-----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, GKkMh3bUpOZrBpNoWsfpVm6JLnbEvqXzZkdr8INuh9ohUbBtbTXlRyHXT8FjCPIx jUg6OcBaqcydxd47HaaBlQ== 0001047469-98-012421.txt : 19980331 0001047469-98-012421.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012421 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTECH SYSTEMS INC CENTRAL INDEX KEY: 0000722313 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 411681094 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13257 FILM NUMBER: 98578269 BUSINESS ADDRESS: STREET 1: 641 EAST LAKE ST STREET 2: SUITE 234 CITY: WAYZATA STATE: MN ZIP: 55391 BUSINESS PHONE: 6124734102 FORMER COMPANY: FORMER CONFORMED NAME: DSC NORTECH INC DATE OF NAME CHANGE: 19901217 FORMER COMPANY: FORMER CONFORMED NAME: DIGIGRAPHIC SYSTEMS CORP DATE OF NAME CHANGE: 19881113 10-K 1 10-K FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 0-13257 NORTECH SYSTEMS INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its chapter) MINNESOTA 41-16810894 ------------------------------- ------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 641 East Lake St., Suite 244 Wayzata, MN 55391 ----------------------------------------- -------- (Address of principal executive offices) (Zip code) Registrant's telephone No., including area code: (612) 473-4102 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 per share par value. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required of file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Based upon the $4.75 per share average of the closing bid and asked prices, respectively, on February 28, 1998 for the shares of common stock of the Company, the aggregate market value of the Company's common stock held by non- affiliates as of such date was $6,056,084 As of February 28, 1998 there were 2,345,362 shares of the Company's $.01 per share par value common stock outstanding. (The remainder of this page was intentionally left blank.) 2 DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference to the parts indicated of the Annual Report on Form 10-K: Parts of Annual Report Documents Incorporated on Form 10-K by Reference PART III Item 10 Reference is made to the 11 Registrant's proxy statements to be 12 used in connection with the 1997 Annual Shareholders' meeting and filed with the Securities and Exchange Commission no later than April 30,1998. (The remainder of this page was intentionally left blank) 3 NORTECH SYSTEMS INCORPORATED ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX PART I PAGE Item 1. Business 5- 9 Item 2. Properties 9-10 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 10-11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-14 Item 8. Consolidated Financial Statements 15-35 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure 36 PART III Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 36 Item 12. Security Ownership of Certain Beneficial Owners and Management 36 Item 13. Certain Relationships and Related Transactions 36 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 37-40 Signatures 41
4 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS Nortech Systems Incorporated (the "Company") is a Minnesota corporation organized in December 1990. Prior to December 1990, the Company operated as DSC Nortech, Inc. , which filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code during 1990. The business and assets of DSC Nortech, Inc., were transferred to Nortech Systems Incorporated during 1990. The Company's headquarters are in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota. The Company's maintains various manufacturing facilities in Minnesota locations of Bemidji, Fairmont, Plymouth, Aitkin, and Merrifield as well as Augusta, Wisconsin. The Company manufactures wire harnesses, cables, electronic sub-assemblies and components, printed circuit board assemblies as well as large-screen high resolution video monitors for radar, document and medical imaging. The Company provides a full "turnkey" contract manufacturing service to its customers. A majority of revenue is derived from products which are built to the customer's design specifications. Nortech Medical Services, Inc., its wholly owned subsidiary, provides service bureau and office management services to physicians and clinics throughout Minnesota. The Company believes it provides a high degree of manufacturing sophistication. This includes the use of statistical process control to insure product quality, state-of-the-art materials management techniques, allowing just-in-time (JIT) delivery of products, and the systems necessary to effectively manage the business. This level of sophistication enables the Company to attract major original equipment manufacturers (OEM). The strategy of the Company in that regard has been to expand its customer base, and has added several new customers from various industries; including Companies engaged in the production of medical products, super computers, mid- size and micro computer business systems, defense industry product and industrial products. The Company strategy is to develop a customer base spanning several industry segments to avoid the affects of fluctuations within a given industry. Some of the Company's major customers are Cray Research, G.E. Medical Systems, Hughes Defense, SPX Corporation, Imation, Thermo King, Polaris, Rosemount, 3M, and Motor Coach Industries. The Company believes that contract manufacturing will continue to grow and expand in the United States because contract manufacturing provides OEMs with the domestic equivalent of off-shore sourcing without the associated logistical problems. The contract manufacturer can provide an OEM with a quality product at a price well below that available in the OEM's own facility. This is due primarily to the specialization available through the contract manufacturer and the significantly lower overhead costs. 5 In 1991, the Company acquired all of the common stock of SMR Computer Services, Inc. The Company, through its subsidiary (currently named Nortech Medical Services, Inc.), also provides service bureau and office management services to physicians. In March 1995, the Company acquired all of the assets of Monitor Technology Corporation. The Company has continued the business of Monitor Technology Corporation which is the manufacturing of large-screen, high resolution video monitors for radar, document and medical imaging. In addition, this division provides repair services on internally and externally produced monitors. In August 1995, the Company acquired all the assets of the Aerospace Division of Communication Cable, Inc. The Company has continued the business formally conducted by Aerospace which involves the manufacturing of custom designed, high-technology electronic cable assemblies for various applications. In November 1996, the Company acquired the inventory and fixed assets of Zercom Corporation, a subsidiary of Communication Systems, Inc. The Company has been, and continues to be a contract manufacturer of electronic sub-assemblies and components. Since the Company's inception, substantially all revenues generated have been directly related to the contract manufacturing industry. Therefore, segmented financial information is not included in this report. MARKETING AND SALES BUSINESS STRATEGY. The Company believes the electronic manufacturing sub-contracting business is emerging from a small job shop oriented business into a dynamic, high technology electronics industry. The first market segment the Company has entered is the wire harness and cable assemblies market. The Company intends to expand from this market segment into complete electromechanical assemblies using the resources acquired from the recent addition of Zercom Corporation. Many companies no longer perform this type of work on a captive, in-house basis, as they are finding that independent subcontractors can more cost effectively perform this specialized work. As part of the Company's commitment to quality, the Bemidji location became ISO 9002 Certified in July 1995 and has actively maintained this certification. The Company believes this certification benefits its current customer base as well as attract new business opportunities. 6 The Company will continue its commitment to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, the Company will provide complete manufacturing services to customers, from the procurement of materials to the manufacturing, testing and shipping of products. The Company will continue its efforts to diversify its customer base and expand into other segments of the electronic manufacturing subcontract business. MARKETING. The Company is continuing to concentrate its marketing activities in the medical, industrial and military manufacturing industries. The emphasis continues to be on mature companies which require a contract manufacturer with a high degree of manufacturing and quality sophistication, including statistical process control (SPC) and statistical quality control (SQC). The Company has initiated efforts to expand its markets beyond the Upper Midwest area, which presently extends east to the Ohio/Michigan area, south to Missouri, and west to Colorado. New market opportunities are continuously being pursued. The Company markets its products and services primarily through manufacturers' representatives. The Company's marketing strategy emphasizes the sophistication of its manufacturing services. The basic systems, procedures, and disciplines normally associated with a mature corporate environment are in place. All the Company's employees are well trained in SPC and SQC. SOURCES AND AVAILABILITY OF MATERIALS The Company is not dependent on any one supplier for materials for products sold to customers. Components utilized in the assembly of wire harnesses, cable assemblies and printed circuit assemblies are purchased directly from the component manufacturers or from their distributors. On occasion some components may be placed on a stringent allocation basis; however, due to the excess manufacturing capacity currently available at most component manufacturers, the Company does not anticipate any major material purchasing or availability problems occurring in the foreseeable future. PATENTS AND LICENSES The Company is not presently dependent on a proprietary product requiring licensing, patent, copyright or trademark protection. There are no revenues derived from a service-related business for which patents, licenses, copyrights and trademark protection are necessary for successful operations. 7 COMPETITION The contract manufacturing industry is characterized by competition among a variety of sources, including small closely-held companies, larger full-service manufacturers, company-owned facilities and foreign competitors. The Company does not believe that the smaller operations are significant competitors as they do not seem to have the capabilities required by target customers of the Company. The Company also believes that foreign competitors do not provide a substantial competitive threat because the cable and wire harness industry involves a high weight-to-cost ratio. Consequently, shipping and transportation costs decrease the ability of foreign manufacturers to compete in this market segment. Further, off-shore production cannot effectively meet the requirements of engineering change order activities, engineering support, delivery flexibility and just-in-time inventory management techniques presently being implemented by many major target customers. Therefore, the Company's principal competitors are larger full-service manufacturers, many of which have substantially far greater assets and capital resources than are available to the Company and are better financed than the Company. The Company will continue to pursue marketing opportunities in the Upper Midwest. Although there presently are no dominant contract manufacturers in the wire harness and cable or higher level build assembly business in the Upper Midwest, there are several established competitors. The Company expects its major competition to come from Americable, OEM Worldwide, MSL, Technical Services, Inc. and Waters Instruments, Inc., all of which are located in Minnesota. Each of these companies specializes in molded cables or wire assemblies and has sufficient manufacturing capabilities to offer a significant competitive challenge to the Company's operations. The principal competitive factors in the contract manufacturing industry are price, quality and responsive service. The Company believes that it can compete favorably in the market segments to which it sells. BACKLOG Historically, the Company's backlog has been running 60 to 90 days, depending on the customer. However, because of the increased emphasis on just-in-time manufacturing (JIT), many of the Company's major customers are taking advantage of the Company's ability to service them adequately under the JIT concept. Additionally, because of the Company's quality history with customers, many products now go directly from the Company's shipping dock to the customer's production line. The Company's 90 day order backlog was approximately $6,127,000 on December 31, 1996 and approximately $7,687,000 on December 31, 1997. 