanning several industry segments to avoid the affects of fluctuations within a
given industry. Some of the Company's major customers are Cray Research, G.E.
Medical Systems, Hughes Defense, and SPX Corporation.
The Company believes that contract manufacturing will continue to grow and
expand in the United States because contract manufacturing provides OEMs with
the domestic equivalent of off-shore sourcing without the associated logistical
problems. The contract manufacturer can provide an OEM with a quality product
at a price well below that available in the OEM's own facility. This is due
primarily to the specialization available through the contract manufacturer and
the significantly lower overhead costs.
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In 1991, the Company acquired all of the common stock of SMR Computer Services,
Inc. The Company, through its subsidiary (currently named Nortech Medical
Services, Inc.), also provides service bureau and office management services to
physicians.
In March 1995, the Company acquired all of the assets of Monitor Technology
Corporation. The Company has continued the business of Monitor Technology
Corporation which is the manufacturing of large-screen, high resolution video
monitors for radar, document and medical imaging. In addition, this division
provides repair services on internally and externally produced monitors.
In August 1995, the Company acquired all the assets of the Aerospace Division of
Communication Cable, Inc. The Company has continued the business formally
conducted by Aerospace which involves the manufacturing of custom designed,
high-technology electronic cable assemblies for various applications.
In November 1996, the Company acquired the inventory and fixed assets of Zercom
Corporation, a subsidiary of Communication Systems, Inc. The Company has been,
and continues to be 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.
Since the Company's inception, substantially all revenues generated have been
directly related to the contract manufacturing industry. Therefore, segmented
financial information is not included in this report.
MARKETING AND SALES
BUSINESS STRATEGY.
The Company believes the electronic manufacturing sub-contracting business is
emerging from a small job shop oriented business into a dynamic, high technology
electronics industry. The first market segment the Company has entered is the
wire harness and cable assemblies market. The Company intends to expand from
this market segment into complete electromechanical assemblies using the
resources acquired from the recent addition of Zercom Corporation. Many
companies no longer perform this type of work on a captive, in-house basis, as
they are finding that independent subcontractors can more cost effectively
perform this specialized work.
As part of the Company's commitment to quality, the Bemidji location became ISO
9002 Certified in July 1995 and has actively maintained this certification. The
Company believes this certification will benefit its current customer base as
well as attract new business opportunities.
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The Company will continue it's commitment to quality, cost effectiveness and
responsiveness to customer requirements. To achieve these objectives, the
Company will provide complete manufacturing services to customers, from the
procurement of materials to the manufacturing, testing and shipping of products.
The Company will continue its efforts to diversify its customer base and expand
into other segments of the electronic manufacturing subcontract business.
MARKETING.
The Company is continuing to concentrate its marketing activities in the
medical, industrial and military manufacturing industries. The emphasis
continues to be on mature companies which require a contract manufacturer with a
high degree of manufacturing and quality sophistication, including statistical
process control (SPC) and statistical quality control (SQC). The Company has
initiated efforts to expand its markets beyond the Upper Midwest area, which
presently extends east to the Ohio/Michigan area, south to Missouri, and west to
Colorado. New market opportunities are continuously being pursued. The Company
markets its products and services primarily through manufacturers'
representatives. The Company's marketing strategy emphasizes the sophistication
of its manufacturing services. The basic systems, procedures, and disciplines
normally associated with a mature corporate environment are in place. All the
Company's employees are well trained in SPC and SQC.
SOURCES AND AVAILABILITY OF MATERIALS
The Company is not dependent on any one supplier for materials for products sold
to customers. Components utilized in the assembly of wire harnesses, cable
assemblies and printed circuit assemblies are purchased directly from the
component manufacturers or from their distributors. On occasion some components
may be placed on a stringent allocation basis; however, due to the excess
manufacturing capacity currently available at most component manufacturers, the
Company does not anticipate any major material purchasing or availability
problems occurring in the foreseeable future.
PATENTS AND LICENSES
The Company is not presently dependent on a proprietary product requiring
licensing, patent, copyright or trademark protection. There are no revenues
derived from a service-related business for which patents, licenses, copyrights
and trademark protection are necessary for successful operations. However, the
Company does own the rights to manufacture certain patented products. For the
year ending December 31, 1996, revenues related to this production were not
material to the financial results.
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COMPETITION
The contract manufacturing industry is characterized by competition among a
variety of sources, including small closely-held companies, larger full-service
manufacturers, company-owned facilities and foreign competitors. The Company
does not believe that the smaller operations are significant competitors as they
do not seem to have the capabilities required by target customers of the
Company. The Company also believes that foreign competitors do not provide a
substantial competitive threat because the cable and wire harness industry
involves a high weight-to-cost ratio. Consequently, shipping and transportation
costs decrease the ability of foreign manufacturers to compete in this
market segment. Further, off-shore production cannot effectively meet the
requirements of just-in-time inventory management techniques presently being
implemented by many major target customers. Therefore, the Company's principal
competitors are larger full-service manufacturers, many of which have
substantially far greater assets and capital resources than are available to the
Company and are better financed than the Company.
The Company will continue to pursue marketing opportunities in the Upper
Midwest. Although there presently are no dominant contract manufacturers in the
wire harness and cable assembly business in the Upper Midwest, there are several
established competitors. The Company expects its major competition to come from
Americable, Technical Services, Inc. and Waters Instruments, Inc., all of which
are located on Minnesota. Each of these companies specializes in molded cables
or wire assemblies and has sufficient manufacturing capabilities to offer a
significant competitive challenge to the Company's operations. The principal
competitive factors in the contract manufacturing industry are price, quality
and responsive service. The Company believes that it can compete favorably in
the market segments to which it sells.
BACKLOG
Historically, the Company's backlog has been running 60 to 90 days, depending on
the customer. However, because of the increased emphasis on just-in-time
manufacturing (JIT), many of the Company's major customers are taking advantage
of the Company's ability to service them adequately under the JIT concept.
Additionally, because of the Company's quality history with customers, many
products now go directly from the Company's shipping dock to the customer's
production line.
The Company's 90 day order backlog was approximately $4,513,000 on December 31,
1995 and approximately $6,127,000 on December 31, 1996.
MAJOR CUSTOMERS
The Company sells its products to companies in the computer, medical,
governmental and various other industries. Historically, the Company has not
experienced significant
8
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losses related to the receivables from customers in any particular industry or
geographic area.
Two customers, G.E. Medical Systems, and Cray Research, Inc. accounted for
approximately 17.5%, and 11.3% of sales, respectively for the year ended
December 31, 1996.
RESEARCH AND DEVELOPMENT
The Company expended $273,697 in 1996 and $124,919 in 1995 on Company-sponsored
research and development. This research is related to the development of large-
screen, high resolution video monitors for the imaging division. In 1994, no
funds were expended on Company-sponsored research.
COMPLIANCE WITH ENVIRONMENTAL PROVISIONS
Management believes that its manufacturing facilities are currently operating
under compliance with local, state, and federal environmental laws. Any
environmental-oriented equipment is capitalized and depreciated over a seven-
year period. The annualized depreciation expense for this type of environmental
equipment on a Company-wide basis is insignificant.
EMPLOYEES
The Company has 438 full-time and 99 part-time employees as of February 15,
1997, consisting of 502 employees in manufacturing, manufacturing product
support and medical support services and 35 in general administration.
ITEM 2. PROPERTIES
The Company's headquarters consist of approximately 1,500 square feet located in
Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The Company
has a lease for a five year term that expires in October 2001. The Company owns
its Bemidji, Minnesota facility consisting of eight acres of land and 60,000
square feet of office and manufacturing space and leases another 8000 square
feet of manufacturing and office space in Augusta, Wisconsin.
The Company's imaging division operates from a facility located in Plymouth,
Minnesota. The building contains approximately 22,800 square feet and is
leased for a term that terminates on May 31, 2000. The Company has an option to
extend the lease for an additional five-year term.
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The Company also owns three buildings which contain approximately 46,900 square
feet and are located in Fairmont, Minnesota, which are used for the
manufacturing of the Company's custom designed, high-technology electronic cable
assemblies.
In connection with the Zercom acquisition, the Company acquired the building
with approximately 45,800 square feet in Merrifield, Minnesota. This facility
is used for the building of surface mount printed circuit board assemblies and
electro-mechanical assemblies. A leased building in Aitkin, Minnesota provides
10,750 square feet for video cable assembly and is leased for a term that
terminates December 1, 2005.
The Company believes that each of these locations is adequate and will be
adequate in the foreseeable future for their manufacturing needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol NSYS. Prior to October 11, 1995, the stock was traded on the NASDAQ
Small Cap Market.
The high and low bid quotations for the Company's Common Stock for each
quarterly period within the two most recent years were as follows:
Quarter Ended: Low High
------------- --- ----
March 31, 1995 $3.000 $4.000
June 30, 1995 $3.000 $4.250
September 30, 1995 $3.250 $6.000
December 31, 1995 $4.750 $8.500
March 31, 1996 $6.000 $9.000
June 30, 1996 $6.000 $8.000
September 30, 1996 $5.000 $7.250
December 31, 1996 $5.250 $6.750
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The low and high quotations set forth above are as reported by NASDAQ. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not necessarily represent actual transactions.
As of March 1, 1997, there were approximately 1,419 holders of shares of the
Company's Common Stock. The Company has never paid a cash dividend on shares of
its Common Stock and does not intend to pay cash dividends in the foreseeable
future.
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11
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED:
- -----------------------------------------------------------------------------------------------------
* **
Dec. 31, 1996 Dec. 31, 1995 Dec.31, 1994 Dec.31,1993 Dec.31, 1992
------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales 26,182,821 18,305,928 12,820,709 11,705,833 7,299.916
Income (Loss) Form
Continuing Operations 446,029 1,331,924 1,183,406 1,042,556 636,723
Income (Loss) Per
Common Share from
Continuing Operations .19 .55 .54 .47 .28
Total Assets 22,152,629 13,223,064 6,647,897 6,553,291 5,284,001
Total Long-Term 10,910,757 3,768,685 746,755 858,437 977,635
Debit
</TABLE>
* Company acquired the assets of Zercom Corporation in November, 1996.
** Company acquired the assets of Monitor Technology in March, 1995, and of
Aerospace Systems in August, 1995.
NOTE: For additional selected Financial Data (Past two years by quarter
information)
See note 12 of the Consolidated Financial Statement.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS, YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
REVENUES.
For the years ended December 31, 1996, and 1995 the Company had sales of
$26,182,821 and $18,305,928, respectively. The increase of $7,876,893, or 43%
resulted primarily from additional revenues generated by the acquisitions which
were completed in 1995 and 1996. For the year ended December 31, 1994 the
Company had sales of $12,820,709. The approximate 42.8% increase in sales in
1995 was attributable primarily to increased sales in the medical and automotive
industries offset by the reduced sales to the mid-sized computer industries as
well as revenues from the newly acquired divisions.
GROSS PROFIT.
The Company had gross profit of $5,184,198 (before one time write offs) in 1996,
$3,764,840 in 1995, and $2,598,569 in 1994. Gross profits as a percentage of
gross sales were 19.8% in 1996 (before one time write-offs), 20.6% in 1995, and
20.3% in 1994. In 1996, the Company experienced certain items which are
considered unusual events for their operations. Due to evolving customer
requirements, the Company wrote off certain inventories from two of the
divisions. A total of $544,000 in inventories was written off from the Bemidji
and Imaging balance sheets. The customer marketplace is complex and ever
changing, but with the current inventory and production mix, the Company
believes they are well poised to address the needs of their current customers as
they continue to pursue additional growth markets. After the one time write-
offs, gross profit margin for 1996 was 17.7%.
The decrease in gross profit percent from 1995 to 1996 is due to an increase in
materials as a percent of total cost of goods sold.
SELLING, GENERAL, AND ADMINISTRATIVE.
Selling, general, and administrative expenses were $3,306,311 in 1996,
$2,280,105 in 1995, and $1,647,797 in 1994. The increases in each year reflects
additional selling, general and administrative expenses associated with the
acquisitions.
MISCELLANEOUS INCOME.
Miscellaneous income was $32,064 in 1996, $177,967 in 1995, and $86,307 in 1994.
The miscellaneous income resulted primarily from charges for miscellaneous
services.
INTEREST EXPENSE.
Interest expense was $475,057 in 1996, $240,562 in 1995, and $117,835 in 1994.
The increased expense for 1996 and 1995 is due to the increased debt from
acquired operations.
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INCOME TAXES.
Income tax expense for 1996 was $192,000. Tax expense was not recorded in 1995
because of additional net operating loss carryforwards (NOL's) of approximately
$2,504,000 which were recognized because of final tax regulations. The
regulations clarified that tax carryforwards attributes in a Chapter 11
bankruptcy prior to December 31, 1993 where stock was issued for debt, need not
be reduced by cancellation income. The tax benefit of approximately $851,000
created by additional NOL's was partially offset by a $300,000 increase in the
deferred tax valuation allowance.
Realization of the deferred tax asset is dependent upon the Company generating
sufficient taxable earnings in future periods. In determining that realization
of the deferred tax asset is more likely than not, the Company gave
consideration to recent earnings history, its expectation for taxable earnings
in the future and the expiration dates associated with tax carryforwards.
Tax benefits of $245,794 were recorded in 1994 due to the reduction in the
deferred tax valuation allowance of $600,000 due to the realization of net
operating loss carryforwards.
NET INCOME.
The Company's net income in 1996 was $446,029 or $.19 per common share. The
Company's net income in 1995 was $1,331,924 or $.55 per common share. The
Company's net income in 1994 was $1,183,406 or $.54 per common share. The
Company believes that the effect of inflation on past operations has not been
significant and anticipates that inflation will not have a significant impact on
future operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital rose from $5,279,509 as of December 31, 1995 to
$8,498,531 on December 31, 1996. Stockholders equity increased from $6,036,166
as of December 31, 1995 to $7,151,192 on December 31, 1996 due to the Company's
1996 net income and the reclassification to equity of $668,400 of redeemable
stock. This reclassification occurred because the put option on 111,400 shares
was not exercised. The Company's liquidity and capital resources have improved
substantially, and the Company believes that its' future financial requirements
can be met with funds generated from the operating activities and from the
Company's operating line of credit.
In March 1995, the Company completed the net asset purchase of Monitor
Technology Corporation. This division of the Company designs and builds high
and ultra-high resolution CRT monitors for radar, document and medical imaging.
In addition, they provide repair services on internally and externally produced
monitors.
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In August 1995, the Company acquired all the assets of the Aerospace Division of
Communication Cable, Inc. The Company has continued the business formally
conducted by Aerospace which involves the manufacturing of custom-designed,
high-technology electronic cable assemblies for various applications.
In November 1996, the Company acquired the inventory and fixed assets of Zercom
Corporation, a subsidiary of Communication Systems, Inc. The Company has been,
and continues to be 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.
These acquisitions are expected to positively impact future operations and
enhance the financial condition of the Company over time. However, there are no
guarantees of future performance.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
PAGE
----
Independent Auditors' Report of :
Larson, Allen, Weishair & Co., LLP 17
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995. 18
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994. 19
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and1994. 20
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994. 21-22
Notes to Consolidated Financial Statements 23-38
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INDEPENDENT AUDITORS' REPORT
Board of Directors
Nortech Systems Incorporated and Subsidiary
Bemidji, Minnesota
We have audited the accompanying consolidated balance sheets of Nortech Systems
Incorporated and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nortech Systems
Incorporated and Subsidiary as of December 31, 1996, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
February 13, 1997
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<TABLE>
<CAPTION>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents (Including Interest Bearing Cash
of $1,069,369 and $906,111 at December 31, 1996 and 1995) $ 1,235,127 $ 924,590
Accounts Receivable, Less Allowance for Uncollectible
Accounts (1996 - $22,301; 1995 - $6,053) 3,695,763 1,856,219
Inventories 6,729,500 3,855,212
Prepaid Expenses and Other 88,821 131,701
Deferred Tax Asset 540,000 430,000
------------ ------------
Total Current Assets $ 12,289,211 $ 7,197,722
------------ ------------
PROPERTY AND EQUIPMENT (At Cost)
Land $ 136,300 $ 108,300
Building and Leasehold Improvements 3,559,155 1,897,559
Manufacturing Equipment 4,588,955 2,389,201
Office and Other Equipment 2,461,997 1,701,640
------------ ------------
Total $ 10,746,407 $ 6,096,700
Accumulated Depreciation (2,875,702) (2,256,862)
------------ ------------
Total Property and Equipment (At Depreciated Cost) $ 7,870,705 $ 3,839,838
------------ ------------
OTHER ASSETS
Goodwill and Other Intangible Assets $ 1,025,463 $ 998,254
Deferred Tax Asset 910,000 1,130,000
Other Assets 57,250 57,250
------------ ------------
Total Other Assets $ 1,992,713 $ 2,185,504
------------ ------------
Total Assets $ 22,152,629 $ 13,223,064
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of Credit $ 500,000 $ -
Current Maturities of Long-Term Debt 731,080 283,100
Accounts Payable 1,596,326 1,054,880
Accrued Payroll 673,303 407,016
Other Liabilities 289,971 173,217
------------ ------------
Total Current Liabilities $ 3,790,680 $ 1,918,213
------------ ------------
LONG-TERM DEBT
Notes Payable (Net of Current Maturities Shown Above) $ 10,910,757 $ 3,768,685
------------ ------------
REDEEMABLE COMMON STOCK
$.01 Par Value; 50,000 and 250,000 Shares Issued and
Outstanding at December 31, 1996 and 1995, Respectively
Redeemable at $6 Per Share $ 300,000 $ 1,500,000
------------ ------------
STOCKHOLDERS' 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 Shares
Authorized; 2,312,362 and 2,200,863 Shares Issued and
Outstanding, Net of Redeemable Shares Reported Above,
at December 31, 1996 and 1995, Respectively 23,124 22,009
Additional Paid-In Capital 11,910,554 11,242,672
Accumulated Deficit (5,032,486) (5,478,515)
------------ ------------
Total Stockholders' Equity $ 7,151,192 $ 6,036,166
------------ ------------
Total Liabilities and Stockholders' Equity $ 22,152,629 $ 13,223,064
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
<TABLE>
<CAPTION>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
SALES $ 26,182,821 $ 18,305,928 $ 12,820,709
COST OF SALES (21,555,459) (14,541,088) (10,222,140)
------------- ------------- -------------
GROSS PROFIT $ 4,627,362 $ 3,764,840 $ 2,598,569
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (3,306,311) (2,280,105) (1,647,797)
RESEARCH AND DEVELOPMENT COSTS (273,697) (124,919) -
INTEREST INCOME 33,668 34,703 18,368
MISCELLANEOUS INCOME 32,064 177,967 86,307
INTEREST EXPENSE (475,057) (240,562) (117,835)
------------- ------------- -------------
INCOME BEFORE INCOME TAX PROVISION $ 638,029 $ 1,331,924 $ 937,612
INCOME TAX BENEFIT (EXPENSE) (192,000) - 245,794
------------- ------------- -------------
NET INCOME $ 446,029 $ 1,331,924 $ 1,183,406
------------- ------------- -------------
------------- ------------- -------------
INCOME PER SHARE OF COMMON STOCK
Net Income Per Share of Common Stock $ 0.19 $ 0.55 $ 0.54
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,384,512 2,407,804 2,194,021
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
<TABLE>
<CAPTION>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Additional Total
Preferred Common Paid-In Accumulated Stockholders'
Stock Stock Capital Deficit Equity
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1993 $ 250,000 $21,937 $11,226,761 $ (7,948,965) $ 3,549,733
1994 Net Income - - - 1,183,406 1,183,406
Issuance of Stock - 6 2,304 - 2,310
Dividends Paid - - - (14,946) (14,946)
--------- ------- ----------- ------------ -------------
BALANCE
DECEMBER 31, 1994 $ 250,000 $21,943 $11,229,065 $ (6,780,505) $ 4,720,503
1995 Net Income - - - 1,331,924 1,331,924
Issuance of Stock -
Stock Options - 50 8,700 - 8,750
Issuance of Stock -
Other - 16 4,907 - 4,923
Dividends Paid - - - (29,934) (29,934)
--------- ------- ----------- ------------ -------------
BALANCE
DECEMBER 31, 1995 $ 250,000 $22,009 $11,242,672 $ (5,478,515) $ 6,036,166
1996 Net Income - - - 446,029 446,029
Issuance of Stock -
Other - 1,115 667,882 - 668,997
--------- ------- ----------- ------------ -------------
BALANCE
DECEMBER 31, 1996 $ 250,000 $23,124 $11,910,554 $ (5,032,486) $ 7,151,192
--------- ------- ----------- ------------ -------------
--------- ------- ----------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
<TABLE>
<CAPTION>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Customers $ 24,375,341 $ 18,114,515 $ 13,307,176
Interest Income Received 33,668 34,703 18,368
Cash Paid to Suppliers and Employees (23,904,901) (17,379,766) (11,794,879)
Interest Expense Paid (403,003) (239,809) (117,927)
Income Taxes Paid (205,900) (19,016) (34,206)
-------------- ------------- --------------
Net Cash Provided (Used) by
Operating Activities $ (104,795) $ 510,627 $ 1,378,532
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Businesses $ (1,559,492) $ (2,930,696) $ -
Acquisition of Property and Equipment (718,835) (458,359) (224,096)
Acquisition of Intangible Assets - (82,059) -
Purchase of Investments - (56,250) -
-------------- ------------- --------------
Net Cash Used by
Investing Activities $ (2,278,327) $ (3,527,364) $ (224,096)
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds (Payments) Under
Line of Credit $ 500,000 $ - $ (266,533)
Payments on Long-Term Debt (431,453) (289,294) (963,178)
Proceeds from Long-Term Debt 3,156,115 3,405,180 531,000
Proceeds from Sale of Stock 597 13,673 2,310
Purchase of Redeemable Stock (531,600) - -
Payment of Dividends - (29,934) (14,946)
-------------- ------------- --------------
Net Cash Provided (Used) by
Financing Activities $ 2,693,659 $ 3,099,625 $ (711,347)
-------------- ------------- --------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS $ 310,537 $ 82,888 $ 443,089
Cash and Cash Equivalents - Beginning 924,590 841,702 398,613
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS - ENDING $ 1,235,127 $ 924,590 $ 841,702
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
NON-CASH TRANSACTIONS
During 1995 the Company issued $1,500,000 of redeemable Common Stock as
part of the purchase of another corporation's net assets.
