-----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, WC3WBz58awIcEVGjSXw820ENHyWMwSOwn5QnQ6lgOtFAbgQ8AdZhU9zfFWzFBYrU EaQgLs/A0u4WzBpEj/ZS0Q== 0000912057-97-016025.txt : 19970509 0000912057-97-016025.hdr.sgml : 19970509 ACCESSION NUMBER: 0000912057-97-016025 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970508 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: ARS SEC ACT: 1934 Act SEC FILE NUMBER: 000-13257 FILM NUMBER: 97597716 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 ARS 1 ARS - ANNUAL REPORT [GRAPHICS PICTURES] [LOGO] NORTECH SYSTEMS 1996 ANNUAL REPORT SYNERGY: THE INTERACTION OF TWO OR MORE FORCES SUCH THAT THEIR COMBINED EFFECT IS GREATER THAN THE SUM OF THEIR INDIVIDUAL EFFECTS. CORPORATE DESCRIPTION Nortech Systems Incorporated manufactures wire harnesses, cable and electromechanical assemblies, printed circuit board assemblies and higher-level assemblies for a wide range of commercial and defense industries. It also designs, manufactures and markets high-performance display monitors for medical imaging, document imaging, radar and industrial applications. Based in Wayzata, Minnesota, Nortech Systems' manufacturing operations are located in Aitkin, Bemidji, Fairmont and Merrifield, Minnesota; and Augusta, Wisconsin. Imaging operations are located in Plymouth, Minnesota. Nortech Systems is traded on the Nasdaq Stock Market under the symbol NSYS and appears in most stock listings under "NorSys." CONTINUOUS QUALITY IMPROVEMENT Nortech Systems practices quality management in every aspect of its business. This philosophy demands continuous quality improvement, accurate process measurement and intensive employee involvement at all levels. The quality management effort at Nortech Systems is continuous, with increased customer satisfaction as its constant goal. SALES (IN THOUSANDS) 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- $7,300 $11,706 $12,821 $18,306 $26,183 ----------------- [LOGO] ----------------- TO OUR SHAREHOLDERS: During 1996, Nortech Systems continued its successful evolution into a full-service manufacturer by broadening its capabilities. We strengthened our core contract manufacturing business by adding more sophisticated electronics, such as printed circuit board assemblies and higher-level assemblies. We now offer a complete package of manufacturing services to customers across diverse industries. GROWING WITH SYNERGY The theme of this annual report is 'synergy' because cooperation among Nortech Systems' different facilities is increasingly important to our success. While similarities exist, our six facilities in Minnesota and Wisconsin each offer distinctly different capabilities and expertise. Working together, they create a whole that is greater than the sum of our parts. We continue to improve cooperation among our facilities, analyzing the best fit for each business opportunity and managing our resources accordingly. In addition, we evaluate strategic acquisitions that will complement this synergy. NEW MANUFACTURING CAPABILITIES Our 1996 acquisition of Zercom Corporation, a division of Communications Systems, Inc., enhanced our existing strengths and added manufacturing capabilities in two key areas: printed circuit board assemblies and higher-level assemblies. Our complete manufacturing services are attractive to customers who are outsourcing some or all of their electronics manufacturing. Presently, we are working with several large OEM customers who are interested in our enhanced capabilities and we expect to finalize several contracts in the near future. The addition of Zercom should add significantly to contract manufacturing revenues in 1997. CAPITALIZING ON OUTSOURCING TRENDS Our broadened capabilities enable us to better capitalize on the recognized growth in manufacturing outsourcing. Electronic Buyers' News reported in its March 3, 1997, issue that original-equipment manufacturers from every segment of the electronics industry are increasingly looking to outsiders like Nortech Systems to perform complete system assembly. According to the Outsourcing Institute, the primary reasons companies outsource are to improve company focus and to access world-class capabilities. At Nortech Systems, we're justifiably proud of our ability to help customers in these areas. FINANCIAL RESULTS We reported net sales for 1996 of $26,182,821 for the year ended Dec. 31, 1996, a 43 percent increase from net sales of $18,305,928 in 1995. Fourth quarter sales were $7,841,475, an increase of 61 percent. Our net operating income for 1996, before a one-time charge, was $1,292,029, or $.54 per share, compared with $1,331,924, or $.55 per share, for 1995. For the fourth quarter, net operating income before a one-time charge was $395,915, or $.17 per share, compared with $424,899, or $.17 per share, for the same period in 1995. The one-time charge consisted of a write-off of excess and obsolete inventory, and costs associated with recent acquisitions. As a result, we reported net income for the year of $446,029, or $.19 per share, and a net loss for the quarter of $234,375, or $.10 per share. Addressing the one-time charge eliminates any long- term detrimental effects, enabling us to focus on generating positive earnings. IMAGING TECHNOLOGIES GROWTH We have invested heavily in research and development for new medical imaging products since we acquired Monitor Technology Corp. in 1995. We expect to see a significant return on this investment from our Imaging Technologies division as we move forward, and positive contributions to earnings in 1997. Our medical imaging sales revenue increased more than 400 percent in 1996, compared to 1995. Several large medical equipment manufacturers have selected our monitors to be part of their diagnostic imaging systems. To create a multinational presence for these products, we are adding well-established distributors in Japan, South Korea, China and Hong Kong, as well as Australia and Europe. RANKED ON FORBES' "200 BEST SMALL COMPANIES" LIST Nortech Systems was again named to Forbes magazine's annual listing of the "200 Best Small Companies in America," ranking 67th. Ranking was based on five- year average return on equity, and five-year average sales and earnings growth per share. Thank you for your interest in Nortech Systems. We look forward to a profitable, exciting 1997. /s/ Quent Finkelson Quent Finkelson CHAIRMAN, PRESIDENT & CEO 1 [GRAPHICS] CONNECTIONS WIRES,CABLES AND PRINTED CIRCUIT BOARDS PRODUCING "BUILDING BLOCKS" Nortech Systems is a full-service electronics manufacturer with extensive capabilities in many areas. On the most basic level, our products include specialized wires, cables and printed circuit boards. These vary in size and complexity, but all are important building blocks that provide the connections necessary for electronics and electrical equipment to operate. Our customers represent a range of high-technology industries, including computer, communications, medical, automotive and defense. As a contract manufacturer, we build products to meet exact customer specifications. Our facilities either have received certification under ISO 9002 or are working towards it, and we also operate in accordance with other quality standards. The Bemidji facility was certified under ISO 9002 in July 1995 and has successfully completed two recertification audits. ADDING NEW CAPABILITIES Our strategic acquisition of Zercom Corporation in 1996 added important capabilities in manufacturing printed circuit board (PCB) assemblies. A PCB consists of numerous electrical circuits mounted on an insulating base. They vary in size and complexity -- we produce single- and double-sided PCBs comprised of 35 to 800 components. One common PCB, a 486 processor board, is used to operate many personal computers, robotic devices and other 2 FULL-SERVICE MANUFACTURING CAPABILITIES ENABLE US TO SERVE A WIDE RANGE OF CUSTOMERS, WITH EVERYTHING FROM BASIC