-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C4WEj9IosEAUvxgQnFmkpJpxuB/UW/BCPVSNJc4bsrNio4CxNha6Q5+9f7C3Mnnm qEMQS/QFAnxuqwJAz5EBMw== 0000912057-97-011087.txt : 19970401 0000912057-97-011087.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011087 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTECH SYSTEMS INC CENTRAL INDEX KEY: 0000722313 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 411681094 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13257 FILM NUMBER: 97568803 BUSINESS ADDRESS: STREET 1: 641 EAST LAKE ST STREET 2: SUITE 234 CITY: WAYZATA STATE: MN ZIP: 55391 BUSINESS PHONE: 6124734102 FORMER COMPANY: FORMER CONFORMED NAME: DSC NORTECH INC DATE OF NAME CHANGE: 19901217 FORMER COMPANY: FORMER CONFORMED NAME: DIGIGRAPHIC SYSTEMS CORP DATE OF NAME CHANGE: 19881113 10-K 1 10-K FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------------- ---------------------- Commission file number 0-13257 --------- NORTECH SYSTEMS INCORPORATED ------------------------------- (Exact name of registrant as specified in its chapter) Minnesota 41-16810894 -------------------------------- ---------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 641 East Lake St., Suite 244 Wayzata, MN 55391 ---------------------------------------------- --------- (Address of principal executive offices) (Zip code) Registrant's telephone No., including area code: (612) 473-4102 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 per share par value. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required of file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO -------- --------- 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Based upon the $4.875 per share average of the closing bid and asked prices, respectively, on February 28, 1997 for the shares of common stock of the Company, the aggregate market value of the Company's common stock held by non- affiliates as of such date was $6,297,847. As of February 28, 1997 there were 2,362,262 shares of the Company's $.01 per share par value common stock outstanding. (The remainder of this page was intentionally left blank.) 2 DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference to the parts indicated of the Annual Report on Form 10-K: Parts of Annual Report Documents Incorporated on Form 10-K by Reference Part III Item 10 Reference is made to the 11 Registrant's proxy statements 12 to be used in connection with the 1996 Annual Shareholders' meeting and filed with the Securities and Exchange Commission no later than April 30,1997. Part IV Item 14 Reference is made to the Asset Purchase Agreement used in the acquisition of the Zercom Division. The agreement was filed with Form 8-K report date November 4, 1996 and filed November 12, 1996. (The remainder of this page was intentionally left blank) 3 NORTECH SYSTEMS INCORPORATED ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 INDEX PAGE PART I Item 1. Business 5-9 Item 2. Properties 9-10 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10-11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-15 Item 8. Consolidated Financial Statements 16-38 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure 39 PART III Item 10. Directors and Executive Officers of the Registrant 39 Item 11. Executive Compensation 39 Item 12. Security Ownership of Certain Beneficial Owners and Management 39 Item 13. Certain Relationships and Related Transactions 39 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 40-42 Signatures 43 4 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS Nortech Systems Incorporated (the "Company") is a Minnesota corporation organized in December 1990. Prior to December 1990, the Company operated as DSC Nortech, Inc. , which filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code during 1990. The business and assets of DSC Nortech, Inc., were transferred to Nortech Systems Incorporated during 1990. The Company's headquarters are in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota. The Company's maintains various manufacturing facilities in Minnesota locations of Bemidji, Fairmont, Plymouth, Aitkin, and Merrifield as well as Augusta, Wisconsin. The Company manufactures wire harnesses, cables, electronic sub-assemblies and components as well as large-screen, high resolution video monitors for radar, document and medical imaging. The Company provides a full "turnkey" contract manufacturing service to its customers. A majority of revenue is derived from products which are built to the customer's design specifications. Nortech Medical Services, Inc., its wholly owned subsidiary, provides service bureau and office management services to physicians and clinics throughout Minnesota. The Company believes it provides a high degree of manufacturing sophistication. This includes the use of statistical process control to insure product quality, state-of-the-art materials, management techniques allowing just-in-time (JIT) delivery of products, and the systems necessary to effectively manage the business. This level of sophistication enables the Company to attract major original equipment manufacturers (OEM). The strategy of the Company in that regard has been to expand its customer base, and has added several new customers from various industries; including Companies engaged in the production of medical products, super computers, mid- size and micro computer business systems, defense industry product and industrial products. The Company strategy is to develop a customer base spanning several industry segments to avoid the affects of fluctuations within a given industry. Some of the Company's major customers are Cray Research, G.E. Medical Systems, Hughes Defense, and SPX Corporation. The Company believes that contract manufacturing will continue to grow and expand in the United States because contract manufacturing provides OEMs with the domestic equivalent of off-shore sourcing without the associated logistical problems. The contract manufacturer can provide an OEM with a quality product at a price well below that available in the OEM's own facility. This is due primarily to the specialization available through the contract manufacturer and the significantly lower overhead costs. 5 In 1991, the Company acquired all of the common stock of SMR Computer Services, Inc. The Company, through its subsidiary (currently named Nortech Medical Services, Inc.), also provides service bureau and office management services to physicians. In March 1995, the Company acquired all of the assets of Monitor Technology Corporation. The Company has continued the business of Monitor Technology Corporation which is the manufacturing of large-screen, high resolution video monitors for radar, document and medical imaging. In addition, this division provides repair services on internally and externally produced monitors. In August 1995, the Company acquired all the assets of the Aerospace Division of Communication Cable, Inc. The Company has continued the business formally conducted by Aerospace which involves the manufacturing of custom designed, high-technology electronic cable assemblies for various applications. In November 1996, the Company acquired the inventory and fixed assets of Zercom Corporation, a subsidiary of Communication Systems, Inc. The Company has been, and continues to be a contract manufacturer of electronic sub-assemblies and components. Zercom Corporation also manufactures a line of proprietary products for sport fishermen, including the Clearwater Classic and Clearwater Pro fish locators. Since the Company's inception, substantially all revenues generated have been directly related to the contract manufacturing industry. Therefore, segmented financial information is not included in this report. MARKETING AND SALES BUSINESS STRATEGY. The Company believes the electronic manufacturing sub-contracting business is emerging from a small job shop oriented business into a dynamic, high technology electronics industry. The first market segment the Company has entered is the wire harness and cable assemblies market. The Company intends to expand from this market segment into complete electromechanical assemblies using the resources acquired from the recent addition of Zercom Corporation. Many companies no longer perform this type of work on a captive, in-house basis, as they are finding that independent subcontractors can more cost effectively perform this specialized work. As part of the Company's commitment to quality, the Bemidji location became ISO 9002 Certified in July 1995 and has actively maintained this certification. The Company believes this certification will benefit its current customer base as well as attract new business opportunities. 6 The Company will continue it's commitment to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, the Company will provide complete manufacturing services to customers, from the procurement of materials to the manufacturing, testing and shipping of products. The Company will continue its efforts to diversify its customer base and expand into other segments of the electronic manufacturing subcontract business. MARKETING. The Company is continuing to concentrate its marketing activities in the medical, industrial and military manufacturing industries. The emphasis continues to be on mature companies which require a contract manufacturer with a high degree of manufacturing and quality sophistication, including statistical process control (SPC) and statistical quality control (SQC). The Company has initiated efforts to expand its markets beyond the Upper Midwest area, which presently extends east to the Ohio/Michigan area, south to Missouri, and west to Colorado. New market opportunities are continuously being pursued. The Company markets its products and services primarily through manufacturers' representatives. The Company's marketing strategy emphasizes the sophistication of its manufacturing services. The basic systems, procedures, and disciplines normally associated with a mature corporate environment are in place. All the Company's employees are well trained in SPC and SQC. SOURCES AND AVAILABILITY OF MATERIALS The Company is not dependent on any one supplier for materials for products sold to customers. Components utilized in the assembly of wire harnesses, cable assemblies and printed circuit assemblies are purchased directly from the component manufacturers or from their distributors. On occasion some components may be placed on a stringent allocation basis; however, due to the excess manufacturing capacity currently available at most component manufacturers, the Company does not anticipate any major material purchasing or availability problems occurring in the foreseeable future. PATENTS AND LICENSES The Company is not presently dependent on a proprietary product requiring licensing, patent, copyright or trademark protection. There are no revenues derived from a service-related business for which patents, licenses, copyrights and trademark protection are necessary for successful operations. However, the Company does own the rights to manufacture certain patented products. For the year ending December 31, 1996, revenues related to this production were not material to the financial results. 7 COMPETITION The contract manufacturing industry is characterized by competition among a variety of sources, including small closely-held companies, larger full-service manufacturers, company-owned facilities and foreign competitors. The Company does not believe that the smaller operations are significant competitors as they do not seem to have the capabilities required by target customers of the Company. The Company also believes that foreign competitors do not provide a substantial competitive threat because the cable and wire harness industry involves a high weight-to-cost ratio. Consequently, shipping and transportation costs decrease the ability of foreign manufacturers to compete in this market segment. Further, off-shore production cannot effectively meet the requirements of just-in-time inventory management techniques presently being implemented by many major target customers. Therefore, the Company's principal competitors are larger full-service manufacturers, many of which have substantially far greater assets and capital resources than are available to the Company and are better financed than the Company. The Company will continue to pursue marketing opportunities in the Upper Midwest. Although there presently are no dominant contract manufacturers in the wire harness and cable assembly business in the Upper Midwest, there are several established competitors. The Company expects its major competition to come from Americable, Technical Services, Inc. and Waters Instruments, Inc., all of which are located on Minnesota. Each of these companies specializes in molded cables or wire assemblies and has sufficient manufacturing capabilities to offer a significant competitive challenge to the Company's operations. The principal competitive factors in the contract manufacturing industry are price, quality and responsive service. The Company believes that it can compete favorably in the market segments to which it sells. BACKLOG Historically, the Company's backlog has been running 60 to 90 days, depending on the customer. However, because of the increased emphasis on just-in-time manufacturing (JIT), many of the Company's major customers are taking advantage of the Company's ability to service them adequately under the JIT concept. Additionally, because of the Company's quality history with customers, many products now go directly from the Company's shipping dock to the customer's production line. The Company's 90 day order backlog was approximately $4,513,000 on December 31, 1995 and approximately $6,127,000 on December 31, 1996. MAJOR CUSTOMERS The Company sells its products to companies in the computer, medical, governmental and various other industries. Historically, the Company has not experienced significant 8 losses related to the receivables from customers in any particular industry or geographic area. Two customers, G.E. Medical Systems, and Cray Research, Inc. accounted for approximately 17.5%, and 11.3% of sales, respectively for the year ended December 31, 1996. RESEARCH AND DEVELOPMENT The Company expended $273,697 in 1996 and $124,919 in 1995 on Company-sponsored research and development. This research is related to the development of large- screen, high resolution video monitors for the imaging division. In 1994, no funds were expended on Company-sponsored research. COMPLIANCE WITH ENVIRONMENTAL PROVISIONS Management believes that its manufacturing facilities are currently operating under compliance with local, state, and federal environmental laws. Any environmental-oriented equipment is capitalized and depreciated over a seven- year period. The annualized depreciation expense for this type of environmental equipment on a Company-wide basis is insignificant. EMPLOYEES The Company has 438 full-time and 99 part-time employees as of February 15, 1997, consisting of 502 employees in manufacturing, manufacturing product support and medical support services and 35 in general administration. ITEM 2. PROPERTIES The Company's headquarters consist of approximately 1,500 square feet located in Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The Company has a lease for a five year term that expires in October 2001. The Company owns its Bemidji, Minnesota facility consisting of eight acres of land and 60,000 square feet of office and manufacturing space and leases another 8000 square feet of manufacturing and office space in Augusta, Wisconsin. The Company's imaging division operates from a facility located in Plymouth, Minnesota. The building contains approximately 22,800 square feet and is leased for a term that terminates on May 31, 2000. The Company has an option to extend the lease for an additional five-year term. 9 The Company also owns three buildings which contain approximately 46,900 square feet and are located in Fairmont, Minnesota, which are used for the manufacturing of the Company's custom designed, high-technology electronic cable assemblies. In connection with the Zercom acquisition, the Company acquired the building with approximately 45,800 square feet in Merrifield, Minnesota. This facility is used for the building of surface mount printed circuit board assemblies and electro-mechanical assemblies. A leased building in Aitkin, Minnesota provides 10,750 square feet for video cable assembly and is leased for a term that terminates December 1, 2005. The Company believes that each of these locations is adequate and will be adequate in the foreseeable future for their manufacturing needs. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ National Market under the symbol NSYS. Prior to October 11, 1995, the stock was traded on the NASDAQ Small Cap Market. The high and low bid quotations for the Company's Common Stock for each quarterly period within the two most recent years were as follows: Quarter Ended: Low High ------------- --- ---- March 31, 1995 $3.000 $4.000 June 30, 1995 $3.000 $4.250 September 30, 1995 $3.250 $6.000 December 31, 1995 $4.750 $8.500 March 31, 1996 $6.000 $9.000 June 30, 1996 $6.000 $8.000 September 30, 1996 $5.000 $7.250 December 31, 1996 $5.250 $6.750 10 The low and high quotations set forth above are as reported by NASDAQ. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions. As of March 1, 1997, there were approximately 1,419 holders of shares of the Company's Common Stock. The Company has never paid a cash dividend on shares of its Common Stock and does not intend to pay cash dividends in the foreseeable future. (The remainder of this page was intentionally left blank.) 11 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED: - ----------------------------------------------------------------------------------------------------- * ** Dec. 31, 1996 Dec. 31, 1995 Dec.31, 1994 Dec.31,1993 Dec.31, 1992 ------------- ------------- ------------ ----------- ------------ Sales 26,182,821 18,305,928 12,820,709 11,705,833 7,299.916 Income (Loss) Form Continuing Operations 446,029 1,331,924 1,183,406 1,042,556 636,723 Income (Loss) Per Common Share from Continuing Operations .19 .55 .54 .47 .28 Total Assets 22,152,629 13,223,064 6,647,897 6,553,291 5,284,001 Total Long-Term 10,910,757 3,768,685 746,755 858,437 977,635 Debit
* Company acquired the assets of Zercom Corporation in November, 1996. ** Company acquired the assets of Monitor Technology in March, 1995, and of Aerospace Systems in August, 1995. NOTE: For additional selected Financial Data (Past two years by quarter information) See note 12 of the Consolidated Financial Statement. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS, YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 REVENUES. For the years ended December 31, 1996, and 1995 the Company had sales of $26,182,821 and $18,305,928, respectively. The increase of $7,876,893, or 43% resulted primarily from additional revenues generated by the acquisitions which were completed in 1995 and 1996. For the year ended December 31, 1994 the Company had sales of $12,820,709. The approximate 42.8% increase in sales in 1995 was attributable primarily to increased sales in the medical and automotive industries offset by the reduced sales to the mid-sized computer industries as well as revenues from the newly acquired divisions. GROSS PROFIT. The Company had gross profit of $5,184,198 (before one time write offs) in 1996, $3,764,840 in 1995, and $2,598,569 in 1994. Gross profits as a percentage of gross sales were 19.8% in 1996 (before one time write-offs), 20.6% in 1995, and 20.3% in 1994. In 1996, the Company experienced certain items which are considered unusual events for their operations. Due to evolving customer requirements, the Company wrote off certain inventories from two of the divisions. A total of $544,000 in inventories was written off from the Bemidji and Imaging balance sheets. The customer marketplace is complex and ever changing, but with the current inventory and production mix, the Company believes they are well poised to address the needs of their current customers as they continue to pursue additional growth markets. After the one time write- offs, gross profit margin for 1996 was 17.7%. The decrease in gross profit percent from 1995 to 1996 is due to an increase in materials as a percent of total cost of goods sold. SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative expenses were $3,306,311 in 1996, $2,280,105 in 1995, and $1,647,797 in 1994. The increases in each year reflects additional selling, general and administrative expenses associated with the acquisitions. MISCELLANEOUS INCOME. Miscellaneous income was $32,064 in 1996, $177,967 in 1995, and $86,307 in 1994. The miscellaneous income resulted primarily from charges for miscellaneous services. INTEREST EXPENSE. Interest expense was $475,057 in 1996, $240,562 in 1995, and $117,835 in 1994. The increased expense for 1996 and 1995 is due to the increased debt from acquired operations. 13 INCOME TAXES. Income tax expense for 1996 was $192,000. Tax expense was not recorded in 1995 because of additional net operating loss carryforwards (NOL's) of approximately $2,504,000 which were recognized because of final tax regulations. The regulations clarified that tax carryforwards attributes in a Chapter 11 bankruptcy prior to December 31, 1993 where stock was issued for debt, need not be reduced by cancellation income. The tax benefit of approximately $851,000 created by additional NOL's was partially offset by a $300,000 increase in the deferred tax valuation allowance. Realization of the deferred tax asset is dependent upon the Company generating sufficient taxable earnings in future periods. In determining that realization of the deferred tax asset is more likely than not, the Company gave consideration to recent earnings history, its expectation for taxable earnings in the future and the expiration dates associated with tax carryforwards. Tax benefits of $245,794 were recorded in 1994 due to the reduction in the deferred tax valuation allowance of $600,000 due to the realization of net operating loss carryforwards. NET INCOME. The Company's net income in 1996 was $446,029 or $.19 per common share. The Company's net income in 1995 was $1,331,924 or $.55 per common share. The Company's net income in 1994 was $1,183,406 or $.54 per common share. The Company believes that the effect of inflation on past operations has not been significant and anticipates that inflation will not have a significant impact on future operations. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital rose from $5,279,509 as of December 31, 1995 to $8,498,531 on December 31, 1996. Stockholders equity increased from $6,036,166 as of December 31, 1995 to $7,151,192 on December 31, 1996 due to the Company's 1996 net income and the reclassification to equity of $668,400 of redeemable stock. This reclassification occurred because the put option on 111,400 shares was not exercised. The Company's liquidity and capital resources have improved substantially, and the Company believes that its' future financial requirements can be met with funds generated from the operating activities and from the Company's operating line of credit. In March 1995, the Company completed the net asset purchase of Monitor Technology Corporation. This division of the Company designs and builds high and ultra-high resolution CRT monitors for radar, document and medical imaging. In addition, they provide repair services on internally and externally produced monitors. 14 In August 1995, the Company acquired all the assets of the Aerospace Division of Communication Cable, Inc. The Company has continued the business formally conducted by Aerospace which involves the manufacturing of custom-designed, high-technology electronic cable assemblies for various applications. In November 1996, the Company acquired the inventory and fixed assets of Zercom Corporation, a subsidiary of Communication Systems, Inc. The Company has been, and continues to be a contract manufacturer of electronic sub-assemblies and components. Zercom Corporation also manufactures a line of proprietary products for sport fishermen, including the Clearwater Classic and Clearwater Pro fish locators. These acquisitions are expected to positively impact future operations and enhance the financial condition of the Company over time. However, there are no guarantees of future performance. (The remainder of this page was intentionally left blank.) 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA PAGE ---- Independent Auditors' Report of : Larson, Allen, Weishair & Co., LLP 17 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1996 and 1995. 18 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. 19 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and1994. 20 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. 21-22 Notes to Consolidated Financial Statements 23-38 (The remainder of this page was intentionally left blank.) 16 INDEPENDENT AUDITORS' REPORT Board of Directors Nortech Systems Incorporated and Subsidiary Bemidji, Minnesota We have audited the accompanying consolidated balance sheets of Nortech Systems Incorporated and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nortech Systems Incorporated and Subsidiary as of December 31, 1996, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota February 13, 1997 17