During 1996 the Company issued a long-term note payable in the amount of
$4,865,390 as part of the purchase price for certain assets of another
corporation.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
<TABLE>
<CAPTION>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net Income $ 446,029 $ 1,331,924 $ 1,183,406
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 693,456 444,636 245,847
Deferred Taxes 110,000 (100,000) (280,000)
(Increase) Decrease in Accounts Receivable (1,839,544) (369,380) 365,160
Decrease in Accounts
Receivable - Stockholder - - 35,000
(Increase) Decrease in Inventory (482,103) (407,932) 173,065
(Increase) Decrease in Prepaid Assets 42,880 (79,751) 33,507
Increase (Decrease) in Accounts Payable 541,446 207,835 (391,788)
Increase (Decrease) in Accrued Payroll 266,287 (17,852) 6,077
Increase (Decrease) in Accrued Liabilities 116,754 (498,853) 8,258
------------- ------------- -------------
Net Cash Provided (Used) by
Operating Activities $ (104,795) $ 510,627 $ 1,378,532
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Nortech Systems Incorporated (the "Company") is a Minnesota corporation
with headquarters in Wayzata, Minnesota, a suburb of Minneapolis,
Minnesota. The Company's main manufacturing facility is located in
Bemidji, Minnesota, with additional manufacturing and engineering
support locations in Fairmont, Plymouth, Merrifield and Aitkin,
Minnesota and 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 also
manufactures and markets high performance display monitors for medical
imaging, radar document imaging and industrial applications. The
Company provides a full "turnkey" contract manufacturing service to its
customers. All products are built to the customer's design
specifications.
In addition, the Company also manufactures a line of proprietory
products for sport fishermen. Nortech Medical Services, Inc., its
wholly owned subsidiary, provides service bureau and office management
services to physicians and clinics throughout Minnesota.
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market (based on the lower of replacement cost or net
realizable value).
PROPERTY AND EQUIPMENT
The Company capitalizes the cost of purchased software, equipment, and
leasehold improvements. Expenditures for maintenance and repairs and
minor renewals and betterments which do not improve or extend the life
of the respective assets are expensed. The assets and related
depreciation accounts are adjusted for property retirements and
disposals with the resulting gain or loss included in results of
operations. Fully depreciated assets remain in the accounts until
retired from service.
23
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Property and equipment are depreciated by the straight-line and
accelerated methods of depreciation. Accelerated depreciation did not
materially exceed straight-line depreciation for the years ended
December 31, 1996, 1995 and 1994. Depreciation was calculated over
estimated useful lives as follows:
Building and Improvements 31 Years
Manufacturing Equipment 5 - 7 Years
Office and Other Equipment 5 - 7 Years
REVENUE RECOGNITION
Sales are recorded by the Company when products are shipped to the
customer.
GOODWILL
Goodwill representing the excess of the purchase price over the fair
value of the net assets of the acquired entities (see Note 2), is being
amortized on a straight-line basis over the period of expected benefit
of fifteen years. Total amortization of goodwill recorded for fiscal
years 1996, 1995 and 1994 was $54,614, $30,724 and $-0-, respectively.
The carrying value of goodwill will be reviewed periodically based on
the undiscounted cash flows of the entity acquired over the remaining
amortization period. Should this review indicate that goodwill will
not be recoverable, the Company's carrying value of the goodwill will
be reduced by the estimated shortfall of undiscounted cash flows.
INTANGIBLE ASSETS
The Company acquired other intangible assets including purchased
technology and certification costs in the amount of $42,333 and $82,059
during 1996 and 1995, respectively. These assets are being amortized
over a period of 3 to 7 years. The related amortization expense for
1996 and 1995 was $13,152 and $1,096, respectively.
CASH AND CASH EQUIVALENTS
The Company considers its investments with an original maturity of
three months or less to be cash equivalents. At December 31, 1996 and
1995, the Company had invested excess funds of $266,000 and $285,000,
respectively, in repurchase agreements collateralized by government
backed securities. Due to the short-term nature of the agreements, the
Company does not take possession of the securities, which are instead
held at the Company's principal bank from which it purchases the
securities.
24
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, short-term investments, receivables,
accounts payable and accrued liabilities approximate fair value because
of the short maturity of these instruments. The fair value of long-
term debt approximates its carrying value and is based on current rates
at which the Company could borrow funds with similar remaining
maturities.
USE OF ESTIMATES
The preparation 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. Estimates also affect the reported
amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
ADVERTISING
Advertising costs are charged to operations as incurred. Total amounts
charged to expense were $65,234, $17,994 and $16,694 for the years
ended December 31, 1996, 1995 and 1994, respectively.
INCOME TAXES
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.
Investment credits are accounted for by using the "flow-through" method
whereby the benefit is reflected as a reduction of income taxes in the
year utilized.
25
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Primary earnings per share of common stock is computed by dividing net
income by the weighted average number of common shares outstanding
during the period.
The impact of outstanding options was not material and was not included
in the calculation of primary earnings per share.
Preferred stock issued is noncumulative and nonconvertible.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock Based Compensation," establishes a new fair value based
accounting method for stock-based compensation plans. As permitted by
the statement, the Company continues to apply the accounting provisions
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," in determining net income.
NOTE 2 ACQUISITIONS
In 1996 and 1995 the Company acquired the three businesses described
below, which have been accounted for by the purchase method of
accounting. The results of the operations of the acquired Companies
are included in the Company's consolidated statement of income from the
dates of the acquisitions.
ZERCOM CORPORATION
On November 4, 1996, the Company acquired substantially all of the
assets of Zercom Corporation (Zercom). Zercom is a contract
manufacturer of electronic sub-assemblies and components. Zercom also
manufactures a line of proprietary products for sport fishermen.
The purchase price was $6,424,882, consisting of a cash payment of
$1,500,000, issuance of promissory notes totalling $4,865,390, and
acquisition costs of $59,492.
The excess of the purchase price over the estimated fair value of the
net assets acquired is being amortized on a straight line basis over 15
years.
26
<PAGE>
NOTE 2 ACQUISITIONS (CONTINUED)
ZERCOM CORPORATION (CONTINUED)
A summary of the purchase price allocation for the 1996 acquisition of
Zercom is as follows:
Net Working Capital Items $ 2,392,185
Property, Plant and Equipment 3,930,872
Other Assets 42,333
Excess of Cost Over Fair Value of Net Assets
of Purchased Business 59,492
------------
Total $ 6,424,882
------------
------------
MONITOR TECHNOLOGY CORPORATION
On March 28, 1995, the Company acquired substantially all of the assets
and assumed certain liabilities of Monitor Technology Corporation
(MTC). Monitor Technology Corporation designs and builds high and
ultra-high resolution CRT monitors for computer applications throughout
the United States. In addition, they provide repair services on
internally and externally produced monitors.
The purchase price of $2,232,667, which includes the assumption of
liabilities of $707,887 and acquisition costs of $24,780, was paid with
cash and by issuing 250,000 shares of the Company's common stock. The
common stock was valued at $6, which is the redeemable price based on a
repurchase agreement issued to the seller at closing. The excess of
the purchase price over the estimated fair value of assets acquired is
being amortized on a straight-line basis over 15 years.
In 1996, 88,600 shares were put back to the Company at $6 per share and
the put option was not exercised on 111,400 shares. The Company
remains contingently liable to repurchase the remaining 50,000 shares,
which are in dispute. The Company's obligation under the repurchase
agreement is guaranteed by a director of the Company.
27
<PAGE>
NOTE 2 ACQUISITIONS (CONTINUED)
AEROSPACE
On August 23, 1995, the Company acquired the Aerospace Division of
Communication Cable, Inc. The Aerospace Division manufactures and
sells multi-conductor electrical cable assemblies to customer
specifications for the aerospace industry throughout the United States.
The purchase price was $2,950,517 consisting of a cash payment of
$2,845,506, the assumption of liabilities of $44,601, and acquisition
costs of $60,410.
A summary of the purchase price allocation for the 1995 acquisitions of
MTC and Aerospace is as follows:
Net Working Capital Items $ 1,984,359
Property, Plant and Equipment 2,250,810
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses 948,015
------------
Total $ 5,183,184
------------
------------
The following proforma unaudited consolidated statements of income for
the Company are presented as though the acquisition of Zercom
Corporation had occurred on January 1, 1996 and 1995 and the
acquisitions of Monitor Technology Corporation and the Aerospace
Division of Communication Cable, Inc. had occurred on January 1, 1995.
(Unaudited) 1996 1995
----------------------------------------- ------------- -------------
Revenues $ 39,702,215 $ 42,283,397
------------- -------------
------------- -------------
Net Income $ 230,045 $ 1,887,304
------------- -------------
------------- -------------
Net Income Per Share of Common Stock $ 0.10 $ 0.78
------------- -------------
------------- -------------
The proforma financial information is presented for information
purposes only and is not necessarily indicative of the operating
results that would have occurred had the acquisitions been consummated
as of the above dates, nor are they necessarily indicative of future
operating results.
28
<PAGE>
NOTE 3 INVENTORIES
Inventories consist of the following:
1996 1995
------------- -------------
Raw Materials $ 3,626,665 $ 1,972,384
Work in Process 1,837,247 1,676,949
Finished Goods 1,265,588 205,879
------------- -------------
Total $ 6,729,500 $ 3,855,212
------------- -------------
------------- -------------
NOTE 4 SHORT-TERM LINE OF CREDIT
The Company has a revolving line of credit available at December 31,
1996, for $500,000. The line of credit is with Northern National Bank,
accrues interest at the prime rate, matures February 10, 1997, and is
secured by accounts receivable, equipment, inventory, general
intangibles and a personal guarantee by a shareholder. The interest
rate was 8.25% at December 31, 1996. The maximum and average amounts
outstanding on short-term lines of credit during 1996, were $500,000
and $266,066, respectively. There was no balance outstanding as of
December 31, 1995.
NOTE 5 LONG-TERM DEBT
<TABLE>
<CAPTION>
Description 1996 1995
------------------------------------------------ ------------ -------------
<S> <C> <C>
Note Payable - Northern National Bank,
Revolving Line of Credit, Borrowing Limit of
$3,000,000, Interest at LIBOR Index Plus 2 1/2%,
Due June 1998; Secured by Accounts
Receivable, Equipment, Inventory and General
Intangibles $ 2,736,179 $ 2,161,179
Note Payable - Northern National Bank,
Revolving Line of Credit, Borrowing Limit of
$1,500,000, Interest at LIBOR Index Plus 2 1/2%,
Due June 1998; Secured by Accounts
Receivable, Equipment, Inventory, General
Intangibles and Personal Guarantee and Stock
Pledged by a Shareholder 680,760 0
29
<PAGE>
NOTE 5 LONG-TERM DEBT (CONTINUED)
<S> <C> <C>
Note Payable - Northern National Bank,
Line of Credit, Borrowing Limit of $400,000,
Interest at Bank's Prime, Monthly Payments of
$7,500 Including Interest, Due December 1998;
Secured by Accounts Receivable, Equipment,
inventory and General Intangibles 200,000 0
Note Payable - Northern National Bank,
Interest at LIBOR Index Plus 2 1/2%, Interest
Only Payments Beginning February 1997,
Due June 1998; Secured by Accounts
Receivable, Equipment, Inventory, General
Intangibles and Personal Guarantee and Stock
Pledged by a Shareholder 1,500,000 0
Notes Payable - Communications Systems, Inc,
Interest at Prime as Established by First Bank
Minneapolis, Semi-Annual Principal Payments
of $200,000 Beginning May 1997, Due
November 2001 4,865,390 0
Note Payable - City of Augusta, Interest at
Prime, Five Annual Payments Beginning
August 1996, Due August 2000; Secured
By Leasehold Improvements 20,802 40,000
Note Payable - Northern States Power Company,
Interest at 6%, Monthly Payments of $483
Including Interest, Due December 1998;
Secured by Equipment 10,476 15,483
Note Payable - Northern National Bank,
Interest at Bank's Prime Plus 2%, Monthly
Payments of $1,200 Including Interest,
Due April 2000; Secured by Real Estate 116,447 120,754
Note Payable - Midwest Minnesota Community,
Development Corporation, Interest at 9%,
Monthly Payments of $2,802 Including Interest,
Due March 2000; Secured by Real Estate
and Equipment 91,288 115,297
30
<PAGE>
NOTE 5 LONG-TERM DEBT (CONTINUED)
<S> <C> <C>
Note Payable - Midwest Minnesota Community,
Development Corporation, Interest at 8%,
Monthly Payments of $1,654 Including Interest,
Due March 2009; Secured by
Real Estate and Equipment 133,858 142,185
Note Payable - Northern National Bank,
Interest at 7.5%, Monthly Payments of $5,270
Including Interest, Due May 1999; Secured by
Inventory, Equipment, Accounts Receivable
and General Intangibles 187,577 230,608
Note Payable - Northern National Bank, Interest
at LIBOR Index Plus 2 1/2%, Monthly Payments
of $13,060 Including Interest, Due January
2001; Secured by Equipment, Accounts
Receivable and Inventory and General
Intangibles 542,017 640,000
Note Payable - Northern National Bank, Interest
at LIBOR Index Plus 2 1/2%, Monthly Payments
of $5,000 Including Interest, Due January 2001;
Secured by Equipment, Accounts Receivable,
Inventory, General Intangibles and Real Estate 493,533 510,000
Note Payable - Joint Economic Development
Commission, Inc., Interest at 8.25%, Monthly
Payments of $1,652 Including Interest, Due
August 2000; Secured by Building and Land 63,510 76,279
------------- ------------
Total Long-Term Debt $ 11,641,837 $ 4,051,785
Current Maturities 731,080 283,100
------------- ------------
Long-Term Debt - Net of
Current Maturities $ 10,910,757 $ 3,768,685
------------- ------------
------------- ------------
</TABLE>
31
<PAGE>
NOTE 5 LONG-TERM DEBT (CONTINUED)
Maturity requirements by year on long-term debt are as follows:
Years Ending December 31, Amount
------------------------- ------
1997 $ 731,080
1998 5,714,488
1999 715,625
2000 1,122,880
2001 3,278,477
Later Years 79,287
-------------
Total $ 11,641,837
-------------
-------------
The maximum and average amounts outstanding on the Company's long-term
lines of credit were $3,716,939 and $2,596,711 during 1996,
respectively, and $2,161,179 and $400,000 during 1995, respectively.
NOTE 6 LEASE OBLIGATION
The Company has entered into various operating leases for equipment and
office space. Rent expense for the years ended December 31, 1996, 1995
and 1994, was $451,659, $290,799 and $118,672, respectively. The
future minimum lease payments are as follows:
Years Ending December 31, Amount
--------------------------- --------
1997 $ 337,214
1998 327,675
1999 327,675
2000 190,650
2001 82,575
-------------
Total $ 1,265,789
-------------
-------------
32
<PAGE>
NOTE 7 RELATED PARTY TRANSACTIONS
Ceridian Corporation is one of the Company's stockholders at December
31, 1996, 1995 and 1994. Transactions and balances with Ceridian
Corporation are as follows:
CONTRACT FOR DEED - CERIDIAN CORPORATION
During 1991 the Company entered into a contract for deed with Ceridian
Corporation for the purchase of the building and land. The original
purchase price was $840,000. The contract was paid off in 1994.
SALES
In 1996, 1995 and 1994, sales to Ceridian Corporation represented
approximately 1% of total sales in each year.
NOTE 8 INCOME TAXES
The provision for income taxes for each of the three years in the
period ended December 31, 1996, consists of the following:
1996 1995 1993
---------- --------- ------------
Current Taxes - Federal $ 10,000 $ 37,000 $ 17,183
Current Taxes - State 72,000 63,000 17,023
Deferred Taxes 110,000 (100,000) (280,000)
---------- --------- ------------
Total Expense (Benefit) $ 192,000 $ 0 $ (245,794)
---------- --------- ------------
---------- --------- ------------
Deferred tax assets at December 31, 1996 and 1995, consist of the
following:
1996 1995
------------ ------------
Net Operating Loss (NOL) Carryforwards $ 1,415,000 $ 1,635,000
Tax Credit Carryforwards 235,000 295,000
Other 40,000 30,000
Valuation Allowance (240,000) (400,000)
------------ ------------
Total $ 1,450,000 $ 1,560,000
------------ ------------
------------ ------------
33
<PAGE>
NOTE 8 INCOME TAXES (CONTINUED)
The statutory rate reconciliation for each of the three years in the
period ended December 31, is as follows:
1996 1995 1994
----------- ------------ -----------
Statutory Tax Provision $ 217,000 $ 453,000 $ 319,000
State Income Taxes 78,000 80,000 50,000
Additional NOL
Carryforwards 0 (851,000) 0
Increase (Reduction) in
Deferred Tax Valuation
Allowance (Net of
Expired Tax Credit
Carryforwards) (100,000) 300,000 (600,000)
Other (3,000) 18,000 (14,794)
----------- ----------- -----------
Income Tax
Provision
(Benefit)
Expense $ 192,000 $ 0 $ (245,794)
----------- ----------- -----------
----------- ----------- -----------
The Company has available for Federal income tax purposes, operating
loss carryforwards, unused investment credits, and unused research and
development credits which may provide future tax benefits, expiring as
follows:
Investment Research and
Operating Loss Tax Credit Development Tax
Year of Expiration Carryforward Carryforward Credit Carryforward
------------------ -------------- ------------ -------------------
1997 $ 0 $ 4,064 $ 43,051
1998 0 50,888 97,643
1999 3,035,800 39,965 0
2001 767,300 0 0
2002 253,200 0 0
2003 109,700 0 0
-------------- ------------- -------------
Totals $ 4,166,000 $ 94,917 $ 140,694
-------------- ------------- -------------
-------------- ------------- -------------
During 1995 the Company identified an additional $2,503,778 of net
operating loss carryforwards related to final tax regulations. The
regulations clarified that tax carryforward attributes in a Title 11
bankruptcy prior to December 31, 1993, where stock was issued for debt,
need not be reduced by debt cancellation income. As a result of the
increase in net operating loss carryforwards, which must be utilized
prior to taking the benefit in tax credit carryovers, the Company has
increased its valuation allowance accordingly.
In 1996 the Company utilized operating loss carryforwards of $642,000
to offset federal taxable income.
34
<PAGE>
NOTE 8 INCOME TAXES (CONTINUED)
In 1995 the Company utilized operating loss carryforwards of $1,450,000
to offset federal taxable income and $46,000 of research and
development credits to offset state tax.
In 1994 the Company utilized operating loss carryforwards of $932,000
to offset federal taxable income and $126,100 to offset state taxable
income. The Company also utilized $33,900 of research and development
tax credits to offset state tax.
NOTE 9 PREFERRED STOCK TRANSACTIONS
The holders of the preferred stock are entitled to a noncumulative
dividend of 12% when and as declared. In liquidation, holders of
preferred stock have preference to the extent of $1.00 per share plus
dividends accrued but unpaid. Preferred stock dividends of $-0-,
$29,934 and $14,946 were paid during the year-ended December 31, 1996,
1995 and 1994, respectively.
NOTE 10 MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company sells its products to companies in the computer, medical,
governmental and various other industries. Historically, the Company
has not experienced significant losses related to receivables from
customers in any particular industry or geographic area.
The Company maintains its excess cash balances in checking and money
market accounts at three financial institutions. These balances exceed
the federally insured limit by $775,000 and $520,000 at December 31,
1996 and 1995, respectively. The Company has not experienced any
losses in any of the short-term investment instruments it has used for
excess cash balances.
Two customers accounted for approximately 11.3% and 17.5% of sales,
respectively, for the year ended December 31, 1996.
Three customers accounted for approximately 24.1%, 16.6% and 11.8% of
sales, respectively, for the year ended December 31, 1995. One
customer accounts for approximately 10.4% of accounts receivable at
December 31, 1995.
Three customers accounted for approximately 26.8%, 24.5% and 20.2% of
sales, respectively, for the year ended December 31, 1994. Three
customers accounted for approximately 29.8%, 20.5% and 11.3% of
accounts receivable, respectively, at December 31, 1994.
35
<PAGE>
NOTE 11 EMPLOYEE STOCK OPTION AND AWARD PLANS
In 1992, the Company approved the adoption of a fixed stock based
compensation plan. The purpose of the Plan is to promote the interests
of the Company and its shareholders by providing officers, directors
and other key employees with additional incentive and the opportunity,
through stock ownership, to increase their proprietary interest in the
Company and their personal interest in its continued success. The
Company has authorized 200,000 shares for issuance under this Plan.
Stock options may be granted for the purchase of common stock at a
price not less than the fair market value on the date of the grant.
Options are generally exercisable after one or more years and expire no
later than 10 years from the date of grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its fixed stock based compensation plan.
Accordingly, no compensation cost has been recognized for this Plan in
1996, 1995 or 1994. Had compensation cost been determined on the basis
of fair value pursuant to SFAS No. 123, "Accounting for Stock Based
Compensation," net income and earnings per share would not differ
materially from amounts reported under APB Opinion No. 25.
Since the proforma disclosures of results under SFAS No. 123 are only
required to consider grants awarded in 1995 and 1996, the proforma
effects of applying SFAS No. 123 during this initial phase-in period
may not be representative of the effects on reported results for future
years.
Following is a summary of the Plan's transactions:
Option Price
Shares (Per Share)
--------- ------------
Balance as of December 31, 1992 22,500 $1.75
Granted January 21, 1993 15,000 $1.625
---------
Balance as of December 31, 1993 37,500 $1.625 - $1.75
Granted January 24, 1994 10,000 $3.625
---------
Balance as of December 31, 1994 47,500 $1.625 - $3.625
Granted December 1, 1995 95,000 $5.25
Exercised (5,000) $1.75
---------
Balance as of December 31, 1995 137,500 $1.625 - $5.25
Granted December 1, 1996 - -
Exercised - -
---------
Balance as of December 31, 1996 137,500 $1.625 - $5.25
---------
---------
36
<PAGE>
NOTE 11 EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED)
A summary of the status of fixed options outstanding at December 31,
1996, is as follows:
Outstanding Exercisable Average Remaining
Exercise Price Options Options Contractural Life
-------------- ----------- ----------- -----------------
1.625 15,000 15,000 6 Years
1.75 17,500 17,500 5 Years
3.625 10,000 10,000 7 Years
5.25 95,000 19,000 9 Years
During 1993, the Company adopted a gain sharing plan. The purpose of
the Plan is to provide a bonus for increased output, improved quality
and productivity and reduced costs. The Company has authorized 50,000
shares to be available under this Plan.
In accordance with the terms of the Plan, employees can acquire newly
issued shares of common stock for 90% of the current market value.
5,168 shares have been issued under this Plan through December 31,
1996.
37
<PAGE>
NOTE 12 SUPPLEMENTARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total
3/31/96 6/30/96 9/30/96 12/31/96 1996
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 5,574,986 $ 6,622,903 $ 6,143,457 $ 7,841,475 $ 26,182,821
GROSS PROFIT 1,006,356 1,214,275 1,096,171 1,310,560 4,627,362
NET INCOME 189,894 288,552 201,958 (234,375) 446,029
INCOME PER SHARE
OF COMMON STOCK 0.08 0.12 0.09 (0.10) 0.19
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total
3/31/95 6/30/95 9/30/95 12/31/95 1995
-------------- -------------- -------------- -------------- ---------------
NET SALES $ 3,625,264 $ 4,374,899 $ 5,449,175 $ 4,856,590 $ 18,305,928
GROSS PROFIT 673,905 964,800 966,969 1,159,166 3,764,840
NET INCOME 244,003 244,049 212,588 631,284 1,331,924
INCOME PER SHARE
OF COMMON STOCK 0.11 0.10 0.10 0.25 0.55
</TABLE>
In the 4th quarter of 1995, the Company reduced previous quarter's tax
expense of $206,388, which increased 4th quarter net income by .08 per
share due to recognition of additional net operating loss
carryforwards.