8 MAJOR CUSTOMERS The Company sells its products to companies in the computer, medical, governmental and various other industries. Historically, the Company has not experienced significant losses related to the receivables from customers in any particular industry or geographic area. Only one customer accounted for more than 10% of revenue, G.E. Medical at 12.7% of sales for the year ended December 31, 1997. RESEARCH AND DEVELOPMENT The Company expended $258,712 in 1997 and $273,697 in 1996 and $124,919 in 1995 on Company-sponsored research and development. This research is related to the development of large-screen, high resolution video monitors for the imaging division. COMPLIANCE WITH ENVIRONMENTAL PROVISIONS Management believes that its manufacturing facilities are currently operating under compliance with local, state, and federal environmental laws. Any environmental-oriented equipment is capitalized and depreciated over a seven- year period. The annualized depreciation expense for this type of environmental equipment on a Company-wide basis is insignificant. EMPLOYEES The Company has 523 full-time and 165 part-time employees as of February 28, 1998, consisting of 645 employees in manufacturing, manufacturing product support and medical support services and 43 in general administration. ITEM 2. PROPERTIES The Company's headquarters consist of approximately 1,500 square feet located in Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The Company has a lease for a five year term that expires in October 1999. The Company owns its Bemidji, Minnesota facility consisting of eight acres of land and 60,000 square feet of office and manufacturing space and leases another 8000 square feet of manufacturing and office space in Augusta, Wisconsin. 9 The Company's Imaging and Medical Services division operates from a facility located in Plymouth, Minnesota. The building contains approximately 22,800 square feet and is leased for a term that terminates on May 31, 2000. The Company has an option to extend the lease for an additional five-year term. The Company also owns three buildings which contain approximately 46,900 square feet and are located in Fairmont, Minnesota, which are used for the manufacturing of the Company's custom designed, high-technology electronic cable assemblies. In connection with the Zercom acquisition, the Company acquired the building with approximately 45,800 square feet in Merrifield, Minnesota. This facility is used for the building of surface mount printed circuit board assemblies and electro-mechanical assemblies. A leased building in Aitkin, Minnesota provides 10,750 square feet for video cable assembly and is leased for a term that terminates December 1, 2005. The Company believes that each of these locations is adequate and will be adequate in the foreseeable future for their manufacturing needs. ITEM 3. LEGAL PROCEEDINGS The Company has litigation pending, both offensive and defensive arising from the conduct of its business, none of which are expected to have any material effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters have been submitted to a vote of security holders which are required to be reported under the instructions to this item. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ National Market under the symbol NSYS. Prior to October 11, 1995, the stock was traded on the NASDAQ Small Cap Market. 10 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, 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 March 31, 1997 $4.75 $6.00 June 30, 1997 $4.50 $5.75 September 30, 1997 $4.50 $5.75 December 31, 1997 $4.50 $5.875
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, 1998, there were approximately 1,351 holders of shares of the Company's Common Stock. The Company has never paid a cash dividend on shares of its Common Stock and does not intend to pay cash dividends in the foreseeable future. (The remainder of this page was intentionally left blank.) 11 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED: - -------------------------------------------------------------------------------------------------------------- * ** DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993 -------------- -------------- -------------- -------------- -------------- Sales $36,433,918.00 $26,182,821.00 $18,305,928.00 $12,820,709.00 $11,705,833.00 Income (Loss) Form Continuing Operations $677,671.00 $446,029.00 $1,331,924.00 $1,183,406.00 $1,042,556.00 Income (Loss) Per Common Share from Continuing Operations 0.28 0.19 0.55 0.54 0.47 Total Assets $24,694,930.00 $22,152,629.00 $13,223,064.00 $6,647,897.00 $6,553,291.00 Total Long-Term $10,388,620.00 $10,910,757.00 $3,768,685.00 $746,755.00 $858,437.00 Debit
* Company acquired the assets of Zercom Corporation in November, 1996. ** Company acquired the assets of Monitor Technology in March, 1995, and of Aerospace Systems in August, 1995. NOTE: For additional selected Financial Data (Past two years by quarter information) See note 14 of the Consolidated Financial Statement. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS, YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 REVENUES. For the years ended December 31, 1997, and 1996 the Company had sales of $36,433,918 and $26,182,821 respectively. The increase of $10,251,097 or 39.2% resulted primarily from additional revenues generated by the acquisitions which were completed in 1996. For the year ended December 31, 1995 the Company had sales of $18,305,928. The approximate 43% increase in sales in 1996 was attributable primarily to increased sales from the newly acquired divisions in 1995. GROSS PROFIT. The Company had gross profit of $6,795,052 in 1997, $4,627,362 in 1996, and $3,764,840 in 1995. Gross profits as a percentage of gross sales were 18.7% in 1997, 17.7% in 1996, and 20.6% in 1995. The Company has experienced gross profit pressure evolving from a change of product mix and material content offset by some improvement in manufacturing productivity. SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative expenses were $4,542,498 in 1997, $3,306,311 in 1996, and $2,280,105 in 1995. The increases in each year reflects additional selling, general and administrative expenses associated with the acquisitions. MISCELLANEOUS INCOME. Miscellaneous income was $53,738 in 1997, $65,732 in 1996, and $212,670 in 1995. The miscellaneous income resulted primarily from charges for miscellaneous services. INTEREST EXPENSE. Interest expense was $1,010,909 in 1997, $475,057 in 1996, and $240,562 in 1995. The increased expense for 1997, 1996 and 1995 is due to the increased debt from acquired operations. 13 INCOME TAXES. Income tax expense for 1997 was $359,000 and $192,000 in 1996. 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 Company has recorded deferred tax assets of $1,241,000, the 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. NET INCOME. The Company's net income in 1997 was $677,671 or $.28 per common share. 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 believes that the effect of inflation on past operations has not been significant and anticipates that inflation will not have a significant impact on future operations. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital rose from $8,498,531 as of December 31, 1996 to $9,670,225 on December 31, 1997. Stockholders equity increased from $7,151,192 as of December 31, 1996 to $7,813,823 on December 31, 1997 due to the Company's 1997 net income. 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. OTHER "YEAR 2000 PROBLEMS." Nortech Systems, Inc. recognizes the dangers of the "Year 2000 Problem". To ensure a minimum negative impact on business operations Nortech has established a Y2K Initiative. The Y2K Initiative addresses the effects on the company, our vendors and our customers. We are currently in the inventory and evaluation phase. Implementation and mitigation measures will be complete and testing started by July 1999. Monitoring and evaluation will continue throughout 1999 and into 2000 until we are sure all issues have been properly resolved. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
PAGE ---- Independent Auditors' Report of : Larson, Allen, Weishair & Co., LLP 16 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1997 and 1996. 17 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995. 18 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995. 19 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. 20-21 Notes to Consolidated Financial Statements 22-35
(The remainder of this page was intentionally left blank.) 15 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nortech Systems Incorporated and Subsidiary as of December 31, 1997, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota February 23, 1998 16 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 -------------- ------------- ASSETS CURRENT ASSETS Cash and Cash Equivalents (Including Interest Bearing Cash of $463,248 and $1,069,369 at December 31, 1997 and 1996) $ 714,169 $ 1,235,127 Accounts Receivable, Less Allowance for Uncollectible Accounts (1997 - $84,128; 1996 - $22,301) 5,008,689 3,695,763 Inventories 9,242,467 6,729,500 Prepaid Expenses and Other 226,387 88,821 Deferred Tax Asset 671,000 540,000 -------------- ------------- Total Current Assets $ 15,862,712 $ 12,289,211 -------------- ------------- PROPERTY AND EQUIPMENT (At Cost) Land 136,300 136,300 Building and Leasehold Improvements 3,765,161 3,559,155 Manufacturing Equipment 4,444,401 4,588,955 Office and Other Equipment 2,805,557 2,461,997 -------------- ------------- Total $ 11,151,419 $ 10,746,407 Accumulated Depreciation (3,851,810) (2,875,702) -------------- ------------- Total Property and Equipment (At Depreciated Cost) $ 7,299,609 $ 7,870,705 -------------- ------------- OTHER ASSETS Goodwill and Other Intangible Assets $ 905,359 $ 1,025,463 Deferred Tax Asset 570,000 910,000 Other Assets 57,250 57,250 -------------- ------------- Total Other Assets $ 1,532,609 $ 1,992,713 -------------- ------------- Total Assets $ 24,694,930 $ 22,152,629 -------------- ------------- -------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of Credit $ 500,000 $ 500,000 Current Maturities of Long-Term Debt 1,038,397 731,080 Accounts Payable 3,013,131 1,596,326 Accrued Payroll 1,082,293 673,303 Other Liabilities 558,666 289,971 -------------- ------------- Total Current Liabilities $ 6,192,487 $ 3,790,680 -------------- ------------- LONG-TERM DEBT Notes Payable (Net of Current Maturities Shown Above) $ 10,388,620 $ 10,910,757 -------------- ------------- REDEEMABLE COMMON STOCK $.01 Par Value;50,000 Shares Issued and Outstanding at December 31, 1997 and 1996 Redeemable at $6 Per Share $ 300,000 $ 300,000 -------------- ------------- STOCKHOLDERS' EQUITY Preferred Stock, $1 Par Value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding $ 250,000 $ 250,000 Common Stock $.01 Par Value; 9,000,000 Shares Authorized; 2,312,362 