WIRES AND CABLES TO HIGHER-LEVEL ASSEMBLIES AND COMPLETE PRODUCTION. other electronic equipment. We use automated pick-and-place machines for component placement on both types of PCBs: conventional through-hole and newer surface mount technology (SMT). The main difference between the two types is size -- SMT boards and components are smaller. Customers appreciate the capabilities we offer in both types, particularly those customers who would otherwise be forced to redesign their products to use SMT technology. [PICTURE] SEEING A NICHE Our Intercon 1 division in Aitkin, Minnesota, produces proprietary video cables used for Closed Circuit Detection (CCD) applications, and is the largest producer of CCD camera cables and accessories in the United States. CCD cables are used in industrial diagnostics and robotic vision technology, where cameras enable machine operators to quickly and safely monitor product quality. In the medical field, CCD cameras are used for microscopic surgery. Other Intercon 1 products include coaxial and triaxial cable for high-speed modem communications. WORKING TOGETHER -- PROFITABLY Our expanding manufacturing capabilities enable Nortech Systems' facilities to share resources and cooperate, each focusing on key areas of expertise. This results in greater operating efficiency, lower production costs and increased profitability. We expect cooperation to increase in the future. Wires, cables and PCBs are produced at facilities in Bemidji, Merrifield and Aitkin, Minnesota, and Augusta, Wisconsin. While these products provide the connections needed for our customers' products to operate, we also utilize them within Nortech Systems to manufacture more complex products, such as higher-level assemblies. 3 [PICTURE] ASSEMBLIES HIGHER-LEVEL ASSEMBLIES PUTTING IT ALL TOGETHER Zercom Corporation, acquired in 1996, has earned a strong reputation for producing a wide array of higher-level assemblies. They consist of wires, cables and PCBs configured together, and often enclosed in a box or housing made of metal or plastic. A higher-level assembly may be a complete, finished product, or a sub-component used by our customers in their manufacturing. Examples of higher-level assemblies produced at our facility in Merrifield, Minnesota, include control panels for refrigeration systems used in ocean freight carriers, components for portable defibrillators, display panels for personal watercraft, electronic assemblies for patient-lifting devices used in health care facilities, and coin-operated control boxes for gas station air compressors. [PICTURE] CAPITALIZING ON OUTSOURCING TRENDS Outsourcing is a growing trend across many industries, including electronics. According to Technology Forecasters, the market for technology outsourcing is expected to increase to $95 billion by 1999 -- an annual growth rate of 22 percent. Customers outsource production steps to minimize their investment in a manufacturing operation, allowing them to focus on product design, 4 MARKET DIVERSIFICATION REDUCES OUR DEPENDENCE ON ANY ONE MARKET. OUR CUSTOMER BASE, BROADENED THROUGH STRATEGIC ACQUISITIONS, ENCOMPASSES MANY INDUSTRIES. sales and order fulfillment. This representsopportunity for all of Nortech Systems --opportunity we are better positioned to capitalize on than ever before. BUILDING PARTNERSHIPS WITH CUSTOMERS Broadening our world-class manufacturing capabilities enables us to target new opportunities, many from current customers. Indeed, much of our sales growth comes from expanding existing relationships. We consider ourselves partners with our customers, and we always strive for a better understanding of their business. As we learn, we can better educate them about our complete capabilities. Consolidating purchases with one vendor has many advantages for our customers. It's easier to work with only one sales representative, and we can provide one package bid at a competitive price. [PICTURE] PROVIDING FLEXIBLE MANUFACTURING Today, our manufacturing capabilities range from basic wires and cables to higher-level assemblies and completed final products -- and everything in between. Some customers come to us first for basic wires and cables, and later we earn the chance to bid on higher-level assembly or final production. In other cases, higher-level assembly customers decide to have us also manufacture the wires and cables, or the entire finished product. We can affix the customers' logo, serial number or other information, and ship the completed product either to their warehouses or directly to the final customer. 5 [PICTURE] AEROSPACE DIVISION MILITARY WIRES AND CABLES BUILDING FOR DEMANDING APPLICATIONS The Aerospace Systems division, in Fairmont, Minnesota, produces complex, custom-designed wires and cables for the defense industry and other demanding applications. Products are engineered to withstand severe environmental conditions, including extreme heat and cold variations, salt spray, water immersion, chemical and abrasion resistance, and electromagnetic and radio interference. Our defense-related products are used primarily in communication, ground support, and training applications. Examples include cables for radio systems, aircraft and missile test equipment, and combat-simulation equipment. Other defense applications include shipboard radar, personnel detection, missile avoidance, and helicopter engine harnessing. Approximately ten percent of Aerospace Systems division revenues are generated by non-defense cables. These are used on light- to medium-duty trailers that transport snowmobiles, personal watercraft, construction equipment and livestock. [PICTURE] 6 ECONOMIES OF SCALE PRODUCE SAVINGS AND IMPROVE EFFICIENCY. MANY OPERATIONS CAN BE CONSOLIDATED; FOR EXAMPLE, MORE THAN ONE-THIRD OF OUR FACILITIES' PURCHASES ARE FROM COMMON SUPPLIERS. STARTING WITH QUALITY Like all Nortech Systems products, wires and cables built by Aerospace Systems are designed to meet customer specifications. We adhere to stringent quality requirements, including military specification MIL-I-43208 and other international and industry standards. The defense industry is increasingly shifting away from military-specific requirements and accepting quality certifications such as ISO 9002. As this happens, it will open up additional opportunities for other Nortech Systems facilities to serve the defense industry. We incorporate statistical process control into our manufacturing andmeasure quality in parts per million. Quality is built in first -- not inspected in later. [PICTURE] RECOGNIZING NEW OPPORTUNITIES Aerospace Systems' expertise in building custom wires and cables that meet rigorous quality requirements enables us to also provide these unique capabilities to commercial customers. We offer short-run production of custom bulk cable and expertise in designing and building cables shielded for electromagnetic or radio interference. Shielding helps ensure proper operation of electronics in a wide range of machinery and equipment. This type of protection is increasingly important today as electronic devices continue to operate at lower and lower voltages, making them more susceptible to interference. 7 [PICTURE] IMAGING TECHNOLOGIES HIGH-RESOLUTION MONITORS BUILDING TO PRECISE SPECIFICATIONS We design, manufacture and market high-performance display monitors used in medical imaging, shipboard radar and document imaging. All of our monitors are sold to original equipment manufacturers (OEMs), who integrate them into their own equipment. Nortech Systems' Imaging Technologies division monitors are precisely engineered to meet demanding OEM customer specifications. [PICTURE] INCREASING SALES AND MARKET SHARE Two years of significant investments in research and product development are paying off -- we are now gaining market share and broadening our customer base. During 1996, sales revenue from medical imaging - our primary target market - increased more than 400 percent. We began shipping monitors to several of the world's largest medical imaging equipment manufacturers. FOCUSING ON MEDICAL IMAGING Our monitors are used in the growing field of digital x-ray archiving, where images are stored electronically instead of on film. Our two newest 21- inch ultra-high resolution monitors feature 5 million pixels -- four times the resolution of a standard 21-inch monitor. 