In the 4th quarter of 1996, the Company wrote off $544,000 of
inventories due to evolving customer requirements. This reduced
4th quarter net income by .15 per share.
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the directors and executive officers of the Registrant
will be included in the Registrant's 1996 proxy statement to be filed with the
Securities and Exchange Commission not later than April 30, 1997 and said
portions of the proxy statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of the Registrant will be included
in the Registrant's 1996 proxy statements to be filed with the Securities and
Exchange Commission not later than April 30, 1997 and said portions of the proxy
statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management of the Registrant will be included in the Registrant's 1996 proxy
statements to be filed with the Securities and Exchange Commission not later
than April 30, 1997 and said portions of the proxy statements are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(See note 7 of Consolidated Financial Statements)
(The remainder of this page was intentionally left blank.)
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS AND
REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements - Consolidated Financial Statements
and related Notes are included in Part II, Item 8, and are identified
in the Index on
Page 16.
(a) 2. Consolidated Financial Schedule - The following Consolidated
Financial Statement Schedule supporting the Consolidated Financial
Statements and the accountant's report thereon are included in this
Annual Report on Form 10-K:
PAGE
----
Independent Auditors' Report on Supplementary Information
Larson, Allen, Weishair & Co. , LLP 44
Consolidated Financial Statement Schedule for the years
ended December 31, 1996, 1995 and 1994
VIII Valuation and Qualifying Accounts 45
All other schedules are omitted since they are not applicable, not
required, or the required information is included in the financial statements or
notes thereto.
(a) 3. THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS REPORT:
10.1 Promissory Note for acquisition of division between Company and
Northern National Bank dated December 31, 1996.
10.2 Revolving Note for working capital line of credit between
Company and Northern National Bank dated December 31, 1996.
10.3 Promissory Note for equipment purchases between Company and
Northern National Bank dated December 31, 1996.
10.4 Revolving Note for the working capital line of credit between
Company and Northern National Bank dated December 31, 1996.
10.5 Revolving Note for repurchase of stock between Company and
Northern National Bank dated May 10, 1996.
10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10,3
10.4 and 10.5.
40
<PAGE>
10.7 Promissory Note for acquisition of division between Company and
Communications Systems, Inc. dated November 4, 1996.
10.8 Promissory Note for the acquisition of division between Company
and Communications Systems, Inc. dated November 4, 1996.
23.1 Letter of Consent from Larson, Allen, Weishair & Company in
reference to the S-8 Forms filed June 21 1994 and June 30, 1993.
The following exhibits are incorporated by reference to exhibits 10.2, 10.3,
10.4, 10.5, 10.6 and 23.1, respectfully, to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
10.2 Promissory Note for purchase of facility in Fairmont, Minnesota
between Company and Northern National Bank dated December 29,
1995.
10.3 Promissory Note for purchase of capital equipment located at
Fairmont, Minnesota facility between Company and Northern
National Bank dated December 29, 1995.
10.4 Security Agreement covering Promissory Notes in Exhibits 10.1,
10.2 and 10.3.
10.5 Asset Purchase Agreement for the purchase of assets of Monitor
Technology Corporation dated February 24, 1995.
10.6 Asset Purchase Agreement for the purchase of Aerospace Division
of Communication Cable, Inc. dated August 23, 1995.
The following exhibits are incorporated by reference to exhibits 10.2, 10.3, and
10.5, respectfully, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.2 Promissory Note and Loan Agreement for capital equipment line of
credit between the Company and Northern National Bank dated April
29, 1994.
10.3 Loan Agreement for Real Estate between the Company and Northern
National Bank dated March 18, 1994.
10.5 Promissory Notes and Loan Agreement for Real Estate between the
Company and MMCDC and MMCDC/NNC dated March 18, 1994.
41
<PAGE>
The following exhibits are incorporated by reference to Exhibits 10.3 and 10.4,
respectfully, to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10.3 Promissory Notes for capital equipment between the Company and
City of Augusta, Wisconsin dated August 17, 1993.
10.4 Promissory Notes and Loan Agreement for capital equipment
between the Company and Northern States Power Company dated
November 15, 1993.
The following exhibits are incorporated by reference to Exhibits 3.1, 3.2, 10.1
and 10.3 respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.
3.1 Articles of Incorporation (SMR) dated August 9,1991
3.2 Bylaws (SMR)
10.3 Promissory Note and Mortgage between the Company and Joint
Economic
Development Commission, Inc. dated June 28, 1991.
The following exhibit is incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1990.
3.1 Articles of Incorporation dated October 30, 1990.
The following exhibit is incorporated by reference to Exhibit 3.2 to the
Annual Report on Form 10-K for the year ended December 31, 1984:
3.2 Bylaws
(b) Reports on Form 8-K.
Form 8-K report date November 4, 1996 and filed November 12, 1996 for
purchase of assets of Zercom Corporation.
Form 8-K/A 1 filed on March 3, 1997. This Form 8-K/A was an amendment
to Form 8-K report date November 4, 1996 and filed November 12, 1996.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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 INCORPORATED
March 27, 1997 By:/s/
----------------------------------
Quentin E. Finkelson
Its President and
Chief Executive Officer
March 27, 1997 By:/s/
----------------------------
Garry M. Anderly
Principal Financial Officer
and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
March 27, 1997 /s/
----------------------------------
Quentin E. Finkelson,
President, Chief Executive
Officer and Director
March 27, 1997 /s/
----------------------------------
Myron Kunin, Director
March 27, 1997 /s/
----------------------------------
Richard W. Perkins, Director
43
<PAGE>
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION
Board of Directors
Nortech Systems Incorporated And Subsidiary
Bemidji, Minnesota
Our report on the basic consolidated financial statements of Nortech Systems
Incorporated and Subsidiary for 1996, 1995 and 1994 precedes the consolidated
financial statements. The audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule on the following page is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
February 13, 1997
44
<PAGE>
<TABLE>
<CAPTION>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column E Column F
- ---------------------------------- ------------- ------------ --------------- --------------
Additions
Balance at Charged Balance at
Beginning to Costs End of
Classification Of Period And Expenses Add (Deduct) Period
- ---------------------------------- ------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Allowance for Doubtful Accounts $ 6,053 $ 16,248 $ - $ 22,301
Deferred Tax Valuation Allowance 400,000 - (160,000) 240,000
------------- ------------ --------------- -------------
$ 406,053 $ 16,248 $ (160,000) $ 262,301
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
Year Ended December 31, 1995:
Allowance for Doubtful Accounts $ 4,343 $ 1,710 $ - $ 6,053
Deferred Tax Valuation Allowance 100,000 - 300,000 400,000
------------- ------------ --------------- -------------
$ 104,343 $ 1,710 $ 300,000 $ 406,053
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
Year Ended December 31, 1994:
Allowance for Doubtful Accounts $ - $ 4,343 $ - $ 4,343
Deferred Tax Valuation Allowance 700,000 - (600,000) 100,000
------------- ------------ --------------- -------------
$ 700,000 $ 4,343 $ (600,000) $ 104,343
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
</TABLE>
45
<PAGE>
INDEX TO EXHIBITS
DESCRIPTIONS OF EXHIBITS
- ------------------------
10.1 Promissory Note for acquisition of division between Company and
Northern National Bank dated December 31, 1996.
10.2 Revolving Note for working capital line of credit between Company and
Northern National Bank dated December 31, 1996.
10.3 Promissory Note for equipment purchases between Company and Northern
National Bank dated December 31, 1996.
10.4 Revolving Note for the working capital line of credit between Company
and Northern National Bank dated December 31, 1996.
10.5 Revolving Note for repurchase of stock between Company and Northern
National Bank dated May 10, 1996.
10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10,3 10.4
and 10.5.
10.7 Promissory Note for acquisition of division between Company and
Communications Systems, Inc. dated November 4, 1996.
10.8 Promissory Note for the acquisition of division between Company and
Communications Systems, Inc. dated November 4, 1996.
23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference
to the S-8 Forms filed June 21 1994 and June 30, 1993.
46
<PAGE>
EXHIBIT 10.1
<PAGE>
VARIABLE RATE COMMERCIAL
PROMISSORY NOTE
- --------------------------------------------------------------------------------
"LENDER": "BORROWER":
NORTHERN NATIONAL BANK Nortech Systems Incorporated
201 Third Street 4050 Norris Court
Bemidji, MN 56601-0790 Bemidji, MN 56601
(218) 751-1530
- --------------------------------------------------------------------------------
Officer Interest Principal Amount Funding Date Maturity Customer Loan
Initials Rate Date Number Number
- --------------------------------------------------------------------------------
BAS VARIABLE $1,500,000.00 12/31/96 6/30/98 533910
- --------------------------------------------------------------------------------
PROMISE TO PAY
For value received, the undersigned Borrower promises to pay to the order
of Lender indicated above, the principal amount of One Million, Five Hundred
Thousand and No/100ths Dollars ($1,500,000.00) plus interest on the unpaid
balance at the rate and in the manner described below. All amounts received
by Lender shall be applied first to late payment charges and expenses, then
to accrued interest, and then to principal or in any other order as
determined by Lender, in Lender's sole discretion, as permitted by law.
LOAN AGREEMENT; INTEREST RATE: This Note evidences a loan or loans made
under, and is subject to acceleration as provided in, and the other terms and
conditions of, that certain Commercial Loan Agreement dated as of December 29,
1995, as amended by an Amendment to Loan Agreement dated as of November 4,
1996, and by a Second Amendment to Loan Agreement dated as of December 31,
1996, by and among Nortech Systems Incorporated, Nortech Medical Services,
Inc. and Northern National Bank (as the same may be amended, restated,
modified or supplemented from time to time, the "Loan Agreement"). Interest
on the principal amount hereunder remaining unpaid from time to time shall be
calculated at the rates set forth in Loan Agreement.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according
to the following schedule:
Interest only payments beginning February 1, 1997, and continuing at monthly
time intervals thereafter. A final payment of the unpaid principal
balance plus accrued interest is due and payable on June 30, 1998.
1
<PAGE>
All payments will be made to First Bank National Association, a national
banking association, as provided in the Loan Agreement, in lawful currency of
the United States of America.
RENEWAL: This Note is a renewal of loan number 533910 and is not in
payment of that Note.
SECURITY: To secure the payment and performance of obligations incurred
under this Note, Borrower grants Lender a security interest in, and pledges
and assigns to Lender all of Borrower's rights, title and interest, in all
monies, instruments, savings, checking and other deposit accounts of
Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to
tax penalties if so assigned) that are now or in the future in Lender's
custody or control. Upon default, and to the extend permitted by applicable
law, Lender may exercise any or all of its rights or remedies as a secured
party with respect to such property which rights and remedies shall be in
addition to all other rights and remedies granted to Lender including,
without limitation, Lender's common law right of setoff. The obligations
under this Note are also secured by a lien and/or security interest in the
property described in the documents executed in connection with this Note as
well as any other property designated as security now or in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all
prepayments will be credited as determined by Lender and as permitted by law.
If this Note is prepaid in full, there will be no prepayment penalty.
LATE PAYMENT CHARGE: If a payment is received more than ten (10) days
late, Borrower will be charged a late payment charge of 5.00% of the unpaid
late installment.
GENERAL TERMS AND CONDITIONS: This Note is subject to the following
general terms and conditions:
GENERAL TERMS AND CONDITIONS
1. DEFAULT: Borrower will be in default under this Note in the event that
Borrower or any guarantor or any other third party: (a) fails to make any
payment on this Note or any other indebtedness to Lender when due; (b) fails
to perform any obligation or breaches any warranty or covenant to Lender
contained in this Note or any other present or future written agreement
regarding this or any indebtedness of Borrower to Lender; (c) provides or
causes any false or misleading signature or representation to be provided to
Lender; (d) allows the collateral securing this Note (if any) to be lost,
stolen, destroyed, damaged in any material respect, or subjected to seizure
or confiscation; (e) permits the entry or service of any garnishment,
judgment, tax levy, attachment or lien against Borrower, any guarantor, or
any of their property or the Collateral; (f) dies, becomes legally
incompetent,
2
<PAGE>
is dissolved or terminated, ceases to operate its business, becomes
insolvent, makes an assignment for the benefit of creditors, fails to pay
debts as they become due, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem
itself insecure for any reason, or Lender, for any reason, in good faith
deems itself insecure.
2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note,
Lender will be entitled to exercise one or more of the following remedies
without notice or demand (except as required by law): (a) to declare the
principal amount plus accrued interest under this Note and all other present
and future obligations of Borrower immediately due and payable in full;
(b) to collect the outstanding obligations of Borrower with or without
resorting to judicial process; (c) to take possession of any collateral in
any manner permitted by law; (d) to require Borrower to deliver and make
available to Lender any collateral at a place reasonably convenient to
Borrower and Lender; (e) to sell, lease or otherwise dispose of any
collateral and collect any deficiency balance with or without resorting to
legal process; (f) to set-off Borrower's obligations against any amounts due
to Borrower including, but not limited to, monies, instruments, and deposit
accounts maintained with Lender; and (g) to exercise all other rights
available to Lender under any other written agreement or applicable law.
Lender's rights are cumulative and may be exercised together, separately,
and in any order. Lender's remedies under this paragraph are in addition to
those available at common law, including, but not limited to, the right of
set-off.
3. FINANCIAL INFORMATION: Borrower will provide Lender with current
financial statements and other financial information (including, but not
limited to, balance sheets and profit and loss statements) upon request.
4. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's
obligations or Lender's rights under this Note must be contained in a
writing signed by Lender. Lender may perform any of Borrower's obligations
or delay or fail to exercise any of its rights without causing a waiver of
those obligations or rights. A waiver on one occasion will not constitute a
waiver on any other occasion. Borrower's obligations under this Note shall
not be affected if Lender amends, compromises, exchanges, fails to exercise,
impairs or releases any of the obligations belonging to any co-borrower or
guarantor or any of its rights against any co-borrower, guarantor or
collateral.
5. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is
invalid, illegal or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby. Notwithstanding anything contained in this Note to the
contrary, in no event shall interest accrue under this Note, before or after
maturity, at a rate in excess of the highest rate permitted by applicable
law, and if interest (including any charge or fee held to be interest by a
court of competent jurisdiction) in excess thereof be paid, any excess shall
constitute a payment of, and be
3
<PAGE>
applied to, the principal balance hereof, and if the principal balance
has been fully paid, then such interest shall be repaid to Borrower.
6. ASSIGNMENT: Borrower will not be entitled to assign any of its rights,
remedies or obligations described in this Note without the prior written
consent of Lender which may be withheld by Lender in its sole discretion.
Lender will be entitled to assign some or all of its rights and remedies
described in this Note without notice to or the prior consent of Borrower in
any manner.
7. NOTICE: Any notice or other communication to be provided to Borrower or
Lender under this Note shall be in writing and sent to the parties at the
addresses described in this Note or such other address as the parties may
designate in writing from time to time.
8. APPLICABLE LAW: This Note shall be governed by the laws of the state
indicated in Lender's address. Borrower consents to the jurisdiction and
venue of any court located in the state indicated in Lender's address in the
event of any legal proceeding pertaining to the negotiation, execution,
performance or enforcement of any term or condition contained in this Note
or any related loan document and agrees not to commence or seek to remove
such legal proceeding in or to a different court.
9. COLLECTION COSTS: If Lender hires an attorney to assist in collecting
any amount due or enforcing any right or remedy under this Note, Borrower
agrees to pay Lender's attorney's fees, to the extent permitted by
applicable law, and collection costs.
10. RETURNED CHECK: If a check for payment is returned to Lender for any
reason, Lender will charge an additional fee of $15.00.
11. MISCELLANEOUS: This Note is being executed for commercial/agricultural
purposes. Borrower and Lender agree that time is of the essence. Borrower
waives presentment, demand for payment, notice of dishonor and protest. If
Lender obtains a judgment for any amount due under this Note, interest will
accrue on the judgment at the judgment rate of interest permitted by law.
All references to Borrower in this Note shall include all of the parties
signing this Note. If there is more than one Borrower, their obligations
will be joint and several. This Note and any related documents represent the
complete and integrated understanding between Borrower and Lender pertaining
to the terms and conditions of those documents.
12. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN
ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON THIS NOTE OR THE COLLATERAL
SECURING THIS NOTE.
4
<PAGE>
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE, INCLUDING THE GENERAL TERMS AND CONDITIONS
SET FORTH ABOVE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
Note Date: December 31, 1996
BORROWER:
NORTECH SYSTEMS INCORPORATED
By: /s/ G M Anderly
-------------------------
Garry M. Anderly
Its: Vice President
5
<PAGE>
EXHIBIT 10.2
<PAGE>
COMMERCIAL/AGRICULTURAL
REVOLVING
NOTE-VARIABLE RATE
"LENDER": "BORROWER":
NORTHERN NATIONAL BANK Nortech Systems Incorporated
201 Third Street 4050 Norris Court
Bemidji, MN 56601-0790 Bemidji, MN 56601
(218) 751-1530
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Officer Interest Principal Amount/ Funding/ Maturity Customer Loan
Initials Rate Credit Limit Agreement Date Date Number Number
- -------- -------- ---------------- --------------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BAS VARIABLE $1,500,000.00 12/31/96 6/30/98 533909
- --------------------------------------------------------------------------------------------------
</TABLE>
PROMISE TO PAY
For value received, the undersigned Borrower promises to pay to the
order of Lender indicated above, the principal amount of One Million, Five
Hundred Thousand and No/100ths Dollars ($1,500,000.00) or, if less, the
aggregate unpaid principal amount of all loans or advances made by the Lender
to the Borrower, plus interest on the unpaid principal balance at the rate
and in the manner described below. All amounts received by Lender shall be
applied first to late payment charges and expenses, then to accrued interest,
and then to principal or in any other order as determined by Lender, in
Lender's sole discretion, as permitted by law.
LOAN AGREEMENT; INTEREST RATE: This Note evidences a loan or loans made
under, and is subject to acceleration as provided in, and the other terms and
conditions of, that certain Commercial Loan Agreement dated as of December 29,
1995, as amended by an Amendment to Loan Agreement dated as of November 4,
1996, and by a Second Amendment to Loan Agreement dated as of December 31,
1996, by and among Nortech Systems Incorporated, Nortech Medical Services,
Inc. and Northern National Bank (as the same may be amended, restated,
modified or supplemented from time to time, the "Loan Agreement"). Interest
on the principal amount hereunder remaining unpaid from time to time shall be
calculated at the rates set forth in Loan Agreement.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest
according to the following schedule:
Interest only payments beginning February 1, 1997, and continuing
at monthly time intervals thereafter. A final payment of the
unpaid principal balance plus accrued interest is due and payable
on June 30, 1998.
<PAGE>
All payments will be made to First Bank National Association, a national
banking association, as provided in the Loan Agreement, and in lawful
currency of the United States of America.
RENEWAL: This Note is a renewal of loan number 533909 and is not in
payment of that Note.
SECURITY: To secure the payment and performance of obligations incurred
under this Note, Borrower grants Lender a security interest in, and pledges
and assigns to Lender all of Borrower's rights, title and interest, in all
monies, instruments, savings, checking and other deposit accounts of
Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to
tax penalties if so assigned) that are now or in the future in Lender's
custody or control. Upon default, and to the extend permitted by applicable
law, Lender may exercise any or all of its rights or remedies as a secured
party with respect to such property which rights and remedies shall be in
addition to all other rights and remedies granted to Lender including,
without limitation, Lender's common law right of setoff. The obligations
under this Note are also secured by a lien and/or security interest in the
property described in the documents executed in connection with this Note as
well as any other property designated as security now or in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before
its maturity date. If this Note contains more than one installment, all
prepayments will be credited as determined by Lender and as permitted by law.
If this Note is prepaid in full, there will be no prepayment penalty.
LATE PAYMENT CHARGE: If a payment is received more than ten (10) days
late, Borrower will be charged a late payment charge of 5.00% of the unpaid
late installment.
REVOLVING FEATURE: This Note possesses a revolving feature. Upon
satisfaction of the conditions set forth in this Note, Borrower shall be
entitled to borrow up to the full principal amount of the Note and to repay
and re-borrow from time to time during the term of this Note.
Lender shall maintain a record of the amounts loaned to and repaid by
Borrower under this Note. The aggregate unpaid principal amount shown on such
record shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on this Note. The Lender's failure to record the date and amount
of any loan or advance shall not limit or otherwise affect the obligations of
the Borrower under this Note to repay the principal amount of the loans or
advances together with all interest accruing thereon. Lender shall not be
obligated to provide Borrower with a copy of the record on a periodic basis.
Borrower shall be entitled to inspect or obtain a copy of the record during
Lender's business hours.
CONDITIONS FOR ADVANCES: If there is no default under this Note,
Borrower shall be entitled to borrow monies or make draws under this Note
(subject to the limitations described above) under the conditions described
herein and in the Loan Agreement.
2
<PAGE>
GENERAL TERMS AND CONDITIONS. This Note is subject to the following
general terms and conditions:
GENERAL TERMS AND CONDITIONS
1. DEFAULT: Borrower will be in default under this Note in the event that
Borrower or any guarantor or any other third party: (a) fails to make
any payment on this Note or any other indebtedness to Lender when due;
(b) fails to perform any obligation or breaches any warranty or covenant
to Lender contained in this Note or any other present or future written
agreement regarding this or any indebtedness of Borrower to Lender; (c)
provides or causes any false or misleading signature or representation to
be provided to Lender; (d) allows the collateral securing this Note (if
any) to be lost, stolen, destroyed, damaged in any material respect, or
subjected to seizure or confiscation; (e) permits the entry or service
any garnishment, judgment, tax levy, attachment or lien against
Borrower, any guarantor, or any of their property or the Collateral; (f)
dies, becomes legally incompetent, is dissolved or terminated, ceases to
operate its business, becomes insolvent, makes an assignment for the
benefit of creditors, fails to pay debts as they become due, or becomes
the subject of any bankruptcy, insolvency or debtor rehabilitation
proceeding; or (g) causes Lender to deem itself insecure for any reason,
or Lender, for any reason, in good faith deems itself insecure.
2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note,
Lender will be entitled to exercise one or more of the following remedies
without notice or demand (except as required by law): (a) to cease making
additional advances under this Note; (b) to declare the principal amount
plus accrued interest under this Note and all other present and future
obligations of Borrower immediately due and payable in full; (c) to
collect the outstanding obligations of Borrower with or without resorting
to judicial process; (d) to take possession of any collateral in any
manner permitted by law; (e) to require Borrower to deliver and make
available to Lender any collateral at a place reasonably convenient to
Borrower and Lender; (f) to sell, lease or otherwise dispose of any
collateral and collect any deficiency balance with or without resorting
to legal process; (g) to set-off Borrower's obligations against any
amounts due to Borrower including, but not limited to, monies,
instruments, and deposit accounts maintained with Lender; and (h) to
exercise all other rights available to Lender under any other written
agreement or applicable law. Lender's rights are cumulative and may be
exercised together, separately, and in any order. Lender's remedies under
this paragraph are in addition to those available at common law,
including, but not limited to, the right of set-off.
