<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, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-13257
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
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(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 by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
Based upon the $4.75 per share average of the closing bid and asked prices,
respectively, on February 28, 1998 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 $6,056,084
As of February 28, 1998 there were 2,345,362 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 to be
12 used in connection with the 1997
Annual Shareholders' meeting and
filed with the Securities and
Exchange Commission no later
than April 30,1998.
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NORTECH SYSTEMS INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDEX
PART I PAGE
<S> <C>
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 13-14
Item 8. Consolidated Financial Statements 15-35
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 37-40
Signatures 41
</TABLE>
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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, printed circuit
board assemblies 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, SPX Corporation, Imation, Thermo King,
Polaris, Rosemount, 3M, and Motor Coach Industries.
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.
5
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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.
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 benefits its current customer base
as well as attract new business opportunities.
6
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The Company will continue its 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.
7
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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 engineering change order activities, engineering support,
delivery flexibility and 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 or higher level build assembly business in the Upper
Midwest, there are several established competitors. The Company expects its
major competition to come from Americable, OEM Worldwide, MSL, Technical
Services, Inc. and Waters Instruments, Inc., all of which are located in
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 $6,127,000 on December 31,
1996 and approximately $7,687,000 on December 31, 1997.
8
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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 losses related to the receivables from customers in any
particular industry or geographic area.
Only one customer accounted for more than 10% of revenue, G.E. Medical at
12.7% of sales for the year ended December 31, 1997.
RESEARCH AND DEVELOPMENT
The Company expended $258,712 in 1997 and $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.
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 523 full-time and 165 part-time employees as of February 28,
1998, consisting of 645 employees in manufacturing, manufacturing product
support and medical support services and 43 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 1999. 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.
9
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The Company's Imaging and Medical Services 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.
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
The Company has litigation pending, both offensive and defensive arising from
the conduct of its business, none of which are expected to have any material
effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of security holders which are required
to be reported under the instructions to this item.
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.
10
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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:
<TABLE>
<CAPTION>
Quarter Ended: Low High
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<S> <C> <C>
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
March 31, 1997 $4.75 $6.00
June 30, 1997 $4.50 $5.75
September 30, 1997 $4.50 $5.75
December 31, 1997 $4.50 $5.875
</TABLE>
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, 1998, there were approximately 1,351 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, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Sales $36,433,918.00 $26,182,821.00 $18,305,928.00 $12,820,709.00 $11,705,833.00
Income (Loss) Form
Continuing Operations $677,671.00 $446,029.00 $1,331,924.00 $1,183,406.00 $1,042,556.00
Income (Loss) Per
Common Share from
Continuing Operations 0.28 0.19 0.55 0.54 0.47
Total Assets $24,694,930.00 $22,152,629.00 $13,223,064.00 $6,647,897.00 $6,553,291.00
Total Long-Term $10,388,620.00 $10,910,757.00 $3,768,685.00 $746,755.00 $858,437.00
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 14 of the Consolidated Financial Statement.
12
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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, 1997, 1996, AND 1995
REVENUES.
For the years ended December 31, 1997, and 1996 the Company had sales of
$36,433,918 and $26,182,821 respectively. The increase of $10,251,097 or
39.2% resulted primarily from additional revenues generated by the
acquisitions which were completed in 1996. For the year ended December 31,
1995 the Company had sales of $18,305,928. The approximate 43% increase in
sales in 1996 was attributable primarily to increased sales from the newly
acquired divisions in 1995.
GROSS PROFIT.
The Company had gross profit of $6,795,052 in 1997, $4,627,362 in 1996, and
$3,764,840 in 1995. Gross profits as a percentage of gross sales were 18.7% in
1997, 17.7% in 1996, and 20.6% in 1995. The Company has experienced gross
profit pressure evolving from a change of product mix and material content
offset by some improvement in manufacturing productivity.
SELLING, GENERAL, AND ADMINISTRATIVE.
Selling, general, and administrative expenses were $4,542,498 in 1997,
$3,306,311 in 1996, and $2,280,105 in 1995. The increases in each year
reflects additional selling, general and administrative expenses associated
with the acquisitions.
MISCELLANEOUS INCOME.
Miscellaneous income was $53,738 in 1997, $65,732 in 1996, and $212,670 in
1995. The miscellaneous income resulted primarily from charges for
miscellaneous services.
INTEREST EXPENSE.
Interest expense was $1,010,909 in 1997, $475,057 in 1996, and $240,562 in
1995. The increased expense for 1997, 1996 and 1995 is due to the increased debt
from acquired operations.
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INCOME TAXES.
Income tax expense for 1997 was $359,000 and $192,000 in 1996. 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 Company has recorded deferred tax assets of $1,241,000, the 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.
NET INCOME.
The Company's net income in 1997 was $677,671 or $.28 per common share. 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 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 $8,498,531 as of December 31, 1996 to
$9,670,225 on December 31, 1997. Stockholders equity increased from $7,151,192
as of December 31, 1996 to $7,813,823 on December 31, 1997 due to the Company's
1997 net income. 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.
OTHER "YEAR 2000 PROBLEMS."
Nortech Systems, Inc. recognizes the dangers of the "Year 2000 Problem". To
ensure a minimum negative impact on business operations Nortech has
established a Y2K Initiative. The Y2K Initiative addresses the effects on the
company, our vendors and our customers. We are currently in the inventory and
evaluation phase. Implementation and mitigation measures will be complete
and testing started by July 1999. Monitoring and evaluation will continue
throughout 1999 and into 2000 until we are sure all issues have been properly
resolved.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Independent Auditors' Report of :
Larson, Allen, Weishair & Co., LLP 16
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and 1996. 17
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995. 18
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995. 19
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. 20-21
Notes to Consolidated Financial Statements 22-35
</TABLE>
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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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
February 23, 1998
16
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents (Including Interest Bearing Cash of
$463,248 and $1,069,369 at December 31, 1997 and 1996) $ 714,169 $ 1,235,127
Accounts Receivable, Less Allowance for Uncollectible
Accounts (1997 - $84,128; 1996 - $22,301) 5,008,689 3,695,763
Inventories 9,242,467 6,729,500
Prepaid Expenses and Other 226,387 88,821
Deferred Tax Asset 671,000 540,000
-------------- -------------
Total Current Assets $ 15,862,712 $ 12,289,211
-------------- -------------
PROPERTY AND EQUIPMENT (At Cost)
Land 136,300 136,300
Building and Leasehold Improvements 3,765,161 3,559,155
Manufacturing Equipment 4,444,401 4,588,955
Office and Other Equipment 2,805,557 2,461,997
-------------- -------------
Total $ 11,151,419 $ 10,746,407
Accumulated Depreciation (3,851,810) (2,875,702)
-------------- -------------
Total Property and Equipment (At Depreciated Cost) $ 7,299,609 $ 7,870,705
-------------- -------------
OTHER ASSETS
Goodwill and Other Intangible Assets $ 905,359 $ 1,025,463
Deferred Tax Asset 570,000 910,000
Other Assets 57,250 57,250
-------------- -------------
Total Other Assets $ 1,532,609 $ 1,992,713
-------------- -------------
Total Assets $ 24,694,930 $ 22,152,629
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of Credit $ 500,000 $ 500,000
Current Maturities of Long-Term Debt 1,038,397 731,080
Accounts Payable 3,013,131 1,596,326
Accrued Payroll 1,082,293 673,303
Other Liabilities 558,666 289,971
-------------- -------------
Total Current Liabilities $ 6,192,487 $ 3,790,680
-------------- -------------
LONG-TERM DEBT
Notes Payable (Net of Current Maturities Shown Above) $ 10,388,620 $ 10,910,757
-------------- -------------
REDEEMABLE COMMON STOCK
$.01 Par Value;50,000 Shares Issued and
Outstanding at December 31, 1997 and 1996
Redeemable at $6 Per Share $ 300,000 $ 300,000
-------------- -------------
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 Shares Issued and
Outstanding, Net of Redeemable Shares Reported Above,
at December 31, 1997 and 1996 23,124 23,124
Additional Paid-In Capital 11,910,554 11,910,554
Accumulated Deficit (4,369,855) (5,032,486)
-------------- -------------
Total Stockholders' Equity $ 7,813,823 $ 7,151,192
-------------- -------------
