-----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, K9NY4f1JvBu+Doru+OrssYpLk0uLsan/72THs3G9xINSVmhzUb8XW4SfK0qmQcwz 5eWXSso+oDBPOc98t4ZU4A== 0000912057-96-007052.txt : 19960426 0000912057-96-007052.hdr.sgml : 19960426 ACCESSION NUMBER: 0000912057-96-007052 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960425 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-K405/A SEC ACT: SEC FILE NUMBER: 000-13257 FILM NUMBER: 96550997 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-K405/A 1 FORM 10-K405/A 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, 1995 ( ) 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 234 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 by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Based upon the $6.625 per share average of the closing bid and asked prices, respectively, on March 15, 1996 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 $9,145,587. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO ------------ -------------- As of March 15, 1996 there were 2,450,863 shares of the Company's $.01 per share par value common stock outstanding. 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 1995 Annual Shareholders' meeting and filed with the Securities and Exchange Commission no later than April 30,1996. (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, 1995 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 13-14 Item 8. Consolidated Financial Statements 15-35 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure 36 PART III Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 36 Item 12. Security Ownership of Certain Beneficial Owners and Management 36 Item 13. Certain Relationships and Related Transactions 36 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 37-39 Signatures 40 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 main manufacturing facility is located in Bemidji, Minnesota, with additional manufacturing and engineering support locations in Fairmont, Minnesota, Plymouth, Minnesota and Augusta, Wisconsin. The Company manufactures wire harnesses, cables, and electromechanical assemblies as well as large-screen, high resolution video monitors for radar, document and medical imaging. The Company provides a full "turnkey" contract manufacturing service to its customers. All products are built to the customer's design specifications. Nortech Medical Services, Inc., its wholly owned subsidiary, provides service bureau and office management services to physicians and clinics throughout Minnesota. 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 and OTC, a division of 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, consisting of inventory, accounts receivable, equipment and other assets. The Company has continued the business of Monitor 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. 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. 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. The Company believes this certification will benefit its current customer base as well as attract new business opportunities. 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. 6 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) 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 that are being pursued are in the Southeast, the Northeast, the Far West, the Southwest and north into Canada. The Company markets its products and services thought 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. Because of the Bemidji facility's rural location, costs can be minimized and its level of manufacturing sophistication can be offered at a competitive price. 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 service-related business for which patents, licenses, copyrights, and trademark protection are necessary for successful operations. 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 7 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 $3,281,641 on December 31, 1994 and approximately $4,513,000 on December 31, 1995. MAJOR CUSTOMERS The Company sells its products to companies in the computer, medical, governmental and various other industries. Historically, the Company has not experienced significant losses related to the receivables from customers in any particular industry or geographic area. Three customers, G.E. Medical Systems, Cray Research and OTC, a division of SPX Corporation, accounted for approximately 24.1%, 16.6% and 11.8% of sales, respectively, for the year ended December 31, 1995. G.E. Medical Systems accounted for approximately 10.4% of accounts receivable at December 31, 1995. 8 Three customers, Cray Research, G.E. Medical Systems and Unisys Corporations, accounted for approximately 26.8%, 24.5% and 20.2% of sales, respectively, for the year ended December 31, 1994. G.E. Medical Systems, Cray Research and OTC, a division of SPX Corporation, accounted for approximately 29.8%, 20.5% and 11.3% of accounts receivable, respectively, at December 31, 1994. Two customers, Cray Research and G.E. Medical Systems, accounted for approximately 33.5% and 27.3% of sales, respectively, for the year ended December 31, 1993. RESEARCH AND DEVELOPMENT The Company expended $124,919 on Company-sponsored research and development in 1995. This research is related to the development of large-screen, high resolution video monitors for the imaging division. In 1994 and 1993, 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 288 full-time and 83 part-time employees as of March 1, 1996, consisting of 348 employees in manufacturing, manufacturing product support and medical support services and 23 in general administration. ITEM 2. PROPERTIES The Company's headquarters consist of approximately 2,900 square feet located in Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. Such facilities now are leased on a month-to-month basis. The Company believes its Wayzata facilities are now adequate and will be adequate in the foreseeable future for its headquarters. However, should the Company need other or additional space, it believes such facilities are readily available. The Company owns its Bemidji, Minnesota facility consisting of eight acres of land and 60,000 spare feet of office and manufacturing space and leases another 8000 square feet of manufacturing and office space in Augusta, Wisconsin. 9 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. The Company believes that this facility is adequate for its operations and will be adequate in the foreseeable future for such operations. 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. The Company believes that these buildings are adequate and will be adequate in the foreseeable future for this portion of the Company's business. 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, 1994 $5.000 $5.750 June 30, 1994 $4.000 $4.750 September 30, 1994 $3.750 $4.500 December 31, 1994 $3.000 $3.750 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
10 The low and high quotations set forth above were furnished 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 15, 1996, there were approximately 1,459 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 left intentionally blank.) 11 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED: -------------------- Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991 ------------- ------------- ------------- ------------- ------------- Sales 18,305,928 12,820,709 11,705,833 7,299,916 6,052,996 Income (Loss) From Continuing Operations 1,331,924 1,183,406 1,042,556 636,723 530,413 Income (Loss) Per Common Share From Continuing Operations 0.55 0.54 0.47 0.28 0.24 Total Assets 13,223,064 6,647,897 6,553,291 5,284,001 2,974,806 Total Long-Term Debt 3,768,685 746,755 858,437 977,635 1,012,942
Note: For additional selected Financial Data (Past two years by quarter information) See note 13 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, 1995, 1994, AND 1993 REVENUES. For the years ended December 31, 1995, and 1994 the Company had sales of $18,305,928 and $12,820,709 respectively. The increase of $5,485,219, or 42.8% resulted primarily from increased sales to the medical and automotive industries offset by the reduced sales to the mid-sized computer industries as well as increased revenues from the newly acquired divisions. For the year ended December 31, 1993 the Company had sales of $11,705,833. The approximate 9.5% increase in sales in 1994 was attributable to an increase in sales in the mid-sized computer industry. GROSS PROFIT. The Company had gross profit of $3,764,840 in 1995, $2,598,569 in 1994 and $2,385,016 in 1993. Gross profits as a percentage of gross sales were 20.6% in 1995, 20.3% in 1994 and 20.4% in 1993. The increase in gross profit from 1994 to 1995 as due to increased sales levels and acquisition activity in 1995. SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative expenses were $2,280,105 in 1995, $1,647,797 in 1994, and $1,546,971 in 1993. The increase from 1994 to 1995 reflects increased selling, general and administrative expenses associated with the acquisition of two additional divisions. The increase from 1993 to 1994 reflects increased selling expense due to increased revenue levels. MISCELLANEOUS INCOME. Miscellaneous income was $177,967 in 1995, $86,307 in 1994, and $71,030 in 1993. The miscellaneous income resulted primarily from charges for miscellaneous services. INTEREST EXPENSE. Interest expense was $240,562 in 1995, $117,835 in 1994, and $124,887 in 1993. The increased expense for 1995 is due to the increased debt from acquired operations. INCOME TAXES. 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. 13 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 and $241,206 were recorded in 1994 and 1993 due to the reduction in the deferred tax valuation allowance of $600,000 and $540,000, respectively, due to the realization of net operating loss carryforwards. NET INCOME. 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's net income in 1993 was $1,042,556 or $.47 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 improved from $2,922,773 as of December 31, 1994 to $5,279,509 as of December 31, 1995. Stockholders equity increased from $4,720,503 as of December 31, 1994 to $6,036,166 as of December 31, 1995 due to the Company's 1995 net income and the issuance of common stock due to the exercise of stock options and gainsharing distributions. 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. 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. 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. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA PAGE ---- Independent Auditor's Report of : Larson, Allen, Weishair & Co., LLP 16 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1995 and 1994. 17 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993. 18 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993. 19 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. 20-21 Notes to Consolidated Financial Statements 22-35 (The remainder of this page was intentionally left blank.) 15 LARSON ALLEN [LOGO] WEISHAIR & CO. CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S 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, 1995 -and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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 perforrn 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years IN the period ervded December 31, 1995, in conformity with generally accepted accounting principles. /s/ Larson, Allen, Meishair & Co., LLP LARSON, ALLEN, MEISHAIR & CO., LLP St. Cloud, Minnesota February 16, 1996 16 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ----------- ASSETS CURRENT ASSETS Cash and Cash Equivalents (Including Interest Bearing Cash of $906,111 and $822,404 at December 31, 1995 and 1994) $ 924,590 $ 841,702 Accounts Receivable, Less Allowance for Uncollectible Accounts (1995 - $6,053; 1994 - $4,343) 1,856,219 1,243,599 Inventories 3,855,212 1,514,658 Prepaid Expenses and Other 131,701 43,453 Deferred Tax Asset 430,000 460,000 ----------- ----------- Total Current Assets $ 7,197,722 $ 4,103,412 ----------- ----------- PROPERTY AND EQUIPMENT (At Cost) Land $ 108,300 $ 68,300 Building and Leasehold Improvements 1,897,559 832,601 Manufacturing Equipment 2,389,201 902,916 Office and Other Equipment 1,701,640 1,583,714 ----------- ----------- Total $ 6,096,700 $ 3,387,531 Accumulated Depreciation (2,256,862) (1,844,046) ----------- ----------- Total Property and Equipment (At Depreciated Cost) $ 3,839,838 $ 1,543,485 ----------- ----------- OTHER ASSETS Goodwill and Other Intangible Assets $ 998,254 $ - Deferred Tax Asset 1,130,000 1,000,000 Other Assets 57,250 1,000 ----------- ----------- Total Other Assets $ 2,185,504 $ 1,001,000 ----------- ----------- Total Assets $13,223,064 $ 6,647,897 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 283,100 $ 189,144 Accounts Payable 1,054,880 580,860 Accrued Payroll 407,016 380,267 Other Liabilities 173,217 30,368 ----------- ----------- Total Current Liabilities $ 1,918,213 $ 1,180,639 ----------- ----------- LONG-TERM DEBT Notes Payable (Net of Current Maturities Shown Above) $ 3,768,685 $ 746,755 ----------- ----------- REDEEMABLE COMMON STOCK $.01 Par Value; 250,000 Shares Issued and Outstanding Redeemable at $6 Per Share $ 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; 2,200,863 and 2,194,305 Shares Issued and Outstanding, Net of Redeemable Shares Reported Above, at December 31, 1995 and 1994, Respectively 22,009 21,943 Additional Paid-In Capital 11,242,672 11,229,065 Accumulated Deficit (5,478,515) (6,780,505) ----------- ----------- Total Stockholders' Equity $ 6,036,166 $ 4,720,503 ----------- ----------- Total Liabilities and Stockholders' Equity $13,223,064 $ 6,647,897 ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 17 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------ ------------ ------------ SALES $ 18,305,928 $ 12,820,709 $ 11,705,833 COST OF SALES (14,541,088) (10,222,140) (9,320,817) ------------ ------------ ------------ GROSS PROFIT $ 3,764,840 $ 2,598,569 $ 2,385,016 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (2,280,105) (1,647,797) (1,546,971) RESEARCH AND DEVELOPMENT COSTS (124,919) - - INTEREST INCOME 34,703 18,368 17,162 MISCELLANEOUS INCOME 177,967 86,307 71,030 INTEREST EXPENSE (240,562) (117,835) (124,887) ------------ ------------ ------------ INCOME BEFORE INCOME TAX PROVISION $ 1,331,924 $ 937,612 $ 801,350 INCOME TAX BENEFIT - 245,794 241,206 ------------ ------------ ------------ NET INCOME $ 1,331,924 $ 1,183,406 $ 1,042,556 ------------ ------------ ------------ ------------ ------------ ------------ INCOME PER SHARE OF COMMON STOCK Net Income Per Share of Common Stock $ 0.55 $ 0.54 0.47 ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,407,804 2,194,021 2,217,265 ------------ ------------ ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Additional Total Preferred Common Paid-In Accumulated Stockholders' Stock Stock Capital Deficit Equity ------------ ------------- ------------- ------------ -------------- BALANCE DECEMBER 31, 1992 $ 250,000 $ 22,408 $ 11,322,929 $ (8,976,661) $ 2,618,676 1993 Net Income - - - 1,042,556 1,042,556 Redemption of Stock - (500) (105,750) - (106,250) Issuance of Stock - 29 9,582 - 9,611 Dividends Paid - - - (14,860) (14,860) ---------- ----------- ------------ ------------- ------------ 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 ---------- ----------- ------------ ------------- ------------ ---------- ----------- ------------ ------------- ------------
See accompanying Notes to Consolidated Financial Statements. 19 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 18,114,515 $ 13,307,176 $ 11,284,702 Interest Income Received 34,703 18,368 17,162 Cash Paid to Suppliers and Employees (17,379,766) (11,794,879) (11,135,177) Interest Expense Paid (239,809) (117,927) (126,521) Income Taxes Paid (19,016) (34,206) (7,546) ------------ ------------ ------------ Net Cash Provided by Operating Activities $ 510,627 $ 1,378,532 $ 32,620 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Businesses $ (2,930,696) $ - $ - Acquisition of Property and Equipment (458,359) (224,096) (422,821) Acquisition of Intangible Assets (82,059) - - Purchase of Investments (56,250) - - ------------ ------------ ------------ Net Cash Used by Investing Activities $ (3,527,364) $ (224,096) $ (422,821) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net Proceeds (Payments) Under Line of Credit $ - $ (266,533) $ 349,329 Payments on Long-Term Debt (289,294) (963,178) (278,739) Proceeds from Long-Term Debt 3,405,180 531,000 196,092 Proceeds from Sale of Stock 13,673 2,310 9,611 Redemption of Stock - - (106,250) Payment of Dividends (29,934) (14,946) (14,860) ------------ ------------ ------------ Net Cash Provided (Used) by Financing Activities $ 3,099,625 $ (711,347) $ 155,183 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 82,888 $ 443,089 $ (235,018) Cash and Cash Equivalents - Beginning 841,702 398,613 633,631 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS - ENDING $ 924,590 $ 841,702 $ 398,613 ------------ ------------ ------------ ------------ ------------ ------------
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. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------ ------------ ------------ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Income $ 1,331,924 $ 1,183,406 $ 1,042,556 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 444,636 245,847 167,723 Deferred Taxes (100,000) (280,000) (250,000) (Increase) Decrease in Accounts Receivable (369,380) 365,160 (485,253) (Increase) Decrease in Accounts Receivable - Stockholder - 35,000 (6,908) (Increase) Decrease in Inventory (407,932) 173,065 (475,431) (Increase) Decrease in Prepaid Ass (79,751) 33,507 (31,618) Decrease in Accounts Payable - Stockholder - - (10,729) Increase (Decrease) in Accounts Payable 207,835 (391,788) (79,179) Increase (Decrease) in Accrued Pa (17,852) 6,077 173,111 Increase (Decrease) in Accrued Liabilities (498,853) 8,258 (11,652) ------------ ------------ ------------ Net Cash Provided by Operating Activities $ 510,627 $ 1,378,532 $ 32,620 ------------ ------------ ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 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, Minnesota, Plymouth, Minnesota and Augusta, Wisconsin. The Company manufactures wire harnesses, cables, and electromechanical assemblies as well as large-screen, high-resolution video monitors for radar, document and medical imaging. The Company provides a full "turnkey" contract manufacturing service to its customers. All products are built to the customer's design specifications. The Company also services the types of monitors it produces. 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. 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, 1995, 1994 and 1993. 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 22 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995,1994 AND 1993 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 1995, 1994 and 1993 was $30,724, $O, and $O, 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 During 1995 the Company acquired other intangible assets including purchased technology and certification costs. Total costs of these assets were $82,059, which are being amortized over a period of 5 to 7 years. The related amortization expense for 1995 was $1,096. 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, 1995, the Company had invested excess funds of $285,000 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. 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. 23 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company has adopted FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. 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. 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 warrants and options was not material and was not included in the calculation of primary earnings per share. Preferred stock issued is noncumulative and nonconvertible. NOTE 2 ACQUISITIONS In 1995 the Company acquired the two 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. 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. 24 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 2 ACQUISITIONS (CONTINUED) MONITOR TECHNOLOGY CORPORATION (CONTINUED) 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. The agreement also allows the seller the option which requires the Company to repurchase the common stock at $6 a share commencing on March 28, 1996, and extending for a period of thirty days hereafter. The Company's obligation under the repurchase agreement is guaranteed by a director of the Company. 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. The excess of the purchase price over the estimated fair value of the net assets acquired is being amortized on a straight-line basis over 15 years. A summary of the purchase price allocation for 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 ------------ ------------ 25 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 2 ACQUISITIONS (CONTINUED) The following proforma unaudited consolidated statements of income for the Company are presented as though the acquisitions of Monitor Technology Corporation and the Aerospace Division of Communication Cable, Inc. had occurred on January 1, 1995 and 1994.