3. FINANCIAL INFORMATION: Borrower will provide Lender with current
financial statements and other financial information (including, but not
limited to, balance sheets and profit and loss statements) upon request.
3
<PAGE>
4. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's
obligations or Lender's rights under this Note must be contained in a
writing signed by Lender. Lender may perform any of Borrower's
obligations or delay or fail to exercise any of its rights without
causing a waiver of those obligations or rights. A waiver on one occasion
will not constitute a waiver on any other occasion. Borrower's
obligations under this Note shall not be affected if Lender amends,
compromises, exchanges, fails to exercise, impairs or releases any of the
obligations belonging to any co-borrower or guarantor or any of its
rights against any co-borrower, guarantor or collateral.
5. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is
invalid, illegal or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby. Notwithstanding anything contained in this
Note to the contrary, in no event shall interest accrue under this Note,
before or after maturity, at a rate in excess of the highest rate
permitted by applicable law, and if interest (including any charge or fee
held to be interest by a court of competent jurisdiction) in excess
thereof be paid, any excess shall constitute a payment of, and be applied
to, the principal balance hereof, and if the principal balance has been
fully paid, then such interest shall be repaid to Borrower.
6. ASSIGNMENT: Borrower will not be entitled to assign any of its rights,
remedies or obligations described in this Note without the prior written
consent of Lender which may be withheld by Lender in its sole discretion.
Lender will be entitled to assign some or all of its rights and remedies
described in this Note without notice to or the prior consent of Borrower
in any manner.
7. NOTICE: Any notice or other communication to be provided to Borrower or
Lender under this Note shall be in writing and sent to the parties at the
addresses described in this Note or such other address as the parties may
designate in writing from time to time.
8. APPLICABLE LAW: This Note shall be governed by the laws of the state
indicated in Lender's address. Borrower consents to the jurisdiction and
venue of any court located in the state indicated in Lender's address in
the event of any legal proceeding pertaining to the negotiation,
execution, performance or enforcement of any term or condition contained
in this Note or any related loan document and agrees not to commence or
seek to remove such legal proceeding in or to a different court.
9. COLLECTION COSTS: If Lender hires an attorney to assist in collecting
any amount due or enforcing any right or remedy under this Note, Borrower
agrees to pay Lender's attorney's fees, to the extent permitted by
applicable law, and collection costs.
10. RETURNED CHECK: If a check for payment is returned to Lender for any
reason, Lender will charge an additional fee of $15.00.
4
<PAGE>
11. MISCELLANEOUS: This Note is being executed for commercial/agricultural
purposes. Borrower and Lender agree that time is of the essence. Borrower
waives presentment, demand for payment, notice of dishonor and protest.
If Lender obtains a judgment for any amount due under this Note, interest
will accrue on the judgment at the judgment rate of interest permitted by
law. All references to Borrower in this Note shall include all of the
parties signing this Note. If there is more than one Borrower, their
obligations will be joint and several. This Note and any related
documents represent the complete and integrated understanding between
Borrower and Lender pertaining to the terms and conditions of those
documents.
12. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
IN ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON THIS NOTE OR THE
COLLATERAL SECURING THIS NOTE.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE, INCLUDING THE GENERAL TERMS AND CONDITIONS
SET FORTH ABOVE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
Note Date: December 31, 1996
BORROWER:
NORTECH SYSTEMS INCORPORATED
BY: /s/ Garry M. Anderly
--------------------------
Garry M. Anderly
Its: Vice President
5
<PAGE>
EXHIBIT 10.3
<PAGE>
BORROWER
[LOGO] NORTHERN NORTECH SYSTEMS INCORPORATED COMMERCIAL/
NATIONAL BANK AGRICULTURAL
201 3RD STREET REVOLVING OR DRAW
BEMIDJI, MN 56601-0790 ADDRESS NOTE-VARIABLE RATE
TELEPHONE 218-751-1530 4050 NORRIS COURT
"LENDER" BEMIDJI, MN 56601
TELEPHONE NO. IDENTIFICATION NO.
218-751-0110
OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
INITIALS RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER
- --------------------------------------------------------------------------------
BAS VARIABLE $400,000.00 11/25/96 12/01/98 533932
- --------------------------------------------------------------------------------
PROMISE TO PAY
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of FOUR HUNDRED THOUSAND AND NO/100 Dollars
($400,000.00) or, if less, the aggregate unpaid principal amount of all loans
or advances made by the Lender to the Borrower, plus interest on the unpaid
principal balance at the rate and in the manner described below. All amounts
received by Lender shall be applied first to late payment charges and
expenses, then to accrued interest, and then to principal or in any other
order as determined by Lender. In Lender's sole discretion, as permitted by
law.
INTEREST RATE: This Note has a variable rate feature. Interest on the Note
may change from time to time if the Index Rate identified below changes.
Interest shall be computed on the basis of 360 days per year. Interest on
this Note shall be calculated at a variable rate equal to NO/1000 percent
(0.000%) per annum over the Index Rate. The Initial Index Rate is currently
EIGHT AND 250/1000 percent (8.250%) per annum. The Initial Interest rate on
this Note shall be EIGHT AND 250/1000 percent (8.250%) per annum. Any change
in the interest rate resulting from a change in the Index Rate will be
effective on: THE DATE THE INDEX RATE CHANGES
INDEX RATE: The Index Rate for this Note shall be: THE NATIONAL PRIME RATE AS
PUBLISHED IN THE WALL STREET JOURNAL
MINIMUM RATE/MAXIMUM RATE: The minimum interest rate on this Note shall be
FOUR AND NO/1000 percent (4.000%) per annum. The maximum interest rate on
this Note shall not exceed NINETEEN AND NO/1000 percent (19.000%) per annum
or the maximum interest rate Lender is permitted to charge by law, whichever
is less.
POST-MATURITY RATE: / / If checked, this loan is for a binding commitment of
at least $100,000.00 and after maturity, due to scheduled maturity or
acceleration, past due amounts shall bear interest at the lesser of:________
___________________________________________________, or the maximum interest
rate Lender is permitted to charge by law.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to
the following schedule:
23 PAYMENTS OF $7,500.00 BEGINNING JANUARY 1, 1997 AND CONTINUING AT MONTHLY
TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE
PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON DECEMBER 1, 1998.
All payments will be made to Lender at its address described above and in
lawful currency of the United States of America.
RENEWAL: If checked, / / this Note is a renewal of loan number__________, and
is not in payment of that Note.
SECURITY: To secure the payment and performance of obligations incurred under
this Note, Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest, in all
monies, instruments, savings, checking and other deposit accounts of
Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to
tax penalties if so assigned) that are now or in the future in Lender's
custody or control. Upon default, and to the extent permitted by applicable
law, Lender may exercise any or all of its rights or remedies as a secured
party with respect to such property which rights and remedies shall be in
addition to all other rights and remedies granted to Lender including,
without limitation, Lender's common law right of setoff. /X/ If checked, the
obligations under this Note are also secured by a lien and/or security
interest in the property described in the documents executed in connection
with this Note as well as any other property designated as security now or in
the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all
prepayments will be credited as determined by Lender and as permitted by
law. If this Note is prepaid in full, there will be: /X/ No prepayment
penalty. / / A prepayment penalty of _______% of the principal prepaid.
LATE PAYMENT CHARGE: If a payment is received more than 10 days late,
Borrower will be charged a late payment charge of 5.00% of the unpaid late
installment.
REVOLVING OR DRAW FEATURE: / / This Note possesses a revolving feature. Upon
satisfaction of the conditions set forth in this Note, Borrower shall be
entitled to borrow up to the full principal amount of the Note and to repay
and reborrow from time to time during the term of this Note. /X/ This Note
possesses a draw feature. Upon satisfaction of the conditions set forth in
this Note, Borrower shall be entitled to make one or more draws under this
Note. The aggregate amount of such draws shall not exceed the full principal
amount of this Note.
Lender shall maintain a record of the amounts loaned to and repaid by
Borrower under this Note. The aggregate unpaid principal amount shown on such
record shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on this Note. The Lender's failure to record the date and amount
of any loan or advance shall not limit or otherwise affect the obligations of
the Borrower under this Note to repay the principal amount of the loans or
advances together with all interest accruing thereon. Lender shall not be
obligated to provide Borrower with a copy of the record on a periodic basis.
Borrower shall be entitled to inspect or obtain a copy of the record during
Lender's business hours.
CONDITIONS FOR ADVANCES: If there is no default under this Note, Borrower
shall be entitled to borrow monies or make draws under this Note (subject to
the limitations described above) under the following conditions:
- --------------------------------------------------------------------------------
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE
SIDE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
NOTE DATE: NOVEMBER 25, 1996
BORROWER: NORTECH SYSTEMS INCORPORATED BORROWER:
/s/ Garry M. Anderly
- -------------------------------------- -------------------------------------
GARRY M. ANDERLY
VICE PRESIDENT
BORROWER: BORROWER:
- -------------------------------------- -------------------------------------
BORROWER: BORROWER:
- -------------------------------------- -------------------------------------
BORROWER: BORROWER:
- -------------------------------------- -------------------------------------
<PAGE>
TERMS AND CONDITIONS
1. DEFAULT: Borrower will be in default under this Note in the event that
Borrower or any guarantor or any other third party: (a) fails to make any
payment on this Note or any other indebtedness to Lender when due; (b) fails
to perform any obligation or breaches any warranty or covenant to Lender
contained in this Note or any other present or future written agreement
regarding this or any indebtedness of Borrower to Lender; (c) provides or
causes any false or misleading signature or representation to be provided to
Lender; (d) allows the collateral securing this Note (if any) to be lost,
stolen, destroyed, damaged in any material respect, or subjected to seizure
or confiscation; (e) permits the entry or service of any garnishment,
judgment, tax levy, attachment or lien against Borrower, any guarantor, or
any of their property or the Collateral; (f) dies, becomes legally
incompetent, is dissolved or terminated, ceases to operate its business,
becomes insolvent, makes an assignment for the benefit of creditors, fails to
pay debts as they become due, or becomes the subject to any bankruptcy,
insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem
itself insecure for any reason, or Lender, for any reason, in good faith
deems itself insecure.
2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender
will be entitled to exercise one or more of the following remedies without
notice or demand (except as required by law): (a) to cease making additional
advances under this Note; (b) to declare the principal amount plus accrued
interest under this Note and all other present and future obligations of
Borrower immediately due and payable in full; (c) to collect the outstanding
obligations of Borrower with or without resorting to judicial process; (d) to
take possession of any collateral in any manner permitted by law; (e) to
require Borrower to deliver and make available to Lender any collateral at a
place reasonably convenient to Borrower and Lender; (f) to sell, lease or
otherwise dispose of any collateral and collect any deficiency balance with
or without resorting to legal process; (g) to set-off Borrower's obligations
against any amounts due to Borrower including, but not limited to monies,
instruments, and deposit accounts maintained with Lender; and (h) to exercise
all other rights available to Lender under any other written agreement or
applicable law. Lender's rights are cumulative and may be exercised
together, separately, and in any order. Lender's remedies under this
paragraph are in addition to those available at common law, including but not
limited to, the right of set-off.
3. DEMAND FEATURE: If this Note contains a demand feature, Lender's right to
demand payment, at any time, and from time to time, shall be in Lender's sole
and absolute discretion, whether or not any default has occurred.
4. FINANCIAL INFORMATION: Borrower will provide Lender with current financial
statements and other financial information (including, but not limited to,
balance sheets and profit and loss statements) upon request.
5. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's
obligations or Lender's rights under this Note must be contained in a writing
signed by Lender. Lender may perform any of Borrower's obligations or delay
or fail to exercise any of its rights without causing a waiver of those
obligations or rights. A waiver on one occasion will not constitute a waiver
on any other occasion. Borrower's obligations under this Note shall not be
affected if Lender amends, compromises, exchanges, fails to exercise, impairs
or releases any of the obligations belonging to any co-borrower or guarantor
or any of its rights against any co-borrower, guarantor or collateral.
6. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is
invalid, illegal or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby. Notwithstanding anything contained in this Note to the contrary, in
no event shall interest accrue under this Note, before or after maturity, at
a rate in excess of the highest rate permitted by applicable law, and if
interest (including any charge or fee held to be interest by a court of
competent jurisdiction) in excess thereof be paid, any excess shall
constitute a payment of, and be applied to, the principal balance hereof, and
if the principal balance has been fully paid, then such interest shall be
repaid to the Borrower.
7. ASSIGNMENT: Borrower will not be entitled to assign any of its rights,
remedies or obligations described in this Note without the prior written
consent of Lender which may be withheld by Lender in its sole discretion.
Lender will be entitled to assign some or all of its rights and remedies
described in this Note without notice to or the prior consent of Borrower in
any manner.
8. NOTICE: Any notice or other communication to be provided to Borrower or
Lender under this Note shall be in writing and sent to the parties at the
addresses described in this Note or such other address as the parties may
designate in writing from time to time.
9. APPLICABLE LAW: This Note shall be governed by the laws of the state
indicated in Lender's address. Borrower consents to the jurisdiction and
venue of any court located in the state indicated in Lender's address in the
event of any legal proceeding pertaining to the negotiation, execution,
performance or enforcement of any term or condition contained in this Note or
any related loan document and agrees not to commence or seek to remove such
legal proceeding in or to a different court.
10. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any
amount due or enforcing any right or remedy under this Note, Borrower agrees
to pay Lender's attorney's fees, to the extent permitted by applicable law,
and collection costs.
11. RETURNED CHECK: If a check for payment is returned to Lender for any
reason, Lender will charge an additional fee of $15.00.
12. MISCELLANEOUS: This Note is being executed for commercial/agricultural
purposes. Borrower and Lender agree that time is of the essence. Borrower
waives presentment, demand for payment, notice of dishonor and protest. If
Lender obtains a judgment for any amount due under this Note, interest will
accrue on the judgment at the judgment rate of interest permitted by law. All
references to Borrower in this Note shall include all of the parties signing
this Note. If there is more than one Borrower, their obligations will be
joint and several. This Note and any related documents represent the complete
and integrated understanding between Borrower and Lender pertaining to the
terms and conditions of those documents.
13. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN
ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON, THIS NOTE OR THE COLLATERAL
SECURING THIS NOTE.
14. ADDITIONAL TERMS:
<TABLE>
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PRINCIPAL ADVANCES AND PAYMENTS INTEREST PAYMENTS RATE CHANGE
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MADE AMOUNT OF AMOUNT OF PRINCIPAL UNDISBURSED RECEIVED INTEREST DATE
BY DATE ADVANCE PAYMENT BALANCE COMMITMENTS BY DATE PAID PAID TO DATE RATE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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</TABLE>
<PAGE>
DISCRETIONARY COMMITMENT LETTER
NORTECH SYSTEMS INCORPORATED (Commercial Credit) NOVEMBER 25, 1996
4050 NORRIS COURT
BEMIDJI, MI 56601
Dear GARRY ANDERLY
NORTHERN NATIONAL BANK is pleased to grant you a discretionary line of credit
on the following terms and conditions:
1. AMOUNT OF CREDIT. We may make loans to you from time to time during the
period from the date of this letter to and including DECEMBER 1, 1998, in an
aggregate amount not to exceed at any time outstanding $ 400,000.00. Each loan
will be in the sole discretion of our officers, and nothing herein should be
interpreted as being a promise to make any one or more loans. If this [ ] is
checked, we anticipate that you will be allowed to prepay and reborrow so
long as no borrowing causes that dollar limit to be exceeded.
2. THE NOTE. Your obligation to repay all loans made by us under this
letter will be evidenced as follows (check one):
[X] By your single promissory note in the above amount, dated the same date
as this letter (the "Note"). [ ] By a separate note for each loan, in each
case in the amount and dated as the date of the loan (all references in this
letter to the "Note" are to be understood as applying to any notes issued
pursuant hereto).
3. INTEREST; MATURITY DATE. The Note shall bear interest (computed on the
basis of actual days elapsed and a 360 day year) on the principal balance
outstanding from time to time, from the date of the initial advance until the
Note is paid in full at the following rate:
[ ] an annual rate of %;
[X] an annual rate equal to 0.00% over the Base Rate (the term "Base Rate"
means the rate of interest established from time to time by THE NORTHERN
NATIONAL BANK as its "base" or "prime" rate);
[ ]an annual rate equal to % in excess of the Discount Rate (the term
"Discount Rate" means the discount rate on 90-day commercial paper in effect
from time to time at the Federal Reserve Bank of Minneapolis) (including, if
permitted by P.L. 96-221, section 511, any surcharge thereon);
[ ]other:
If the Note evidences a variable rate loan, the following provisions shall
also apply:
a. If the $100,000 exemption to the usury law does not apply and the borrower
is not a corporation, the annual rate of interest on the the Note shall
never exceed [ ] % [ ] a rate that is % in excess of the
Discount Rate.
b. The Note shall bear the same rate of interest after it becomes due as
was in effect on its due date unless the $100,000 exemption from the
usury law applies.
c. The rate of interest shall initially be determined as of the date hereof
and shall thereafter be adjusted: [X] daily on the same day the Index
Rate changes; [ ] daily on the day following the day the Index Rate
changes; [ ] monthly, the rate for any given month depending on the
Index Rate for the last day of the immediately preceding month; [ ]
monthly, on the day of each calendar month with the rate being
determined based on the Index Rate in effect on the day of change; or,
[ ] as follows:
The term "Index Rate" means the Base Rate, the Discount Rate or the
rate described in the "other" paragraph, as applicable.
The amount of interest earned each will be payable [ ] at maturity,
[X] on or before the day of the next , and on demand. In
addition, any earned and unpaid interest will be payable on the due date of
the Note.
The unpaid balance of the Note shall be due and payable in full (check
one): [ ]on demand, and in any event on , if demand has not been made by
that day; [ ] on ; [X] on the date stated in the Note, not later
than DECEMBER 1, 1998.
The Note will also specify events of default and the rights and remedies
available to us upon the occurrence of an event of default. The Note must be
properly executed by you and be in form and substance acceptable to us.
4. SECURITY. The Note will be [ ] unsecured [X] secured by:
A. [X] UCC security agreement granting a security interest in the
following property:
(a) [X] Inventory;
(b) [X] Equipment;
(c) [X] Accounts;
(d) [X] General intangibles;
(e) [ ] Motor vehicles (other than equipment) described as
follows: __________________________________________________
___________________________________________________________
and all substitutions and replacements for, and all
accessions, accessories, attachments, parts, equipment and
repairs now or hereafter attached to such motor vehicles;
(f) [ ] ___________________________________________________________
specify
This property will be more fully described in the UCC security agreement. The
security interest shall extend to property of the type described, whether now
owned or hereafter acquired.
B. [ ] A real estate mortgage granting a lien on the following real
estate:
and on all property now or hereafter attached or affixed to
that real estate.
5. DROP IN DISCOUNT RATE. If this letter provides that your obligations
will bear interest at a fixed rate or at a variable rate subject to a fixed
interest rate ceiling and if the Federal Reserve discount rate falls after
the date of this letter, so that the rate or rate ceiling specified is no
longer permissible, that rate or rate ceiling that applies to subsequent
advances shall be reduced automatically and we will ask you to execute a new
Note or Notes to evidence subsequent advances. If the original Note was a
fixed rate Note, the new Note shall bear interest at the highest permissible
rate. If the original Note bore interest at a variable rate subject to a fixed
ceiling, interest on the new Note shall vary with the same index, subject to
the highest permissible ceiling. In either event, paragraphs 2 and 3 of this
letter shall be deemed to have been amended correspondingly. If the Federal
Reserve discount rate falls more than once, additional new Notes shall be issued
as necessary. In any event, once an advance has been made and is evidenced by a
particular Note, that advance shall continue to bear the rate specified by
that Note until it matures. This paragraph applies only if you are an
individual or a partnership.
Your signature below shall constitute an acknowledgement that you have read
this commitment letter, and that you approve of all of the terms of this
commitment letter and that you have received a copy hereof.
Accepted this 25th day of Very truly yours,
NOVEMBER 1996. The proceeds
of the loans made under this NORTHERN NATIONAL BANK
letter will be used for By: /s/ Barbara A. Smith
business purposes exclusively ------------------------------
NORTECH SYSTEMS INCORPORATED Title: SENIOR VICE PRESIDENT
ILLEGIBLE --------------------------
By:-------------------------
Title: VICE PRESIDENT
-------------------
<PAGE>
[Logo] Northern
National Bank
201 3rd Street
Bemidji, MN 56601-0790
Telephone 218-751-1530
"LENDER"
COMMERCIAL SECURITY
AGREEMENT
BORROWER OWNER OF COLLATERAL
NORTECH SYSTEMS INCORPORATED NORTECH SYSTEMS INCORPORATED
ADDRESS ADDRESS
4050 NORRIS COURT 4050 NORRIS COURT
BEMIDJI, MN 56601 BEMIDJI, MN 56601
TELEPHONE NO. IDENTIFICATION NO. TELEPHONE NO. IDENTIFICATION NO.
218-751-0110 218-751-0110
1. SECURITY INTEREST. For good and valuable consideration, Owner of
Collateral ("Owner") grants to Lender identified above a continuing security
interest in the Collateral described below to secure the obligations
described in this Agreement.
2. OBLIGATIONS. The Collateral shall secure the payment and performance
of all of Borrower's and Owner's present and future, joint and/or several,
direct and indirect, absolute and contingent, express and implied,
indebtedness, (Including costs of collection, legal expenses and attorneys'
fees, incurred by Lender upon the occurrence of a default under this
Agreement, in collecting or enforcing payment of such indebtedness, or
preserving, protecting or realizing on the Collateral herein), liabilities,
obligations and covenants (cumulatively "Obligations") to Lender including
(without limitation) those arising under or pursuant to:
a. this Agreement and the following promissory notes and agreements:
INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER
- -------------------------------------------------------------------
VARIABLE $400,000.00 11/25/96 12/01/98 533932
b. all other present or future, Obligations of Borrower or Owner to
Lender (WHETHER INCURRED FOR THE SAME OR DIFFERENT PURPOSES THAN THE
FOREGOING);
c. all renewals, extensions, amendments, modifications, replacements or
substitutions to any of the foregoing; and
d. applicable law.
