-----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, JZnf2Qpy3dswiCShjI3+BpDt9kuNJaELApK9XpotrGN648c6ZaWbq0uo7nqQfny6 tECEgwTGNNj5mJjNczLUZA== 0000912057-97-007570.txt : 19970304 0000912057-97-007570.hdr.sgml : 19970304 ACCESSION NUMBER: 0000912057-97-007570 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961104 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 19970303 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-13257 FILM NUMBER: 97548980 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 8-K/A 1 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT TO APPLICATION OR REPORT Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) November 4, 1996 ------------------------ NORTECH SYSTEMS INCORPORATED - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 0-13257 41-0681094 - ------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification #) 641 East Lake Street - Wayzata, MN 55391 - ------------------------------------------------------------------------------- (Address of executive offices) (Zip Code) Registrant's telephone number, including area code (612) 473-4102 ------------------------ AMENDMENT NO. 1 TO FORM 8-K The undersigned registrant hereby amends the following items, financial or other portions of its Current Report on Form 8-K dated November 4, 1996. A Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired Financial statements of Zercom as of December, 1995, and related statements of earnings and retained earnings and cash for the years then ended. (b) Pro Forma Financial Information. (i) Proforma balance sheets (unaudited) for registrant and Zercom, for the 9-month period ended September 30, 1996; (ii) Proforma statements of income (unaudited) for the 9-month period ended September 30, 1996, and for the year ended December 31, 1995. SIGNATUARES Pursuant to the requirements of the Securities Exchange Commission of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, hereunto duly authorized. NORTECH SYSTEMS INCORPORATED By ---------------------------------- Quentin E. Finkelson, President, Chairman and Chief Executive Officer Dated _________, 1997 B NORTECH SYSTEMS INCORPORATED PRO FORMA TABLE OF CONTENTS PAGE ---- 8KA Amendment to Application or Report A-B Table of Contents C Independent Auditor's Report - Zercom Corporation Title Page D-1 Table of Contents D-2 Auditor's Report & Financial Statements 1-14 Independent Auditor's Consent A-1 Unaudited Pro Forma Condensed Financial Statements Pro Forma Introduction P-1 Pro Forma Balance Sheet (Unaudited) for Period Ended Sept 30, 1996 P-2 Pro Forma Statement of Income (Unaudited) for Period Ended Sept 30, 1996 P-3 Pro Forma Balance Sheet (Unaudited) Work Sheet for Sept 30, 1996 P-4 Pro Forma Statement of Income (Unaudited) Work Sheet for Sept 30, 1996 P-5 Pro Forma Statement of Income (Audited) for Year Ended Dec 31, 1995 P-6 Notes to the Pro Forma P-7 C ZERCOM CORPORATION (A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.) FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT DECEMBER 31, 1995 AND 1994 D-1 TABLE OF CONTENTS PAGE ---- Independent Auditor's Report 1 Balance Sheets December 31, 1995 and 1994 2 - 3 Statements of Operations and Retained Earnings For the Years Ended December 31, 1995 and 1994 4 Statements of Cash Flows For the Years Ended December 31, 1995 and 1994 5 - 6 Notes to Financial Statements 7 - 14 D-2 INDEPENDENT AUDITOR'S REPORT Board of Directors Zercom Corporation (A Subsidiary of Communication Systems, Inc.) Merrifield, Minnesota We have audited the accompanying balance sheets of Zercom Corporation (a Subsidiary of Communication Systems, Inc.) ("CSI") as of December 31, 1995 and 1994, and the related statements of operations and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the CSI's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Zercom Corporation (a Subsidiary of Communication Systems, Inc.) as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota December 17, 1996 (1) ZERCOM CORPORATION (A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.) BALANCE SHEETS DECEMBER 31, 1995 AND 1994 1995 1994 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 494,919 $ 83,706 Accounts Receivable - Trade (Less Allowance for Doubtful Accounts of $56,700 - 1995; $74,200 - 1994) 1,860,747 2,488,824 Inventories 4,054,429 4,861,363 Prepaid Expenses 55,774 50,384 Deferred Income Taxes 816,400 774,100 ------------ ------------ Total Current Assets $ 7,282,269 $ 8,258,377 ------------ ------------ PROPERTY AND EQUIPMENT (At Cost) Furniture and Fixtures $ 135,307 $ 100,948 Machinery and Equipment 2,095,361 1,969,791 Buildings and Improvements 1,192,547 875,326 Land and Improvements 81,460 78,460 ------------ ------------ Total $ 3,504,675 $ 3,024,525 Less: Accumulated Depreciation 1,209,858 799,401 ------------ ------------ Total Property and Equipment (At Depreciated Cost) $ 2,294,817 $ 2,225,124 ------------ ------------ OTHER ASSETS Account Receivable - ERT $ 512,797 $ - Other Assets 59,000 79,000 ------------ ------------ Total Other Assets $ 571,797 $ 79,000 ------------ ------------ Total Assets $ 10,148,883 $ 10,562,501 ------------ ------------ ------------ ------------ SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. (2) 1995 1994 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 12,504 $ 12,504 Accounts Payable - Trade 845,351 2,374,642 Due to Parent Company 7,961,002 7,075,344 Accrued Expenses 420,816 597,859 ------------ ------------ Total Current Liabilities $ 9,239,673 $ 10,060,349 ------------ ------------ LONG-TERM LIABILITIES Long-Term Debt (Net of Current Maturities Shown Above) $ 67,704 $ 80,204 Deferred Income Taxes 116,400 94,100 ------------ ------------ Total Long-Term Liabilities $ 184,104 $ 174,304 ------------ ------------ Total Liabilities $ 9,423,777 $ 10,234,653 ------------ ------------ STOCKHOLDERS' EQUITY Common Stock - $1 Par Value; 25,000 Shares Authorized; 10,000 Shares Issued and Outstanding $ 10,000 $ 10,000 Contributed Capital 40,000 40,000 Retained Earnings 675,106 277,848 ------------ ------------ Total Stockholders' Equity $ 725,106 $ 327,848 ------------ ------------ Total Liabilities and Stockholders' Equity $ 10,148,883 $ 10,562,501 ------------ ------------ ------------ ------------ (3) ZERCOM CORPORATION (A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.) STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ------------ ------------- SALES $ 19,951,343 $ 17,659,093 COST OF GOODS SOLD (17,127,802) (15,955,524) ------------ ------------- GROSS PROFIT $ 2,823,541 $ 1,703,569 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (2,206,632) (2,078,908) INTEREST INCOME 58,226 11,253 INTEREST EXPENSE (17,477) (8,949) ------------ ------------- INCOME (LOSS) BEFORE INCOME TAXES $ 657,658 $ (373,035) PROVISION FOR (BENEFIT FROM) INCOME TAXES 260,400 (147,700) ------------ ------------- NET INCOME (LOSS) $ 397,258 $ (225,335) Retained Earnings - Beginning 277,848 503,183 ------------ ------------- RETAINED EARNINGS - ENDING $ 675,106 $ 277,848 ------------ ------------- ------------ ------------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. (4) ZERCOM CORPORATION (A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 20,066,623 $ 17,106,481 Cash Paid to Suppliers, Employees and Contractors (19,808,101) (18,743,100) Interest Received 58,226 11,253 Interest Paid (17,477) (8,949) Income Taxes Paid (280,400) (132,300) ------------- ------------- Net Cash Provided (Used) by Operating Activities $ 18,871 $ (1,766,615) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of Property and Equipment $ (480,816) $ (984,834) Acquisition of Licensing Rights - (20,000) ------------- ------------- Net Cash Used by Investing Activities $ (480,816) $ (1,004,834) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on Long-Term Debt $ (12,500) $ (7,292) Net Increase in Due to Parent 885,658 2,770,001 ------------- ------------- Net Cash Provided by Financing Activities $ 873,158 $ 2,762,709 ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 411,213 $ (8,740) Cash and Cash Equivalents - Beginning 83,706 92,446 ------------- ------------- CASH AND CASH EQUIVALENTS - ENDING $ 494,919 $ 83,706 ------------- ------------- ------------- ------------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. (5) ZERCOM CORPORATION (A SUBSIDIARY OF COMMUNICATION SYSTEMS, INC.) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ------------ ------------- RECONCILIATION OF NET INCOME (LOSS) TO CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 397,258 $ (225,335) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 431,123 308,943 Deferred Income Taxes (20,000) (280,000) (Increase) Decrease in Receivables 115,280 (552,612) (Increase) Decrease in Inventories 806,934 (1,264,143) Increase in Prepaid Expenses (5,390) (9,573) Increase (Decrease) in Accounts Payable (1,529,291) 201,947 Increase (Decrease) in Other Accrued Expenses (177,043) 54,158 ------------ ------------- Net Cash Provided (Used) by Operating Activities $ 18,871 $ (1,766,615) ------------ ------------- ------------ ------------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. (6) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Zercom Corporation (the "Company") is a subsidiary of Communication Systems, Inc. ("CSI"). The Company is a contract manufacturer of electronic sub-assemblies and components. Zercom Corporation also manufactures a line of proprietary products for sport fishermen, including the Clearwater Classic and Clearwater Pro fish locators. BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Company as described above. These statements are presented as if the Company had existed as a corporation separate from CSI during the periods presented and include the assets, liabilities, sales and expenses that are directly related to the Company's operations. These financial statements include CSI corporate overhead allocations. USE OF ESTIMATES The presentation 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's estimates consist principally of reserves for doubtful accounts and inventory obsolescence. ACCOUNTS RECEIVABLE The Company establishes an allowance for doubtful accounts equal to the estimated collection losses to be incurred. The estimated losses are based on actual collection experience and management's opinion of the current status of existing receivables. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Allowances are made for obsolete inventory and for lower of cost or market amounts. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. (7) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER ASSETS Other assets consist of licensing rights purchased for the right to manufacture and sell certain fish locator products. The licensing rights are being amortized on a straight-line basis of a 5-year period. Amortization expense was $20,000 and $17,000 in 1995 and 1994, respectively. DUE TO PARENT COMPANY Corporate allocated expenses and all intercompany transfers of cash are recorded in the intercompany account entitled "Due to Parent Company." The corporate expenses allocated to the Company are due to various services that are provided by the corporate office of CSI. The cost of such services not directly attributable to a specific division or subsidiary, primarily insurance and corporate overhead, are allocated to the separate divisions and subsidiaries on the basis described below. The corporate allocation is comprised of the following expenses and is allocated based on a beginning of year budget using the following methods: Expense Allocation Method ---------------------------- ---------------------------------- Corporate Overhead Revenue/Total Revenue Legal and Audit Revenue/Total Revenue Group Health Insurance Actual Charges Life Insurance Actual Charges 401(k) Plan Actual Charges ESOP Plan Actual Charges INCOME TAXES Current income tax expense is recorded at the Company level as if the Company were a separate taxable entity using the overall effective rate of Communication Systems, Inc. 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. (8) NOTE 2 INVENTORIES The components of inventories are as follows: 1995 1994 ------------ ------------ Finished Goods $ 1,343,468 $ 910,857 Raw and Processed Materials 4,185,961 4,975,506 ------------ ------------ $ 5,529,429 $ 5,886,363 Less: Inventory Allowances 1,475,000 1,025,000 ------------ ------------ Total $ 4,054,429 $ 4,861,363 ------------ ------------ ------------ ------------ NOTE 3 LONG-TERM DEBT Long-term debt consists of a note payable to Consolidated Telephone Co. The non-interest bearing note is due in monthly installments of $1,042 through June 2002. Maturity requirements are as follows: Years Ending December 31, Amount ------------------------- ---------- 1996 $ 12,504 1997 12,504 1998 12,504 1999 12,504 2000 12,504 Thereafter 17,688 ---------- Total $ 80,208 ---------- ---------- (9) NOTE 4 FEDERAL AND STATE INCOME TAXES The components of income tax expense for the years ended December 31, 1995 and 1994, consisted of the following: 1995 1994 ----------- ------------ Current Federal $ 226,600 $ 96,200 State 53,800 36,100 ----------- ------------ Total Current $ 280,400 $ 132,300 Deferred Federal $ (15,800) $ (220,600) State (4,200) (59,400) ----------- ------------ Total Deferred $ (20,000) $ (280,000) ----------- ------------ Income Tax Provision $ 260,400 $ (147,700) ----------- ------------ ----------- ------------ The components of net deferred tax assets at December 31, 1995, are as follows: Deferred Tax Assets: Inventories, Principally Due to Inventory Allowances and Additional Costs Inventoried for Tax Purposes $ 778,700 Accounts Receivable, Principally Due to Allowance for Doubtful Accounts 22,500 Accrued Expenses 15,200 ---------- Deferred Tax Assets $ 816,400 ---------- Deferred Tax Liabilities: Property and Equipment, Principally Due to Differences in Depreciation $ 116,400 ---------- Net Deferred Tax Asset $ 700,000 ---------- ---------- The deferred income tax benefit for 1995 and 1994 results from changes in the net deferred tax asset due to: 1995 1994 ----------- ----------- Inventory Allowances $ 135,800 $ 294,400 Allowance for Doubtful Accounts (6,900) 2,100 Accrued Expenses (86,700) 16,900 Property and Equipment (22,200) (33,400) ----------- ----------- Total $ 20,000 $ 280,000 ----------- ----------- ----------- ----------- (10) NOTE 4 FEDERAL AND STATE INCOME TAXES (CONTINUED) The actual income tax expense for the years ended December 31, 1995 and 1994, differs from the "expected" amount (computed by applying the statutory federal income tax rate of 34% to the earnings before income taxes and cumulative effect of a change in accounting principle) as follows: 1995 1994 ---------- ---------- Computed "Expected" Tax Expense 34.0 % 34.0 % Increase (Decrease) in Income Taxes Resulting from State Income Taxes, Net of Federal Tax Benefit 5.6 5.6 ---------- ---------- Total 39.6 % 39.6 % ---------- ---------- ---------- ---------- NOTE 5 EMPLOYEE BENEFIT PLAN CSI has an employee savings plan (401k) and matches a percentage of employee contributions up to eight percent of compensation. Several of the Company's employees are participants in the Plan. It is CSI's policy to recognize Plan costs as they accrue and to allocate those costs to the divisions. Costs associated with the Plan that were allocated to the Company were $42,000 and $28,000 for 1995 and 1994, respectively. NOTE 6 LEASE COMMITMENTS The Company leases equipment and building space under operating leases. Operating lease rental payments approximated $74,000 and $85,000 for the years ended December 31, 1995 and 1994, respectively. At December 31, 1995, the Company was obligated under one operating lease to make minimum annual future lease payments as follows: Years Ending December 31, Amount ------------------------- --------- 1996 $ 51,975 1997 51,975 1998 51,975 1999 51,975 --------- Total $ 207,900 --------- --------- (11) NOTE 7 EMPLOYEE STOCK PLANS EMPLOYEE STOCK OWNERSHIP PLAN During 1985, the Board of Directors adopted a leveraged employee stock ownership plan (ESOP) and authorized CSI to advance the ESOP or guarantee debt of up to $2,000,000 to enable the Plan to purchase CSI's common stock in the open market. Advances to the Plan bear interest at 85% of prime and are repaid over ten years through CSI contributions to the Plan. Contributions to the Plan are determined by the Board of Directors and can be made in cash or shares of CSI's stock. Contributions by the Company of $28,000, and $37,000 were made in the years ending December 31, 1995 and 1994, respectively. At December 31, 1995, the ESOP held 342,593 shares of CSI's common stock, all of which has been allocated to the accounts of eligible employees. All eligible employees of CSI participate in the Plan after completing one year of service. Contributions are allocated to each participant based on compensation and vest 30% after three years of service and incrementally thereafter, with full vesting after seven years. All advances by CSI to the ESOP were repaid at December 31, 1995. EMPLOYEE STOCK PURCHASE PLAN CSI maintains an Employee Stock Purchase Plan for which 200,000 common shares have been reserved. Several of the Company's employees participate in the Plan. Under the terms of the Plan, participating employees may acquire shares of common stock through payroll deductions of not more that 10% of compensation. The price at which shares can be purchased is 85% of the lower of fair market value for such shares on one of two specified dates in each Plan year. A participant is limited to the acquisition in any Plan year to the number of shares which their payroll deductions for the year would purchase based on the market price on the first day of the year or $25,000, whichever is less. Shares issued to employees under the Plan were 23,567 and 15,408 for the Plan years ended August 31, 1995 and 1994, respectively. At December 31, 1995, employees had subscribed to purchase an additional 15,600 shares in the current Plan cycle ending August 31, 1996. NOTE 8 RELATED PARTY The Company is allocated a portion of CSI's expenses, which are charged to cost of goods sold and selling, general and administrative expenses based on various methods (see Note 1). During 1995 and 1994, these allocated expenses were $79,812 and $50,295, respectively. In 1991, the Company borrowed $100,000 under a financing arrangement between CSI and First Bank. CSI charged the Company for monthly principal and interest payments equal to those required by First Bank. The amounts outstanding were $-0- and $177,500 at December 31, 1995 and 1994, respectively. (12) NOTE 8 RELATED PARTY (CONTINUED) Sales to affiliated companies totaled $428,842 and $343,081 for the years ended December 31, 1995 and 1994, respectively. NOTE 9 SALES TO MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK Two customers accounted for approximately 38.5% and 14.3% of sales, respectively, for the year ended December 31, 1995. One customer accounts for approximately 36.8% of accounts receivable at December 31, 1995. One customer accounted for approximately 51.2% of sales, and 32.6% of accounts receivable for the year ended December 31, 1994. A major customer during 1994 and 1995 reduced their orders with the Company during 1996 by approximately $5,000,000. NOTE 10 COMMITMENTS AND CONTINGENCIES WATERSTRIKE AGREEMENT During January, 1995 the Company entered into an agreement with Waterstrike Incorporated (Waterstrike) to purchase certain assets and license intellectual property rights related to manufacturing the Polaris MFD product line. As part of the agreement, the Company is obligated to pay Waterstrike $2.50 per unit for the first 80,000 Polaris MFD units shipped for a successive four year period beginning January 1, 1996. Aggregate payments made under the agreement for the four year period are not to exceed $200,000. In addition, the Company has an obligation to pay Waterstrike 65% of the gross profit realized on the sale of all Polaris MFD products covered under the agreement for as long as Zercom continues to sell the products. MARCUM AGREEMENT During June, 1993 the Company entered into an agreement with Marcum Enterprises, Inc. (Marcum) to purchase for $100,000 the exclusive right to manufacture, promote and sell the single color and multi-color electronic sonar units previously developed by Marcum. The units are marketed under the "Zercom Marine" product line. As part of the agreement, The Company is also obligated to pay Marcum license fees of $10 for each of the first 5,000 single color and the first 5,000 multi-color sonar units sold, $7.50 for each of the second 5,000 single color and second 5,000 multi-color sonar units sold and $5.00 for each of the units sold in excess of 10,000 annually for the first two years of the agreement. During the third year of the agreement and each year thereafter, the licensing fee is equal to $7.00 for each unit sold regardless of the number of such units. The agreement shall remain in effect so long as Zercom continues to market and sell sonar units licensed under the agreement and may be terminated by Zercom at any time with 90 day written notice. (13) NOTE 10 COMMITMENTS AND CONTINGENCIES MARCUM AGREEMENT (CONTINUED) In November, 1995, Zercom entered into an agreement with Emerging Recreational Technologies, Inc. (ERT) to transfer to ERT the responsibility for the marketing and sale of "Zercom Marine" product line on an exclusive basis. Pursuant to the agreement ERT purchased certain "Zercom Marine" inventory and accounts receivable from previous "Zercom Marine" sales totaling $671,286 to be paid in installments maturing on November 22, 1996. A balance of $512,797 remains due from ERT as of December 31, 1995. In addition, ERT assumed the obligation to Marcum for licensing fees discussed in the preceding paragraph. However, should ERT fail to pay such fees, Zercom is liable for the payment. The agreement also provides for the sale of inventory to ERT at agreed upon prices through July 1, 1996. After that date, products shall be sold to ERT at prices reasonably established based upon changes in labor and material costs and other factors related to