Total Liabilities and Stockholders' Equity $ 24,694,930 $ 22,152,629
-------------- -------------
-------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- --------------
<S> <C> <C> <C>
SALES $ 36,433,918 $ 26,182,821 $ 18,305,928
COST OF SALES (29,638,866) (21,555,459) (14,541,088)
------------- -------------- --------------
GROSS PROFIT $ 6,795,052 $ 4,627,362 $ 3,764,840
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (4,542,498) (3,306,311) (2,280,105)
RESEARCH AND DEVELOPMENT COSTS (258,712) (273,697) (124,919)
INTEREST INCOME 37,423 33,668 34,703
MISCELLANEOUS INCOME 16,315 32,064 177,967
INTEREST EXPENSE (1,010,909) (475,057) (240,562)
------------- -------------- --------------
INCOME BEFORE INCOME TAX PROVISION $ 1,036,671 $ 638,029 $ 1,331,924
INCOME TAX EXPENSE (359,000) (192,000) -
------------- -------------- --------------
NET INCOME $ 677,671 $ 446,029 $ 1,331,924
------------- -------------- --------------
------------- -------------- --------------
BASIC EARNINGS PER SHARE
OF COMMON STOCK $ 0.28 $ 0.19 $ 0.55
------------- -------------- --------------
------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,362,362 2,384,512 2,407,804
------------- -------------- --------------
------------- -------------- --------------
DILUTED EARNINGS PER SHARE
OF COMMON STOCK $ 0.28 $ 0.18 $ 0.55
------------- -------------- --------------
------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,387,829 2,429,071 2,436,118
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additional Total
Preferred Common Paid-In Accumulated Stockholders'
Stock Stock Capital Deficit Equity
----------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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
1997 Net Income - - - 677,671 677,671
Dividends Paid - - - (15,040) (15,040)
----------- ---------- ------------- ------------- -------------
BALANCE
DECEMBER 31, 1997 $ 250,000 $ 23,124 $ 11,910,554 $ (4,369,855) $ 7,813,823
----------- ---------- ------------- ------------- -------------
----------- ---------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Customers $ 35,137,009 $ 24,375,341 $ 18,114,515
Cash Paid to Suppliers and Employees (33,970,078) (23,904,901) (17,379,766)
Interest Expense Paid (985,519) (403,003) (239,809)
Interest Income Received 37,423 33,668 34,703
Income Taxes Paid (56,400) (205,900) (19,016)
------------- ------------- -------------
Net Cash Provided (Used) by
Operating Activities $ 162,435 $ (104,795) $ 510,627
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Businesses $ - $ (1,559,492) $ (2,930,696)
Proceeds from Sale of Assets 300,000 - -
Acquisition of Property and Equipment (753,533) (718,835) (458,359)
Acquisition of Intangible Assets - - (82,059)
Purchase of Investments - - (56,250)
Net Cash Used by
------------- ------------- -------------
Investing Activities $ (453,533) $ (2,278,327) $ (3,527,364)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds Under Line of Credit $ - $ 500,000 $ -
Payments on Long-Term Debt (2,720,271) (431,453) (289,294)
Proceeds from Long-Term Debt 2,505,451 3,156,115 3,405,180
Proceeds from Sale of Stock - 597 13,673
Purchase of Redeemable Stock - (531,600) -
Payment of Dividends (15,040) - (29,934)
------------- ------------- -------------
Net Cash Provided (Used) by
Financing Activities $ (229,860) $ 2,693,659 $ 3,099,625
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (520,958) $ 310,537 $ 82,888
Cash and Cash Equivalents - Beginning 1,235,127 924,590 841,702
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 714,169 $ 1,235,127 $ 924,590
------------- ------------- -------------
------------- ------------- -------------
</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 FINANCIAL STATEMENTS.
20
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
Net Income $ 677,671 $ 446,029 $ 1,331,924
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 1,145,032 693,456 444,636
Deferred Taxes 209,000 110,000 (100,000)
Gain on Sale of Assets (299) - -
Changes in Current Operating Items:
Accounts Receivable (1,312,926) (1,839,544) (369,380)
Inventory (2,512,967) (482,103) (407,932)
Prepaid Assets (137,566) 42,880 (79,751)
Accounts Payable 1,416,805 541,446 207,835
Accrued Payroll 408,990 266,287 (17,852)
Accrued Liabilities 268,695 116,754 (498,853)
------------- ------------- -------------
Net Cash Provided (Used) by
Operating Activities $ 162,435 $ (104,795) $ 510,627
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
21
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 "turn-key" contract manufacturing service to its
customers. All products 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.
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.
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.
22
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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, 1997, 1996 and 1995. Depreciation was calculated over
estimated useful lives as follows:
<TABLE>
<S> <C>
Leasehold Improvements 7 Years
Buildings and Improvements 31 Years
Manufacturing Equipment 5 - 7 Years
Office Equipment and Purchased Software 5 - 7 Years
</TABLE>
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 3), 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 1997, 1996 and 1995 was $67,954, $54,614 and $30,724,
respectively. The carrying value of goodwill is 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
fiscal years 1997, 1996 and 1995 was $52,151, $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, 1997 and 1996,
the Company had invested excess funds of $116,219 and $266,000,
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.
ADVERTISING
Advertising costs are charged to operations as incurred. Total amounts
charged to expense were $124,997, $65,234 and $17,994 for the years
ended December 31, 1997, 1996 and 1995, respectively.
23
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FINANCIAL INSTRUMENTS
The carrying amounts for all financial instruments approximate fair
values. The carrying amounts for cash, receivables, accounts payable
and accrued liabilities approximate fair value because of the short
maturity of these instruments. The carrying value of long-term debt
materially approximates fair value based on current rates at which the
Company could borrow funds with similar remaining maturities.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share. SFAS No. 128 replaces APB Opinion 15,
Earnings per Share, and simplifies the computation of earnings per share
(EPS) by replacing the presentation of primary EPS. In addition, the
statement requires dual presentation of basic and diluted EPS by
entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to
fully diluted EPS.
Preferred stock issued is noncumulative and nonconvertible.
ACCOUNTING FOR STOCK-BASED COMPENSATION
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 INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Raw Materials $ 5,961,221 $ 3,626,665
Work in Process 1,659,244 1,837,247
Finished Goods 1,622,002 1,265,588
------------ ------------
Total $ 9,242,467 $ 6,729,500
------------ ------------
------------ ------------
</TABLE>
24
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 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 totaling $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.
A summary of the purchase price allocation for the 1996 acquisition of
Zercom is as follows:
<TABLE>
<S> <C>
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
------------
------------
</TABLE>
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 at December 31, 1997. The Company's obligation under the
repurchase agreement is guaranteed by a director of the Company. See
subsequent event Note 12 for settlement of such dispute.
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.
25
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 ACQUISITIONS (CONTINUED)
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:
<TABLE>
<S> <C>
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
------------
------------
</TABLE>
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.
<TABLE>
<CAPTION>
(Unaudited) 1996 1995
------------------------------------- ------------- -------------
<S> <C> <C>
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
</TABLE>
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.
NOTE 4 SHORT-TERM LINE OF CREDIT
The Company has a revolving line of credit at December 31, 1997, for
$500,000. The line of credit is with Norwest Bank North Country, N.A.,
accrues interest at the prime rate, matures August 10, 1998, and is
secured by accounts receivable, equipment, inventory, general
intangibles and a personal guarantee by a shareholder. The interest
rate was 8.5% at December 31, 1997. The maximum and average amounts
outstanding on the short-term line of credit during 1997 were $500,000.
26
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 5 LONG-TERM DEBT
<TABLE>
<CAPTION>
Description 1997 1996
- ---------------------------------------------------- ------------- -------------
<S> <C> <C>
Notes Payable - Norwest Bank North Country, N.A. ,
Revolving Lines of Credit, Borrowing Limit of
$4,500,000; Promissory Note of $1,500,000;
Interest at LIBOR Index Plus 2 1/2%,
Due June 1999; Secured by Accounts
Receivable, Equipment, Inventory, General
Intangibles and Personal Guarantee and Stock
Pledged By a Shareholder $ 5,069,717 $ 4,916,939
Notes Payable - Norwest Bank North Country, N.A. ,
Interest Ranging From 7.5% to 8.5%, Monthly
Installment Payments Through January 2001;
Secured by Accounts Receivable, Equipment,
Inventory, General Intangibles and Real Estate 1,480,579 1,539,574
Note 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; Secured by Underlying Assets
Purchased 4,465,390 4,865,390
Notes Payable - Other, Interest Ranging From
4.9% to 9%; Monthly Installment Payments
Through March 2009; Secured by Land, Building,
Leasehold Improvements, Equipment and Vehicle 411,331 319,934
------------ ------------
Total Long-Term Debt $ 11,427,017 $ 11,641,837
Current Maturities 1,038,397 731,080
------------ ------------
Long-Term Debt - Net of
Current Maturities $ 10,388,620 $ 10,910,757
------------ ------------
------------ ------------
</TABLE>
27
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 5 LONG-TERM DEBT (CONTINUED)
Maturity requirements by year on long-term debt are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amounts
------------------------ -------------
<S> <C>
1998 $ 1,038,397
1999 5,818,766
2000 1,195,298
2001 3,292,692
2002 18,170
Later Years 63,694
-------------
Total $ 11,427,017
-------------
-------------
</TABLE>
The maximum and average amounts outstanding on the Company's long-term
lines of credit were $4,389,281 and $3,804,534 during 1997,
respectively, and $3,716,939 and $2,596,711 during 1996, respectively.