3. COLLATERAL. The Collateral shall consist of all of the
following-described property and Owner's rights, title and interest in such
property whether now owned or hereafter acquired by Owner and wherever
located:
[X] All accounts, contract rights and rights to payment in money or in
kind for goods sold or leased or for services rendered, and all
guarantees and security therefor; all returned or repossessed
goods arising from or relating to any account, contract right, or
right to payment; and any rights of Owner as an unpaid seller of
goods or services; including, but not limited to, the accounts and
contract rights described on Schedule A attached hereto and
incorporated herein by this reference;
[ ] All chattel paper, together with all guarantees and security
therefor; including, but not limited to, the chattel paper
described on Schedule A attached hereto and incorporated herein
by this reference;
[ ] All documents of title including, but not limited to, the documents
described on Schedule A attached hereto and incorporated herein by
this reference;
[X] All equipment, machinery, and vehicles including, but not limited
to, the equipment described on Schedule A attached hereto and
incorporated herein by this reference;
[ ] All fixtures, including, but not limited to, the fixtures located or
to be located on the real property described on Schedule B attached
hereto and incorporated herein by this reference;
[X] All general intangibles of any kind or nature including, but not
limited to, goodwill, literary rights, copyrights, trademarks and
patents; all securities, stocks, bonds, partnership interests, and
similar devices; any right to performance or payment, including,
without limitation, rights to receive dividends, tax refunds,
insurance claims and insurance proceeds, pension payments, and other
disbursements; things in action; and rights in intangible property
of any kind, specifically including, but not limited to, the general
intangibles described on Schedule A attached hereto and incorporated
herein by this reference;
[ ] All instruments including, but not limited to, the instruments
described on Schedule A attached hereto and incorporated herein by
this reference;
[X] All inventory (goods, merchandise, and other personal property)
which are held for sale or lease, or are furnished or to be furnished
under any contract of service or are raw materials, work-in-process,
supplies, or materials used or consumed in Owner's business, and any
right of Owner as an unpaid seller of goods or services, including,
but not limited to, the inventory described on Schedule A attached
hereto and incorporated herein by this reference;
[ ] All minerals or the like located on or related to the real property
described on Schedule B attached hereto and incorporated herein by
this reference;
[ ] All standing timber located on the real property described on
Schedule B attached hereto and incorporated herein by this
reference;
[ ] Other;
All monies, instruments, and savings, checking or other deposit accounts that
are now or in the future in Lender's custody or control (excluding IRA,
Keogh, trust accounts, and deposits subject to tax penalties if so assigned);
All accessions, accessories, additions, amendments, attachments,
modifications, replacements and substitutions to any of the above;
All proceeds and products of any of the above;
All policies of Insurance pertaining to any of the above as well as any
proceeds and unearned premiums pertaining to such policies; and
All books and records pertaining to any of the above.
<PAGE>
4. OWNER'S TAXPAYER IDENTIFICATION. Owner's social security number or
federal taxpayer identification number is:
41-1681094 .
- ----------------------
5. RESIDENCY/LEGAL STATUS. / / Owner is an individual(s) and a resident of
the state of:_____________________. /x/ Owner is a Corporation duly
____________
organized, validly existing and in good standing under the laws of the state of
MINNESOTA.
---------
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Owner represents,
warrants and covenants to Lender that:
(a) Owner is and shall remain the sole owner of the Collateral;
(b) Neither Owner nor, to the best of Owner's knowledge, has any other
party used, generated, released, discharged, stored, or disposed of
any hazardous material, toxic substance, or related material on any
of the Collateral. Owner shall not commit or permit such actions to
be taken in the future. The term "Hazardous Materials" shall mean
any substance, material, or waste which is or becomes regulated by
any governmental authority including, but not limited to, (i)
petroleum; (ii) asbestos; (iii) polychlorinated biphenyls; (iv)
those substances, materials or wastes designated as a "hazardous
substance" pursuant to Section 311 of the Clean Water Act or listed
pursuant to Section 307 of the Clean Water Act or any amendments or
replacements to these statutes; (v) those substances, materials or
wastes defined as a "hazardous waste" pursuant to Section 1004 of
the Resource Conservation Recovery Act or any amendments or
replacements to that statute; or (vi) those substances, materials or
wastes defined as a "hazardous substance" pursuant to Section 101
of the Comprehensive Environmental Response, Compensation and
Liability Act, or any amendments or replacements to that statute;
(c) Owner's chief executive office, chief place of business, office
where its business records are located, or residence is the address
identified above. Owner's other executive offices, places of
business, locations of its business records, or domiciles are
described on Schedule C attached hereto and incorporated herein by
this reference. Owner shall immediately advise Lender in writing of
any change in or addition to the foregoing addresses;
(d) Owner shall not become a party to any restructuring of its form of
business or participate in any consolidation, merger, liquidation
or dissolution without providing Lender with thirty (30) or more
days' prior written notice of such change;
(e) Owner shall notify Lender of the nature of any intended change of
Owner's name, or the use of any trade name, and the effective date
of such change;
(f) The Collateral is and shall at all times remain free of all tax and
other liens, security interests, encumbrances and claims of any
kind except for those belonging to Lender and those described on
Schedule D attached hereto and incorporated herein by this
reference. Without waiving the event of default as a result
thereof, Owner shall take any action and execute any document
needed to discharge the foregoing liens, security interests,
encumbrances and claims;
(g) Owner shall defend the Collateral against all claims and demands of
all persons at any time claiming any interest therein;
(h) All of the goods, fixtures, minerals or the like, and standing
timber constituting the Collateral is and shall be located at
Owner's executive offices, places of business, residence and
domiciles specifically described in this Agreement;
(i) Owner shall provide Lender with possession of all chattel paper and
instruments constituting the Collateral unless otherwise agreed by
Lender. Owner shall promptly mark all chattel paper, instruments,
and documents constituting the Collateral to show that the same are
subject to Lender's security interest;
(j) All of Owner's accounts or contract rights; chattel paper;
documents; general intangibles; instruments; and federal, state,
county, and municipal government and other permits and licenses;
trusts, liens, contracts, leases, and agreements constituting the
Collateral are and shall be valid, genuine and legally enforceable
obligations and rights belonging to Owner and not subject to any
claim, defense, set-off or counterclaim of any kind;
(k) Owner shall not amend, modify, replace, or substitute any account
or contract right; chattel paper; document; general intangible; or
instrument constituting the Collateral without the prior consent of
Lender, which shall not be unreasonably withheld;
(l) Owner has the right and is duly authorized to enter into and perform
its obligations under this Agreement. Owner's execution and
performance of these obligations do not and shall not conflict with
the provisions of any statute, regulation, ordinance, rule of law,
contract or other agreement which may now or hereafter be binding
on Owner;
(m) No action or proceeding is pending against Owner which might result
in any material adverse change in its business operations or
financial condition or materially affect the Collateral;
(n) Owner has not violated and shall not violate any applicable federal,
state, county or municipal statute, regulation or ordinance
(including but not limited to those governing Hazardous Materials)
which may materially and adversely affect its business operations
or financial condition or the Collateral;
(o) Owner shall, upon Lender's request, deposit all proceeds of the
Collateral into an account or accounts maintained by Owner or
Lender at Lender's institution;
(p) Owner will, upon receipt, deliver to Lender as additional
Collateral all securities distributed on account of the Collateral
such as stock dividends and securities resulting from stock splits,
reorganizations and recapitalizations; and
(q) This Agreement and the obligations described in this Agreement are
executed and incurred for business and not consumer purposes.
7. SALE OF COLLATERAL. Owner shall not assign, convey, lease, sell or
transfer any of the Collateral to any third party without the prior written
consent of Lender except for sales of inventory to buyers in the ordinary
course of business.
8. FINANCING STATEMENTS AND OTHER DOCUMENTS. Owner shall take all actions
and execute all documents required by Lender to attach, perfect and maintain
Lender's security interest in the Collateral and establish and maintain
Lender's right to receive the payment of the proceeds of the Collateral
including, but not limited to, executing any financing statements, fixture
filings, continuation statements, notices of security interest and
other documents required by the Uniform Commercial Code and other applicable
law. Owner shall pay the costs of filing such documents in all offices
wherever filing or recording is deemed by Lender to be necessary or
desirable. Lender shall be entitled to perfect its security interest in the
Collateral by filing carbon, photographic or other reproductions of the
aforementioned documents with any authority required by the Uniform
Commercial Code or other applicable law. Lender may execute and file any
financing statements, as well as extensions, renewals and amendments of
financing statements in such form as Lender may require to perfect and
maintain perfection of any security interest granted in this Agreement. Owner
appoints Lender as its agent and attorney-in-fact to endorse Owner's name on
all instruments and other remittances payable to Owner with respect to the
Collateral. This power of attorney is coupled with an interest and is
irrevocable.
9. INQUIRES AND NOTIFICATION TO THIRD PARTIES. Owner hereby authorizes
Lender to contact any third party and make any inquiry pertaining to Owner's
financial condition or the Collateral. In addition, Lender is authorized to
provide oral or written notice of its security interest in the Collateral to
any third party.
10. COLLECTION OF INDEBTEDNESS FROM THIRD PARTIES. Lender shall be
entitled to notify, and upon the request of Lender, Owner shall notify any
account debtor or other third party (including, but not limited to, insurance
companies) to pay any indebtedness or obligation owing to Owner and
constituting the Collateral (cumulatively "Indebtedness") to Lender whether or
not a default exists under this Agreement. Owner shall diligently collect the
Indebtedness owing to Owner from its account debtors and other third parties
until the giving of such notification. In the event that Owner possesses or
receives possession of any instruments or other remittances with respect to
the Indebtedness following the giving of such notification or if the
instruments or other remittances constitute the prepayment of any
Indebtedness or the payment of any insurance proceeds, Owner shall hold such
instruments and other remittances in trust for Lender apart from its other
property, endorse the instruments and other remittances to Lender, and
immediately provide Lender with possession of the instruments and other
remittances. Lender shall be entitled, but not required, to collect (by legal
proceedings or otherwise), extend the time for payment, compromise, exchange
or release any obligor or collateral upon, or otherwise settle any of the
Indebtedness whether or not an event of default exists under this Agreement.
Lender shall not be liable to Owner for any action, error, mistake, omission
or delay pertaining to the actions described in this paragraph or any damages
resulting therefrom.
11. POWER OF ATTORNEY. Owner hereby appoints Lender as its
attorney-in-fact to endorse Owner's name on all instruments and other
remittances payable to Owner with respect to the Indebtedness or other
documents pertaining to Lender's actions in connection with the
Indebtedness. In addition, Lender shall be entitled, but not required, to
perform any action or execute any document required to be taken or executed
by Owner under this Agreement. Lender's performance of such action or
execution of such documents shall not relieve Owner from any obligation or
cure any default under this Agreement. The powers of attorney described in
this paragraph are coupled with an interest and are irrevocable.
12. USE AND MAINTENANCE OF COLLATERAL. Owner shall use the Collateral
solely in the ordinary course of its business, for the usual purposes
intended by the manufacturer (if applicable), with due care, and in
compliance with the laws, ordinances, regulations, requirements and rules of
all federal, state, county and municipal authorities including environmental
laws and regulations and insurance policies. Owner shall not make any
alterations, additions or improvements to the Collateral without the prior
written consent of Lender. Without limiting the foregoing, all alterations,
additions and improvements made to the Collateral shall be subject to the
security interest belonging to Lender, shall not be removed without the prior
written consent of Lender, and shall be made at Owner's sole expense. Owner
shall take all actions and make any repairs or replacements needed to
maintain the Collateral in good condition and working order.
Page 2 of 5 ______________
<PAGE>
13. LOSS OR DAMAGE. Owner shall bear the entire risk of any loss, theft,
destruction or damage (cumulatively "Loss or Damage") to all or any part of
the Collateral. In the event of any Loss or Damage, Owner will either restore
the Collateral to its previous condition, replace the Collateral with similar
property acceptable to Lender in its sole discretion, or pay or cause to be
paid to Lender the decrease in the fair market value of the affected
Collateral.
14. INSURANCE. The Collateral will be kept insured for its full value
against all hazards including loss or damage caused by fire, collision, theft
or other casualty. If the Collateral consists of a motor vehicle, Owner will
obtain comprehensive and collision coverage in amounts at least equal to the
actual cash value of the vehicle with deductibles not to exceed
$______n/a_____. Insurance coverage obtained by Owner shall be from a
licensed insurer subject to Lender's approval. Owner shall assign to Lender
all rights to receive proceeds of insurance not exceeding the amount owed
under the obligations described above, and direct the Insurer to pay all
proceeds directly to Lender. The insurance policies shall require the
insurance company to provide Lender with at least thirty (30) days' written
notice before such policies are altered or cancelled in any manner. The
insurance policies shall name Lender as a loss payee and provide that no act
or omission of Owner or any other person shall affect the right of Lender to
be paid the insurance proceeds pertaining to the loss or damage of the
Collateral. In the event Owner fails to acquire or maintain insurance, Lender
(after providing notice as may be required by law) may in its discretion
procure appropriate insurance coverage upon the Collateral and charge the
insurance cost as an advance of principal under the promissory note. Owner
shall furnish Lender with evidence of insurance indicating the required
coverage. Lender may act as attorney-in-fact for Owner in making and settling
claims under insurance policies, cancelling any policy or endorsing Owner's
name on any draft or negotiable instrument drawn by any insurer.
15. INDEMNIFICATION. Lender shall not assume or be responsible for the
performance of any of Owner's obligations with respect to the Collateral
under any circumstances. Owner shall immediately provide Lender with written
notice of and indemnify and hold Lender and its shareholders, directors,
officers, employees and agents harmless from all claims, damages, liabilities
(including attorneys' fees and legal expenses), causes of action, actions,
suits and other legal proceedings (cumulatively "Claims") pertaining to its
business operations or the Collateral including, but not limited to, those
arising from Lender's performance of Owner's obligations with respect to the
Collateral. Owner, upon the request of Lender, shall hire legal counsel to
defend Lender from such Claims, and pay the attorneys' fees, legal expenses
and other costs to the extent permitted by applicable law, incurred in
connection therewith. In the alternative, Lender shall be entitled to employ
its own legal counsel to defend such Claims at Owner's cost.
16. TAXES AND ASSESSMENTS. Owner shall execute and file all tax returns
and pay all taxes, licenses, fees and assessments relating to its business
operations and the Collateral (including, but not limited to, income taxes,
personal property taxes, withholding taxes, sales taxes, use taxes, excise
taxes and workers' compensation premiums) in a timely manner.
17. INSPECTION OF COLLATERAL AND BOOKS AND RECORDS. Owner shall allow
Lender or its agents to examine, inspect and make abstracts and copies of the
Collateral and Owner's books and records pertaining to Owner's business
operations and financial condition or the Collateral during normal business
hours. Owner shall provide any assistance required by Lender for these
purposes. All of the signatures and information pertaining to the Collateral
or contained in the books and records shall be genuine, true, accurate and
complete in all respects.
18. DEFAULT. Owner shall be in default under this Agreement in the event
that Owner, Borrower or any guarantor:
(a) fails to make any payment under this Agreement or any other
indebtedness to Lender when due;
(b) fails to perform any obligation or breaches any warranty or covenant
to Lender contained in this Agreement or any other present or future
written agreement regarding this or any other indebtedness to Lender;
(c) provides or causes any false or misleading signature or
representation to be provided to Lender;
(d) allows the Collateral to be destroyed, lost or stolen, damaged in
any material respect, or subjected to seizure or confiscation;
(e) seeks to revoke, terminate or otherwise limit its liability under
any continuing guaranty;
(f) permits the entry or service of any garnishment, judgment, tax levy,
attachment or lien against Owner, any guarantor, or any of their
property;
(g) dies, becomes legally incompetent, is dissolved or terminated,
ceases to operate its business, becomes insolvent, makes an assignment
for the benefit of creditors, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding;
(h) allows the Collateral to be used by anyone to transport or store
goods, the possession, transportation, or use of which, is illegal; or
(i) causes Lender in good faith to deem itself insecure for any reason.
19. RIGHTS OF LENDER ON DEFAULT. If there is a default under this
Agreement, Lender shall be entitled to exercise one or more of the following
remedies without notice or demand (except as required by law):
(a) to declare the Obligations immediately due and payable in full;
(b) to collect the outstanding Obligations with or without resorting to
judicial process;
(c) to retain any instruments or other remittances constituting the
Collateral;
(d) to take possession of any Collateral in any manner permitted by law;
(e) to apply for and obtain, without notice and upon ex parte application,
the appointment of a receiver for the Collateral without regard to
Owner's financial condition or solvency, the adequacy of the Collateral
to secure the payment or performance of the obligations, or the
existence of any waste to the Collateral;
(f) to require Owner to deliver and make available to Lender any
Collateral at a place reasonably convenient to Owner and Lender;
(g) to sell, lease or otherwise dispose of any Collateral and collect
any deficiency balance with or without resorting to legal process;
(h) to set-off Owner's obligations against any amounts due to Owner
including, but not limited to, monies, instruments, and deposit
accounts maintained with Lender; and
(i) to exercise all other rights available to Lender under any other
written agreement or applicable law.
Lender's rights are cumulative and may be exercised together, separately, and
in any order. If notice to Owner of intended disposition of Collateral is
required by law, Lender will provide reasonable notification of the time and
place of any sale or intended disposition as required under the Uniform
Commercial Code. In the event that Lender institutes an action to recover any
Collateral or seeks recovery of any Collateral by way of a prejudgment remedy
in an action against Owner, Owner waives the posting of any bond which might
otherwise be required. Lender's remedies under this paragraph are in addition
to those available at common law, such as setoff.
20. APPLICATION OF PAYMENTS. Whether or not a default has occurred under
this Agreement, all payments made by or on behalf of Owner and all credits due
to Owner from the disposition of the Collateral or otherwise may be applied
against the amounts paid by Lender (including attorneys' fees and legal
expenses) in connection with the exercise of its rights or remedies described
in this Agreement and any interest thereon and then to the payment of the
remaining Obligations.
21. REIMBURSEMENT OF AMOUNTS EXPENDED BY LENDER. Owner shall reimburse
Lender for all amounts (including attorneys' fees and legal expenses) expended
by Lender in the performance of any action required to be taken by Owner or the
exercise of any right or remedy belonging to Lender under this Agreement,
together with interest thereon at the lower of the highest rate described in
any promissory note or credit agreement executed by Borrower or Owner or the
highest rate allowed by law from the date of payment until the date of
reimbursement. These sums shall be included in the definition of Obligations,
shall be secured by the Collateral identified in this Agreement and shall be
payable upon demand.
22. ASSIGNMENT. Owner shall not be entitled to assign any of its rights,
remedies or obligations described in this Agreement without the prior written
consent of Lender. Consent may be withheld by Lender in its sole discretion.
Lender shall be entitled to assign some or all of its rights and remedies
described in this Agreement without notice to or the prior consent of Owner in
any manner.
23. MODIFICATION AND WAIVER. The modification or waiver of any of
Owner's Obligations or Lender's rights under this Agreement must be contained
in a writing signed by Lender. Lender may perform any of Owner's Obligations or
delay or fail to exercise any of its rights without causing a waiver of those
Obligations or rights. A waiver on one occasion shall not constitute a waiver
on any other occasion. Owner's Obligations under this Agreement shall not be
affected if Lender amends, compromises, exchanges, fails to exercise, impairs
or releases any of the obligations belonging to any Owner or third party or any
of its rights against any Owner, third party or collateral.
24. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of Owner and Lender and their respective successors,
assigns, trustees, receivers, administrators, personal representatives,
legatees, and devisees.
25. NOTICES. Any notice or other communication to be provided under
this Agreement shall be in writing and sent to the parties at the addresses
described in this Agreement or such other address as the parties may designate
in writing from time to time.
26. SEVERABILITY. If any provision of this Agreement violates the law
or is unenforceable, the rest of the Agreement shall remain valid.
Page 3 of 5 ______________
<PAGE>
27. APPLICABLE LAW. This Agreement shall be governed by the laws of the
state indicated in Lender's address. Owner consents to the jurisdiction and
venue of any court located in the state indicated in Lender's address in the
event of any legal proceeding pertaining to the negotiation, execution,
performance or enforcement of any term or condition contained in this
Agreement or any related document and agrees not to commence or seek to
remove such legal proceeding in or to a different court.
28. COLLECTION COSTS. If Lender hires an attorney to assist in collecting
any amount due or enforcing any right or remedy under this Agreement, Owner
agrees to pay Lender's attorney's fees and collection costs.
29. MISCELLANEOUS. This Agreement is executed for commercial purposes.
Owner shall supply information regarding Owner's business operations and
financial condition or the Collateral in the form and manner as requested by
Lender from time to time. All information furnished by Owner to Lender shall
be true, accurate and complete in all respects. Owner and Lender agree that
time is of the essence. Owner waives presentment, demand for payment, notice
of dishonor and protest except as required by law. All references to Owner in
this Agreement shall include all parties signing below except Lender. If
there is more than one Owner, their obligations shall be joint and several.
This Agreement shall remain in full force and effect until Lender provides
Owner with written notice of termination. This Agreement and any related
documents represent the complete and integrated understanding between Owner
and Lender pertaining to the terms and conditions of those documents.
30. WAIVER OF JURY TRIAL LENDER AND OWNER HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT
TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH
THE PROMISSORY NOTE, THIS AGREEMENT AND ANY OTHER AGREEMENT CONTEMPLATED TO
BE EXECUTED IN CONJUNCTION HEREWITH OR THEREWITH, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF
EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER MAKING THE
LOAN EVIDENCED BY THE PROMISSORY NOTE.
31. ADDITIONAL TERMS:
Owner acknowledges that Owner has read, understands, and agrees to the terms
and conditions of this Agreement.
Dated: NOVEMBER 25, 1996
OWNER: NORTECH SYSTEMS INCORPORATED OWNER:
- ------------------------------------- ------------------------------------
GARRY M. ANDERLY
VICE PRESIDENT
OWNER: OWNER:
- ------------------------------------- ------------------------------------
OWNER: OWNER:
- ------------------------------------- ------------------------------------
OWNER: OWNER:
- ------------------------------------- ------------------------------------
Page 4 of 5
<PAGE>
SCHEDULE A
SCHEDULE B
The name of the record owner is: ____________________________________________
SCHEDULE C
SCHEDULE D
Page 5 of 5
<PAGE>
DISCRETIONARY COMMITMENT LETTER
(COMMERCIAL CREDIT)
NORTECH SYSTEMS INCORPORATED MAY 10, 1996
4050 NORRIS COURT
BEMIDJI, MN 56601
Dear GARRY ANDERLY
NORTHERN NATIONAL BANK is pleased to grant you a discretionary line of credit
on the following terms and conditions:
1. AMOUNT OF CREDIT. We may make loans to you from time to time during the
period from the date of this letter to and including FEBRUARY 10, 1997, in an
aggregate amount not to exceed at any time outstanding $500,000.00. Each loan
will be in the sole discretion of our officers, and nothing herein should be
interpreted as being a promise to make any one or more loans. If this /X/ is
checked, we anticipate that you will be allowed to prepay and reborrow so long
as no borrowing causes that dollar limit to be exceeded.
2. THE NOTE. Your obligation to repay all loans made by us under this
letter will be evidenced as follows (check one):
/X/ By your single promissory note in the above amount, dated the same date
as this letter (the "Note"). / / By a separate note for each loan, in each
case in the amount and dated as of the date of the loan (all references in
this letter to the "Note" are to be understood as applying to any notes
issued pursuant hereto).