8 SUCCESSFUL CROSS-SELLING CAN RESULT WHEN A CUSTOMER IS INTRODUCED TO OUR COMPLETE MANUFACTURING CAPABILITIES. CONSOLIDATING SUPPLIERS SIMPLIFIES BUSINESS FOR THE CUSTOMER, AND PROVIDES OPPORTUNITY FOR US. Greater resolution provides a clearer, more well-defined image for easier diagnosis. Other medical imaging applications for our monitors include MRI, CT, fluoroscopy and digital cardiology/angiography. We are an acknowledged leader in the latter area, which includes monitors used in heart catheterization labs performing procedures like balloon angioplasty. Our Imaging Technologies division is well- positioned to benefit from this expanding market. [PICTURE] BENEFITING FROM EXTERNAL, INTERNAL COOPERATION Our Imaging Technologies division provides another way to introduce customers to the full range of Nortech Systems' manufacturing capabilities. In addition to monitors, imaging equipment OEMs typically outsource wires, cables and printed circuit boards. Because of our broad capabilities, we are positioned to capture a larger share of this total business. And this is happening already. For one of our customers, a large medical equipment manufacturer, we supply monitors, as well as internal wires and cable harnesses. Some components used in monitormanufacturing -- wires, cables and sophisticated electronics -- can now be obtained from other Nortech Systems' facilities, rather than purchased from outside suppliers. We are committed to increasing this type of internal cooperation, including utilizing our manufacturing capabilities most efficiently. 9 ----------------- [LOGO] ----------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS, YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 REVENUES. For the years ended December 31, 1996, and 1995 the Company had sales of $26,182,821 and $18,305,928, respectively. The increase of $7,876,893, or 43%, resulted primarily from additional revenues generated by the acquisitions which were completed in 1995 and 1996. For the year ended December 31, 1994 the Company had sales of $12,820,709. The approximate 42.8% increase in sales in 1995 was attributable primarily to increased sales in the medical and automotive industries offset by the reduced sales to the mid-sized computer industries as well as revenues from the newly acquired divisions. GROSS PROFIT. The Company had gross profit of $5,184,198 (before one-time write-offs) in 1996, $3,764,840 in 1995, and $2,598,569 in 1994. Gross profits as a percentage of gross sales were 19.8% in 1996 (before one-time write-offs), 20.6% in 1995, and 20.3% in 1994. In 1996, the Company experienced certain items which are considered unusual events for their operations. Due to evolving customer requirements, the Company wrote off certain inventories from two of the divisions. A total of $544,000 in inventories was written off from the Bemidji and Imaging balance sheets. The customer marketplace is complex and ever- changing, but with the current inventory and production mix, the Company believes they are well-poised to address the needs of their current customers as they continue to pursue additional growth markets. After the one-time write- offs, gross profit margin for 1996 was 17.7%. The decrease in gross profit percent from 1995 to 1996 is due to an increase in materials as a percent of total cost of goods sold. SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative expenses were $3,306,311 in 1996, $2,280,105 in 1995, and $1,647,797 in 1994. The increases in each year reflect additional selling, general and administrative expenses associated with the acquisitions. MISCELLANEOUS INCOME. Miscellaneous income was $32,064 in 1996, $177,967 in 1995, and $86,307 in 1994. The miscellaneous income resulted primarily from charges formiscellaneous services. INTEREST EXPENSE. Interest expense was $475,057 in 1996, $240,562 in 1995, and $117,835 in 1994. The increased expense for 1996 and 1995 is due to the increased debt from acquired operations. INCOME TAXES. Income tax expense for 1996 was $192,000. Tax expense was not recorded in 1995 because of additional net operating loss carryforwards (NOL's) of approximately $2,504,000 which were recognized because of final tax regulations. The regulations clarified that tax carryforwards attributes in a Chapter 11 bankruptcy prior to December 31, 1993 where stock was issued for debt, need not be reduced by cancellation income. The tax benefit of approximately $851,000 created by additional NOL's was partially offset by a $300,000 increase in the deferred tax valuation allowance. Realization of the deferred tax asset is dependent upon the Company generating sufficient taxable earnings in future periods. In determining that realization of the deferred tax asset is more likely than not, the Company gave consideration to recent earnings history, its expectation for taxable earnings in the future and the expiration dates associated with tax carryforwards. Tax benefits of $245,794 were recorded in 1994 due to the reduction in the deferred tax valuation allowance of $600,000 due to the realization of net operating loss carryforwards. NET INCOME. The Company's net income in 1996 was $446,029 or $.19 per common share. The Company's net income in 1995 was $1,331,924 or $.55 per common share. The Company's net income in 1994 was $1,183,406 or $.54 per common share. The Company believes that the effect of inflation on past operations has not been significant and anticipates that inflation will not have a significant impact on future operations. 10 LIQUIDITY AND CAPITAL RESOURCES. The Company's working capital rose from $5,279,509 as of December 31, 1995 to $8,498,531 on December 31, 1996. Stockholders' equity increased from $6,036,166 as of December 31, 1995 to $7,151,192 on December 31, 1996 due to the Company's 1996 net income and the reclassification to equity of $668,400 of redeemable stock. This reclassification occurred because the put option on 111,400 shares was not exercised. The Company's liquidity and capital resources have improved substantially, and the Company believes that its future financial requirements can be met with funds generated from the operating activities and from the Company's operating line of credit. In March 1995, the Company completed the net asset purchase of Monitor Technology Corporation. This division of the Company designs and builds high and ultra-high resolution CRT monitors for medical imaging, document imaging, radar and industrial applications. 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. In November 1996, the Company acquired the inventory and fixed assets of Zercom Corporation, a subsidiary of Communication Systems, Inc. The Company has been, and continues to be, a contract manufacturer of electronic sub-assemblies and components. Zercom Corporation also manufactures a line of proprietary products for sport fishermen, including the Clearwater Classic and Clearwater Pro fish locators. These acquisitions are expected to positively impact future operations and enhance the financial condition of the Company over time. However, there are no guarantees of future performance. ----------------- [LOGO] ----------------- INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY BEMIDJI, MINNESOTA We have audited the accompanying consolidated balance sheets of Nortech Systems Incorporated and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nortech Systems Incorporated and Subsidiary as of December 31, 1996, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP ST. CLOUD, MINNESOTA FEBRUARY 13, 1997 11 ----------------- [LOGO] ----------------- CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
