<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999.
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ___________ to ___________.
Commission File Number 0-13257.
NORTECH SYSTEMS INCORPORATED
(Exact name of registrant as specified in its chapter)
MINNESOTA 41-1681094
- -------------------------------- -------------------------
(State of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
641 East Lake St. Suite 244, Wayzata, MN 55391
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(612) 473-4102
- ---------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
- ------------------------
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01
per share per value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------------- -------------
Page 1
<PAGE>
APPLICABLE ONLY TO CORPORATE REGISTRANTS;
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of latest practicable data.
As of July 31, 1999, there were 2,351,377 shares of the Company's $.01 per share
par value common stock outstanding.
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<PAGE>
NORTECH SYSTEMS INCORPORATED
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 4-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of Operations 9
Discontinued Operations 9
Segment Reporting Information 10
Item 2 - Management's Discussion and Analysis of Financial
Condition 11
PART II - OTHER INFORMATION
Item 2 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
Page 3
<PAGE>
NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS ASSETS
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
ASSETS 1999 1998
(UNAUDITED) (AUDITED)
----------- -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 409,956 $ 375,528
Accounts receivable, net 5,087,403 4,647,376
Inventories:
Finished goods 310,630 1,737,483
Work in process 1,243,765 1,386,502
Raw materials 6,069,688 4,681,384
-------------------- ----------------------
Total inventories $ 7,624,083 $ 7,805,369
Prepaid expenses and other 862,692 941,728
Net Current Assets of Discontinued Operations 2,602,217 2,431,486
-------------------- ----------------------
Total current assets $ 16,586,351 $ 16,201,487
-------------------- ----------------------
PLANT, Property, and Equipment (at Cost)
Land and Building/leaseholds $ 3,927,026 $ 3,903,236
Manufacturing equipment 4,589,934 3,923,015
Office and other equipment 2,154,895 2,433,476
-------------------- ----------------------
$ 10,671,855 $ 10,259,727
Less accumulated depreciation and
amortization (4,414,895) (3,968,837)
-------------------- ----------------------
Net Property and Equipment for Continuing Operations $ 6,256,960 $ 6,290,890
-------------------- ----------------------
Net Property and Equipment for Discontinued Operations 406,856 474,181
-------------------- ----------------------
Other Assets
Goodwill and other intangible assets 129,107 144,210
Deferred tax asset 475,000 475,000
Other assets 87,250 57,250
-------------------- ----------------------
Total Other Assets from Continuing Operations $ 691,357 676,460
-------------------- ----------------------
Total Other Assets from Discontinued Operations 1,025,959 1,085,544
-------------------- ----------------------
Total Assets $ 24,967,483 $ 24,728,562
==================== ======================
</TABLE>
See accompanying notes to consolidated financials statements
Page 4
<PAGE>
NORTECH SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS LIABILITIES
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
(UNAUDITED) (AUDITED)
----------------- ------------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 648,063 $ 810,934
Accounts payable 2,433,524 3,232,593
Accrued payrolls and commissions 1,533,785 682,539
Other 2,131,904 491,388
----------------- ------------------
Total Current Liabilities $ 6,747,276 $ 5,217,454
----------------- ------------------
Long-Term Debt
Notes Payable (net of current
maturities shown above) $ 10,765,383 $ 11,146,537
----------------- ------------------
Shareholders' Equity:
Preferred Stock, $1 par value;
1,000,000 shares authorized; 250,000
shares issued and outstanding $ 250,000 $ 250,000
Common Stock - $.01 par value; 9,000,000
shares authorized; 2,351,377 and 2,312,262 shares
issued and outstanding. 23,514 23,514
Additional paid-in capital 12,131,045 12,131,045
Accumulated deficit (4,949,735) (4,039,988)
----------------- ------------------
Total Shareholders' Equity $ 7,454,824 $ 8,364,571
----------------- ------------------
Total Liabilities & Shareholders' Equity $ 24,967,483 $ 24,728,562
================= ==================
</TABLE>
See accompanying notes to consolidated financials statements
Page 5
<PAGE>
NORTECH SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1999 1998
(UNAUDITED) (UNAUDITED)
-------------------- ----------------------
<S> <C> <C>
Sales $ 9,421,813 $ 8,374,280
Cost of Sales 7,787,771 6,968,476
-------------------- ----------------------
Gross Profit $ 1,634,042 $ 1,405,804
Selling, General and Admin. 1,020,485 907,513
Engineering/Reseach & Development 0 0
Misc. (Income) Expense, net 21,344 1,236
Interest Expense 167,990 129,638
-------------------- ----------------------
Net Income From Continuing Operations
Before Income Taxes $ 424,223 $ 367,417
Income Tax-Continuing Operations 148,479 145,949
-------------------- ----------------------
Net Income-Continuing Operations $ 275,744 $ 221,468
-------------------- ----------------------
Discontinued Operations, Net of Income Taxes
Net (Loss) From Operations (255,208) (33,630)
Estimated (Loss) on Sale (1,180,000) 0
-------------------- ----------------------