(Unaudited) 1995 1994 ------------------------------------- -------------- -------------- Revenues $ 22,332,054 $ 20,449,800 -------------- -------------- -------------- -------------- Net Income (Loss) $ 1,497,486 $ 1,281,232 -------------- -------------- -------------- -------------- Net Income Per Share of Common Stock $ .61 $ .52 -------------- -------------- -------------- --------------
The proforma financial information is presented for information purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results. NOTE 3 INVENTORIES Inventories consist of the following:
1995 1994 -------------- -------------- Raw Materials $ 1,972,384 $ 795,272 Work in Process 1,676,949 603,932 Finished Goods 205,879 115,454 -------------- -------------- Total $ 3,855,212 $ 1,514,658 -------------- -------------- -------------- --------------
NOTE 4 SHORT-TERM LINE OF CREDIT The Company had a line of credit available at December 31, 1994, for $350,000. The line of credit was with Northern National Bank, paid interest at a variable rate, and was secured by accounts receivable and inventory. The interest rate was 8% at December 31, 1994. The maximum and average amounts outstanding on lines of credit during 1994, were $349,329 and $320,219, respectively. There was no balance outstanding as of December 31, 1994. 26 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 5 LONG-TERM DEBT
Description 1995 1994 ---------------------------------------------- ---------- ------- Note Payable - Northern National Bank, Revolving Line of Credit, Borrowing Limit of $3,000,000, Interest at LIBOR Index PLUS 2 1/2%, Due January 1997; Secured by Accounts Receivable, Equipment, Inventory and General Intangibles 2,161,179 $ 0 Note Payable - City of Augusta, Interest at Firstar Bank of Eau Claire's Prime, Five Annual Payments Beginning August 1996, Due August 2000; Secured by Leasehold Improvements 40,000 40,000 Note Payable - Northern States Power Company, Interest at 6%, Monthly Payments of $483 Including Interest, Due December 1998; Secured by Equipment 15,483 20,199 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 120,754 122,876 Note Payable - Midwest Minnesota Community, Development Corporation, Interest at 9%, Monthly Payments of $2,802 Including Interest, Due January 2000; Secured by Real Estate and Equipment 115,297 135,178 Note Payable - Midwest Minnesota Community, Development Corporation, Interest at 8%, Monthly Payments of $1,654 Including Interest, Due September 2009; Secured by Real Estate and Equipment 142,185 146,279 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 230,608 232,796 27 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 311,1995, 1994 AND 1993 NOTE 5 LONG-TERM DEBT (CONTINUED) Description 1995 1994 ---------------------------------------------- ---------- ------- 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 640,000 0 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 and General Intangibles 510,000 0 Note Payable - Joint Economic Development Commission, Inc., Interest at 10%, Monthly Payments of $1,652 Including Interest, Due June 1996; Secured by Building and Land 76,279 90,586 Note Payable - Northern National Bank, Interest at Bank's Prime Plus 3%, Monthly Payments of $11,638 Including Interest, Due December 1995; Secured by Certificate of Deposit, Equipment, Accounts Receivable and Inventory 0 45,119 Note Payable - Northern National Bank, Interest at Bank's Prime, Monthly Payments of $4,600 Including Interest, Due January 15, 1995; Secured by Inventory, Equipment and Accounts Receivable 0 98,570 Note Payable - Northern National Bank, Interest at Bank's Prime, Monthly Payments of $375 Including Interest, Due 0 4,296 January 15, 1996; Secured by Vehicle ----------- -------- Total Long-Term Debt $ 4,051,785 $935,899 Current Maturities 283,100 189,144 ----------- -------- Long-Term Debt - Net of Current Maturities $ 3,768,685 $746,755 ----------- -------- ----------- --------
28 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 5 LONG-TERM DEBT (CONTINUED) Maturity requirements by year on long-term debt are as follows: Years Ending December 31, Amount ------------------------- -------------- 1996 $ 283,100 1997 2,400,339 1998 258,046 1999 296,594 2000 314,579 Later Years 499,127 ----------- Total $ 4,051,785 ----------- ----------- The maximum and average amounts outstanding on the Company's revolving line of credit during 1995 were $2,161,179 and $400,000, 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, 1995, 1994 and 1993, was $290,799, $77,516 and $118,672, respectively. The future minimum lease payments are as follows: Years Ending December 31, Amount ------------------------- -------------- 1996 $ 227,695 1997 184,625 1998 176,700 1999 176,700 2000 176,700 ----------- Total $ 942,420 ----------- ----------- NOTE 7 RELATED PARTY TRANSACTIONS Ceridian Corporation is one of the Company's stockholders at December 31, 1995, 1994 and 1993. 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. 29 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 7 RELATED PARTY TRANSACTIONS (CONTINUED) SALES In 1995, 1994 and 1993, 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, 1995, consists of the following:
1995 1994 1993 --------- --------- --------- Current Taxes - Federal $ 37,000 $ 17,183 $ 2,148 Current Taxes - State 63,000 17,023 6,646 Deferred Taxes (100,000) (280,000) (250,000) --------- --------- --------- Total $ 0 $(245,794) $(241,206) --------- --------- --------- --------- --------- ---------
Deferred tax assets at December 31, 1995 and 1994, consist of the following:
1995 1994 ----------- ----------- Net Operating Loss (NOL) Carryforwards $ 1,635,000 $ 1,240,000 Tax Credit Carryforwards 295,000 320,000 Other 30,000 0 Valuation Allowance (400,000) (100,000) ----------- ----------- Total $ 1,560,000 $ 1,460,000 ----------- ----------- ----------- -----------
The statutory rate reconciliation for each of the three years in the period ended December 31, is as follows:
1995 1994 1993 --------- --------- --------- Statutory Tax Provision $ 453,000 $319,000 $272,000 State Income Taxes 80,000 50,000 40,000 Additional NOL Carryforwards (851,000) 0 0 Increase (Reduction) in Deferred Tax Valuation Allowance 300,000 (600,000) (540,000) Other 18,000 (14,794) (13,206) --------- --------- --------- Income Tax Benefit $ 0 $(245,794) $(241,206) --------- --------- --------- --------- --------- ---------
30 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 8 INCOME TAXES (CONTINUED) 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 ------------------ -------------- -------------- ------------------- 1996 $ 0 $ 12,546 $ 44,779 1997 0 4,064 43,051 1998 0 50,888 97,643 1999 3,678,800 39,965 0 2001 767,300 0 0 2002 253,200 0 0 2003 109,700 0 0 ---------- -------- -------- Totals $4,809,000 $107,463 $185,473 ---------- -------- -------- ---------- -------- --------
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 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. In 1993 the Company utilized operating loss carryforwards of $760,000 to offset federal taxable income and $365,300 to offset state taxable income. 31 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 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 $29,934, $14,946 and $14,860 were paid during the year-ended December 31, 1995, 1994 and 1993, respectively. During 1993, Nortech Systems Incorporated redeemed 50,000 shares of common stock from Ceridian Corporation. 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, money market and certificate of deposit accounts at two financial institutions. These balances exceed the federally insured limit by $520,000 at December 31, 1995. The Company has not experienced any losses in any of the short-term investment instruments it has used for excess cash balances. 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. Two customers accounted for approximately 33.5% and 27.3% of sales, respectively, for the year ended December 31, 1993. 32 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 11 EMPLOYEE STOCK OPTION AND AWARD PLANS In 1992, the Company approved the adoption of a stock option 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. Through December 31, 1995, 100,000 shares have been authorized for issuance. In addition, the Company has contingently granted an additional 50,000 options to its president awaiting approval by the shareholders. 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. Changes in the stock options outstanding, including contingent options, are as follows:
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 ---------- ----------
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. 5,069 shares have been issued under this Plan through December 31, 1995. 33 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 12 RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board (the FASB) statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, will become effective for the Company in 1996. Currently, Statement No. 121 would have no impact on the Company's financial position or results of operations. FASB issued Statement No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, which will become effective for the Company in 1996. The Company has not determined the impact of Statement No. 123 on its financial position or results of operations. 34 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 13 SUPPLEMENTARY FINANCIAL INFORMATION
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 Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/95 6/30/95 9/30/95 12/31/95 1995 -------------- -------------- -------------- -------------- ------------- NET SALES $ 3,499,798 $ 3,235,186 $ 2,666,091 $ 3,419,634 $ 12,820,709 GROSS PROFIT 704,144 614,024 566,570 713,831 2,598,569 NET INCOME 297,126 262,564 200,622 423,094 1,183,406 INCOME PER SHARE OF COMMON STOCK 0.14 0.12 0.09 0.19 0.54
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. 35 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 1995 proxy statement to be filed with the Securities and Exchange Commission not later than April 30, 1996 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 1995 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1996 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 1995 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1996 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 left intentionally blank) 36 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 13. (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 Auditor's Report on Supplementary Information Larson, Allen, Weishair & Co., LLP 41 Consolidated Financial Statement Schedule for the years ended December 31, 1995, 1994 and 1993 VIII Valuation and Qualifying Accounts 42 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 Revolving Note and Security Agreement for working capital line of credit between Company and Northern National Bank dated December 29, 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. 37 10.6 Asset Purchase Agreement for the purchase of Aerospace Division of Communication Cable, Inc. dated August 23, 1995. 23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference to the S-8 Forms filed June 21 1994 and June 30, 1993. The following exhibits are incorporated by reference to exhibits 10.1, 10.2, 10.3, 10.4 and 10.5, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.1 Promissory Note for working capital line of credit between the Company and Northern National Bank dated May 2, 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. 10.4 Update Promissory Note and Loan Agreement for NMS capital equipment between the Company and Northern National Bank dated January 15, 1995. 10.5 Promissory Notes and Loan Agreement for Real Estate between the Company and MMCDC and MMCDC/NNC dated March 18, 1994. The following exhibits are incorporated by reference to Exhibits 10.2, 10.3 and 10.4, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.2 Promissory Note and Loan Agreement for capital equipment line of credit between the Company and Northern National Bank date September 24, 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. 38 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 March 28, 1995 and filed April 5, 1995 for purchase of assets of Monitor Technology Corporation. Form 8-K/A Amendment #1 filed on July 13, 1995. This Form 8-K/A was an amendment to Form 8-K report date March 28, 1995 and filed April 5, 1995. Form 8-K report date August 23, 1995 filed August 28, 1995 for the purchase of assets of Aerospace Division of Communication Cable, Inc. (CCI) Form 8-K/A Amendment #1 filed October 25, 1995. This Form 8-K/A was an amendment to Form 8-K report date August 23, 1995 and filed August 28, 1995. Form 8-K/A Amendment #2 filed November 21, 1995. This Form 8-K/A was an amendment to Form 8-K report date August 23, 1995 and filed August 28, 1995. (The remainder of this page was left intentionally blank.) 39 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 29, 1996 By:/s/ --------------------------- Quentin E. Finkelson Its President and Chief Executive Officer March 29, 1996 By:/s/ Gary M. Anderly --------------------------- Gary 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 29, 1996 /s/ --------------------------- Quentin E. Finkelson, President, Chief Executive Officer and Director March 29, 1996 /s/ --------------------------- Myron Kunin, Director March 29, 1996 /s/ --------------------------- Richard W. Perkins, Director 40 LARSON [LOGO] ALLEN WEISHAIR & CO. Certified Public Accountants INDEPENDENT AUDITOR'S 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 1995, 1994 and 1993 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. /s/ Larson, Allen, Weishair & Co. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota February 16, 1996 41 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, 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 -------------- ------------ ------------ ------------ -------------- ------------ ------------ ------------ Year Ended December 31, 1993: Allowance for Doubtful Accounts $ 5,000 $ - $ (5,000) $ - Deferred Tax Valuation Allowance 1,240,000 - (540,000) 700,000 -------------- ------------ ------------ ------------ $ 1,245,000 $ - $ (545,000) $ 700,000 -------------- ------------ ------------ ------------ -------------- ------------ ------------ ------------
42 INDEX TO EXHIBITS DESCRIPTIONS OF EXHIBITS 10.1 Revolving Note and Security Agreement for working capital line of credit between Company and Northern National Bank dated December 29, 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. 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. 43 EX-10.1 2 EXHIBIT 10.1 BORROWER NORTECH SYSTEMS INCORPORATED NORTECH MEDICAL SERVICES, INC. [LOGO]NORTHERN COMMERCIAL/ NATIONAL BANK AGRICULTURAL 201 3RD STREET REVOLVING OR DRAW BEMIDJI, MN 56601-0790 NOTE-VARIABLE RATE TELEPHONE: 218-751-1530 "LENDER" ADDRESS 641 EAST LAKE STREET SUITE 234 WAYZATA, MN 55391 TELEPHONE NO. IDENTIFICATION NO. - -------------------------------------------------------------------------------- OFFICER INTEREST PRINCIPAL FUNDING MATURITY CUSTOMER LOAN INITIALS RATE AMOUNT DATE DATE NUMBER NUMBER BAS VARIABLE $3,000,000.00 12/29/95 01/01/97 533551 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, Borrower promises to pay to the order of Lender indicated above the principal amount of THREE MILLION AND NO/100 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. 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 TWO AND 500/1000 percent (2.500%) per annum over the Index Rate. The initial Index Rate is currently FIVE AND 63/100 percent (5.625%) per annum. The initial interest rate on this Note shall be EIGHT AND 125/1000 percent (8.125%) per annum. Any change in the interest rate resulting from a change in the Index Rate will be effective on APRIL 1, 1996 AND QUARTERLY THEREAFTER. INDEX RATE: The Index Rate for this Note shall be: THE 90 DAY LIBOR RATE AS QUOTED BY FIRSTAR BANK MILWAUKEE, N.A. AND IN EFFECT AS OF THE DATE OF RATE CHANGE. 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 FEBRUARY 1, 1996 AND CONTINUING AT MONTHLY TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON JANUARY 1, 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, [X] this Note is a renewal of loan number 533404/532577/530821, 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: DECEMBER 29, 1995 BORROWER:NORTECH SYSTEMS INCORPORATED BORROWER:NORTECH MEDICAL SERVICES, INC. /S/ GARRY M. Anderly /s/ GARRY M. Anderly - ------------------------ ------------------------ GARRY M. ANDERLY GARRY M. ANDERLY VICE PRESIDENT 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:
- ---------------------------------------------------------------------------------------------------------------- PRINCIPAL ADVANCES AND PAYMENTS INTEREST PAYMENTS RATE CHANGE - ---------------------------------------------------------------------------------------------------------------- Made Date Amount of Amount of Principal Undisbursed Received Date Interest Date Date Rate By Advance Payment Balance Commitments By Paid Paid to - ----------------------------------------------------------------------------------------------------------------
[LOGO]NORTHERN NATIONAL BANK COMMERCIAL SECURITY 201 3RD STREET AGREEMENT BEMIDJI, MN 56601-0790 TELEPHONE: 218-751-1530 "LENDER" BORROWER OWNER OF COLLATERAL NORTECH MEDICAL SERVICES, INC. NORTECH MEDICAL SERVICES, INC. ADDRESS ADDRESS 641 EAST LAKE STREET SUITE 234 641 EAST LAKE STREET SUITE 234 WAYZATA, MN 55391 WAYZATA, MN 55391 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 FUNDING MATURITY CUSTOMER LOAN RATE AMOUNT DATE DATE NUMBER NUMBER VARIABLE $3,000,000.00 12/29/95 01/01/97 533551 - -------------------------------------------------------------------------------- b. all other present or future, Obligations of Borrower or Owner to Lender (whether incurred for the same or different purposes than the foregoing); c. all renewals, extensions, amendments, modifications, replacements or substitutions to any of the foregoing; and d. applicable law. 3. COLLATERAL. The Collateral shall consist of all of the following-described property and Owner's rights, title and interest in such property whether now owned or hereafter acquired by Owner and wherever located: [X] All accounts, contract rights and rights to payment in money or in kind for goods sold or leased or for services rendered, and all guarantees and security therefor; all returned or repossessed goods arising from or relating to any account, contract right, or right to payment; and any rights of Owner as an unpaid seller of goods or services; including, but not limited to, the accounts and contract rights described on Schedule A attached hereto and incorporated herein by this reference; [ ] All chattel paper, together with all guarantees and security therefor; including, but not limited to, the chattel paper described on Schedule A attached hereto and incorporated herein by this reference; [ ] All documents of title including, but not limited to, the documents described on Schedule A attached hereto and incorporated herein by this reference; [X} All equipment, machinery, and vehicles including, but not limited to, the equipment described on Schedule A attached hereto and incorporated herein by this reference; [ ] All fixtures, including, but not limited to, the fixtures located or to be located on the real property described on Schedule B attached hereto and incorporated herein by this reference; [X} All general intangibles of any kind or nature including, but not limited to, goodwill, literary rights, copyrights, trademarks and patents; all securities, stocks, bonds, partnership interests, and similar devices, any right to performance or payment, including, without limitation, rights to receive dividends, tax refunds, insurance claims and insurance proceeds, pension payments, and other disbursements; things in action; and rights in intangible property of any kind, specifically including, but not limited to, the general intangibles described on Schedule A attached hereto and incorporated herein by this reference; [ ] All instruments including, but not limited to, the instruments described on Schedule A attached hereto and incorporated herein by this reference; [X] All inventory (goods, merchandise, and other personal property) which are held for sale or lease, or are furnished or to be furnished under any contract of service or are raw materials, work-in-process, supplies, or materials used or consumed in Owner's business, and any right of Owner as an unpaid seller of goods or services, including, but not limited to, the inventory described on Schedule A attached hereto and incorporated herein by this reference; [ ] All minerals or the like located on or related to the real property described on Schedule B attached hereto and incorporated herein by this reference; [ ] All standing timber located on the real property described on Schedule B attached hereto and incorporated herein