Shares Issued and Outstanding, Net of Redeemable Shares Reported Above, at December 31, 1997 and 1996 23,124 23,124 Additional Paid-In Capital 11,910,554 11,910,554 Accumulated Deficit (4,369,855) (5,032,486) -------------- ------------- Total Stockholders' Equity $ 7,813,823 $ 7,151,192 -------------- ------------- Total Liabilities and Stockholders' Equity $ 24,694,930 $ 22,152,629 -------------- ------------- -------------- -------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------- -------------- -------------- SALES $ 36,433,918 $ 26,182,821 $ 18,305,928 COST OF SALES (29,638,866) (21,555,459) (14,541,088) ------------- -------------- -------------- GROSS PROFIT $ 6,795,052 $ 4,627,362 $ 3,764,840 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (4,542,498) (3,306,311) (2,280,105) RESEARCH AND DEVELOPMENT COSTS (258,712) (273,697) (124,919) INTEREST INCOME 37,423 33,668 34,703 MISCELLANEOUS INCOME 16,315 32,064 177,967 INTEREST EXPENSE (1,010,909) (475,057) (240,562) ------------- -------------- -------------- INCOME BEFORE INCOME TAX PROVISION $ 1,036,671 $ 638,029 $ 1,331,924 INCOME TAX EXPENSE (359,000) (192,000) - ------------- -------------- -------------- NET INCOME $ 677,671 $ 446,029 $ 1,331,924 ------------- -------------- -------------- ------------- -------------- -------------- BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.28 $ 0.19 $ 0.55 ------------- -------------- -------------- ------------- -------------- -------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,362,362 2,384,512 2,407,804 ------------- -------------- -------------- ------------- -------------- -------------- DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.28 $ 0.18 $ 0.55 ------------- -------------- -------------- ------------- -------------- -------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,387,829 2,429,071 2,436,118 ------------- -------------- -------------- ------------- -------------- --------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 18 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Additional Total Preferred Common Paid-In Accumulated Stockholders' Stock Stock Capital Deficit Equity ----------- ---------- ------------- ------------- ------------- BALANCE DECEMBER 31, 1994 $ 250,000 $ 21,943 $ 11,229,065 $ (6,780,505) $ 4,720,503 1995 Net Income - - - 1,331,924 1,331,924 Issuance of Stock - Stock Options - 50 8,700 - 8,750 Issuance of Stock - Other - 16 4,907 - 4,923 Dividends Paid - - - (29,934) (29,934) ----------- ---------- ------------- ------------- ------------- BALANCE DECEMBER 31, 1995 $ 250,000 $ 22,009 $ 11,242,672 $ (5,478,515) $ 6,036,166 1996 Net Income - - - 446,029 446,029 Issuance of Stock - Other - 1,115 667,882 - 668,997 ----------- ---------- ------------- ------------- ------------- BALANCE DECEMBER 31, 1996 $ 250,000 $ 23,124 $ 11,910,554 $ (5,032,486) $ 7,151,192 1997 Net Income - - - 677,671 677,671 Dividends Paid - - - (15,040) (15,040) ----------- ---------- ------------- ------------- ------------- BALANCE DECEMBER 31, 1997 $ 250,000 $ 23,124 $ 11,910,554 $ (4,369,855) $ 7,813,823 ----------- ---------- ------------- ------------- ------------- ----------- ---------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 35,137,009 $ 24,375,341 $ 18,114,515 Cash Paid to Suppliers and Employees (33,970,078) (23,904,901) (17,379,766) Interest Expense Paid (985,519) (403,003) (239,809) Interest Income Received 37,423 33,668 34,703 Income Taxes Paid (56,400) (205,900) (19,016) ------------- ------------- ------------- Net Cash Provided (Used) by Operating Activities $ 162,435 $ (104,795) $ 510,627 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Businesses $ - $ (1,559,492) $ (2,930,696) Proceeds from Sale of Assets 300,000 - - Acquisition of Property and Equipment (753,533) (718,835) (458,359) Acquisition of Intangible Assets - - (82,059) Purchase of Investments - - (56,250) Net Cash Used by ------------- ------------- ------------- Investing Activities $ (453,533) $ (2,278,327) $ (3,527,364) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net Proceeds Under Line of Credit $ - $ 500,000 $ - Payments on Long-Term Debt (2,720,271) (431,453) (289,294) Proceeds from Long-Term Debt 2,505,451 3,156,115 3,405,180 Proceeds from Sale of Stock - 597 13,673 Purchase of Redeemable Stock - (531,600) - Payment of Dividends (15,040) - (29,934) ------------- ------------- ------------- Net Cash Provided (Used) by Financing Activities $ (229,860) $ 2,693,659 $ 3,099,625 ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (520,958) $ 310,537 $ 82,888 Cash and Cash Equivalents - Beginning 1,235,127 924,590 841,702 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS - ENDING $ 714,169 $ 1,235,127 $ 924,590 ------------- ------------- ------------- ------------- ------------- -------------
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 FINANCIAL STATEMENTS. 20 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------- ------------- ------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Net Income $ 677,671 $ 446,029 $ 1,331,924 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 1,145,032 693,456 444,636 Deferred Taxes 209,000 110,000 (100,000) Gain on Sale of Assets (299) - - Changes in Current Operating Items: Accounts Receivable (1,312,926) (1,839,544) (369,380) Inventory (2,512,967) (482,103) (407,932) Prepaid Assets (137,566) 42,880 (79,751) Accounts Payable 1,416,805 541,446 207,835 Accrued Payroll 408,990 266,287 (17,852) Accrued Liabilities 268,695 116,754 (498,853) ------------- ------------- ------------- Net Cash Provided (Used) by Operating Activities $ 162,435 $ (104,795) $ 510,627 ------------- ------------- ------------- ------------- ------------- -------------
21 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION Nortech Systems Incorporated (the "Company") is a Minnesota corporation with headquarters in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota. The Company's main manufacturing facility is located in Bemidji, Minnesota, with additional manufacturing and engineering support locations in Fairmont, Plymouth, Merrifield and Aitkin, Minnesota and Augusta, Wisconsin. The Company manufactures wire harnesses, cables, and electromechanical assemblies, printed circuit boards and higher-level assemblies for a wide range of commercial and defense industries. The Company also manufactures and markets high performance display monitors for medical imaging, radar document imaging and industrial applications. The Company provides a full "turn-key" contract manufacturing service to its customers. All products are built to the customer's design specifications. Nortech Medical Services, Inc., its wholly owned subsidiary, provides service bureau and office management services to physicians and clinics throughout Minnesota. 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. 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. 22 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION Property and equipment are depreciated by the straight-line and accelerated methods of depreciation. Accelerated depreciation did not materially exceed straight-line depreciation for the years ended December 31, 1997, 1996 and 1995. Depreciation was calculated over estimated useful lives as follows: Leasehold Improvements 7 Years Buildings and Improvements 31 Years Manufacturing Equipment 5 - 7 Years Office Equipment and Purchased Software 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 3), 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 1997, 1996 and 1995 was $67,954, $54,614 and $30,724, respectively. The carrying value of goodwill is 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 fiscal years 1997, 1996 and 1995 was $52,151, $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, 1997 and 1996, the Company had invested excess funds of $116,219 and $266,000, 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. ADVERTISING Advertising costs are charged to operations as incurred. Total amounts charged to expense were $124,997, $65,234 and $17,994 for the years ended December 31, 1997, 1996 and 1995, respectively. 23 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company has adopted FASB Statement No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. FINANCIAL INSTRUMENTS The carrying amounts for all financial instruments approximate fair values. The carrying amounts for cash, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying value of long-term debt materially approximates fair value based on current rates at which the Company could borrow funds with similar remaining maturities. EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 replaces APB Opinion 15, Earnings per Share, and simplifies the computation of earnings per share (EPS) by replacing the presentation of primary EPS. In addition, the statement requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted EPS. Preferred stock issued is noncumulative and nonconvertible. ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock Based Compensation," establishes a new fair value based accounting method for stock-based compensation plans. As permitted by the statement, the Company continues to apply the accounting provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," in determining net income. NOTE 2 INVENTORIES Inventories consist of the following:
1997 1996 ------------ ------------ Raw Materials $ 5,961,221 $ 3,626,665 Work in Process 1,659,244 1,837,247 Finished Goods 1,622,002 1,265,588 ------------ ------------ Total $ 9,242,467 $ 6,729,500 ------------ ------------ ------------ ------------
24 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 3 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 totaling $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 Purchased Business 59,492 ------------ Total $ 6,424,882 ------------ ------------
MONITOR TECHNOLOGY CORPORATION On March 28, 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Monitor Technology Corporation (MTC). Monitor Technology Corporation designs and builds high and ultra-high resolution CRT monitors for computer applications throughout the United States. In addition, they provide repair services on internally and externally produced monitors. The purchase price of $2,232,667, which includes the assumption of liabilities of $707,887 and acquisition costs of $24,780, was paid with cash and by issuing 250,000 shares of the Company's common stock. The common stock was valued at $6, which is the redeemable price based on a repurchase agreement issued to the seller at closing. The excess of the purchase price over the estimated fair value of assets acquired is being amortized on a straight-line basis over 15 years. In 1996, 88,600 shares were put back to the Company at $6 per share and the put option was not exercised on 111,400 shares. The Company remains contingently liable to repurchase the remaining 50,000 shares, which are in dispute at December 31, 1997. The Company's obligation under the repurchase agreement is guaranteed by a director of the Company. See subsequent event Note 12 for settlement of such dispute. 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. 25 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 3 ACQUISITIONS (CONTINUED) 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. NOTE 4 SHORT-TERM LINE OF CREDIT The Company has a revolving line of credit at December 31, 1997, for $500,000. The line of credit is with Norwest Bank North Country, N.A., accrues interest at the prime rate, matures August 10, 1998, and is secured by accounts receivable, equipment, inventory, general intangibles and a personal guarantee by a shareholder. The interest rate was 8.5% at December 31, 1997. The maximum and average amounts outstanding on the short-term line of credit during 1997 were $500,000. 26 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 5 LONG-TERM DEBT