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 1996 1995 ------------ ------------ ASSETS CURRENT ASSETS Cash and Cash Equivalents (Including Interest Bearing Cash of $1,069,369 and $906,111 at December 31, 1996 and 1995) $ 1,235,127 $ 924,590 Accounts Receivable, Less Allowance for Uncollectible Accounts (1996 - $22,301; 1995 - $6,053) 3,695,763 1,856,219 Inventories 6,729,500 3,855,212 Prepaid Expenses and Other 88,821 131,701 Deferred Tax Asset 540,000 430,000 ------------ ------------ Total Current Assets $ 12,289,211 $ 7,197,722 ------------ ------------ PROPERTY AND EQUIPMENT (At Cost) Land $ 136,300 $ 108,300 Building and Leasehold Improvements 3,559,155 1,897,559 Manufacturing Equipment 4,588,955 2,389,201 Office and Other Equipment 2,461,997 1,701,640 ------------ ------------ Total $ 10,746,407 $ 6,096,700 Accumulated Depreciation (2,875,702) (2,256,862) ------------ ------------ Total Property and Equipment (At Depreciated Cost) $ 7,870,705 $ 3,839,838 ------------ ------------ OTHER ASSETS Goodwill and Other Intangible Assets $ 1,025,463 $ 998,254 Deferred Tax Asset 910,000 1,130,000 Other Assets 57,250 57,250 ------------ ------------ Total Other Assets $ 1,992,713 $ 2,185,504 ------------ ------------ Total Assets $ 22,152,629 $ 13,223,064 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of Credit $ 500,000 $ - Current Maturities of Long-Term Debt 731,080 283,100 Accounts Payable 1,596,326 1,054,880 Accrued Payroll 673,303 407,016 Other Liabilities 289,971 173,217 ------------ ------------ Total Current Liabilities $ 3,790,680 $ 1,918,213 ------------ ------------ LONG-TERM DEBT Notes Payable (Net of Current Maturities Shown Above) $ 10,910,757 $ 3,768,685 ------------ ------------ REDEEMABLE COMMON STOCK $.01 Par Value; 50,000 and 250,000 Shares Issued and Outstanding at December 31, 1996 and 1995, Respectively Redeemable at $6 Per Share $ 300,000 $ 1,500,000 ------------ ------------ STOCKHOLDERS' EQUITY Preferred Stock, $1 Par Value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding $ 250,000 $ 250,000 Common Stock $.01 Par Value; 9,000,000 Shares Authorized; 2,312,362 and 2,200,863 Shares Issued and Outstanding, Net of Redeemable Shares Reported Above, at December 31, 1996 and 1995, Respectively 23,124 22,009 Additional Paid-In Capital 11,910,554 11,242,672 Accumulated Deficit (5,032,486) (5,478,515) ------------ ------------ Total Stockholders' Equity $ 7,151,192 $ 6,036,166 ------------ ------------ Total Liabilities and Stockholders' Equity $ 22,152,629 $ 13,223,064 ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ------------- ------------- ------------- SALES $ 26,182,821 $ 18,305,928 $ 12,820,709 COST OF SALES (21,555,459) (14,541,088) (10,222,140) ------------- ------------- ------------- GROSS PROFIT $ 4,627,362 $ 3,764,840 $ 2,598,569 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (3,306,311) (2,280,105) (1,647,797) RESEARCH AND DEVELOPMENT COSTS (273,697) (124,919) - INTEREST INCOME 33,668 34,703 18,368 MISCELLANEOUS INCOME 32,064 177,967 86,307 INTEREST EXPENSE (475,057) (240,562) (117,835) ------------- ------------- ------------- INCOME BEFORE INCOME TAX PROVISION $ 638,029 $ 1,331,924 $ 937,612 INCOME TAX BENEFIT (EXPENSE) (192,000) - 245,794 ------------- ------------- ------------- NET INCOME $ 446,029 $ 1,331,924 $ 1,183,406 ------------- ------------- ------------- ------------- ------------- ------------- INCOME PER SHARE OF COMMON STOCK Net Income Per Share of Common Stock $ 0.19 $ 0.55 $ 0.54 ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,384,512 2,407,804 2,194,021 ------------- ------------- ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Additional Total Preferred Common Paid-In Accumulated Stockholders' Stock Stock Capital Deficit Equity --------- ------- ----------- ------------ ------------- BALANCE DECEMBER 31, 1993 $ 250,000 $21,937 $11,226,761 $ (7,948,965) $ 3,549,733 1994 Net Income - - - 1,183,406 1,183,406 Issuance of Stock - 6 2,304 - 2,310 Dividends Paid - - - (14,946) (14,946) --------- ------- ----------- ------------ ------------- BALANCE DECEMBER 31, 1994 $ 250,000 $21,943 $11,229,065 $ (6,780,505) $ 4,720,503 1995 Net Income - - - 1,331,924 1,331,924 Issuance of Stock - Stock Options - 50 8,700 - 8,750 Issuance of Stock - Other - 16 4,907 - 4,923 Dividends Paid - - - (29,934) (29,934) --------- ------- ----------- ------------ ------------- BALANCE DECEMBER 31, 1995 $ 250,000 $22,009 $11,242,672 $ (5,478,515) $ 6,036,166 1996 Net Income - - - 446,029 446,029 Issuance of Stock - Other - 1,115 667,882 - 668,997 --------- ------- ----------- ------------ ------------- BALANCE DECEMBER 31, 1996 $ 250,000 $23,124 $11,910,554 $ (5,032,486) $ 7,151,192 --------- ------- ----------- ------------ ------------- --------- ------- ----------- ------------ -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 -------------- ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 24,375,341 $ 18,114,515 $ 13,307,176 Interest Income Received 33,668 34,703 18,368 Cash Paid to Suppliers and Employees (23,904,901) (17,379,766) (11,794,879) Interest Expense Paid (403,003) (239,809) (117,927) Income Taxes Paid (205,900) (19,016) (34,206) -------------- ------------- -------------- Net Cash Provided (Used) by Operating Activities $ (104,795) $ 510,627 $ 1,378,532 -------------- ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Businesses $ (1,559,492) $ (2,930,696) $ - Acquisition of Property and Equipment (718,835) (458,359) (224,096) Acquisition of Intangible Assets - (82,059) - Purchase of Investments - (56,250) - -------------- ------------- -------------- Net Cash Used by Investing Activities $ (2,278,327) $ (3,527,364) $ (224,096) -------------- ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Net Proceeds (Payments) Under Line of Credit $ 500,000 $ - $ (266,533) Payments on Long-Term Debt (431,453) (289,294) (963,178) Proceeds from Long-Term Debt 3,156,115 3,405,180 531,000 Proceeds from Sale of Stock 597 13,673 2,310 Purchase of Redeemable Stock (531,600) - - Payment of Dividends - (29,934) (14,946) -------------- ------------- -------------- Net Cash Provided (Used) by Financing Activities $ 2,693,659 $ 3,099,625 $ (711,347) -------------- ------------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS $ 310,537 $ 82,888 $ 443,089 Cash and Cash Equivalents - Beginning 924,590 841,702 398,613 -------------- ------------- -------------- CASH AND CASH EQUIVALENTS - ENDING $ 1,235,127 $ 924,590 $ 841,702 -------------- ------------- -------------- -------------- ------------- --------------
NON-CASH TRANSACTIONS During 1995 the Company issued $1,500,000 of redeemable Common Stock as part of the purchase of another corporation's net assets. During 1996 the Company issued a long-term note payable in the amount of $4,865,390 as part of the purchase price for certain assets of another corporation. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ------------- ------------- ------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Income $ 446,029 $ 1,331,924 $ 1,183,406 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 693,456 444,636 245,847 Deferred Taxes 110,000 (100,000) (280,000) (Increase) Decrease in Accounts Receivable (1,839,544) (369,380) 365,160 Decrease in Accounts Receivable - Stockholder - - 35,000 (Increase) Decrease in Inventory (482,103) (407,932) 173,065 (Increase) Decrease in Prepaid Assets 42,880 (79,751) 33,507 Increase (Decrease) in Accounts Payable 541,446 207,835 (391,788) Increase (Decrease) in Accrued Payroll 266,287 (17,852) 6,077 Increase (Decrease) in Accrued Liabilities 116,754 (498,853) 8,258 ------------- ------------- ------------- Net Cash Provided (Used) by Operating Activities $ (104,795) $ 510,627 $ 1,378,532 ------------- ------------- ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 22 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION Nortech Systems Incorporated (the "Company") is a Minnesota corporation with headquarters in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota. The Company's main manufacturing facility is located in Bemidji, Minnesota, with additional manufacturing and engineering support locations in Fairmont, Plymouth, Merrifield and Aitkin, Minnesota and Augusta, Wisconsin. The Company manufactures wire harnesses, cables, and electromechanical assemblies, printed circuit boards and higher-level assemblies for a wide range of commercial and defense industries. The company also manufactures and markets high performance display monitors for medical imaging, radar document imaging and industrial applications. The Company provides a full "turnkey" contract manufacturing service to its customers. All products are built to the customer's design specifications. In addition, the Company also manufactures a line of proprietory products for sport fishermen. Nortech Medical Services, Inc., its wholly owned subsidiary, provides service bureau and office management services to physicians and clinics throughout Minnesota. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value). PROPERTY AND EQUIPMENT The Company capitalizes the cost of purchased software, equipment, and leasehold improvements. Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gain or loss included in results of operations. Fully depreciated assets remain in the accounts until retired from service. 23 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION Property and equipment are depreciated by the straight-line and accelerated methods of depreciation. Accelerated depreciation did not materially exceed straight-line depreciation for the years ended December 31, 1996, 1995 and 1994. Depreciation was calculated over estimated useful lives as follows: Building and Improvements 31 Years Manufacturing Equipment 5 - 7 Years Office and Other Equipment 5 - 7 Years REVENUE RECOGNITION Sales are recorded by the Company when products are shipped to the customer. GOODWILL Goodwill representing the excess of the purchase price over the fair value of the net assets of the acquired entities (see Note 2), is being amortized on a straight-line basis over the period of expected benefit of fifteen years. Total amortization of goodwill recorded for fiscal years 1996, 1995 and 1994 was $54,614, $30,724 and $-0-, respectively. The carrying value of goodwill will be reviewed periodically based on the undiscounted cash flows of the entity acquired over the remaining amortization period. Should this review indicate that goodwill will not be recoverable, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of undiscounted cash flows. INTANGIBLE ASSETS The Company acquired other intangible assets including purchased technology and certification costs in the amount of $42,333 and $82,059 during 1996 and 1995, respectively. These assets are being amortized over a period of 3 to 7 years. The related amortization expense for 1996 and 1995 was $13,152 and $1,096, respectively. CASH AND CASH EQUIVALENTS The Company considers its investments with an original maturity of three months or less to be cash equivalents. At December 31, 1996 and 1995, the Company had invested excess funds of $266,000 and $285,000, respectively, in repurchase agreements collateralized by government backed securities. Due to the short-term nature of the agreements, the Company does not take possession of the securities, which are instead held at the Company's principal bank from which it purchases the securities. 24 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for cash, short-term investments, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of long- term debt approximates its carrying value and is based on current rates at which the Company could borrow funds with similar remaining maturities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. ADVERTISING Advertising costs are charged to operations as incurred. Total amounts charged to expense were $65,234, $17,994 and $16,694 for the years ended December 31, 1996, 1995 and 1994, respectively. INCOME TAXES The Company has adopted FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Investment credits are accounted for by using the "flow-through" method whereby the benefit is reflected as a reduction of income taxes in the year utilized. 25 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE Primary earnings per share of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. The impact of outstanding options was not material and was not included in the calculation of primary earnings per share. Preferred stock issued is noncumulative and nonconvertible. ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation," establishes a new fair value based accounting method for stock-based compensation plans. As permitted by the statement, the Company continues to apply the accounting provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," in determining net income. NOTE 2 ACQUISITIONS In 1996 and 1995 the Company acquired the three businesses described below, which have been accounted for by the purchase method of accounting. The results of the operations of the acquired Companies are included in the Company's consolidated statement of income from the dates of the acquisitions. ZERCOM CORPORATION On November 4, 1996, the Company acquired substantially all of the assets of Zercom Corporation (Zercom). Zercom is a contract manufacturer of electronic sub-assemblies and components. Zercom also manufactures a line of proprietary products for sport fishermen. The purchase price was $6,424,882, consisting of a cash payment of $1,500,000, issuance of promissory notes totalling $4,865,390, and acquisition costs of $59,492. The excess of the purchase price over the estimated fair value of the net assets acquired is being amortized on a straight line basis over 15 years. 26 NOTE 2 ACQUISITIONS (CONTINUED) ZERCOM CORPORATION (CONTINUED) A summary of the purchase price allocation for the 1996 acquisition of Zercom is as follows: Net Working Capital Items $ 2,392,185 Property, Plant and Equipment 3,930,872 Other Assets 42,333 Excess of Cost Over Fair Value of Net Assets of Purchased Business 59,492 ------------ Total $ 6,424,882 ------------ ------------ MONITOR TECHNOLOGY CORPORATION On March 28, 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Monitor Technology Corporation (MTC). Monitor Technology Corporation designs and builds high and ultra-high resolution CRT monitors for computer applications throughout the United States. In addition, they provide repair services on internally and externally produced monitors. The purchase price of $2,232,667, which includes the assumption of liabilities of $707,887 and acquisition costs of $24,780, was paid with cash and by issuing 250,000 shares of the Company's common stock. The common stock was valued at $6, which is the redeemable price based on a repurchase agreement issued to the seller at closing. The excess of the purchase price over the estimated fair value of assets acquired is being amortized on a straight-line basis over 15 years. In 1996, 88,600 shares were put back to the Company at $6 per share and the put option was not exercised on 111,400 shares. The Company remains contingently liable to repurchase the remaining 50,000 shares, which are in dispute. The Company's obligation under the repurchase agreement is guaranteed by a director of the Company. 27 NOTE 2 ACQUISITIONS (CONTINUED) AEROSPACE On August 23, 1995, the Company acquired the Aerospace Division of Communication Cable, Inc. The Aerospace Division manufactures and sells multi-conductor electrical cable assemblies to customer specifications for the aerospace industry throughout the United States. The purchase price was $2,950,517 consisting of a cash payment of $2,845,506, the assumption of liabilities of $44,601, and acquisition costs of $60,410. A summary of the purchase price allocation for the 1995 acquisitions of MTC and Aerospace is as follows: Net Working Capital Items $ 1,984,359 Property, Plant and Equipment 2,250,810 Excess of Cost over Fair Value of Net Assets of Purchased Businesses 948,015 ------------ Total $ 5,183,184 ------------ ------------ The following proforma unaudited consolidated statements of income for the Company are presented as though the acquisition of Zercom Corporation had occurred on January 1, 1996 and 1995 and the acquisitions of Monitor Technology Corporation and the Aerospace Division of Communication Cable, Inc. had occurred on January 1, 1995. (Unaudited) 1996 1995 ----------------------------------------- ------------- ------------- Revenues $ 39,702,215 $ 42,283,397 ------------- ------------- ------------- ------------- Net Income $ 230,045 $ 1,887,304 ------------- ------------- ------------- ------------- Net Income Per Share of Common Stock $ 0.10 $ 0.78 ------------- ------------- ------------- ------------- The proforma financial information is presented for information purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results. 28 NOTE 3 INVENTORIES Inventories consist of the following: 1996 1995 ------------- ------------- Raw Materials $ 3,626,665 $ 1,972,384 Work in Process 1,837,247 1,676,949 Finished Goods 1,265,588 205,879 ------------- ------------- Total $ 6,729,500 $ 3,855,212 ------------- ------------- ------------- ------------- NOTE 4 SHORT-TERM LINE OF CREDIT The Company has a revolving line of credit available at December 31, 1996, for $500,000. The line of credit is with Northern National Bank, accrues interest at the prime rate, matures February 10, 1997, and is secured by accounts receivable, equipment, inventory, general intangibles and a personal guarantee by a shareholder. The interest rate was 8.25% at December 31, 1996. The maximum and average amounts outstanding on short-term lines of credit during 1996, were $500,000 and $266,066, respectively. There was no balance outstanding as of December 31, 1995. NOTE 5 LONG-TERM DEBT
Description 1996 1995 ------------------------------------------------ ------------ ------------- Note Payable - Northern National Bank, Revolving Line of Credit, Borrowing Limit of $3,000,000, Interest at LIBOR Index Plus 2 1/2%, Due June 1998; Secured by Accounts Receivable, Equipment, Inventory and General Intangibles $ 2,736,179 $ 2,161,179 Note Payable - Northern National Bank, Revolving Line of Credit, Borrowing Limit of $1,500,000, Interest at LIBOR Index Plus 2 1/2%, Due June 1998; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Personal Guarantee and Stock Pledged by a Shareholder 680,760 0 29 NOTE 5 LONG-TERM DEBT (CONTINUED) Note Payable - Northern National Bank, Line of Credit, Borrowing Limit of $400,000, Interest at Bank's Prime, Monthly Payments of $7,500 Including Interest, Due December 1998; Secured by Accounts Receivable, Equipment, inventory and General Intangibles 200,000 0 Note Payable - Northern National Bank, Interest at LIBOR Index Plus 2 1/2%, Interest Only Payments Beginning February 1997, Due June 1998; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Personal Guarantee and Stock Pledged by a Shareholder 1,500,000 0 Notes Payable - Communications Systems, Inc, Interest at Prime as Established by First Bank Minneapolis, Semi-Annual Principal Payments of $200,000 Beginning May 1997, Due November 2001 4,865,390 0 Note Payable - City of Augusta, Interest at Prime, Five Annual Payments Beginning August 1996, Due August 2000; Secured By Leasehold Improvements 20,802 40,000 Note Payable - Northern States Power Company, Interest at 6%, Monthly Payments of $483 Including Interest, Due December 1998; Secured by Equipment 10,476 15,483 Note Payable - Northern National Bank, Interest at Bank's Prime Plus 2%, Monthly Payments of $1,200 Including Interest, Due April 2000; Secured by Real Estate 116,447 120,754 Note Payable - Midwest Minnesota Community, Development Corporation, Interest at 9%, Monthly Payments of $2,802 Including Interest, Due March 2000; Secured by Real Estate and Equipment 91,288 115,297 30 NOTE 5 LONG-TERM DEBT (CONTINUED) Note Payable - Midwest Minnesota Community, Development Corporation, Interest at 8%, Monthly Payments of $1,654 Including Interest, Due March 2009; Secured by Real Estate and Equipment 133,858 142,185 Note Payable - Northern National Bank, Interest at 7.5%, Monthly Payments of $5,270 Including Interest, Due May 1999; Secured by Inventory, Equipment, Accounts Receivable and General Intangibles 187,577 230,608 Note Payable - Northern National Bank, Interest at LIBOR Index Plus 2 1/2%, Monthly Payments of $13,060 Including Interest, Due January 2001; Secured by Equipment, Accounts Receivable and Inventory and General Intangibles 542,017 640,000 Note Payable - Northern National Bank, Interest at LIBOR Index Plus 2 1/2%, Monthly Payments of $5,000 Including Interest, Due January 2001; Secured by Equipment, Accounts Receivable, Inventory, General Intangibles and Real Estate 493,533 510,000 Note Payable - Joint Economic Development Commission, Inc., Interest at 8.25%, Monthly Payments of $1,652 Including Interest, Due August 2000; Secured by Building and Land 63,510 76,279 ------------- ------------ Total Long-Term Debt $ 11,641,837 $ 4,051,785 Current Maturities 731,080 283,100 ------------- ------------ Long-Term Debt - Net of Current Maturities $ 10,910,757 $ 3,768,685 ------------- ------------ ------------- ------------
31 NOTE 5 LONG-TERM DEBT (CONTINUED) Maturity requirements by year on long-term debt are as follows: Years Ending December 31, Amount ------------------------- ------ 1997 $ 731,080 1998 5,714,488 1999 715,625 2000 1,122,880 2001 3,278,477 Later Years 79,287 ------------- Total $ 11,641,837 ------------- ------------- The maximum and average amounts outstanding on the Company's long-term lines of credit were $3,716,939 and $2,596,711 during 1996, respectively, and $2,161,179 and $400,000 during 1995, respectively. NOTE 6 LEASE OBLIGATION The Company has entered into various operating leases for equipment and office space. Rent expense for the years ended December 31, 1996, 1995 and 1994, was $451,659, $290,799 and $118,672, respectively. The future minimum lease payments are as follows: Years Ending December 31, Amount --------------------------- -------- 1997 $ 337,214 1998 327,675 1999 327,675 2000 190,650 2001 82,575 ------------- Total $ 1,265,789 ------------- ------------- 32 NOTE 7 RELATED PARTY TRANSACTIONS Ceridian Corporation is one of the Company's stockholders at December 31, 1996, 1995 and 1994. Transactions and balances with Ceridian Corporation are as follows: CONTRACT FOR DEED - CERIDIAN CORPORATION During 1991 the Company entered into a contract for deed with Ceridian Corporation for the purchase of the building and land. The original purchase price was $840,000. The contract was paid off in 1994. SALES In 1996, 1995 and 1994, sales to Ceridian Corporation represented approximately 1% of total sales in each year. NOTE 8 INCOME TAXES The provision for income taxes for each of the three years in the period ended December 31, 1996, consists of the following: 1996 1995 1993 ---------- --------- ------------ Current Taxes - Federal $ 10,000 $ 37,000 $ 17,183 Current Taxes - State 72,000 63,000 17,023 Deferred Taxes 110,000 (100,000) (280,000) ---------- --------- ------------ Total Expense (Benefit) $ 192,000 $ 0 $ (245,794) ---------- --------- ------------ ---------- --------- ------------ Deferred tax assets at December 31, 1996 and 1995, consist of the following: 1996 1995 ------------ ------------ Net Operating Loss (NOL) Carryforwards $ 1,415,000 $ 1,635,000 Tax Credit Carryforwards 235,000 295,000 Other 40,000 30,000 Valuation Allowance (240,000) (400,000) ------------ ------------ Total $ 1,450,000 $ 1,560,000 ------------ ------------ ------------ ------------ 33 NOTE 8 INCOME TAXES (CONTINUED) The statutory rate reconciliation for each of the three years in the period ended December 31, is as follows: 1996 1995 1994 ----------- ------------ ----------- Statutory Tax Provision $ 217,000 $ 453,000 $ 319,000 State Income Taxes 78,000 80,000 50,000 Additional NOL Carryforwards 0 (851,000) 0 Increase (Reduction) in Deferred Tax Valuation Allowance (Net of Expired Tax Credit Carryforwards) (100,000) 300,000 (600,000) Other (3,000) 18,000 (14,794) ----------- ----------- ----------- Income Tax Provision (Benefit) Expense $ 192,000 $ 0 $ (245,794) ----------- ----------- ----------- ----------- ----------- ----------- The Company has available for Federal income tax purposes, operating loss carryforwards, unused investment credits, and unused research and development credits which may provide future tax benefits, expiring as follows: Investment Research and Operating Loss Tax Credit Development Tax Year of Expiration Carryforward Carryforward Credit Carryforward ------------------ -------------- ------------ ------------------- 1997 $ 0 $ 4,064 $ 43,051 1998 0 50,888 97,643 1999 3,035,800 39,965 0 2001 767,300 0 0 2002 253,200 0 0 2003 109,700 0 0 -------------- ------------- ------------- Totals $ 4,166,000 $ 94,917 $ 140,694 -------------- ------------- ------------- -------------- ------------- ------------- During 1995 the Company identified an additional $2,503,778 of net operating loss carryforwards related to final tax regulations. The regulations clarified that tax carryforward attributes in a Title 11 bankruptcy prior to December 31, 1993, where stock was issued for debt, need not be reduced by debt cancellation income. As a result of the increase in net operating loss carryforwards, which must be utilized prior to taking the benefit in tax credit carryovers, the Company has increased its valuation allowance accordingly. In 1996 the Company utilized operating loss carryforwards of $642,000 to offset federal taxable income. 34 NOTE 8 INCOME TAXES (CONTINUED) In 1995 the Company utilized operating loss carryforwards of $1,450,000 to offset federal taxable income and $46,000 of research and development credits to offset state tax. In 1994 the Company utilized operating loss carryforwards of $932,000 to offset federal taxable income and $126,100 to offset state taxable income. The Company also utilized $33,900 of research and development tax credits to offset state tax. NOTE 9 PREFERRED STOCK TRANSACTIONS The holders of the preferred stock are entitled to a noncumulative dividend of 12% when and as declared. In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. Preferred stock dividends of $-0-, $29,934 and $14,946 were paid during the year-ended December 31, 1996, 1995 and 1994, respectively. NOTE 10 MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company sells its products to companies in the computer, medical, governmental and various other industries. Historically, the Company has not experienced significant losses related to receivables from customers in any particular industry or geographic area. The Company maintains its excess cash balances in checking and money market accounts at three financial institutions. These balances exceed the federally insured limit by $775,000 and $520,000 at December 31, 1996 and 1995, respectively. The Company has not experienced any losses in any of the short-term investment instruments it has used for excess cash balances. Two customers accounted for approximately 11.3% and 17.5% of sales, respectively, for the year ended December 31, 1996. Three customers accounted for approximately 24.1%, 16.6% and 11.8% of sales, respectively, for the year ended December 31, 1995. One customer accounts for approximately 10.4% of accounts receivable at December 31, 1995. Three customers accounted for approximately 26.8%, 24.5% and 20.2% of sales, respectively, for the year ended December 31, 1994. Three customers accounted for approximately 29.8%, 20.5% and 11.3% of accounts receivable, respectively, at December 31, 1994. 35 NOTE 11 EMPLOYEE STOCK OPTION AND AWARD PLANS In 1992, the Company approved the adoption of a fixed stock based compensation plan. The purpose of the Plan is to promote the interests of the Company and its shareholders by providing officers, directors and other key employees with additional incentive and the opportunity, through stock ownership, to increase their proprietary interest in the Company and their personal interest in its continued success. The Company has authorized 200,000 shares for issuance under this Plan. Stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of the grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its fixed stock based compensation plan. Accordingly, no compensation cost has been recognized for this Plan in 1996, 1995 or 1994. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, "Accounting for Stock Based Compensation," net income and earnings per share would not differ materially from amounts reported under APB Opinion No. 25. Since the proforma disclosures of results under SFAS No. 123 are only required to consider grants awarded in 1995 and 1996, the proforma effects of applying SFAS No. 123 during this initial phase-in period may not be representative of the effects on reported results for future years. Following is a summary of the Plan's transactions: Option Price Shares (Per Share) --------- ------------ Balance as of December 31, 1992 22,500 $1.75 Granted January 21, 1993 15,000 $1.625 --------- Balance as of December 31, 1993 37,500 $1.625 - $1.75 Granted January 24, 1994 10,000 $3.625 --------- Balance as of December 31, 1994 47,500 $1.625 - $3.625 Granted December 1, 1995 95,000 $5.25 Exercised (5,000) $1.75 --------- Balance as of December 31, 1995 137,500 $1.625 - $5.25 Granted December 1, 1996 - - Exercised - - --------- Balance as of December 31, 1996 137,500 $1.625 - $5.25 --------- --------- 36 NOTE 11 EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED) A summary of the status of fixed options outstanding at December 31, 1996, is as follows: Outstanding Exercisable Average Remaining Exercise Price Options Options Contractural Life -------------- ----------- ----------- ----------------- 1.625 15,000 15,000 6 Years 1.75 17,500 17,500 5 Years 3.625 10,000 10,000 7 Years 5.25 95,000 19,000 9 Years During 1993, the Company adopted a gain sharing plan. The purpose of the Plan is to provide a bonus for increased output, improved quality and productivity and reduced costs. The Company has authorized 50,000 shares to be available under this Plan. In accordance with the terms of the Plan, employees can acquire newly issued shares of common stock for 90% of the current market value. 5,168 shares have been issued under this Plan through December 31, 1996. 37 NOTE 12 SUPPLEMENTARY FINANCIAL INFORMATION