by this reference; [ ] Other: All monies, instruments, and savings, checking or other deposit accounts that are now or in the future in Lender's custody or control (excluding IRA, Keogh, trust accounts, and deposits subject to tax penalties if so assigned); All accessions, accessories, additions, amendments, attachments, modifications, replacements and substitutions to any of the above; All proceeds and products of any of the above; All policies of insurance pertaining to any of the above as well as any proceeds and unearned premiums pertaining to such policies; and All books and records pertaining to any of the above. Page 1 of 5 /s/GMA 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 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 any 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 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 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 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 or 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 /s/GMA 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 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 canceled 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 on 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 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. Lenders 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 /s/GMA 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: Owner acknowledges that Owner has read, understands, and agrees to the terms and conditions of this Agreement. Dated: DECEMBER 29,1995 LENDER: NORTHERN NATIONAL BANK /s/Barbara A. Smith -------------------------------- BARBARA A. SMITH SENIOR VICE PRESIDENT OWNER: NORTECH SYSTEMS INCORPORATED OWNER: /s/Garry M. Anderly - ----------------------------------- -------------------------------- GARRY M. ANDERLY VICE PRESIDENT OWNER: OWNER: - ----------------------------------- -------------------------------- OWNER: OWNER: - ----------------------------------- -------------------------------- OWNER: OWNER: - ----------------------------------- -------------------------------- OWNER: OWNER: - ----------------------------------- -------------------------------- Page 4 of 5 /s/GMA SCHEDULE A SCHEDULE B The name of the record owner is: ----------------------------------------- SCHEDULE C SCHEDULE D Page 5 of 5 /s/GMA EX-10.2 3 EXHIBIT 10.2 BORROWER NORTECH SYSTEMS INCORPORATED [LOGO]NORTHERN VARIABLE RATE NATIONAL BANK COMMERCIAL 201 3RD STREET PROMISSORY BEMIDJI, MN 56601-0790 NOTE TELEPHONE: 218-751-1530 "LENDER" ADDRESS 4050 NORRIS COURT BEMIDJI, MN 56601 TELEPHONE NO. IDENTIFICATION NO 218-751-0110 - -------------------------------------------------------------------------------- OFFICER INTEREST PRINCIPAL FUNDING MATURITY CUSTOMER LOAN INITIALS RATE AMOUNT DATE DATE NUMBER NUMBER BAS VARIABLE $510,000.00 12/29/95 01/01/01 533522 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, Borrower promises to pay to the order of Lender indicated above the principal amount of FIVE HUNDRED TEN THOUSAND AND NO/100 Dollars ($ 510,000.00) 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 interest 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 TWO AND FIVE 500/1000 percent (2.500%) per annum OVER the Index Rate. The initial Index Rate is FIVE AND 625/1000 percent (5.625%) per annum. The initial interest rate on this Note shall be EIGHT AND 125/1000 percent (8.125%) per annum. Any change in the interest rate resulting from a change in the Index Rate will be effective on: APRIL 1, 1996 AND QUARTERLY THEREAFTER. INDEX RATE: The Index Rate for this Note shall be: THE 90 DAY LIBOR RATE AS QUOTED BY FIRSTAR BANK MILWAUKEE, N.A. AND IN EFFECT AS OF THE DATE OF RATE EXCHANGE. 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 at least $100,000, and after maturity, due to scheduled maturity or acceleration, past due amounts shall be 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: 59 PAYMENTS OF $5,000 BEGINNING FEBRUARY 1, 1996 AND CONTINUING AT MONTHLY TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON JANUARY 1, 2001. ANY CHANGE IN THE INTEREST RATE MAY RESULT IN A CHANGE IN THE MONTHLY PAYMENT AMOUNT, SUCH THAT THE NEW MONTHLY PAYMENT WOULD BE SUFFICIENT TO FULLY AMORTIZE THE LOAN BASED UPON A 15 YEAR AMORTIZATION FROM THE ORIGINATION DATE. 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, [x] this Note is a renewal of Loan Number 533404, and 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 the 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 perpaid. 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. - -------------------------------------------------------------------------------- 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: DECEMBER 29, 1995 BORROWER: NORTECH SYSTEMS INCORPORATED BORROWER /S/ G.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 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. Lenders 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 Borrowers 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: EX-10.3 4 EXHIBIT 10.3 BORROWER NORTECH SYSTEMS INCORPORATED [LOGO]NORTHERN VARIABLE RATE NATIONAL BANK COMMERCIAL 201 3RD STREET PROMISSORY BEMIDJI, MN 56601-0790 NOTE TELEPHONE: 218-751-1530 "LENDER" ADDRESS 4050 NORRIS COURT BEMIDJI, MN 56601 TELEPHONE NO. IDENTIFICATION NO. 218-751-0110 - -------------------------------------------------------------------------------- OFFICER INTEREST PRINCIPAL FUNDING MATURITY CUSTOMER LOAN INITIALS RATE AMOUNT DATE DATE NUMBER NUMBER BAS VARIABLE $640,000.00 12/29/95 01/01/01 533553 - -------------------------------------------------------------------------------- PROMISE TO PAY For value received, Borrower promises to pay to the order of Lender indicated above the principal amount of SIX HUNDRED FORTY THOUSAND AND NO/100 Dollars ($640,000.00) 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 interest 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 TWO AND 500/1000 percent (2.500%) per annum over the Index Rate. The initial Index Rate is FIVE AND 625/1000 percent (5.625%) per annum. The initial interest rate on this Note shall be EIGHT AND 125/1000 percent (8.125%) per annum. Any change in the interest rate resulting from a change in the Index Rate will be effective on: APRIL 1, 1996 AND QUARTERLY THEREAFTER. INDEX RATE: The Index Rate for this Note shall be: THE 90 DAY LIBOR RATE AS QUOTED BY FIRSTAR BANK MILWAUKEE, N.A. AND IN EFFECT AS OF THE DATE OF RATE CHANGE. 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 at least $100,000.00, and after maturity, due to scheduled maturity or acceleration, past due amounts shall bear interest at the lessor 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: 59 PAYMENTS OF $13,060.00 BEGINNING FEBRUARY 1, 1996 AND CONTINUING AT MONTHLY TIME INTERVALS TEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON JANUARY 1, 2001. ANY CHANGE IN THE INTEREST RATE MAY RESULT IN A CHANGE IN THE MONTHLY PAYMENT AMOUNT, SUCH THAT THE NEW MONTHLY PAYMENT WOULD BE SUFFICIENT TO FULLY AMORTIZE THE LOAN BY THE MATURITY DATE. 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, [X] this Note is a renewal of Loan Number 533353/533404, and 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 of 5.00% of the unpaid installment. - -------------------------------------------------------------------------------- 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: DECEMBER 29, 1995 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 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. Lenders 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: EX-10.4 5 EXHIBIT 10.4 [LOGO] [LETTERHEAD] 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 $3,000,000.00 12/29/95 01/01/97 533551 VARIABLE $510,000.00 12/29/95 01/01/01 533552 VARIABLE $640,000.00 12/29/95 01/01/01 533553 - ---------------------------------------------------------------------------------------------------------
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 thereof; 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 of 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 101 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 Agreementnt; (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 costs of filing documents in all offices whereever 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 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 owning 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 or 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. 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 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 canceled 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 my 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 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 on 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. Lenders 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 prejudgement 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 the 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 prior written 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 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: Owner acknowledges that Owner has read, understands, and agrees to the terms and conditions of this Agreement. Dated: DECEMBER 29,1995 LENDER: NORTHERN NATIONAL BANK /s/Barbara A. Smith ----------------------------------- BARBARA A. SMITH SENIOR VICE PRESIDENT OWNER: NORTECH SYSTEMS INCORPORATED OWNER: /s/Garry M. Anderly - ----------------------------------- ----------------------------------- GARRY M. ANDERLY VICE PRESIDENT OWNER: OWNER: - ----------------------------------- ----------------------------------- OWNER: OWNER: - ----------------------------------- ----------------------------------- OWNER: OWNER: - ----------------------------------- ----------------------------------- SCHEDULE A SCHEDULE B The name of the record owner is: ------------------------------------------------ SCHEDULE C SCHEDULE D EX-10.5 6 EXHIBIT 10.5 ASSET PURCHASE AGREEMENT AGREEMENT, (hereinafter, together with the Exhibits annexed here to the "Agreement") made and entered into as of the 24th day of February, 1995, by and among Nortech Systems Incorporated, a Minnesota corporation ("Purchaser"), Monitor Technology Corporation, a Minnesota corporation, ("Seller") and C. Paul Pesek, John Dettloff, Jack Lehtinen, Joseph Lloyd, Daniel J. Jones, Michael Wheelock, Timothy J. Kalstad, Thomas J. Tingo, Curtis S. Gustafson, John L. Roudebush, and John F. Lamoureux, who are all of the shareholders (the "Shareholders") of Seller. WITNESSETH: WHEREAS, Seller owns and operates the Plant located at 2864 Vicksburg Lane, Plymouth, Minnesota 55447 (the "Plant") . WHEREAS, Purchaser desires to purchase and acquire all the assets and business of Seller, and Seller is willing to sell said assets and business to Purchaser, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the purchase and sale of the assets and of the premises and the mutual promises, covenants and conditions hereinafter set forth, Seller and Shareholder, jointly and severally, and Purchaser, hereby agree as follows: ARTICLE I DEFINITIONS As used herein, the following terms shall have the meanings set forth below, and where said meanings are intended, said terms shall be capitalized: 1.1 "INVENTORY" shall mean all of Seller's inventory and supplies, including parts, supplies, raw materials, work in process, finished goods and goods held for sale to customers. 1.2 "RECEIVABLES" shall mean Seller's accounts receivable arising from sales of merchandise or services to customers in the ordinary course of Seller's business. 1.3 "EQUIPMENT" means all of Seller's tangible assets, other than inventory, including but not limited to furniture, machinery, equipment, tooling, computers and the software utilized therewith, and vehicles, specifically including but not limited to the items listed on Exhibit A. 1.4 "CONTRACTS" shall mean all of Seller's right, title and interest in and to all contracts, commitments and agreements which relate to the Assets or Seller's business, all of which are listed on an Exhibit B attached hereto. Those Contracts which Purchaser elects to acquire as provided herein are referred to as the "Acquired Contracts." 1.5 "ORDERS" shall mean all Seller's orders. Exhibit C attached hereto lists all of Sellers Orders for the Plant as of the date set forth on said Exhibit. 1.6 "PERMITS AND APPROVALS" shall mean all licenses, permits, franchises, approvals and authorizations by governmental authorities or third parties held by Seller. 1.7 "BOOKS AND RECORDS" shall mean all of Seller's books and records relating to the Assets or Seller's business (other than Seller's tax returns) including without limitation, lists of customers and suppliers, and records with respect to pricing, volume, payment history, cost, inventory, machinery and equipment, mailing lists, distribution and customer lists, sales, purchasing and materials, and including any such records which are maintained on computer. 1.8 "PLANS" shall mean all plans, blueprints, designs, processes, computer programs and related documents, formulae, process sheets, drawings, instructions, machine manuals, any non-expired warranties and guarantees, and similar items used or required by Seller in its business, including, but not limited to, such items used in production of products, such items relating to equipment and its operation, and such items relating to the building and improvements on the Real Estate. 1.9 "INTELLECTUAL PROPERTY RIGHTS" shall mean all patent copyrights, trademarks, trade names, trade secrets, and knowhow, utilized by Seller, including but not limited to those items listed on Exhibit D attached hereto. 1.10 "GOODWILL" shall mean all goodwill and business of Seller. 1.11 "ASSETS" shall mean all of the assets, properties and rights of Seller, including but not limited to cash on hand and on deposit, Inventory, Receivables, Equipment, Acquired Contracts, Orders, Permits and Approvals, Books and Records, Plans, Intellectual Property Rights, and Goodwill. 1.12 "CLOSING DATE" shall mean the date on which the Closing hereunder is held. The Closing shall be held at 10:00 a.m., then current Minnesota time, on March 1, 1995, or at such other time or date as the parties may mutually agree upon in writing, unless delayed by a party for failure to satisfy conditions precedent to said party's obligations hereunder, in which case Closing shall be held as soon as practicable after such conditions are satisfied. 1.13 "LIABILITIES AND OBLIGATIONS" shall mean any indebtedness, claim, obligation or liability of any kind or nature whatsoever, whether absolute or contingent, liquidated or unliquidated, due or to become due, accrued or not accrued, or 2 otherwise. 1.16 "GUARANTOR" shall mean Myron Kunin. ARTICLE II PURCHASE AND SALE 2.1 PURCHASE PRICE. On the Closing Date, subject to terms and conditions set forth in this Agreement, Seller agrees to sell and convey to Purchaser, and Purchaser agrees to purchase, the Assets, for an amount (the "Purchase Price") equal to the sum of $1,500,000 plus those liabilities of Seller that are assumed by Purchaser pursuant to this Agreement. The parties agree to allocate the Purchase Price among the Assets in accordance with an allocation schedule to be prepared at Closing based upon the results of Purchaser's review or audit of the financial statements of Seller. Each of the parties hereto agrees to report this transaction consistently with the foregoing allocation, specifically including for income tax purposes. 2.2 PAYMENT AT CLOSING. The $1,500,000 portion of the Purchase Price shall be paid as follows: (a) By delivery to Seller of 200,000 shares of Purchaser's common stock (the "Nortech Shares") with a guaranteed minimum value one year after Closing of $6 per share, as provided below. The Nortech Shares will be restricted for one year after Closing and shall not be sold or otherwise transferred or encumbered during such one-year period without Purchaser's prior written consent; and (b) By delivery to the Escrow Agent of 50,000 shares of Purchaser's common stock (the "Escrow Shares"). The Escrow Shares shall be held by the Escrow Agent pursuant to an escrow agreement in the form attached hereto as Exhibit H. (c) Commencing on the anniversary date of Closing and for a 30-day period thereafter, Seller shall have the right to require Purchaser to purchase the Nortech Shares for $1,200,000 (the "Put Option"). The Put Option shall be exercised by Seller, if at all, by giving written notice to Purchaser within the 30-day period referred to above. If Seller does not give such notice, the Put Option shall terminate and be of no further force and effect. The obligation of Purchaser to purchase the Nortech Shares pursuant to the Put Option shall be unconditionally guaranteed by the Guarantor; 3 (d) Purchaser shall, within six months after Closing, file a registration statement at its expense under the Securities Act of 1933 covering the Nortech Shares and use its best efforts to cause the Nortech Shares to be registered and available for public distribution by the Seller, without restriction under federal and Minnesota state law, within one year after Closing. Purchaser shall keep the registration effective for a period of 24 months after registration to enable the Seller to make a public distribution of the Nortech Shares acquired pursuant to this agreement. (e) Commencing on the anniversary date of Closing and for a 30-day period thereafter, Seller shall have the right to require Purchaser to purchase any Escrow Shares delivered to Seller pursuant to the Escrow Agreement for $6 per share (the"Escrow Put Option"). The Escrow Put Option shall be exercised by Seller, if at all, by giving written notice to Purchaser within the 30-day period referred to herein. If Seller does not give such notice, the Escrow Put Option shall terminate and be of no further force and effect. The obligation of Purchaser to purchase the Escrow Shares pursuant to the Escrow Put Option shall be unconditionally guaranteed by the Guarantor. All payments made hereunder are subject to the terms and conditions herein set forth, and will be made by Purchaser in reliance upon the representations, warranties, covenants and agreements contained herein. 2.3 NO ASSUMPTION OF LIABILITIES. Purchaser shall not assume or become liable for any Liabilities and Obligations of Seller except only those liabilities and obligations expressly assumed by Purchaser pursuant to Section 2.4 thereof. 2.4 ASSUMED LIABILITIES. At Closing, Purchaser shall execute and deliver to Seller an undertaking wherein Purchaser shall assume and agree to pay or discharge the following: (a) All of Seller's liabilities and obligations as of December 31, 1994, which are reflected or reserved against in Seller's balance sheet of that date, but only to the extent so reflected or reserved against; (b) All of Seller's liabilities and obligations arising in the ordinary course of its business between December 31, 1994 and the Closing, except those referred to in subdivisions (i), (ii) and (iii) of subparagraph (d) of this section; 4 (c) All of Seller's liabilities and obligations arising under Acquired Contracts and all other contracts and commitments entered into in the ordinary course of Seller's business at any time before Closing; (d) Purchaser shall not assume or be liable for any liability of Seller in respect of: (i) any profit derived from the sale provided for by this agreement; (ii) the payment of any accrued vacation pay owed to any shareholder by Seller. 2.5 INDEMNIFICATION AGAINST NON-ASSUMED LIABILITIES. Seller shall indemnify, defend and hold Purchaser harmless from and against all claims, demands, losses, expenses, and liabilities, including but not limited to reasonable attorneys' fees, arising in any fashion out of any non-assumed Liabilities or Obligations of Seller. This indemnity shall be limited to Purchaser's rights in the Escrow Shares. 2.6 NON-COMPETE. At the closing, Purchaser and Seller and the Shareholders shall enter into a Non-Compete Agreement in the form of Exhibit E attached hereto, pursuant to which each of Seller and the Shareholders will agree not to compete with Purchaser for a period of five (5) years after the Closing. ARTICLE III DELIVERIES BY SELLER 3.1 SELLER'S DELIVERIES. On the Closing Date, subject to the terms and conditions set forth in this Agreement, Seller shall make the following deliveries: (a) Bill of Sale, Assignments, certificates of title, and other instruments of conveyance reasonably requested by Purchaser; (b) Any assignments of registered intellectual property such as patents or registered trademarks; (c) A current certified search showing all financing statements on file against the Assets, together with appropriate releases or termination statements for any security interests in the Assets; (d) Non-Compete Agreements duly executed by Seller and the Shareholders; (e) The Escrow Agreement duly executed by Seller; 5 (f) All other items or documents necessary or appropriate hereunder. 