producing the sonar units. The agreement also provides ERT the option, for a 30 day period beginning June 30, 1997, to purchase all of the manufacturing assets related to the manufacture of the sonar units at an amount equal to 10% of the aggregate sales of the sonar units during the twelve months ended June 30, 1997. The purchase price however, is not to be less than $300,000 nor to exceed $500,000. The agreement expires on August 1, 1997. However the agreement may be renewed automatically for four successive one-year periods thereafter unless either party gives notice not to renew 30 days prior to the renewal date. NOTE 11 SUBSEQUENT EVENTS On November 4, 1996, CSI sold the Property and Equipment and Inventories of the Company to Nortech Systems, Inc. The purchase price of approximately $6,300,000 was paid with $1,500,000 cash and the remainder on a note payable to CSI. The note requires that a minimum of $200,000 principal be paid semi-annually beginning May 1, 1997, for a period of 5 years at which time all remaining principal and accrued interest is required to be paid in full. Each semi-annual installment payment is to be applied first to accrued interest before reducing principal. Interest accrues on the note at the prime or reference rate as established by First Bank Minneapolis. 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. (14) INDEPENDENT AUDITORS' CONSENT We consent to the use of our report dated December 17, 1996 on the financial statements of Zercom Corporation (a division of Communications Systems, Inc. and Subsidiaries) appearing in this Form 8-K/A of Nortech Systems, Inc. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota February 6, 1997 A-1 NORTECH SYSTEMS INCORPORATED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The Unaudited Pro Forma Consolidated Balance Sheet is derived from the unaudited balance sheets of Nortech Systems Incorporated and Zercom as of September 30, 1996, included elsewhere herein, and assumes that the transaction was consummated on September 30, 1996. The Unaudited Pro Forma Condensed Statement of Income for the nine-month period ended September 30, 1996, is derived from the unaudited combined Statements of Income of Nortech Systems Incorporated and Zercom, included elsewhere herein, and assumes that the transactions were consummated on January 1, 1996. The Unaudited Pro Forma Condensed Statement of Income for the year ended December 31, 1995, is derived from the audited consolidated Statements of Income of Nortech Systems Incorporated and Zercom, included elsewhere herein, and assumes that the transactions were consummated on January 1, 1995. The Unaudited Pro Forma Consolidated Financial Statements do not purport to represent what Nortech Systems Incorporated's results of operations or financial condition would actually have been if the transactions had occurred on the dates indicated, and do not project Nortech Systems Incorporated's results or financial condition for or to any future period or date. The Unaudited Pro Forma Consolidated Financial Statements are presented for comparative purposes only. The pro forma adjustments, as discussed in "Notes" to the Pro Forma, are based on available information and certain assumptions that management believes are reasonable. The acquisition will be accounted for using the purchase method of accounting. The purchase price of the acquisition will be allocated to the tangible assets and liabilities of Zercom, based upon management's preliminary estimates of their fair value with the remainder allocated to goodwill. The allocation of purchase price for the acquisition is subject to revision when additional information concerning asset and liability valuations are obtained. In the opinion of Nortech Systems Incorporated management, and assuming a stable interest rate environment, the asset and liability valuations for the acquisition will not be materially different from the Unaudited Pro Forma Consolidated Financial Statements presented. P-1 NORTECH SYSTEMS INCORPORATED PRO FORMA BALANCE SHEETS (UNAUDITED) NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