Total Discontinued Operations, Net of Income Taxes (1,435,208) (33,630)
-------------------- ----------------------
Net Income(Loss) $ (1,159,464) $ 187,838
==================== ======================
Income/(Loss) per Share of Common Stock
From Continuing Operations $ 0.12 $ 0.09
From Discontinued Operations $ (0.61) $ (0.01)
-------------------- ----------------------
Total Income/(Loss) per Share of Common Stock $ (0.49) $ 0.08
==================== ======================
Weighted Average Number of Shares Outstanding 2,351,377 2,345,262
==================== ======================
</TABLE>
See accompanying notes to consolidated financials statements
Page 6
<PAGE>
NORTECH SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1999 1998
(UNAUDITED) (UNAUDITED)
-------------------- ----------------------
<S> <C> <C>
Sales $ 18,889,152 $ 17,603,629
Cost of Sales 15,554,971 14,747,816
-------------------- ----------------------
Gross Profit $ 3,334,181 $ 2,855,813
Selling, General and Admin. 2,058,613 1,735,810
Engineering/Reseach & Development 0 0
Misc. (Income) Expense, net 12,384 (19,606)
Interest Expense 293,120 308,231
-------------------- ----------------------
Net Income From Continuing Operations
Before Income Taxes $ 970,064 $ 831,378
Income Tax-Continuing Operations 339,522 329,205
-------------------- ----------------------
Net Income-Continuing Operations $ 630,542 $ 502,173
-------------------- ----------------------
Discontinued Operations, Net of Income Taxes
Net (Loss) From Operations (361,299) (67,903)
Estimated (Loss) on Sale (1,180,000) 0
-------------------- ----------------------
Total Discontinued Operations, Net of Income Taxes $ (1,541,299) $ (67,903)
-------------------- ----------------------
Net Income(Loss) $ (910,757) $ 434,270
==================== ======================
Income/(Loss) per Share of Common Stock
From Continuing Operations 0.27 0.22
From Discontinued Operations (0.66) (0.03)
-------------------- ----------------------
Total Income/(Loss) per Share of Common Stock $ (0.39) $ 0.19
==================== ======================
Weighted Average Number of Shares Outstanding 2,351,377 2,345,262
==================== ======================
</TABLE>
See accompanying notes to consolidated financials statements
Page 7
<PAGE>
NORTECH SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1999 1998
(UNAUDITED) (UNAUDITED)
-------------------- ----------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 630,542 $ 434,270
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 446,058 441,130
Deferred Taxes
Loss on Sale of Discontinued operations (1,180,000)
Changes in Operating Assets and Liabilities:
Accounts receivable (440,027) (246,320)
Inventories 181,286 (1,519,541)
Prepaid expenses 79,036 (30,278)
Other assets (14,897) 148,646
Net assets of discontinued operation (103,406)
Accounts payable (799,069) (52,561)
Accrued payrolls 851,246 (161,478)
Other accruals 1,419,632 61,985
-------------------- ----------------------
Net cash used by operating activity 1,070,401 (924,147)
Cash Flows from Investing Activities:
Acquistion of equipment (412,128) (122,554)
Proceeds from sale of Assets 0 0
Payment of Pref. Stock Dividend 0 0
-------------------- ----------------------
Net cash used by investing activity (412,128) (122,554)
Cash Flows from Financing Activities:
Net borrowing of Long Term debt 830,283
Payments of long term debt (460,974) (375,774)
Change in current debt (162,871) (12,846)
-------------------- ----------------------
Net cash provided by financing
activities (623,845) 441,663
-------------------- ----------------------
Net Increase/(Decrease) in Cash 34,428 (605,038)
Cash at Beginning of Period 375,528 714,169
-------------------- ----------------------
Cash at End of Period $ 409,956 $ 109,131
==================== ======================
</TABLE>
See accompanying notes to consolidated financials statements
Page 8
<PAGE>
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the consolidated
financial statements for the respective periods. Interim results are not
necessarily indicative of results for a full year. The consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the year ended December 31, 1998.
(2) DISCONTINUED OPERATION On June 30, 1999, The Company, decided to sell the
Imaging Technologies operation (Display Product Segments) and Nortech Medical
Services (Medical Management Segment). As of July 30, The Company has interested
buyers that want to sign confidentiality agreements with The Company. Although
it is difficult to predict, the Company expects to complete the sales in the
third quarter of 1999. Display Products and Medical Management are reported as
discontinued operations, and the consolidated financial statements have been
reclassified to segregate the net assets and operating results of the business.
The estimated loss recorded during 1999 on the sale of the discontinued
operation, was $1,800,000, which included a reduction in asset value of
$1,200,000 and a reduction for anticipated closing costs and operating losses
until disposal, of $600,000. The loss was reported net of an income tax benefit
of $620,000, for an after-tax loss of $1,180,000.
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<PAGE>
(3) SEGMENT REPORTING INFORMATION Nortech Systems, Inc manufactures and sells a
variety of products used in the computer, medical, government and defense
industries, primarily for the commercial industrial market. The Company's
principal businesses are based upon the nature of the manufacturing operations
of the respective location.