Description 1997 1996 - ---------------------------------------------------- ------------- ------------- Notes Payable - Norwest Bank North Country, N.A. , Revolving Lines of Credit, Borrowing Limit of $4,500,000; Promissory Note of $1,500,000; Interest at LIBOR Index Plus 2 1/2%, Due June 1999; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Personal Guarantee and Stock Pledged By a Shareholder $ 5,069,717 $ 4,916,939 Notes Payable - Norwest Bank North Country, N.A. , Interest Ranging From 7.5% to 8.5%, Monthly Installment Payments Through January 2001; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Real Estate 1,480,579 1,539,574 Note 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; Secured by Underlying Assets Purchased 4,465,390 4,865,390 Notes Payable - Other, Interest Ranging From 4.9% to 9%; Monthly Installment Payments Through March 2009; Secured by Land, Building, Leasehold Improvements, Equipment and Vehicle 411,331 319,934 ------------ ------------ Total Long-Term Debt $ 11,427,017 $ 11,641,837 Current Maturities 1,038,397 731,080 ------------ ------------ Long-Term Debt - Net of Current Maturities $ 10,388,620 $ 10,910,757 ------------ ------------ ------------ ------------
27 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 5 LONG-TERM DEBT (CONTINUED) Maturity requirements by year on long-term debt are as follows:
Years Ending December 31, Amounts ------------------------ ------------- 1998 $ 1,038,397 1999 5,818,766 2000 1,195,298 2001 3,292,692 2002 18,170 Later Years 63,694 ------------- Total $ 11,427,017 ------------- -------------
The maximum and average amounts outstanding on the Company's long-term lines of credit were $4,389,281 and $3,804,534 during 1997, respectively, and $3,716,939 and $2,596,711 during 1996, respectively. The Company is subject to certain restrictive covenants on debt with Norwest Bank North Country, N.A. The Company is in violation of one of the covenants at December 31, 1997 and has obtained a waiver for this violation. NOTE 6 CONTINGENCY At December 31, 1997, the Company was contingently liable for an additional $108,000 on the note payable to Communications Systems, Inc. (CSI). The Company incurred warranty costs in 1997 on sales that occurred prior to the acquisition of Zercom, and consequently reduced their note payable to CSI for such amounts. Management representing both Nortech and CSI have been communicating in an attempt to resolve this matter, however, a mutual agreement has not yet been reached. 28 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 7 LEASE OBLIGATION The Company has entered into various operating leases for production and office equipment, office space and buildings. The Company has the option to purchase equipment upon lease expiration at fair market value. The Company also has the option to purchase a building under an operating lease which, however, is subject to cancellation fees until December 1999. The monthly rent expense on another building under operating lease is subject to an annual adjustment for the increase in the Consumer Price Index. Rent expense for the years ended December 31, 1997, 1996 and 1995, was $548,943, $451,659 and $290,799, respectively. The future minimum lease payments are as follows:
Years Ending December 31, Amount ------------------------- ------------- 1998 $ 412,742 1999 399,014 2000 185,541 2001 68,670 2002 51,502 ------------ Total $ 1,117,469 ------------ ------------
NOTE 8 INCOME TAXES The provision for income taxes for each of the three years in the period ended December 31, 1997, consists of the following:
1997 1996 1995 --------- --------- --------- Current Taxes - Federal $ 31,000 $ 10,000 $ 37,000 Current Taxes - State 119,000 72,000 63,000 Deferred Taxes 209,000 110,000 (100,000) --------- --------- --------- Total Expense $ 359,000 $ 192,000 $ - --------- --------- --------- --------- --------- ---------
Net deferred tax assets at December 31, 1997 and 1996, consist of the following:
1997 1996 ------------ ------------ Net Operating Loss (NOL) Carryforwards $ 1,100,000 $ 1,415,000 Tax Credit Carryforwards 240,000 235,000 Allowance for Doubtful Accounts 35,000 10,000 Inventory Obsolescence Reserve 125,000 50,000 Accrued Vacation 135,000 85,000 Health Insurance Reserve 55,000 60,000 Property and Equipment (259,000) (165,000) Valuation Allowance (190,000) (240,000) ------------ ------------ Total $ 1,241,000 $ 1,450,000 ------------ ------------ ------------ ------------
29 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 8 INCOME TAXES (CONTINUED) The statutory rate reconciliation for each of the three years in the period ended December 31, is as follows:
1997 1996 1995 ---------- ---------- ---------- Statutory Tax Provision $ 353,000 $ 217,000 $ 453,000 State Income Taxes 72,000 78,000 80,000 Additional NOL Carryforwards - - (851,000) Increase (Reduction) in Deferred Tax Valuation Allowance (Net of Expired Tax Credit Carryforwards) (50,000) (100,000) 300,000 Other (16,000) (3,000) 18,000 ---------- ---------- ---------- Income Tax Expense $ 359,000 $ 192,000 $ - ---------- ---------- ---------- ---------- ---------- ----------
The Company has available for Federal income tax purposes, operating loss carryforwards, unused investment credits, and unused research and development credits which may provide future tax benefits, expiring as follows:
Investment Research and Operating Loss Tax Credit Development Tax Year of Expiration Carryforward Carryforward Credit Carryforward - --------------------------- ------------- ------------ ------------------- 1998 $ - $ 50,900 $ 97,600 1999 1,706,300 40,000 - 2000 - - - 2001 767,300 - - 2002 253,200 - - 2003 109,700 - - ------------- ----------- ------------------- Totals $ 2,836,500 $ 90,900 $ 97,600 ------------- ----------- ------------------- ------------- ----------- -------------------
During 1995 the Company identified an additional $2,500,000 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 increased its valuation allowance in 1995. The Company utilized operating loss carryforwards of $1,341,000, 642,000 and 1,450,000 for the years ended December 31, 1997, 1996 and 1995, respectively, to offset federal taxable income. In 1995 the Company utilized $46,000 of research and development credits to offset state taxable income. 30 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 9 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 adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plan been determined based on the fair market value at the grant date for awards in 1997 and 1995 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ---------- ---------- ------------ Net Earnings - as Reported $ 677,671 $ 446,029 $ 1,331,924 Net Earnings - Pro Forma $ 612,402 $ 413,236 $ 1,320,197 Basic Earnings Per Share - as Reported $ 0.28 $ 0.19 $ 0.55 Basic Earnings Per Share - Pro Forma $ 0.25 $ 0.17 $ 0.55 Diluted Earnings Per Share - as Reported $ 0.28 $ 0.18 $ 0.55 Diluted Earnings Per Share - Pro Forma $ 0.25 $ 0.17 $ 0.54
The assumption regarding stock options issued is that compensation cost is recognized over the graded vesting period of the options, which ranges from zero to five years. Options granted before 1995 were not considered in the calculation. No options were granted during the year ended December 31, 1996. The fair value of each option grant issued is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1997 1995 ----- ----- Expected Lives (Years) 10 10 Dividend Yield 0.0% 0.0% Expected Volatility 45% 39% Risk-Free Interest Rate 6.25% 5.50%
The total number of shares of common stock that may be granted under the plan is 200,000. The plan provides that shares granted come from the Company's authorized but unissued common stock. The price of the options granted to the plan will not be less that 100% of the fair market value of the shares on the date of grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant. 31 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 9 EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED) Information regarding the Company's common stock options is as follows:
1997 1996 1995 ----------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- ------- -------- ------ --------- Options Outstanding, Beginning of Year 137,500 $ 4.29 137,500 $ 4.29 47,500 $ 2.11 Options Exercised - - - - (5,000) 1.75 Options Granted 115,000 5.00 - - 95,000 5.25 -------- -------- ------- -------- ------ --------- Options Outstanding, End of Year 252,500 $ 4.61 137,500 $ 4.29 137,500 $ 4.29 -------- -------- ------- -------- ------ --------- -------- -------- ------- -------- ------ --------- Option Price Range of Exercised Shares $ - $ - $ 1.75 Weighted Average Fair Value of Options Granted During the Year $ 3.31 $ - $ 2.96
The following table summarizes information about fixed-price stock options outstanding at December 31, 1997:
Exercise Prices 12/31/97 12/31/97 Contractual Life --------------- -------- ------- ---------------- 1.625 15,000 15,000 5 Years 1.75 17,500 17,500 4 Years 3.625 10,000 10,000 6 Years 5.00 115,000 23,000 9 Years 5.25 95,000 38,000 8 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, 1997. 32 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 10 MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company sells its products to companies in the computer, medical, governmental and various other industries. Historically, the Company has not experienced significant losses related to receivables from customers in any particular industry or geographic area. The Company maintains its excess cash balances in checking and money market accounts at three financial institutions. These balances exceed the federally insured limit by $540,000 and $775,000 at December 31, 1997 and 1996, respectively. The Company has not experienced any losses in any of the short-term investment instruments it has used for excess cash balances. One customer accounted for approximately 12.7% of sales for the year ended December 31, 1997. 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. NOTE 11 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 $15,040, $-0- and $29,934 were paid during the years-ended December 31, 1997, 1996 and 1995, respectively. NOTE 12 SUBSEQUENT EVENT On January 23, 1998 the Company entered into an agreement to settle the dispute over the 50,000 shares placed in escrow as a result of the 1995 Monitor Technology Corporation (MTC) purchase. The settlement agreement states that the Company must issue 33,000 shares of its common stock within 30 days of the settlement date to certain shareholders of MTC. The shares will be unrestricted and will be freely tradable by the recipients. Nortech agrees to pay to the recipients, for each Nortech share received pursuant to the settlement, the amount, if any, by which $6.00 exceeds the closing price per share of the Nortech shares on July 20, 1998. The Company shall have the option to pay the recipients any such excess either in cash or by delivering freely tradable shares of Nortech stock having a value on July 20, 1998, equal to such excess. Such payment, either in cash or by delivery of Nortech shares, shall be made on or before July 31, 1998. Upon execution of the settlement, all parties have agreed to release any and all future claims related to the MTC purchase. The remaining 17,000 escrowed shares will be canceled. 33 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 14 PROSPECTIVE ACCOUNTING PRONOUNCEMENTS REPORTING COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 is effective for interim and annual periods beginning after December 15, 1997, and is to be applied retroactively to all periods presented. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It does not, however, specify when to recognize or how to measure items that make up comprehensive income. SFAS No. 130 was issued to address concerns over the practice of reporting elements of comprehensive income directly in equity. This statement requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with the other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statement and display the balance of other comprehensive income to be disclosed. Management does not expect that adoption of SFAS No. 130 will have a material impact on the Company's consolidated financial statements. FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 is effective for interim periods beginning after December 15, 1997, and is to be applied retroactively to all periods presented. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management does not expect that adoption of SFAS No. 131 will have a material impact on the Company's consolidated financial statements. 34 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 14 SUPPLEMENTARY FINANCIAL INFORMATION