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/96 6/30/96 9/30/96 12/31/96 1996 -------------- -------------- -------------- -------------- --------------- NET SALES $ 5,574,986 $ 6,622,903 $ 6,143,457 $ 7,841,475 $ 26,182,821 GROSS PROFIT 1,006,356 1,214,275 1,096,171 1,310,560 4,627,362 NET INCOME 189,894 288,552 201,958 (234,375) 446,029 INCOME PER SHARE OF COMMON STOCK 0.08 0.12 0.09 (0.10) 0.19 Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/95 6/30/95 9/30/95 12/31/95 1995 -------------- -------------- -------------- -------------- --------------- NET SALES $ 3,625,264 $ 4,374,899 $ 5,449,175 $ 4,856,590 $ 18,305,928 GROSS PROFIT 673,905 964,800 966,969 1,159,166 3,764,840 NET INCOME 244,003 244,049 212,588 631,284 1,331,924 INCOME PER SHARE OF COMMON STOCK 0.11 0.10 0.10 0.25 0.55
In the 4th quarter of 1995, the Company reduced previous quarter's tax expense of $206,388, which increased 4th quarter net income by .08 per share due to recognition of additional net operating loss carryforwards. In the 4th quarter of 1996, the Company wrote off $544,000 of inventories due to evolving customer requirements. This reduced 4th quarter net income by .15 per share. 38 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding the directors and executive officers of the Registrant will be included in the Registrant's 1996 proxy statement to be filed with the Securities and Exchange Commission not later than April 30, 1997 and said portions of the proxy statement are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation of the Registrant will be included in the Registrant's 1996 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1997 and said portions of the proxy statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership of certain beneficial owners and management of the Registrant will be included in the Registrant's 1996 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1997 and said portions of the proxy statements are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (See note 7 of Consolidated Financial Statements) (The remainder of this page was intentionally left blank.) 39 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a) 1. Consolidated Financial Statements - Consolidated Financial Statements and related Notes are included in Part II, Item 8, and are identified in the Index on Page 16. (a) 2. Consolidated Financial Schedule - The following Consolidated Financial Statement Schedule supporting the Consolidated Financial Statements and the accountant's report thereon are included in this Annual Report on Form 10-K: PAGE ---- Independent Auditors' Report on Supplementary Information Larson, Allen, Weishair & Co. , LLP 44 Consolidated Financial Statement Schedule for the years ended December 31, 1996, 1995 and 1994 VIII Valuation and Qualifying Accounts 45 All other schedules are omitted since they are not applicable, not required, or the required information is included in the financial statements or notes thereto. (a) 3. THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS REPORT: 10.1 Promissory Note for acquisition of division between Company and Northern National Bank dated December 31, 1996. 10.2 Revolving Note for working capital line of credit between Company and Northern National Bank dated December 31, 1996. 10.3 Promissory Note for equipment purchases between Company and Northern National Bank dated December 31, 1996. 10.4 Revolving Note for the working capital line of credit between Company and Northern National Bank dated December 31, 1996. 10.5 Revolving Note for repurchase of stock between Company and Northern National Bank dated May 10, 1996. 10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10,3 10.4 and 10.5. 40 10.7 Promissory Note for acquisition of division between Company and Communications Systems, Inc. dated November 4, 1996. 10.8 Promissory Note for the acquisition of division between Company and Communications Systems, Inc. dated November 4, 1996. 23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference to the S-8 Forms filed June 21 1994 and June 30, 1993. The following exhibits are incorporated by reference to exhibits 10.2, 10.3, 10.4, 10.5, 10.6 and 23.1, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.2 Promissory Note for purchase of facility in Fairmont, Minnesota between Company and Northern National Bank dated December 29, 1995. 10.3 Promissory Note for purchase of capital equipment located at Fairmont, Minnesota facility between Company and Northern National Bank dated December 29, 1995. 10.4 Security Agreement covering Promissory Notes in Exhibits 10.1, 10.2 and 10.3. 10.5 Asset Purchase Agreement for the purchase of assets of Monitor Technology Corporation dated February 24, 1995. 10.6 Asset Purchase Agreement for the purchase of Aerospace Division of Communication Cable, Inc. dated August 23, 1995. The following exhibits are incorporated by reference to exhibits 10.2, 10.3, and 10.5, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.2 Promissory Note and Loan Agreement for capital equipment line of credit between the Company and Northern National Bank dated April 29, 1994. 10.3 Loan Agreement for Real Estate between the Company and Northern National Bank dated March 18, 1994. 10.5 Promissory Notes and Loan Agreement for Real Estate between the Company and MMCDC and MMCDC/NNC dated March 18, 1994. 41 The following exhibits are incorporated by reference to Exhibits 10.3 and 10.4, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.3 Promissory Notes for capital equipment between the Company and City of Augusta, Wisconsin dated August 17, 1993. 10.4 Promissory Notes and Loan Agreement for capital equipment between the Company and Northern States Power Company dated November 15, 1993. The following exhibits are incorporated by reference to Exhibits 3.1, 3.2, 10.1 and 10.3 respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 3.1 Articles of Incorporation (SMR) dated August 9,1991 3.2 Bylaws (SMR) 10.3 Promissory Note and Mortgage between the Company and Joint Economic Development Commission, Inc. dated June 28, 1991. The following exhibit is incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 3.1 Articles of Incorporation dated October 30, 1990. The following exhibit is incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended December 31, 1984: 3.2 Bylaws (b) Reports on Form 8-K. Form 8-K report date November 4, 1996 and filed November 12, 1996 for purchase of assets of Zercom Corporation. Form 8-K/A 1 filed on March 3, 1997. This Form 8-K/A was an amendment to Form 8-K report date November 4, 1996 and filed November 12, 1996. 42 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTECH SYSTEMS INCORPORATED March 27, 1997 By:/s/ ---------------------------------- Quentin E. Finkelson Its President and Chief Executive Officer March 27, 1997 By:/s/ ---------------------------- Garry M. Anderly Principal Financial Officer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 27, 1997 /s/ ---------------------------------- Quentin E. Finkelson, President, Chief Executive Officer and Director March 27, 1997 /s/ ---------------------------------- Myron Kunin, Director March 27, 1997 /s/ ---------------------------------- Richard W. Perkins, Director 43 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION Board of Directors Nortech Systems Incorporated And Subsidiary Bemidji, Minnesota Our report on the basic consolidated financial statements of Nortech Systems Incorporated and Subsidiary for 1996, 1995 and 1994 precedes the consolidated financial statements. The audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule on the following page is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota February 13, 1997 44
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column E Column F - ---------------------------------- ------------- ------------ --------------- -------------- Additions Balance at Charged Balance at Beginning to Costs End of Classification Of Period And Expenses Add (Deduct) Period - ---------------------------------- ------------- ------------ --------------- -------------- Year Ended December 31, 1996: Allowance for Doubtful Accounts $ 6,053 $ 16,248 $ - $ 22,301 Deferred Tax Valuation Allowance 400,000 - (160,000) 240,000 ------------- ------------ --------------- ------------- $ 406,053 $ 16,248 $ (160,000) $ 262,301 ------------- ------------ --------------- ------------- ------------- ------------ --------------- ------------- Year Ended December 31, 1995: Allowance for Doubtful Accounts $ 4,343 $ 1,710 $ - $ 6,053 Deferred Tax Valuation Allowance 100,000 - 300,000 400,000 ------------- ------------ --------------- ------------- $ 104,343 $ 1,710 $ 300,000 $ 406,053 ------------- ------------ --------------- ------------- ------------- ------------ --------------- ------------- Year Ended December 31, 1994: Allowance for Doubtful Accounts $ - $ 4,343 $ - $ 4,343 Deferred Tax Valuation Allowance 700,000 - (600,000) 100,000 ------------- ------------ --------------- ------------- $ 700,000 $ 4,343 $ (600,000) $ 104,343 ------------- ------------ --------------- ------------- ------------- ------------ --------------- -------------
45 INDEX TO EXHIBITS DESCRIPTIONS OF EXHIBITS - ------------------------ 10.1 Promissory Note for acquisition of division between Company and Northern National Bank dated December 31, 1996. 10.2 Revolving Note for working capital line of credit between Company and Northern National Bank dated December 31, 1996. 10.3 Promissory Note for equipment purchases between Company and Northern National Bank dated December 31, 1996. 10.4 Revolving Note for the working capital line of credit between Company and Northern National Bank dated December 31, 1996. 10.5 Revolving Note for repurchase of stock between Company and Northern National Bank dated May 10, 1996. 10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10,3 10.4 and 10.5. 10.7 Promissory Note for acquisition of division between Company and Communications Systems, Inc. dated November 4, 1996. 10.8 Promissory Note for the acquisition of division between Company and Communications Systems, Inc. dated November 4, 1996. 23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference to the S-8 Forms filed June 21 1994 and June 30, 1993. 46 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 VARIABLE RATE COMMERCIAL PROMISSORY NOTE - -------------------------------------------------------------------------------- "LENDER": "BORROWER": NORTHERN NATIONAL BANK Nortech Systems Incorporated 201 Third Street 4050 Norris Court Bemidji, MN 56601-0790 Bemidji, MN 56601 (218) 751-1530 - -------------------------------------------------------------------------------- Officer Interest Principal Amount Funding Date Maturity Customer Loan Initials Rate Date Number Number - -------------------------------------------------------------------------------- BAS VARIABLE $1,500,000.00 12/31/96 6/30/98 533910 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, the undersigned Borrower promises to pay to the order of Lender indicated above, the principal amount of One Million, Five Hundred Thousand and No/100ths Dollars ($1,500,000.00) plus interest on the unpaid balance at the rate and in the manner described below. All amounts received by Lender shall be applied first to late payment charges and expenses, then to accrued interest, and then to principal or in any other order as determined by Lender, in Lender's sole discretion, as permitted by law. LOAN AGREEMENT; INTEREST RATE: This Note evidences a loan or loans made under, and is subject to acceleration as provided in, and the other terms and conditions of, that certain Commercial Loan Agreement dated as of December 29, 1995, as amended by an Amendment to Loan Agreement dated as of November 4, 1996, and by a Second Amendment to Loan Agreement dated as of December 31, 1996, by and among Nortech Systems Incorporated, Nortech Medical Services, Inc. and Northern National Bank (as the same may be amended, restated, modified or supplemented from time to time, the "Loan Agreement"). Interest on the principal amount hereunder remaining unpaid from time to time shall be calculated at the rates set forth in Loan Agreement. PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the following schedule: Interest only payments beginning February 1, 1997, and continuing at monthly time intervals thereafter. A final payment of the unpaid principal balance plus accrued interest is due and payable on June 30, 1998. 1 All payments will be made to First Bank National Association, a national banking association, as provided in the Loan Agreement, in lawful currency of the United States of America. RENEWAL: This Note is a renewal of loan number 533910 and is not in payment of that Note. SECURITY: To secure the payment and performance of obligations incurred under this Note, Borrower grants Lender a security interest in, and pledges and assigns to Lender all of Borrower's rights, title and interest, in all monies, instruments, savings, checking and other deposit accounts of Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to tax penalties if so assigned) that are now or in the future in Lender's custody or control. Upon default, and to the extend permitted by applicable law, Lender may exercise any or all of its rights or remedies as a secured party with respect to such property which rights and remedies shall be in addition to all other rights and remedies granted to Lender including, without limitation, Lender's common law right of setoff. The obligations under this Note are also secured by a lien and/or security interest in the property described in the documents executed in connection with this Note as well as any other property designated as security now or in the future. PREPAYMENT: This Note may be prepaid in part or in full on or before its maturity date. If this Note contains more than one installment, all prepayments will be credited as determined by Lender and as permitted by law. If this Note is prepaid in full, there will be no prepayment penalty. LATE PAYMENT CHARGE: If a payment is received more than ten (10) days late, Borrower will be charged a late payment charge of 5.00% of the unpaid late installment. GENERAL TERMS AND CONDITIONS: This Note is subject to the following general terms and conditions: GENERAL TERMS AND CONDITIONS 1. DEFAULT: Borrower will be in default under this Note in the event that Borrower or any guarantor or any other third party: (a) fails to make any payment on this Note or any other indebtedness to Lender when due; (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Note or any other present or future written agreement regarding this or any indebtedness of Borrower to Lender; (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows the collateral securing this Note (if any) to be lost, stolen, destroyed, damaged in any material respect, or subjected to seizure or confiscation; (e) permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against Borrower, any guarantor, or any of their property or the Collateral; (f) dies, becomes legally incompetent, 2 is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, fails to pay debts as they become due, or becomes the subject of any bankruptcy, insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem itself insecure for any reason, or Lender, for any reason, in good faith deems itself insecure. 2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender will be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to declare the principal amount plus accrued interest under this Note and all other present and future obligations of Borrower immediately due and payable in full; (b) to collect the outstanding obligations of Borrower with or without resorting to judicial process; (c) to take possession of any collateral in any manner permitted by law; (d) to require Borrower to deliver and make available to Lender any collateral at a place reasonably convenient to Borrower and Lender; (e) to sell, lease or otherwise dispose of any collateral and collect any deficiency balance with or without resorting to legal process; (f) to set-off Borrower's obligations against any amounts due to Borrower including, but not limited to, monies, instruments, and deposit accounts maintained with Lender; and (g) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender's rights are cumulative and may be exercised together, separately, and in any order. Lender's remedies under this paragraph are in addition to those available at common law, including, but not limited to, the right of set-off. 3. FINANCIAL INFORMATION: Borrower will provide Lender with current financial statements and other financial information (including, but not limited to, balance sheets and profit and loss statements) upon request. 4. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's obligations or Lender's rights under this Note must be contained in a writing signed by Lender. Lender may perform any of Borrower's obligations or delay or fail to exercise any of its rights without causing a waiver of those obligations or rights. A waiver on one occasion will not constitute a waiver on any other occasion. Borrower's obligations under this Note shall not be affected if Lender amends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any co-borrower or guarantor or any of its rights against any co-borrower, guarantor or collateral. 5. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Notwithstanding anything contained in this Note to the contrary, in no event shall interest accrue under this Note, before or after maturity, at a rate in excess of the highest rate permitted by applicable law, and if interest (including any charge or fee held to be interest by a court of competent jurisdiction) in excess thereof be paid, any excess shall constitute a payment of, and be 3 applied to, the principal balance hereof, and if the principal balance has been fully paid, then such interest shall be repaid to Borrower. 6. ASSIGNMENT: Borrower will not be entitled to assign any of its rights, remedies or obligations described in this Note without the prior written consent of Lender which may be withheld by Lender in its sole discretion. Lender will be entitled to assign some or all of its rights and remedies described in this Note without notice to or the prior consent of Borrower in any manner. 7. NOTICE: Any notice or other communication to be provided to Borrower or Lender under this Note shall be in writing and sent to the parties at the addresses described in this Note or such other address as the parties may designate in writing from time to time. 8. APPLICABLE LAW: This Note shall be governed by the laws of the state indicated in Lender's address. Borrower consents to the jurisdiction and venue of any court located in the state indicated in Lender's address in the event of any legal proceeding pertaining to the negotiation, execution, performance or enforcement of any term or condition contained in this Note or any related loan document and agrees not to commence or seek to remove such legal proceeding in or to a different court. 9. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any amount due or enforcing any right or remedy under this Note, Borrower agrees to pay Lender's attorney's fees, to the extent permitted by applicable law, and collection costs. 10. RETURNED CHECK: If a check for payment is returned to Lender for any reason, Lender will charge an additional fee of $15.00. 11. MISCELLANEOUS: This Note is being executed for commercial/agricultural purposes. Borrower and Lender agree that time is of the essence. Borrower waives presentment, demand for payment, notice of dishonor and protest. If Lender obtains a judgment for any amount due under this Note, interest will accrue on the judgment at the judgment rate of interest permitted by law. All references to Borrower in this Note shall include all of the parties signing this Note. If there is more than one Borrower, their obligations will be joint and several. This Note and any related documents represent the complete and integrated understanding between Borrower and Lender pertaining to the terms and conditions of those documents. 12. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON THIS NOTE OR THE COLLATERAL SECURING THIS NOTE. 4 BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE TERMS AND CONDITIONS OF THIS NOTE, INCLUDING THE GENERAL TERMS AND CONDITIONS SET FORTH ABOVE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE. Note Date: December 31, 1996 BORROWER: NORTECH SYSTEMS INCORPORATED By: /s/ G M Anderly ------------------------- Garry M. Anderly Its: Vice President 5 EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 COMMERCIAL/AGRICULTURAL REVOLVING NOTE-VARIABLE RATE "LENDER": "BORROWER": NORTHERN NATIONAL BANK Nortech Systems Incorporated 201 Third Street 4050 Norris Court Bemidji, MN 56601-0790 Bemidji, MN 56601 (218) 751-1530
- ------------------------------------------------------------------------------------------------ Officer Interest Principal Amount/ Funding/ Maturity Customer Loan Initials Rate Credit Limit Agreement Date Date Number Number - -------- -------- ---------------- --------------- -------- -------- ------- BAS VARIABLE $1,500,000.00 12/31/96 6/30/98 533909 - --------------------------------------------------------------------------------------------------
PROMISE TO PAY For value received, the undersigned Borrower promises to pay to the order of Lender indicated above, the principal amount of One Million, Five Hundred Thousand and No/100ths Dollars ($1,500,000.00) or, if less, the aggregate unpaid principal amount of all loans or advances made by the Lender to the Borrower, plus interest on the unpaid principal balance at the rate and in the manner described below. All amounts received by Lender shall be applied first to late payment charges and expenses, then to accrued interest, and then to principal or in any other order as determined by Lender, in Lender's sole discretion, as permitted by law. LOAN AGREEMENT; INTEREST RATE: This Note evidences a loan or loans made under, and is subject to acceleration as provided in, and the other terms and conditions of, that certain Commercial Loan Agreement dated as of December 29, 1995, as amended by an Amendment to Loan Agreement dated as of November 4, 1996, and by a Second Amendment to Loan Agreement dated as of December 31, 1996, by and among Nortech Systems Incorporated, Nortech Medical Services, Inc. and Northern National Bank (as the same may be amended, restated, modified or supplemented from time to time, the "Loan Agreement"). Interest on the principal amount hereunder remaining unpaid from time to time shall be calculated at the rates set forth in Loan Agreement. PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the following schedule: Interest only payments beginning February 1, 1997, and continuing at monthly time intervals thereafter. A final payment of the unpaid principal balance plus accrued interest is due and payable on June 30, 1998. All payments will be made to First Bank National Association, a national banking association, as provided in the Loan Agreement, and in lawful currency of the United States of America. RENEWAL: This Note is a renewal of loan number 533909 and is not in payment of that Note. SECURITY: To secure the payment and performance of obligations incurred under this Note, Borrower grants Lender a security interest in, and pledges and assigns to Lender all of Borrower's rights, title and interest, in all monies, instruments, savings, checking and other deposit accounts of Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to tax penalties if so assigned) that are now or in the future in Lender's custody or control. Upon default, and to the extend permitted by applicable law, Lender may exercise any or all of its rights or remedies as a secured party with respect to such property which rights and remedies shall be in addition to all other rights and remedies granted to Lender including, without limitation, Lender's common law right of setoff. The obligations under this Note are also secured by a lien and/or security interest in the property described in the documents executed in connection with this Note as well as any other property designated as security now or in the future. PREPAYMENT: This Note may be prepaid in part or in full on or before its maturity date. If this Note contains more than one installment, all prepayments will be credited as determined by Lender and as permitted by law. If this Note is prepaid in full, there will be no prepayment penalty. LATE PAYMENT CHARGE: If a payment is received more than ten (10) days late, Borrower will be charged a late payment charge of 5.00% of the unpaid late installment. REVOLVING FEATURE: This Note possesses a revolving feature. Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled to borrow up to the full principal amount of the Note and to repay and re-borrow from time to time during the term of this Note. Lender shall maintain a record of the amounts loaned to and repaid by Borrower under this Note. The aggregate unpaid principal amount shown on such record shall be rebuttable presumptive evidence of the principal amount owing and unpaid on this Note. The Lender's failure to record the date and amount of any loan or advance shall not limit or otherwise affect the obligations of the Borrower under this Note to repay the principal amount of the loans or advances together with all interest accruing thereon. Lender shall not be obligated to provide Borrower with a copy of the record on a periodic basis. Borrower shall be entitled to inspect or obtain a copy of the record during Lender's business hours. CONDITIONS FOR ADVANCES: If there is no default under this Note, Borrower shall be entitled to borrow monies or make draws under this Note (subject to the limitations described above) under the conditions described herein and in the Loan Agreement. 