ASSETS 1996 1995 - ------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and Cash Equivalents (Including Interest Bearing Cash of $1,069,369 and $906,111 at December 31, 1996 and 1995) $1,235,127 $924,590 Accounts Receivable, Less Allowance for Uncollectible Accounts (1996 - $22,301; 1995 - $6,053) 3,695,763 1,856,219 Inventories 6,729,500 3,855,212 Prepaid Expenses and Other 88,821 131,701 Deferred Tax Asset 540,000 430,000 - ------------------------------------------------------------------------------------------------------------------- Total Current Assets $12,289,211 $7,197,722 - ------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT (AT COST) Land $136,300 $108,300 Building and Leasehold Improvements 3,559,155 1,897,559 Manufacturing Equipment 4,588,955 2,389,201 Office and Other Equipment 2,461,997 1,701,640 - ------------------------------------------------------------------------------------------------------------------- Total $10,746,407 $6,096,700 Accumulated Depreciation (2,875,702) (2,256,862) - ------------------------------------------------------------------------------------------------------------------- Total Property and Equipment (at Depreciated Cost) $7,870,705 $3,839,838 - ------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Goodwill and Other Intangible Assets $1,025,463 $998,254 Deferred Tax Asset 910,000 1,130,000 Other Assets 57,250 57,250 - ------------------------------------------------------------------------------------------------------------------- Total Other Assets $1,992,713 $2,185,504 - ------------------------------------------------------------------------------------------------------------------- Total Assets $22,152,629 $13,223,064 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of Credit $500,000 $0 Current Maturities of Long-Term Debt 731,080 283,100 Accounts Payable 1,596,326 1,054,880 Accrued Payroll 673,303 407,016 Other Liabilities 289,971 173,217 - ------------------------------------------------------------------------------------------------------------------- Total Current Liabilities $3,790,680 $1,918,213 - ------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT Notes Payable (Net of Current Maturities Shown Above) $10,910,757 $3,768,685 - ------------------------------------------------------------------------------------------------------------------- REDEEMABLE COMMON STOCK $.01 Par Value; 50,000 and 250,000 Shares Issued and Outstanding at December 31, 1996 and 1995, Respectively Redeemable at $6 Per Share $300,000 $1,500,000 - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred Stock, $1 Par Value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding $250,000 $250,000 12 LIABILITIES AND STOCKHOLDERS' EQUITY continued 1996 1995 Common Stock $.01 Par Value; 9,000,000 Shares Authorized; 2,312,362 and 2,200,863 Shares Issued and Outstanding, Net of Redeemable Shares Reported Above, at December 31, 1996 and 1995, Respectively 23,124 22,009 Additional Paid-in Capital 11,910,554 11,242,672 Accumulated Deficit (5,032,486) (5,478,515) - ------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity $7,151,192 $6,036,166 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $22,152,629 $13,223,064 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ----------------- [LOGO] ----------------- CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Sales $26,182,821 $18,305,928 $12,820,709 Cost of Sales (21,555,459) (14,541,088) (10,222,140) - ------------------------------------------------------------------------------------------------------------------- Gross Profit $4,627,362 $3,764,840 $2,598,569 Selling, General and Administrative Expenses (3,306,311) (2,280,105) (1,647,797) Research and Development Costs (273,697) (124,919) 0 Interest Income 33,668 34,703 18,368 Miscellaneous Income 32,064 177,967 86,307 Interest Expense (475,057) (240,562) (117,835) - ------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Provision $638,029 $1,331,924 $937,612 Income Tax Benefit (Expense) (192,000) 0 245,794 - ------------------------------------------------------------------------------------------------------------------- Net Income $446,029 $1,331,924 $1,183,406 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Income Per Share of Common Stock Net Income Per Share of Common Stock $0.19 $0.55 $0.54 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Weighted Average Number of Shares Outstanding 2,384,512 2,407,804 2,194,021 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 13 ----------------- [LOGO] ----------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
ADDITIONAL TOTAL PREFERRED COMMON PAID-IN ACCUMULATED STOCKHOLDERS' STOCK STOCK CAPITAL DEFICIT EQUITY - ----------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1993 $250,000 $21,937 $11,226,761 $(7,948,965) $3,549,733 1994 Net Income 0 0 0 1,183,406 1,183,406 Issuance of Stock 0 6 2,304 0 2,310 Dividends Paid 0 0 0 (14,946) (14,946) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1994 $250,000 $21,943 $11,229,065 $(6,780,505) $4,720,503 1995 Net Income 0 0 0 1,331,924 1,331,924 Issuance of Stock - Stock Options 0 50 8,700 0 8,750 Issuance of Stock - Other 0 16 4,907 0 4,923 Dividends Paid 0 0 0 (29,934) (29,934) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 $250,000 $22,009 $11,242,672 $(5,478,515) $6,036,166 1996 Net Income 0 0 0 446,029 446,029 Issuance of Stock - Other 0 1,115 667,882 0 668,997 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 $250,000 $23,124 $11,910,554 $(5,032,486) $7,151,192 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 14 ----------------- [LOGO] ----------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
1996 1995 1994 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $24,375,341 $18,114,515 $13,307,176 Interest Income Received 33,668 34,703 18,368 Cash Paid to Suppliers and Employees (23,904,901) (17,379,766) (11,794,879) Interest Expense Paid (403,003) (239,809) (117,927) Income Taxes Paid (205,900) (19,016) (34,206) - --------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities $(104,795) $510,627 $1,378,532 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Businesses $(1,559,492) $(2,930,696) $0 Acquisition of Property and Equipment (718,835) (458,359) (224,096) Acquisition of Intangible Assets 0 (82,059) 0 Purchase of Investments 0 (56,250) 0 - --------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities $(2,278,327) $(3,527,364) $(224,096) - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net Proceeds (Payments) Under Line of Credit $500,000 $0 $(266,533) Payments on Long-Term Debt (431,453) (289,294) (963,178) Proceeds from Long-Term Debt 3,156,115 3,405,180 531,000 Proceeds from Sale of Stock 597 13,673 2,310 Purchase of Redeemable Stock (531,600) 0 0 Payment of Dividends 0 (29,934) (14,946) - --------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities $2,693,659 $3,099,625 $(711,347) - --------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS $310,537 $82,888 $443,089 Cash and Cash Equivalents - Beginning 924,590 841,702 398,613 - --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS - ENDING $1,235,127 $924,590 $841,702 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