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/97 6/30/97 9/30/97 12/31/97 1997 -------------- -------------- --------------- -------------- ------------- NET SALES $ 8,564,846 $ 9,039,176 $ 8,693,449 $ 10,136,447 $ 36,433,918 GROSS PROFIT 1,520,489 1,655,316 1,564,735 2,054,512 6,795,052 NET INCOME 132,755 167,255 140,555 237,106 677,671 BASIC EARNINGS PER SHARE OF COMMON STOCK 0.06 0.07 0.06 0.09 0.28
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/96 6/30/96 9/30/96 12/31/96 1996 -------------- -------------- -------------- --------------- ------------- NET SALES $ 5,574,986 $ 6,622,903 $ 6,143,457 $ 7,841,475 $ 26,182,821 GROSS PROFIT 1,006,356 1,214,275 1,096,171 1,310,560 4,627,362 NET INCOME 189,894 288,552 201,958 (234,375) 446,029 BASIC EARNINGS PER SHARE OF COMMON STOCK 0.08 0.12 0.09 (0.10) 0.19
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. 35 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding the directors and executive officers of the Registrant will be included in the Registrant's 1997 proxy statement to be filed with the Securities and Exchange Commission not later than April 30, 1998 and said portions of the proxy statement are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation of the Registrant will be included in the Registrant's 1997 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1998 and said portions of the proxy statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership of certain beneficial owners and management of the Registrant will be included in the Registrant's 1997 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1998 and said portions of the proxy statements are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. (The remainder of this page was intentionally left blank.) 36 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a) 1. Consolidated Financial Statements - Consolidated Financial Statements and related Notes are included in Part II, Item 8, and are identified in the Index on Page 16. (a) 2. Consolidated Financial Schedule - The following Consolidated Financial Statement Schedule supporting the Consolidated Financial Statements and the accountant's report thereon are included in this Annual Report on Form 10-K: PAGE Independent Auditors' Report on Supplementary Information Larson, Allen, Weishair & Co. , LLP 42 Consolidated Financial Statement Schedule for the years ended December 31, 1997, 1996 and 1995 II Valuation and Qualifying Accounts 43 All other schedules are omitted since they are not applicable, not required, or the required information is included in the financial statements or notes thereto. (a) 3. THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS REPORT: 10.1 Master lease agreement for equipment between Norwest Leasing Company and the Company. 10.2 Land contract between the city of Augusta and the Company for the purchase of building and land in Augusta, Wisconsin. 23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference to the S-8 Forms filed June 21 1994 and June 30, 1993. The following exhibits are incorporated by reference to exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7 and 10.8 respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.1 Promissory Note for acquisition of division between Company and Northern National Bank dated December 31, 1996. 37 10.2 Revolving Note for working capital line of credit between Company and Northern National Bank dated December 31, 1996. 10.3 Promissory Note for equipment purchases between Company and Northern National Bank dated December 31, 1996. 10.4 Revolving Note for the working capital line of credit between Company and Northern National Bank dated December 31, 1996. 10.5 Revolving Note for repurchase of stock between Company and Northern National Bank dated May 10, 1996. 10.6 Security Agreement covering Notes in Exhibits 10.1, 10.2, 10,3 10.4 and 10.5. 10.7 Promissory Note for acquisition of division between Company and Communications Systems, Inc. dated November 4, 1996. 10.8 Promissory Note for the acquisition of division between Company and Communications Systems, Inc. dated November 4, 1996. The following exhibits are incorporated by reference to exhibits 10.2, 10.3, 10.4, 10.5, 10.6 and 23.1, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.2 Promissory Note for purchase of facility in Fairmont, Minnesota between Company and Northern National Bank dated December 29, 1995. 10.3 Promissory Note for purchase of capital equipment located at Fairmont, Minnesota facility between Company and Northern National Bank dated December 29, 1995. 10.4 Security Agreement covering Promissory Notes in Exhibits 10.2 and 10.3. 10.5 Asset Purchase Agreement for the purchase of assets of Monitor Technology Corporation dated February 24, 1995. 10.6 Asset Purchase Agreement for the purchase of Aerospace Division of Communication Cable, Inc. dated August 23, 1995. 38 The following exhibits are incorporated by reference to exhibits 10.2, 10.3, and 10.5, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.2 Promissory Note and Loan agreement for capital equipment line of credit between the Company and Northern National Bank dated April 29, 1994. 10.3 LOAN AGREEMENT FOR REAL ESTATE BETWEEN THE COMPANY AND NORTHERN National Bank dated March 18, 1994. 10.5 Promissory Notes and Loan Agreement for Real Estate between the Company and MMCDC and MMCDC/NNC dated March 18, 1994. The following exhibits are incorporated by reference to Exhibits 10.3 and 10.4, respectfully, to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.3 Promissory Notes for capital equipment between the Company and City of Augusta, Wisconsin dated August 17, 1993. 10.4 Promissory Notes and Loan Agreement for capital equipment between the Company and Northern States Power Company dated November 15, 1993. The following exhibits are incorporated by reference to Exhibits 3.1, 3.2, 10.1 and 10.3 respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 3.1 Articles of Incorporation (SMR) dated August 9,1991 3.2 Bylaws (SMR) 10.3 Promissory Note and Mortgage between the Company and Joint Economic Development Commission, Inc. dated June 28, 1991. The following exhibit is incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 3.1 Articles of Incorporation dated October 30, 1990. 39 The following exhibit is incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended December 31, 1984: 3.2 Bylaws (b) Reports on Form 8-K. None. (The remainder of this page was intentionally left blank.) 40 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTECH SYSTEMS INCORPORATED March 27, 1998 By:/s/ ----------------------------- Garry M. Anderly Principal Financial Officer and Principal Accounting Officer March 27, 1998 By:/s/ ----------------------------- QUENTIN E. FINKELSON Its President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 27, 1998 /s/ ----------------------------- Quentin E. Finkelson, President, Chief Executive Officer and Director March 27, 1998 /s/ ----------------------------- Myron Kunin, Director March 27, 1998 /s/ ----------------------------- Richard W. Perkins, Director 41 [Letterhead] 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 1997, 1996 and 1995, precedes the consolidated financial statements. The audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule on the following page is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. LARSON, ALLEN, WEISHAIR & CO., LLP ST. CLOUD, MINNESOTA February 23, 1998 42 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY SCHEDULE II FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997: Allowance for Doubtful Accounts $ 22,301 $ 61,827 $ - $ 84,128 Inventory Obsolescence Reserve 120,000 200,000 - 320,000 Deferred Tax Valuation Allowance 240,000 - (50,000) 190,000 ---------- ------------ ------------- ------------ $ 382,301 $ 261,827 $ (50,000) $ 594,128 ---------- ------------ ------------- ------------ ---------- ------------ ------------- ------------ Year Ended December 31, 1996: Allowance for Doubtful Accounts $ 6,053 $ 16,248 $ - $ 22,301 Inventory Obsolescence Reserve 120,000 - - 120,000 Deferred Tax Valuation Allowance 400,000 - (160,000) 240,000 ---------- ------------ ------------- ------------ $ 526,053 $ 16,248 $(160,000) $ 382,301 ---------- ------------ ------------- ------------ ---------- ------------ ------------- ------------ Year Ended December 31, 1995: Allowance for Doubtful Accounts $ 4,343 $ 1,710 $ - $ 6,053 Inventory Obsolescence Reserve 40,000 80,000 - 120,000 Deferred Tax Valuation Allowance 100,000 - 300,000 400,000 ---------- ------------ ------------- ------------ $ 144,343 $ 81,710 $ 300,000 $ 526,053 ---------- ------------ ------------- ------------ ---------- ------------ ------------- ------------
43 INDEX TO EXHIBITS DESCRIPTIONS OF EXHIBITS 10.1 Master lease agreement for equipment between Norwest Leasing Company and the Company. 10.2 Land contract between the city of Augusta and the Company for the purchase of building and land in Augusta, Wisconsin. 23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference to the S-8 Forms filed June 21 1994 and June 30, 1993. 44 EX-10.1 2 EXHIBIT 10.1 Norwest Equipment Finance, Inc. MASTER LEASE [Logo] Equipment Investors Building, Suite 300 Finance 733 Marquette Avenue Minneapolis, MN 55479-2048 - ------------------------------------------------------------------------------ Master Lease Number 30576 dated as of September 18, 1997 Name and Address of Lessee: Nortech Systems, Incorporated 641 East Lake Street Suite 234 Wayzata, MN 55391 - ------------------------------------------------------------------------------ MASTER LEASE PROVISIONS - ------------------------------------------------------------------------------ 1. LEASE. Lessor hereby agrees to lease to Lessee, and Lessee hereby agrees to lease from Lessor, the personal property described in a Supplement or Supplements to this Master Lease from time to time signed by Lessor and Lessee upon the terms and conditions set forth herein and in the related Supplement (such property together with all replacements, repairs, and additions incorporated therein or affixed thereto being referred to herein as the "Equipment"). The lease of the items described in a particular Supplement shall be considered a separate lease pursuant to the terms of the Master Lease and the Supplement the same as if a single lease agreement containing such terms had been executed covering such items. 2. TERM. The term of this lease with respect to each item of Equipment shall begin on the date it is accepted by Lessee and shall continue for the number of consecutive months from the rent commencement date shown in the related Supplement (the "Initial term") unless earlier terminated as provided herein or unless extended automatically as provided below in this paragraph. The rent commencement date is the 15th day of the month in which all of the items of Equipment described in the related Supplement have been delivered and accepted by Lessee if such delivery and acceptance is completed on or before the 15th of such month, and the rent commencement date is the last day of such month if such delivery and acceptance is completed during the balance of such month. In the event Lessee executes the related Supplement prior to delivery and acceptance of all items of Equipment described therein, Lessee agrees that the rent commencement date may be left blank when Lessee executes the related Supplement and hereby authorizes Lessor to insert the rent commencement date based upon the date appearing on the delivery and acceptance certificate signed by Lessee with respect to the last item of Equipment to be delivered. AUTOMATIC EXTENSION. Lessee or Lessor may terminate this lease at the expiration of the initial term by giving the other at least 90 days prior written notice of termination. If neither Lessee nor Lessor gives such notice, then the term of this lease shall be extended automatically on the same rental and other terms set forth herein (except that in any event rent during any extended term shall be payable in the amounts and at the times provided in paragraph 3) for successive periods of one month until terminated by either Lessee or Lessor giving the other at least 90 days prior written notice of termination. 