2 GENERAL TERMS AND CONDITIONS. This Note is subject to the following general terms and conditions: GENERAL TERMS AND CONDITIONS 1. DEFAULT: Borrower will be in default under this Note in the event that Borrower or any guarantor or any other third party: (a) fails to make any payment on this Note or any other indebtedness to Lender when due; (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Note or any other present or future written agreement regarding this or any indebtedness of Borrower to Lender; (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows the collateral securing this Note (if any) to be lost, stolen, destroyed, damaged in any material respect, or subjected to seizure or confiscation; (e) permits the entry or service any garnishment, judgment, tax levy, attachment or lien against Borrower, any guarantor, or any of their property or the Collateral; (f) dies, becomes legally incompetent, is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, fails to pay debts as they become due, or becomes the subject of any bankruptcy, insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem itself insecure for any reason, or Lender, for any reason, in good faith deems itself insecure. 2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender will be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to cease making additional advances under this Note; (b) to declare the principal amount plus accrued interest under this Note and all other present and future obligations of Borrower immediately due and payable in full; (c) to collect the outstanding obligations of Borrower with or without resorting to judicial process; (d) to take possession of any collateral in any manner permitted by law; (e) to require Borrower to deliver and make available to Lender any collateral at a place reasonably convenient to Borrower and Lender; (f) to sell, lease or otherwise dispose of any collateral and collect any deficiency balance with or without resorting to legal process; (g) to set-off Borrower's obligations against any amounts due to Borrower including, but not limited to, monies, instruments, and deposit accounts maintained with Lender; and (h) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender's rights are cumulative and may be exercised together, separately, and in any order. Lender's remedies under this paragraph are in addition to those available at common law, including, but not limited to, the right of set-off. 3. FINANCIAL INFORMATION: Borrower will provide Lender with current financial statements and other financial information (including, but not limited to, balance sheets and profit and loss statements) upon request. 3 4. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's obligations or Lender's rights under this Note must be contained in a writing signed by Lender. Lender may perform any of Borrower's obligations or delay or fail to exercise any of its rights without causing a waiver of those obligations or rights. A waiver on one occasion will not constitute a waiver on any other occasion. Borrower's obligations under this Note shall not be affected if Lender amends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any co-borrower or guarantor or any of its rights against any co-borrower, guarantor or collateral. 5. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Notwithstanding anything contained in this Note to the contrary, in no event shall interest accrue under this Note, before or after maturity, at a rate in excess of the highest rate permitted by applicable law, and if interest (including any charge or fee held to be interest by a court of competent jurisdiction) in excess thereof be paid, any excess shall constitute a payment of, and be applied to, the principal balance hereof, and if the principal balance has been fully paid, then such interest shall be repaid to Borrower. 6. ASSIGNMENT: Borrower will not be entitled to assign any of its rights, remedies or obligations described in this Note without the prior written consent of Lender which may be withheld by Lender in its sole discretion. Lender will be entitled to assign some or all of its rights and remedies described in this Note without notice to or the prior consent of Borrower in any manner. 7. NOTICE: Any notice or other communication to be provided to Borrower or Lender under this Note shall be in writing and sent to the parties at the addresses described in this Note or such other address as the parties may designate in writing from time to time. 8. APPLICABLE LAW: This Note shall be governed by the laws of the state indicated in Lender's address. Borrower consents to the jurisdiction and venue of any court located in the state indicated in Lender's address in the event of any legal proceeding pertaining to the negotiation, execution, performance or enforcement of any term or condition contained in this Note or any related loan document and agrees not to commence or seek to remove such legal proceeding in or to a different court. 9. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any amount due or enforcing any right or remedy under this Note, Borrower agrees to pay Lender's attorney's fees, to the extent permitted by applicable law, and collection costs. 10. RETURNED CHECK: If a check for payment is returned to Lender for any reason, Lender will charge an additional fee of $15.00. 4 11. MISCELLANEOUS: This Note is being executed for commercial/agricultural purposes. Borrower and Lender agree that time is of the essence. Borrower waives presentment, demand for payment, notice of dishonor and protest. If Lender obtains a judgment for any amount due under this Note, interest will accrue on the judgment at the judgment rate of interest permitted by law. All references to Borrower in this Note shall include all of the parties signing this Note. If there is more than one Borrower, their obligations will be joint and several. This Note and any related documents represent the complete and integrated understanding between Borrower and Lender pertaining to the terms and conditions of those documents. 12. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON THIS NOTE OR THE COLLATERAL SECURING THIS NOTE. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE TERMS AND CONDITIONS OF THIS NOTE, INCLUDING THE GENERAL TERMS AND CONDITIONS SET FORTH ABOVE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE. Note Date: December 31, 1996 BORROWER: NORTECH SYSTEMS INCORPORATED BY: /s/ Garry M. Anderly -------------------------- Garry M. Anderly Its: Vice President 5 EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 BORROWER [LOGO] NORTHERN NORTECH SYSTEMS INCORPORATED COMMERCIAL/ NATIONAL BANK AGRICULTURAL 201 3RD STREET REVOLVING OR DRAW BEMIDJI, MN 56601-0790 ADDRESS NOTE-VARIABLE RATE TELEPHONE 218-751-1530 4050 NORRIS COURT "LENDER" BEMIDJI, MN 56601 TELEPHONE NO. IDENTIFICATION NO. 218-751-0110 OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN INITIALS RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER - -------------------------------------------------------------------------------- BAS VARIABLE $400,000.00 11/25/96 12/01/98 533932 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, Borrower promises to pay to the order of Lender indicated above the principal amount of FOUR HUNDRED THOUSAND AND NO/100 Dollars ($400,000.00) or, if less, the aggregate unpaid principal amount of all loans or advances made by the Lender to the Borrower, plus interest on the unpaid principal balance at the rate and in the manner described below. All amounts received by Lender shall be applied first to late payment charges and expenses, then to accrued interest, and then to principal or in any other order as determined by Lender. In Lender's sole discretion, as permitted by law. INTEREST RATE: This Note has a variable rate feature. Interest on the Note may change from time to time if the Index Rate identified below changes. Interest shall be computed on the basis of 360 days per year. Interest on this Note shall be calculated at a variable rate equal to NO/1000 percent (0.000%) per annum over the Index Rate. The Initial Index Rate is currently EIGHT AND 250/1000 percent (8.250%) per annum. The Initial Interest rate on this Note shall be EIGHT AND 250/1000 percent (8.250%) per annum. Any change in the interest rate resulting from a change in the Index Rate will be effective on: THE DATE THE INDEX RATE CHANGES INDEX RATE: The Index Rate for this Note shall be: THE NATIONAL PRIME RATE AS PUBLISHED IN THE WALL STREET JOURNAL MINIMUM RATE/MAXIMUM RATE: The minimum interest rate on this Note shall be FOUR AND NO/1000 percent (4.000%) per annum. The maximum interest rate on this Note shall not exceed NINETEEN AND NO/1000 percent (19.000%) per annum or the maximum interest rate Lender is permitted to charge by law, whichever is less. POST-MATURITY RATE: / / If checked, this loan is for a binding commitment of at least $100,000.00 and after maturity, due to scheduled maturity or acceleration, past due amounts shall bear interest at the lesser of:________ ___________________________________________________, or the maximum interest rate Lender is permitted to charge by law. PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the following schedule: 23 PAYMENTS OF $7,500.00 BEGINNING JANUARY 1, 1997 AND CONTINUING AT MONTHLY TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON DECEMBER 1, 1998. All payments will be made to Lender at its address described above and in lawful currency of the United States of America. RENEWAL: If checked, / / this Note is a renewal of loan number__________, and is not in payment of that Note. SECURITY: To secure the payment and performance of obligations incurred under this Note, Borrower grants Lender a security interest in, and pledges and assigns to Lender all of Borrower's rights, title, and interest, in all monies, instruments, savings, checking and other deposit accounts of Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to tax penalties if so assigned) that are now or in the future in Lender's custody or control. Upon default, and to the extent permitted by applicable law, Lender may exercise any or all of its rights or remedies as a secured party with respect to such property which rights and remedies shall be in addition to all other rights and remedies granted to Lender including, without limitation, Lender's common law right of setoff. /X/ If checked, the obligations under this Note are also secured by a lien and/or security interest in the property described in the documents executed in connection with this Note as well as any other property designated as security now or in the future. PREPAYMENT: This Note may be prepaid in part or in full on or before its maturity date. If this Note contains more than one installment, all prepayments will be credited as determined by Lender and as permitted by law. If this Note is prepaid in full, there will be: /X/ No prepayment penalty. / / A prepayment penalty of _______% of the principal prepaid. LATE PAYMENT CHARGE: If a payment is received more than 10 days late, Borrower will be charged a late payment charge of 5.00% of the unpaid late installment. REVOLVING OR DRAW FEATURE: / / This Note possesses a revolving feature. Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled to borrow up to the full principal amount of the Note and to repay and reborrow from time to time during the term of this Note. /X/ This Note possesses a draw feature. Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled to make one or more draws under this Note. The aggregate amount of such draws shall not exceed the full principal amount of this Note. Lender shall maintain a record of the amounts loaned to and repaid by Borrower under this Note. The aggregate unpaid principal amount shown on such record shall be rebuttable presumptive evidence of the principal amount owing and unpaid on this Note. The Lender's failure to record the date and amount of any loan or advance shall not limit or otherwise affect the obligations of the Borrower under this Note to repay the principal amount of the loans or advances together with all interest accruing thereon. Lender shall not be obligated to provide Borrower with a copy of the record on a periodic basis. Borrower shall be entitled to inspect or obtain a copy of the record during Lender's business hours. CONDITIONS FOR ADVANCES: If there is no default under this Note, Borrower shall be entitled to borrow monies or make draws under this Note (subject to the limitations described above) under the following conditions: - -------------------------------------------------------------------------------- BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE. NOTE DATE: NOVEMBER 25, 1996 BORROWER: NORTECH SYSTEMS INCORPORATED BORROWER: /s/ Garry M. Anderly - -------------------------------------- ------------------------------------- GARRY M. ANDERLY VICE PRESIDENT BORROWER: BORROWER: - -------------------------------------- ------------------------------------- BORROWER: BORROWER: - -------------------------------------- ------------------------------------- BORROWER: BORROWER: - -------------------------------------- ------------------------------------- TERMS AND CONDITIONS 1. DEFAULT: Borrower will be in default under this Note in the event that Borrower or any guarantor or any other third party: (a) fails to make any payment on this Note or any other indebtedness to Lender when due; (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Note or any other present or future written agreement regarding this or any indebtedness of Borrower to Lender; (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows the collateral securing this Note (if any) to be lost, stolen, destroyed, damaged in any material respect, or subjected to seizure or confiscation; (e) permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against Borrower, any guarantor, or any of their property or the Collateral; (f) dies, becomes legally incompetent, is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, fails to pay debts as they become due, or becomes the subject to any bankruptcy, insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem itself insecure for any reason, or Lender, for any reason, in good faith deems itself insecure. 2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender will be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to cease making additional advances under this Note; (b) to declare the principal amount plus accrued interest under this Note and all other present and future obligations of Borrower immediately due and payable in full; (c) to collect the outstanding obligations of Borrower with or without resorting to judicial process; (d) to take possession of any collateral in any manner permitted by law; (e) to require Borrower to deliver and make available to Lender any collateral at a place reasonably convenient to Borrower and Lender; (f) to sell, lease or otherwise dispose of any collateral and collect any deficiency balance with or without resorting to legal process; (g) to set-off Borrower's obligations against any amounts due to Borrower including, but not limited to monies, instruments, and deposit accounts maintained with Lender; and (h) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender's rights are cumulative and may be exercised together, separately, and in any order. Lender's remedies under this paragraph are in addition to those available at common law, including but not limited to, the right of set-off. 3. DEMAND FEATURE: If this Note contains a demand feature, Lender's right to demand payment, at any time, and from time to time, shall be in Lender's sole and absolute discretion, whether or not any default has occurred. 4. FINANCIAL INFORMATION: Borrower will provide Lender with current financial statements and other financial information (including, but not limited to, balance sheets and profit and loss statements) upon request. 5. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's obligations or Lender's rights under this Note must be contained in a writing signed by Lender. Lender may perform any of Borrower's obligations or delay or fail to exercise any of its rights without causing a waiver of those obligations or rights. A waiver on one occasion will not constitute a waiver on any other occasion. Borrower's obligations under this Note shall not be affected if Lender amends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any co-borrower or guarantor or any of its rights against any co-borrower, guarantor or collateral. 6. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Notwithstanding anything contained in this Note to the contrary, in no event shall interest accrue under this Note, before or after maturity, at a rate in excess of the highest rate permitted by applicable law, and if interest (including any charge or fee held to be interest by a court of competent jurisdiction) in excess thereof be paid, any excess shall constitute a payment of, and be applied to, the principal balance hereof, and if the principal balance has been fully paid, then such interest shall be repaid to the Borrower. 7. ASSIGNMENT: Borrower will not be entitled to assign any of its rights, remedies or obligations described in this Note without the prior written consent of Lender which may be withheld by Lender in its sole discretion. Lender will be entitled to assign some or all of its rights and remedies described in this Note without notice to or the prior consent of Borrower in any manner. 8. NOTICE: Any notice or other communication to be provided to Borrower or Lender under this Note shall be in writing and sent to the parties at the addresses described in this Note or such other address as the parties may designate in writing from time to time. 9. APPLICABLE LAW: This Note shall be governed by the laws of the state indicated in Lender's address. Borrower consents to the jurisdiction and venue of any court located in the state indicated in Lender's address in the event of any legal proceeding pertaining to the negotiation, execution, performance or enforcement of any term or condition contained in this Note or any related loan document and agrees not to commence or seek to remove such legal proceeding in or to a different court. 10. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any amount due or enforcing any right or remedy under this Note, Borrower agrees to pay Lender's attorney's fees, to the extent permitted by applicable law, and collection costs. 11. RETURNED CHECK: If a check for payment is returned to Lender for any reason, Lender will charge an additional fee of $15.00. 12. MISCELLANEOUS: This Note is being executed for commercial/agricultural purposes. Borrower and Lender agree that time is of the essence. Borrower waives presentment, demand for payment, notice of dishonor and protest. If Lender obtains a judgment for any amount due under this Note, interest will accrue on the judgment at the judgment rate of interest permitted by law. All references to Borrower in this Note shall include all of the parties signing this Note. If there is more than one Borrower, their obligations will be joint and several. This Note and any related documents represent the complete and integrated understanding between Borrower and Lender pertaining to the terms and conditions of those documents. 13. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON, THIS NOTE OR THE COLLATERAL SECURING THIS NOTE. 14. ADDITIONAL TERMS:
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DISCRETIONARY COMMITMENT LETTER NORTECH SYSTEMS INCORPORATED (Commercial Credit) NOVEMBER 25, 1996 4050 NORRIS COURT BEMIDJI, MI 56601 Dear GARRY ANDERLY NORTHERN NATIONAL BANK is pleased to grant you a discretionary line of credit on the following terms and conditions: 1. AMOUNT OF CREDIT. We may make loans to you from time to time during the period from the date of this letter to and including DECEMBER 1, 1998, in an aggregate amount not to exceed at any time outstanding $ 400,000.00. Each loan will be in the sole discretion of our officers, and nothing herein should be interpreted as being a promise to make any one or more loans. If this [ ] is checked, we anticipate that you will be allowed to prepay and reborrow so long as no borrowing causes that dollar limit to be exceeded. 2. THE NOTE. Your obligation to repay all loans made by us under this letter will be evidenced as follows (check one): [X] By your single promissory note in the above amount, dated the same date as this letter (the "Note"). [ ] By a separate note for each loan, in each case in the amount and dated as the date of the loan (all references in this letter to the "Note" are to be understood as applying to any notes issued pursuant hereto). 3. INTEREST; MATURITY DATE. The Note shall bear interest (computed on the basis of actual days elapsed and a 360 day year) on the principal balance outstanding from time to time, from the date of the initial advance until the Note is paid in full at the following rate: [ ] an annual rate of %; [X] an annual rate equal to 0.00% over the Base Rate (the term "Base Rate" means the rate of interest established from time to time by THE NORTHERN NATIONAL BANK as its "base" or "prime" rate); [ ]an annual rate equal to % in excess of the Discount Rate (the term "Discount Rate" means the discount rate on 90-day commercial paper in effect from time to time at the Federal Reserve Bank of Minneapolis) (including, if permitted by P.L. 96-221, section 511, any surcharge thereon); [ ]other: If the Note evidences a variable rate loan, the following provisions shall also apply: a. If the $100,000 exemption to the usury law does not apply and the borrower is not a corporation, the annual rate of interest on the the Note shall never exceed [ ] % [ ] a rate that is % in excess of the Discount Rate. b. The Note shall bear the same rate of interest after it becomes due as was in effect on its due date unless the $100,000 exemption from the usury law applies. c. The rate of interest shall initially be determined as of the date hereof and shall thereafter be adjusted: [X] daily on the same day the Index Rate changes; [ ] daily on the day following the day the Index Rate changes; [ ] monthly, the rate for any given month depending on the Index Rate for the last day of the immediately preceding month; [ ] monthly, on the day of each calendar month with the rate being determined based on the Index Rate in effect on the day of change; or, [ ] as follows: The term "Index Rate" means the Base Rate, the Discount Rate or the rate described in the "other" paragraph, as applicable. The amount of interest earned each will be payable [ ] at maturity, [X] on or before the day of the next , and on demand. In addition, any earned and unpaid interest will be payable on the due date of the Note. The unpaid balance of the Note shall be due and payable in full (check one): [ ]on demand, and in any event on , if demand has not been made by that day; [ ] on ; [X] on the date stated in the Note, not later than DECEMBER 1, 1998. The Note will also specify events of default and the rights and remedies available to us upon the occurrence of an event of default. The Note must be properly executed by you and be in form and substance acceptable to us. 4. SECURITY. The Note will be [ ] unsecured [X] secured by: A. [X] UCC security agreement granting a security interest in the following property: (a) [X] Inventory; (b) [X] Equipment; (c) [X] Accounts; (d) [X] General intangibles; (e) [ ] Motor vehicles (other than equipment) described as follows: __________________________________________________ ___________________________________________________________ and all substitutions and replacements for, and all accessions, accessories, attachments, parts, equipment and repairs now or hereafter attached to such motor vehicles; (f) [ ] ___________________________________________________________ specify This property will be more fully described in the UCC security agreement. The security interest shall extend to property of the type described, whether now owned or hereafter acquired. B. [ ] A real estate mortgage granting a lien on the following real estate: and on all property now or hereafter attached or affixed to that real estate. 5. DROP IN DISCOUNT RATE. If this letter provides that your obligations will bear interest at a fixed rate or at a variable rate subject to a fixed interest rate ceiling and if the Federal Reserve discount rate falls after the date of this letter, so that the rate or rate ceiling specified is no longer permissible, that rate or rate ceiling that applies to subsequent advances shall be reduced automatically and we will ask you to execute a new Note or Notes to evidence subsequent advances. If the original Note was a fixed rate Note, the new Note shall bear interest at the highest permissible rate. If the original Note bore interest at a variable rate subject to a fixed ceiling, interest on the new Note shall vary with the same index, subject to the highest permissible ceiling. In either event, paragraphs 2 and 3 of this letter shall be deemed to have been amended correspondingly. If the Federal Reserve discount rate falls more than once, additional new Notes shall be issued as necessary. In any event, once an advance has been made and is evidenced by a particular Note, that advance shall continue to bear the rate specified by that Note until it matures. This paragraph applies only if you are an individual or a partnership. Your signature below shall constitute an acknowledgement that you have read this commitment letter, and that you approve of all of the terms of this commitment letter and that you have received a copy hereof. Accepted this 25th day of Very truly yours, NOVEMBER 1996. The proceeds of the loans made under this NORTHERN NATIONAL BANK letter will be used for By: /s/ Barbara A. Smith business purposes exclusively ------------------------------ NORTECH SYSTEMS INCORPORATED Title: SENIOR VICE PRESIDENT ILLEGIBLE -------------------------- By:------------------------- Title: VICE PRESIDENT ------------------- [Logo] Northern National Bank 201 3rd Street Bemidji, MN 56601-0790 Telephone 218-751-1530 "LENDER" COMMERCIAL SECURITY AGREEMENT BORROWER OWNER OF COLLATERAL NORTECH SYSTEMS INCORPORATED NORTECH SYSTEMS INCORPORATED ADDRESS ADDRESS 4050 NORRIS COURT 4050 NORRIS COURT BEMIDJI, MN 56601 BEMIDJI, MN 56601 TELEPHONE NO. IDENTIFICATION NO. TELEPHONE NO. IDENTIFICATION NO. 218-751-0110 218-751-0110 1. SECURITY INTEREST. For good and valuable consideration, Owner of Collateral ("Owner") grants to Lender identified above a continuing security interest in the Collateral described below to secure the obligations described in this Agreement. 