NON-CASH TRANSACTIONS During 1995 the Company issued $1,500,000 of redeemable Common Stock as part of the purchase of another corporation's net assets. During 1996 the Company issued a long-term note payable in the amount of $4,865,390 as part of the purchase price for certain assets of another corporation. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 15 ----------------- [LOGO] ----------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Income $446,029 $1,331,924 $1,183,406 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 693,456 444,636 245,847 Deferred Taxes 110,000 (100,000) (280,000) (Increase) Decrease in Accounts Receivable (1,839,544) (369,380) 365,160 Decrease in Accounts Receivable - Stockholder 0 0 35,000 (Increase) Decrease in Inventory (482,103) (407,932) 173,065 (Increase) Decrease in Prepaid Assets 42,880 (79,751) 33,507 Increase (Decrease) in Accounts Payable 541,446 207,835 (391,788) Increase (Decrease) in Accrued Payroll 266,287 (17,852) 6,077 Increase (Decrease) in Accrued Liabilities 116,754 (498,853) 8,258 - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities $(104,795) $510,627 $1,378,532 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 ----------------- [LOGO] ----------------- NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION Nortech Systems Incorporated (the Company) is a Minnesota corporation with headquarters in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota. The Company's main manufacturing facility is located in Bemidji, Minnesota, with additional manufacturing and engineering support locations in Fairmont, Plymouth, Merrifield and Aitkin, Minnesota and Augusta, Wisconsin. The Company manufactures wire harnesses, cables, and electromechanical assemblies, printed circuit board assemblies and higher-level assemblies for a wide range of commercial and defense industries. The Company also manufactures and markets high performance display monitors for medical imaging, document imaging, radar and industrial applications. The Company provides a full turnkey contract manufacturing service to its customers. All products are built to the customer's design specifications. In addition, the Company also manufactures a line of proprietary products for sport fishermen. Nortech Medical Services, Inc., its wholly owned subsidiary, provides service bureau and office management services to physicians and clinics throughout Minnesota. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value). PROPERTY AND EQUIPMENT The Company capitalizes the cost of purchased software, equipment, and leasehold improvements. Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gain or loss included in results of operations. Fully depreciated assets remain in the accounts until retired from service. DEPRECIATION Property and equipment are depreciated by the straight-line and accelerated methods of depreciation. Accelerated depreciation did not materially exceed straight-line depreciation for the years ended December 31, 1996, 1995 and 1994. Depreciation was calculated over estimated useful lives as follows: Building and Improvements: 31 Years Manufacturing Equipment: 5-7 Years Office and Other Equipment: 5-7 Years REVENUE RECOGNITION Sales are recorded by the Company when products are shipped to the customer. GOODWILL Goodwill representing the excess of the purchase price over the fair value of the net assets of the acquired entities (see Note 2), is being amortized on a straight-line basis over the period of expected benefit of fifteen years. Total amortization of goodwill recorded for fiscal years 1996, 1995 and 1994 was $54,614, $30,724 and $-0-, respectively. The carrying value of goodwill will be reviewed periodically based on the undiscounted cash flows of the entity acquired over the remaining amortization period. Should this review indicate that goodwill will not be recoverable, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of undiscounted cash flows. INTANGIBLE ASSETS The Company acquired other intangible assets including purchased technology and certification costs in the amount of $42,333 and $82,059 during 1996 and 1995, respectively. These assets are being amortized over a period of 3 to 7 years. The related amortization expense for 1996 and 1995 was $13,152 and $1,096, respectively. CASH AND CASH EQUIVALENTS The Company considers its investments with an original maturity of three months or less to be cash equivalents. At December 31, 1996 and 1995, the Company had invested excess funds of $266,000 and $285,000, respectively, in repurchase agreements collateralized by government-backed securities. Due to the short-term nature of the agreements, the Company does not take possession of the securities, which are instead held at the Company's principal bank from which it purchases the securities. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for cash, short-terminvestments, 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 17 on current rates at which the Company could borrow funds with similar remaining maturities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. ADVERTISING Advertising costs are charged to operations as incurred. Total amounts charged to expense were $65,234, $17,994 and $16,694 for the years ended December 31, 1996, 1995 and 1994, respectively. INCOME TAXES The Company has adopted FASB Statement No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Investment credits are accounted for by using the flow-through method whereby the benefit is reflected as a reduction of income taxes in the year utilized. EARNINGS PER SHARE Primary earnings per share of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. The impact of outstanding options was not material and was not included in the calculation of primary earnings per share. Preferred stock issued is noncumulative and nonconvertible. ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, establishes a new fair value based accounting method for stock-based compensation plans. As permitted by the statement, the Company continues to apply the accounting provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, in determining net income. ----------------- [LOGO] ----------------- NOTE 2: ACQUISITIONS In 1996 and 1995 the Company acquired the three businesses described below, which have been accounted for by the purchase method of accounting. The results of the operations of the acquired Companies are included in the Company's consolidated statement of income from the dates of the acquisitions. ZERCOM CORPORATION On November 4, 1996, the Company acquired substantially all of the assets of Zercom Corporation (Zercom). Zercom is a contract manufacturer of electronic sub-assemblies and components. Zercom also manufactures a line of proprietary products for sport fishermen. The purchase price was $6,424,882, consisting of a cash payment of $1,500,000, issuance of promissory notes totalling $4,865,390, and acquisition costs of $59,492. The excess of the purchase price over the estimated fair value of the net assets acquired is being amortized on a straight line basis over 15 years. A summary of the purchase price allocation for the 1996 acquisition of Zercom is as follows: Net Working Capital Items $2,392,185 Property, Plant and Equipment 3,930,872 Other Assets 42,333 Excess of Cost Over Fair Value of Net Assets of Net Assets of Purchased Business 59,492 - --------------------------------------------------------- Total $6,424,882 - --------------------------------------------------------- - --------------------------------------------------------- MONITOR TECHNOLOGY CORPORATION On March 28, 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Monitor Technology Corporation (MTC). MTC 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. 