The Company is subject to certain restrictive covenants on debt with
Norwest Bank North Country, N.A. The Company is in violation of one of
the covenants at December 31, 1997 and has obtained a waiver for this
violation.
NOTE 6 CONTINGENCY
At December 31, 1997, the Company was contingently liable for an
additional $108,000 on the note payable to Communications Systems, Inc.
(CSI). The Company incurred warranty costs in 1997 on sales that
occurred prior to the acquisition of Zercom, and consequently reduced
their note payable to CSI for such amounts. Management representing
both Nortech and CSI have been communicating in an attempt to resolve
this matter, however, a mutual agreement has not yet been reached.
28
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 7 LEASE OBLIGATION
The Company has entered into various operating leases for production and
office equipment, office space and buildings. The Company has the
option to purchase equipment upon lease expiration at fair market value.
The Company also has the option to purchase a building under an
operating lease which, however, is subject to cancellation fees until
December 1999. The monthly rent expense on another building under
operating lease is subject to an annual adjustment for the increase in
the Consumer Price Index.
Rent expense for the years ended December 31, 1997, 1996 and 1995, was
$548,943, $451,659 and $290,799, respectively. The future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- -------------
<S> <C>
1998 $ 412,742
1999 399,014
2000 185,541
2001 68,670
2002 51,502
------------
Total $ 1,117,469
------------
------------
</TABLE>
NOTE 8 INCOME TAXES
The provision for income taxes for each of the three years in the period
ended December 31, 1997, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current Taxes - Federal $ 31,000 $ 10,000 $ 37,000
Current Taxes - State 119,000 72,000 63,000
Deferred Taxes 209,000 110,000 (100,000)
--------- --------- ---------
Total Expense $ 359,000 $ 192,000 $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
Net deferred tax assets at December 31, 1997 and 1996, consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net Operating Loss (NOL) Carryforwards $ 1,100,000 $ 1,415,000
Tax Credit Carryforwards 240,000 235,000
Allowance for Doubtful Accounts 35,000 10,000
Inventory Obsolescence Reserve 125,000 50,000
Accrued Vacation 135,000 85,000
Health Insurance Reserve 55,000 60,000
Property and Equipment (259,000) (165,000)
Valuation Allowance (190,000) (240,000)
------------ ------------
Total $ 1,241,000 $ 1,450,000
------------ ------------
------------ ------------
</TABLE>
29
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 INCOME TAXES (CONTINUED)
The statutory rate reconciliation for each of the three years in the
period ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Tax Provision $ 353,000 $ 217,000 $ 453,000
State Income Taxes 72,000 78,000 80,000
Additional NOL Carryforwards - - (851,000)
Increase (Reduction) in Deferred Tax
Valuation Allowance (Net of Expired
Tax Credit Carryforwards) (50,000) (100,000) 300,000
Other (16,000) (3,000) 18,000
---------- ---------- ----------
Income Tax Expense $ 359,000 $ 192,000 $ -
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
Investment Research and
Operating Loss Tax Credit Development Tax
Year of Expiration Carryforward Carryforward Credit Carryforward
- --------------------------- ------------- ------------ -------------------
<S> <C> <C> <C>
1998 $ - $ 50,900 $ 97,600
1999 1,706,300 40,000 -
2000 - - -
2001 767,300 - -
2002 253,200 - -
2003 109,700 - -
------------- ----------- -------------------
Totals $ 2,836,500 $ 90,900 $ 97,600
------------- ----------- -------------------
------------- ----------- -------------------
</TABLE>
During 1995 the Company identified an additional $2,500,000 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
increased its valuation allowance in 1995.
The Company utilized operating loss carryforwards of $1,341,000, 642,000
and 1,450,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, to offset federal taxable income.
In 1995 the Company utilized $46,000 of research and development credits
to offset state taxable income.
30
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 9 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 adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation cost for the Company's
stock option plan been determined based on the fair market value at the
grant date for awards in 1997 and 1995 consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Net Earnings - as Reported $ 677,671 $ 446,029 $ 1,331,924
Net Earnings - Pro Forma $ 612,402 $ 413,236 $ 1,320,197
Basic Earnings Per Share - as Reported $ 0.28 $ 0.19 $ 0.55
Basic Earnings Per Share - Pro Forma $ 0.25 $ 0.17 $ 0.55
Diluted Earnings Per Share - as Reported $ 0.28 $ 0.18 $ 0.55
Diluted Earnings Per Share - Pro Forma $ 0.25 $ 0.17 $ 0.54
</TABLE>
The assumption regarding stock options issued is that compensation cost
is recognized over the graded vesting period of the options, which
ranges from zero to five years. Options granted before 1995 were not
considered in the calculation. No options were granted during the year
ended December 31, 1996.
The fair value of each option grant issued is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1995
----- -----
<S> <C> <C>
Expected Lives (Years) 10 10
Dividend Yield 0.0% 0.0%
Expected Volatility 45% 39%
Risk-Free Interest Rate 6.25% 5.50%
</TABLE>
The total number of shares of common stock that may be granted under the
plan is 200,000. The plan provides that shares granted come from the
Company's authorized but unissued common stock. The price of the
options granted to the plan will not be less that 100% of the fair
market value of the shares on the date of grant. Options are generally
exercisable after one or more years and expire no later than 10 years
from the date of grant.
31
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 9 EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED)
Information regarding the Company's common stock options is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding,
Beginning of Year 137,500 $ 4.29 137,500 $ 4.29 47,500 $ 2.11
Options Exercised - - - - (5,000) 1.75
Options Granted 115,000 5.00 - - 95,000 5.25
-------- -------- ------- -------- ------ ---------
Options Outstanding,
End of Year 252,500 $ 4.61 137,500 $ 4.29 137,500 $ 4.29
-------- -------- ------- -------- ------ ---------
-------- -------- ------- -------- ------ ---------
Option Price Range
of Exercised Shares $ - $ - $ 1.75
Weighted Average
Fair Value of Options
Granted During the
Year $ 3.31 $ - $ 2.96
</TABLE>
The following table summarizes information about fixed-price
stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Exercise Prices 12/31/97 12/31/97 Contractual Life
--------------- -------- ------- ----------------
<S> <C> <C> <C>
1.625 15,000 15,000 5 Years
1.75 17,500 17,500 4 Years
3.625 10,000 10,000 6 Years
5.00 115,000 23,000 9 Years
5.25 95,000 38,000 8 Years
</TABLE>
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, 1997.
32
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 $540,000 and $775,000 at December 31,
1997 and 1996, respectively. The Company has not experienced any losses
in any of the short-term investment instruments it has used for excess
cash balances.
One customer accounted for approximately 12.7% of sales for the year
ended December 31, 1997.
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
accounted for approximately 10.4% of accounts receivable at December 31,
1995.
NOTE 11 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 $15,040, $-0-
and $29,934 were paid during the years-ended December 31, 1997, 1996 and
1995, respectively.
NOTE 12 SUBSEQUENT EVENT
On January 23, 1998 the Company entered into an agreement to settle the
dispute over the 50,000 shares placed in escrow as a result of the 1995
Monitor Technology Corporation (MTC) purchase. The settlement agreement
states that the Company must issue 33,000 shares of its common stock
within 30 days of the settlement date to certain shareholders of MTC.
The shares will be unrestricted and will be freely tradable by the
recipients. Nortech agrees to pay to the recipients, for each Nortech
share received pursuant to the settlement, the amount, if any, by which
$6.00 exceeds the closing price per share of the Nortech shares on July
20, 1998. The Company shall have the option to pay the recipients any
such excess either in cash or by delivering freely tradable shares of
Nortech stock having a value on July 20, 1998, equal to such excess.
Such payment, either in cash or by delivery of Nortech shares, shall be
made on or before July 31, 1998.
Upon execution of the settlement, all parties have agreed to release any
and all future claims related to the MTC purchase. The remaining 17,000
escrowed shares will be canceled.