3.2 PURCHASER'S DELIVERIES. On the Closing Date, subject to the terms and conditions set forth in this Agreement, Purchaser shall make the following deliveries: (a) A certificate for the Nortech Shares in the number determined pursuant to Sections 2.2 and 2.3 above. (b) Purchaser shall execute and deliver the Non-Compete Agreement. (c) The guaranty of the Guarantor pursuant to Section 2.2(b) above, in the form as set forth in Exhibit F annexed hereto: (d) The Escrow Agreement duly executed by Purchaser; (e) All other items or documents necessary or appropriate hereunder. ARTICLE IV CLOSING The Closing hereunder shall take place at the offices of Phillips & Gross, P.A., attorneys for Purchaser, 5420 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402, on the Closing Date, or at such other place as may be mutually agreed upon in writing by Purchaser and Seller. ARTICLE V INVESTIGATION From and after the date hereof and through the Closing Date, Seller shall afford to the officers and representatives of Purchaser free access to the properties and records of Seller in order that Purchaser may have full opportunity to make such investigation at reasonable times as it shall desire of the assets and of the affairs of Seller, and Seller shall provide to Purchaser reasonable assistance in the conduct of said investigation by Purchaser. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE SELLER AND SHAREHOLDERS Seller and Shareholders represent and warrant to Purchaser that the following statements are true and correct as of the date of this Agreement and will be true and correct on the Closing Date as if made on said Date. 6 6.1 SELLER. Seller is a corporation duly organized and existing and in good standing under the laws of the state of Minnesota and is entitled to own or lease its properties and to carry on its business as and in the places where such properties are now owned, leased or operated, or such business is now conducted. Seller has full power and authority to sell, convey, assign, transfer and deliver the Assets as herein provided, and all corporate and other proceedings necessary to be taken by Seller in connection with the transactions provided for by this Agreement and necessary to make the same effective have been duly and validly taken, and this Agreement has been duly and validly executed and delivered by each of Seller and Shareholders and constitutes a valid and binding obligation of each of Seller and Shareholders enforceable in accordance with its terms. Shareholders constitute the only shareholders of Seller, and no other persons or entities hold stock or other equity interests in Seller. Seller does not have any subsidiaries, nor does it have any equity interest in any corporation, partnership, limited liability company, or other business entity. 6.2 TITLE. Except as set forth on Exhibit G, Seller has good and marketable title to the Assets, free and clear of any mortgages, liens, security interests, pledges, easements or encumbrances of any kind or nature whatsoever. At the Closing, Seller will convey good and marketable title to the Assets to be sold hereunder, free and clear of any and all mortgages, liens, security interests, pledges, easements, or encumbrances of any kind or nature whatsoever. 6.3 OTHER OPERATIONS. Each of Seller and Shareholders does not have any divisions or other operations, nor do any subsidiaries or other affiliated or controlled corporations or entities of Seller or Shareholders have any divisions or operations, which produce products similar to those sold by Seller. 6.4 NON-BREACH, ETC. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Seller and each of Shareholders will not (a) result in a breach of any of the terms or conditions of, or constitute a default under, any mortgage, note, bond, indenture, agreement, license or other instrument or obligation (including any "Contracts") to which Seller or each Shareholder is now a party or by which it or any of its properties or assets may be bound or affected, or (b) violate any order, writ, injunction or decree of any court, administrative agency or governmental body. 6.5 CONTRACTS. Except as listed in Exhibit B, Seller is not a party to any written or oral: (i) contract, agreement or understanding for the employment of any officer, consultant, director or 7 employee; (ii) contract, agreement or understanding with any labor union; (iii) contract, agreement or understanding for the purchase of any materials, supplies or equipment; (iv) contract, agreement or understanding for the sale of products or performance of services; (v) license or franchise agreement, either as licensor or licensee or franchisor or franchisee, including any related to intellectual property, or distributor, dealership or sales agency contract, agreement or understanding; (vi) lease for real or personal property under which Seller is a lessor or lessee, or contract, agreement or understanding to purchase or sell real property or a material amount of personal property; (vii) pension, profit-sharing, bonus, deferred compensation, retirement or stock option or stock purchase plan in effect with respect to employees or others; (viii) contract or agreement granting to any person the right to use any property or property right of Seller, including any trademark or patent licensing agreement, contract or understanding; (ix) plan or contract or other arrangement providing for insurance for any officer, director or employee or member of their families; (x) construction contract; (xi) contract or agreement containing covenants by Seller not to compete in any line of business or with any person; (xii) joint venture contract or partnership or arrangement or other agreement involving a sharing of profits; or (xiii) contract or agreement relating to the borrowing or lending of money by Seller, providing for letters of credit, or providing for any mortgage, lien or security interest upon any of the Assets; or 8 (xiv) any guaranties or indemnifications by Seller, except for Seller's obligations resulting from the endorsement of checks deposited for collection; (xiv) any contracts calling for payments by Seller in excess of $25,000.00; (xvi) other material contract, agreement or understanding. Seller has provided to Purchaser true, current, correct and complete copies of all of the Contracts, including all items specified in the preceding paragraph. Seller has performed all obligations required to be performed by it to date under, and Seller and each other party to each Contract is not in default under, each of the Contracts, all of which are in full force and effect. Upon request of Purchaser, Seller shall assign to Purchaser any or all of the Contracts. Except as stated on Exhibit H each of said Contracts are assignable without consent. 6.6 INVENTORY. The Inventory reflected on the Current Statement is valued at the lower of cost or market and has not been written down since the date of the Interim Statement. The cost of all such inventory is determined using the last-in first-out method, in accordance with generally accepted accounting principles. 6.7 EQUIPMENT. Except as may be set forth on Exhibit I, all items included in the Equipment are in good condition and repair, ordinary wear and tear excepted. 6.8 ASSETS COMPLETE, ETC. The Assets which will be acquired by Purchaser at Closing include (i) all Assets used in or necessary for the operation of Seller's business, and (ii) except for assets leased under leases disclosed herein, except for inventory and supplies utilized in the ordinary course of business, and except non-material items of personal property owned by employees, all assets presently located at the Plant. No tooling, fixtures or any manufacturing operation is located other than at the Plant, except that certain tooling is held by third parties ("Tooling Holders") who perform manufacturing operations for Seller as is specified on Exhibit I. There are no contracts, agreements, or understandings with the Tooling Holders except as referenced on Exhibit 1. At the Closing, Seller will send notices to the Tooling Holders advising them that the Tooling is the property of Purchaser, and will take such other actions as may be reasonably required to give purchaser ownership and control of the tooling held by the Tooling Holders. Seller does not lease or otherwise use any property owned by third parties in its operations, except as may occur under leases 9 disclosed as Contracts hereunder. 6.9 LITIGATION. There are no claims, actions, suits, proceedings or investigations (whether or not purportedly on behalf of Seller) pending or threatened against or affecting Seller or the Assets, or before or by any federal, state, municipal or other governmental department, commission, board, agency or instrumentality, domestic or foreign, nor has any such action, suit, proceeding or investigation been pending during the three (3)-year period preceding the date hereof; and Seller is not operating under or subject to, or in default with respect to, any order, writ, injunction or decree of any court or federal, state, municipal or other governmental department, commission, board, agency or instrumentality, domestic or foreign. 6.10 COMPLIANCE WITH LAWS. Seller has complied with, and the Assets comply with, all applicable laws, regulations and orders applicable including without limitation CERCLA, RCRA, MERLA, the Occupational Safety & Health Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and the Refuse Act, and the present uses by Seller of the Assets do not violate any such laws, regulations and orders. 6.11 INTELLECTUAL PROPERTY. Exhibit D lists all service marks, patents, trademarks, trade names, trademark and trade name registrations, brand names, copyrights and copyright registrations, all pending applications for any of the foregoing, and any other proprietary rights, inventions, trade secrets, or know- how or processes (hereinafter the foregoing are collectively referred to as "Intellectual Property") used in the operation of Seller's business, or owned by Seller, and any licenses granted by or to Seller, and any other agreements to which it is a party, which relate, in whole or in part, to Intellectual Property. Said Exhibit further includes a brief description of the filing, registration or issuance dates of any such Intellectual Property. Seller owns or is licensed to use, all Intellectual Property used by it in the conduct of currently conducted. The use by Seller of any such Intellectual Property, and the conduct by Seller of its business, does not infringe on the rights of any third party, and no claim has been asserted to such effect or otherwise affecting any Intellectual Property of Seller. The Intellectual Property to be assigned, transferred or conveyed to Purchaser hereunder constitutes all the Intellectual Property used by Seller in the conduct of its business, or in connection with the Assets. 6.12 LABOR CONTROVERSIES. There are no controversies pending or to the best knowledge of Seller, threatened, between Seller and (i) any union or (ii) any of Seller's employees. Seller is not currently subject to (i) any threats of strikes or work stoppages, or (ii) any organizational efforts or demands for collective bargaining or any union organization. Seller is in substantial compliance with applicable labor laws. Seller is not party to any 10 collective bargaining agreements. 6.13 PENSION AND PROFIT SHARING PLANS; BENEFITS. Seller has no pension or profit sharing plans which cover any of its employees, except as referenced on Exhibit J. All contributions required to be made or accrued prior to the Closing Date to any such plans shall have been paid. Exhibit J contains a complete list of all benefit plans and employee benefits provided by Seller to its employees including but not limited to any disability, medical, dental, workers compensation, health insurance, life insurance, vacation, benefits plans, incentive plans, fringe benefit plans and any other material plans, programs, agreements or arrangements which provide benefits to any current or former employee of Seller. 6.14 CHANGES IN SUPPLIERS AND CUSTOMERS. Seller is not aware of any facts which indicate that any of the customers of Seller intends to cease being a customer of Seller (or intends to not continue as customer with Purchaser after the Closing hereunder), nor is Seller aware of any facts which indicate that any supplier to Seller intends to cease doing business with Seller, or to not do business with Purchaser after the Closing hereunder, whether as a result of the transactions contemplated hereby or otherwise. 6.15 CONDUCT OF BUSINESS. Since the ending date of the most recent Seller Statement and until the Closing Date, Seller has not and will not have: (i) incurred any Liabilities or Obligations (absolute or contingent), except for Liabilities and Obligations disclosed in the Current Statement, or in the Exhibits annexed hereto, and except for such Liabilities and Obligations as have arisen in the ordinary course of business of Seller since the date of the Current Statement, none of which newly arisen Liabilities and Obligations have a material adverse effect upon Seller, the Assets, or Seller's organization, business, properties, or financial condition; (ii) mortgaged, pledged or subjected to any lien, charge or other encumbrance, any of the Assets, tangible or intangible; (iii) sold or transferred any assets included in the Assets, other than sales of inventory or utilization of supplies in the ordinary course of business; (iv) sold, assigned or transferred any Intellectual Property, or other intangible assets of Seller or 11 relating to the Assets or Seller's business, or included in the Assets; (v) suffered any extraordinary losses or waived any rights of substantial value relating to Seller's business or the Assets; (vi) suffered any damage, destruction or loss to any Assets, whether or not covered by insurance; (vii) entered into any transaction involving or relating to Seller's business or the Assets other than in the ordinary course of business; (viii) increased the compensation payable, or to become payable by Seller to any of its employees including, but not limited to, any bonus payment or deferred compensation; (ix) made or suffered any amendment or termination of any Contracts; (x) increased any benefits to employees of Seller under pension, insurance or other employee benefit programs; (xi) changed its methods of accounting in any respect; (xii) acquired a significant portion of the assets or stock of any person or business entity; or (xiii) suffered a termination of, or amended, any license or permit. 6.16 EMPLOYEES. Seller is not aware that any employees of Seller intend to cease their employment with Seller, whether as a result of the transactions contemplated hereby or otherwise. 6.17 LICENSES AND PERMITS. All licenses, permits, franchises, approvals and governmental authorizations required for Seller, its business, the Assets, or their operations, are listed on Exhibit K. No other licenses, permits, franchises, approvals or other governmental authorizations are required for Seller, its business, the Assets or their operations as heretofore conducted by Seller. True, current, correct and complete copies of such licenses, permits, franchises, approvals, and governmental authorizations have been delivered by Seller to Purchaser. Seller has performed in all material respects all obligations required to be performed by it to date under, and is not in default under, any such licenses, permits, franchises, approvals, or governmental authorizations or the laws, regulations and requirements of the licensing and permit authorities. All such licenses, permits, 12 franchises, approvals, and governmental authorizations are in full force and effect. Except as set forth on Exhibit K, all such licenses, permits, franchises, approvals, and governmental authorizations will be assigned to Purchaser at the Closing. 6.18 PLANS. The Plans relating to products produced by Seller are complete and of such quality that competent personnel by use of such Plans can produce, manufacture and assemble such products so that they meet the specifications and requirements applicable thereto. 6.19 SUPPLIERS. Exhibit L attached hereto lists all significant suppliers of products or services to Seller. 6.20 PRODUCTS AND WARRANTIES. Except as listed on Exhibit M, all products sold or leased by Seller during the last five (5) years complied, and all finished goods included in Seller's inventory on the Closing Date will comply, with Seller's standard warranties applicable thereto and with all requirements in any applicable agreements of sale as to such products. True, complete and correct copies of Seller's standard warranties have been provided to Purchaser. 6.21 MATERIAL CHANGE. Since the date of the Current Statement there has been no material change in the condition, financial or otherwise, of Seller, Seller's business, or the Assets from that shown in said Statement, except changes occurring in the ordinary course of business, which changes have not materially adversely affected the Assets, or Seller's organization, business, properties or financial condition. No statute, order, judgment, writ, injunction, decree, permit, rule or regulation of any court or governmental or regulatory body has been adopted or entered, or is proposed to be adopted or entered, which may materially and adversely affect Seller, the Assets or the business of Seller. There has been no event or occurrence affecting Seller, the Assets, or the business of Seller which may have a material adverse effect upon Seller's business, prospects or Assets. 6.22 DISCLOSURE. No representation or warranty made by Seller or Shareholders herein or in any agreements, certificates or documents delivered in connection with this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make such representation or warranty not misleading. ARTICLE VII REPRESENTATIONS AND WARRANTIES BY PURCHASER Purchaser represents and warrants to Seller that the following statements are true and correct as of the date of this Agreement 13 and will be true and correct on the Closing Date as if made on said date: 7.1 ORGANIZATION AND STANDING. Purchaser is a corporation duly organized, existing and in good standing under the laws of the State of Minnesota. 7.2 NO CONFLICT. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not (a) result in a breach of any of the terms or conditions of, or constitute a default under, any mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which Purchaser is a party or by which it or any of its properties or assets may be bound or affected, or (b) violate any order, writ, injunction or decree of any court, administrative agency or governmental body, or (c) conflict with or result in the breach of the terms, conditions or provisions of the Articles of Incorporation or Bylaws of the Purchaser. 7.3 AUTHORITY. Purchaser has full power and authority to enter into this Agreement and to carry out the transactions contemplated hereby, and all corporate and other proceedings required to be taken by Purchaser in connection with this Agreement and the transactions contemplated hereby and necessary to make the same effective have been duly and validly taken. This Agreement constitutes a valid and binding obligation of Purchaser and is enforceable in accordance with its terms. ARTICLE VIII COVENANTS OF THE SELLER 8.1 ACTION BY SELLER. Seller will not take or permit to be taken any action or do or permit to be done anything in the conduct of its business or otherwise, which would be contrary to or in breach of any of the terms, conditions or provisions of this Agreement, or which would cause any of the representations and warranties of Seller to be untrue as of the Closing Date or any time thereafter. Seller will not enter into any contract or incur any liability the amount of which would exceed $25,000 without the prior consent of Purchaser. 8.2 FEES. Seller shall pay all fees and disbursements of counsel and accountants for Seller arising in connection with this Agreement and the transactions contemplated hereby. 8.3 FURTHER ASSURANCES. On the Closing Date, and from time to time thereafter, at the request of Purchaser, Seller will execute and deliver to Purchaser all such assignments, endorsements and other documents, and take such other action as Purchaser may reasonably request in order more effectively to transfer and assign to Purchaser the Assets transferred to Purchaser pursuant to this Agreement, to confirm the title of Purchaser thereto and to assist 14 Purchaser in exercising its rights with respect thereto and under this Agreement. 