2. OBLIGATIONS. The Collateral shall secure the payment and performance of all of Borrower's and Owner's present and future, joint and/or several, direct and indirect, absolute and contingent, express and implied, indebtedness, (Including costs of collection, legal expenses and attorneys' fees, incurred by Lender upon the occurrence of a default under this Agreement, in collecting or enforcing payment of such indebtedness, or preserving, protecting or realizing on the Collateral herein), liabilities, obligations and covenants (cumulatively "Obligations") to Lender including (without limitation) those arising under or pursuant to: a. this Agreement and the following promissory notes and agreements: INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER - ------------------------------------------------------------------- VARIABLE $400,000.00 11/25/96 12/01/98 533932 b. all other present or future, Obligations of Borrower or Owner to Lender (WHETHER INCURRED FOR THE SAME OR DIFFERENT PURPOSES THAN THE FOREGOING); c. all renewals, extensions, amendments, modifications, replacements or substitutions to any of the foregoing; and d. applicable law. 3. COLLATERAL. The Collateral shall consist of all of the following-described property and Owner's rights, title and interest in such property whether now owned or hereafter acquired by Owner and wherever located: [X] All accounts, contract rights and rights to payment in money or in kind for goods sold or leased or for services rendered, and all guarantees and security therefor; all returned or repossessed goods arising from or relating to any account, contract right, or right to payment; and any rights of Owner as an unpaid seller of goods or services; including, but not limited to, the accounts and contract rights described on Schedule A attached hereto and incorporated herein by this reference; [ ] All chattel paper, together with all guarantees and security therefor; including, but not limited to, the chattel paper described on Schedule A attached hereto and incorporated herein by this reference; [ ] All documents of title including, but not limited to, the documents described on Schedule A attached hereto and incorporated herein by this reference; [X] All equipment, machinery, and vehicles including, but not limited to, the equipment described on Schedule A attached hereto and incorporated herein by this reference; [ ] All fixtures, including, but not limited to, the fixtures located or to be located on the real property described on Schedule B attached hereto and incorporated herein by this reference; [X] All general intangibles of any kind or nature including, but not limited to, goodwill, literary rights, copyrights, trademarks and patents; all securities, stocks, bonds, partnership interests, and similar devices; any right to performance or payment, including, without limitation, rights to receive dividends, tax refunds, insurance claims and insurance proceeds, pension payments, and other disbursements; things in action; and rights in intangible property of any kind, specifically including, but not limited to, the general intangibles described on Schedule A attached hereto and incorporated herein by this reference; [ ] All instruments including, but not limited to, the instruments described on Schedule A attached hereto and incorporated herein by this reference; [X] All inventory (goods, merchandise, and other personal property) which are held for sale or lease, or are furnished or to be furnished under any contract of service or are raw materials, work-in-process, supplies, or materials used or consumed in Owner's business, and any right of Owner as an unpaid seller of goods or services, including, but not limited to, the inventory described on Schedule A attached hereto and incorporated herein by this reference; [ ] All minerals or the like located on or related to the real property described on Schedule B attached hereto and incorporated herein by this reference; [ ] All standing timber located on the real property described on Schedule B attached hereto and incorporated herein by this reference; [ ] Other; All monies, instruments, and savings, checking or other deposit accounts that are now or in the future in Lender's custody or control (excluding IRA, Keogh, trust accounts, and deposits subject to tax penalties if so assigned); All accessions, accessories, additions, amendments, attachments, modifications, replacements and substitutions to any of the above; All proceeds and products of any of the above; All policies of Insurance pertaining to any of the above as well as any proceeds and unearned premiums pertaining to such policies; and All books and records pertaining to any of the above. 4. OWNER'S TAXPAYER IDENTIFICATION. Owner's social security number or federal taxpayer identification number is: 41-1681094 . - ---------------------- 5. RESIDENCY/LEGAL STATUS. / / Owner is an individual(s) and a resident of the state of:_____________________. /x/ Owner is a Corporation duly ____________ organized, validly existing and in good standing under the laws of the state of MINNESOTA. --------- 6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Owner represents, warrants and covenants to Lender that: (a) Owner is and shall remain the sole owner of the Collateral; (b) Neither Owner nor, to the best of Owner's knowledge, has any other party used, generated, released, discharged, stored, or disposed of any hazardous material, toxic substance, or related material on any of the Collateral. Owner shall not commit or permit such actions to be taken in the future. The term "Hazardous Materials" shall mean any substance, material, or waste which is or becomes regulated by any governmental authority including, but not limited to, (i) petroleum; (ii) asbestos; (iii) polychlorinated biphenyls; (iv) those substances, materials or wastes designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act or listed pursuant to Section 307 of the Clean Water Act or any amendments or replacements to these statutes; (v) those substances, materials or wastes defined as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation Recovery Act or any amendments or replacements to that statute; or (vi) those substances, materials or wastes defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, or any amendments or replacements to that statute; (c) Owner's chief executive office, chief place of business, office where its business records are located, or residence is the address identified above. Owner's other executive offices, places of business, locations of its business records, or domiciles are described on Schedule C attached hereto and incorporated herein by this reference. Owner shall immediately advise Lender in writing of any change in or addition to the foregoing addresses; (d) Owner shall not become a party to any restructuring of its form of business or participate in any consolidation, merger, liquidation or dissolution without providing Lender with thirty (30) or more days' prior written notice of such change; (e) Owner shall notify Lender of the nature of any intended change of Owner's name, or the use of any trade name, and the effective date of such change; (f) The Collateral is and shall at all times remain free of all tax and other liens, security interests, encumbrances and claims of any kind except for those belonging to Lender and those described on Schedule D attached hereto and incorporated herein by this reference. Without waiving the event of default as a result thereof, Owner shall take any action and execute any document needed to discharge the foregoing liens, security interests, encumbrances and claims; (g) Owner shall defend the Collateral against all claims and demands of all persons at any time claiming any interest therein; (h) All of the goods, fixtures, minerals or the like, and standing timber constituting the Collateral is and shall be located at Owner's executive offices, places of business, residence and domiciles specifically described in this Agreement; (i) Owner shall provide Lender with possession of all chattel paper and instruments constituting the Collateral unless otherwise agreed by Lender. Owner shall promptly mark all chattel paper, instruments, and documents constituting the Collateral to show that the same are subject to Lender's security interest; (j) All of Owner's accounts or contract rights; chattel paper; documents; general intangibles; instruments; and federal, state, county, and municipal government and other permits and licenses; trusts, liens, contracts, leases, and agreements constituting the Collateral are and shall be valid, genuine and legally enforceable obligations and rights belonging to Owner and not subject to any claim, defense, set-off or counterclaim of any kind; (k) Owner shall not amend, modify, replace, or substitute any account or contract right; chattel paper; document; general intangible; or instrument constituting the Collateral without the prior consent of Lender, which shall not be unreasonably withheld; (l) Owner has the right and is duly authorized to enter into and perform its obligations under this Agreement. Owner's execution and performance of these obligations do not and shall not conflict with the provisions of any statute, regulation, ordinance, rule of law, contract or other agreement which may now or hereafter be binding on Owner; (m) No action or proceeding is pending against Owner which might result in any material adverse change in its business operations or financial condition or materially affect the Collateral; (n) Owner has not violated and shall not violate any applicable federal, state, county or municipal statute, regulation or ordinance (including but not limited to those governing Hazardous Materials) which may materially and adversely affect its business operations or financial condition or the Collateral; (o) Owner shall, upon Lender's request, deposit all proceeds of the Collateral into an account or accounts maintained by Owner or Lender at Lender's institution; (p) Owner will, upon receipt, deliver to Lender as additional Collateral all securities distributed on account of the Collateral such as stock dividends and securities resulting from stock splits, reorganizations and recapitalizations; and (q) This Agreement and the obligations described in this Agreement are executed and incurred for business and not consumer purposes. 7. SALE OF COLLATERAL. Owner shall not assign, convey, lease, sell or transfer any of the Collateral to any third party without the prior written consent of Lender except for sales of inventory to buyers in the ordinary course of business. 8. FINANCING STATEMENTS AND OTHER DOCUMENTS. Owner shall take all actions and execute all documents required by Lender to attach, perfect and maintain Lender's security interest in the Collateral and establish and maintain Lender's right to receive the payment of the proceeds of the Collateral including, but not limited to, executing any financing statements, fixture filings, continuation statements, notices of security interest and other documents required by the Uniform Commercial Code and other applicable law. Owner shall pay the costs of filing such documents in all offices wherever filing or recording is deemed by Lender to be necessary or desirable. Lender shall be entitled to perfect its security interest in the Collateral by filing carbon, photographic or other reproductions of the aforementioned documents with any authority required by the Uniform Commercial Code or other applicable law. Lender may execute and file any financing statements, as well as extensions, renewals and amendments of financing statements in such form as Lender may require to perfect and maintain perfection of any security interest granted in this Agreement. Owner appoints Lender as its agent and attorney-in-fact to endorse Owner's name on all instruments and other remittances payable to Owner with respect to the Collateral. This power of attorney is coupled with an interest and is irrevocable. 9. INQUIRES AND NOTIFICATION TO THIRD PARTIES. Owner hereby authorizes Lender to contact any third party and make any inquiry pertaining to Owner's financial condition or the Collateral. In addition, Lender is authorized to provide oral or written notice of its security interest in the Collateral to any third party. 10. COLLECTION OF INDEBTEDNESS FROM THIRD PARTIES. Lender shall be entitled to notify, and upon the request of Lender, Owner shall notify any account debtor or other third party (including, but not limited to, insurance companies) to pay any indebtedness or obligation owing to Owner and constituting the Collateral (cumulatively "Indebtedness") to Lender whether or not a default exists under this Agreement. Owner shall diligently collect the Indebtedness owing to Owner from its account debtors and other third parties until the giving of such notification. In the event that Owner possesses or receives possession of any instruments or other remittances with respect to the Indebtedness following the giving of such notification or if the instruments or other remittances constitute the prepayment of any Indebtedness or the payment of any insurance proceeds, Owner shall hold such instruments and other remittances in trust for Lender apart from its other property, endorse the instruments and other remittances to Lender, and immediately provide Lender with possession of the instruments and other remittances. Lender shall be entitled, but not required, to collect (by legal proceedings or otherwise), extend the time for payment, compromise, exchange or release any obligor or collateral upon, or otherwise settle any of the Indebtedness whether or not an event of default exists under this Agreement. Lender shall not be liable to Owner for any action, error, mistake, omission or delay pertaining to the actions described in this paragraph or any damages resulting therefrom. 11. POWER OF ATTORNEY. Owner hereby appoints Lender as its attorney-in-fact to endorse Owner's name on all instruments and other remittances payable to Owner with respect to the Indebtedness or other documents pertaining to Lender's actions in connection with the Indebtedness. In addition, Lender shall be entitled, but not required, to perform any action or execute any document required to be taken or executed by Owner under this Agreement. Lender's performance of such action or execution of such documents shall not relieve Owner from any obligation or cure any default under this Agreement. The powers of attorney described in this paragraph are coupled with an interest and are irrevocable. 12. USE AND MAINTENANCE OF COLLATERAL. Owner shall use the Collateral solely in the ordinary course of its business, for the usual purposes intended by the manufacturer (if applicable), with due care, and in compliance with the laws, ordinances, regulations, requirements and rules of all federal, state, county and municipal authorities including environmental laws and regulations and insurance policies. Owner shall not make any alterations, additions or improvements to the Collateral without the prior written consent of Lender. Without limiting the foregoing, all alterations, additions and improvements made to the Collateral shall be subject to the security interest belonging to Lender, shall not be removed without the prior written consent of Lender, and shall be made at Owner's sole expense. Owner shall take all actions and make any repairs or replacements needed to maintain the Collateral in good condition and working order. Page 2 of 5 ______________ 13. LOSS OR DAMAGE. Owner shall bear the entire risk of any loss, theft, destruction or damage (cumulatively "Loss or Damage") to all or any part of the Collateral. In the event of any Loss or Damage, Owner will either restore the Collateral to its previous condition, replace the Collateral with similar property acceptable to Lender in its sole discretion, or pay or cause to be paid to Lender the decrease in the fair market value of the affected Collateral. 14. INSURANCE. The Collateral will be kept insured for its full value against all hazards including loss or damage caused by fire, collision, theft or other casualty. If the Collateral consists of a motor vehicle, Owner will obtain comprehensive and collision coverage in amounts at least equal to the actual cash value of the vehicle with deductibles not to exceed $______n/a_____. Insurance coverage obtained by Owner shall be from a licensed insurer subject to Lender's approval. Owner shall assign to Lender all rights to receive proceeds of insurance not exceeding the amount owed under the obligations described above, and direct the Insurer to pay all proceeds directly to Lender. The insurance policies shall require the insurance company to provide Lender with at least thirty (30) days' written notice before such policies are altered or cancelled in any manner. The insurance policies shall name Lender as a loss payee and provide that no act or omission of Owner or any other person shall affect the right of Lender to be paid the insurance proceeds pertaining to the loss or damage of the Collateral. In the event Owner fails to acquire or maintain insurance, Lender (after providing notice as may be required by law) may in its discretion procure appropriate insurance coverage upon the Collateral and charge the insurance cost as an advance of principal under the promissory note. Owner shall furnish Lender with evidence of insurance indicating the required coverage. Lender may act as attorney-in-fact for Owner in making and settling claims under insurance policies, cancelling any policy or endorsing Owner's name on any draft or negotiable instrument drawn by any insurer. 15. INDEMNIFICATION. Lender shall not assume or be responsible for the performance of any of Owner's obligations with respect to the Collateral under any circumstances. Owner shall immediately provide Lender with written notice of and indemnify and hold Lender and its shareholders, directors, officers, employees and agents harmless from all claims, damages, liabilities (including attorneys' fees and legal expenses), causes of action, actions, suits and other legal proceedings (cumulatively "Claims") pertaining to its business operations or the Collateral including, but not limited to, those arising from Lender's performance of Owner's obligations with respect to the Collateral. Owner, upon the request of Lender, shall hire legal counsel to defend Lender from such Claims, and pay the attorneys' fees, legal expenses and other costs to the extent permitted by applicable law, incurred in connection therewith. In the alternative, Lender shall be entitled to employ its own legal counsel to defend such Claims at Owner's cost. 16. TAXES AND ASSESSMENTS. Owner shall execute and file all tax returns and pay all taxes, licenses, fees and assessments relating to its business operations and the Collateral (including, but not limited to, income taxes, personal property taxes, withholding taxes, sales taxes, use taxes, excise taxes and workers' compensation premiums) in a timely manner. 17. INSPECTION OF COLLATERAL AND BOOKS AND RECORDS. Owner shall allow Lender or its agents to examine, inspect and make abstracts and copies of the Collateral and Owner's books and records pertaining to Owner's business operations and financial condition or the Collateral during normal business hours. Owner shall provide any assistance required by Lender for these purposes. All of the signatures and information pertaining to the Collateral or contained in the books and records shall be genuine, true, accurate and complete in all respects. 18. DEFAULT. Owner shall be in default under this Agreement in the event that Owner, Borrower or any guarantor: (a) fails to make any payment under this Agreement or any other indebtedness to Lender when due; (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Agreement or any other present or future written agreement regarding this or any other indebtedness to Lender; (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows the Collateral to be destroyed, lost or stolen, damaged in any material respect, or subjected to seizure or confiscation; (e) seeks to revoke, terminate or otherwise limit its liability under any continuing guaranty; (f) permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against Owner, any guarantor, or any of their property; (g) dies, becomes legally incompetent, is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, or becomes the subject of any bankruptcy, insolvency or debtor rehabilitation proceeding; (h) allows the Collateral to be used by anyone to transport or store goods, the possession, transportation, or use of which, is illegal; or (i) causes Lender in good faith to deem itself insecure for any reason. 19. RIGHTS OF LENDER ON DEFAULT. If there is a default under this Agreement, Lender shall be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to declare the Obligations immediately due and payable in full; (b) to collect the outstanding Obligations with or without resorting to judicial process; (c) to retain any instruments or other remittances constituting the Collateral; (d) to take possession of any Collateral in any manner permitted by law; (e) to apply for and obtain, without notice and upon ex parte application, the appointment of a receiver for the Collateral without regard to Owner's financial condition or solvency, the adequacy of the Collateral to secure the payment or performance of the obligations, or the existence of any waste to the Collateral; (f) to require Owner to deliver and make available to Lender any Collateral at a place reasonably convenient to Owner and Lender; (g) to sell, lease or otherwise dispose of any Collateral and collect any deficiency balance with or without resorting to legal process; (h) to set-off Owner's obligations against any amounts due to Owner including, but not limited to, monies, instruments, and deposit accounts maintained with Lender; and (i) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender's rights are cumulative and may be exercised together, separately, and in any order. If notice to Owner of intended disposition of Collateral is required by law, Lender will provide reasonable notification of the time and place of any sale or intended disposition as required under the Uniform Commercial Code. In the event that Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of a prejudgment remedy in an action against Owner, Owner waives the posting of any bond which might otherwise be required. Lender's remedies under this paragraph are in addition to those available at common law, such as setoff. 20. APPLICATION OF PAYMENTS. Whether or not a default has occurred under this Agreement, all payments made by or on behalf of Owner and all credits due to Owner from the disposition of the Collateral or otherwise may be applied against the amounts paid by Lender (including attorneys' fees and legal expenses) in connection with the exercise of its rights or remedies described in this Agreement and any interest thereon and then to the payment of the remaining Obligations. 21. REIMBURSEMENT OF AMOUNTS EXPENDED BY LENDER. Owner shall reimburse Lender for all amounts (including attorneys' fees and legal expenses) expended by Lender in the performance of any action required to be taken by Owner or the exercise of any right or remedy belonging to Lender under this Agreement, together with interest thereon at the lower of the highest rate described in any promissory note or credit agreement executed by Borrower or Owner or the highest rate allowed by law from the date of payment until the date of reimbursement. These sums shall be included in the definition of Obligations, shall be secured by the Collateral identified in this Agreement and shall be payable upon demand. 22. ASSIGNMENT. Owner shall not be entitled to assign any of its rights, remedies or obligations described in this Agreement without the prior written consent of Lender. Consent may be withheld by Lender in its sole discretion. Lender shall be entitled to assign some or all of its rights and remedies described in this Agreement without notice to or the prior consent of Owner in any manner. 23. MODIFICATION AND WAIVER. The modification or waiver of any of Owner's Obligations or Lender's rights under this Agreement must be contained in a writing signed by Lender. Lender may perform any of Owner's Obligations or delay or fail to exercise any of its rights without causing a waiver of those Obligations or rights. A waiver on one occasion shall not constitute a waiver on any other occasion. Owner's Obligations under this Agreement shall not be affected if Lender amends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any Owner or third party or any of its rights against any Owner, third party or collateral. 24. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Owner and Lender and their respective successors, assigns, trustees, receivers, administrators, personal representatives, legatees, and devisees. 25. NOTICES. Any notice or other communication to be provided under this Agreement shall be in writing and sent to the parties at the addresses described in this Agreement or such other address as the parties may designate in writing from time to time. 26. SEVERABILITY. If any provision of this Agreement violates the law or is unenforceable, the rest of the Agreement shall remain valid. Page 3 of 5 ______________ 27. APPLICABLE LAW. This Agreement shall be governed by the laws of the state indicated in Lender's address. Owner consents to the jurisdiction and venue of any court located in the state indicated in Lender's address in the event of any legal proceeding pertaining to the negotiation, execution, performance or enforcement of any term or condition contained in this Agreement or any related document and agrees not to commence or seek to remove such legal proceeding in or to a different court. 28. COLLECTION COSTS. If Lender hires an attorney to assist in collecting any amount due or enforcing any right or remedy under this Agreement, Owner agrees to pay Lender's attorney's fees and collection costs. 29. MISCELLANEOUS. This Agreement is executed for commercial purposes. Owner shall supply information regarding Owner's business operations and financial condition or the Collateral in the form and manner as requested by Lender from time to time. All information furnished by Owner to Lender shall be true, accurate and complete in all respects. Owner and Lender agree that time is of the essence. Owner waives presentment, demand for payment, notice of dishonor and protest except as required by law. All references to Owner in this Agreement shall include all parties signing below except Lender. If there is more than one Owner, their obligations shall be joint and several. This Agreement shall remain in full force and effect until Lender provides Owner with written notice of termination. This Agreement and any related documents represent the complete and integrated understanding between Owner and Lender pertaining to the terms and conditions of those documents. 30. WAIVER OF JURY TRIAL LENDER AND OWNER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH THE PROMISSORY NOTE, THIS AGREEMENT AND ANY OTHER AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH OR THEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER MAKING THE LOAN EVIDENCED BY THE PROMISSORY NOTE. 31. ADDITIONAL TERMS: Owner acknowledges that Owner has read, understands, and agrees to the terms and conditions of this Agreement. Dated: NOVEMBER 25, 1996 OWNER: NORTECH SYSTEMS INCORPORATED OWNER: - ------------------------------------- ------------------------------------ GARRY M. ANDERLY VICE PRESIDENT OWNER: OWNER: - ------------------------------------- ------------------------------------ OWNER: OWNER: - ------------------------------------- ------------------------------------ OWNER: OWNER: - ------------------------------------- ------------------------------------ Page 4 of 5 SCHEDULE A SCHEDULE B The name of the record owner is: ____________________________________________ SCHEDULE C SCHEDULE D Page 5 of 5 DISCRETIONARY COMMITMENT LETTER (COMMERCIAL CREDIT) NORTECH SYSTEMS INCORPORATED MAY 10, 1996 4050 NORRIS COURT BEMIDJI, MN 56601 Dear GARRY ANDERLY NORTHERN NATIONAL BANK is pleased to grant you a discretionary line of credit on the following terms and conditions: 1. AMOUNT OF CREDIT. We may make loans to you from time to time during the period from the date of this letter to and including FEBRUARY 10, 1997, in an aggregate amount not to exceed at any time outstanding $500,000.00. Each loan will be in the sole discretion of our officers, and nothing herein should be interpreted as being a promise to make any one or more loans. If this /X/ is checked, we anticipate that you will be allowed to prepay and reborrow so long as no borrowing causes that dollar limit to be exceeded. 