3. RENT. Lessee shall pay as basic rent for the initial term of this lease the amount shown in the related Supplement as Total Basic Rent. The Total Basic Rent shall be payable in installments each in the amount of the basic rental payment set forth in the related Supplement plus sales and use tax thereon. Lessee shall pay advance installments and any security deposit, each as shown in the related Supplement, on the date it is executed by Lessee. Subsequent installments shall be payable on the first day of each rental payment period shown in the related Supplement beginning after the first rental payment period; provided, however, that Lessor and Lessee may agree to any other payment schedule, including irregular payments or balloon payments, in which event they shall be set forth in the space provided in the Supplement for additional provisions. If the actual cost of the Equipment is more or less than the Total Cost as shown in the Supplement, the amount of each installment of rent will be adjusted up or down to provide the same yield to Lessor as would have been obtained if the actual cost had been the same as the Total Cost Adjustments of 10% or less may be made by written notice from Lessor to Lessee. Adjustments of more than 10% shall be made by execution of an amendment to the Supplement reflecting the change in Total Cost and rent. During any extended term of this lease, basic rent shall be payable monthly in advance on the first day of each month during such extended term in the amount equal to the basic rental payment set forth in the related Supplement if rent is payable monthly during the initial term or in an amount equal to the monthly equivalent of the basic rental payment set forth in the related Supplement if rent is payable other than monthly during the initial term. In addition, Lessee shall pay any applicable sales and use tax on rent payable during any extended term. In addition to basic rent, which is payable only from the rent commencement date as provided above, Lessee agrees to pay interim rent with respect to each separate item of Equipment covered by a particular Supplement from the date it is delivered and accepted to the rent commencement date at a daily rate equal to the percentage of Lessor's cost of such item specified in such Supplement. Interim rent accruing each calendar month shall be payable by the 10th day of the following month and in any event on the rent commencement date. Lessee agrees that if all of the items of Equipment covered by such Supplement have not been delivered and accepted thereunder before the date specified as the Cutoff Date in such Supplement, Lessee shall purchase from Lessor the items of Equipment then subject to the lease within five days after Lessor's request to do so for a price equal to Lessor's cost of such items plus all accrued but unpaid interim rent thereon. Lessee shall also pay any applicable sales and use tax on such sale. 4. SECURITY DEPOSIT. Lessor may apply any security deposit toward any obligation of Lessee under this lease, and shall return any unapplied balance to Lessee without interest upon satisfaction of Lessee's obligations hereunder. 5. WARRANTIES. Lessee agrees that it has selected each item of Equipment based upon its own judgement and disclaims any reliance upon any statements or representations made by Lessor. LESSOR MAKES NO WARRANTY WITH RESPECT TO THE EQUIPMENT, EXPRESS OR IMPLIED, AND LESSOR SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE AND ANY LIABILITY FOR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OF OR THE INABILITY TO USE THE EQUIPMENT. Lessee agrees to make the rental and other payments required hereunder without regard to the condition of the Equipment and to look only to persons other than Lessor such as the manufacturer, vendor or came, thereof should any item of Equipment for any reason be defective. So long as no Event of Default has occurred and is continuing, Lessor agrees, to the extent they are assignable, to assign to Lessee, without any recourse to Lessor, any warranty received by Lessor. 6. TITLE. Title to the Equipment shall at all times remain in Lessor, and Lessee at its expense shall protect and defend the title of Lessor and keep it free of all claims and liens other than the rights of Lessee hereunder and claims and liens created by or arising through Lessor. The Equipment shall remain personal property regardless of its attachment to realty, and Lessee agrees to take such action at its expense as may be necessary to prevent any third party form acquiring any interest in the Equipment as a result of its attachment to realty. 7. LAWS AND TAXES. Lessee shall comply with all laws and regulations relating to the Equipment and its use and shall promptly pay when due all sales, use, property, excise and other taxes and all license and registration fees now or hereafter imposed by any governmental body or agency upon the Equipment or its use or the rentals hereunder. Upon request by Lessor, Lessee shall prepare and file all tax returns relating to taxes for which Lessee is responsible hereunder which Lessee is permitted to file under the laws of the applicable taxing jurisdiction. 8. Indemnity Lessee hereby indemnifies Lessor against and agrees to save Lessor harmless from any and all liability and expense arising out of the ordering, ownership, use, condition, or operation of each item of Equipment during the term of this lease, including liability for death or injury to persons, damage to property, strict liability under the laws or judicial decisions of any state or the United States, and legal expenses in defending any claim brought to enforce any such liability or expense. 9. ASSIGNMENT WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE WILL NOT SELL, ASSIGN, SUBLET, PLEDGE, OR OTHERWISE ENCUMBER OR PERMIT A LIEN ARISING THROUGH LESSEE TO EXIST ON OR AGAINST ANY INTEREST IN THIS LEASE OR THE EQUIPMENT, or remove the Equipment from its location referred to above. Lessor may assign its interest in this lease and sell or grant a security interest in all or any part of the Equipment without notice to or the consent of Lessee. Lessee agrees not to assert against any assignee of Lessor any claim or defense Lessee may have against Lessor. 10. INSPECTION. Lessor may inspect the Equipment at any time and from time to time during regular business hours. 11. REPAIRS. Lessee will use the Equipment with due care and for the purpose for which it is intended. Lessee will maintain the Equipment in good repair, condition and working order and will furnish all parts and services required therefor, all at its expenses, ordinary wear and tear excepted. Lessee shall, at its expense, make all modifications and improvements to the Equipment required by law, and shall not make other modifications or improvements to the Equipment without the prior written consent of Lessor. All parts, modifications and improvements to the Equipment shall when installed or made, immediately become the property of Lessor and part of the Equipment for all purposes. 12. LOSS OR DAMAGE. In the event any item of Equipment shall become lost, stolen, destroyed, damaged beyond repair or rendered permanently unfit for use for any reason, or in the event of condemnation or seizure of any item of Equipment, Lessee shall promptly pay Lessor the sum of (a) the amount of all rent and other amounts payable by Lessee hereunder with respect to such item due but unpaid at the date of such payment plus (b) the amount of all unpaid rent with respect to such item for the balance of the term of this lease not yet due at the time of such payment discounted from the respective dates installment payments would be due at the rate implicit in the schedule of rental payments when applied to the cost of such item plus (c) 10% of the cost of such item as shown in the related Supplement. Upon payment of such amount to Lessor, such item shall become the property of Lessee. Lessor will transfer to Lessee, without recourse or warranty, all of Lessor's right, title and interest therein, the rent with respect to such item shall terminate, and the basic rental payments on the remaining items shall be reduced accordingly. THIS AGREEMENT INCLUDES THE TERMS ON THE BACK OF THIS PAGE Lessor: Norwest Equipment Finance, Inc. Nortech Systems, Incorporated, Lessee [Illegible] [Illegible] - -------------------------------------- ------------------------------------- By By Sr. Contract Admin. Sr. V.P. Finance & Treasurer - -------------------------------------- ------------------------------------- Title Title Lessee shall pay any sales and use taxes due on such transfer. Any insurance or condemnation proceeds received shall be credited to Lessee's obligation under this paragraph and Lessor shall be entitled to any surplus. 13. INSURANCE. Lessee shall obtain and maintain on or with respect to the Equipment at its own expense (a) liability insurance insuring against liability for bodily injury and property damage with a minimum limit of $500,000 combined single limit and (b) physical damage insurance insuring against loss or damage to the Equipment in an amount not less than the full replacement value of the Equipment. Lessee shall furnish Lessor with a certificate of insurance evidencing the issuance of a policy or policies to Lessee in at least the minimum amounts required herein naming Lessor as an additional insured thereunder for the liability coverage and as loss payee for the property damage coverage. Each such policy shall be in such form and with such insurers as may be satisfactory to Lessor, and shall contain a clause requiring the insurer to give to Lessor at least 10 days prior written notice of any alteration in the terms of such policy or the cancellation thereof, and a clause specifying that no action or misrepresentation by Lessee shall invalidate such policy. Lessor shall be under no duty to ascertain the existence of or to examine any such policy or to advise Lessee in the event any such policy shall not comply with the requirements hereof. 14. RETURN OF THE EQUIPMENT. Upon the expiration or earlier termination of this lease, Lessee will immediately deliver the Equipment to Lessor in the same condition as when delivered to Lessee, ordinary wear and tear excepted, at such location within the continental United States as Lessor shall designate. Lessee shall pay all transportation and other expenses relating to such delivery. 15. ADDITIONAL ACTION. Lessee will promptly execute and deliver to Lessor such further documents and take such further action as Lessor may request in order to carry out more effectively the intent and purpose of this lease, including the execution and delivery of appropriate financing statements to protect fully Lessor's interest hereunder in accordance with the Uniform Commercial Code or other applicable law. Lessee will furnish, from time to time on request, a copy of Lessee's latest annual balance sheet and income statement. 16. LATE CHARGES. If any installment of interim rent or basic rent is not paid when due, Lessor may impose a late charge of up to 5% of the amount of the installment but in any event not more than permitted by applicable law. Payments thereafter received shall be applied first to delinquent installments and then to current installments. 