8.4 NON-COMPETE AGREEMENT. At the Closing, Purchaser and Seller shall enter into the Non-Compete Agreement in the form of Exhibit E annexed hereto. ARTICLE IX NO BROKERS OR FINDERS Seller and Purchaser represent and warrant to each other that each did not directly or indirectly engage any person, corporation or partnership to bring about the consummation of the transactions contemplated herein, and, that no person, corporation or partnership is entitled to a broker's commission, finder's fee or any similar compensation upon the consummation of the transactions contemplated herein. If this representation and warranty is breached by either Seller or Purchaser, the breaching party shall indemnify and hold harmless the other party from any and all claims, demands, liabilities and obligations (and any and all expenses and costs incurred in connection with or in defending against the same), which may arise due to any third party's claim as a broker or finder. ARTICLE X CONDITIONS PRECEDENT OF PURCHASER The obligations of Purchaser hereunder are subject to the conditions that, on or before the Closing Date: 10.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties of Seller and Shareholders contained in this Agreement or in any certificate or document delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true on and as of the Closing Date as though such representations and warranties were made at and as of such date. 10.2 COMPLIANCE WITH THE AGREEMENT. Seller and Shareholders shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date. 10.3 DELIVERIES. The documents required under Article 3.1 hereof shall be tendered by Seller for delivery to Purchaser at the Closing. 10.4 INJUNCTION. On the Closing Date, there shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them not be consummated as herein provided. 15 10.5 CASUALTY. Prior to the Closing Date, the business and the Assets of Seller, or any portion thereof, shall not have been adversely affected in any material way as a result of any fire, accident, flood or other casualty or act of God or the public enemy. 10.6 ADVERSE DEVELOPMENT. There shall have been no developments in the business of Seller, or in the Assets, between the date of the Interim Statement and the Closing Date which would have a materially adverse effect on Seller's business or the Assets. 10.7 NON-COMPETE AGREEMENT. The Non-Compete Agreement (Exhibit E) shall have been executed and delivered by Seller and Shareholders to Purchaser. 10.8 INVESTIGATIONS. Purchaser shall be satisfied with the results of its legal, accounting, business, environmental and other due diligence review of Seller's business and the Assets. Without limiting the generality of the foregoing, an environmental inspection of the Assets shall have been completed on behalf of Purchaser, and the results of said inspection shall be satisfactory to Purchaser, in its sole discretion. ARTICLE XI CONDITIONS PRECEDENT OF THE SELLER The obligations of the Seller hereunder are subject to the conditions that, on or before the Closing Date: 11.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties of Purchaser contained in this Agreement or in any certificate or document delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby, shall be true on and as of the Closing Date as though such representations and warranties were made at and as of such date. 11.2 PURCHASER'S COMPLIANCE WITH THE AGREEMENT. Purchaser shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date. 11.4 INJUNCTION. There shall be no effective injunction, restraining order or order of any nature issued by a court of competent jurisdiction which shall direct that this Agreement, or any of the transactions provided for herein, not be consummated as herein provided. 16 ARTICLE XII INDEMNIFICATION 12.1 INDEMNIFICATION. Seller and Shareholders hereby agree that, notwithstanding the Closing, the delivery of instruments of conveyance, and regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party hereto may have in respect thereof, Seller and the Shareholders will for a period of one (1) year after Closing indemnify, save and hold Purchaser harmless from and against any and all liabilities, losses, damages, claims, deficiencies, costs and expenses (including, without limitation, reasonable attorney fees and other costs and expenses incident to any suit, action or proceeding) arising out of or resulting from and will pay to Purchaser the amount of damages suffered thereby together with any amount which it may pay or become obligated to pay on account of: (a) the breach or inaccuracy of any warranty or representation by Seller or Shareholders herein or any misstatement of a fact or facts herein made by the Seller or Shareholders; (b) the failure by Seller or Shareholders to state or disclose a material fact herein necessary in order to make the facts herein stated or disclosed not misleading; (c) any failure of the Seller or Shareholders to perform or observe any term, provision, covenant or condition hereunder on the part of any of them to be performed or observed; or (d) any act performed, transaction entered into, or state of facts suffered to exist by Seller or Shareholders in violation of the terms of this Agreement. The liability of Seller and Shareholders under this indemnification shall be limited to Purchaser's rights in the Escrow Shares. ARTICLE XIII NATURE AND SURVIVAL OF REPRESENTATIONS All statements contained in any documents, certificates or other instruments delivered by or on behalf of Seller or Purchaser pursuant to this Agreement or in connection with the transactions contemplated hereby shall be deemed representations and warranties by Seller or Purchaser hereunder. All representations and warranties and agreements made by Seller or Purchaser in this Agreement or in any documents, certificates, or other instruments delivered pursuant hereto shall survive the Closing hereunder (and any investigation at any time made by or on behalf of Seller or Purchaser). 17 ARTICLE XIV NOTICES All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed first-class postage prepaid: (a) To the Seller or Shareholders: Monitor Technology Corporation 2284 Vicksburg Lane Plymouth, Minnesota 55447 Attention: -------------------------- with a copy thereof to: ------------------------------------ ------------------------------------ ------------------------------------ (b) To Purchaser: Nortech Systems Incorporated 641 East Lake Street, Suite 234 Wayzata, Minnesota 55391 Attention: Quentin Finkelson, President with a copy thereof to: Bert M. Gross Phillips & Gross, P.A. 5420 Norwest Center 90 South Seventh Street Minneapolis, Minnesota 55402 or to such other address or to such other person as Purchaser or Seller shall have last designated by notice to the other. ARTICLE XV MODIFICATION This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and shall not be modified or amended except by an instrument in writing signed by or on behalf of the parties hereto. ARTICLE XVI EXPENSES Whether or not the transactions contemplated hereby are consummated, each of the parties hereto shall pay its own expenses incurred in connection with the authorization, preparation, 18 execution or performance of this Agreement and all transactions contemplated hereby, including without limitation all fees and expenses of agents, representatives, counsel and accountants. ARTICLE XVII ASSIGNMENT This Agreement shall not be assignable by any party hereto without the prior written consent of the other party. ARTICLE XVIII MINNESOTA LAW TO GOVERN This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota. ARTICLE XIX COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. ARTICLE XX HEADINGS The headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision thereof. Reference to numbered "articles," "sections," "paragraphs" and "subparagraphs," and to lettered "Exhibits" refer to articles, sections, paragraphs and subparagraphs of this Agreement and Exhibits annexed thereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. NORTECH SYSTEMS INCORPORATED /s/ Quentin E. Finkelson ----------------------------- By: Quentin E. Finkelson Its President, Chairman and Chief Executive Officer MONITOR TECHNOLOGY CORPORATION /s/ (Illegible) -------------------------------- By: (Illegible) Its Chairman 19 SHAREHOLDERS /s/ C. Paul Pesek -------------------------------- C. PAUL PESEK /s/ John Detloff -------------------------------- JOHN DETLOFF /s/ Jack Lehtinen -------------------------------- JACK LEHTINEN /s/ Joseph A. Lloyd -------------------------------- JOSEPH LLOYD /s/ Daniel J. Jones -------------------------------- DANIEL J. JONES -------------------------------- MICHAEL WHEELOCK -------------------------------- TIMOTHY J. KALSTAD -------------------------------- THOMAS J. TINGO -------------------------------- CURTIS S. GUSTAFSON -------------------------------- JOHN L. ROUDEBUSH -------------------------------- JOHN F. LAMOUREUX 20 EX-10.6 7 EXHIBIT 10.6 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT (together with the exhibits and schedules hereto, the "Agreement") is entered into as of AUGUST 23, 1995 , by and between Communication Cable, Inc., a North Carolina corporation ("Seller" herein) and Nortech Systems Incorporated ("Buyer" herein): RECITALS A. Seller, through its Aerospace Division, is the owner of certain assets more particularly described in this Agreement used by it in the business of manufacturing and selling multi-conductor electrical cable assemblies to customer specifications for the aerospace industry. B. Buyer wishes to purchase those assets and is willing to assume certain associated obligations and liabilities, and Seller is willing to sell those assets, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties agree as follows: 1. DEFINITIONS. The Following terms shall have the following meanings when used in this Agreement: "Affiliate" shall mean any parent, subsidiary, or division, whether direct or indirect, of a specified corporation or division. "Assets" shall have the meaning set forth in Section 2.1. "Assigned Contracts" shall have the meaning set forth in Section 2.1.8. "Assignment and Assumption Agreement" shall mean an Assignment and Assumption Agreement substantially in the form of Exhibit A hereto. "Assumed Liabilities" shall have the meaning set forth in Section 3.5. "Balance Sheet" shall mean the unaudited balance sheet of the Division as of July 31, 1995 (the "Balance Sheet Date"), attached hereto as Exhibit B-1, subject to adjustments reflecting Intercompany Transactions not reflected in such balance sheet. "Bill of Sale" shall mean a Bill of Sale substantially in the form of Exhibit C hereto. 2 "Closing" and "Closing Date" shall have the respective meanings set forth in Section 3.1. "Contract" shall mean any contract, agreement, license, lease, sales order, purchase order, or other legally binding commitment, whether written or oral. "Division" shall mean Seller's Aerospace Division, as it exists and is conducting business on the date hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Employees" shall have the meaning set forth in Section 4.8.1. "Environmental Laws" means all applicable present and future statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises, and similar items, of all governmental agencies, departments, commissions, boards, bureaus, or instrumentalities of the United States, states and political subdivisions thereof and all applicable judicial and administrative and regulatory decrees, judgments, and orders relating to the protection of human health or the environment, including, without limitation, all requirements, including but not limited to those 3 pertaining to reporting, licensing, permitting, investigation, and remediation of emissions, discharges, releases, or threatened releases of Hazardous Materials, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes whether solid, liquid or gaseous in nature, into the air, surface, water, groundwater, or land, or relating to the manufacture, processing, distribution, user, treatment, storage, disposal, transport, or handling of chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes, whether solid, liquid, or gaseous in nature. "Environmental Losses" shall have the meaning set forth in Section 3.5.4. "Excluded Assets" shall have the meaning set forth in Section 2.2. "Excluded Liabilities shall have the meaning set forth in Section 3.6. "Financial Statements" shall mean the Balance Sheet and Income Statement. 'Hazardous Material" means any chemical substance: (i) the presence of which requires investigation or remediation 4 under any federal, state, or local statute, regulation, ordinance, order, action, policy, or common law, or (ii) which is or becomes defined as a "hazardous waste" or "hazardous substance" under any federal, state, or local statute, regulation or ordinance, or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. 9601, et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. 6901, et seq.); or (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency, or instrumentality of the United States, states, or any political subdivision thereof; or (iv) the presence of which on the Real Property causes or threatens to cause a nuisance upon the Real Property or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Real Property; or (v) without limitation, which contains gasoline, diesel fuel, or other petroleum hydrocarbons. "Income Statement" shall mean the unaudited income statement of the Division for the period ended July 31, 1995, attached hereto as Exhibit B-2, as adjusted to reflect Intercompany Transactions not reflected in such income statement. 5 "Indemnifying Party" shall mean, with respect to any Losses, the party from whom indemnity is being sought hereunder. "Intellectual Property" shall have the meaning set forth in Section 2.1.5. "Intercompany Transactions" shall mean (a) transactions among Seller and its Affiliates which are allocable or attributable to the Division, including, but limited to, any services (such as administrative, data processing, employee benefits, insurance, etc.) provided by Seller or any such Affiliate to the Division, and (b) transactions between Seller or any of its Affiliates, on the one hand, and the Division, on the other, including, but not limited to, any products or services (such as administrative, data processing, employee benefits, insurance etc.) provided by Seller or any such Affiliate to the Division. "Inventories" shall have the meaning set forth in Section 2.1.2. "Real Property" shall have the meaning set forth in Section 2.1.3. "Losses" shall mean any and all costs and expenses (including, but not limited to, reasonable attorneys', fees), damages and losses actually incurred by the Indemnified Party 6 net of (i) any tax adjustments, benefits, savings, or reductions, and (ii) any insurance proceeds, in either case to which the indemnified Party is entitled by virtue of such costs, expenses, damages, and losses. "Machinery and Equipment" shall have the meaning set forth in Section 2.1.1. "Management Employees" shall mean employees of the Seller working exclusively for the Division. "Material Contracts" shall have the meaning set forth in Section 4.9. "Purchase Price" shall have the meaning set forth in Section 3.2. "Responsible Contracting Officer" means, with respect to any Contract with the United States Government, the person identified as such with respect thereto in Section 42.1202(a) of the Federal Acquisition Regulation, Part 42 of the Code of Federal Regulations. "Tangible Personal Property" shall mean the Machinery and Equipment and Inventories. 7 "Transaction Documents" shall mean this Agreement, the Assignment and Assumption Agreement, and the Bill of Sale to be delivered to Buyer by Seller on the Closing Date pursuant to Section 3.4. "Transactions" shall mean the transactions contemplated by the Transaction Documents. "U.S. Government" means the United States Government including any agencies, commissions, branches, instrumentalities, and departments thereof. "Working Capital" shall mean current assets (other than cash or cash equivalents) less total liabilities, determined in a manner consistent with the Balance Sheet. For purposes of determining the value of current assets, inventory will be valued an the FIFO basis without giving effect to a LIFO reserve. 2. TRANSFER OF ASSETS. 2.1 TRANSFER OF ASSETS. Subject to the terms and conditions of this Agreement, on the Closing Date, Seller will sell, convey, transfer, assign, and deliver to Buyer, and Buyer will purchase from Seller, for the Purchase Price, all of Seller's right, title, and interest at the time of the Closing 8 Date in and to the following assets and properties to the extent that (a) they are tangible property located on or at Seller's Aerospace Division at Fairmont, Minnesota, and relate to or are used in the operations of the Division or (b) they are intangible property and are used exclusively in or relate as the same shall exist on the Closing Date (except the Excluded Assets): 2.1.1 PERSONAL PROPERTY. All tangible personal property including, but not limited to, fixtures, machinery and equipment, furniture, tools, and Supplies a list of which as of July 31' 1995 is set forth in Schedule 2.1.1 (the "Machinery and Equipment"); 2.1.2 INVENTORIES. All inventories including, but not limited to, all finished goods, work-in-progress, raw materials, spare parts, packaging, and supplies (the "Inventories"); provided, however, that notwithstanding anything to the contrary contained in this Section 2.1.2, all consigned customer materials (as identified to Buyer ten (10) days after execution of this Agreement) are specifically excluded from the Inventories and shall be retained by Seller; 2.1.3 REAL PROPERTY. The realty listed on Schedule 2.1.3 hereto, including all improvements thereto; 9 2.1.4 Prepayments. All prepaid items and deposits paid by Seller exclusively in connection with the Division (to the extent reflected an the Final Balance Sheet); 2.1.5 PATENTS A TRADEMARKS. Subject to Section 2.2.6, the patents, trademarks and trade names, trademark and trade name registrations, service marks and service mark registrations, copyrights and copyright registrations, the applications therefor and the with respect thereto listed in Schedule 2.1.5, together with the goodwill and the business appurtenant thereto and any rights, claims, or choses in action relating to or deriving from any of the foregoing and attributable to the Division, and together with any unregistered intellectual property used exclusively by the Division to the extent owned by the Division (collectively, the "Intellectual Property"); 2.1.6 SALES MATERIALS. Subject to the restrictions in Section 11.4, all catalogues, brochures, sales literature, promotional material, and other selling material relating solely to the products of the Division; 10 2.1.7 BOOKS AND RECORDS. All books and records (other than historical accounting and financial records and personnel reviews and medical records), and all files, documents, papers, and agreements pertaining to the Assets, the Assumed Liabilities, or otherwise to the business of the Division that are material to continuing the operation of the Division as a going concern and that are located at the Division, subject to Seller retaining copies (at Seller's expense) or originals of the same if and as it so chooses; 2.1.8 ASSIGNED CONTRACTS. The rights of Seller under all Contracts relating to the Division including, but not limited to, the Contracts listed on any of the schedules hereto (including all Material Contracts listed in Schedule 4.9) and those entered into in the ordinary course of the business of the Division through the Closing Date, except for any Contract that requires the consent to assignment of a party thereto (or such novation agreements as may be required) and for which such consent or novation agreement executed by any other contracting party has not been obtained pursuant to Section 6.3 prior to the Closing (the "Assigned Contracts"); 11 2.1.9 INSURANCE FROM DESTROYED OR DAMAGED ASSETS. All insurance proceeds from any insurance provider, other than any proceeds under any retroactively rated insurance policy or other self-insurance program which constitute a refund of excess premiums, for any Asset that is destroyed or damaged after the date hereof and prior to the Closing, or any replacement property or asset actually acquired for such destroyed or damaged Asset; and 2.1.10 PERMITS AND LICENSES. All transferable business licenses, permits, and equivalent documents used exclusively in or relating exclusively to the operations of the Division. The Assets shall include all assets of the type described above that are acquired by Seller for use exclusively in connection with the Division between the date hereof and the Closing Date, except any such assets that are disposed of, sold, or consumed after the date hereof in the ordinary course of business on a basis consistent with past practice. 