33
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 is effective for interim and annual periods
beginning after December 15, 1997, and is to be applied retroactively to
all periods presented. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. It does not, however, specify
when to recognize or how to measure items that make up comprehensive
income.
SFAS No. 130 was issued to address concerns over the practice of
reporting elements of comprehensive income directly in equity. This
statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed in equal prominence with the
other financial statements. It does not require a specific format for
that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period in that
financial statement. Enterprises are required to classify items of
"other comprehensive income" by their nature in the financial statement
and display the balance of other comprehensive income to be disclosed.
Management does not expect that adoption of SFAS No. 130 will have a
material impact on the Company's consolidated financial statements.
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 is effective for
interim periods beginning after December 15, 1997, and is to be applied
retroactively to all periods presented. SFAS No. 131 establishes
standards for the way public business enterprises are to report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers.
Management does not expect that adoption of SFAS No. 131 will have a
material impact on the Company's consolidated financial statements.
34
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 SUPPLEMENTARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total
3/31/97 6/30/97 9/30/97 12/31/97 1997
-------------- -------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 8,564,846 $ 9,039,176 $ 8,693,449 $ 10,136,447 $ 36,433,918
GROSS PROFIT 1,520,489 1,655,316 1,564,735 2,054,512 6,795,052
NET INCOME 132,755 167,255 140,555 237,106 677,671
BASIC EARNINGS PER SHARE
OF COMMON STOCK 0.06 0.07 0.06 0.09 0.28
</TABLE>
<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
BASIC EARNINGS PER SHARE
OF COMMON STOCK 0.08 0.12 0.09 (0.10) 0.19
</TABLE>
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.
35
<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 1997 proxy statement to be filed with the
Securities and Exchange Commission not later than April 30, 1998 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 1997 proxy statements to be filed with the Securities and
Exchange Commission not later than April 30, 1998 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 1997 proxy
statements to be filed with the Securities and Exchange Commission not later
than April 30, 1998 and said portions of the proxy statements are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
(The remainder of this page was intentionally left blank.)
36
<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 42
Consolidated Financial Statement Schedule for the years ended December 31,
1997, 1996 and 1995
II Valuation and Qualifying Accounts 43
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 Master lease agreement for equipment between Norwest Leasing
Company and the Company.
10.2 Land contract between the city of Augusta and the Company for the
purchase of building and land in Augusta, Wisconsin.
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 10.1, 10.2,
10.3, 10.4, 10.5, 10.6, 10.7 and 10.8 respectfully, to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
10.1 Promissory Note for acquisition of division between Company and
Northern National Bank dated December 31, 1996.
37
<PAGE>
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.
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 10.2 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.
38
<PAGE>
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.
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.
39
<PAGE>
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.
None.
(The remainder of this page was intentionally left blank.)
40
<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, 1998 By:/s/
-----------------------------
Garry M. Anderly
Principal Financial Officer
and
Principal Accounting Officer
March 27, 1998 By:/s/
-----------------------------
QUENTIN E. FINKELSON
Its President and
Chief Executive 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, 1998 /s/
-----------------------------
Quentin E. Finkelson,
President, Chief Executive
Officer and Director
March 27, 1998 /s/
-----------------------------
Myron Kunin, Director
March 27, 1998 /s/
-----------------------------
Richard W. Perkins, Director
41
<PAGE>
[Letterhead]
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 1997, 1996 and 1995, 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 23, 1998
42
<PAGE>
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
SCHEDULE II
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
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, 1997:
Allowance for Doubtful Accounts $ 22,301 $ 61,827 $ - $ 84,128
Inventory Obsolescence Reserve 120,000 200,000 - 320,000
Deferred Tax Valuation Allowance 240,000 - (50,000) 190,000
---------- ------------ ------------- ------------
$ 382,301 $ 261,827 $ (50,000) $ 594,128
---------- ------------ ------------- ------------
---------- ------------ ------------- ------------
Year Ended December 31, 1996:
Allowance for Doubtful Accounts $ 6,053 $ 16,248 $ - $ 22,301
Inventory Obsolescence Reserve 120,000 - - 120,000
Deferred Tax Valuation Allowance 400,000 - (160,000) 240,000
---------- ------------ ------------- ------------
$ 526,053 $ 16,248 $(160,000) $ 382,301
---------- ------------ ------------- ------------
---------- ------------ ------------- ------------
Year Ended December 31, 1995:
Allowance for Doubtful Accounts $ 4,343 $ 1,710 $ - $ 6,053
Inventory Obsolescence Reserve 40,000 80,000 - 120,000
Deferred Tax Valuation Allowance 100,000 - 300,000 400,000
---------- ------------ ------------- ------------
$ 144,343 $ 81,710 $ 300,000 $ 526,053
---------- ------------ ------------- ------------
---------- ------------ ------------- ------------
</TABLE>
43
<PAGE>
INDEX TO EXHIBITS
DESCRIPTIONS OF EXHIBITS
10.1 Master lease agreement for equipment between Norwest Leasing
Company and the Company.
10.2 Land contract between the city of Augusta and the Company for the
purchase of building and land in Augusta, Wisconsin.
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.
44
<PAGE>
Norwest Equipment Finance, Inc. MASTER LEASE
[Logo] Equipment Investors Building, Suite 300
Finance 733 Marquette Avenue
Minneapolis, MN 55479-2048
- ------------------------------------------------------------------------------
Master Lease Number 30576 dated as of September 18, 1997
Name and Address of Lessee:
Nortech Systems, Incorporated
641 East Lake Street
Suite 234
Wayzata, MN 55391
- ------------------------------------------------------------------------------
MASTER LEASE PROVISIONS
- ------------------------------------------------------------------------------
1. LEASE. Lessor hereby agrees to lease to Lessee, and Lessee hereby
agrees to lease from Lessor, the personal property described in a
Supplement or Supplements to this Master Lease from time to time signed by
Lessor and Lessee upon the terms and conditions set forth herein and in the
related Supplement (such property together with all replacements, repairs,
and additions incorporated therein or affixed thereto being referred to
herein as the "Equipment"). The lease of the items described in a particular
Supplement shall be considered a separate lease pursuant to the terms of the
Master Lease and the Supplement the same as if a single lease agreement
containing such terms had been executed covering such items.
2. TERM. The term of this lease with respect to each item of Equipment
shall begin on the date it is accepted by Lessee and shall continue for the
number of consecutive months from the rent commencement date shown in the
related Supplement (the "Initial term") unless earlier terminated as provided
herein or unless extended automatically as provided below in this paragraph.
The rent commencement date is the 15th day of the month in which all of the
items of Equipment described in the related Supplement have been delivered
and accepted by Lessee if such delivery and acceptance is completed on or before
the 15th of such month, and the rent commencement date is the last day of
such month if such delivery and acceptance is completed during the balance of
such month. In the event Lessee executes the related Supplement prior to
delivery and acceptance of all items of Equipment described therein, Lessee
agrees that the rent commencement date may be left blank when Lessee executes
the related Supplement and hereby authorizes Lessor to insert the rent
commencement date based upon the date appearing on the delivery and
acceptance certificate signed by Lessee with respect to the last item of
Equipment to be delivered.
AUTOMATIC EXTENSION. Lessee or Lessor may terminate this lease at the
expiration of the initial term by giving the other at least 90 days prior
written notice of termination. If neither Lessee nor Lessor gives such
notice, then the term of this lease shall be extended automatically on the
same rental and other terms set forth herein (except that in any event rent
during any extended term shall be payable in the amounts and at the times
provided in paragraph 3) for successive periods of one month until terminated
by either Lessee or Lessor giving the other at least 90 days prior written
notice of termination.
3. RENT. Lessee shall pay as basic rent for the initial term of this lease
the amount shown in the related Supplement as Total Basic Rent. The Total
Basic Rent shall be payable in installments each in the amount of the basic
rental payment set forth in the related Supplement plus sales and use tax
thereon. Lessee shall pay advance installments and any security deposit, each
as shown in the related Supplement, on the date it is executed by Lessee.
Subsequent installments shall be payable on the first day of each rental
payment period shown in the related Supplement beginning after the first
rental payment period; provided, however, that Lessor and Lessee may agree to
any other payment schedule, including irregular payments or balloon payments,
in which event they shall be set forth in the space provided in the
Supplement for additional provisions. If the actual cost of the Equipment is
more or less than the Total Cost as shown in the Supplement, the amount of
each installment of rent will be adjusted up or down to provide the same
yield to Lessor as would have been obtained if the actual cost had been the
same as the Total Cost Adjustments of 10% or less may be made by written
notice from Lessor to Lessee. Adjustments of more than 10% shall be made by
execution of an amendment to the Supplement reflecting the change in Total
Cost and rent.