2. THE NOTE. Your obligation to repay all loans made by us under this letter will be evidenced as follows (check one): /X/ By your single promissory note in the above amount, dated the same date as this letter (the "Note"). / / By a separate note for each loan, in each case in the amount and dated as of the date of the loan (all references in this letter to the "Note" are to be understood as applying to any notes issued pursuant hereto). 3. INTEREST; MATURITY DATE. The Note shall bear interest (computed on the basis of actual days elapsed and a 360 day year) on the principal balance outstanding from time to time, from the date of the initial advance until the Note is paid in full at the following rate: / / an annual rate of __________%; /X/ an annual rate equal to 0.00% over the Base Rate (the term "Base Rate" means the rate of interest established from time to time by THE NORTHERN NATIONAL BANK as its "base" or "prime" rate); / / an annual rate equal to _______% in excess of the Discount Rate (the term "Discount Rate" means the discount rate on 90-day commercial paper in effect from time to time at the Federal Reserve Bank of Minneapolis) (including, if permitted by P.L. 96-221, Section 511, any surcharge thereon); / / other: ___________________________________________________________________ __________________________________________________________________________ If the Note evidences a variable rate loan, the following provisions shall also apply: a. If the $100,000 exemption to the usury law does not apply and the borrower is not a corporation, the annual rate of interest on the the Note shall never exceed / / ________% / / a rate that is ___________% in excess of the Discount Rate. b. The Note shall bear the same rate of interest after it becomes due as was in effect on its due date unless the $100,000 exemption from the usury law applies. c. The rate of interest shall initially be determined as of the date hereof and shall thereafter be adjusted: /X/ daily on the same day the Index Rate changes; / / daily on the day following the day the Index Rate changes; / / monthly, the rate for any given month depending on the Index Rate for the last day of the immediately preceding month; / / monthly, on the ________ day of each calendar month with the rate being determined based on the Index Rate in effect on the day of change; or, / / as follows: _____________________________________________ _________________________________________________________________________ The term "Index Rate" means the Base Rate, the Discount Rate or the rate described in the "other" paragraph, as applicable. The amount of interest earned each month will be payable / / at maturity, /X/ on or before the 10TH day of the next month, and on demand. In addition, any earned and unpaid interest will be payable on the due date of the Note. The unpaid balance of the Note shall be due and payable in full (check one): / / on demand, and in any event on _________, if demand has not been made by that day; / / on ____________; /X/ on the date stated in the Note, not later than FEBRUARY 10, 1997. The Note will also specify events of default and the rights and remedies available to us upon the occurrence of an event of default. The Note must be properly executed by you and be in form and substance acceptable to us. 4. SECURITY. The Note will be / / unsecured /X/ secured by: A. /X/ UCC security agreement granting a security interest in the following property: (a) /X/ Inventory; (b) /X/ Equipment; (c) /X/ Accounts; (d) /X/ General intangibles; (e) / / Motor vehicles (other than equipment) described as follows: ___________________________________________________________ ____________________________________________________________ and all substitutions and replacements for, and all accessions, accessories, attachments, parts, equipment and repairs now or hereafter attached to such motor vehicles; (f) / / ____________________________________________________________ (specify) This property will be more fully described in the UCC security agreement. The security interest shall extend to property of the type described, whether now owned or hereafter acquired. B. / / A real estate mortgage granting a lien on the following real estate:______________________________________________________ _____________________________________________________________ and on all property now or hereafter attached or affixed to that real estate. 5. DROP IN DISCOUNT RATE. If this letter provides that your obligations will bear interest at a fixed rate or at a variable rate subject to a fixed interest rate ceiling and if the Federal Reserve discount rate falls after the date of this letter, so that the rate or rate ceiling specified is no longer permissible, that rate or rate ceiling that applies to subsequent advances shall be reduced automatically and we will ask you to execute a new Note or Notes to evidence subsequent advances. If the original Note was a fixed rate Note, the new Note shall bear interest at the highest permissible rate. If the original Note bore interest at a variable rate subject to a fixed ceiling, interest on the new Note shall vary with the same index, subject to the highest permissible ceiling. In either event, paragraphs 2 and 3 of this letter shall be deemed to have been amended correspondingly. If the Federal Reserve discount rate falls more than once, additional new Notes shall be issued as necessary. In any event, once an advance has been made and is evidenced by a particular Note, that advance shall continue to bear the rate specified by that Note until it matures. This paragraph applies only if you are an individual or a partnership. Your signature below shall constitute an acknowledgment that you have read this commitment letter, and that you approve of all of the terms of this commitment letter and that you have received a copy hereof. Accepted this 10TH day of MAY, 1996. The proceeds Very truly yours, of the loans made under this letter will be used for NORTHERN NATIONAL BANK business purposes exclusively. By: /s/ Barbara A. Smith NORTECH SYSTEMS INCORPORATED ------------------------------------- - ------------------------------ Title: SENIOR VICE PRESIDENT By: /s/ Garry M. Anderly ------------------------------------ - ------------------------------ Title: VICE PRESIDENT COMMERCIAL CONTINUING GUARANTY (LIMITED) - ------------------------------------------------------------------------------- GUARANTOR BORROWER - ------------------------------------------------------------------------------- MYRON KUNIN NORTECH SYSTEMS INCORPORATED - ------------------------------------------------------------------------------- ADDRESS ADDRESS - ------------------------------------------------------------------------------- 7201 METRO BOULEVARD 4050 NORRIS COURT MINNEAPOLIS, MN 55439 BEMIDJI, MN 56601 - ------------------------------------------------------------------------------- TELEPHONE NO. IDENTIFICATION NO. TELEPHONE NO. IDENTIFICATION NO. - ------------------------------------------------------------------------------- 218-751-0110 - ------------------------------------------------------------------------------- 1. CONSIDERATION. This Guaranty is being executed to induce Lender indicated above to enter into one or more loans or other financial accommodations with or on behalf of Borrower. 2. GUARANTY. Guarantor hereby unconditionally guarantees the prompt and full payment and performance of Borrower's present and future, joint and/or several, direct and indirect, absolute and contingent, express and implied, indebtedness, liabilities, obligations and convenants (cumulatively "Obligations") to Lender as follows: / / LIMITED: Guarantor's Obligations under this Guaranty shall include all present or future written agreements between Borrower and Lender (whether executed for the same or different purposes), but shall be limited to the principal amount of _________________________________________________ ___________________________ Dollars, together with all interest and all of Lender's expenses and costs, incurred in connection with the Obligations, including any amendments, extensions, modifications, renewals, replacements or substitutions thereto. /X/ LIMITED TO THE FOLLOWING DESCRIBED NOTES/AGREEMENTS: Guarantor's Obligations under this Guaranty shall be limited to the following described promissory notes and agreements between Borrower and Lender, together with all interest and all of Lender's expenses and costs, incurred in connection with the Obligations, including any amendments, extensions, modifications, renewals, replacements or substitutions thereto: - ----------------------------------------------------------------------------- INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER - ----------------------------------------------------------------------------- VARIABLE $500,000.00 05/10/96 02/10/97 533717 - ----------------------------------------------------------------------------- / / If checked, this Guaranty is secured by a security interest in the property described in the documents executed in connection with this Guaranty. 3. ABSOLUTE AND CONTINUING NATURE OF GUARANTY. Guarantor's obligations under this Guaranty are absolute and continuing and shall not be affected or impaired if Lender amends, renews, extends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any Borrower, Co-guarantor or third party of any of Lender's rights against any Borrower, Co-guarantor, third party, or collateral. In addition, Guarantor's Obligations under this Guaranty shall not be affected or impaired by the death, incompetency, termination, dissolution, insolvency, business cessation, or other financial deterioration of any Borrower, Guarantor, or third party. 4. DIRECT AND UNCONDITIONAL NATURE OF GUARANTY. Guarantor's Obligations under this Guaranty are direct and unconditional and may be enforced without requiring Lender to exercise, enforce, or exhaust any right or remedy against any Borrower, Co-guarantor, third party, or collateral. 5. WAIVER OF NOTICE. Guarantor hereby waives notice of the acceptance of this Guaranty; notice of present and future extensions of credit and other financial accommodations by Lender to any Borrower; notice of the obtaining or release of any guaranty, assignment or other security for any of the Obligations; notice of presentment for payment, demand, protest, dishonor, default, and nonpayment pertaining to the Obligations and this Guaranty and all other notices and demands pertaining to the Obligations and this Guaranty as permitted by law. 6. WAIVER OF JURY TRIAL. LENDER AND GUARANTOR KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH THE PROMISSORY NOTE, THIS GUARANTY AND ANY OTHER AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER MAKING THE LOAN EVIDENCED BY THE PROMISSORY NOTE. 7. DEFAULT. Guarantor shall be in default under this Guaranty in the event that any Borrower or Guarantor: (a) fails to pay any amount under this Guaranty or any other indebtedness to Lender when due (whether such amount is due by acceleration or otherwise); (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Guaranty or any other present or future written agreement: (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows any collateral for the Obligations or this Guaranty to be destroyed, lost or stolen, or damaged in any material respect; (e) permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against Borrower, Guarantor, or any of their property or the Collateral; (f) dies, becomes legally incompetent, is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, or becomes the subject of any bankruptcy, insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem itself insecure in good faith for any reason. - ------------------------------------------------------------------------------ GUARANTOR ACKNOWLEDGES GUARANTOR HAS READ, UNDERSTANDS, AND AGREES TO THE TERMS AND CONDITIONS IF THIS AGREEMENT INCLUDING THE TERMS AND CONDITIONS ON THE REVERSE SIDE. GUARANTOR HAS EXECUTED THIS AGREEMENT WITH THE INTENT TO BE LEGALLY BOUND. GUARANTOR ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS AGREEMENT. GUARANTOR: MYRON KUNIN GUARANTOR: /s/ Myron Kunin - -------------------------------- ----------------------------------- MYRON KUNIN GUARANTOR: GUARANTOR: - -------------------------------- ----------------------------------- 8. RIGHTS OF LENDER ON DEFAULT. If there is a default under this Guaranty, Lender shall be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to declare Guarantor's Obligations under this Guaranty immediately due and payable in full; (b) to collect the outstanding obligations under this Guaranty with or without resorting to judicial process; (c) to set-off Guarantor's Obligations under this Guaranty against any amounts due to Guarantor including, but not limited to, monies, instruments, and deposit accounts maintained with Lender; and (d) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender rights are cumulative and may be exercised together, separately, and in any order. 9. WAIVER OF DEFENSES. The Guarantor waives all defenses, claims, and discharges of Borrower or any other third party pertaining to the Obligations, except the defense of payment in full. The Guarantor will not assert against the Lender any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statute of frauds, anti-deficiency statute, fraud, incapacity, illegality or unenforceability which may be available to Borrower or any third party, whether or not on account of a related transaction. The Guarantor agrees that the Guarantor shall be liable for any deficiency remaining after foreclosure of any mortgage or security interest securing the Obligations, whether or not the liability of Borrower or any other third party for the deficiency is discharged by statute or judicial decision. 10. SUBORDINATION. The payment of any present or future indebtedness of Borrower to Guarantor will be postponed and subordinated to the payment in full of any present or future indebtedness of Borrower to Lender during the term of this Agreement. In the event that Guarantor receives any monies, instruments, or other remittances to be applied against Borrower's obligations to Guarantor. Guarantor will hold these funds in trust for Lender and immediately endorse or assign (if necessary) and deliver these monies, instruments and other remittances to Lender. Guarantor agrees that Lender shall be preferred to Guarantor in any assignment for the benefit of Borrower's creditors in any bankruptcy, insolvency, liquidation, or reorganization proceeding commenced by or against Borrower in any federal or state court. 11. INDEPENDENT INVESTIGATION. Guarantor's execution and delivery to Lender of this Guaranty is based solely upon Guarantor's Independent Investigation of Borrower's financial condition and not upon any written or oral representation of Lender in any manner. Guarantor assumes full responsibility for obtaining any additional information regarding Borrower's financial condition and Lender shall not be required to furnish Guarantor with any information of any kind regarding Borrower's financial condition. 12. ACCEPTANCE OF RISKS. Guarantor acknowledges the absolute and continuing nature of this Guaranty and voluntarily accepts the full range of risks associated herewith including, but not limited to, the risk that Borrower's financial condition shall deteriorate or the risk that Borrower shall incur additional Obligations to Lender in the future. 13. SUBROGATION. The Guarantor hereby irrevocably waives and releases the Borrower from all "claims" (as defined in Section 101(5) of the Bankruptcy Code) to which the Guarantor is or would, at any time, be entitled by virtue of its obligations under this Guaranty, including, without limitation, any right of subrogation (whether contractual, under Section 509 of the Bankruptcy Code, or otherwise), reimbursement, contribution, exoneration or similar right against the Borrower. 14. APPLICATION OF PAYMENTS. Lender will be entitled to apply any payments or other monies received from Borrower, any third party, or any collateral against Borrower's present and future obligations to Lender in any order. 15. TERMINATION. This Guaranty shall remain in full force and effect until Lender executes and delivers to Guarantor a written release thereof. Notwithstanding the foregoing, Guarantor shall be entitled to terminate any guaranty as to Borrower's future Obligations to Lender following any anniversary of this Guaranty by providing Lender with ten (10) or more days' written notice of such termination by hand-delivery or certified mail. Notice shall be deemed given when received by Lender. Such notice of termination shall not affect or impair any of the agreements and obligations of the Guarantor under this Agreement with respect to any of the obligations existing prior to the time of actual receipt of such notice by Lender, any extensions or renewals thereof, and any interest on any of the foregoing. 16. ASSIGNMENT. Guarantor shall not be entitled to assign any of its rights or obligations described in this Guaranty without Lenders' prior written consent which may be withheld by Lender in its sole discretion. Lender shall be entitled to assign some or all of its rights and remedies described in this Guaranty without notice to or the prior consent of Guarantor in any manner. Unless the Lender shall otherwise consent in writing, the Lender has not assigned. 17. MODIFICATION AND WAIVER. The modification or waiver of any of Guarantor's obligations or Lender's rights under this Guaranty must be contained in a writing signed by Lender. Lender may delay in exercising or fail to exercise any of its rights without causing a waiver of those rights. A waiver on one occasion shall not constitute a waiver on any other occasion. 18. SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon and inure to the benefit of Guarantor and lender and their respective successors, assigns, trustees, receivers, administrators, personal representatives, legatees, and devisees. 19. NOTICE. Any notice or other communication to be provided under this Guaranty shall be in writing and sent to the parties at the addresses described in this Guaranty or such other addresses as the parties may designate in writing from time to time. 20. SEVERABILITY. If any provision of this Guaranty violates the law or is unenforceable, the rest of the Guaranty shall remain valid. 21. APPLICABLE LAW. This Guaranty shall be governed by the laws of the state indicated in Lender's address. Guarantor consents to the and venue of any court located in such state in the event of any legal proceeding under this Guaranty. 22. COLLECTION COSTS. If Lender hires and attorney to assist in collecting any amount due or enforcing any right or remedy under this Guaranty, Guarantor agrees to pay Lender's attorneys' fees, legal expenses and other costs as permitted by law. 23. REPRESENTATIONS OF GUARANTOR. Guarantor acknowledges receipt of reasonably equivalent value in consideration for the execution of this Guaranty and represents that, after giving effect to this Guaranty, the fair market value of Guarantor's assets exceeds Guarantor's total liabilities, including contingent, subordinate and unliquidated liabilities, that Guarantor has sufficient cash flow to meet debts as they mature, and the Guarantor does not have unreasonably small capital. 24. MISCELLANEOUS. This Guaranty is executed in connection with a commercial loan. Guarantor will provide Lender with a current financial statement upon request. All references to Guarantor in this Guaranty shall include all entities or persons signing this Guaranty. If there is more than one Guarantor, their obligations shall be joint and several. This Guaranty and any related documents represent the complete and integrated understanding between Guarantor and Lender pertaining to the terms and conditions of those documents. 25. ADDITIONAL TERMS. EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 COMMERCIAL/AGRICULTURAL REVOLVING NOTE-VARIABLE RATE "LENDER": "BORROWER": NORTHERN NATIONAL BANK Nortech Systems Incorporated and 201 Third Street Nortech Medical Services, Inc. Bemidji, MN 56601-0790 641 East Lake Street, Suite 234 (218) 751-1530 Wayzata, MN 55391 OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN INITIALS RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER - -------------------------------------------------------------------------------- BAS VARIABLE $3,000,000.00 12/31/96 6/30/98 533551 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, the undersigned Borrower (whether one or more persons or entities, and if more than one, then jointly and severally) promises to pay to the order of Lender indicated above, the principal amount of Three Million and No/100ths Dollars ($3,000,000.00) or, if less, the aggregate unpaid principal amount of all loans or advances made by the Lender to the Borrower, plus interest on the unpaid principal balance at the rate and in the manner described below. All amounts received by Lender shall be applied first to late payment charges and expenses, then to accrued interest, and then to principal or in any other order as determined by Lender, in Lender's sole discretion, as permitted by law. LOAN AGREEMENT; INTEREST RATE: This Note evidences a loan or loans made under, and is subject to acceleration as provided in, and the other terms and conditions of, that certain Commercial Loan Agreement dated as of December 29, 1995, as amended by an Amendment to Loan Agreement dated as of November 4, 1996, and by a Second Amendment to Loan Agreement dated as of December 31, 1996, by and among Nortech Systems Incorporated, Nortech Medical Services, Inc. and Northern National Bank (as the same may be amended, restated, modified or supplemented from time to time, the "Loan Agreement"). Interest on the principal amount hereunder remaining unpaid from time to time shall be calculated at the rates set forth in Loan Agreement. PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the following schedule: Interest only payments beginning February 1, 1997, and continuing at monthly time intervals thereafter. A final payment of the unpaid principal balance plus accrued interest is due and payable on June 30, 1998. All payments will be made to First Bank National Association, a national banking association, as provided in the Loan Agreement, in lawful currency of the United States of America. RENEWAL: This Note is a renewal of loan number 533551 and is not in payment of that Note. SECURITY: To secure the payment and performance of obligations incurred under this Note, Borrower grants Lender a security interest in, and pledges and assigns to Lender all of Borrower's rights, title and interest, in all monies, instruments, savings, checking and other deposit accounts of Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to tax penalties if so assigned) that are now or in the future in Lender's custody or control. Upon default, and to the extent permitted by applicable law, Lender may exercise any or all of its rights or remedies as a secured party with respect to such property which rights and remedies shall be in addition to all other rights and remedies granted to Lender including, without limitation, Lender's common law right of setoff. The obligations under this Note are also secured by a lien and/or security interest in the property described in the documents executed in connection with this Note as well as any other property designated as security now or in the future. PREPAYMENT: This Note may be prepaid in part or in full on or before its maturity date. If this Note contains more than one installment, all prepayments will be credited as determined by Lender and as permitted by law. If this Note is prepaid in full, there will be no prepayment penalty. LATE PAYMENT CHARGE: If a payment is received more than ten (10) days late, Borrower will be charged a late payment charge of 5.00% of the unpaid late installment. REVOLVING FEATURE: This Note possesses a revolving feature. Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled to borrow up to the full principal amount of the Note and to repay and re-borrow from time to time during the term of this Note. Lender shall maintain a record of the amounts loaned to and repaid by Borrower under this Note. The aggregate unpaid principal amount shown on such record shall be rebuttable presumptive evidence of the principal amount owing and unpaid on this Note. The Lender's failure to record the date and amount of any loan or advance shall not limit or otherwise affect the obligations of the Borrower under this Note to repay the principal amount of the loans or advances together with all interest accruing thereon. Lender shall not be obligated to provide Borrower with a copy of the record on a periodic basis. Borrower shall be entitled to inspect or obtain a copy of the record during Lender's business hours. CONDITIONS FOR ADVANCES: If there is no default under this Note, Borrower shall be entitled to borrow monies or make draws under this Note (subject to the limitations described above) under the conditions described herein and in the Loan Agreement. 2 GENERAL TERMS AND CONDITIONS: This Note is subject to the following general terms and conditions: GENERAL TERMS AND CONDITIONS 1. DEFAULT: Borrower will be in default under this Note in the event that Borrower or any guarantor or any other third party: (a) fails to make any payment on this Note or any other indebtedness to Lender when due; (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Note or any other present or future written agreement regarding this or any indebtedness of Borrower to Lender; (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows the collateral securing this Note (if any) to be lost, stolen, destroyed, damaged in any material respect, or subjected to seizure or confiscation; (e) permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against Borrower, any guarantor, of any of their property or the Collateral; (f) dies, becomes legally incompetent, is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, fails to pay debts as they become due, or becomes the subject of any bankruptcy, insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem itself insecure for any reason, or Lender, for any reason, in good faith deems itself insecure. 2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender will be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to cease making additional advances under this Note; (b) to declare the principal amount plus accrued interest under this Note and all other present and future obligations of Borrower immediately due and payable in full; (c) to collect the outstanding obligations of Borrower with or without resorting to judicial process; (d) to take possession of any collateral in any manner permitted by law; (e) to require Borrower to deliver and make available to Lender any collateral at a place reasonably convenient to Borrower and Lender; (f) to sell, lease or otherwise dispose of any collateral and collect any deficiency balance with or without resorting to legal process; (g) to set-off Borrower's obligations against any amounts due to Borrower including, but not limited to, monies, instruments, and deposit accounts maintained with Lender; and (h) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender's rights are cumulative and may be exercised together, separately, and in any order. Lender's remedies under this paragraph are in addition to those available at common law, including, but not limited to, the right of set-off. 3. FINANCIAL INFORMATION: Borrower will provide Lender with current financial statements and other financial information (including, but not limited to, balance sheets and profit and loss statements) upon request. 