18 The purchase price of $2,232,667, which includes the assumption of liabilities of $707,887 and acquisition costs of $24,780, was paid with cash and by issuing 250,000 shares of the Company's common stock. The common stock was valued at $6, which is the redeemable price based on a repurchase agreement issued to the seller at closing. The excess of the purchase price over the estimated fair value of assets acquired is being amortized on a straight-line basis over 15 years. In 1996, 88,600 shares were put back to the Company at $6 per share and the put option was not exercised on 111,400 shares. The Company remains contingently liable to repurchase the remaining 50,000 shares, which are in dispute. The Company's obligation under the repurchase agreement is guaranteed by a director of the Company. AEROSPACE On August 23, 1995, the Company acquired the Aerospace Division of Communication Cable, Inc. The Aerospace Division manufactures and sells multi- conductor electrical cable assemblies to customer specifications for the aerospace industry throughout the United States. The purchase price was $2,950,517 consisting of a cash payment of $2,845,506, the assumption of liabilities of $44,601, and acquisition costs of $60,410. A summary of the purchase price allocation for the 1995 acquisitions of MTC and Aerospace is as follows: Net Working Capital Items $1,984,359 Property, Plant and Equipment 2,250,810 Excess of Cost over Fair Value of Net Assets of Purchased Businesses 948,015 - --------------------------------------------------------- Total $5,183,184 - --------------------------------------------------------- - --------------------------------------------------------- The following proforma unaudited consolidated statements of income for the Company are presented as though the acquisition of Zercom Corporation had occurred on January 1, 1996 and 1995 and the acquisitions of Monitor Technology Corporation and the Aerospace Division of Communication Cable, Inc. had occurred on January 1, 1995. (Unaudited) 1996 1995 - -------------------------------------------------------------- Revenues $39,702,215 $42,283,397 - -------------------------------------------------------------- - -------------------------------------------------------------- Net Income $230,045 $1,887,304 - -------------------------------------------------------------- - -------------------------------------------------------------- Net Income Per Share of Common Stock $ 0.10 $ 0.78 The proforma financial information is presented for information purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results. ----------------- [LOGO] ----------------- NOTE 3: INVENTORIES Inventories consist of the following: 1996 1995 - -------------------------------------------------------------- Raw Materials $3,626,665 $1,972,384 Work in Process 1,837,247 1,676,949 Finished Goods 1,265,588 205,879 - -------------------------------------------------------------- Total $6,729,500 $3,855,212 - -------------------------------------------------------------- - -------------------------------------------------------------- ----------------- [LOGO] ----------------- NOTE 4: SHORT-TERM LINE OF CREDIT The Company has a revolving line of credit available at December 31, 1996, for $500,000. The line of credit is with Northern National Bank, accrues interest at the prime rate, matures February 10, 1997, and is secured by accounts receivable, equipment, inventory, general intangibles and a personal guarantee by a shareholder. The interest rate was 8.25% at December 31, 1996. The maximum and average amounts outstanding on short-term lines of credit during 1996, were $500,000 and $266,066, respectively. There was no balanceoutstanding as of December 31, 1995. 19 ----------------- [LOGO] ----------------- NOTE 5: LONG-TERM DEBT DESCRIPTION 1996 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Revolving Line of Credit, Borrowing Limit of $3,000,000, Interest at LIBOR Index Plus 2.5%, Due June 1998; Secured by Accounts Receivable, Equipment, Inventory and General Intangibles $2,736,179 $2,161,179 - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Revolving Line of Credit, Borrowing Limit of $1,500,000, Interest at LIBOR Index Plus 2.5%, Due June 1998; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Personal Guarantee and Stock Pledged by a Shareholder 680,760 0 - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Line of Credit, Borrowing Limit of $400,000, Interest at Bank's Prime, Monthly Payments of $7,500 Including Interest, Due December 1998; Secured by Accounts Receivable, Equipment, Inventory and General Intangibles 200,000 0 - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Interest at LIBOR Index Plus 2.5%, Interest Only Payments Beginning February 1997, Due June 1998; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Personal Guarantee and Stock Pledged by a Shareholder 1,500,000 0 - -------------------------------------------------------------------------------- DESCRIPTION 1996 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Notes Payable - Communications Systems, Inc., Interest at Prime as Established by First Bank Minneapolis, Semi-Annual Principal Payments of $200,000 Beginning May 1997, Due November 2001 4,865,390 0 - -------------------------------------------------------------------------------- Note Payable - City of Augusta, Interest at Prime, Five Annual Payments Beginning August 1996, Due August 2000; Secured by Leasehold Improvements 20,802 40,000 - -------------------------------------------------------------------------------- Note Payable - Northern States Power Company, Interest at 6%, Monthly Payments of $483 Including Interest, Due December 1998; Secured by Equipment 10,476 15,483 - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Interest at Bank's Prime Plus 2%, Monthly Payments of $1,200 Including Interest, Due April 2000; Secured by Real Estate 116,447 120,754 - -------------------------------------------------------------------------------- Note Payable - Midwest Minnesota Community, Development Corporation, Interest at 9%, Monthly Payments of $2,802 Including Interest, Due March 2000; Secured by Real Estate and Equipment 91,288 115,297 - -------------------------------------------------------------------------------- 20 NOTE 5: LONG-TERM DEBT CONTINUED DESCRIPTION 1996 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note Payable - Midwest Minnesota Community, Development Corporation, Interest at 8%, Monthly Payments of $1,654 Including Interest, Due March 2009; Secured by Real Estate and Equipment 133,858 142,185 - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Interest at 7.5%, Monthly Payments of $5,270 Including Interest, Due May 1999; Secured by Inventory, Equipment, Accounts Receivable and General Intangibles 187,577 230,608 - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Interest at LIBOR Index Plus 2.5%, Monthly Payments of $13,060 Including Interest, Due January 2001; Secured by Equipment, Accounts Receivable and Inventory and General Intangibles 542,017 640,000 - -------------------------------------------------------------------------------- Note Payable - Northern National Bank, Interest at LIBOR Index Plus 2.5%, Monthly Payments of $5,000 Including Interest, Due January 2001; Secured by Equipment, Accounts Receivable, Inventory, General Intangibles and Real Estate 493,533 510,000 - -------------------------------------------------------------------------------- Note Payable - Joint Economic Development Commission, Inc., Interest at 8.25%, Monthly Payments of $1,652 Including Interest, Due August 2000; Secured by Building and Land 63,510 76,279 - -------------------------------------------------------------------------------- DESCRIPTION 1996 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Long-Term Debt $11,641,837 $4,051,785 Current Maturities 731,080 283,100 Long-Term Debt - Net of Current Maturities $10,910,757 $3,768,685 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Maturity requirements by year on long-term debt are as follows: YEARS ENDING DECEMBER 31, AMOUNT - -------------------------------------------------------------------------------- 1997 $731,080 1998 5,714,488 1999 715,625 2000 1,122,880 2001 3,278,477 Later Years 79,287 - -------------------------------------------------------------------------------- Total $11,641,837 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The maximum and average amounts outstanding on the Company's long-term lines of credit were $3,716,939 and $2,596,711 during 1996, respectively, and $2,161,179 and $400,000 during 1995, respectively. 