ZERCOM PRO FORMA OPENING PRO FORMA ASSETS NORTECH ADJUSTED ADJUSTMENT A BALANCE CONDENSED Current Assets Cash and cash equivalents $ 589,937 $ 842,512 $ (842,512) $ 0 $ 589,937 Accounts receivable, net 2,816,629 1,918,354 (1,918,354) 0 2,816,629 Total inventories $ 4,977,086 $ 3,825,741 $ (1,433,556) $ 2,392,185 $ 7,369,271 Prepaid expenses and other 532,478 (23,515) 23,515 0 532,478 Total current assets $ 8,916,130 $ 6,563,092 $ (4,170,907) $ 2,392,185 $ 11,308,315 PLANT, Property, and Equipment (at Cost) Land and Building/leaseholds $ 2,129,647 $ 1,362,404 $ 25,505 $ 1,387,909 $ 3,517,556 Manufacturing Equipment 2,908,700 2,547,556 (4,593) 2,542,963 5,451,663 Office and other equipment 1,677,886 0 1,677,886 Total Fixed Assets 6,716,233 3,909,960 20,912 3,930,872 10,647,105 Less Accumulated Depreciation and Amortization (2,663,651) (1,574,658) 1,574,658 0 (2,663,651) Total Fixed Assets less Depreciation $ 4,052,582 $ 2,335,302 $ 1,595,570 $ 3,930,872 $ 7,983,454 Other Assets 2,013,910 744,000 (701,667) 42,333 2,056,243 TOTAL ASSETS $ 14,982,622 $ 9,642,394 $ (3,277,004) $ 6,365,390 $ 21,348,012 LIABILITIES & SHAREHOLDERS' EQUITY Current Lialilities: Current maturities of long-term debt $ 200,984 $ 12,504 $ 387,496 $ 400,000 $ 600,984 Accounts payable 1,286,653 547,983 (547,983) 0 1,286,653 Accrued payrolls and commissions 615,201 276,944 (229,348) 47,596 662,797 Other 387,711 7,989,992 (7,989,992) 0 387,711 Total Current Liabilities $ 2,490,549 $ 8,827,423 $ (8,379,827) $ 447,596 $ 2,938,145 Long-Term Debt Notes Payable (net of current $ 4,813,556 $ 58,333 $ 5,859,461 $ 5,917,794 $ 10,731,350 maturities shown above) Total Long Term Debt 4,813,556 58,333 5,859,461 5,917,794 10,731,350 Total Liabilities $ 7,304,105 $ 8,885,756 $ (2,520,366) $ 6,365,390 $ 13,669,495 Redeemable Stock $ 1,500,000 $ $ $ $ 1,500,000 Shareholders' Equity: Preferred Stock $ 250,000 $ $ $ $ 250,000 Common Stock 22,009 10,000 (10,000) 0 22,009 Additional Paid-in Capital 11,242,672 40,000 (40,000) 0 11,242,672 Accumulated Deficit (5,336,164) 675,106 (675,106) 0 (5,336,164) Total Shareholders' Equity $ 6,178,517 $ 725,106 $ (725,106) $ 0 $ 6,178,517 Current Year Earnings 31,532 (31,532) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,982,622 $ 9,642,394 $ (3,277,004) $ 6,365,390 $ 21,348,012
P-2 NORTECH SYSTEMS INCORPORATED PRO FORMA STATEMENTS OF INCOME (UNAUDITED) NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
ZERCOM PRO FORMA PRO FORMA NORTECH ADJUSTED ADJUSTMENT CONDENSED -------------- -------------- ------------- -------------- Sales $ 18,341,346 $ 11,950,789 $ $ 30,292,135 Cost of Sales 15,024,544 10,398,264 25,422,808 -------------- -------------- ------------- ------------- Gross Profit $ 3,316,802 $ 1,552,525 $ 0 $ 4,869,327 Selling, General and Admin. 1,895,551 1,569,100 (360,000) 13,104,651 Engineering/Reseach & Development 280,771 280,771 Misc. (Income) Expense, net (7,283) (23,367) 23,367 3 (7,283) Interest (Income) Expense, net 251,649 (24,740) 369,000 2 595,909 -------------- -------------- ------------- ------------- Operating Expenses 2,420,688 1,520,993 32,367 3,974,048 -------------- -------------- ------------- ------------- Net Income (Loss) Before Tax Provision $ 896,114 $ 31,532 $ (32,367) $ 895,279 -------------- -------------- ------------- ------------- Income Tax (Benefit)/Expense 215,710 11,982 (15,127) 212,565 -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- NET INCOME/(LOSS) $ 680,404 $ 19,550 $ (17,240) $ 682,714 Retained Earnings - Beginning Retained Earnings - Ending 19,550 Net Income per Share of Common Stock $ 0.29 $ $ 0.29 -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- Weighted Average Number of Shares Outstanding 2,362,263 2,362,263
P-3 NORTECH SYSTEMS INCORPORATED PRO FORMA BALANCE SHEET (UNAUDITED) WORK SHEET NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
ZERCOM ASSETS ZERCOM ADJUSTMENT ADJUSTED ADJUSTMENT ADJUSTED Current Assets Cash and cash equivalents $ 842,512 $ $ 842,512 $ $ 842,512 Accounts receivable, net 1,975,075 (56,721) 1,918,354 1,918,354 Total inventories $ 3,965,741 $ (640,000) $ 3,325,741 $ 500,000 $ 3,825,741 Prepaid expenses and other (23,515) (23,515) (23,515) Total current assets $ 6,759,813 $ (696,721) $ 6,063,092 $ 500,000 $ 6,563,092 PLANT, Property, and Equipment (at Cost) Land and Building/leaseholds $ 1,362,404 $ $ 1,362,404 $ $ 1,362,404 Manufacturing Equipment 2,547,556 37,529 2,585,085 (37,529) 2,547,556 Office and other equipment Total Fixed Assets 3,909,960 37,529 3,947,489 (37,529) 3,909,960 Less Accumulated Depreciation and Amortization (1,574,658) (1,574,658) (1,574,658) Total Fixed Assets less Depreciation $ 2,335,302 $ 37,529 $ 2,372,831 $ (37,529) $ 2,335,302 Other Assets 44,000 700,000 744,000 744,000 TOTAL ASSETS $ 