3 4. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's obligations or Lender's rights under this Note must be contained in a writing signed by Lender. Lender may perform any of Borrower's obligations or delay or fail to exercise any of its rights without causing a waiver of those obligations or rights. A waiver on one occasion will not constitute a waiver on any other occasion. Borrower's obligations under this Note shall not be affected if Lender amends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any co-borrower or guarantor or any of its rights against any co-borrower, guarantor or collateral. 5. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Notwithstanding anything contained in this Note to the contrary, in no event shall interest accrue under this Note, before or after maturity, at a rate in excess of the highest rate permitted by applicable law, and if interest (including any charge or fee held to be interest by a court of competent jurisdiction) in excess thereof be paid, any excess shall constitute a payment of, and be applied to, the principal balance hereof, and if the principal balance has been fully paid, then such interest shall be repaid to Borrower. 6. ASSIGNMENT: Borrower will not be entitled to assign any of its rights, remedies or obligations described in this Note without the prior written consent of Lender which may be withheld by Lender in its sole discretion. Lender will be entitled to assign some or all of its rights and remedies described in this Note without notice to or the prior consent of Borrower in any manner. 7. NOTICE: Any notice or other communication to be provided to Borrower or Lender under this Note shall be in writing and sent to the parties at the addresses described in this Note or such other address as the parties may designate in writing from time to time. 8. APPLICABLE LAW: This Note shall be governed by the laws of the state indicated in Lender's address. Borrower consents to the jurisdiction and venue of any court located in the state indicated in Lender's address in the event of the any legal proceeding pertaining to the negotiation, execution, performance or enforcement of any term or condition contained in this Note or any related loan document and agrees not to commence or seek to remove such legal proceeding in or to a different court. 4 9. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any amount due or enforcing any right or remedy under this Note, Borrower agrees to pay Lender's attorney's fees, to the extent permitted by applicable law, and collection costs. 10. RETURNED CHECK: If a check for payment is returned to Lender for any reason, Lender will charge an additional fee of $15.00. 11. MISCELLANEOUS: This Note is being executed for commercial/agricultural purposes. Borrower and Lender agree that time is of the essence. Borrower waives presentment, demand for payment, notice of dishonor and protest. If Lender obtains a judgment for any amount due under this Note, interest will accrue on the judgment at the judgment rate of interest permitted by law. All references to Borrower in this Note shall include all of the parties signing this Note. If there is more than one Borrower, their obligations will be joint and several. This Note and any related documents represent the complete and integrated understanding between Borrower and Lender pertaining to the terms and conditions of those documents. 12. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON THIS NOTE OR THE COLLATERAL SECURING THIS NOTE. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE TERMS AND CONDITIONS OF THIS NOTE, INCLUDING THE GENERAL TERMS AND CONDITIONS SET FORTH ABOVE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE. Note Date: December 31,1996 BORROWER: BORROWER: NORTECH SYSTEMS INCORPORATED NORTECH MEDICAL SERVICES, INC By: /s/ Garry M. Anderly By: /s/ Garry M. Anderly -------------------- -------------------- Garry M. Anderly Garry M. Anderly Its: Vice President Its: Vice President 5 EX-10.5 6 EXHIBIT 10.5 EXHIBIT 10.5 BORROWER [LOGO] NORTHERN NORTECH SYSTEMS INCORPORATED COMMERCIAL/ NATIONAL BANK AGRICULTURAL 201 3RD STREET REVOLVING OR DRAW BEMIDJI, MN 56601-0790 ADDRESS NOTE-VARIABLE RATE TELEPHONE 218-751-1530 4050 NORRIS COURT "LENDER" BEMIDJI, MN 56601 TELEPHONE NO. IDENTIFICATION NO. 218-751-0110 OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN INITIALS RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER - -------------------------------------------------------------------------------- BAS VARIABLE $500,000.00 05/10/96 02/10/97 533717 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, Borrower promises to pay to the order of Lender indicated above the principal amount of FIVE HUNDRED THOUSAND AND NO/100 Dollars ($500,000.00) or, if less, the aggregate unpaid principal amount of all loans or advances made by the Lender to the Borrower, plus interest on the unpaid principal balance at the rate and in the manner described below. All amounts received by Lender shall be applied first to late payment charges and expenses, then to accrued interest, and then to principal or in any other order as determined by Lender, in Lender's sole discretion, as permitted by law. INTEREST RATE: This Note has a variable rate feature. Interest on the Note may change from time to time if the Index Rate identified below changes. Interest shall be computed on the basis of 360 days per year. Interest on this Note shall be calculated at a variable rate equal to NO/1000 percent (0.000%) per annum over the Index Rate. The Initial Index Rate is currently EIGHT AND 25/100 percent (8.250%) per annum. The Initial Interest rate on this Note shall be EIGHT AND 250/1000 percent (8.250%) per annum. Any change in the interest rate resulting from a change in the Index Rate will be effective on: THE DATE THE INDEX RATE CHANGES INDEX RATE: The Index Rate for this Note shall be: THE NATIONAL PRIME RATE AS PUBLISHED IN THE WALL STREET JOURNAL. MINIMUM RATE/MAXIMUM RATE: The minimum interest rate on this Note shall be FOUR AND NO/1000 percent (4.000%) per annum. The maximum interest rate on this Note shall not exceed NINETEEN AND NO/1000 percent (19.000%) per annum or the maximum interest rate Lender is permitted to charge by law, whichever is less. POST-MATURITY RATE: / / If checked, this loan is for a binding commitment of at least $100,000.00 and after maturity, due to scheduled maturity or acceleration, past due amounts shall bear interest at the lesser of:________ ___________________________________________________, or the maximum interest rate Lender is permitted to charge by law. PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the following schedule: INTEREST ONLY PAYMENTS BEGINNING JUNE 10, 1996 AND CONTINUING AT MONTHLY TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON FEBRUARY 10, 1997. All payments will be made to Lender at its address described above and in lawful currency of the United States of America. RENEWAL: If checked, / / this Note is a renewal of loan number__________, and is not in payment of that Note. SECURITY: To secure the payment and performance of obligations incurred under this Note, Borrower grants Lender a security interest in, and pledges and assigns to Lender all of Borrower's rights, title, and interest, in all monies, instruments, savings, checking and other deposit accounts of Borrower's, (excluding IRA, Keogh and trust accounts and deposits subject to tax penalties if so assigned) that are now or in the future in Lender's custody or control. Upon default, and to the extent permitted by applicable law, Lender may exercise any or all of its rights or remedies as a secured party with respect to such property which rights and remedies shall be in addition to all other rights and remedies granted to Lender including, without limitation, Lender's common law right of setoff. /X/ If checked, the obligations under this Note are also secured by a lien and/or security interest in the property described in the documents executed in connection with this Note as well as any other property designated as security now or in the future. PREPAYMENT: This Note may be prepaid in part or in full on or before its maturity date. If this Note contains more than one installment, all prepayments will be credited as determined by Lender and as permitted by law. If this Note is prepaid in full, there will be: /X/ No prepayment penalty. / / A prepayment penalty of _______% of the principal prepaid. LATE PAYMENT CHARGE: If a payment is received more than 10 days late, Borrower will be charged a late payment charge of 5.00% of the unpaid late installment. REVOLVING OR DRAW FEATURE: /X/ This Note possesses a revolving feature. Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled to borrow up to the full principal amount of the Note and to repay and reborrow from time to time during the term of this Note. This Note possesses a draw feature. Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled to make one or more draws under this Note. The aggregate amount of such draws shall not exceed the full principal amount of this Note. Lender shall maintain a record of the amounts loaned to and repaid by Borrower under this Note. The aggregate unpaid principal amount shown on such record shall be rebuttable presumptive evidence of the principal amount owing and unpaid on this Note. The Lender's failure to record the date and amount of any loan or advance shall not limit or otherwise affect the obligations of the Borrower under this Note to repay the principal amount of the loans or advances together with all interest accruing thereon. Lender shall not be obligated to provide Borrower with a copy of the record on a periodic basis. Borrower shall be entitled to inspect or obtain a copy of the record during Lender's business hours. CONDITIONS FOR ADVANCES: If there is no default under this Note, Borrower shall be entitled to borrow monies or make draws under this Note (subject to the limitations described above) under the following conditions: - -------------------------------------------------------------------------------- BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE. BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE. NOTE DATE: MAY 10, 1996 BORROWER: NORTECH SYSTEMS INCORPORATED BORROWER: /s/ Garry M. Anderly - -------------------------------------- ------------------------------------- GARRY M. ANDERLY VICE PRESIDENT BORROWER: BORROWER: - -------------------------------------- ------------------------------------- BORROWER: BORROWER: - -------------------------------------- ------------------------------------- BORROWER: BORROWER: - -------------------------------------- ------------------------------------- TERMS AND CONDITIONS 1. DEFAULT: Borrower will be in default under this Note in the event that Borrower or any guarantor or any other third party: (a) fails to make any payment on this Note or any other indebtedness to Lender when due; (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Note or any other present or future written agreement regarding this or any indebtedness of Borrower to Lender; (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows the collateral securing this Note (if any) to be lost, stolen, destroyed, damaged in any material respect, or subjected to seizure or confiscation; (e) permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against Borrower, any guarantor, or any of their property or the Collateral; (f) dies, becomes legally incompetent, is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, fails to pay debts as they become due, or becomes the subject of any bankruptcy, insolvency or debtor rehabilitation proceeding; or (g) causes Lender to deem itself insecure for any reason, or Lender, for any reason, in good faith deems itself insecure. 2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender will be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to cease making additional advances under this Note; (b) to declare the principal amount plus accrued interest under this Note and all other present and future obligations of Borrower immediately due and payable in full; (c) to collect the outstanding obligations of Borrower with or without resorting to judicial process; (d) to take possession of any collateral in any manner permitted by law; (e) to require Borrower to deliver and make available to Lender any collateral at a place reasonably convenient to Borrower and Lender; (f) to sell, lease or otherwise dispose of any collateral and collect any deficiency balance with or without resorting to legal process; (g) to set-off Borrower's obligations against any amounts due to Borrower including, but not limited to monies, instruments, and deposit accounts maintained with Lender; and (h) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender's rights are cumulative and may be exercised together, separately, and in any order. Lender's remedies under this paragraph are in addition to those available at common law, including, but not limited to, the right of set-off. 3. DEMAND FEATURE: If this Note contains a demand feature, Lender's right to demand payment, at any time, and from time to time, shall be in Lender's sole and absolute discretion, whether or not any default has occurred. 4. FINANCIAL INFORMATION: Borrower will provide Lender with current financial statements and other financial information (including, but not limited to, balance sheets and profit and loss statements) upon request. 5. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's obligations or Lender's rights under this Note must be contained in a writing signed by Lender. Lender may perform any of Borrower's obligations or delay or fail to exercise any of its rights without causing a waiver of those obligations or rights. A waiver on one occasion will not constitute a waiver on any other occasion. Borrower's obligations under this Note shall not be affected if Lender amends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any co-borrower or guarantor or any of its rights against any co-borrower, guarantor or collateral. 6. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Notwithstanding anything contained in this Note to the contrary, in no event shall interest accrue under this Note, before or after maturity, at a rate in excess of the highest rate permitted by applicable law, and if interest (including any charge or fee held to be interest by a court of competent jurisdiction) in excess thereof be paid, any excess shall constitute a payment of, and be applied to, the principal balance hereof, and if the principal balance has been fully paid, then such interest shall be repaid to the Borrower. 7. ASSIGNMENT: Borrower will not be entitled to assign any of its rights, remedies or obligations described in this Note without the prior written consent of Lender which may be withheld by Lender in its sole discretion. Lender will be entitled to assign some or all of its rights and remedies described in this Note without notice to or the prior consent of Borrower in any manner. 8. NOTICE: Any notice or other communication to be provided to Borrower or Lender under this Note shall be in writing and sent to the parties at the addresses described in this Note or such other address as the parties may designate in writing from time to time. 9. APPLICABLE LAW: This Note shall be governed by the laws of the state indicated in Lender's address. Borrower consents to the jurisdiction and venue of any court located in the state indicated in Lender's address in the event of any legal proceeding pertaining to the negotiation, execution, performance or enforcement of any term or condition contained in this Note or any related loan document and agrees not to commence or seek to remove such legal proceeding in or to a different court. 10. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any amount due or enforcing any right or remedy under this Note, Borrower agrees to pay Lender's attorney's fees, to the extent permitted by applicable law, and collection costs. 11. RETURNED CHECK: If a check for payment is returned to Lender for any reason, Lender will charge an additional fee of $15.00. 12. MISCELLANEOUS: This Note is being executed for commercial/agricultural purposes. Borrower and Lender agree that time is of the essence. Borrower waives presentment, demand for payment, notice of dishonor and protest. If Lender obtains a judgment for any amount due under this Note, interest will accrue on the judgment at the judgment rate of interest permitted by law. All references to Borrower in this Note shall include all of the parties signing this Note. If there is more than one Borrower, their obligations will be joint and several. This Note and any related documents represent the complete and integrated understanding between Borrower and Lender pertaining to the terms and conditions of those documents. 13. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY CIVIL ACTION ARISING OUT OF, OR BASED UPON, THIS NOTE OR THE COLLATERAL SECURING THIS NOTE. 14. ADDITIONAL TERMS:
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EX-10.6 7 EXHIBIT 10.6 EXHIBIT 10.6 COMMERCIAL SECURITY AGREEMENT BORROWER OWNER OF COLLATERAL Nortech Systems Incorporated Nortech Systems Incorporated Nortech Medical Services, Inc. ADDRESS ADDRESS 4050 Norris Court 4050 Norris Court Bemidji, MN 56601 Bemidji, MN 56601 TELEPHONE NO. IDENTIFICATION NO. TELEPHONE NO. IDENTIFICATION NO. 1. SECURITY INTEREST. For good and valuable consideration, Owner of Collateral ("Owner") grants to Lender identified above a continuing security interest in the Collateral described below to secure the obligations described in this Agreement. 2. OBLIGATIONS. The Collateral shall secure the payment and performance of all of Borrower's and Owner's present and future, joint and/or several, direct and indirect, absolute and contingent, express and implied, indebtedness, (including costs of collection, legal expenses and attorneys' fees, incurred by Lender upon the occurrence of a default under this Agreement, in collecting or enforcing payment of such indebtedness, or preserving, protecting or realizing on the Collateral herein), liabilities, obligations and covenants (cumulatively "Obligations") to Lender including (without limitation) those arising under or pursuant to: a. this Agreement and the following promissory notes and agreements: INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN RATE CREDIT LIMIT AGREEMENT DATE DATE NUMBER NUMBER Variable 3,000,000 12/31/96 6/30/98 533551 Variable 510,000 12/29/95 1/1/01 533552 Variable 640,000 12/29/95 1/1/01 533553 Variable 500,000 5/10/96 2/10/97 533717 Variable 1,500,000 12/31/96 6/30/98 533910 Variable 1,500,000 12/31/96 6/30/98 533909 Variable 400,000 11/25/96 12/1/98 533932 *schedule continued on page 4 b. all other present or future, Obligations of Borrower or Owner to Lender (whether incurred for the same or different purposes than the foregoing); c. all renewals, extensions, amendments, modifications, replacements or substitutions to any of the foregoing; and d. applicable law. 3. COLLATERAL. The Collateral shall consist of all of the following- described property and Owner's rights, title and interest in such property whether now owned or hereafter acquired by Owner and wherever located: /x/ All accounts, contract rights and rights to payment in money or in kind for goods sold or leased or for services rendered, and all guarantees and security therefor; all returned or repossessed goods arising from or relating to any account, contract right, or right to payment; and any rights of Owner as an unpaid seller of goods or services; including, but not limited to, the accounts and contract rights described on Schedule A attached hereto and incorporated herein by this reference; /x/ All chattel paper, together with all guarantees and security therefor; including, but not limited to, the chattel paper described on Schedule A attached hereto and incorporated herein by this reference; /x/ All documents of title including, but not limited to, the documents described on Schedule A attached hereto and incorporated herein by this reference; /x/ All equipment, machinery, and vehicles including, but not limited to, the equipment described on Schedule A attached hereto and incorporated herein by this reference; / / All fixtures, including, but not limited to, the fixtures located or to be located on the real property described on Schedule B attached hereto and incorporated herein by this reference; /X/ All general intangibles of any kind or nature including, but not limited to, goodwill, literary rights, copyrights, trademarks and patents; all securities, stocks, bonds, partnership interests, and similar devices; any right to performance or payment, including, without limitation, rights to receive dividends, tax refunds, insurance claims and insurance proceeds, pension payments, and other disbursements; things in action; and rights in intangible property of any kind, specifically including, but not limited to, the general intangibles described on Schedule A attached hereto and incorporated herein by this reference; /x/ All instruments including, but not limited to, the instruments described on Schedule A attached hereto and incorporated herein by this reference; /x/ All inventory (goods, merchandise, and other personal property) which are held for sale or lease, or are furnished or to be furnished under any contract of service or are raw materials, work-in-process, supplies, or materials used or consumed in Owner's business, and any right of Owner as an unpaid seller of goods or services, including, but not limited to, the inventory described on Schedule A attached hereto and incorporated herein by this reference; / / All minerals or the like located on or related to the real property described on Schedule B attached hereto and incorporated herein by this reference; / / All standing timber located on the real property described on Schedule B attached hereto and incorporated herein by this reference; / / Other: All monies, instruments, and savings, checking or other deposit accounts that are now or in the future in Lender's custody or control (excluding IRA, Keogh, trust accounts, and deposits subject to tax penalties if so assigned); All accessions, accessories, additions, amendments, attachments, modifications, replacements and substitutions to any of the above; All proceeds and products of any of the above; All policies of insurance pertaining to any of the above as well as any proceeds and unearned premiums pertaining to such policies; and All books and records pertaining to any of the above. 4. OWNER'S TAXPAYER IDENTIFICATION. Owner's social security number or federal taxpayer identification number is:__________________________________. 5. RESIDENCY/LEGAL STATUS. / / Owner is an individual(s) and a resident of the state of: ___________________________________________________________. /x/ Owner is a: Corporation duly organized, validly existing and in good standing under the laws of the state of: Minnesota 6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Owner represents, warrants and covenants to Lender that: (a) Owner is and shall remain the sole owner of the Collateral; (b) Neither Owner nor, to the best of Owner's knowledge, has any other party used, generated, released, discharged, stored, or disposed of any hazardous material, toxic substance, or related material on any of the Collateral. Owner shall not commit or permit such actions to be taken in the future. The term "Hazardous Materials" shall mean any substance, material, or waste which is or becomes regulated by any governmental authority including, but not limited to, (i) petroleum; (ii) asbestos; (iii) polychlorinated biphenyls; (iv) those substances, materials or wastes designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act or listed pursuant to Section 307 of the Clean Water Act or any amendments or replacements to these statutes; (v) those substances, materials or wastes defined as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act or any amendments or replacements to that statute; or (vi) those substances, materials or wastes defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, or any amendments or replacements to that statute; (c) Owner's chief executive office, chief place of business, office where its business records are located, or residence is the address identified above. Owner's other executive offices, places of business, locations of its business records, or domiciles are described on Schedule C attached hereto and incorporated herein by this reference. Owner shall immediately advise Lender in writing of any change in or addition to the foregoing addresses; (d) Owner shall not become a party to any restructuring of its form of business or participate in any consolidation, merger, liquidation or dissolution without providing Lender with thirty (30) or more days' prior written notice of change; (e) Owner shall notify Lender of the nature of any intended change of Owner's name, or the use of any trade name, and the effective date of such change; (f) The Collateral is and shall at all times remain free of all tax and other liens, security interests, encumbrances and claims of any kind except for those belonging to Lender and those described on Schedule D attached hereto and incorporated herein by this reference. Without waiving the event of default as a result thereof, Owner shall take any action and execute any document needed to discharge the foregoing liens, security interests, encumbrances and claims; (g) Owner shall defend the Collateral against all claims and demands of all persons at any time claiming any interest therein; (h) All of the goods, fixtures, minerals or the like, and standing timber constituting the Collateral is and shall be located at Owner's executive offices, places of business, residence and domiciles specifically described in this Agreement; (i) Owner shall provide Lender with possession of all chattel paper and instruments constituting the Collateral unless otherwise agreed by Lender. Owner shall promptly mark all chattel paper, instruments, and documents constituting the Collateral to show that the same are subject to Lender's security interest; (j) All of Owner's accounts or contract rights; chattel paper; documents; general intangibles; instruments; and federal, state, county, and municipal government and other permits and licenses; trusts, liens, contracts, leases, and agreements constituting the Collateral are and shall be valid, genuine and legally enforceable obligations and rights belonging to Owner and not subject to any claim, defense, set-off or counterclaim of any kind; (k) Owner shall not amend, modify, replace, or substitute any account or contract right; chattel paper; document; general intangible; or instrument constituting the Collateral without the prior consent of Lender, which shall not be unreasonably withheld; (l) Owner has the right and is duly authorized to enter into and perform its obligations under this Agreement. Owner's execution and performance of these obligations do not and shall not conflict with the provisions of any statute, regulation, ordinance, rule of law, contract or other agreement which now or hereafter be binding on Owner; (m) No action or proceeding is pending against Owner which might result in any material adverse change in its business operations or financial condition or materially affect the Collateral; (n) Owner has not violated and shall not violate any applicable federal, state, county or municipal statute, regulation or ordinance (including but not limited to those governing Hazardous Materials) which may materially and adversely affect its business operations or financial condition or the Collateral; (o) Owner shall, upon Lender's request, deposit all proceeds of the Collateral into an account or accounts maintained by Owner or Lender at Lender's institution; (p) Owner will, upon receipt, deliver to Lender as additional Collateral all securities distributed on account of the Collateral such as stock dividends and securities resulting from stock splits, reorganizations and recapitalizations; and (q) This Agreement and the obligations described in this Agreement are executed and incurred for business and not consumer purposes. 