During any extended term of this lease, basic rent shall be payable
monthly in advance on the first day of each month during such extended term
in the amount equal to the basic rental payment set forth in the related
Supplement if rent is payable monthly during the initial term or in an amount
equal to the monthly equivalent of the basic rental payment set forth in the
related Supplement if rent is payable other than monthly during the initial
term. In addition, Lessee shall pay any applicable sales and use tax on rent
payable during any extended term.
In addition to basic rent, which is payable only from the rent
commencement date as provided above, Lessee agrees to pay interim rent with
respect to each separate item of Equipment covered by a particular Supplement
from the date it is delivered and accepted to the rent commencement date at a
daily rate equal to the percentage of Lessor's cost of such item specified in
such Supplement. Interim rent accruing each calendar month shall be payable
by the 10th day of the following month and in any event on the rent
commencement date. Lessee agrees that if all of the items of Equipment
covered by such Supplement have not been delivered and accepted thereunder
before the date specified as the Cutoff Date in such Supplement, Lessee shall
purchase from Lessor the items of Equipment then subject to the lease within
five days after Lessor's request to do so for a price equal to Lessor's cost
of such items plus all accrued but unpaid interim rent thereon. Lessee shall
also pay any applicable sales and use tax on such sale.
4. SECURITY DEPOSIT. Lessor may apply any security deposit toward any
obligation of Lessee under this lease, and shall return any unapplied balance
to Lessee without interest upon satisfaction of Lessee's obligations
hereunder.
5. WARRANTIES. Lessee agrees that it has selected each item of Equipment
based upon its own judgement and disclaims any reliance upon any statements or
representations made by Lessor. LESSOR MAKES NO WARRANTY WITH RESPECT TO THE
EQUIPMENT, EXPRESS OR IMPLIED, AND LESSOR SPECIFICALLY DISCLAIMS ANY WARRANTY
OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE AND ANY LIABILITY
FOR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OF OR THE INABILITY TO USE
THE EQUIPMENT. Lessee agrees to make the rental and other payments required
hereunder without regard to the condition of the Equipment and to look only
to persons other than Lessor such as the manufacturer, vendor or came, thereof
should any item of Equipment for any reason be defective. So long as no Event
of Default has occurred and is continuing, Lessor agrees, to the extent they
are assignable, to assign to Lessee, without any recourse to Lessor, any
warranty received by Lessor.
6. TITLE. Title to the Equipment shall at all times remain in Lessor, and
Lessee at its expense shall protect and defend the title of Lessor and keep
it free of all claims and liens other than the rights of Lessee hereunder and
claims and liens created by or arising through Lessor. The Equipment shall
remain personal property regardless of its attachment to realty, and Lessee
agrees to take such action at its expense as may be necessary to prevent any
third party form acquiring any interest in the Equipment as a result of its
attachment to realty.
7. LAWS AND TAXES. Lessee shall comply with all laws and regulations
relating to the Equipment and its use and shall promptly pay when due all
sales, use, property, excise and other taxes and all license and
registration fees now or hereafter imposed by any governmental body or agency
upon the Equipment or its use or the rentals hereunder. Upon request by
Lessor, Lessee shall prepare and file all tax returns relating to taxes for
which Lessee is responsible hereunder which Lessee is permitted to file under
the laws of the applicable taxing jurisdiction.
8. Indemnity Lessee hereby indemnifies Lessor against and agrees to save
Lessor harmless from any and all liability and expense arising out of the
ordering, ownership, use, condition, or operation of each item of Equipment
during the term of this lease, including liability for death or injury to
persons, damage to property, strict liability under the laws or judicial
decisions of any state or the United States, and legal expenses in defending
any claim brought to enforce any such liability or expense.
9. ASSIGNMENT WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE WILL NOT SELL,
ASSIGN, SUBLET, PLEDGE, OR OTHERWISE ENCUMBER OR PERMIT A LIEN ARISING
THROUGH LESSEE TO EXIST ON OR AGAINST ANY INTEREST IN THIS LEASE OR THE
EQUIPMENT, or remove the Equipment from its location referred to above.
Lessor may assign its interest in this lease and sell or grant a security
interest in all or any part of the Equipment without notice to or the consent
of Lessee. Lessee agrees not to assert against any assignee of Lessor any
claim or defense Lessee may have against Lessor.
10. INSPECTION. Lessor may inspect the Equipment at any time and from time
to time during regular business hours.
11. REPAIRS. Lessee will use the Equipment with due care and for the
purpose for which it is intended. Lessee will maintain the Equipment in good
repair, condition and working order and will furnish all parts and services
required therefor, all at its expenses, ordinary wear and tear excepted.
Lessee shall, at its expense, make all modifications and improvements to the
Equipment required by law, and shall not make other modifications or
improvements to the Equipment without the prior written consent of Lessor.
All parts, modifications and improvements to the Equipment shall when
installed or made, immediately become the property of Lessor and part of the
Equipment for all purposes.
12. LOSS OR DAMAGE. In the event any item of Equipment shall become lost,
stolen, destroyed, damaged beyond repair or rendered permanently unfit for
use for any reason, or in the event of condemnation or seizure of any item of
Equipment, Lessee shall promptly pay Lessor the sum of (a) the amount of all
rent and other amounts payable by Lessee hereunder with respect to such item
due but unpaid at the date of such payment plus (b) the amount of all unpaid
rent with respect to such item for the balance of the term of this lease not
yet due at the time of such payment discounted from the respective dates
installment payments would be due at the rate implicit in the schedule of
rental payments when applied to the cost of such item plus (c) 10% of the
cost of such item as shown in the related Supplement. Upon payment of such
amount to Lessor, such item shall become the property of Lessee. Lessor will
transfer to Lessee, without recourse or warranty, all of Lessor's right, title
and interest therein, the rent with respect to such item shall terminate, and
the basic rental payments on the remaining items shall be reduced accordingly.
THIS AGREEMENT INCLUDES THE TERMS ON THE BACK OF THIS PAGE
Lessor: Norwest Equipment Finance, Inc. Nortech Systems, Incorporated, Lessee
[Illegible] [Illegible]
- -------------------------------------- -------------------------------------
By By
Sr. Contract Admin. Sr. V.P. Finance & Treasurer
- -------------------------------------- -------------------------------------
Title Title
<PAGE>
Lessee shall pay any sales and use taxes due on such transfer. Any insurance
or condemnation proceeds received shall be credited to Lessee's obligation
under this paragraph and Lessor shall be entitled to any surplus.
13. INSURANCE. Lessee shall obtain and maintain on or with respect to the
Equipment at its own expense (a) liability insurance insuring against
liability for bodily injury and property damage with a minimum limit of
$500,000 combined single limit and (b) physical damage insurance insuring
against loss or damage to the Equipment in an amount not less than the full
replacement value of the Equipment. Lessee shall furnish Lessor with a
certificate of insurance evidencing the issuance of a policy or policies to
Lessee in at least the minimum amounts required herein naming Lessor as an
additional insured thereunder for the liability coverage and as loss payee
for the property damage coverage. Each such policy shall be in such form and
with such insurers as may be satisfactory to Lessor, and shall contain a
clause requiring the insurer to give to Lessor at least 10 days prior written
notice of any alteration in the terms of such policy or the cancellation
thereof, and a clause specifying that no action or misrepresentation by
Lessee shall invalidate such policy. Lessor shall be under no duty to
ascertain the existence of or to examine any such policy or to advise Lessee
in the event any such policy shall not comply with the requirements hereof.
14. RETURN OF THE EQUIPMENT. Upon the expiration or earlier termination of
this lease, Lessee will immediately deliver the Equipment to Lessor in the
same condition as when delivered to Lessee, ordinary wear and tear excepted,
at such location within the continental United States as Lessor shall
designate. Lessee shall pay all transportation and other expenses relating to
such delivery.
15. ADDITIONAL ACTION. Lessee will promptly execute and deliver to Lessor
such further documents and take such further action as Lessor may request in
order to carry out more effectively the intent and purpose of this lease,
including the execution and delivery of appropriate financing statements to
protect fully Lessor's interest hereunder in accordance with the Uniform
Commercial Code or other applicable law. Lessee will furnish, from time to
time on request, a copy of Lessee's latest annual balance sheet and income
statement.
16. LATE CHARGES. If any installment of interim rent or basic rent is not
paid when due, Lessor may impose a late charge of up to 5% of the amount of
the installment but in any event not more than permitted by applicable law.
Payments thereafter received shall be applied first to delinquent
installments and then to current installments.