21 ----------------- [LOGO] ----------------- NOTE 6: LEASE OBLIGATION The Company has entered into various operating leases for equipment and office space. Rent expense for the years ended December 31, 1996, 1995 and 1994, was $451,659, $290,799 and $118,672, respectively. The future minimum lease payments are as follows: YEARS ENDING DECEMBER 31, AMOUNT - -------------------------------------------------------------------------------- 1997 $337,214 1998 327,675 1999 327,675 2000 190,650 2001 82,575 - -------------------------------------------------------------------------------- Total $1,265,789 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ----------------- [LOGO] ----------------- NOTE 7: RELATED PARTY TRANSACTIONS Ceridian Corporation is one of the Company's stockholders at December 31, 1996, 1995 and 1994. Transactions and balances with Ceridian Corporation are as follows: CONTRACT FOR DEED - CERIDIAN CORPORATION During 1991 the Company entered into a contract for deed with Ceridian Corporation for the purchase of the building and land. The original purchase price was $840,000. The contract was paid off in 1994. SALES In 1996, 1995 and 1994, sales to Ceridian Corporation represented approximately 1% of total sales in each year. 22 ----------------- [LOGO] ----------------- NOTE 8: INCOME TAXES The provision for income taxes for each of the three years in the period ended December 31, 1996, consists of the following: 1996 1995 1993 - -------------------------------------------------------------------------------- Current Taxes - Federal $10,000 $37,000 $17,183 Current Taxes - State 72,000 63,000 17,023 Deferred Taxes 110,000 (100,000) (280,000) - -------------------------------------------------------------------------------- Total Expense (Benefit) $192,000 $0 $(245,794) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Deferred tax assets at December 31, 1996 and 1995, consist of the following: 1996 1995 - -------------------------------------------------------------------------------- Net Operating Loss (NOL) Carryforwards $1,415,000 $1,635,000 Tax Credit Carryforwards 235,000 295,000 Other 40,000 30,000 Valuation Allowance (240,000) (400,000) - -------------------------------------------------------------------------------- Total $1,450,000 $1,560,000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The statutory rate reconciliation for each of the three years in the period ended December 31, is as follows: 1996 1995 1994 - -------------------------------------------------------------------------------- Statutory Tax Provision $217,000 $453,000 $319,000 State Income Taxes 78,000 80,000 50,000 Additional NOL Carryforwards 0 (851,000) 0 Increase (Reduction) in Deferred Tax Valuation Allowance (Net of Expired Tax Credit Carryforwards) (100,000) 300,000 (600,000) Other (3,000) 18,000 (14,794) - -------------------------------------------------------------------------------- Income Tax Provision(Benefit) Expense $192,000 $0 $(245,794) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company has available for Federal income tax purposes, operating loss carryforwards, unused investment credits, and unused research and development credits which may provide future tax benefits, expiring as follows: Research and Year Operating Investment Tax Development of Loss Credit Tax Credit Expiration Carryforward Carryforward Carryforward - -------------------------------------------------------------------------------- 1997 $0 $4,064 $43,051 1998 0 50,888 97,643 1999 3,035,800 39,965 0 2001 767,300 0 0 2002 253,200 0 0 2003 109,700 0 0 - -------------------------------------------------------------------------------- Totals $4,166,000 $94,917 $140,694 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- During 1995 the Company identified an additional $2,503,778 of net operating loss carryforwards related to final tax regulations. The regulations clarified that tax carryforward attributes in a Title 11 bankruptcy prior to December 31, 1993, where stock was issued for debt, need not be reduced by debt cancellation income. As a result of the increase in net operating loss carryforwards, which must be utilized prior to taking the benefit in tax credit carryovers, the Company has increased its valuation allowance accordingly. In 1996 the Company utilized operating loss carryforwards of $642,000 to offset federal taxable income. 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. 23 ----------------- [LOGO] ----------------- NOTE 9: PREFERRED STOCK TRANSACTIONS The holders of the preferred stock are entitled to a noncumulative dividend of 12% when and as declared. In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. Preferred stock dividends of $-0-, $29,934 and $14,946 were paid during the year ended December 31, 1996, 1995 and 1994, respectively. ----------------- [LOGO] ----------------- 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 balancesin checking and money market accounts at three financial institutions. These balances exceed the federally insured limit by $775,000 and $520,000 at December 31, 1996 and 1995, respectively. The Company has not experienced any losses in any of the short- term investment instruments it has used for excess cash balances. Two customers accounted for approximately 11.3% and 17.5% of sales, respectively, for the year ended December 31, 1996. Three customers accounted for approximately 24.1%, 16.6% and 11.8% of sales, respectively, for the year ended December 31, 1995. One customer accounted 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. 24 ----------------- [LOGO] ----------------- NOTE 11: EMPLOYEE STOCK OPTION AND AWARD PLANS In 1992, the Company approved the adoption of a fixed stock based compensation plan. The purpose of the Plan is to promote the interests of the Company and its shareholders by providing officers, directors and other key employees with additional incentive and the opportunity, through stock ownership, to increase their proprietary interest in the Company and their personal interest in its continued success. The Company has authorized 200,000 shares for issuance under this Plan. Stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of the grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its fixed stock based compensation plan. Accordingly, no compensation cost has been recognized for this Plan in 1996, 1995 or 1994. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, net income and earnings per share would not differ materially from amounts reported under APB Opinion No. 25. Since the proforma disclosures of results under SFAS No. 123 are only required to consider grants awarded in 1995 and 1996, the proforma effects of applying SFAS No. 123 during this initial phase-in period may not be representative of the effects on reported results for future years. Following is a summary of the Plan's transactions: Option Price Shares (Per Share) - ---------------------------------------------------------------------- Balance as of December 31, 1992 22,500 $1.75 Granted January 21, 1993 15,000 $1.625 - ---------------------------------------------------------------------- Balance as of December 31, 1993 37,500 $1.625 - $1.75 Granted January 24, 1994 10,000 $3.625 - ---------------------------------------------------------------------- Option Price Shares (Per Share) - ---------------------------------------------------------------------- Balance as of December 31, 1994 47,500 $1.625 - $3.625 Granted December 1, 1995 95,000 $5.25 Exercised (5,000) $1.75 - ---------------------------------------------------------------------- Balance as of December 31, 1995 137,500 $1.625 - $5.25 Granted December 1, 1996 0 - Exercised 0 - - ---------------------------------------------------------------------- Balance as of December 31, 1996 137,500 $1.625 - $5.25 - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- A summary of the status of fixed options outstanding at December 31, 1996, is as follows: Average Remaining Exercise Outstanding Exercisable Contractural Price Options Options Life - ------------------------------------------------------------------------- $1.625 15,000 15,000 6 Years $1.75 17,500 17,500 5 Years $3.625 10,000 10,000 7 Years $5.25 95,000 19,000 9 Years During 1993, the Company adopted a gain sharing plan. The purpose of the Plan is to provide a bonus for increased output, improved quality and productivity and reduced costs. The Company has authorized 50,000 shares to be available under this Plan. In accordance with the terms of the Plan, employees can acquire newly issued shares of common stock for 90% of the current market value. 5,168 shares have been issued under this Plan through December 31, 1996. 25 ----------------- [LOGO] ----------------- NOTE 12: SUPPLEMENTARY FINANCIAL INFORMATION