7. SALE OF COLLATERAL. Owner shall not assign, convey, lease, sell or transfer any of the Collateral to any third party without the prior written consent of Lender except for sales of inventory to buyers in the ordinary course of business. 8. FINANCING STATEMENTS AND OTHER DOCUMENTS. Owner shall take all actions and execute all documents required by Lender to attach, perfect and maintain Lender's security interest in the Collateral and establish and maintain Lender's right to receive the payment of the proceeds of the Collateral including, but not limited to, executing any financing statements, fixture filings, continuation statements, notices of security interest and other documents required by the Uniform Commercial Code and other applicable law. Owner shall pay the costs of filing such documents in all offices wherever filing or recording is deemed by Lender to be necessary or desirable. Lender shall be entitled to perfect its security interest in the Collateral by filing carbon, photographic or other reproductions of the aforementioned documents with any authority required by the Uniform Commercial Code or other applicable law. Lender may execute and file any financing statements, as well as extensions, renewals and amendments of financing statements in such form as Lender may require to perfect and maintain perfection of any security interest granted in this Agreement. Owner appoints Lender as its agent and attorney-in-fact to endorse Owner's name on all instruments and other remittances payable to Owner with respect to the Collateral. This power of attorney is coupled with an interest and is irrevocable. 9. INQUIRIES AND NOTIFICATION TO THIRD PARTIES. Owner hereby authorizes Lender to contact any third party and make any inquiry pertaining to Owner's financial condition or the Collateral. In addition, Lender is authorized to provide oral or written notice of its security interest in the Collateral to any third party. 10. COLLECTION OF INDEBTEDNESS FROM THIRD PARTIES. Lender shall be entitled to notify, and upon request of Lender Owner shall notify any account debtor or other third party (including, but not limited to, insurance companies) to pay any indebtedness or obligation owing to Owner and constituting the Collateral (cumulatively "Indebtedness") to Lender whether or not a default exists under this Agreement. Owner shall diligently collect the indebtedness owing to Owner from its account debtors and other third parties until the giving of such notification. In the event that Owner possesses or receives possession of any instruments or other remittances with respect to the indebtedness following the giving of such notification or if the instruments or other remittances constitute the prepayment of any indebtedness or the payment of any insurance proceeds, Owner shall hold such instruments and other remittances in trust for Lender apart from its other property, endorse the instruments and other remittances to Lender, and immediately provide Lender with possession of the instruments and other remittances. Lender shall be entitled, but not required, to collect (by legal proceedings or otherwise), extend the time for payment, compromise, exchange or release any obligor or collateral upon, or otherwise settle any of the indebtedness whether or not an event of default exists under this Agreement. Lender shall not be liable to Owner for any action, error, mistake, omission or delay pertaining to the actions described in this paragraph or any damages resulting therefrom. 11. POWER OF ATTORNEY. Owner hereby appoints Lender as its attorney-in-fact to endorse Owner's name on all instruments and other remittances payable to Owner with respect to the Indebtedness or other documents pertaining to Lender's actions in connection with the indebtedness. In addition, Lender shall be entitled, but not required, to perform any action or execute any document required to be taken or executed by Owner under this Agreement. Lender's performance of such action or execution of such documents shall not relieve Owner from any obligation or cure any default under this Agreement. The powers of attorney described in this paragraph are coupled with an interest and are irrevocable. 12. USE AND MAINTENANCE OF COLLATERAL. Owner shall use the Collateral solely in the ordinary course of its business, for the usual purposes intended by the manufacturer (if applicable), with due care, and in compliance with the laws, ordinances, regulation requirements and rules of all federal, state, county and municipal authorities including environmental laws and regulations and insurance policies. Owner shall not make any alterations, additions or improvements to the Collateral without the prior written consent of Lender. Without limiting the foregoing, all alterations, additions and improvements made to the Collateral shall be subject to the security interest belonging to Lender, shall not be removed without the prior written consent of Lender, and shall be made at Owner's sole expense. Owner shall take all actions and make any repairs or replacements needed to maintain the Collateral in good condition and working order. Page 2 of 5 ________ 13. LOSS OR DAMAGE. Owner shall bear the entire risk of any loss, theft, destruction or damage (cumulatively "Loss or Damage") to all or any part of the Collateral. In the event of any Loss or Damage, Owner will either restore the Collateral to its previous condition, replace the Collateral with similar property acceptable to Lender in its sole discretion, or pay or cause to be paid to Lender the decrease in the fair market value of the affected Collateral. 14. INSURANCE. The Collateral will be kept insured for its full value against all hazards including loss or damage caused by fire, collision, theft or other casualty. If the Collateral consists of a motor vehicle, Owner will obtain comprehensive and collision coverage in amounts at least equal to the actual cash value of the vehicle with deductibles not to exceed $____________. Insurance coverage obtained by Owner shall be from a licensed insurer subject to Lender's approval. Owner shall assign to Lender all rights to receive proceeds of insurance not exceeding the amount owed under the obligations described above, and direct the insurer to pay all proceeds directly to Lender. The insurance policies shall require the insurance company to provide Lender with at least thirty (30) days' written notice before such policies are altered or cancelled in any manner. The insurance policies shall name Lender as a loss payee and provide that no act or omission of Owner or any other person shall affect the right of Lender to be paid the insurance proceeds pertaining to the loss or damage of the Collateral. In the event Owner fails to acquire or maintain insurance, Lender (after providing notice as may be required by law) may in its discretion procure appropriate insurance coverage upon the Collateral and charge the insurance cost as an advance of principal under the promissory note. Owner shall furnish Lender with evidence of insurance indicating the required coverage. Lender may act as attorney-in-fact for Owner in making and settling claims under insurance policies, cancelling any policy or endorsing Owner's name on any draft or negotiable instrument drawn by any insurer. 15. INDEMNIFICATION. Lender shall not assume or be responsible for the performance of any of Owner's obligations with respect to the Collateral under any circumstances. Owner shall immediately provide Lender with written notice of and indemnify and hold Lender and its shareholders, directors, officers, employees and agents harmless from all claims, damages, liabilities (including attorneys' fees and legal expenses), causes of action, actions, suits and other legal proceedings (cumulatively "Claims") pertaining to its business operations or the Collateral including, but not limited to, those arising from Lender's performance of Owner's obligations with respect to the Collateral. Owner, upon the request of Lender, shall hire legal counsel to defend Lender from such Claims, and pay the attorneys' fees, legal expenses and other costs to the extent permitted by applicable law, incurred in connection therewith. In the alternative, Lender shall be entitled to employ its own legal counsel to defend such Claims at Owner's cost. 16. TAXES AND ASSESSMENTS. Owner shall execute and file all tax returns and pay all taxes, licenses, fees and assessments relating to its business operations and the Collateral (including, but not limited to, income taxes, personal property taxes, withholding taxes, sales taxes, use taxes, excise taxes and workers' compensation premiums) in a timely manner. 17. INSPECTION OF COLLATERAL AND BOOKS AND RECORDS. Owner shall allow Lender or its agents to examine, inspect and make abstracts and copies of the Collateral and Owner's books and records pertaining to Owner's business operations and financial condition or the Collateral during normal business hours. Owner shall provide any assistance required by Lender for these purposes. All of the signatures and information pertaining to the Collateral or contained in the books and records shall be genuine, true, accurate and complete in all respects. 18. DEFAULT. Owner shall be in default under this Agreement in the event that Owner, Borrower or any guarantor: (a) fails to make any payment under this Agreement or any other indebtedness to Lender when due; (b) fails to perform any obligation or breaches any warranty or covenant to Lender contained in this Agreement or any other present or future written agreement regarding this or any other indebtedness to Lender; (c) provides or causes any false or misleading signature or representation to be provided to Lender; (d) allows the Collateral to be destroyed, lost or stolen, damaged in any material respect, or subject to seizure or confiscation; (e) seeks to revoke, terminate or otherwise limit its liability under any continuing guaranty; (f) permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against Owner, any guarantor, or any of their property; (g) dies, becomes legally incompetent, is dissolved or terminated, ceases to operate its business, becomes insolvent, makes an assignment for the benefit of creditors, or becomes the subject of any bankruptcy, insolvency or debtor rehabilitation proceeding; (h) allows the Collateral to be used by anyone to transport or store goods, the possession, transportation, or use of which, is illegal; or (i) causes Lender in good faith to deem itself insecure for any reason. 19. RIGHTS OF LENDER ON DEFAULT. If there is a default under this Agreement, Lender shall be entitled to exercise one or more of the following remedies without notice or demand (except as required by law): (a) to declare the Obligations immediately due and payable in full; (b) to collect the outstanding Obligations with or without resorting to judicial process; (c) to retain any instruments or other remittances constituting the Collateral; (d) to take possession of any Collateral in any manner permitted by law; (e) to apply for and obtain, without notice and upon ex parte application, the appointment of a receiver for the Collateral without regard to Owner's financial condition or solvency, the adequacy of the Collateral to secure the payment or performance of the obligations, or the existence of any waste to the Collateral; (f) to require Owner to deliver and make available to Lender any Collateral at a place reasonably convenient to Owner and Lender; (g) to sell, lease or otherwise dispose of any Collateral and collect any deficiency balance with or without resorting to legal process; (h) to set-off Owner's obligations against any amounts due to Owner including, but not limited to, monies, instruments, and deposit accounts maintained with Lender; and (i) to exercise all other rights available to Lender under any other written agreement or applicable law. Lender's rights are cumulative and may be exercised together, separately, and in any order. If notice to Owner of intended disposition of Collateral is required by law, Lender will provide reasonable notification of the time and place of any sale or intended disposition as required under the Uniform Commercial Code. In the event that Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of a prejudgment remedy in an action against Owner, Owner waives the posting of any bond which might otherwise be required. Lender's remedies under this paragraph are in addition to those available at common law, such as setoff. 20. APPLICATION OF PAYMENTS. Whether or not a default has occurred under this Agreement, all payments made by or on behalf of Owner and all credits due to Owner from the disposition of the Collateral or otherwise may be applied against the amounts paid by Lender (including attorneys' fees and legal expenses) in connection with the exercise of its rights or remedies described in this Agreement and any interest thereon and then to the payment of the remaining Obligations. 21. REIMBURSEMENT OF AMOUNTS EXPENDED BY LENDER. Owner shall reimburse Lender for all amounts (including attorneys' fees and legal expenses) expended by Lender in the performance of any action required to be taken by Owner or the exercise of any right or remedy belonging to Lender under this Agreement, together with interest thereon at the lower of the highest rate described in any promissory note or credit agreement executed by Borrower or Owner or the highest rate allowed by law from the date of payment until the date of reimbursement. These sums shall be included in the definition of Obligations, shall be secured by the Collateral identified in this Agreement and shall be payable upon demand. 22. ASSIGNMENT. Owner shall not be entitled to assign any of its rights, remedies or obligations described in this Agreement without the prior written consent of Lender. Consent may be withheld by Lender in its sole discretion. Lender shall be entitled to assign some or all of its rights and remedies described in this Agreement without notice to or the prior consent of Owner in any manner. 23. MODIFICATION AND WAIVER. The modification or waiver of any of Owner's Obligations or Lender's rights under this Agreement must be contained in a writing signed by Lender. Lender may perform any of Owner's Obligations or delay or fail to exercise any of its rights without causing a waiver of those Obligations or rights. A waiver on one occasion shall not constitute a waiver on any other occasion. Owner's Obligations under this Agreement shall not be affected if Lender amends, compromises, exchanges, fails to exercise, impairs or releases any of the obligations belonging to any Owner or third party or any of its rights against any Owner, third party or collateral. 24. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Owner and Lender and their respective successors, assigns, trustees, receivers, administrators, personal representatives, legatees, and devisees. 25. NOTICES. Any notice or other communication to be provided under this Agreement shall be in writing and sent to the parties at the addresses described in this Agreement or such other address as the parties may designate in writing from time to time. 26. SEVERABILITY. If any provision of this Agreement violates the law or is unenforceable, the rest of the Agreement shall remain valid. 27. APPLICABLE LAW. This Agreement shall be governed by the laws of the state indicated in Lender's address. Owner consents to the jurisdiction and venue of any court located in the state indicated in Lender's address in the event of any legal proceeding pertaining to the negotiation, execution, performance or enforcement of any term or condition contained in this Agreement or any related document and agrees not to commence or seek to remove such legal proceeding in or to a different court. 28. COLLECTION COSTS. If Lender hires an attorney to assist in collecting any amount due or enforcing any right or remedy under this Agreement, Owner agrees to pay Lender's attorneys' fees and collection costs. 29. MISCELLANEOUS. This Agreement is executed for commercial purposes. Owner shall supply information regarding Owner's business operations and financial condition or the Collateral in the form and manner as requested by Lender from time to time. All information furnished by Owner to Lender shall be true, accurate and complete in all respects. Owner and Lender agree that time is of the essence. Owner waives presentment, demand for payment, notice of dishonor and protest except as required by law. All references to Owner in this Agreement shall include all parties signing below except Lender. If there is more than one Owner, their obligations shall be joint and several. This Agreement shall remain in full force and effect until Lender provides Owner with written notice of termination. This Agreement and any related documents represent the complete and integrated understanding between Owner and Lender pertaining to the terms and conditions of those documents. 30. WAIVER OF JURY TRIAL. LENDER AND OWNER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH THE PROMISSORY NOTE, THIS AGREEMENT AND ANY OTHER AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH OR THEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER MAKING THE LOAN EVIDENCED BY THE PROMISSORY NOTE. 31. ADDITIONAL TERMS: In addition to all of its other rights, powers and remedies under this Agreement, Lender shall, upon the occurrence and during the continuation of any default hereunder, have the right (i) to enter upon the premises of Borrower or Owner or any other place or places where the Collateral is located through self-help and without judicial process or giving Borrower or Owner notice and opportunity for a hearing on the validity of Lender's claim and without any obligation to pay rent; (ii) to prepare, assemble or process the collateral for sale, lease, or other disposition; (iii) to remove the Collateral to the premises of Lender or any agent of Lender, for such time as Lender may desire, in order to collect or dispose of the Collateral; (iv) to require Borrower or Owner to assemble the Collateral and make it available to Lender at a place to be designated by Lender; and (v) to require Borrower or Owner to make available to Lender all computer and other equipment of Borrower or Owner containing books and records pertaining to the Collateral (and the assistance of the employees of Borrower or Owner having responsibility for such equipment) and to use such computer and other equipment at no charge for the purposes of obtaining information pertaining to the Collateral, including by making copies of computer and other files and records. To the extent necessary or desirable to enable Lender to dispose of the Collateral, Lender is hereby granted a license or other right to use, without charge, Borrower's or Owner's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, and advertising matter, or any property of a similar nature as it pertains to the Collateral or in advertising for sale or lease for the disposition of any of the Collateral, and Borrower's or Owner's rights under all licenses and all franchise agreements shall to such extent and for such purpose inure to the Lender's benefit. *2a schedule continued: Interest Rate Principal Amount Agreement Date Maturity Date Loan Number - ------------- ---------------- -------------- ------------- ----------- Variable 125,000 3/21/94 4/01/00 532784 Fixed 300,000 9/24/93 5/01/99 532693 Owner acknowledges that Owner has read, understands, and agrees to the terms and conditions of this Agreement. Dated: December 31, 1996 OWNER: Nortech Systems Incorporated OWNER: ______________________________________ ___________________________________ Garry M. Anderly Vice President OWNER: OWNER: ______________________________________ ___________________________________ OWNER: OWNER: ______________________________________ ___________________________________ OWNER: OWNER: ______________________________________ ___________________________________ Page 4 of ____ SCHEDULE A SCHEDULE B The name of the record owner is: _____________________________________________ SCHEDULE C SCHEDULE D EX-10.7 8 EXHIBIT 10.7 EXHIBIT 10.7 THE INDEBTEDNESS EVIDENCED BY THIS NOTE IS SECURED BY A COMBINATION MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT (THE "MORTGAGE") OF EVEN DATE HEREWITH, ON LAND IN CROW WING COUNTY, MINNESOTA, AND REFERENCE IS MADE TO THE MORTGAGE FOR RIGHTS AS TO ACCELERATION OF THE INDEBTEDNESS EVIDENCED BY THIS NOTE. PROMISSORY NOTE $1,000,000.00 Minneapolis, Minnesota March 27, 1997 FOR VALUE RECEIVED, the undersigned Nortech Systems Incorporated ("Maker"), a Minnesota corporation, hereby promises to pay to the order of Communications Systems, Inc. ("Payee"), a Minnesota corporation, at Hector, Minnesota, or at such other place as may be designated from time to time in writing by the holder thereof, the principal sum of One Million Dollars ($1,000,000.00) with simple interest on the outstanding principal balance beginning on November 4, 1996, at a rate equal to the prime or reference rate established from time to time by First Bank Minneapolis. Principal in the amount of Forty Thousand Dollars ($40,000.00) or more per installment shall be payable semiannually commencing May 1, 1997, and continuing on the first day of every November and May thereafter for a total of five (5) years, at which time all remaining principal and accrued interest, if not sooner paid, shall be paid in full. This Note is given to evidence the unpaid balance of the purchase price owed by Maker to Payee for the purchase of the assets of Payee, pursuant to the terms of that certain Asset Purchase Agreement (the "Asset Purchase Agreement") dated 1996, between Maker and Payee. This Note is subject to and governed by the terms and provisions of the Asset Purchase Agreement, including rights of offset as set forth therein. Each payment (including prepayments, if made) hereunder shall be applied first to payment of accrued interest, and the balance to payment of principal. Prepayments can be made at any time, and from time to time, at the election of Maker, without penalty. If default is made in the payment of any installment of this Note, and such payment is not made within fifteen (15) days after notice from the Note holder of non-payment, the Note holder may declare the entire unpaid principal balance of this Note and all accrued interest due and payable without further notice. In the event that the holder hereof shall institute any action for the enforcement or collection of this Note, there shall be immediately due from the Maker, in addition to the unpaid balance, all reasonable costs and expenses of said action, including reasonable attorneys' fees. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed on the date first above written. NORTECH SYSTEMS INCORPORATED By /s/ Q. E. Finkelson ----------------------------- Its President & CEO ------------------------- EX-10.8 9 EXHIBIT 10.8 EXHIBIT 10.8 PROMISSORY NOTE $3,865,390.00 Minneapolis, Minnesota March 27, 1997 FOR VALUE RECEIVED, the undersigned Nortech Systems Incorporated ("Maker"), a Minnesota corporation, hereby promises to pay to the order of Communications Systems, Inc. ("Payee"), a Minnesota corporation, at Hector, Minnesota, or at such other place as may be designated from time to time in writing by the holder thereof, the principal sum of Three Million Eight Hundred Sixty-Five Thousand Three Hundred Ninety Dollars ($3,865,390) with simple interest on the outstanding principal balance beginning on November 4, 1996, at a rate equal to the prime or reference rate established from time to time by First Bank Minneapolis. Principal in the amount of One Hundred Sixty Thousand Dollars ($160,000.00) or more per installment shall be payable semiannually commencing May 1, 1997, and continuing on the first day of every November and May thereafter for a total of five (5) years, at which time all remaining principal and accrued interest, if not sooner paid, shall be paid in full. This Note is given to evidence the unpaid balance of the purchase price owed by Maker to Payee for the purchase of the assets of Payee, pursuant to the terms of that certain Asset Purchase Agreement (the "Asset Purchase Agreement") dated 1996, between Maker and Payee. This Note is subject to and governed by the terms and provisions of the Asset Purchase Agreement, including rights of offset as set forth therein. This Note is secured by that certain Security Agreement of even date herewith. Each payment (including prepayments, if made) hereunder shall be applied first to payment of accrued interest, and the balance to payment of principal. Prepayments can be made at any time, and from time to time, at the election of Maker, without penalty. If default is made in the payment of any installment of this Note, and such payment is not made within fifteen (15) days after notice from the Note holder of non-payment, the Note holder may declare the entire unpaid principal balance of this Note and all accrued interest due and payable without further notice. In the event that the holder hereof shall institute any action for the enforcement or collection of this Note, there shall be immediately due from the Maker, in addition to the unpaid balance, all reasonable costs and expenses of said action, including reasonable attorneys' fees. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed on the date first above written. NORTECH SYSTEMS INCORPORATED By /s/ Q. E. Finkelson ----------------------------- Its President & CEO ------------------------- EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference, in the Registration Statements of Nortech Systems Incorporated on Forms S-8 registered on June 21, 1994 and June 30, 1993, of our reports dated February 13, 1997, in the Annual Report on Form 10-K for the year ended December 31, 1996. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota March 27, 1997 EX-27 11 EXHIBIT 27
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,235,127 0 3,718,064 22,301 6,729,500 12,289,211 10,746,407 2,875,702 22,152,629 3,790,680 0 0 250,000 23,124 7,178,068 22,152,629 26,182,821 26,182,821 21,555,459 21,555,459 3,514,276 0 475,057 638,029 192,000 446,029 0 0 0 446,029 .19 .19
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