2.2 ASSETS NOT TRANSFERRED. Notwithstanding anything to the contrary contained herein, the following assets and properties of Seller are specifically excluded from the Assets and shall be retained by Seller (the "Excluded Assets"): 12 2.2.1 CASH AND CASH EQUIVALENTS. Subject to Section 2.1.8, all cash on hand and cash equivalents of Seller (whether or not relating to the Division), including, but not limited to, bank accounts and temporary cash investments; 2.2.2 REFUND CLAIMS. Rights to or claims for refunds of taxes and other governmental charges for periods ending on or prior to the Closing Date and the benefit of net operating loss carry-forwards or other credits of Seller, whether or not attributable to the Division; 2.2.3 THIRD PARTY CLAIMS. Claims or rights against third parties, except those arising with respect to events or breaches occurring after the Closing Date under the Assigned Contracts; provided, however, that any rights of indemnification, contribution, or reimbursement that may exist under the Assigned Contracts in respect of liabilities or obligations retained by Seller hereunder shall be Excluded Assets; 2.2.4 INSURANCE. Except as set forth in Section 2.1.9, all insurance policies and rights thereunder, including but not limited to rights to any cancellation value as of the Closing Date; 13 2.2.5 UNRELATED CONFIDENTIAL INFORMATION Proprietary or confidential business or technical information, records, and policies that relate generally to Seller or any of its affiliates and are not used primarily by the Division including, but not limited to, the Aerospace directory, management procedures and guidelines, proprietary financial reporting formats, accounting procedures, instructions, organization manuals, and strategic plans, but specifically excluding technical drawings, quality control, and manufacturing procedures used by the Division; 2.2.6 AEROSPACE MARKS AND PROPRIETARY SYSTEMS AND PROCEDURES. All "Aerospace" marks, including any and all trademarks or service marks, trade names, slogans, or other like property relating to or including the name "Aerospace," the mark Aerospace, or any derivative thereof, and the Aerospace logo or any derivative thereof, and Seller's proprietary computer programs or other software including, but not limited to, Seller's proprietary data bases, accounting and reporting formats, systems, and procedures; 2.2.7 SELLER'S RIGHTS. Seller's rights under the Transaction Documents; 14 2.2.8 UNRELATED AND CORPORATE ASSETS. All other assets of Seller not specifically included in the Assets to be sold hereunder including, but not limited to, any and all fixtures and improvements located on the Real Property and assets used by Seller or its Affiliates in other businesses of Seller or its Affiliates, and assets used primarily in connection with Seller's corporate functions (including but not limited to the corporate charter, taxpayer and other identification numbers, seals, minute books, and stock transfer books), whether or not used for the benefit of the Division; 2.2.9 VEHICLES. All vehicles owned or leased by Seller and not reflected on the Balance Sheet; and 2.1.10 ACCOUNTS RECEIVABLE. All accounts receivable and notes receivable of Seller on the Closing Date arising exclusively out of the activities of the Division (to the extent reflected on the Final Balance Sheet). 15 3. CLOSING, PURCHASE PRICE, ALLOCATION OF PURCHASE PRICE, ASSUMPTION OF LIABILITIES. 3.1 CLOSING. The Closing (the "Closing") shall take place at such place as the parties may agree on or before August 25, 1995, at 9:00 a.m. C.D.T., or at such other date and time as Seller and Buyer may mutually agree (the "Closing Date"). The parties agree that time is of the essence. 3.2 PURCHASE PRICE AND ADJUSTMENT. PURCHASE PRICE. The purchase price (the "Purchase Price") for the Assets hereunder shall be: (a) $1.45 Million for the fixed assets; and (b) An amount equal to the inventory at book value as of the settlement date. The inventory will be valued in a manner which is consistent with Seller's current 16 accounting policies. At the settlement date, the inventory value will be estimated using the most recent end-of-month value and adjusted to the actual amount as soon as possible following the Closing. 3.3 PAYMENT TO SELLER ON CLOSING DATE. On the Closine Date, Buyer shall pay the Purchase Price to Seller by certified check or wire transfer. 3.4 INSTRUMENTS OF CONVEYANCE AND TRANSFER. On the Closing Date, Seller shall execute and deliver to Buyer (a) a warranty deed conveying marketable title to the Real Property, free of all liens and encumbrances, (b) the Bill of Sale transferring good title to the Assets (except the Real Property), free and clear of all liens and encumbrances, (c) the Assignment and Assumption Agreement, and (d) such other documents as may be reasonably requested by Buyer in order to carry out the Transactions. 3.5 ASSUMPTION OF LIABILITIES. On the Closing Date, Buyer shall execute and deliver to Seller the Assignment and Assumption Agreement, pursuant to which Seller shall agree to retain and pay the Excluded Liabilities (as hereinafter defined) and Buyer shall assume and agree to pay, perform, and discharge when due only the following liabilities and obligations of 17 Seller arising out of the business of the Division as presently or previously conducted (collectively, the "Assumed Liabilities"): 3.5.1 CONTRACTS AND OTHER OBLIGATIONS. All liabilities and obligations of Seller under the Assigned Contracts; 3.5.2 PRODUCT LIABILITY. All Losses from any products shipped or services provided by Seller through the Division at any time prior to the Closing Date, but only to the extent arising from occurrences on or after the Closing Date; provided, however, that Seller shall reimburse Buyer from the first dollar for any Losses suffered by Buyer under this Section 3.5.2 when and if the cost to Buyer of such Losses exceeds $5,000 for any one occurrence, or $15,000 in the aggregate. With reepect to products manufactured or sold but not shipped prior to the Closing Date, Seller shall reimburse Buyer when and if the cost to Buyer exceeds $5,000 for any one occurrence, or $15,000 in the aggregate; 3.5.3 WARRANTY OBLIGATIONS. All liabilities and obligations of Seller whether arising before or after the Closing, arising under warranties provided by Seller 18 relating to products shipped by the Division prior to the Closing Date, including any obligations to repair or replace any item as a result of a material deficiency report under any contract with the U.S. Government, and all additional obligations and commitments of Seller to provide spare parts, service, product support, or other goods and services relating to products shipped by the Division prior to the Closing Date; prcvided, however, Seller shall reimburse Buyer from the first dollar for any cost determined on the basis of direct labor, direct material and direct overhead costs incurred by Buyer in repairing or replacing such product in fulfillment of such obligations if and when the cost to Buyer of such warranty obligation exceeds $5,000 for any one occurrence, or $15,000 in the aggregate. Buyer agrees to Consult with Seller regarding any warranty claim which is the subject of this Section 3.5.3 prior to providing warranty service and to cooperate with Seller in connection with any investigation or other proceeding relating to such warranty claim. With respect to products manufactured or sold but not shipped prior to the Closing Date, Buyer assumes full responsibility for any claims based on such products without any recourse for reimbursement by Seller; and 19 3.5.4 ENVIRONMENTAL LIABILITIES. Subject to the indemnification obligations of Seller under Section 9.2.3, all Losses, whether arising from claims by private or governmental parties which are incurred at any time as a result of the existence of Hazardous Material upon, about, beneath, or migrating, or threatening to migrate to or from the Real Property on which Hazardous Material is or has been used, generated, or disposed of in connection with or arising out of the business of the Division as presently or previously conducted or the existence of a violation of any Environmental Law pertaining to the Real Property or the business of the Division as presently or previously conducted (the "Environmental Losses.") 3.6 NON-ASSUMPTION OF CERTAIN LIABILITIES. Buyer is not assuming, and shall not be deemed to have assumed, any obligation, liability, or commitment of Seller relating to or arising out of the operation of the business of the Division prior to the Closing Date other than the Assumed Liabilities (the "Excluded Liabilities"), including, but not limited to, (a) liabilities for taxes of Seller or the Division (other than as set forth in Section 3.8) not shown on the Final Balance Sheet with respect to the operation of the Division prior to the Closing; or (b) liabilities (including but not limited to any liabilities resulting from unfunded contributions under any 20 employee benefit plan subject to ERISA) for any pension, profit sharing, or welfare benefit plans maintained by Seller or its Affiliates; and (c) liabilities arising from claims brought by former employees of Seller who are not Employees. 3.7 TAX ALLOCATION. Buyer and Seller shall allocate the Purchase Price to broad categories constituting components of the Assets in accordance with the basis of allocation used in preparing the Form 8594 attached hereto as Schedule 3.7 and shall file a Form 8594 with respect to the Transactions similar to that set forth in Schedule 3.7, except to the extent that modifications are necessary to reflect changes in the Assets between the date hereof and the Closing Date. Each party will report the purchase and sale of the Assets in accordance with the agreed upon allocation among such broad categories for all federal, state, local, and other tax purposes, but such allocation shall not constrain reporting for other purposes. 3.8 SALES AND USE TAX. Buyer and Seller shall cooperate in preparing and filing use and sales tax returns relating to, and Buyer shall pay any and all sales, real estate, transfer, or use tax due with regard to, the Transactions; provided that any real estate transfer taxes shall be divided equally by the parties. Buyer shall also furnish Seller with a form of reseller certificate that complies with the requirements of 21 Section 297A of the Minnesota Statutes Annotated and other applicable state taxation laws. 4. REPRESENTATION AND WARRANTIES OF SELLER. As an inducement for Buyer to enter into this Agreement, Seller represents and warrants to Buyer that each of the following statements is true and correct as of the date hereof: 4.1 ORGANIZATION, CORPORATE POWER, AND AUTHORITY. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of North Carolina, and is duly qualified to do business as a foreign corporation in the jurisdictions in which Seller conducts the business of the Division, except where the failure so to qualify will not have a material adverse effect on the business of the Division. Seller has all requisite corporate power and authority to own, operate, and sell the Assets, to conduct the business of the Division, to execute and deliver the Transactions Documents, and to perform its obligations thereunder. 4.2 AUTHORIZATION OF AGREEMENTS. The execution, delivery, and performance by Seller of the Transaction Documents, and the consummation by it of the Transactions, have been duly authorized by all necessary corporate action by Seller. This 22 Agreement has been, and each other Transaction Document will be at the Closing, duly executed and delivered by Seller and constitute, or will, when delivered, constitute, the legal, valid, and binding obligations of Seller, enforceable against Seller in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, and other similar laws and equitable principles relating to or limiting creditors', rights generally. 4.3 EFFECT OF AGREEMENT. The execution, delivery, and performance by Seller of the Transaction Documents, and the consummation by it of the Transactions, will not violate the Articles of Incorporation or By-Laws of Seller or any judgment, award or decree, or any material indenture, material agreement, or other material instrument to which Seller is a party, or by which Seller or the Assets are bound, or conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, or other instrument, or result in the creation or imposition of any lien, charge, security interest, or encumbrance of any nature whatsoever upon any of the Assets, except to the extent that (a) the effect thereof is not materially adverse to the business of the Division, (b) consents may be required under Seller's loan agreements, (c) consents may be required for assignment of certain of the Contracts, (d) consents of the lessors of personal 23 properties used in the operation of the Division may be required, or (e) novation agreements may be required with respect to Contracts with the U.S. Government. 4.4 GOVERNMENTAL APPROVALS. Except for novation agreements that may be required with respect to Contracts with the U.S. Government, noapproval, authorization, consent or order, or action of or filing with any court, administrative agency, or other governmental authority is required to be obtained by Seller for the execution and delivery by Seller of the Transaction Documents or the consummation by it of the Transactions. 4.5 FINANCIAL STATEMENTS. Except as set forth in Schedule 4.5, the Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved. Except as set forth in Schedule 4.5, the Balance Sheet fairly presents the financial condition of the Division as of the Balance Sheet Date and the Income Statement fairly presents the results of operations of the Division for the period then ended. There have been no liabilities incurred in connection with the operation of the Division since the Balance Sheet date of July 31, 1995, except as listed on Schedule 4.5. 24 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the Balance Sheet Date except as contemplated hereunder, Seller has not with respect to the Division: 4.6.1 MATERIAL OBLIGATIONS. Incurred any material obligation or liability (fixed or contingent), except normal trade or business obligations and liabilities incurred in the ordinary course of business and obligations and liabilities in connection with this Agreement and the Transactions; 4.6.2 DISCHARGE OR SATISFACTION OF LIENS. Discharged or satisfied any material lien, security interest, or encumbrance, or paid any material obligation or liability (fixed or contingent), other than pursuant to the terms of such obligation or in the ordinary course of business; 4.6.3 ADDITIONAL LIENS. Mortgaged, pledged, or subjected the Assets to any material lien, security interest, or other encumbrance (other than of the type set forth in Section 4.7); 25 4.6.4 ACQUISITION OR DISPOSITION OF ASSETS. Transferred, leased, or otherwise disposed of any material portion of the Assets, or acquired any material assets or properties, except those acquired, disposed of, sold, or consumed in the ordinary course of business; 4.6.5 COMPROMISE OF DEBTS OR CLAIMS. Canceled or compromised any material debt or claim, except in the ordinary course of business; 4.6.6 WAIVER OF MATERIAL RIGHTS. Waived or released in writing any rights of material value to the Division; 4.6.7 RIGHTS IN LICENSES, TRADEMARKS, PATENTS. Transferred or granted any material rights under any material Intellectual Property (other than licenses granted by Seller in the ordinary course of business); 4.6.8 EMPLOYEE COMPENSATION. Except for any "stay" bonus or special severance agreements listed on Schedule 4.6.8 hereto or as otherwise required by law, made or granted any material wage or salary increase applicable generally to any group or classification of 26 employees working exclusively for the Division (other than in connection with Seller's general salary plan), entered into any written employment contract with any officer or employee of Seller working exclusively for the Division or made any material loan to, or entered into any material transaction of any other nature with, any officer or employee of Seller working exclusively for the Division; or 4.6.9 MATERIAL CONTRACTS. Entered into any Material Contract, except for Contracts listed in Schedule 4.6.9 and the Transaction Documents and sales or purchases in the ordinary course of business. 4.7 TITLE TO PROPERTIES, ABSENCE OF LIENS AND ENCUMBRANCES. Seller has good and valid title to all of the Tangible Personal Property (except for leased Tangible Personal Property), in each case free and clear of all mortgages, liens, charges, security interests, or other encumbrances of any nature whatsoever, other than (a) liens for taxes not yet due and (b) matters set forth on Schedule 4.7 hereto. 4.8 EMPLOYEE COMPENSATION. Attached hereto as Schedule 4.8 is a list setting forth the following with respect to the Division: 27 4.8.1 EMPLOYEE COMPENSATION PLANS AND BENEFITS. All material collective bargaining agreements, employment and consulting agreements, executive compensation plans, bonus plans, deferred compensation agreements, employee pension plans or retirement plans, and employee profit sharing plans, employee stock purchase and stock option plans (other than employment arrangements terminable at will without liability on the part of the employer or upon payment of no more than the applicable statutory or regulatory severance or termination benefits) providing for benefits to employees of Seller working exclusively for the Division (the "Employees"); and 4.8.2 MANAGEMENT EMPLOYEES. The names and current annual compensation rates of all Management Employees as of the date hereof. 4.9 MATERIAL CONTRACTS. Schedule 4.9 sets forth each executory Contract (collectively, the "Material Contracts") that (a) obligates Seller to pay an amount of $10,000 and (b) by which any or all the Assets are bound or to which the Division is a party and by which it is bound. Seller has made available to Buyer true and complete copies of all written Material Contracts, together with all amendments thereto, and accurate 28 descriptions of all oral Material Contracts, listed, or required to be listed, on Schedule 4.9 Except as set forth in Schedule 4.9, to the best knowledge of Seller, there is no Material Contract that is not valid and enforceable in accordance with its terms for the periods stated therein, or that there is under any such Material Contract any existing material default or event of material default or event that, with notice or lapse of time or both, would constitute such a material default. Except as set forth in Schedule 4.9, to the knowledge of Seller, there are no disputes with customers or vendors of the Division with respect to performance by Seller or the Division under any Material Contracts requiring, or which could require, payment by Seller or the Division, or performance of services or delivery of assets or properties of the Division in excess of $17,500. 4.10 LITIGATION. Except as set forth in Schedule 4.10, there are no actions, suits, or proceedings relating to the Division (other than actions, suits, or proceedings against Seller generally which do not relate specifically to the Division) pending or, to the knowledge of Seller, overtly threatened against Seller at law or in equity, or before or by any federal, state, or other governmental agency or instrumentality that might reasonably be expected to have a material adverse effect on the Division; provided, however, that any action, suit, or proceeding as to which Seller has not received service of 29 process shall not be deemed pending for purposes hereof. Except as set forth in Schedule 4.10, there are no legal written orders, judgments, or decrees of any court or governmental agency, that apply specifically to the Division or any of the Assets (other than orders, judgments, or decrees which relate to Seller generally and not specifically to the Division). 4.11 LABOR MATTERS. Except as set forth in Schedule 4.11, there are no unfair labor practice or labor arbitration proceedings with respect to the Division (other than actions, suits, or proceedings against Seller generally which do not relate specifically to the Division) pending against Seller or the Division, and to Seller's knowledge, there are no organizational efforts presently being made or overtly threatened involving any of Seller's employees working exclusively for the Division. Since the Balance Sheet Date, Seller has not received notice of any claim that, with respect to the Division, it has not complied with any laws relating to the employment of labor, including any provisions thereof relating to wages, hours, collective bargaining, the payment of Social Security, and similar taxes, equal employment opportunity, employment discrimination and employment safety, or that it is liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 30 4.12 USE OF REAL PROPERTY. To Seller's knowledge, all Real Estate is used and operated in compliance and conformity with law, except to the extent that the failure so to conform would not materially adversely affect the business of the Division. Seller has not received notice of any material violation of any applicable zoning or building regulation or ordinance relating to the Real Estate and, to the knowledge of Seller, there is no such material violation. 