9,139,115 $ 40,808 $ 9,179,923 $ 462,471 $ 9,642,394 ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- ------------ ------------- LIABILITIES & SHAREHOLDERS' EQUITY Current Lialilities: Current maturities of long-term debt $ 12,500 $ 4 $ 12,504 $ $ 12,504 Accounts payable 662,826 (77,314) 585,512 (37,529) 547,983 Accrued payrolls and commissions 225,596 81,245 306,841 (29,897) 276,944 Other 7,560,054 429,938 7,989,992 7,989,992 Total Current Liabilities $ 8,460,976 $ 433,873 $ 8,894,849 $ (67,426) $ 8,827,423 Long-Term Debt Notes Payable (net of current $ 58,333 $ $ 58,333 $ $ 58,333 maturities shown above) Total Long Term Debt 58,333 0 58,333 0 58,333 Total Liabilities $ 8,519,309 $ 433,873 $ 8,953,182 $ (67,426) $ 8,885,756 Redeemable Stock $ $ $ $ $ Shareholders' Equity: Preferred Stock $ $ $ $ $ Common Stock 10,000 10,000 10,000 Additional Paid-in Capital 40,000 40,000 40,000 Accumulated Deficit 1,068,171 (393,065) 675,106 675,106 Total Shareholders' Equity $ 1,118,171 $ (393,065) $ 725,106 $ 0 $ 725,106 Current Year Earnings (498,365) (498,365) 529,897 31,532 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,139,115 $ 40,808 $ 9,179,923 $ 462,471 $ 9,642,394 ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- ------------ -------------
P-4 NORTECH SYSTEMS INCORPORATED PRO FORMA STATEMENTS OF INCOME (UNAUDITED) WORK SHEET NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
ADJUSTMENT ADJUSTMENT Per 1995 Audit ZERCOM ZERCOM Per 1995 Audit ADJUSTED Reversed in 1996 ADJUSTED -------------- Sales $ 11,950,789 $ $ 11,950,789 $ $ 11,950,789 Cost of Sales 10,928,161 (529,897) 10,398,264 10,398,264 -------------- Gross Profit $ 1,022,628 $ 529,897 $ 1,552,525 $ 0 $ 1,552,525 Selling, General and Admin. 1,569,100 1,569,100 1,569,100 Engineering/Reseach & Development Misc. (Income) Expense, net (23,367) (23,367) (23,367) Interest (Income) Expense, net (24,740) (24,740) (24,740) -------------- Operating Expenses 1,520,993 0 1,520,9930 1,520,993 -------------- Net Income (Loss) Before Tax Provision $ (498,365) $ 529,897 $ 31,532 $ 0 $ 31,532 -------------- Income Tax (Benefit)/Expense -------------- -------------- Net Income/(Loss) $ (498,365) $ 529,897 $ 31,532 $ 0 $ 31,532 Retained Earnings - Beginning -------------- Retained Earnings - Ending $ (498,365) $ 529,897 $ 31,532 $ 31,532 -------------- -------------- Net Income per Share of Common Stock $ $ $ $ $ Weighted Average Number of Shares Outstanding
P-5 NORTECH SYSTEMS INCORPORATED PRO FORMA STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1995
AUDITED AUDITED PRO FORMA PRO FORMA NORTECH ZERCOM ADJUSTMENT CONDENSED -------------- -------------- ----------- -------------- Sales $ 18,305,928 $ 19,951,343 $ $ 38,257,271 Cost of Sales 14,541,088 17,127,802 31,668,890 -------------- -------------- ----------- -------------- Gross Profit $ 3,764,840 $ 2,823,541 $ 0 $ 6,588,381 Selling, General and Admin. 2,280,105 2,206,632 (480,000)(1) 14,006,737 Engineering/Reseach & Development 124,919 0 124,919 Misc. (Income) Expense, net (212,670) (212,670) Interest Expense 240,562 17,477 492,000 (2) 2750,039 -------------- -------------- ----------- -------------- Operating Expenses 2,432,916 2,224,109 12,000 4,669,025 Net Income (Loss) Before Tax Provision $ 1,331,924 $ 657,658 $ (12,000) $ 1,977,582 -------------- -------------- ----------- -------------- Income Tax (Benefit)/Expense 251,200 (4,560) 246,640 -------------- -------------- ----------- -------------- -------------- -------------- ----------- -------------- Net Income/(Loss) $ 1,331,924 $ 406,458 $ (7,440) $ 1,730,942 -------------- -------------- ----------- -------------- -------------- -------------- ----------- -------------- Retained Earnings - Beginning Retained Earnings - Ending Net Income per Share of Common Stock $ 0.55 $ 0.72 -------------- -------------- -------------- -------------- Weighted Average Number of Shares Outstanding 2,407,804 2,407,804
P-6 NOTES TO THE PRO FORMA A TO RECORD THE ACQUISITION OF ASSETS AND THE ALLOCATION OF PURCHASE PRICE, ALSO ELIMINATING NON-PURCHASED ASSETS INTERCOMPANY DEBT AND OTHER LIABILITIES 1 ELIMINATE DUPLICATE MANAGEMENT AND OPERATING EXPENSES 2 RECORD ADDITIONAL INTEREST EXPENSE FOR INCREASED DEBT 3 ELIMINATE INTEREST INCOME DUE TO REDUCED CASH LEVELS NOTE: NO ADDITIONAL DEPRECIATION EXPENSE WAS RECORDED, FIXED ASSET LEVEL REMAINS THE SAME ONLY THE LIFE OF THE ASSETS WAS EXTENDED. P-7 -----END PRIVACY-ENHANCED MESSAGE-----