17. DEFAULT. Each of the following events shall constitute an "Event of
Default" hereunder: (a) Lessee shall fail to pay when due any installment of
interim rent or basic rent; (b) Lessee shall fail to observe or perform any
other agreement to be observed or performed by Lessee hereunder and the
continuance thereof for 10 calendar days following written notice thereof by
Lessor to Lessee; (c) Lessee or any guarantor of this lease or any partner of
Lessee if Lessee is a partnership shall cease doing business as a going
concern or make an assignment for the benefit of creditors; (d) Lessee or any
guarantor of this lease or any partner of Lessee if Lessee is a partnership
shall voluntarily file, or have filed against it involuntarily, a petition
for liquidation, reorganization, adjustment of debt, or similar relief under
the federal Bankruptcy Code or any other present or future federal or state
bankruptcy or insolvency law, or a trustee, receiver, or liquidator shall be
appointed of it or of all or a substantial part of its assets; (e) any
individual Lessee, guarantor of this lease, or partner of Lessee if Lessee is
a partnership shall die; (f) any financial or credit information submitted by
or on behalf of Lessee shall prove to have been false or materially
misleading when made; (g) an event of default shall occur under any other
obligation Lessee owes to Lessor; (h) any indebtedness Lessee may now or
hereafter owe to Norwest Bank Minnesota, National Association or any
affiliate thereof shall be accelerated following a default thereunder or, if
any such indebtedness is payable on demand, payment thereof shall be
demanded; (i) if Lessee is a corporation, more than 50% of the shares of
voting stock of Lessee shall become owned by a shareholder or shareholders
who were not owners of voting stock of Lessee on the date this lease begins
or, if Lessee is a partnership, more than 50% of the partnership interests in
the Lessee shall become owned by a partner or partners who were not partners
of Lessee on the date this lease begins; and (j) Lessee shall consolidate
with or merge into, or sell or lease all or substantially all of its assets
to, any individual, corporation, or other entity.
18. REMEDIES. Lessor and Lessee agree that Lessor's damages suffered by
reason of an Event of Default are uncertain and not capable of exact
measurement at the time this lease is executed because the value of the
Equipment at the expiration of this lease is uncertain, and therefore they
agree that for purposes of this paragraph 18 "Lessor's Loss" as of any date
shall be the sum of the following: (1) the amount of all rent and other
amounts payable by Lessee hereunder due but unpaid as of such date plus (2)
the amount of all unpaid rent for the balance of the term of this lease not
yet due as of such date discounted from the respective dates installment
payments would be due at the rate of 5% per annum plus (3) 10% of the cost of
the Equipment subject to this lease as of such date.
Upon the occurrence of an Event of Default and at any time thereafter,
Lessor may exercise any one or more of the remedies listed below as Lessor in
its sole discretion may lawfully elect; provided, however, that upon the
occurrence of an Event of Default specified in paragraph 17(d), an amount
equal to Lessor's Loss as of the date of such occurrence shall automatically
become and be immediately due and payable without notice or demand of any
kind.
a) Lessor may, by written notice to Lessee, terminate this lease and
declare an amount equal to Lessor's Loss as of the date of such notice to be
immediately due and payable, and the same shall thereupon be and become
immediately due and payable without further notice or demand, and all rights
of Lessee to use the Equipment shall terminate but Lessee shall be and remain
liable as provided in this paragraph 18. Lessee shall at its expense
promptly deliver the Equipment to Lessor at a location or locations within
the continental United States designated by Lessor. Lessor may also enter
upon the premises where the Equipment is located and take immediate
possession of and remove the same with or without instituting legal
proceedings.
b) Lessor may proceed by appropriate court action to enforce performance by
Lessee of the applicable covenants of this lease or to recover, for breach of
this lease, Lessor's Loss as of the date Lessor's Loss is declared due and
payable hereunder, provided, however, that upon recovery of Lessor's Loss
from Lessee in any such action without having to repossess and dispose of the
Equipment, Lessor shall transfer the Equipment to Lessee at its then location
upon payment of any additional amount due under clauses (d) and (e) below.
c) In the event Lessor repossessed the Equipment, Lessor shall either retain
the Equipment in full satisfaction of Lessee's obligation hereunder or sell
or lease each item of Equipment in such manner and upon such terms as Lessor
may in its sole discretion determine. The proceeds of such sale or lease
shall be applied to reimburse Lessor for Lessor's Loss and any additional
amount due under clauses (d) and (e) below. Lessor shall be entitled to any
surplus and Lessee shall remain liable for any deficiency. For purposes of
this subparagraph, the proceeds of any lease of all or any part of the
Equipment by Lessor shall be the amount reasonably assigned by Lessor as the
cost of such Equipment in determining the rent under such lease.
d) Lessor may recover interest on the unpaid balance of Lessor's Loss from
the date it becomes payable until fully paid at the rate of the lesser of 8%
per annum or the highest rate permitted by law.
e) Lessor may exercise any other right or remedy available to it by law or
by agreement, and may in any event recover legal fees and other expenses
incurred by reason of an Event of Default or the exercise of any remedy
hereunder, including expenses of repossession, repair, storage,
transportation, and disposition of the Equipment.
If any Supplement is deemed at any time to be a lease intended as
security, Lessee grants Lessor a security interest in the Equipment to secure
its obligations under this lease and all other indebtedness at any time owing
by Lessee to Lessor and agrees that upon the occurrence of an Event of
Default, in addition to all of the other rights and remedies available to
Lessor hereunder, Lessor shall have all of the rights and remedies of a
secured party under the Uniform Commercial Code..
No remedy given in this paragraph is intended to be exclusive, and each
shall be cumulative but only to the extent necessary to permit Lessor to
recover amounts for which Lessee is liable hereunder. No express or implied
waiver by Lessor of any breach of Lessee's obligations hereunder shall
constitute a waiver of any other breach of Lessee's obligations hereunder.
19. NOTICES. Any written notice hereunder to Lessee or Lessor shall be
deemed to have been given when delivered personally or deposited in the
United States mails, postage prepaid, addressed to recipient at its address
set forth above or at such other address as may be last known to the sender.
20. NET LEASE AND UNCONDITIONAL OBLIGATION. This lease is a completely net
lease and Lessee's obligation to pay rent and amounts payable by Lessee under
paragraphs 12 and 18 is unconditional and not subject to any abatement,
reduction, setoff or defense of any kind.
21. NON-CANCELABLE LEASE. This lease cannot be canceled or terminated except
as expressly provided herein.
22. SURVIVAL OF INDEMNITIES. Lessee's obligations under paragraphs 7, 8, 18
shall survive termination or expiration of this lease.
23. COUNTERPARTS. There shall be but one counterpart of the Master Lease and
of each Supplement and such counterpart will be marked "Original." To the
extent that any Supplement constitutes chattel paper (as the term is defined
by the Uniform Commercial Code), a security interest may only be created in
the Supplement marked "Original."
24. MISCELLANEOUS. This Master Lease and related Supplement(s) constitute
the entire agreement between Lessor and Lessee and may be modified only by a
written instrument signed by Lessor and Lessee. Any provision of this lease
which is unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such unenforceability without invalidating the
remaining provisions of this lease, and any such unenforceability in any
jurisdiction shall not render unenforceable such provision in any other
jurisdiction. If this lease shall in all respects be governed by, and
construed in accordance with, the substantive laws of the State of Minnesota.
In the event there is more than one Lessee named herein or in any Supplement,
the obligations of each shall be joint and several.
<PAGE>
- --------------------------------------------------------------------------------
[LOGO] EQUIPMENT Norwest Equipment Finance, Inc. SUPPLEMENT TO MASTER LEASE
FINANCE Investors Building, Suite 300 OPTION TO PURCHASE
731 Marquette Avenue
Minneapolis, MN 55479-2048
- --------------------------------------------------------------------------------
Supplement Number 30576-100 dated as of September 18, 1997 to
Master Lease Number 30576 dated as of September 18, 1997
Name and Address of Lessee:
Nortech Systems, Incorporated
641 East Lake Street
Suite 234
Wayzata, MN 55391
- -------------------------------------------------------------------------------
This is a Supplement to the Master Lease identified above between Lessor
and Lessee (the "Master Lease"). Upon the execution and delivery by Lessor
and Lessee of this Supplement, Lessor hereby agrees to lease to Lessee, and
Lessee hereby agrees to lease from Lessor, the equipment described below upon
the terms and conditions of this Supplement and the Master Lease. All terms
and conditions of the Master Lease shall remain in full force and effect
except to the extent modified by this Supplement. This Supplement and the
Master Lease as it relate to this Supplement are hereinafter referred to as
the "Lease".