17. DEFAULT. Each of the following events shall constitute an "Event of Default" hereunder: (a) Lessee shall fail to pay when due any installment of interim rent or basic rent; (b) Lessee shall fail to observe or perform any other agreement to be observed or performed by Lessee hereunder and the continuance thereof for 10 calendar days following written notice thereof by Lessor to Lessee; (c) Lessee or any guarantor of this lease or any partner of Lessee if Lessee is a partnership shall cease doing business as a going concern or make an assignment for the benefit of creditors; (d) Lessee or any guarantor of this lease or any partner of Lessee if Lessee is a partnership shall voluntarily file, or have filed against it involuntarily, a petition for liquidation, reorganization, adjustment of debt, or similar relief under the federal Bankruptcy Code or any other present or future federal or state bankruptcy or insolvency law, or a trustee, receiver, or liquidator shall be appointed of it or of all or a substantial part of its assets; (e) any individual Lessee, guarantor of this lease, or partner of Lessee if Lessee is a partnership shall die; (f) any financial or credit information submitted by or on behalf of Lessee shall prove to have been false or materially misleading when made; (g) an event of default shall occur under any other obligation Lessee owes to Lessor; (h) any indebtedness Lessee may now or hereafter owe to Norwest Bank Minnesota, National Association or any affiliate thereof shall be accelerated following a default thereunder or, if any such indebtedness is payable on demand, payment thereof shall be demanded; (i) if Lessee is a corporation, more than 50% of the shares of voting stock of Lessee shall become owned by a shareholder or shareholders who were not owners of voting stock of Lessee on the date this lease begins or, if Lessee is a partnership, more than 50% of the partnership interests in the Lessee shall become owned by a partner or partners who were not partners of Lessee on the date this lease begins; and (j) Lessee shall consolidate with or merge into, or sell or lease all or substantially all of its assets to, any individual, corporation, or other entity. 18. REMEDIES. Lessor and Lessee agree that Lessor's damages suffered by reason of an Event of Default are uncertain and not capable of exact measurement at the time this lease is executed because the value of the Equipment at the expiration of this lease is uncertain, and therefore they agree that for purposes of this paragraph 18 "Lessor's Loss" as of any date shall be the sum of the following: (1) the amount of all rent and other amounts payable by Lessee hereunder due but unpaid as of such date plus (2) the amount of all unpaid rent for the balance of the term of this lease not yet due as of such date discounted from the respective dates installment payments would be due at the rate of 5% per annum plus (3) 10% of the cost of the Equipment subject to this lease as of such date. Upon the occurrence of an Event of Default and at any time thereafter, Lessor may exercise any one or more of the remedies listed below as Lessor in its sole discretion may lawfully elect; provided, however, that upon the occurrence of an Event of Default specified in paragraph 17(d), an amount equal to Lessor's Loss as of the date of such occurrence shall automatically become and be immediately due and payable without notice or demand of any kind. a) Lessor may, by written notice to Lessee, terminate this lease and declare an amount equal to Lessor's Loss as of the date of such notice to be immediately due and payable, and the same shall thereupon be and become immediately due and payable without further notice or demand, and all rights of Lessee to use the Equipment shall terminate but Lessee shall be and remain liable as provided in this paragraph 18. Lessee shall at its expense promptly deliver the Equipment to Lessor at a location or locations within the continental United States designated by Lessor. Lessor may also enter upon the premises where the Equipment is located and take immediate possession of and remove the same with or without instituting legal proceedings. b) Lessor may proceed by appropriate court action to enforce performance by Lessee of the applicable covenants of this lease or to recover, for breach of this lease, Lessor's Loss as of the date Lessor's Loss is declared due and payable hereunder, provided, however, that upon recovery of Lessor's Loss from Lessee in any such action without having to repossess and dispose of the Equipment, Lessor shall transfer the Equipment to Lessee at its then location upon payment of any additional amount due under clauses (d) and (e) below. c) In the event Lessor repossessed the Equipment, Lessor shall either retain the Equipment in full satisfaction of Lessee's obligation hereunder or sell or lease each item of Equipment in such manner and upon such terms as Lessor may in its sole discretion determine. The proceeds of such sale or lease shall be applied to reimburse Lessor for Lessor's Loss and any additional amount due under clauses (d) and (e) below. Lessor shall be entitled to any surplus and Lessee shall remain liable for any deficiency. For purposes of this subparagraph, the proceeds of any lease of all or any part of the Equipment by Lessor shall be the amount reasonably assigned by Lessor as the cost of such Equipment in determining the rent under such lease. d) Lessor may recover interest on the unpaid balance of Lessor's Loss from the date it becomes payable until fully paid at the rate of the lesser of 8% per annum or the highest rate permitted by law. e) Lessor may exercise any other right or remedy available to it by law or by agreement, and may in any event recover legal fees and other expenses incurred by reason of an Event of Default or the exercise of any remedy hereunder, including expenses of repossession, repair, storage, transportation, and disposition of the Equipment. If any Supplement is deemed at any time to be a lease intended as security, Lessee grants Lessor a security interest in the Equipment to secure its obligations under this lease and all other indebtedness at any time owing by Lessee to Lessor and agrees that upon the occurrence of an Event of Default, in addition to all of the other rights and remedies available to Lessor hereunder, Lessor shall have all of the rights and remedies of a secured party under the Uniform Commercial Code.. No remedy given in this paragraph is intended to be exclusive, and each shall be cumulative but only to the extent necessary to permit Lessor to recover amounts for which Lessee is liable hereunder. No express or implied waiver by Lessor of any breach of Lessee's obligations hereunder shall constitute a waiver of any other breach of Lessee's obligations hereunder. 19. NOTICES. Any written notice hereunder to Lessee or Lessor shall be deemed to have been given when delivered personally or deposited in the United States mails, postage prepaid, addressed to recipient at its address set forth above or at such other address as may be last known to the sender. 20. NET LEASE AND UNCONDITIONAL OBLIGATION. This lease is a completely net lease and Lessee's obligation to pay rent and amounts payable by Lessee under paragraphs 12 and 18 is unconditional and not subject to any abatement, reduction, setoff or defense of any kind. 21. NON-CANCELABLE LEASE. This lease cannot be canceled or terminated except as expressly provided herein. 22. SURVIVAL OF INDEMNITIES. Lessee's obligations under paragraphs 7, 8, 18 shall survive termination or expiration of this lease. 23. COUNTERPARTS. There shall be but one counterpart of the Master Lease and of each Supplement and such counterpart will be marked "Original." To the extent that any Supplement constitutes chattel paper (as the term is defined by the Uniform Commercial Code), a security interest may only be created in the Supplement marked "Original." 24. MISCELLANEOUS. This Master Lease and related Supplement(s) constitute the entire agreement between Lessor and Lessee and may be modified only by a written instrument signed by Lessor and Lessee. Any provision of this lease which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability without invalidating the remaining provisions of this lease, and any such unenforceability in any jurisdiction shall not render unenforceable such provision in any other jurisdiction. If this lease shall in all respects be governed by, and construed in accordance with, the substantive laws of the State of Minnesota. In the event there is more than one Lessee named herein or in any Supplement, the obligations of each shall be joint and several. - -------------------------------------------------------------------------------- [LOGO] EQUIPMENT Norwest Equipment Finance, Inc. SUPPLEMENT TO MASTER LEASE FINANCE Investors Building, Suite 300 OPTION TO PURCHASE 731 Marquette Avenue Minneapolis, MN 55479-2048 - -------------------------------------------------------------------------------- Supplement Number 30576-100 dated as of September 18, 1997 to Master Lease Number 30576 dated as of September 18, 1997 Name and Address of Lessee: Nortech Systems, Incorporated 641 East Lake Street Suite 234 Wayzata, MN 55391 - ------------------------------------------------------------------------------- This is a Supplement to the Master Lease identified above between Lessor and Lessee (the "Master Lease"). Upon the execution and delivery by Lessor and Lessee of this Supplement, Lessor hereby agrees to lease to Lessee, and Lessee hereby agrees to lease from Lessor, the equipment described below upon the terms and conditions of this Supplement and the Master Lease. All terms and conditions of the Master Lease shall remain in full force and effect except to the extent modified by this Supplement. This Supplement and the Master Lease as it relate to this Supplement are hereinafter referred to as the "Lease". Equipment Description: See Schedule A Equipment Location: Zercom Drive, Merrifield, MN 56465
SUMMARY OF PAYMENTS TERMS Initial Term in Months: 60 Total Cost: $304,334.00 Payment Frequency: Monthly Total Basic Rent: $343,349.40 Basic Rental payment $5,722.49 plus applicable sales and use tax Interim Rent Daily Rate: .063 Number of Installments: 60 Interim Rent Cutoff Date: December 31, 1997 Advance Payments: First due on signing this Lease Security Deposit: N/A