3. INTEREST; MATURITY DATE. The Note shall bear interest (computed on the
basis of actual days elapsed and a 360 day year) on the principal balance
outstanding from time to time, from the date of the initial advance until the
Note is paid in full at the following rate:
/ / an annual rate of __________%;
/X/ an annual rate equal to 0.00% over the Base Rate (the term "Base Rate"
means the rate of interest established from time to time by THE NORTHERN
NATIONAL BANK as its "base" or "prime" rate);
/ / an annual rate equal to _______% in excess of the Discount Rate (the term
"Discount Rate" means the discount rate on 90-day commercial paper in
effect from time to time at the Federal Reserve Bank of Minneapolis)
(including, if permitted by P.L. 96-221, Section 511, any surcharge
thereon);
/ / other: ___________________________________________________________________
__________________________________________________________________________
If the Note evidences a variable rate loan, the following provisions shall
also apply:
a. If the $100,000 exemption to the usury law does not apply and the
borrower is not a corporation, the annual rate of interest on the the Note
shall never exceed / / ________% / / a rate that is ___________% in excess
of the Discount Rate.
b. The Note shall bear the same rate of interest after it becomes due as
was in effect on its due date unless the $100,000 exemption from the
usury law applies.
c. The rate of interest shall initially be determined as of the date hereof
and shall thereafter be adjusted: /X/ daily on the same day the Index
Rate changes; / / daily on the day following the day the Index Rate
changes; / / monthly, the rate for any given month depending on the
Index Rate for the last day of the immediately preceding month;
/ / monthly, on the ________ day of each calendar month with the rate
being determined based on the Index Rate in effect on the day of
change; or, / / as follows: _____________________________________________
_________________________________________________________________________
The term "Index Rate" means the Base Rate, the Discount Rate or the rate
described in the "other" paragraph, as applicable.
The amount of interest earned each month will be payable / / at maturity,
/X/ on or before the 10TH day of the next month, and on demand. In addition,
any earned and unpaid interest will be payable on the due date of the Note.
The unpaid balance of the Note shall be due and payable in full (check
one): / / on demand, and in any event on _________, if demand has not been
made by that day; / / on ____________; /X/ on the date stated in the Note,
not later than FEBRUARY 10, 1997.
The Note will also specify events of default and the rights and remedies
available to us upon the occurrence of an event of default. The Note must be
properly executed by you and be in form and substance acceptable to us.
4. SECURITY. The Note will be / / unsecured /X/ secured by:
A. /X/ UCC security agreement granting a security interest in the
following property:
(a) /X/ Inventory;
(b) /X/ Equipment;
(c) /X/ Accounts;
(d) /X/ General intangibles;
(e) / / Motor vehicles (other than equipment) described as follows:
___________________________________________________________
____________________________________________________________
and all substitutions and replacements for, and all
accessions, accessories, attachments, parts, equipment and
repairs now or hereafter attached to such motor vehicles;
(f) / / ____________________________________________________________
(specify)
This property will be more fully described in the UCC security agreement. The
security interest shall extend to property of the type described, whether now
owned or hereafter acquired.
B. / / A real estate mortgage granting a lien on the following real
estate:______________________________________________________
_____________________________________________________________
and on all property now or hereafter attached or affixed to
that real estate.
5. DROP IN DISCOUNT RATE. If this letter provides that your obligations
will bear interest at a fixed rate or at a variable rate subject to a fixed
interest rate ceiling and if the Federal Reserve discount rate falls after
the date of this letter, so that the rate or rate ceiling specified is no
longer permissible, that rate or rate ceiling that applies to subsequent
advances shall be reduced automatically and we will ask you to execute a
new Note or Notes to evidence subsequent advances. If the original Note was a
fixed rate Note, the new Note shall bear interest at the highest permissible
rate. If the original Note bore interest at a variable rate subject to a
fixed ceiling, interest on the new Note shall vary with the same index,
subject to the highest permissible ceiling. In either event, paragraphs 2
and 3 of this letter shall be deemed to have been amended correspondingly.
If the Federal Reserve discount rate falls more than once, additional new
Notes shall be issued as necessary. In any event, once an advance has been
made and is evidenced by a particular Note, that advance shall continue to
bear the rate specified by that Note until it matures. This paragraph applies
only if you are an individual or a partnership.
Your signature below shall constitute an acknowledgment that you have read
this commitment letter, and that you approve of all of the terms of this
commitment letter and that you have received a copy hereof.
Accepted this 10TH day of
MAY, 1996. The proceeds Very truly yours,
of the loans made under
this letter will be used for NORTHERN NATIONAL BANK
business purposes exclusively. By: /s/ Barbara A. Smith
NORTECH SYSTEMS INCORPORATED -------------------------------------
- ------------------------------ Title: SENIOR VICE PRESIDENT
By: /s/ Garry M. Anderly ------------------------------------
- ------------------------------
Title: VICE PRESIDENT
<PAGE>
COMMERCIAL CONTINUING
GUARANTY
(LIMITED)
- -------------------------------------------------------------------------------
GUARANTOR BORROWER
- -------------------------------------------------------------------------------
MYRON KUNIN NORTECH SYSTEMS INCORPORATED
- -------------------------------------------------------------------------------
ADDRESS ADDRESS
- -------------------------------------------------------------------------------
7201 METRO BOULEVARD 4050 NORRIS COURT
MINNEAPOLIS, MN 55439 BEMIDJI, MN 56601
- -------------------------------------------------------------------------------
TELEPHONE NO. IDENTIFICATION NO. TELEPHONE NO. IDENTIFICATION NO.
- -------------------------------------------------------------------------------
218-751-0110
- -------------------------------------------------------------------------------
1. CONSIDERATION. This Guaranty is being executed to induce Lender
indicated above to enter into one or more loans or other financial
accommodations with or on behalf of Borrower.
2. GUARANTY. Guarantor hereby unconditionally guarantees the prompt and
full payment and performance of Borrower's present and future, joint and/or
several, direct and indirect, absolute and contingent, express and implied,
indebtedness, liabilities, obligations and convenants (cumulatively
"Obligations") to Lender as follows:
/ / LIMITED: Guarantor's Obligations under this Guaranty shall include all
present or future written agreements between Borrower and Lender (whether
executed for the same or different purposes), but shall be limited to the
principal amount of _________________________________________________
___________________________ Dollars, together with all interest and all of
Lender's expenses and costs, incurred in connection with the Obligations,
including any amendments, extensions, modifications, renewals, replacements
or substitutions thereto.
/X/ LIMITED TO THE FOLLOWING DESCRIBED NOTES/AGREEMENTS: Guarantor's
Obligations under this Guaranty shall be limited to the following described
promissory notes and agreements between Borrower and Lender, together with
all interest and all of Lender's expenses and costs, incurred in connection
with the Obligations, including any amendments, extensions, modifications,
renewals, replacements or substitutions thereto:
- -----------------------------------------------------------------------------
INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER
- -----------------------------------------------------------------------------
VARIABLE $500,000.00 05/10/96 02/10/97 533717
- -----------------------------------------------------------------------------
/ / If checked, this Guaranty is secured by a security interest in the
property described in the documents executed in connection with this Guaranty.
3. ABSOLUTE AND CONTINUING NATURE OF GUARANTY. Guarantor's obligations
under this Guaranty are absolute and continuing and shall not be affected or
impaired if Lender amends, renews, extends, compromises, exchanges, fails to
exercise, impairs or releases any of the obligations belonging to any
Borrower, Co-guarantor or third party of any of Lender's rights against any
Borrower, Co-guarantor, third party, or collateral. In addition, Guarantor's
Obligations under this Guaranty shall not be affected or impaired by the
death, incompetency, termination, dissolution, insolvency, business
cessation, or other financial deterioration of any Borrower, Guarantor, or
third party.
4. DIRECT AND UNCONDITIONAL NATURE OF GUARANTY. Guarantor's Obligations
under this Guaranty are direct and unconditional and may be enforced
without requiring Lender to exercise, enforce, or exhaust any right or
remedy against any Borrower, Co-guarantor, third party, or collateral.
5. WAIVER OF NOTICE. Guarantor hereby waives notice of the acceptance of
this Guaranty; notice of present and future extensions of credit and other
financial accommodations by Lender to any Borrower; notice of the obtaining or
release of any guaranty, assignment or other security for any of the
Obligations; notice of presentment for payment, demand, protest, dishonor,
default, and nonpayment pertaining to the Obligations and this Guaranty and
all other notices and demands pertaining to the Obligations and this
Guaranty as permitted by law.
6. WAIVER OF JURY TRIAL. LENDER AND GUARANTOR KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT
TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH
THE PROMISSORY NOTE, THIS GUARANTY AND ANY OTHER AGREEMENT CONTEMPLATED TO
BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY.
THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER MAKING THE LOAN EVIDENCED
BY THE PROMISSORY NOTE.
7. DEFAULT. Guarantor shall be in default under this Guaranty in the
event that any Borrower or Guarantor:
(a) fails to pay any amount under this Guaranty or any other
indebtedness to Lender when due (whether such amount is due by
acceleration or otherwise);
(b) fails to perform any obligation or breaches any warranty or
covenant to Lender contained in this Guaranty or any other present
or future written agreement:
(c) provides or causes any false or misleading signature or
representation to be provided to Lender;
(d) allows any collateral for the Obligations or this Guaranty to be
destroyed, lost or stolen, or damaged in any material respect;
(e) permits the entry or service of any garnishment, judgment, tax
levy, attachment or lien against Borrower, Guarantor, or any of their
property or the Collateral;
(f) dies, becomes legally incompetent, is dissolved or terminated,
ceases to operate its business, becomes insolvent, makes an
assignment for the benefit of creditors, or becomes the subject of
any bankruptcy, insolvency or debtor rehabilitation proceeding; or
(g) causes Lender to deem itself insecure in good faith for any reason.
- ------------------------------------------------------------------------------
GUARANTOR ACKNOWLEDGES GUARANTOR HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS IF THIS AGREEMENT INCLUDING THE TERMS AND CONDITIONS ON
THE REVERSE SIDE. GUARANTOR HAS EXECUTED THIS AGREEMENT WITH THE INTENT TO BE
LEGALLY BOUND. GUARANTOR ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS
AGREEMENT.
GUARANTOR: MYRON KUNIN GUARANTOR:
/s/ Myron Kunin
- -------------------------------- -----------------------------------
MYRON KUNIN
GUARANTOR: GUARANTOR:
- -------------------------------- -----------------------------------
<PAGE>
8. RIGHTS OF LENDER ON DEFAULT. If there is a default under this
Guaranty, Lender shall be entitled to exercise one or more of the following
remedies without notice or demand (except as required by law):
(a) to declare Guarantor's Obligations under this Guaranty immediately
due and payable in full;
(b) to collect the outstanding obligations under this Guaranty with or
without resorting to judicial process;
(c) to set-off Guarantor's Obligations under this Guaranty against any
amounts due to Guarantor including, but not limited to, monies,
instruments, and deposit accounts maintained with Lender; and
(d) to exercise all other rights available to Lender under any other
written agreement or applicable law.
Lender rights are cumulative and may be exercised together, separately, and
in any order.
9. WAIVER OF DEFENSES. The Guarantor waives all defenses, claims, and
discharges of Borrower or any other third party pertaining to the Obligations,
except the defense of payment in full. The Guarantor will not assert against
the Lender any defense of waiver, release, discharge in bankruptcy, statute
of limitations, res judicata, statute of frauds, anti-deficiency statute,
fraud, incapacity, illegality or unenforceability which may be available to
Borrower or any third party, whether or not on account of a related
transaction. The Guarantor agrees that the Guarantor shall be liable for any
deficiency remaining after foreclosure of any mortgage or security interest
securing the Obligations, whether or not the liability of Borrower or any
other third party for the deficiency is discharged by statute or judicial
decision.
10. SUBORDINATION. The payment of any present or future indebtedness of
Borrower to Guarantor will be postponed and subordinated to the payment in
full of any present or future indebtedness of Borrower to Lender during the
term of this Agreement. In the event that Guarantor receives any monies,
instruments, or other remittances to be applied against Borrower's
obligations to Guarantor. Guarantor will hold these funds in trust for Lender
and immediately endorse or assign (if necessary) and deliver these monies,
instruments and other remittances to Lender. Guarantor agrees that Lender
shall be preferred to Guarantor in any assignment for the benefit of
Borrower's creditors in any bankruptcy, insolvency, liquidation, or
reorganization proceeding commenced by or against Borrower in any federal
or state court.
11. INDEPENDENT INVESTIGATION. Guarantor's execution and delivery to
Lender of this Guaranty is based solely upon Guarantor's Independent
Investigation of Borrower's financial condition and not upon any written or
oral representation of Lender in any manner. Guarantor assumes full
responsibility for obtaining any additional information regarding Borrower's
financial condition and Lender shall not be required to furnish Guarantor with
any information of any kind regarding Borrower's financial condition.
12. ACCEPTANCE OF RISKS. Guarantor acknowledges the absolute and
continuing nature of this Guaranty and voluntarily accepts the full range of
risks associated herewith including, but not limited to, the risk that
Borrower's financial condition shall deteriorate or the risk that Borrower
shall incur additional Obligations to Lender in the future.
13. SUBROGATION. The Guarantor hereby irrevocably waives and releases the
Borrower from all "claims" (as defined in Section 101(5) of the Bankruptcy
Code) to which the Guarantor is or would, at any time, be entitled by virtue
of its obligations under this Guaranty, including, without limitation, any
right of subrogation (whether contractual, under Section 509 of the
Bankruptcy Code, or otherwise), reimbursement, contribution, exoneration or
similar right against the Borrower.
14. APPLICATION OF PAYMENTS. Lender will be entitled to apply any
payments or other monies received from Borrower, any third party, or any
collateral against Borrower's present and future obligations to Lender in any
order.
15. TERMINATION. This Guaranty shall remain in full force and effect
until Lender executes and delivers to Guarantor a written release thereof.
Notwithstanding the foregoing, Guarantor shall be entitled to terminate any
guaranty as to Borrower's future Obligations to Lender following any
anniversary of this Guaranty by providing Lender with ten (10) or more days'
written notice of such termination by hand-delivery or certified mail. Notice
shall be deemed given when received by Lender. Such notice of termination
shall not affect or impair any of the agreements and obligations of the
Guarantor under this Agreement with respect to any of the obligations
existing prior to the time of actual receipt of such notice by Lender, any
extensions or renewals thereof, and any interest on any of the foregoing.
16. ASSIGNMENT. Guarantor shall not be entitled to assign any of its
rights or obligations described in this Guaranty without Lenders' prior
written consent which may be withheld by Lender in its sole discretion.
Lender shall be entitled to assign some or all of its rights and remedies
described in this Guaranty without notice to or the prior consent of
Guarantor in any manner. Unless the Lender shall otherwise consent in
writing, the Lender has not assigned.
17. MODIFICATION AND WAIVER. The modification or waiver of any of
Guarantor's obligations or Lender's rights under this Guaranty must be
contained in a writing signed by Lender. Lender may delay in exercising or
fail to exercise any of its rights without causing a waiver of those rights.
A waiver on one occasion shall not constitute a waiver on any other occasion.
18. SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon and inure
to the benefit of Guarantor and lender and their respective successors,
assigns, trustees, receivers, administrators, personal representatives,
legatees, and devisees.
19. NOTICE. Any notice or other communication to be provided under this
Guaranty shall be in writing and sent to the parties at the addresses
described in this Guaranty or such other addresses as the parties may
designate in writing from time to time.
20. SEVERABILITY. If any provision of this Guaranty violates the law or
is unenforceable, the rest of the Guaranty shall remain valid.
21. APPLICABLE LAW. This Guaranty shall be governed by the laws of the
state indicated in Lender's address. Guarantor consents to the
and venue of any court located in such state in the event of any legal
proceeding under this Guaranty.
22. COLLECTION COSTS. If Lender hires and attorney to assist in
collecting any amount due or enforcing any right or remedy under this
Guaranty, Guarantor agrees to pay Lender's attorneys' fees, legal expenses
and other costs as permitted by law.
23. REPRESENTATIONS OF GUARANTOR. Guarantor acknowledges receipt of
reasonably equivalent value in consideration for the execution of this
Guaranty and represents that, after giving effect to this Guaranty, the fair
market value of Guarantor's assets exceeds Guarantor's total liabilities,
including contingent, subordinate and unliquidated liabilities, that
Guarantor has sufficient cash flow to meet debts as they mature, and the
Guarantor does not have unreasonably small capital.
24. MISCELLANEOUS. This Guaranty is executed in connection with a
commercial loan. Guarantor will provide Lender with a current financial
statement upon request. All references to Guarantor in this Guaranty shall
include all entities or persons signing this Guaranty. If there is more than
one Guarantor, their obligations shall be joint and several. This Guaranty
and any related documents represent the complete and integrated understanding
between Guarantor and Lender pertaining to the terms and conditions of those
documents.
25. ADDITIONAL TERMS.
<PAGE>
EXHIBIT 10.4
<PAGE>
COMMERCIAL/AGRICULTURAL
REVOLVING
NOTE-VARIABLE RATE
"LENDER": "BORROWER":
NORTHERN NATIONAL BANK Nortech Systems Incorporated and
201 Third Street Nortech Medical Services, Inc.
Bemidji, MN 56601-0790 641 East Lake Street, Suite 234
(218) 751-1530 Wayzata, MN 55391
OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
INITIALS RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER
- --------------------------------------------------------------------------------
BAS VARIABLE $3,000,000.00 12/31/96 6/30/98 533551
- --------------------------------------------------------------------------------
PROMISE TO PAY
For value received, the undersigned Borrower (whether one or more persons
or entities, and if more than one, then jointly and severally) promises to
pay to the order of Lender indicated above, the principal amount of Three
Million and No/100ths Dollars ($3,000,000.00) or, if less, the aggregate
unpaid principal amount of all loans or advances made by the Lender to the
Borrower, plus interest on the unpaid principal balance at the rate and in
the manner described below. All amounts received by Lender shall be applied
first to late payment charges and expenses, then to accrued interest, and
then to principal or in any other order as determined by Lender, in Lender's
sole discretion, as permitted by law.
LOAN AGREEMENT; INTEREST RATE: This Note evidences a loan or loans made
under, and is subject to acceleration as provided in, and the other terms and
conditions of, that certain Commercial Loan Agreement dated as of December
29, 1995, as amended by an Amendment to Loan Agreement dated as of November
4, 1996, and by a Second Amendment to Loan Agreement dated as of December 31,
1996, by and among Nortech Systems Incorporated, Nortech Medical Services,
Inc. and Northern National Bank (as the same may be amended, restated,
modified or supplemented from time to time, the "Loan Agreement"). Interest
on the principal amount hereunder remaining unpaid from time to time shall be
calculated at the rates set forth in Loan Agreement.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest
according to the following schedule:
Interest only payments beginning February 1, 1997, and
continuing at monthly time intervals thereafter. A final
payment of the unpaid principal balance plus accrued
interest is due and payable on June 30, 1998.
<PAGE>
All payments will be made to First Bank National Association, a national
banking association, as provided in the Loan Agreement, in lawful currency of
the United States of America.
RENEWAL: This Note is a renewal of loan number 533551 and is not in
payment of that Note.
SECURITY: To secure the payment and performance of obligations incurred
under this Note, Borrower grants Lender a security interest in, and pledges
and assigns to Lender all of Borrower's rights, title and interest, in all
monies, instruments, savings, checking and other deposit accounts of
Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to
tax penalties if so assigned) that are now or in the future in Lender's
custody or control. Upon default, and to the extent permitted by applicable
law, Lender may exercise any or all of its rights or remedies as a secured
party with respect to such property which rights and remedies shall be in
addition to all other rights and remedies granted to Lender including,
without limitation, Lender's common law right of setoff. The obligations
under this Note are also secured by a lien and/or security interest in the
property described in the documents executed in connection with this Note as
well as any other property designated as security now or in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all
prepayments will be credited as determined by Lender and as permitted by law.
If this Note is prepaid in full, there will be no prepayment penalty.
LATE PAYMENT CHARGE: If a payment is received more than ten (10) days
late, Borrower will be charged a late payment charge of 5.00% of the unpaid
late installment.
REVOLVING FEATURE: This Note possesses a revolving feature. Upon
satisfaction of the conditions set forth in this Note, Borrower shall be
entitled to borrow up to the full principal amount of the Note and to repay
and re-borrow from time to time during the term of this Note.
Lender shall maintain a record of the amounts loaned to and repaid by
Borrower under this Note. The aggregate unpaid principal amount shown on such
record shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on this Note. The Lender's failure to record the date and amount
of any loan or advance shall not limit or otherwise affect the obligations of
the Borrower under this Note to repay the principal amount of the loans or
advances together with all interest accruing thereon. Lender shall not be
obligated to provide Borrower with a copy of the record on a periodic basis.
Borrower shall be entitled to inspect or obtain a copy of the record during
Lender's business hours.
CONDITIONS FOR ADVANCES: If there is no default under this Note,
Borrower shall be entitled to borrow monies or make draws under this Note
(subject to the limitations described above) under the conditions described
herein and in the Loan Agreement.
2
<PAGE>
GENERAL TERMS AND CONDITIONS: This Note is subject to the following general
terms and conditions:
GENERAL TERMS AND CONDITIONS
1. DEFAULT: Borrower will be in default under this Note in the event that
Borrower or any guarantor or any other third party: (a) fails to make any
payment on this Note or any other indebtedness to Lender when due; (b) fails
to perform any obligation or breaches any warranty or covenant to Lender
contained in this Note or any other present or future written agreement
regarding this or any indebtedness of Borrower to Lender; (c) provides or
causes any false or misleading signature or representation to be provided to
Lender; (d) allows the collateral securing this Note (if any) to be lost,
stolen, destroyed, damaged in any material respect, or subjected to seizure
or confiscation; (e) permits the entry or service of any garnishment,
judgment, tax levy, attachment or lien against Borrower, any guarantor, of
any of their property or the Collateral; (f) dies, becomes legally
incompetent, is dissolved or terminated, ceases to operate its business,
becomes insolvent, makes an assignment for the benefit of creditors, fails to
pay debts as they become due, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem
itself insecure for any reason, or Lender, for any reason, in good faith
deems itself insecure.
2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender
will be entitled to exercise one or more of the following remedies without
notice or demand (except as required by law): (a) to cease making additional
advances under this Note; (b) to declare the principal amount plus accrued
interest under this Note and all other present and future obligations of
Borrower immediately due and payable in full; (c) to collect the outstanding
obligations of Borrower with or without resorting to judicial process; (d) to
take possession of any collateral in any manner permitted by law; (e) to
require Borrower to deliver and make available to Lender any collateral at a
place reasonably convenient to Borrower and Lender; (f) to sell, lease or
otherwise dispose of any collateral and collect any deficiency balance with
or without resorting to legal process; (g) to set-off Borrower's obligations
against any amounts due to Borrower including, but not limited to, monies,
instruments, and deposit accounts maintained with Lender; and (h) to exercise
all other rights available to Lender under any other written agreement or
applicable law. Lender's rights are cumulative and may be exercised
together, separately, and in any order. Lender's remedies under this
paragraph are in addition to those available at common law, including, but
not limited to, the right of set-off.
3. FINANCIAL INFORMATION: Borrower will provide Lender with current financial
statements and other financial information (including, but not limited to,
balance sheets and profit and loss statements) upon request.