Equipment Description:
See Schedule A
Equipment Location: Zercom Drive, Merrifield, MN 56465
<TABLE>
<CAPTION>
SUMMARY OF PAYMENTS TERMS
<S> <C>
Initial Term in Months: 60 Total Cost: $304,334.00
Payment Frequency: Monthly Total Basic Rent: $343,349.40
Basic Rental payment $5,722.49 plus applicable sales and use tax Interim Rent Daily Rate: .063
Number of Installments: 60 Interim Rent Cutoff Date: December 31, 1997
Advance Payments: First due on signing this Lease Security Deposit: N/A
</TABLE>
END OF TERM OPTIONS:
1. Upon expiration of the initial term of the Lease and provided that the
Lease has not been terminated early and Lessee is in compliance with the
Lease in all respects, Lessee may upon at least 90 but not more than 120
days prior written notice to Lessor exercise one of the following options:
(i) purchase all but not less than all of the Equipment at the
expiration of the initial term of the Lease or any renewal term
pursuant to paragraph 1(ii) hereof for a purchase price equal to
the then Fair Market Value of the Equipment. "Fair Market Value"
of the Equipment for purposes of this paragraph shall be an
amount determined according to the following procedure. Upon
receipt of Lessee's notice of election to purchase the Equipment,
Lessee and Lessor will attempt to agree on an amount during the
next 30 days, and the amount so agreed upon shall be the Fair
Market Value. In the event Lessor and Lessee cannot agree on an
amount during such 30-day period, then each party shall choose an
independent appraiser, and the two appraisers shall each
determine the fair market value of the Equipment on the basis of
an arm's-length sale between an informed and willing buyer (other
than a buyer currently in possession) and an informed and willing
seller under no compulsion to sell. The average of the amounts
determined by the two appraisers shall be the Fair Market Value.
Each party shall pay the expenses of the appraiser it chooses; or
(ii) renew the Lease with respect to all but not less than all of the
Equipment at the expiration of the initial term of the Lease for
the then Fair Market Rental Value of the Equipment and for a term
to be agreed upon by Lessee and Lessor. Upon expiration of the
renewal term Lessee shall either purchase the Equipment pursuant
to paragraph 1 above or return the Equipment in accordance with
the Lease. "Fair Market Rental Value" of the Equipment for
purposes of this paragraph shall be an amount determined
according to the following procedure. Upon receipt of Lessee's
notice of election to renew the Lease, Lessee and Lessor will
attempt to agree on an amount during the next 30 days, and the
amount so agreed upon shall be the Fair Market Rental Value. In
the event Lessor and Lessee cannot agree on an amount during such
30-day period, then each party shall choose an independent
appraiser, and the two appraisers shall each determine the fair
market rental value of the Equipment on the basis of an
arm's-length transaction between an informed and willing lessor
and an informed and willing lessee under no compulsion to lease.
The average of the amounts determined by the two appraisers shall
be the Fair Market Rental Value. Each party shall pay the
expenses of the appraiser it chooses; or
THIS AGREEMENT INCLUDES THE TERMS ON THE BACK OF THIS PAGE
Lessor: Norwest Equipment Finance, Inc. Nortech Systems, Incorporated, Lessee
BY: [Illegible] BY: [Illegible]
------------------------------------- ----------------------------------
TITLE: Sr. Contract Admin. TITLE: Sr. V.P. Finance & Treasuer
---------------------------------- ----------------------------------
December 31st, 1997
- ---------------------------------------
RENT COMMENCEMENT DATE
<PAGE>
VOL 1040 PAGE 88
722169 STATE BAR OF WISCONSIN FORM 11 - 1982
LAND CONTRACT
INDIVIDUAL AND CORPORATE [STAMP]
(TO BE USED FOR ALL TRANSACTIONS WHERE OVER
$25,000 IS FINANCED AND IN OTHER NON-CONSUMER
DOCUMENT NO. ACT TRANSACTIONS)
CONTRACT, by and between CITY OF AUGUSTA
-----------------------------------------------------
- ------------------------------------------------------------------------------
("Vendor",
- --------------------------------------------------------------------
whether one or more) and NORTECH SYSTEMS INCORPORATED
-----------------------------------------------------
- ------------------------------------------------------------------------------
("Purchaser", whether one or more).
- -------------------------------------------
Vendor sells and agrees to convey to Purchaser, upon the prompt and full
performance of this contract by Purchaser, the following property, together
with the rents, profits, fixtures and other appurtenant interests (all called
the "Property"), in
-----------------------------------------------------------
EAU CLAIRE County, State of Wisconsin:
- ---------------------------------------------------
Parcel of land located in the Northeast Quarter of the Northwest Quarter of
Section 5, Township 25 North, Range 6 West, City of Augusta, Wisconsin, being
more particularly described as follows:
Commencing at the Northeast Corner of the Northwest Quarter of said
Section 5; Thence S0DEG.01`06" E, 33.01 feet; Thence S88DEG.19`03"W,
264.00 feet; Thence S0DEG.01'06"E, 280.12 feet; Thence S88DEG.19'03"W,
50.02 feet to the Point of Beginning; Thence N0DEG.01`06"W, 250.11 feet;
Thence S88DEG.19'03"W, 238.76 feet; Thence S0DEG.50'59"E, 250.03
feet; Thence N88DEG.19`03"E, 235.13 feet to the Point of Beginning.
Said Parcel contains 59,237 sq. ft. (1.36 acres) and is subject to all
easements and restrictions of record.
This is not homestead property.
----------------
(is) (is not)
Purchaser agrees to purchase the Property and to pay to Vendor at ____ the
sum of $82,529.28 in the following manner: (a) $0.00 at the execution of this
Contract; and (b) the balance of $82,529.28, together with interest from date
hereof on the balance outstanding from time to time at the rate of 6.5
percent per annum until paid in full, as follows:
Twelve (12) quarterly payments of $4735.30, commencing September 1, 1997.
Provided, however, the entire outstanding balance shall be paid in full
on or before the 1st day of June, 2000. (the maturity date).
Following any default in payment, interest shall accrue at the rate of
6.5% per annum on the entire amount in default (which shall include, without
limitation, delinquent interest and, upon acceleration or maturity, the
entire principal balance).
Purchaser, unless excused by Vendor, agrees to pay monthly to Vendor
amounts sufficient to pay reasonably anticipated annual taxes, special
assessments, fire and required insurance premiums when due. To the extent
received by Vendor, Vendor agrees to apply payments to these obligations when
due. Such amounts received by the Vendor for payment of taxes, assessments
and insurance will be deposited into an escrow fund or trustee account, but
shall not bear interest unless otherwise required by law.
Payments shall be applied first to interest on the unpaid balance at the
rate specified and then to principal. Any amount may be prepaid without
premium or fee upon principal at any time after closing.
In the event of any prepayment, this contract shall not be treated as in
default with respect to payment so long as the unpaid balance of principal,
and interest (and in such case accruing interest from month to month shall be
treated as unpaid principal) is less than the amount that said indebtedness
would have been had the monthly payments been made as first specified above;
provided that monthly payments shall be continued in the event of credit of
any proceeds of insurance or condemnation, the condemned premises being
thereafter excluded herefrom.
Purchaser states that Purchaser is satisfied with the title as shown by
the title evidence submitted to Purchaser for examination except:
Purchaser agrees to pay the cost of future title evidence. If title
evidence is in the form of an abstract, it shall be retained by Vendor until
the full purchase price is paid.
Purchaser shall be entitled to take possession of the Property after
closing.
<PAGE>
Purchaser promises to pay when due all taxes and assessments levied on
the Property or upon Vendor's interest in it and to deliver to Vendor on
demand receipts showing such payment.
Purchaser shall keep the improvements on the Property insured against
loss or damage occasioned by fire, extended coverage perils and such other
hazards as Vendor may require, without co-insurance, through insurers
approved by Vendor, in the sum of $ insured value but Vendor shall not
require coverage in an amount more than the balance owed under this Contract.
Purchaser shall pay the insurance premium when due. The policies shall
contain the standard clause in favor of the Vendor's interest and, unless
Vendor otherwise agrees in writing, the original of all policies covering the
Property shall be deposited with Vendor. Purchaser shall promptly give notice
of loss to insurance companies and Vendor. Unless Purchaser and Vendor
otherwise agree in writing, insurance proceeds shall be applied to
restoration or repair of the Property damaged, provided the Vendor deems the
restoration or repair to be economically feasible.
Purchaser covenants not to commit waste nor allow waste to be committed
on the Property, to keep the Property in good tenantable condition and
repair, to keep the Property free from liens superior to the lien of this
Contract, and to comply with all laws, ordinances and regulations affecting
the Property.