4.13 COMPLIANCE WITH LAW. Seller (a) is not in default with respect to any legal, written order of any court or governmental authority to which Seller is subject and which applies specifically to the Division or the Assets, and (b) to the knowledge of Seller, is not in violation of any laws, ordinances, governmental rules or regulations to which it is subject, except to the extent that novation agreements have not been obtained and may be required with respect to any Contracts with the U.S. Government. 4.14 Assets. The Assets constitute all of the assets and properties used exclusively by the Division as of the Balance Sheet Date, except for (a) Assets sold, disposed of, or consumed in the ordinary course of business since such date, (b) the Excluded Assets, and (c) Contracts, the assignment of which has not been consented to by a party thereto. 31 4.15 COMMISSIONS. Neither Seller nor any of its directors, officers, employees, or agents have employed, or incurred any liability to, any broker, finder, or agent for any brokerage fees, finder's fees, commissions, or other amounts with respect to the Transactions. 4.16 CONDITION OF ASSETS; LIMITED WARRANTIES. Except as otherwise expressly provided in this Agreement, Seller makes no representations or warranties whatsoever to Buyer, express, implied, or statutory, concerning the Assets or the Division including, but not limited to, any representation or warranty as to value, quality, quantity, condition, merchantability, design, suitability, usability, salability, obsolescence, working order, compliance with law, validity, or enforceability. ALL PERSONAL PROPERTY INCLUDED IN THE ASSETS IS SOLD "AS IS, WHERE IS." BUYER SPECIFICALLY ACKNOWLEDGES THAT NO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE ARE MADE OR SHOULD BE IMPLIED IN THE TRANSACTIONS. Buyer acknowledges that it has had an opportunity to thoroughly inspect the Assets. 32 5. REPRESENTATIONS AND WARRANTIES OF BUYER. As an inducement for Seller to enter into this Agreement, Buyer represents and warrants to Seller that each of the following statements is true and correct as of the date hereof: 5.1 ORGANIZATION, CORPORATE POWER AND AUTHORITY. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Minnesota and is duly qualified to perform its obligations under the Transaction Documents and, after the Closing, to use the Assets and operate the Division. Buyer has all requisite corporate power and authority to acquire, own, lease, and operate the Assets, to conduct the business of the Division, to execute and deliver the Transaction Documents to which it is a party, and to perform its obligations thereunder. 5.2 AUTHORIZATION OF AGREEMENT. The execution, delivery, and performance by Buyer of the Transaction Documents to which it is a party, and the consummation by it of the Transactions, have been duly authorized by all necessary corporate action by Buyer. This Agreement has been, and each other Transaction Document to which Buyer is a party will be at the Closing, duly executed and delivered by Buyer and constitute, or will, when delivered, constitute the legal, valid, and binding obligations of Buyer, enforceable against Buyer in accordance with 33 their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, and other similar laws and equitable principles relating to or limiting creditors' rights generally. 5.3 EFFECT OF AGREEMENT. The execution, delivery, and performance by Buyer of the Transaction Documents to which it is a party, and the consummation by it of the Transactions, will not violate the Articles of Incorporation or By- Laws of Buyer or any judgment, award or decree, or any material indenture, material agreement, or other material instrument to which Buyer is a party, or by which Buyer or its properties or assets are bound, or conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement, or other instrument, or result in the creation or imposition of any lien, charge, security interest, or encumbrance of any nature whatsoever upon any of the properties or assets of Buyer, except to the extent the effect thereof will not be materially adverse to Buyer's ability to fulfill its obligations under the Transaction Documents to which it is a party and, after the Closing, to use the Assets and operate the business of the Division. 5.4 GOVERNMENTAL APPROVALS. To the knowledge of Buyer, except for novation agreements that may be required with respect to any Contracts with the U.S. Government, no approval, 34 authorization, consent or order, or action of or filing with any court, administrative agency, or other governmental authority is required to be obtained by Buyer for the execution and delivery by Buyer of the Transaction Documents to which it is a party or the consummation by it of the Transactions. 5.5 COMMISSIONS. Neither Buyer nor any of its directors, officers, employees, or agents have employed, or incurred any liability to, any broker, finder, or agent for any brokerage fees, finder's fees, commissions, or other amounts with respect to the Transactions. 5.6 FINANCING. Buyer has available cash sufficient to consummate the Transactions. No financing is required to enable Buyer to consummate the Transactions. 5.7 EXON-FLORIO. Buyer is not a "foreign person" for the purposes of the Exon-Florio Amendment to the Defense Production Act of 1950. 5.8 INVESTIGATION. Buyer has conducted a full and complete investigation and inspection of the Assets, the Assumed Liabilities, and the Division as Buyer may have deemed necessary or appropriate for the purpose of entering into this Agreement and consummating the Transactions. In executing this Agreement, Buyer is relying on its own investigation and on the provisions 35 set forth herein and not on any other statements, representations, warranties, or assurances of any kind made by Seller, its representatives, or any other person other than the representations and warranties of Seller pursuant to Section 4, or any statements made during any presentation by any employee or representative of Seller or the Division. 6. COVENANTS OF SELLER. 6.1 CONDUCT OF DIVISION. During the period from the date hereof to the Closing Date, unless Buyer consents otherwise in writing (which consent shall not be unreasonably withheld), Seller shall use its reasonable efforts to: 6.1.1 ORDINARY COURSE. Conduct the business of the Division only in the ordinary course consistent with past practice, except as contemplated by this Agreement; 6.1.2 PRESERVATION OF GOODWILL. Preserve the goodwill of those of its suppliers, customers, and distributors having business relations with the Division; 6.1.3 MAINTAIN INSURANCE. Maintain any insurance coverage existing as of the date hereof against loss or damage to the Assets; 36 6.1.4 SALE OF ASSETS. Not transfer or encumber any of the Assets except for any transfer or encumbrance in the ordinary course of business consistent with past practice; 6.1.5 MAINTENANCE OF ASSETS. Maintain the Assets, in the aggregate, in a condition comparable to their current condition, reasonable wear, tear, and depreciation excepted, and except for Assets disposed of, sold, or consumed in the ordinary course of business; 6.1.6 ASSIGNED CONTRACTS. Not materially amend any Assigned Contract; and 6.1.7 EMPLOYMENT CONTRACTS. Not enter into any employment contract with any Employees or materially increase the compensation of any of the Division's current officers or key Employees. 6.2 ACCESS. Seller will (a) during ordinary business hours and upon reasonable notice from Buyer, permit Buyer and its authorized representatives to have access to all Assets, (b) furnish, as soon as reasonably practicable, to Buyer or its authorized representatives such other information in Seller's possession with respect to the Division as Buyer may from time to time reasonably request, and (c) otherwise reasonably cooperate in the examination or audit of the Division by Buyer. 37 6.3 PERMITS, CONSENTS, AND NOVATIONS. As promptly as practicable after the date hereof, Seller shall make all filings with governmental bodies and other regulatory authorities, and use all reasonable efforts to obtain all permits, approvals, authorizations, and consents of all third parties required for Seller to consummate the Transactions. Seller shall furnish promptly to Buyer all information that is in Seller's possession and not otherwise available to Buyer that Buyer may reasonably request in connection with any such filing to be made by Buyer. Seller and Buyer shall use reasonable efforts to obtain such consents to the assignment of the Contracts and such novation agreements as may be required. Notwithstanding anything herein to the contrary, the parties hereto acknowledge and agree that at the Closing, Seller will not assign to Buyer any Contract that by its terms requires, prior to such assignment, the consent of any other contracting party thereto (or a novation agreement executed by any other contracting party) unless such consent has been obtained prior to the Closing Date. With respect to each such Contract not assigned on the Closing Date, after the Closing Date Seller shall continue to deal with the other contracting party(ies) to such Contract as the prime contracting party, and Buyer and Seller shall use reasonable efforts to obtain the consent of all required parties to the assignment or novation agreement as may be required. Such Contract shall be promptly assigned by Seller to Buyer after receipt of such consent or novation of such Contract after the Closing Date, and 38 thereafter shall be deemed to be an Assigned Contract for all purposes hereunder. Notwithstanding the absence of any such consent or novation, Buyer shall be entitled to the benefits of such Contract accruing after the Closing Date to the extent that Seller may provide Buyer with such benefits without violating the terms of such Contract; Buyer agrees to perform at its sole expense all of the obligations of Seller to be performed under such Contract after the Closing Date. As soon as practicable following the date hereof, with respect to any Contract with the U.S. Government to which Seller is a party, Seller shall submit to the relevant Responsible Contracting Officer a written request that the U.S. Government enter into a novation agreement with Buyer with respect to such Contract. In this regard, Seller and Buyer shall take all actions required or customary under the Federal Acquisition Regulations System. Except as provided in the immediately preceding sentence, in no event shall Seller or Buyer be obligated to pay any money to the U.S. Government or to offer or grant other financial or other accommodations to the U.S. Government in connection with obtaining any novation agreement or any such consent or waiver. 6.4 COOPERATION WITH BUYER. After the Closing, Seller shall provide such cooperation as Buyer or its counsel may reasonably request in connection with: (a) any proceedings relating to the Assumed Liabilities which are hereafter pending or threatened and to which Buyer is a party; and (b) any proceedings for which Seller is entitled to indemnification from Buyer 39 under Section 9.2.2 hereof. Such cooperation shall include, but not be limited to: (i) making available at the reasonable request of Buyer or its counsel, and permitting Buyer and its counsel to make and retain copies of, any and all documents in the possession of or otherwise available to Seller; (ii) making available upon the reasonable request of Buyer or its counsel, employees, and other persons within the control of or available to Seller to consult with and assist Buyer and its counsel and to prepare for and testify truthfully in connection with any proceedings, including depositions, trials, and arbitration proceedings; and (iii) making available at the reasonable request of Buyer or its counsel such other resources as may be within the control of or available to Seller. The cooperation of Seller required by this Section 6.5 shall be provided at Seller's cost; provided, however, that Buyer shall reimburse Seller for Seller's reasonable out-of-pocket expenses incurred pursuant to this Section. 7. COVENANTS OF BUYER. 7.1 PERMITS AND CONSENTS. As promptly as practicable after the date hereof, Buyer will make all filings with governmental bodies and other regulatory authorities required of Buyer in connection with the Transactions, and use all reasonable efforts to obtain all permits, approvals, authorizations, and consents of all third parties, required for Buyer to consummate the 40 Transactions. Buyer shall promptly furnish to Seller all information that is in Buyer's possession and not otherwise available to Seller which Seller may reasonably request in connection with any such filing to be made by Seller. 7.2 ACCESS TO BOOKS AND RECORDS. Buyer shall maintain for five (5) years after the Closing Date all original books, records, files, documents, papers, and agreements pertaining to the Assets, the Assumed Liabilities or otherwise to the business of the Division before the Closing. After the Closing, Buyer shall provide Seller and its representatives, during ordinary business hours and upon reasonable notice from Seller, with reasonable access to such original documents. If, at any time after the expiration of the five (5) year period described above, Buyer proposes to dispose of any such original documents, Buyer shall first offer in writing to deliver the same to Seller at the expense of Seller. If Seller fails to respond to such offer within ninety (90) days of its receipt, Buyer shall be permitted to dispose of such documents. 7.3 COOPERATION WITH SELLER. After the Closing, Buyer shall provide such cooperation as Seller or its counsel may reasonably request in connection with: (a) pending or threatened proceedings set forth in Schedule 4.10; (b) any proceedings relating to the Division which are hereafter pending or threatened and to which Seller is a party; (c) any proceedings for which 41 Buyer is entitled to indemnification from Seller under Section 9.2.1 hereof; and (d) the liabilities described in Section 3.6 hereof. Such cooperation shall include, but not be limited to: (i) making available at the reasonable request of Seller or its counsel, and permitting Seller and its counsel to make and retain copies of, any and all documents in the possession of or otherwise available to Buyer; (ii) making available upon the reasonable request of Seller or its counsel, employees, and other persons within the control of or available to Buyer to consult with and assist Seller and its counsel and to prepare for and testify truthfully in connection with any proceedings, including depositions, trials, and arbitration proceedings; and (iii) making available at the reasonable request of Seller or its counsel such other resources as may be within the control of or available to Buyer. The cooperation of Buyer required by this Section 7.3 shall be provided at Buyer's cost; provided, however, that Seller shall reimburse Buyer for Buyer's reasonable out-of-pocket expenses incurred pursuant to this Section. 7.4 INSURANCE. Buyer shall secure insurance with respect to the Division from the Closing Date covering general liability and products liability in amounts consistent with Buyer's past practices. 8. CONDITIONS PRECEDENT. 42 8.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. The obligations of Buyer under this Agreement are subject, at the option of Buyer, to the satisfaction or waiver of each of the following conditions on or prior to the Closing Date: 8.1.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller contained in this Agreement or in any certificate delivered to Buyer pursuant hereto shall be true and correct in all material respects on and as of the Closing Date as though made at and as of that date (except where such representation and warranty is made as of a date specifically set forth therein), and Seller shall have delivered to Buyer a certificate to that effect; 8.1.2 COMPLIANCE WITH COVENANTS. Seller shall in all material respects have performed and complied with all terms, agreements, covenants, and conditions of this Agreement to be performed or complied with by it at the Closing Date, and Seller shall have delivered to Buyer a certificate to that effect; 8.1.3 OPINION OF COUNSEL FOR SELLER. Buyer shall have received the favorable opinion of McDaniel & Anderson, L.L.P., counsel to Seller, dated the Closing Date, substantially in the form attached as Exhibit F; 43 8.1.4 LEGAL ACTIONS OR PROCEEDINGS. No legal action or proceeding shall have been instituted or overtly threatened by any governmental agency seeking to restrain, prohibit, invalidate, or otherwise affect the consummation of the Transactions; 8.1.5 CONSENTS OBTAINED. Each party hereto shall have obtained all material consents and approvals required to be obtained from any governmental authority, except where the failure to obtain such consents or approvals is a result of a breach by Buyer and except for novation agreements required to be obtained with respect to government Contracts; and 8.1.6 OTHER TRANSACTION DOCUMENTS. Seller shall have executed and delivered to Buyer original counterparts of each Transaction Document to which it is a party. 8.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligations of Seller under this Agreement are subject, at the option of Seller, to the satisfaction or waiver of each of the following conditions at or prior to the Closing Date: 8.2.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer contained in this Agreement or in any certificate delivered to 44 Seller pursuant hereto shall be true and correct in all material respects on and as of the Closing Date as though made at and as of that date (except where such representation and warranty is made as of a date specifically set forth therein), and Buyer shall have delivered to Seller a certificate to that effect; 8.2.2 COMPLIANCE WITH COVENANTS. Buyer shall in all material respects have performed and complied with all terms, agreements, covenants, and conditions of this Agreement to be performed or complied with by it at the Closing Date, and Buyer shall have delivered to Seller a certificate to that effect; 8.2.3 OPINION OF COUNSEL FOR BUYER. Seller shall have received the favorable opinion of Phillips & Gross, P.A., counsel for Buyer, dated the Closing Date, substantially in the form attached as Exhibit G; 8.2.4 LEGAL ACTIONS OR PROCEEDINGS. No legal action or proceeding shall have been instituted or overtly threatened by any governmental agency seeking to retrain, prohibit, invalidate, or otherwise affect the consummation of the Transactions; 45 8.2.5 CONSENTS OBTAINED. Each party hereto shall have obtained all material consents and approvals required to be obtained from any governmental authority, except where the failure to obtain such consents or approvals is a result of a breach by Seller and except for novation agreements required to be obtained with respect to government Contracts: 8.2.6 PURCHASE PRICE. Buyer shall have delivered the Purchase Price in accordance with Section 3.3; 8.2.7 RELEASE OF GUARANTIES. Seller (other than the Division) shall have been fully released from any and all guaranties listed an Schedule 8.2.7, with respect to any obligations or liabilities of the Division; and 8.2.8 OTHER TRANSACTION DOCUMENTS. Buyer shall have executed and delivered to Seller original counterparts of each Transaction Document to which it is a party. 46 9. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATIONS. 9.1 SURVIVAL OF REPRESENTATIONS. The representations and warranties set forth in Sections 4.2, 4.17, 5.2, and 5.7 shall survive indefinitely. All other representations or warranties contained herein shall survive for a period of two years from the Closing Date and shall then expire. Upon the expiration of a representation or warranty pursuant to this Section 9.1, unless written notice of a claim based on such representation or warranty specifying in reasonable detail the facts on which the claim is based shall have been delivered to the Indemnifying Party prior to the expiration of such representation or warranty, such representation or warranty shall be deemed to be of no further force or effect, as if never made, and no action may be brought based on the same, whether for breach of contract, tort, or under any other legal theory. 9.2 AGREEMENTS TO INDEMNIFY. 