3
<PAGE>
4. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's
obligations or Lender's rights under this Note must be contained in a writing
signed by Lender. Lender may perform any of Borrower's obligations or delay
or fail to exercise any of its rights without causing a waiver of those
obligations or rights. A waiver on one occasion will not constitute a waiver
on any other occasion. Borrower's obligations under this Note shall not be
affected if Lender amends, compromises, exchanges, fails to exercise, impairs
or releases any of the obligations belonging to any co-borrower or guarantor
or any of its rights against any co-borrower, guarantor or collateral.
5. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is
invalid, illegal or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby. Notwithstanding anything contained in this Note to the contrary, in
no event shall interest accrue under this Note, before or after maturity, at
a rate in excess of the highest rate permitted by applicable law, and if
interest (including any charge or fee held to be interest by a court of
competent jurisdiction) in excess thereof be paid, any excess shall
constitute a payment of, and be applied to, the principal balance hereof, and
if the principal balance has been fully paid, then such interest shall be
repaid to Borrower.
6. ASSIGNMENT: Borrower will not be entitled to assign any of its rights,
remedies or obligations described in this Note without the prior written
consent of Lender which may be withheld by Lender in its sole discretion.
Lender will be entitled to assign some or all of its rights and remedies
described in this Note without notice to or the prior consent of Borrower in
any manner.
7. NOTICE: Any notice or other communication to be provided to Borrower or
Lender under this Note shall be in writing and sent to the parties at the
addresses described in this Note or such other address as the parties may
designate in writing from time to time.
8. APPLICABLE LAW: This Note shall be governed by the laws of the state
indicated in Lender's address. Borrower consents to the jurisdiction and
venue of any court located in the state indicated in Lender's address in the
event of the any legal proceeding pertaining to the negotiation, execution,
performance or enforcement of any term or condition contained in this Note or
any related loan document and agrees not to commence or seek to remove such
legal proceeding in or to a different court.
4
<PAGE>
9. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any
amount due or enforcing any right or remedy under this Note, Borrower agrees
to pay Lender's attorney's fees, to the extent permitted by applicable law,
and collection costs.
10. RETURNED CHECK: If a check for payment is returned to Lender for any
reason, Lender will charge an additional fee of $15.00.
11. MISCELLANEOUS: This Note is being executed for commercial/agricultural
purposes. Borrower and Lender agree that time is of the essence. Borrower
waives presentment, demand for payment, notice of dishonor and protest. If
Lender obtains a judgment for any amount due under this Note, interest will
accrue on the judgment at the judgment rate of interest permitted by law. All
references to Borrower in this Note shall include all of the parties signing
this Note. If there is more than one Borrower, their obligations will be
joint and several. This Note and any related documents represent the complete
and integrated understanding between Borrower and Lender pertaining to the
terms and conditions of those documents.
12. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN
ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON THIS NOTE OR THE COLLATERAL
SECURING THIS NOTE.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE, INCLUDING THE GENERAL TERMS AND CONDITIONS
SET FORTH ABOVE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
Note Date: December 31,1996
BORROWER: BORROWER:
NORTECH SYSTEMS INCORPORATED NORTECH MEDICAL SERVICES, INC
By: /s/ Garry M. Anderly By: /s/ Garry M. Anderly
-------------------- --------------------
Garry M. Anderly Garry M. Anderly
Its: Vice President Its: Vice President
5
<PAGE>
EXHIBIT 10.5
<PAGE>
BORROWER
[LOGO] NORTHERN NORTECH SYSTEMS INCORPORATED COMMERCIAL/
NATIONAL BANK AGRICULTURAL
201 3RD STREET REVOLVING OR DRAW
BEMIDJI, MN 56601-0790 ADDRESS NOTE-VARIABLE RATE
TELEPHONE 218-751-1530 4050 NORRIS COURT
"LENDER" BEMIDJI, MN 56601
TELEPHONE NO. IDENTIFICATION NO.
218-751-0110
OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
INITIALS RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER
- --------------------------------------------------------------------------------
BAS VARIABLE $500,000.00 05/10/96 02/10/97 533717
- --------------------------------------------------------------------------------
PROMISE TO PAY
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of FIVE HUNDRED THOUSAND AND NO/100 Dollars
($500,000.00) or, if less, the aggregate unpaid principal amount of all loans
or advances made by the Lender to the Borrower, plus interest on the unpaid
principal balance at the rate and in the manner described below. All amounts
received by Lender shall be applied first to late payment charges and
expenses, then to accrued interest, and then to principal or in any other
order as determined by Lender, in Lender's sole discretion, as permitted by
law.
INTEREST RATE: This Note has a variable rate feature. Interest on the Note
may change from time to time if the Index Rate identified below changes.
Interest shall be computed on the basis of 360 days per year. Interest on
this Note shall be calculated at a variable rate equal to NO/1000 percent
(0.000%) per annum over the Index Rate. The Initial Index Rate is currently
EIGHT AND 25/100 percent (8.250%) per annum. The Initial Interest rate on
this Note shall be EIGHT AND 250/1000 percent (8.250%) per annum. Any change
in the interest rate resulting from a change in the Index
Rate will be effective on: THE DATE THE INDEX RATE CHANGES
INDEX RATE: The Index Rate for this Note shall be: THE NATIONAL PRIME RATE AS
PUBLISHED IN THE WALL STREET JOURNAL.
MINIMUM RATE/MAXIMUM RATE: The minimum interest rate on this Note shall be
FOUR AND NO/1000 percent (4.000%) per annum. The maximum interest rate on
this Note shall not exceed NINETEEN AND NO/1000 percent (19.000%) per annum
or the maximum interest rate Lender is permitted to charge by law, whichever
is less.
POST-MATURITY RATE: / / If checked, this loan is for a binding commitment of
at least $100,000.00 and after maturity, due to scheduled maturity or
acceleration, past due amounts shall bear interest at the lesser of:________
___________________________________________________, or the maximum interest
rate Lender is permitted to charge by law.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to
the following schedule:
INTEREST ONLY PAYMENTS BEGINNING JUNE 10, 1996 AND CONTINUING AT MONTHLY
TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE
PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON FEBRUARY 10, 1997.
All payments will be made to Lender at its address described above and in
lawful currency of the United States of America.
RENEWAL: If checked, / / this Note is a renewal of loan number__________, and
is not in payment of that Note.
SECURITY: To secure the payment and performance of obligations incurred under
this Note, Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest, in all
monies, instruments, savings, checking and other deposit accounts of
Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to
tax penalties if so assigned) that are now or in the future in Lender's
custody or control. Upon default, and to the extent permitted by applicable
law, Lender may exercise any or all of its rights or remedies as a secured
party with respect to such property which rights and remedies shall be in
addition to all other rights and remedies granted to Lender including,
without limitation, Lender's common law right of setoff. /X/ If checked, the
obligations under this Note are also secured by a lien and/or security
interest in the property described in the documents executed in connection
with this Note as well as any other property designated as security now or in
the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all
prepayments will be credited as determined by Lender and as permitted by
law. If this Note is prepaid in full, there will be: /X/ No prepayment
penalty. / / A prepayment penalty of _______% of the principal prepaid.
LATE PAYMENT CHARGE: If a payment is received more than 10 days late,
Borrower will be charged a late payment charge of 5.00% of the unpaid late
installment.
REVOLVING OR DRAW FEATURE: /X/ This Note possesses a revolving feature. Upon
satisfaction of the conditions set forth in this Note, Borrower shall be
entitled to borrow up to the full principal amount of the Note and to repay
and reborrow from time to time during the term of this Note. This Note
possesses a draw feature. Upon satisfaction of the conditions set forth in
this Note, Borrower shall be entitled to make one or more draws under this
Note. The aggregate amount of such draws shall not exceed the full principal
amount of this Note.
Lender shall maintain a record of the amounts loaned to and repaid by
Borrower under this Note. The aggregate unpaid principal amount shown on such
record shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on this Note. The Lender's failure to record the date and amount
of any loan or advance shall not limit or otherwise affect the obligations of
the Borrower under this Note to repay the principal amount of the loans or
advances together with all interest accruing thereon. Lender shall not be
obligated to provide Borrower with a copy of the record on a periodic basis.
Borrower shall be entitled to inspect or obtain a copy of the record during
Lender's business hours.
CONDITIONS FOR ADVANCES: If there is no default under this Note, Borrower
shall be entitled to borrow monies or make draws under this Note (subject to
the limitations described above) under the following conditions:
- --------------------------------------------------------------------------------
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE
SIDE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
NOTE DATE: MAY 10, 1996
BORROWER: NORTECH SYSTEMS INCORPORATED BORROWER:
/s/ Garry M. Anderly
- -------------------------------------- -------------------------------------
GARRY M. ANDERLY
VICE PRESIDENT
BORROWER: BORROWER:
- -------------------------------------- -------------------------------------
BORROWER: BORROWER:
- -------------------------------------- -------------------------------------
BORROWER: BORROWER:
- -------------------------------------- -------------------------------------
<PAGE>
TERMS AND CONDITIONS
1. DEFAULT: Borrower will be in default under this Note in the event that
Borrower or any guarantor or any other third party: (a) fails to make any
payment on this Note or any other indebtedness to Lender when due; (b) fails
to perform any obligation or breaches any warranty or covenant to Lender
contained in this Note or any other present or future written agreement
regarding this or any indebtedness of Borrower to Lender; (c) provides or
causes any false or misleading signature or representation to be provided to
Lender; (d) allows the collateral securing this Note (if any) to be lost,
stolen, destroyed, damaged in any material respect, or subjected to seizure
or confiscation; (e) permits the entry or service of any garnishment,
judgment, tax levy, attachment or lien against Borrower, any guarantor, or
any of their property or the Collateral; (f) dies, becomes legally
incompetent, is dissolved or terminated, ceases to operate its business,
becomes insolvent, makes an assignment for the benefit of creditors, fails to
pay debts as they become due, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem
itself insecure for any reason, or Lender, for any reason, in good faith
deems itself insecure.
2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender
will be entitled to exercise one or more of the following remedies without
notice or demand (except as required by law): (a) to cease making additional
advances under this Note; (b) to declare the principal amount plus accrued
interest under this Note and all other present and future obligations of
Borrower immediately due and payable in full; (c) to collect the outstanding
obligations of Borrower with or without resorting to judicial process; (d) to
take possession of any collateral in any manner permitted by law; (e) to
require Borrower to deliver and make available to Lender any collateral at a
place reasonably convenient to Borrower and Lender; (f) to sell, lease or
otherwise dispose of any collateral and collect any deficiency balance with
or without resorting to legal process; (g) to set-off Borrower's obligations
against any amounts due to Borrower including, but not limited to monies,
instruments, and deposit accounts maintained with Lender; and (h) to exercise
all other rights available to Lender under any other written agreement or
applicable law. Lender's rights are cumulative and may be exercised
together, separately, and in any order. Lender's remedies under this
paragraph are in addition to those available at common law, including, but not
limited to, the right of set-off.
3. DEMAND FEATURE: If this Note contains a demand feature, Lender's right to
demand payment, at any time, and from time to time, shall be in Lender's sole
and absolute discretion, whether or not any default has occurred.
4. FINANCIAL INFORMATION: Borrower will provide Lender with current financial
statements and other financial information (including, but not limited to,
balance sheets and profit and loss statements) upon request.
5. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's
obligations or Lender's rights under this Note must be contained in a writing
signed by Lender. Lender may perform any of Borrower's obligations or delay
or fail to exercise any of its rights without causing a waiver of those
obligations or rights. A waiver on one occasion will not constitute a waiver
on any other occasion. Borrower's obligations under this Note shall not be
affected if Lender amends, compromises, exchanges, fails to exercise, impairs
or releases any of the obligations belonging to any co-borrower or guarantor
or any of its rights against any co-borrower, guarantor or collateral.
6. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is
invalid, illegal or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby. Notwithstanding anything contained in this Note to the contrary, in
no event shall interest accrue under this Note, before or after maturity, at
a rate in excess of the highest rate permitted by applicable law, and if
interest (including any charge or fee held to be interest by a court of
competent jurisdiction) in excess thereof be paid, any excess shall
constitute a payment of, and be applied to, the principal balance hereof, and
if the principal balance has been fully paid, then such interest shall be
repaid to the Borrower.
7. ASSIGNMENT: Borrower will not be entitled to assign any of its rights,
remedies or obligations described in this Note without the prior written
consent of Lender which may be withheld by Lender in its sole discretion.
Lender will be entitled to assign some or all of its rights and remedies
described in this Note without notice to or the prior consent of Borrower in
any manner.
8. NOTICE: Any notice or other communication to be provided to Borrower or
Lender under this Note shall be in writing and sent to the parties at the
addresses described in this Note or such other address as the parties may
designate in writing from time to time.
9. APPLICABLE LAW: This Note shall be governed by the laws of the state
indicated in Lender's address. Borrower consents to the jurisdiction and
venue of any court located in the state indicated in Lender's address in the
event of any legal proceeding pertaining to the negotiation, execution,
performance or enforcement of any term or condition contained in this Note or
any related loan document and agrees not to commence or seek to remove such
legal proceeding in or to a different court.
10. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any
amount due or enforcing any right or remedy under this Note, Borrower agrees
to pay Lender's attorney's fees, to the extent permitted by applicable law,
and collection costs.
11. RETURNED CHECK: If a check for payment is returned to Lender for any
reason, Lender will charge an additional fee of $15.00.
12. MISCELLANEOUS: This Note is being executed for commercial/agricultural
purposes. Borrower and Lender agree that time is of the essence. Borrower
waives presentment, demand for payment, notice of dishonor and protest. If
Lender obtains a judgment for any amount due under this Note, interest will
accrue on the judgment at the judgment rate of interest permitted by law. All
references to Borrower in this Note shall include all of the parties signing
this Note. If there is more than one Borrower, their obligations will be
joint and several. This Note and any related documents represent the complete
and integrated understanding between Borrower and Lender pertaining to the
terms and conditions of those documents.
13. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN
ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON, THIS NOTE OR THE COLLATERAL
SECURING THIS NOTE.
14. ADDITIONAL TERMS:
<TABLE>
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PRINCIPAL ADVANCES AND PAYMENTS INTEREST PAYMENTS RATE CHANGE
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MADE AMOUNT OF AMOUNT OF PRINCIPAL UNDISBURSED RECEIVED INTEREST DATE
BY DATE ADVANCE PAYMENT BALANCE COMMITMENTS BY DATE PAID PAID TO DATE RATE
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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</TABLE>
<PAGE>
EXHIBIT 10.6
<PAGE>
COMMERCIAL SECURITY
AGREEMENT
BORROWER OWNER OF COLLATERAL
Nortech Systems Incorporated Nortech Systems Incorporated
Nortech Medical Services, Inc.
ADDRESS ADDRESS
4050 Norris Court 4050 Norris Court
Bemidji, MN 56601 Bemidji, MN 56601
TELEPHONE NO. IDENTIFICATION NO. TELEPHONE NO. IDENTIFICATION NO.
1. SECURITY INTEREST. For good and valuable consideration, Owner of
Collateral ("Owner") grants to Lender identified above a continuing security
interest in the Collateral described below to secure the obligations
described in this Agreement.
2. OBLIGATIONS. The Collateral shall secure the payment and performance
of all of Borrower's and Owner's present and future, joint and/or several,
direct and indirect, absolute and contingent, express and implied,
indebtedness, (including costs of collection, legal expenses and attorneys'
fees, incurred by Lender upon the occurrence of a default under this
Agreement, in collecting or enforcing payment of such indebtedness, or
preserving, protecting or realizing on the Collateral herein), liabilities,
obligations and covenants (cumulatively "Obligations") to Lender including
(without limitation) those arising under or pursuant to:
a. this Agreement and the following promissory notes and agreements:
INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER
Variable 3,000,000 12/31/96 6/30/98 533551
Variable 510,000 12/29/95 1/1/01 533552
Variable 640,000 12/29/95 1/1/01 533553
Variable 500,000 5/10/96 2/10/97 533717
Variable 1,500,000 12/31/96 6/30/98 533910
Variable 1,500,000 12/31/96 6/30/98 533909
Variable 400,000 11/25/96 12/1/98 533932
*schedule continued on page 4
b. all other present or future, Obligations of Borrower or Owner to Lender
(whether incurred for the same or different purposes than the foregoing);
c. all renewals, extensions, amendments, modifications, replacements or
substitutions to any of the foregoing; and
d. applicable law.
3. COLLATERAL. The Collateral shall consist of all of the following-
described property and Owner's rights, title and interest in such property
whether now owned or hereafter acquired by Owner and wherever located:
/x/ All accounts, contract rights and rights to payment in money or in
kind for goods sold or leased or for services rendered, and all
guarantees and security therefor; all returned or repossessed goods
arising from or relating to any account, contract right, or right to
payment; and any rights of Owner as an unpaid seller of goods or
services; including, but not limited to, the accounts and contract
rights described on Schedule A attached hereto and incorporated herein
by this reference;
/x/ All chattel paper, together with all guarantees and security
therefor; including, but not limited to, the chattel paper described
on Schedule A attached hereto and incorporated herein by this
reference;
/x/ All documents of title including, but not limited to, the documents
described on Schedule A attached hereto and incorporated herein by
this reference;
/x/ All equipment, machinery, and vehicles including, but not limited
to, the equipment described on Schedule A attached hereto and
incorporated herein by this reference;
/ / All fixtures, including, but not limited to, the fixtures located
or to be located on the real property described on Schedule B
attached hereto and incorporated herein by this reference;
/X/ All general intangibles of any kind or nature including, but not
limited to, goodwill, literary rights, copyrights, trademarks and
patents; all securities, stocks, bonds, partnership interests, and
similar devices; any right to performance or payment, including,
without limitation, rights to receive dividends, tax refunds,
insurance claims and insurance proceeds, pension payments, and
other disbursements; things in action; and rights in intangible
property of any kind, specifically including, but not limited to,
the general intangibles described on Schedule A attached hereto and
incorporated herein by this reference;
/x/ All instruments including, but not limited to, the instruments
described on Schedule A attached hereto and incorporated herein by
this reference;
/x/ All inventory (goods, merchandise, and other personal property)
which are held for sale or lease, or are furnished or to be furnished
under any contract of service or are raw materials, work-in-process,
supplies, or materials used or consumed in Owner's business, and any
right of Owner as an unpaid seller of goods or services, including,
but not limited to, the inventory described on Schedule A attached
hereto and incorporated herein by this reference;
/ / All minerals or the like located on or related to the real property
described on Schedule B attached hereto and incorporated herein by
this reference;
/ / All standing timber located on the real property described on
Schedule B attached hereto and incorporated herein by this reference;
/ / Other:
All monies, instruments, and savings, checking or other deposit accounts that
are now or in the future in Lender's custody or control (excluding IRA,
Keogh, trust accounts, and deposits subject to tax penalties if so assigned);
All accessions, accessories, additions, amendments, attachments,
modifications, replacements and substitutions to any of the above;
All proceeds and products of any of the above;
All policies of insurance pertaining to any of the above as well as any
proceeds and unearned premiums pertaining to such policies; and
All books and records pertaining to any of the above.
<PAGE>
4. OWNER'S TAXPAYER IDENTIFICATION. Owner's social security number or
federal taxpayer identification number is:__________________________________.
5. RESIDENCY/LEGAL STATUS. / / Owner is an individual(s) and a resident
of the state of: ___________________________________________________________.
/x/ Owner is a: Corporation duly organized, validly existing and in good
standing under the laws of the state of: Minnesota
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Owner represents,
warrants and covenants to Lender that:
(a) Owner is and shall remain the sole owner of the Collateral;
(b) Neither Owner nor, to the best of Owner's knowledge, has any other
party used, generated, released, discharged, stored, or disposed of
any hazardous material, toxic substance, or related material on any
of the Collateral. Owner shall not commit or permit such actions to
be taken in the future. The term "Hazardous Materials" shall mean any
substance, material, or waste which is or becomes regulated by any
governmental authority including, but not limited to, (i) petroleum;
(ii) asbestos; (iii) polychlorinated biphenyls; (iv) those substances,
materials or wastes designated as a "hazardous substance" pursuant to
Section 311 of the Clean Water Act or listed pursuant to Section 307
of the Clean Water Act or any amendments or replacements to these
statutes; (v) those substances, materials or wastes defined as a
"hazardous waste" pursuant to Section 1004 of the Resource
Conservation and Recovery Act or any amendments or replacements to
that statute; or (vi) those substances, materials or wastes defined as
a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, or any
amendments or replacements to that statute;
(c) Owner's chief executive office, chief place of business, office
where its business records are located, or residence is the address
identified above. Owner's other executive offices, places of business,
locations of its business records, or domiciles are described on
Schedule C attached hereto and incorporated herein by this reference.
Owner shall immediately advise Lender in writing of any change in or
addition to the foregoing addresses;
(d) Owner shall not become a party to any restructuring of its form of
business or participate in any consolidation, merger, liquidation or
dissolution without providing Lender with thirty (30) or more days'
prior written notice of change;
(e) Owner shall notify Lender of the nature of any intended change of
Owner's name, or the use of any trade name, and the effective date of
such change;
(f) The Collateral is and shall at all times remain free of all tax and
other liens, security interests, encumbrances and claims of any kind
except for those belonging to Lender and those described on Schedule D
attached hereto and incorporated herein by this reference. Without
waiving the event of default as a result thereof, Owner shall take any
action and execute any document needed to discharge the foregoing
liens, security interests, encumbrances and claims;
(g) Owner shall defend the Collateral against all claims and demands of
all persons at any time claiming any interest therein;
(h) All of the goods, fixtures, minerals or the like, and standing
timber constituting the Collateral is and shall be located at Owner's
executive offices, places of business, residence and domiciles
specifically described in this Agreement;
(i) Owner shall provide Lender with possession of all chattel paper and
instruments constituting the Collateral unless otherwise agreed by
Lender. Owner shall promptly mark all chattel paper, instruments, and
documents constituting the Collateral to show that the same are
subject to Lender's security interest;
(j) All of Owner's accounts or contract rights; chattel paper;
documents; general intangibles; instruments; and federal, state,
county, and municipal government and other permits and licenses;
trusts, liens, contracts, leases, and agreements constituting the
Collateral are and shall be valid, genuine and legally enforceable
obligations and rights belonging to Owner and not subject to any
claim, defense, set-off or counterclaim of any kind;
(k) Owner shall not amend, modify, replace, or substitute any account
or contract right; chattel paper; document; general intangible; or
instrument constituting the Collateral without the prior consent of
Lender, which shall not be unreasonably withheld;
(l) Owner has the right and is duly authorized to enter into and perform
its obligations under this Agreement. Owner's execution and
performance of these obligations do not and shall not conflict with
the provisions of any statute, regulation, ordinance, rule of law,
contract or other agreement which now or hereafter be binding on
Owner;
(m) No action or proceeding is pending against Owner which might result
in any material adverse change in its business operations or financial
condition or materially affect the Collateral;
(n) Owner has not violated and shall not violate any applicable federal,
state, county or municipal statute, regulation or ordinance (including
but not limited to those governing Hazardous Materials) which may
materially and adversely affect its business operations or financial
condition or the Collateral;
(o) Owner shall, upon Lender's request, deposit all proceeds of the
Collateral into an account or accounts maintained by Owner or Lender
at Lender's institution;
(p) Owner will, upon receipt, deliver to Lender as additional
Collateral all securities distributed on account of the Collateral
such as stock dividends and securities resulting from stock splits,
reorganizations and recapitalizations; and
(q) This Agreement and the obligations described in this Agreement are
executed and incurred for business and not consumer purposes.