Vendor agrees that in case the purchase price with interest and other
moneys shall be fully paid and all conditions shall be fully performed at the
times and in the manner above specified. Vendor will on demand, execute and
deliver to the Purchaser, a Warranty Deed, in fee simple, of the Property,
free and clear of all liens and encumbrances, except any liens or
encumbrances created by the act or default of Purchaser, and except:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Purchaser agrees that time is of the essence and (a) in the event of a
default in the payment of any principal or interest which continues for a
period of _____ days following the specified due date or (b) in the event of
a default in performance of any other obligation of Purchaser which continues
for a period of _____ days following written notice thereof by Vendor
(delivered personally or mailed by certified mail); then the entire
outstanding balance under this contract shall become immediately due and
payable in full, at Vendor's option and without notice (which Purchaser
hereby waives), and Vendor shall also have the following rights and remedies
(subject to any limitations provided by law) in addition to those
provided by law or in equity: (i) Vendor may, at his option, terminate this
Contract and Purchaser's rights, title and interest in the Property and
recover the Property back through strict foreclosure with any equity of
redemption to be conditioned upon Purchaser's full payment of the entire
outstanding balance, with interest thereon from the date of default at the
rate in effect on such date and other amounts due hereunder (in which event
all amounts previously paid by Purchaser shall be forfeited as liquidated
damages for failure to fulfill this Contract and as rental for the Property
if Purchaser fails to redeem), or (ii) Vendor may sue for specific
performance of this Contract to compel immediate and full payment on the
entire outstanding balance, with interest thereon at the rate in effect on
the date of default and other amounts due hereunder, in which event the
Property shall be auctioned at judicial sale and Purchaser shall be liable
for any deficiency; or (iii) Vendor may sue at law for the entire unpaid
purchase price or any portion thereof; or (iv) Vendor may declare this
Contract at an end and remove this Contract as a cloud on title in a
quiet-title auction if the equitable interest of Purchaser is insignificant;
and (v) Vendor may have Purchaser ejected from possession of the Property and
have a receiver appointed to collect any rents, issues or profits during the
pendency of any action under (i), (ii) or (iv) above. Notwithstanding any
oral or written statements or actions of Vendor, an election of any of the
foregoing remedies shall only be binding upon Vendor if and when pursued in
litigation and all costs and expenses including reasonable attorneys fees of
Vendor incurred to enforce any remedy hereunder (whether abated or not) to
the extent not prohibited by law and expenses of title evidence shall be
added to principal and paid by Purchaser, as incurred, and shall be included
in any judgment.
Upon the commencement or during the pendency of any action of
foreclosure of this Contract, Purchaser consents to the appointment to a
receiver of the Property, including homestead interest, to collect the rents,
issues, and profits of the Property during the pendency of such action and
such rents, issues, and profits when so collected shall be held and applied
as the court shall direct.
Purchaser shall not transfer, sell or convey any legal or equitable
interest in the Property (by assignment of any of Purchaser's rights under
this Contract or by option, long-term lease or in any other way) without the
prior written consent of Vendor unless either the outstanding balance payable
under this Contract is first paid in full or the interest conveyed is a
pledge or assignment of Purchaser's interest under this Contract solely as
security for an indebtedness of Purchaser. In the event of any such transfer,
sale or conveyance without Vendor's written consent, the entire outstanding
balance payable under this Contract shall become immediately due and payable
in full, at Vendor's option without notice.
Vendor shall make all payments when due under any mortgage outstanding
against the Property on the date of this Contract (except for any mortgage
granted by Purchaser) or under any note secured thereby, provided Purchaser
makes timely payment of the amount then due under this Contract. Purchaser may
make such payments directly to the Mortgagee if Vendor fails to do so and all
payments so made by Purchaser shall be considered payments made on this
Contract.
Vendor may waive any default without waving other subsequent or prior
default of Purchase.
All terms of this Contract shall be binding upon and inure to the
benefits of the heirs, legal representatives, successors and assigns of
Vendor and Purchaser. (If not an owner of the property the spouse of Vendor
for a valuable consideration joins herein to release homestead rights in the
subject Property and agrees to join in the execution of the deed to be made in
fulfillment hereof.)
Dated this 4th day of June, 1997, but effective June 1, 1997.
/s/ Roger H. Hahn (SEAL) /s/ Quentin E. Finkelson (SEAL)
- ------------------------------- -------------------------------
Roger H. Hahn Quentin E. Finkelson
- ------------------------------- -------------------------------
/s/ Sandra L. Boettcher (SEAL) (SEAL)
- ------------------------------- -------------------------------
Sandra L. Boettcher
- ------------------------------- -------------------------------
AUTHENTICATION ACKNOWLEDGMENT
Signature(s) of Roger H. Hahn and State of Minnesota )
Sandra L. Boettcher ) ss
authenticated County of Hennepin )
this 4th day of June, 1997 Personally came before me this
18th day of June, 1997,
/s/ Delton J. Thorson the above name
- -------------------------------------
Delton J. Thorson Quentin E. Finkelson
-------------------------------------
TITLE: MEMBER STATE BAR OF WISCONSIN -------------------------------------
(If not, ___________________________
authorized by Section 706.06, to me known to be the person ___ who
Wis. Stats.) executed the foregoing instrument
and acknowledged the same.
THIS INSTRUMENT WAS DRAFTED BY /s/ BERT M. GROSS
--------------------------------------
Delton J. Thorson, Attorney BERT M. GROSS
P.O. Box 31, Augusta, WI 54722 --------------------------------------
- ------------------------------------- Notary Public, Minnesota
(Signatures may be authenticated or HENNEPIN COUNTY
acknowledged. Both are not necessary) My Commission Expires Jan. 31, 2000
* Names of persons signing in any capacity
should be typed or printed below their
signatures AND CONTRACT - Individual
and Corporate - State Bar of Wisconsin,
Form No. 11-1982.
<PAGE>
INDEPENDENT AUDITORS' 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 714,169
<SECURITIES> 0
<RECEIVABLES> 5,092,817
<ALLOWANCES> 84,128
<INVENTORY> 9,242,467
<CURRENT-ASSETS> 15,862,712
<PP&E> 11,151,419
<DEPRECIATION> 3,851,810
<TOTAL-ASSETS> 24,694,930
<CURRENT-LIABILITIES> 6,192,487
<BONDS> 0
0
250,000
<COMMON> 23,124
<OTHER-SE> 7,840,699
<TOTAL-LIABILITY-AND-EQUITY> 24,694,930
<SALES> 36,433,918
<TOTAL-REVENUES> 36,433,918
<CGS> 29,638,866
<TOTAL-COSTS> 29,638,866
<OTHER-EXPENSES> 4,747,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,010,909
<INCOME-PRETAX> 1,036,671
<INCOME-TAX> 359,000
<INCOME-CONTINUING> 677,671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 677,671
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 APR-01-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 1,235,127 589,937 480,889 472,605
<SECURITIES> 0 0 0 0
<RECEIVABLES> 3,718,064 2,816,629 3,031,130 2,870,570
<ALLOWANCES> 22,301 0 0 0
<INVENTORY> 6,729,500 4,977,086 4,700,823 4,683,421
<CURRENT-ASSETS> 12,289,211 8,916,130 8,911,762 8,678,219
<PP&E> 10,746,407 6,716,233 6,388,128 6,165,087
<DEPRECIATION> 2,875,702 2,663,651 2,514,398 2,280,323
<TOTAL-ASSETS> 22,152,629 14,982,622 14,952,234 14,737,965
<CURRENT-LIABILITIES> 3,790,680 2,490,549 2,831,628 3,019,991
<BONDS> 0 0 0 0
0 0 0 0
250,000 250,000 250,000 250,000
<COMMON> 23,124 22,009 22,009 22,009
<OTHER-SE> 7,178,068 7,406,508 7,207,694 7,484,235
<TOTAL-LIABILITY-AND-EQUITY> 22,152,629 14,982,622 14,952,234 14,737,965
<SALES> 26,182,821 6,143,457 6,622,903 5,574,986
<TOTAL-REVENUES> 26,182,821 6,143,457 6,622,903 5,574,986
<CGS> 21,555,459 5,047,285 5,408,628 4,568,631
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<INCOME-TAX> 192,000 54,542 96,200 63,300
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<NET-INCOME> 446,029 203,626 288,552 189,894
<EPS-PRIMARY> .19 .09 .12 .08
<EPS-DILUTED> .19 .09 .12 .08
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<S> <C> <C> <C>
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<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
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0 0 0
250,000 250,000 250,000
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