9.2.1 SELLER INDEMNITY. Subject to the terms and conditions of this Section 9, Seller hereby agrees to indemnify, defend, and hold Buyer harmless from and against all Losses incurred by Buyer and Buyer's Affiliates, employees, directors, officers, shareholders, and agents resulting form (a) a breach of any representation, warranty, or covenant of Seller made in this Agreement, or (b) any liabilities or obligations of, or 47 claims against, Seller other than the Assumed Liabilities; 9.2.2 BUYER INDEMNITY. Subject to the terms and conditions of this Section 9, Buyer hereby agrees to indemnify, defend, and hold Seller harmless from and against all Losses incurred by Seller and Seller's Affiliates, employees, directors, officers, shareholders, and agents resulting from (a) a breach of any representation, warranty, or covenant of Buyer made in this Agreement, (b) the failure of Buyer to pay, perform, and discharge when due the Assumed Liabilities, or (c) the conduct of the business of the Division after the Closing; 9.2.3 INDEMNIFICATION FOR ENVIRONMENTAL MATTERS. (a) Subject to the terms and conditions of this Section 9, Seller shall indemnify and hold Buyer harmless from and against all Environmental Losses to the extent such Environmental Losses are attributable to Seller's use and/or occupancy of the Real Property; provided, however, that this indemnification obligation shall expire three (3) years from the Closing Date, Seller shall have no obligation to indemnify Buyer with respect to any conditions that existed prior to Seller's use and/or occupancy of the Real Property; and 48 (b) Notwithstanding the obligation of seller to indemnify Buyer pursuant to this Agreement, Seller may take any actions required by any federal, state, or local governmental agency or political subdivision or reasonably necessary to mitigate Losses referred to in Section 9.2.3(a), and Buyer shall allow Seller reasonable access to the Real Property for that purpose. Such actions may include, but need not be limited to, the investigation of the environmental condition of the applicable Real Property, the preparation of any feasibility studies, reports, or remedial plans, and the performance of any cleanup, remediation, containment, operation, maintenance, monitoring, or restoration work. Seller shall proceed diligently with any such actions it elects to take, provided that in all cases such actions shall be in accordance with all applicable requirements of governmental entities. Any such actions shall be performed in a good, safe and workmanlike manner, and shall to the extent reasonable minimize any impact on the business conducted at the applicable Real Property. Seller shall have the exclusive right to undertake and control actions of the type described in this Section 9.2.3(b), using agents reasonably satisfactory to Buyer. Costs and expenses incurred by Buyer as a result of their undertaking any such actions shall be deemed Losses; 49 9.2.4 INDEMNIFICATION THRESHOLD. No claim for indemnification will be made by either party hereunder unless the aggregate of all Losses (excluding Losses under Section 3.5.2 [Product Liability] and 3.5.3 [Warranty Obligations]) incurred by such party otherwise indemnified against hereunder exceeds $20,000, and any such claim shall be made only for the amount by which such aggregate Losses exceed $20,000; 9.2.5 MAXIMUM LOSSES. No claim for indemnification of Losses (whether in an action for indemnification or otherwise) may be made by either party hereunder to the extent the aggregate Losses claimed (including any Losses previously recovered, but excluding Losses under Sections 9.2.1(b), 9.2.2(b) and (c), and 9.2.3(a)) by such party exceeds the Purchase Price. Notwithstanding anything to the contrary in this Section 9.2.5, no claim for indemnification of Environmental Losses may be made by Buyer under Section 9.2.3(a) to the extent that such aggregate Environmental Losses suffered by Buyer exceed the Purchase Price; and 9.2.6 SUBROGATION. If the Indemnifying Party makes any payment under this Section 9 in respect of any Losses, the Indemnifying Party shall be subrogated, to the extent of such payment, to the rights of the Indemnified Party against any Insurer or third party 50 with respect to such Losses; provided, however, that the Indemnifying Party shall not have any rights of subrogation with respect to the other party hereto or any of its Affiliates or any of its or its Affiliates' officers, directors, agents, or employees. 9.3 CONDITIONS OF INDEMNIFICATION. The respective obligations and liabilities of the Indemnifying Party to the Indemnified Party under Section 9.2 shall be subject to the following terms and conditions: 9.3.1 NOTICE. Within 60 days after receipt of notice of commencement of any action or the assertion of any claim by a third party (but in any event at least 10 days preceding the date on which an answer or other pleading must be served in order to prevent a judgment by default in favor of the party asserting the claim), the Indemnified Party shall give the Indemnifying Party written notice thereof together with a copy of such claim, process, or other legal pleading, and the Indemnifying Party shall have the right to undertake the defense thereof by representatives of its own choosing that are reasonably satisfactory to the Indemnified Party; 9.3.2 FAILURE TO ASSUME DEFENSE. If the Indemnifying Party, by the fifteenth day after receipt of notice of any such claim (or, if earlier, by the fifth 51 day preceding the day on which an answer or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim), does not elect to defend against such claim, the Indemnified Party will have the right to undertake the defense, compromise, or settlement of such claim on behalf of and for the account and risk of the Indemnifying Party; 9.3.3 CLAIM ADVERSE TO INDEMNIFYING PARTY. Notwithstanding anything to the contrary in this Section 9.3, if there is a reasonable probability that a claim may materially adversely affect the Indemnifying Party other than as a result of money damages or other money payments, the Indemnifying Party shall have the right, at its own cost and expense, to compromise or settle such claim, but the Indemnifying Party shall not, without the prior written consent of the Indemnified Party, settle or compromise any claim or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect of such claim; and 9.3.4 COOPERATION. In connection with any such indemnification, the Indemnified Party will cooperate in all reasonable requests of the Indemnifying Party. 52 9.4 REMEDIES EXCLUSIVE. Except as provided in Section 12.11, the remedies provided in this Section 9 shall be the exclusive remedy for monetary damages (whether at law or in equity) . Without limiting the foregoing, and except for statements, representations, warranties, and assurances made in this Agreement, neither Seller nor any of its officers, employees, agents, stockholders, Affiliates, consultants, investment bankers, legal advisers, or representatives shall have any liability or obligation to Buyer in respect of any statement, representation, warranty, or assurance of any kind made by Seller, its representatives, or any other person including, but not limited to, any statements set forth in the Information Memorandum or any statements made during any presentation by any employee or representative of Seller to the Division. 10. TERMINATION. This Agreement may be terminated at any time on or prior to the Closing Date: 10.1 INJUNCTION. By either party if any court of competent jurisdiction in the United States shall have issued an order (other than a temporary restraining order), decree or ruling or taken any other action restraining, enjoining, or otherwise prohibiting the Transactions and such order, decree, ruling, or other action shall have become final and non-appealable. 10.2 MUTUAL AGREEMENT. By mutual written agreement of the parties. 53 10.3 TERMINATION DATE. By either party if the Closing shall not have occurred on or before September 30, 1995, time being of the essence. 10.4 MATERIAL BREACH. By either Buyer or Seller, if there has been a material breach on the part of the other party in its representations, warranties, or covenants set forth herein; provided, however, that if such breach is susceptible to cure, the breaching party shall have three (3) business days after receipt of notice from the other party of its intention to terminate this Agreement pursuant to this Section 10.4 in which to cure such breach. 10.5 EFFECTS OF TERMINATION. If this Agreement is terminated pursuant to Section 10, all obligations of the parties hereunder (except for this Section and Sections 11.1, 12.2, 12.8, 12.9, 12.10, and 12.11) shall terminate without liability of any party to any other party, except that in the event of any termination under Section 10.4, the breaching party shall be liable for the reasonable expenses (including attorneys' fees and court costs) of the other party incurred in connection with this Agreement and the Transactions. Nothing contained in this Section 10.5 shall relieve any party of liability for any breach of this Agreement that occurred prior to the date of termination of this Agreement. 54 11. OTHER COVENANTS. 11.1 ANNOUNCEMENTS. Each party agrees not to make, nor cause to be made, any news releases or other public announcements pertaining to the Transactions without first consulting the other party and attempting to formulate a mutually satisfactory arrangement for such disclosure, and in any case will make an announcement thereafter without the consent of the other only to the extent required by applicable law. 11.2 EMPLOYEES. Buyer agrees that it will offer employment to all Employees working for the Division on the Closing Date, effective on such date. Each Employee shall be offered such employment at his or her basic annual salary in effect on the date of this Agreement, together with employment benefits, to the extent available at reasonable cost to Buyer reasonably equivalent to those provided by Buyer to its Employees (a) for (i) group life insurance, and (ii) accidental death and dismemberment insurance, and (b) under its group comprehensive medical plan. Buyer acknowledges that Seller is terminating employees of the Division in reliance upon Buyer's commitment to offer the Employees employment. Buyer agrees to comply with the terms of the Worker Adjustment and Retraining Notification Act. 55 11.3 COOPERATION. Each party hereto agrees, both before and after the Closing, to execute any and all further documents and writings and perform such other reasonable actions which may be or become necessary or expedient to effectuate and carry out the Transactions (which shall not include any obligation to make payments). 11.4 NOTIFICATION OF SALE. In utilizing existing stocks of packaging material, catalogues, brochures, sales literature, promotional material, and other selling material included in the Assets that bear the "Aerospace" name or any other trade name, trademark, service mark, slogan, logo, or like property retained by Seller under Section 2.2.6, Buyer shall, after the Closing Date, promptly indicate prominently on all such material (by sticker or otherwise) that the business of the Division is not being conducted by Seller. In no event shall Buyer use any such packaging material, catalogues, brochures, sales literature, promotional, and other selling material more than 90 days after the Closing Date. 11.5 EXCLUDED ASSETS. If, after the Closing Date, Excluded Assets including, but not limited to, proprietary information of Seller, shall remain on the premises utilized by or under the control of Buyer, then buyer shall take reasonable efforts to deliver such Excluded Assets to Seller at the expense of Seller and, so long as such information shall remain on said 56 premises, Buyer shall exercise the same reasonable degree of care with respect thereto as it does with respect to its own property. 11.6 TAX COOPERATION. After the Closing, the parties shall, and shall cause their respective Affiliates to, cooperate with each other in the preparation of all tax returns and shall provide, or cause to be provided, to such other party any records and other information reasonably requested by such party in connection therewith as well as access to, and the cooperation of, the auditors of such other party and its Affiliates. After the Closing, the parties shall, and shall cause their respective Affiliates to, cooperate with the other party in connection with any tax investigation, tax audit, or other tax proceeding relating to the Division. Any information obtained pursuant to this Section relating to taxes shall be kept confidential by the other party. 11.7 BEST EFFORTS. Each party will use its best efforts to cause all conditions to its obligations hereunder to be timely satisfied and to perform and fulfill all obligations on its part to be performed and fulfilled under this Agreement to the end that the Transactions shall be effected substantially in accordance with the terms of this Agreement as soon as reasonably practicable. 57 12. MISCELLANEOUS. 12.1 BULK TRANSFER LAWS. Subject to Section 9.2, Seller hereby waives compliance by Buyer with any applicable bulk transfer laws including, but not limited to, the bulk transfer provisions of the Uniform Commercial Code of any state, or any similar statute, with respect to the transactions contemplated hereby. 12.2 EXPENSES. Except as set forth in Section 10.5, whether or not the Transactions are consummated, neither of the parties hereto shall have any obligation to pay any of the fees and expenses of the other party incident to the negotiation, preparation, execution of the Transaction Documents, or the closing of the Transactions including, but not limited to, the fees and expenses of counsel, accountants, investment bankers, and other experts. 12.3 WAIVERS. Either party may, by written notice to the other party, (a) extend the time for the performance of any of the obligations or other actions of the other party under this Agreement; (b) waive any inaccuracies in the representations or warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement; (c) waive compliance with any of the conditions or covenants of the other contained in this Agreement; or (d) waive performance 58 of any of the obligations of the other under this Agreement. With regard to any power, remedy, or right provided herein or otherwise available to any party hereunder, (i) no waiver or extension of time will be effective unless expressly contained in a writing signed by the waiving party, and (ii) no alteration, modification, or impairment will be implied by reason of any previous waiver, extension of time, or delay or omission in exercise of rights or other indulgence. 12.4 AMENDMENTS, SUPPLEMENTS. This Agreement may be amended or supplemented at any time by the mutual written consent of the parties. 12.5 ENTIRE AGREEMENT. This Agreement, its exhibits and schedules, the documents incorporated by reference, and the documents executed on the Closing Date in connection herewith, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. No representation, warranty, promise, inducement, or statement of intention has been made by either party that is not embodied in this Agreement or such other documents, and neither party shall be bound by, or be liable for, any alleged representation, warranty, promise, inducement, or statement of intention not ambodied herein or therein. 59 12.6 BINDING EFFECT, BENEFITS. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer an any person other than the parties hereto or their respective permitted successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement. 12.7 ASSIGNABILITY. Neither this Agreement nor any of the parties' rights hereunder shall be assignable by either party without the prior written consent of the other party. 12.8 NOTICES. All notices under this Agreement shall be in writing and shall be delivered by personal service or telegram, telecopy, or certified mail (if such service is not available, then by first class mail), postage prepaid, or overnight courier, to such address as may be designated from time to time by the relevant party, and which shall be deemed given when received. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. Notices shall be addressed as follows or to such other address as the party to whom the same is directed will have specified in conformity with the foregoing: 60 (a) If to Buyer: Nortech Systems Incorporated 641 East Lake Street Suite 234 Wayzata, Minnesota 55391 Attention: Quentin E. Finkelson, President (b) If to Seller: Communication Cable, Inc. Post Office Box 1575 Sanford, North Carolina 27331 Attention: James R. Fore, President 12.9 GOVERNING LAW; JURISDICTION. This Agreement has been negotiated and entered into in the State of Minnesota, and all questions with respect to the Agreement and the rights and liabilities of the parties will be governed by the laws of that state, regardless of the choice of laws provisions of Minnesota or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Agreement will be heard and determined before an appropriate federal or state court located in Minnesota. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Agreement and the parties waive any and all 61 objections that they may have as to jurisdiction or venue in any other court. 12.10 ATTORNEYS' FEES. If any litigation is commenced (including any proceedings in a bankruptcy court) between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any person or entity hereunder, solely as between the parties hereto or their successors, the party or parties prevailing in such proceeding will be entitled to the reasonable attorneys' fees and expenses of counsel and court costs incurred by reason of such litigation. 12.11 EQUITABLE REMEDIES. Seller and Buyer acknowledge that the remedy at law for any breach, or threatened breach, of their respective covenants to consummate the Transactions will be inadequate and, accordingly, each covenants and agrees that, with respect to any such breach or threatened breach, the other will, in addition to any other rights or remedies that it may have and regardless of whether such other rights or remedies have been previously exercised, be entitled to such equitable and injunctive relief as may be available from any appropriate court referred to in Section 12.9. Notwithstanding the foregoing sentence, any monetary damages which are all or a portion of any equitable relief granted hereunder shall be subject to the limitations set forth in Section 9. 62 12.12 REPRESENTATIONS AND WARRANTIES. No fact, event, misrepresentation, or occurrence that, in the absence of this Section 12.12, would constitute a breach or breaches of any representation or warranty of either party under this Agreement shall be deemed to constitute a breach or breaches by such party of its representations or warranties under this Agreement if such party has knowledge of such breach or breaches on the date hereof and/or as of the Closing Date. The disclosure of any information on any schedule to this Agreement shall be deemed to constitute the disclosure of such information on all other schedules to this Agreement applicable to such information. 12.13 RULES OF CONSTRUCTION. 12.13.1 HEADINGS. The section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Agreement or of any particular section. 12.13.2 TENSE AND CASE. Throughout this Agreement, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 63 12.13.3 SEVERABILITY. The validity, legality, or enforceability of the remainder of this Agreement will not be affected even if one or more of the provisions of this Agreement will be held to be invalid, illegal, or unenforceable in any respect. 12.13.4 KNOWLEDGE. Whenever a representation or warranty is stated to be based on the knowledge of a party, such phrase refers to whether any of such party's senior management has actual knowledge of the matters involved. As used herein, "senior management" shall mean any officer of Seller or Buyer, as the case may be, with a title of vice president or its equivalent or higher. 12.13.5 AGREEMENT NEGOTIATED. The parties hereto are sophisticated and have been represented by lawyers through the Transactions who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe the presumption of laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive its effects. 12.14 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an 64 original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Asset Purchase Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first-above written. NORTECH SYSTEMS INCORPORATED Buyer By: /s/ Q. E. Finkelson ----------------------------- President COMMUNICATION CABLE, INC. Seller By: /s/ James R. Fore ----------------------------- President 65 EX-23.1 8 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 16, 1996 in the Annual Report on Form 10-K for the year ended December 31, 1995. /s/Larson, Allen, Weishair & Co., LLP LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota March 27, 1996 EX-27 9 EXHIBIT 27 FDS
5 0000722313 NORTECH YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 924,590 0 1,862,272 6,053 3,855,212 7,197,722 6,096,700 2,256,862 13,223,064 1,918,213 0 0 250,000 22,009 7,264,157 13,223,064 18,305,928 18,305,928 14,541,088 14,541,088 2,192,354 0 240,562 1,331,924 0 1,331,924 0 0 0 1,331,924 .55 .55
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