7. SALE OF COLLATERAL. Owner shall not assign, convey, lease, sell or
transfer any of the Collateral to any third party without the prior written
consent of Lender except for sales of inventory to buyers in the ordinary
course of business.
8. FINANCING STATEMENTS AND OTHER DOCUMENTS. Owner shall take all
actions and execute all documents required by Lender to attach, perfect and
maintain Lender's security interest in the Collateral and establish and
maintain Lender's right to receive the payment of the proceeds of the
Collateral including, but not limited to, executing any financing statements,
fixture filings, continuation statements, notices of security interest and
other documents required by the Uniform Commercial Code and other applicable
law. Owner shall pay the costs of filing such documents in all offices
wherever filing or recording is deemed by Lender to be necessary or
desirable. Lender shall be entitled to perfect its security interest in the
Collateral by filing carbon, photographic or other reproductions of the
aforementioned documents with any authority required by the Uniform
Commercial Code or other applicable law. Lender may execute and file any
financing statements, as well as extensions, renewals and amendments of
financing statements in such form as Lender may require to perfect and
maintain perfection of any security interest granted in this Agreement. Owner
appoints Lender as its agent and attorney-in-fact to endorse Owner's name on
all instruments and other remittances payable to Owner with respect to the
Collateral. This power of attorney is coupled with an interest and is
irrevocable.
9. INQUIRIES AND NOTIFICATION TO THIRD PARTIES. Owner hereby authorizes
Lender to contact any third party and make any inquiry pertaining to Owner's
financial condition or the Collateral. In addition, Lender is authorized to
provide oral or written notice of its security interest in the Collateral to
any third party.
10. COLLECTION OF INDEBTEDNESS FROM THIRD PARTIES. Lender shall be
entitled to notify, and upon request of Lender Owner shall notify any account
debtor or other third party (including, but not limited to, insurance
companies) to pay any indebtedness or obligation owing to Owner and
constituting the Collateral (cumulatively "Indebtedness") to Lender whether
or not a default exists under this Agreement. Owner shall diligently collect
the indebtedness owing to Owner from its account debtors and other third
parties until the giving of such notification. In the event that Owner
possesses or receives possession of any instruments or other remittances with
respect to the indebtedness following the giving of such notification or if
the instruments or other remittances constitute the prepayment of any
indebtedness or the payment of any insurance proceeds, Owner shall hold such
instruments and other remittances in trust for Lender apart from its other
property, endorse the instruments and other remittances to Lender, and
immediately provide Lender with possession of the instruments and other
remittances. Lender shall be entitled, but not required, to collect (by legal
proceedings or otherwise), extend the time for payment, compromise, exchange
or release any obligor or collateral upon, or otherwise settle any of the
indebtedness whether or not an event of default exists under this Agreement.
Lender shall not be liable to Owner for any action, error, mistake, omission
or delay pertaining to the actions described in this paragraph or any damages
resulting therefrom.
11. POWER OF ATTORNEY. Owner hereby appoints Lender as its
attorney-in-fact to endorse Owner's name on all instruments and other
remittances payable to Owner with respect to the Indebtedness or other
documents pertaining to Lender's actions in connection with the indebtedness.
In addition, Lender shall be entitled, but not required, to perform any
action or execute any document required to be taken or executed by Owner
under this Agreement. Lender's performance of such action or execution of
such documents shall not relieve Owner from any obligation or cure any
default under this Agreement. The powers of attorney described in this
paragraph are coupled with an interest and are irrevocable.
12. USE AND MAINTENANCE OF COLLATERAL. Owner shall use the Collateral
solely in the ordinary course of its business, for the usual purposes
intended by the manufacturer (if applicable), with due care, and in
compliance with the laws, ordinances, regulation requirements and rules of
all federal, state, county and municipal authorities including environmental
laws and regulations and insurance policies. Owner shall not make any
alterations, additions or improvements to the Collateral without the prior
written consent of Lender. Without limiting the foregoing, all alterations,
additions and improvements made to the Collateral shall be subject to the
security interest belonging to Lender, shall not be removed without the prior
written consent of Lender, and shall be made at Owner's sole expense. Owner
shall take all actions and make any repairs or replacements needed to
maintain the Collateral in good condition and working order.
Page 2 of 5 ________
<PAGE>
13. LOSS OR DAMAGE. Owner shall bear the entire risk of any loss, theft,
destruction or damage (cumulatively "Loss or Damage") to all or any part of
the Collateral. In the event of any Loss or Damage, Owner will either restore
the Collateral to its previous condition, replace the Collateral with similar
property acceptable to Lender in its sole discretion, or pay or cause to be
paid to Lender the decrease in the fair market value of the affected
Collateral.
14. INSURANCE. The Collateral will be kept insured for its full value
against all hazards including loss or damage caused by fire, collision, theft
or other casualty. If the Collateral consists of a motor vehicle, Owner will
obtain comprehensive and collision coverage in amounts at least equal to the
actual cash value of the vehicle with deductibles not to exceed $____________.
Insurance coverage obtained by Owner shall be from a licensed insurer subject
to Lender's approval. Owner shall assign to Lender all rights to receive
proceeds of insurance not exceeding the amount owed under the obligations
described above, and direct the insurer to pay all proceeds directly to
Lender. The insurance policies shall require the insurance company to provide
Lender with at least thirty (30) days' written notice before such policies
are altered or cancelled in any manner. The insurance policies shall name
Lender as a loss payee and provide that no act or omission of Owner or any
other person shall affect the right of Lender to be paid the insurance
proceeds pertaining to the loss or damage of the Collateral. In the event
Owner fails to acquire or maintain insurance, Lender (after providing notice
as may be required by law) may in its discretion procure appropriate
insurance coverage upon the Collateral and charge the insurance cost as an
advance of principal under the promissory note. Owner shall furnish Lender
with evidence of insurance indicating the required coverage. Lender may act
as attorney-in-fact for Owner in making and settling claims under insurance
policies, cancelling any policy or endorsing Owner's name on any draft or
negotiable instrument drawn by any insurer.
15. INDEMNIFICATION. Lender shall not assume or be responsible for the
performance of any of Owner's obligations with respect to the Collateral
under any circumstances. Owner shall immediately provide Lender with written
notice of and indemnify and hold Lender and its shareholders, directors,
officers, employees and agents harmless from all claims, damages, liabilities
(including attorneys' fees and legal expenses), causes of action, actions,
suits and other legal proceedings (cumulatively "Claims") pertaining to its
business operations or the Collateral including, but not limited to, those
arising from Lender's performance of Owner's obligations with respect to the
Collateral. Owner, upon the request of Lender, shall hire legal counsel to
defend Lender from such Claims, and pay the attorneys' fees, legal expenses
and other costs to the extent permitted by applicable law, incurred in
connection therewith. In the alternative, Lender shall be entitled to employ
its own legal counsel to defend such Claims at Owner's cost.
16. TAXES AND ASSESSMENTS. Owner shall execute and file all tax returns
and pay all taxes, licenses, fees and assessments relating to its business
operations and the Collateral (including, but not limited to, income taxes,
personal property taxes, withholding taxes, sales taxes, use taxes, excise
taxes and workers' compensation premiums) in a timely manner.
17. INSPECTION OF COLLATERAL AND BOOKS AND RECORDS. Owner shall allow
Lender or its agents to examine, inspect and make abstracts and copies of the
Collateral and Owner's books and records pertaining to Owner's business
operations and financial condition or the Collateral during normal business
hours. Owner shall provide any assistance required by Lender for these
purposes. All of the signatures and information pertaining to the Collateral
or contained in the books and records shall be genuine, true, accurate and
complete in all respects.
18. DEFAULT. Owner shall be in default under this Agreement in the
event that Owner, Borrower or any guarantor:
(a) fails to make any payment under this Agreement or any other
indebtedness to Lender when due;
(b) fails to perform any obligation or breaches any warranty or covenant
to Lender contained in this Agreement or any other present or future
written agreement regarding this or any other indebtedness to Lender;
(c) provides or causes any false or misleading signature or
representation to be provided to Lender;
(d) allows the Collateral to be destroyed, lost or stolen, damaged in
any material respect, or subject to seizure or confiscation;
(e) seeks to revoke, terminate or otherwise limit its liability under
any continuing guaranty;
(f) permits the entry or service of any garnishment, judgment, tax levy,
attachment or lien against Owner, any guarantor, or any of their
property;
(g) dies, becomes legally incompetent, is dissolved or terminated,
ceases to operate its business, becomes insolvent, makes an assignment
for the benefit of creditors, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding;
(h) allows the Collateral to be used by anyone to transport or store
goods, the possession, transportation, or use of which, is illegal; or
(i) causes Lender in good faith to deem itself insecure for any reason.
19. RIGHTS OF LENDER ON DEFAULT. If there is a default under this
Agreement, Lender shall be entitled to exercise one or more of the following
remedies without notice or demand (except as required by law):
(a) to declare the Obligations immediately due and payable in full;
(b) to collect the outstanding Obligations with or without resorting to
judicial process;
(c) to retain any instruments or other remittances constituting the
Collateral;
(d) to take possession of any Collateral in any manner permitted by law;
(e) to apply for and obtain, without notice and upon ex parte application,
the appointment of a receiver for the Collateral without regard to
Owner's financial condition or solvency, the adequacy of the Collateral
to secure the payment or performance of the obligations, or the
existence of any waste to the Collateral;
(f) to require Owner to deliver and make available to Lender any
Collateral at a place reasonably convenient to Owner and Lender;
(g) to sell, lease or otherwise dispose of any Collateral and collect
any deficiency balance with or without resorting to legal process;
(h) to set-off Owner's obligations against any amounts due to Owner
including, but not limited to, monies, instruments, and deposit
accounts maintained with Lender; and
(i) to exercise all other rights available to Lender under any other
written agreement or applicable law.
Lender's rights are cumulative and may be exercised together, separately, and
in any order. If notice to Owner of intended disposition of Collateral is
required by law, Lender will provide reasonable notification of the time and
place of any sale or intended disposition as required under the Uniform
Commercial Code. In the event that Lender institutes an action to recover any
Collateral or seeks recovery of any Collateral by way of a prejudgment remedy
in an action against Owner, Owner waives the posting of any bond which might
otherwise be required. Lender's remedies under this paragraph are in addition
to those available at common law, such as setoff.
20. APPLICATION OF PAYMENTS. Whether or not a default has occurred under
this Agreement, all payments made by or on behalf of Owner and all credits
due to Owner from the disposition of the Collateral or otherwise may be
applied against the amounts paid by Lender (including attorneys' fees and
legal expenses) in connection with the exercise of its rights or remedies
described in this Agreement and any interest thereon and then to the payment
of the remaining Obligations.
21. REIMBURSEMENT OF AMOUNTS EXPENDED BY LENDER. Owner shall reimburse
Lender for all amounts (including attorneys' fees and legal expenses)
expended by Lender in the performance of any action required to be taken by
Owner or the exercise of any right or remedy belonging to Lender under this
Agreement, together with interest thereon at the lower of the highest rate
described in any promissory note or credit agreement executed by Borrower or
Owner or the highest rate allowed by law from the date of payment until the
date of reimbursement. These sums shall be included in the definition of
Obligations, shall be secured by the Collateral identified in this Agreement
and shall be payable upon demand.
22. ASSIGNMENT. Owner shall not be entitled to assign any of its rights,
remedies or obligations described in this Agreement without the prior written
consent of Lender. Consent may be withheld by Lender in its sole discretion.
Lender shall be entitled to assign some or all of its rights and remedies
described in this Agreement without notice to or the prior consent of Owner
in any manner.
23. MODIFICATION AND WAIVER. The modification or waiver of any of
Owner's Obligations or Lender's rights under this Agreement must be contained
in a writing signed by Lender. Lender may perform any of Owner's Obligations
or delay or fail to exercise any of its rights without causing a waiver of
those Obligations or rights. A waiver on one occasion shall not constitute a
waiver on any other occasion. Owner's Obligations under this Agreement shall
not be affected if Lender amends, compromises, exchanges, fails to exercise,
impairs or releases any of the obligations belonging to any Owner or third
party or any of its rights against any Owner, third party or collateral.
24. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of Owner and Lender and their respective successors,
assigns, trustees, receivers, administrators, personal representatives,
legatees, and devisees.
25. NOTICES. Any notice or other communication to be provided under this
Agreement shall be in writing and sent to the parties at the addresses
described in this Agreement or such other address as the parties may
designate in writing from time to time.
26. SEVERABILITY. If any provision of this Agreement violates the law or
is unenforceable, the rest of the Agreement shall remain valid.
<PAGE>
27. APPLICABLE LAW. This Agreement shall be governed by the laws of the
state indicated in Lender's address. Owner consents to the jurisdiction and
venue of any court located in the state indicated in Lender's address in the
event of any legal proceeding pertaining to the negotiation, execution,
performance or enforcement of any term or condition contained in this
Agreement or any related document and agrees not to commence or seek to
remove such legal proceeding in or to a different court.
28. COLLECTION COSTS. If Lender hires an attorney to assist in
collecting any amount due or enforcing any right or remedy under this
Agreement, Owner agrees to pay Lender's attorneys' fees and collection costs.
29. MISCELLANEOUS. This Agreement is executed for commercial purposes.
Owner shall supply information regarding Owner's business operations and
financial condition or the Collateral in the form and manner as requested by
Lender from time to time. All information furnished by Owner to Lender shall
be true, accurate and complete in all respects. Owner and Lender agree that
time is of the essence. Owner waives presentment, demand for payment, notice
of dishonor and protest except as required by law. All references to Owner in
this Agreement shall include all parties signing below except Lender. If
there is more than one Owner, their obligations shall be joint and several.
This Agreement shall remain in full force and effect until Lender provides
Owner with written notice of termination. This Agreement and any related
documents represent the complete and integrated understanding between Owner
and Lender pertaining to the terms and conditions of those documents.
30. WAIVER OF JURY TRIAL. LENDER AND OWNER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN
RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN
CONJUNCTION WITH THE PROMISSORY NOTE, THIS AGREEMENT AND ANY OTHER AGREEMENT
CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH OR THEREWITH, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN)
OR ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
LENDER MAKING THE LOAN EVIDENCED BY THE PROMISSORY NOTE.
31. ADDITIONAL TERMS:
In addition to all of its other rights, powers and remedies under this
Agreement, Lender shall, upon the occurrence and during the continuation of
any default hereunder, have the right (i) to enter upon the premises of
Borrower or Owner or any other place or places where the Collateral is
located through self-help and without judicial process or giving Borrower or
Owner notice and opportunity for a hearing on the validity of Lender's claim
and without any obligation to pay rent; (ii) to prepare, assemble or process
the collateral for sale, lease, or other disposition; (iii) to remove the
Collateral to the premises of Lender or any agent of Lender, for such time as
Lender may desire, in order to collect or dispose of the Collateral; (iv) to
require Borrower or Owner to assemble the Collateral and make it available to
Lender at a place to be designated by Lender; and (v) to require Borrower or
Owner to make available to Lender all computer and other equipment of
Borrower or Owner containing books and records pertaining to the Collateral
(and the assistance of the employees of Borrower or Owner having
responsibility for such equipment) and to use such computer and other
equipment at no charge for the purposes of obtaining information pertaining
to the Collateral, including by making copies of computer and other files and
records. To the extent necessary or desirable to enable Lender to dispose of
the Collateral, Lender is hereby granted a license or other right to use,
without charge, Borrower's or Owner's labels, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks, and advertising
matter, or any property of a similar nature as it pertains to the Collateral
or in advertising for sale or lease for the disposition of any of the
Collateral, and Borrower's or Owner's rights under all licenses and all
franchise agreements shall to such extent and for such purpose inure to the
Lender's benefit.
*2a schedule continued:
Interest Rate Principal Amount Agreement Date Maturity Date Loan Number
- ------------- ---------------- -------------- ------------- -----------
Variable 125,000 3/21/94 4/01/00 532784
Fixed 300,000 9/24/93 5/01/99 532693
Owner acknowledges that Owner has read, understands, and agrees to the terms
and conditions of this Agreement.
Dated: December 31, 1996
OWNER: Nortech Systems Incorporated OWNER:
______________________________________ ___________________________________
Garry M. Anderly
Vice President
OWNER: OWNER:
______________________________________ ___________________________________
OWNER: OWNER:
______________________________________ ___________________________________
OWNER: OWNER:
______________________________________ ___________________________________
Page 4 of ____
<PAGE>
SCHEDULE A
SCHEDULE B
The name of the record owner is: _____________________________________________
SCHEDULE C
SCHEDULE D
<PAGE>
EXHIBIT 10.7
<PAGE>
THE INDEBTEDNESS EVIDENCED BY THIS NOTE IS SECURED BY A COMBINATION
MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE
FINANCING STATEMENT (THE "MORTGAGE") OF EVEN DATE HEREWITH, ON LAND IN CROW
WING COUNTY, MINNESOTA, AND REFERENCE IS MADE TO THE MORTGAGE FOR RIGHTS AS
TO ACCELERATION OF THE INDEBTEDNESS EVIDENCED BY THIS NOTE.
PROMISSORY NOTE
$1,000,000.00 Minneapolis, Minnesota
March 27, 1997
FOR VALUE RECEIVED, the undersigned Nortech Systems Incorporated
("Maker"), a Minnesota corporation, hereby promises to pay to the order of
Communications Systems, Inc. ("Payee"), a Minnesota corporation, at Hector,
Minnesota, or at such other place as may be designated from time to time in
writing by the holder thereof, the principal sum of One Million Dollars
($1,000,000.00) with simple interest on the outstanding principal balance
beginning on November 4, 1996, at a rate equal to the prime or reference rate
established from time to time by First Bank Minneapolis.
Principal in the amount of Forty Thousand Dollars ($40,000.00) or more
per installment shall be payable semiannually commencing May 1, 1997, and
continuing on the first day of every November and May thereafter for a total
of five (5) years, at which time all remaining principal and accrued
interest, if not sooner paid, shall be paid in full.
This Note is given to evidence the unpaid balance of the purchase price
owed by Maker to Payee for the purchase of the assets of Payee, pursuant to
the terms of that certain Asset Purchase Agreement (the "Asset Purchase
Agreement") dated 1996, between Maker and Payee. This Note is subject to and
governed by the terms and provisions of the Asset Purchase Agreement,
including rights of offset as set forth therein.
Each payment (including prepayments, if made) hereunder shall be applied
first to payment of accrued interest, and the balance to payment of
principal. Prepayments can be made at any time, and from time to time, at the
election of Maker, without penalty. If default is made in the payment of any
installment of this Note, and such payment is not made within fifteen (15)
days after notice from the Note holder of non-payment, the Note holder may
declare the entire unpaid principal balance of this Note and all accrued
interest due and payable without further notice.
In the event that the holder hereof shall institute any action for the
enforcement or collection of this Note, there shall be immediately due from
the Maker, in addition to the unpaid balance, all reasonable costs and
expenses of said action, including reasonable attorneys' fees.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
on the date first above written.
NORTECH SYSTEMS INCORPORATED
By /s/ Q. E. Finkelson
-----------------------------
Its President & CEO
-------------------------
<PAGE>
EXHIBIT 10.8
<PAGE>
PROMISSORY NOTE
$3,865,390.00 Minneapolis, Minnesota
March 27, 1997
FOR VALUE RECEIVED, the undersigned Nortech Systems Incorporated
("Maker"), a Minnesota corporation, hereby promises to pay to the order of
Communications Systems, Inc. ("Payee"), a Minnesota corporation, at Hector,
Minnesota, or at such other place as may be designated from time to time in
writing by the holder thereof, the principal sum of Three Million Eight
Hundred Sixty-Five Thousand Three Hundred Ninety Dollars ($3,865,390) with
simple interest on the outstanding principal balance beginning on November 4,
1996, at a rate equal to the prime or reference rate established from time to
time by First Bank Minneapolis.
Principal in the amount of One Hundred Sixty Thousand Dollars
($160,000.00) or more per installment shall be payable semiannually
commencing May 1, 1997, and continuing on the first day of every November and
May thereafter for a total of five (5) years, at which time all remaining
principal and accrued interest, if not sooner paid, shall be paid in full.
This Note is given to evidence the unpaid balance of the purchase price
owed by Maker to Payee for the purchase of the assets of Payee, pursuant to
the terms of that certain Asset Purchase Agreement (the "Asset Purchase
Agreement") dated 1996, between Maker and Payee. This Note is subject to and
governed by the terms and provisions of the Asset Purchase Agreement,
including rights of offset as set forth therein. This Note is secured by that
certain Security Agreement of even date herewith.
Each payment (including prepayments, if made) hereunder shall be applied
first to payment of accrued interest, and the balance to payment of
principal. Prepayments can be made at any time, and from time to time, at the
election of Maker, without penalty. If default is made in the payment of any
installment of this Note, and such payment is not made within fifteen (15)
days after notice from the Note holder of non-payment, the Note holder may
declare the entire unpaid principal balance of this Note and all accrued
interest due and payable without further notice.
In the event that the holder hereof shall institute any action for the
enforcement or collection of this Note, there shall be immediately due from
the Maker, in addition to the unpaid balance, all reasonable costs and
expenses of said action, including reasonable attorneys' fees.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
on the date first above written.
NORTECH SYSTEMS INCORPORATED
By /s/ Q. E. Finkelson
-----------------------------
Its President & CEO
-------------------------
<PAGE>
EXHIBIT 23.1
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference, in the Registration Statements
of Nortech Systems Incorporated on Forms S-8 registered on June 21, 1994 and
June 30, 1993, of our reports dated February 13, 1997, in the Annual Report
on Form 10-K for the year ended December 31, 1996.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,235,127
<SECURITIES> 0
<RECEIVABLES> 3,718,064
<ALLOWANCES> 22,301
<INVENTORY> 6,729,500
<CURRENT-ASSETS> 12,289,211
<PP&E> 10,746,407
<DEPRECIATION> 2,875,702
<TOTAL-ASSETS> 22,152,629
<CURRENT-LIABILITIES> 3,790,680
<BONDS> 0
0
250,000
<COMMON> 23,124
<OTHER-SE> 7,178,068
<TOTAL-LIABILITY-AND-EQUITY> 22,152,629
<SALES> 26,182,821
<TOTAL-REVENUES> 26,182,821
<CGS> 21,555,459
<TOTAL-COSTS> 21,555,459
<OTHER-EXPENSES> 3,514,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 475,057
<INCOME-PRETAX> 638,029
<INCOME-TAX> 192,000
<INCOME-CONTINUING> 446,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,029
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