1. CONTRACT MANUFACTURING - Includes the manufacture of wire harnesses,
cable and electromechanical assemblies, printed circuit board
assemblies, and higher-level assemblies, all of which are manufactured
under contract specifications. These products are sold primarily to the
commercial and defense industries.
2. DISPLAY PRODUCTS - Includes the design, manufacture, and marketing of
high performance display monitors. The products are sold primarily to
the medical, industrial, and service industries. Segment discontinued
as of June 30, 1999.
3. MEDICAL MANAGEMENT - Provides service bureau and office management
services to physicians and clinics. Segment discontinued as of June 30,
1999.
Each of these is a business segment, with its respective financial performance
detailed in this report for the six months ended June 30, 1999 and June 30,
1998.
NORTECH SYSTEMS INCORPORATED
BUSINESS SEGMENT INFORMATION
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1999 1998
(UNAUDITED) (UNAUDITED)
-------------------- ----------------------
<S> <C> <C>
BUSINESS SEGMENT NET REVENUES
Contract Manufacturing $ 18,889,152 $ 17,603,629
Display Products 1,458,500 2,264,580
Medical Management 210,071 206,360
-------------------- ----------------------
Total $ 20,557,723 $ 20,074,569
==================== ======================
BUSINESS SEGMENT PROFIT/(LOSS)
Contract Manufacturing $ 630,542 $ 502,173
Display Products (308,673) (22,360)
Medical Management (52,626) (45,543)
-------------------- ----------------------
Total $ 269,243 $ 434,270
==================== ======================
JUNE 30 DECEMBER 31
1999 1998
(UNAUDITED) (AUDITED)
-------------------- ----------------------
BUSINESS SEGMENT ASSETS
Contract Manufacturing $ 20,902,452 $ 21,142,528
Display Products 3,883,454 4,034,706
Medical Management 181,577 241,575
-------------------- ----------------------
Total $ 24,967,483 $ 25,418,809
==================== ======================
</TABLE>
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR PERIOD ENDED JUNE 30, 1999
Effective June 30, 1999, the Company made a decision to sell Imaging Technology
Division (Display Product Segment) and Nortech Medical Services (Medical
Management Segment). The following management discussion related only to the
continuing operation of contract manufacturing. See below, the details of
discontinued operations.
For the quarter ended June 30, 1999, the Company had revenues of $9,421,813
compared to revenues of $8,374,280 for the quarter ended June 30, 1998. The
increase in revenues resulted primarily from the additional revenues generated
from internal growth. The net income for the three months ended June 30, 1999
was $275,744 or $.12 per share, compared to a net income of $221,468 or $.09 per
share, for the three months ended June 30, 1998. The net income for the quarter
ended June 30, 1999 was primarily impacted by increased gross profit from the
increased revenue offset by increased selling expenses.
Company's 90 day order backlog was $8,590,000 as of June 30, 1999, compared to
$8,575,000 at the beginning of the quarter. Based on the current conditions, the
Company anticipates revenue levels in the third quarter of 1999 to be about the
same as the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's working capital increased to $9,539,075 during the second quarter
of 1999, compared to $9,080,589 as of December 31, 1998. The Company believes
that its financial stability will continue to improve during 1999 and would
expect that its operating cash flow and available credit faculties will be
sufficient to fund the expected growth in the near term.
UPDATE ON YEAR 2000 STATUS
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 effect on the company, our
vendors and our customers. We have completed the inventory and evaluation phase,
and are nearing completion of the implementation phase. Testing is nearly
completed on most systems. Monitoring and evaluation will continue throughout
1999 and into 2000 until we are sure all issues have been properly resolved.
Page 11
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K.
None
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Page 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 11, 1999 NORTECH SYSTEMS INCORPORATED
By: /s/ Quentin E. Finkelson
------------------------------
Quentin E. Finkelson
Its President and Chief
Executive Officer
By: /s/ Garry M. Anderly
------------------------------
Garry M. Anderly
Principal Financial
Officer and Principal
Accounting Officer
Page 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 409,956
<SECURITIES> 0
<RECEIVABLES> 5,166,963
<ALLOWANCES> 79,560
<INVENTORY> 7,624,083
<CURRENT-ASSETS> 16,586,351
<PP&E> 10,671,855
<DEPRECIATION> 4,414,895
<TOTAL-ASSETS> 24,967,483
<CURRENT-LIABILITIES> 6,747,276
<BONDS> 0
0
250,000
<COMMON> 23,514
<OTHER-SE> 7,181,310
<TOTAL-LIABILITY-AND-EQUITY> 24,967,483
<SALES> 9,421,813
<TOTAL-REVENUES> 9,421,813
<CGS> 7,787,771
<TOTAL-COSTS> 7,787,771
<OTHER-EXPENSES> 1,041,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,990
<INCOME-PRETAX> 424,223
<INCOME-TAX> 148,479
<INCOME-CONTINUING> 275,744
<DISCONTINUED> (1,435,208)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,159,464)
<EPS-BASIC> (.49)
<EPS-DILUTED> (.49)
</TABLE>