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/96 6/30/96 9/30/96 12/31/96 1996 - --------------------------------------------------------------------------------------------------------------------------------- NET SALES $5,574,986 $6,622,903 $6,143,457 $7,841,475 $26,182,821 GROSS PROFIT $1,006,356 $1,214,275 $1,096,171 $1,310,560 $4,627,362 NET INCOME (LOSS) $189,894 $288,552 $201,958 $(234,375) $446,029 INCOME (LOSS) PER SHARE OF COMMON STOCK $0.08 $0.12 $0.09 $(0.10) $0.19 Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/95 6/30/95 9/30/95 12/31/95 1995 - --------------------------------------------------------------------------------------------------------------------------------- NET SALES $3,625,264 $4,374,899 $5,449,175 $4,856,590 $18,305,928 GROSS PROFIT $673,905 $964,800 $966,969 $1,159,166 $3,764,840 NET INCOME $244,003 $244,049 $212,588 $631,284 $1,331,924 INCOME PER SHARE OF COMMON STOCK $0.11 $0.10 $0.10 $0.25 $0.55
In the 4th quarter of 1995, the Company reduced previous quarter's tax expense of $206,388, which increased 4th quarter net income by $.08 per share due to recognition of additional net operating loss carryforwards. In the 4th quarter of 1996, the Company wrote off $544,000 of inventories due to evolving customer requirements. This reduced 4th quarter net income by $.15 per share. 26 ----------------- [LOGO] ----------------- INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION BOARD OF DIRECTORS NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY BEMIDJI, MINNESOTA Our report on the basic consolidated financial statements of Nortech Systems Incorporated and Subsidiary for 1996, 1995 and 1994 precedes the consolidated financial statements. The audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule below 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 states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. LARSON, ALLEN, WEISHAIR & CO., LLP ST. CLOUD, MINNESOTA FEBRUARY 13, 1997 ----------------- [LOGO] ----------------- SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY
Column A Column B Column C Column E Column F - --------------------------------------------------------------------------------------------------------------- Additions Balance at Charged Balance at Beginning to Costs End of Classification Of Period And Expenses Add (Deduct) Period - --------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996: Allowance for Doubtful Accounts $6,053 $16,248 $0 $22,301 Deferred Tax Valuation Allowance $400,000 $0 $(160,000) $240,000 - --------------------------------------------------------------------------------------------------------------- $406,053 $16,248 $(160,000) $262,301 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995: Allowance for Doubtful Accounts $4,343 $1,710 $0 $6,053 Deferred Tax Valuation Allowance $100,000 $0 $300,000 $400,000 - --------------------------------------------------------------------------------------------------------------- $104,343 $1,710 $300,000 $406,053 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1994: Allowance for Doubtful Accounts $0 $4,343 $0 $4,343 Deferred Tax Valuation Allowance $700,000 $0 $(600,000) $100,000 - --------------------------------------------------------------------------------------------------------------- $700,000 $4,343 $(600,000) $104,343 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
27 ----------------- [LOGO] ----------------- REGISTRAR AND TRANSFER AGENT American Securities Transfer, 1825 Lawrence Street, #444, Denver, Colorado 80202 LEGAL COUNSEL Phillips & Gross, P.A., 5420 Norwest Center, 90 South 7th Street, Minneapolis, Minnesota 55402 AUDITORS Larson, Allen, Weishair & Co., 500 Zapp Bank Plaza, 1015 St. Germain, St. Cloud, Minnesota 56301 ANNUAL REPORT ON FORM 10-K A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (including financial statements and a list of exhibits thereto) may be obtained by shareholders without charge upon written request addressed to Quentin E. Finkelson, Nortech Systems Incorporated, 641 East Lake Street, Wayzata, Minnesota 55391. The exhibits to the Form 10-K may be obtained in the same manner, but a reasonable fee will be charged to such shareholders for copying and related expenses. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. The Board of Directors currently intends to retain any and all earnings for use in the Company's business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors. ANNUAL MEETING The annual meeting of shareholders will be held June 12, 1997, at 4:00 p.m. at the Wayzata Country Club, 200 West Wayzata Boulevard, Wayzata, Minnesota. All shareholders are invited to attend. MARKET INFORMATION The Company's Common Stock is traded on the Nasdaq National Market under the symbol NSYS. It appears in most stock listings under "NorSys." Prior to October 11, 1995, the stock was traded on the Nasdaq Small Cap Market. The high and low bid quotations for the Company's Common Stock for each quarterly period within the two most recent years were as follows: Quarter Ended: Low High March 31, 1995 $3.000 $4.000 June 30, 1995 $3.000 $4.250 September 30, 1995 $3.250 $6.000 December 31, 1995 $4.750 $8.500 March 31, 1996 $6.000 $9.000 June 30, 1996 $6.000 $8.000 September 30, 1996 $5.000 $7.250 December 31, 1996 $5.250 $6.750 The low and high quotations set forth above are as reported by Nasdaq. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions. As of March 1, 1997, there were approximately 1,419 holders of shares of the Company's Common Stock. 28 DIRECTORS Quentin E. Finkelson Chairman, President & Chief Executive Officer Nortech Systems Incorporated Wayzata, Minnesota Myron Kunin Chairman Regis Corporation Edina, Minnesota Richard W. Perkins President & Chief Executive Officer Perkins Capital Management Wayzata, Minnesota OFFICERS Quentin E. Finkelson Chairman, President & Chief Executive Officer Gregory D. Tweed Executive Vice President & Chief Operating Officer Garry Anderly Senior Vice President, Corporate Finance; Treasurer Peter L. Kucera Vice President, Corporate Quality ADDITIONAL INFORMATION FOR ADDITIONAL COMPANY INFORMATION, YOU MAY CONTACT: Quentin E. Finkelson Chairman, President & Chief Executive Officer Nortech Systems Incorporated 641 East Lake Street Wayzata, Minnesota 55391 (612) 473-4102 CORPORATE HEADQUARTERS Nortech Systems Incorporated 641 East Lake Street Wayzata, Minnesota 55391 MANUFACTURING FACILITIES Nortech Systems 350 Industrial Drive Augusta, Wisconsin 54722 Nortech Systems 4050 Norris Court N.W. Bemidji, Minnesota 56601 Nortech Systems P.O. Box 84 Zercom Drive Merrifield, Minnesota 56465 Nortech Systems Aerospace Systems Division 1007 East 10th Street P.O. Box 998 Fairmont, Minnesota 56031 Nortech Systems Imaging Technologies Division 2500 Niagara Lane North Plymouth, Minnesota 55447 Nortech Systems Intercon 1 Division HC7 Airport Road Aitkin, Minnesota 56431 NASDAQ STOCK MARKET: NSYS STOCK LISTINGS:NORSYS [LOGO] NORTECH SYSTEMS 641 EAST LAKE STREET, WAYZATA, MINNESOTA 55391 612-473-4102 -----END PRIVACY-ENHANCED MESSAGE-----