END OF TERM OPTIONS: 1. Upon expiration of the initial term of the Lease and provided that the Lease has not been terminated early and Lessee is in compliance with the Lease in all respects, Lessee may upon at least 90 but not more than 120 days prior written notice to Lessor exercise one of the following options: (i) purchase all but not less than all of the Equipment at the expiration of the initial term of the Lease or any renewal term pursuant to paragraph 1(ii) hereof for a purchase price equal to the then Fair Market Value of the Equipment. "Fair Market Value" of the Equipment for purposes of this paragraph shall be an amount determined according to the following procedure. Upon receipt of Lessee's notice of election to purchase the Equipment, Lessee and Lessor will attempt to agree on an amount during the next 30 days, and the amount so agreed upon shall be the Fair Market Value. In the event Lessor and Lessee cannot agree on an amount during such 30-day period, then each party shall choose an independent appraiser, and the two appraisers shall each determine the fair market value of the Equipment on the basis of an arm's-length sale between an informed and willing buyer (other than a buyer currently in possession) and an informed and willing seller under no compulsion to sell. The average of the amounts determined by the two appraisers shall be the Fair Market Value. Each party shall pay the expenses of the appraiser it chooses; or (ii) renew the Lease with respect to all but not less than all of the Equipment at the expiration of the initial term of the Lease for the then Fair Market Rental Value of the Equipment and for a term to be agreed upon by Lessee and Lessor. Upon expiration of the renewal term Lessee shall either purchase the Equipment pursuant to paragraph 1 above or return the Equipment in accordance with the Lease. "Fair Market Rental Value" of the Equipment for purposes of this paragraph shall be an amount determined according to the following procedure. Upon receipt of Lessee's notice of election to renew the Lease, Lessee and Lessor will attempt to agree on an amount during the next 30 days, and the amount so agreed upon shall be the Fair Market Rental Value. In the event Lessor and Lessee cannot agree on an amount during such 30-day period, then each party shall choose an independent appraiser, and the two appraisers shall each determine the fair market rental value of the Equipment on the basis of an arm's-length transaction between an informed and willing lessor and an informed and willing lessee under no compulsion to lease. The average of the amounts determined by the two appraisers shall be the Fair Market Rental Value. Each party shall pay the expenses of the appraiser it chooses; or THIS AGREEMENT INCLUDES THE TERMS ON THE BACK OF THIS PAGE Lessor: Norwest Equipment Finance, Inc. Nortech Systems, Incorporated, Lessee BY: [Illegible] BY: [Illegible] ------------------------------------- ---------------------------------- TITLE: Sr. Contract Admin. TITLE: Sr. V.P. Finance & Treasuer ---------------------------------- ---------------------------------- December 31st, 1997 - --------------------------------------- RENT COMMENCEMENT DATE EX-10.2 3 EXHIBIT 10.2 VOL 1040 PAGE 88 722169 STATE BAR OF WISCONSIN FORM 11 - 1982 LAND CONTRACT INDIVIDUAL AND CORPORATE [STAMP] (TO BE USED FOR ALL TRANSACTIONS WHERE OVER $25,000 IS FINANCED AND IN OTHER NON-CONSUMER DOCUMENT NO. ACT TRANSACTIONS) CONTRACT, by and between CITY OF AUGUSTA ----------------------------------------------------- - ------------------------------------------------------------------------------ ("Vendor", - -------------------------------------------------------------------- whether one or more) and NORTECH SYSTEMS INCORPORATED ----------------------------------------------------- - ------------------------------------------------------------------------------ ("Purchaser", whether one or more). - ------------------------------------------- Vendor sells and agrees to convey to Purchaser, upon the prompt and full performance of this contract by Purchaser, the following property, together with the rents, profits, fixtures and other appurtenant interests (all called the "Property"), in ----------------------------------------------------------- EAU CLAIRE County, State of Wisconsin: - --------------------------------------------------- Parcel of land located in the Northeast Quarter of the Northwest Quarter of Section 5, Township 25 North, Range 6 West, City of Augusta, Wisconsin, being more particularly described as follows: Commencing at the Northeast Corner of the Northwest Quarter of said Section 5; Thence S0DEG.01`06" E, 33.01 feet; Thence S88DEG.19`03"W, 264.00 feet; Thence S0DEG.01'06"E, 280.12 feet; Thence S88DEG.19'03"W, 50.02 feet to the Point of Beginning; Thence N0DEG.01`06"W, 250.11 feet; Thence S88DEG.19'03"W, 238.76 feet; Thence S0DEG.50'59"E, 250.03 feet; Thence N88DEG.19`03"E, 235.13 feet to the Point of Beginning. Said Parcel contains 59,237 sq. ft. (1.36 acres) and is subject to all easements and restrictions of record. This is not homestead property. ---------------- (is) (is not) Purchaser agrees to purchase the Property and to pay to Vendor at ____ the sum of $82,529.28 in the following manner: (a) $0.00 at the execution of this Contract; and (b) the balance of $82,529.28, together with interest from date hereof on the balance outstanding from time to time at the rate of 6.5 percent per annum until paid in full, as follows: Twelve (12) quarterly payments of $4735.30, commencing September 1, 1997. Provided, however, the entire outstanding balance shall be paid in full on or before the 1st day of June, 2000. (the maturity date). Following any default in payment, interest shall accrue at the rate of 6.5% per annum on the entire amount in default (which shall include, without limitation, delinquent interest and, upon acceleration or maturity, the entire principal balance). Purchaser, unless excused by Vendor, agrees to pay monthly to Vendor amounts sufficient to pay reasonably anticipated annual taxes, special assessments, fire and required insurance premiums when due. To the extent received by Vendor, Vendor agrees to apply payments to these obligations when due. Such amounts received by the Vendor for payment of taxes, assessments and insurance will be deposited into an escrow fund or trustee account, but shall not bear interest unless otherwise required by law. Payments shall be applied first to interest on the unpaid balance at the rate specified and then to principal. Any amount may be prepaid without premium or fee upon principal at any time after closing. In the event of any prepayment, this contract shall not be treated as in default with respect to payment so long as the unpaid balance of principal, and interest (and in such case accruing interest from month to month shall be treated as unpaid principal) is less than the amount that said indebtedness would have been had the monthly payments been made as first specified above; provided that monthly payments shall be continued in the event of credit of any proceeds of insurance or condemnation, the condemned premises being thereafter excluded herefrom. Purchaser states that Purchaser is satisfied with the title as shown by the title evidence submitted to Purchaser for examination except: Purchaser agrees to pay the cost of future title evidence. If title evidence is in the form of an abstract, it shall be retained by Vendor until the full purchase price is paid. Purchaser shall be entitled to take possession of the Property after closing. Purchaser promises to pay when due all taxes and assessments levied on the Property or upon Vendor's interest in it and to deliver to Vendor on demand receipts showing such payment. Purchaser shall keep the improvements on the Property insured against loss or damage occasioned by fire, extended coverage perils and such other hazards as Vendor may require, without co-insurance, through insurers approved by Vendor, in the sum of $ insured value but Vendor shall not require coverage in an amount more than the balance owed under this Contract. Purchaser shall pay the insurance premium when due. The policies shall contain the standard clause in favor of the Vendor's interest and, unless Vendor otherwise agrees in writing, the original of all policies covering the Property shall be deposited with Vendor. Purchaser shall promptly give notice of loss to insurance companies and Vendor. Unless Purchaser and Vendor otherwise agree in writing, insurance proceeds shall be applied to restoration or repair of the Property damaged, provided the Vendor deems the restoration or repair to be economically feasible. Purchaser covenants not to commit waste nor allow waste to be committed on the Property, to keep the Property in good tenantable condition and repair, to keep the Property free from liens superior to the lien of this Contract, and to comply with all laws, ordinances and regulations affecting the Property. Vendor agrees that in case the purchase price with interest and other moneys shall be fully paid and all conditions shall be fully performed at the times and in the manner above specified. Vendor will on demand, execute and deliver to the Purchaser, a Warranty Deed, in fee simple, of the Property, free and clear of all liens and encumbrances, except any liens or encumbrances created by the act or default of Purchaser, and except: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Purchaser agrees that time is of the essence and (a) in the event of a default in the payment of any principal or interest which continues for a period of _____ days following the specified due date or (b) in the event of a default in performance of any other obligation of Purchaser which continues for a period of _____ days following written notice thereof by Vendor (delivered personally or mailed by certified mail); then the entire outstanding balance under this contract shall become immediately due and payable in full, at Vendor's option and without notice (which Purchaser hereby waives), and Vendor shall also have the following rights and remedies (subject to any limitations provided by law) in addition to those provided by law or in equity: (i) Vendor may, at his option, terminate this Contract and Purchaser's rights, title and interest in the Property and recover the Property back through strict foreclosure with any equity of redemption to be conditioned upon Purchaser's full payment of the entire outstanding balance, with interest thereon from the date of default at the rate in effect on such date and other amounts due hereunder (in which event all amounts previously paid by Purchaser shall be forfeited as liquidated damages for failure to fulfill this Contract and as rental for the Property if Purchaser fails to redeem), or (ii) Vendor may sue for specific performance of this Contract to compel immediate and full payment on the entire outstanding balance, with interest thereon at the rate in effect on the date of default and other amounts due hereunder, in which event the Property shall be auctioned at judicial sale and Purchaser shall be liable for any deficiency; or (iii) Vendor may sue at law for the entire unpaid purchase price or any portion thereof; or (iv) Vendor may declare this Contract at an end and remove this Contract as a cloud on title in a quiet-title auction if the equitable interest of Purchaser is insignificant; and (v) Vendor may have Purchaser ejected from possession of the Property and have a receiver appointed to collect any rents, issues or profits during the pendency of any action under (i), (ii) or (iv) above. Notwithstanding any oral or written statements or actions of Vendor, an election of any of the foregoing remedies shall only be binding upon Vendor if and when pursued in litigation and all costs and expenses including reasonable attorneys fees of Vendor incurred to enforce any remedy hereunder (whether abated or not) to the extent not prohibited by law and expenses of title evidence shall be added to principal and paid by Purchaser, as incurred, and shall be included in any judgment. Upon the commencement or during the pendency of any action of foreclosure of this Contract, Purchaser consents to the appointment to a receiver of the Property, including homestead interest, to collect the rents, issues, and profits of the Property during the pendency of such action and such rents, issues, and profits when so collected shall be held and applied as the court shall direct. Purchaser shall not transfer, sell or convey any legal or equitable interest in the Property (by assignment of any of Purchaser's rights under this Contract or by option, long-term lease or in any other way) without the prior written consent of Vendor unless either the outstanding balance payable under this Contract is first paid in full or the interest conveyed is a pledge or assignment of Purchaser's interest under this Contract solely as security for an indebtedness of Purchaser. In the event of any such transfer, sale or conveyance without Vendor's written consent, the entire outstanding balance payable under this Contract shall become immediately due and payable in full, at Vendor's option without notice. Vendor shall make all payments when due under any mortgage outstanding against the Property on the date of this Contract (except for any mortgage granted by Purchaser) or under any note secured thereby, provided Purchaser makes timely payment of the amount then due under this Contract. Purchaser may make such payments directly to the Mortgagee if Vendor fails to do so and all payments so made by Purchaser shall be considered payments made on this Contract. Vendor may waive any default without waving other subsequent or prior default of Purchase. All terms of this Contract shall be binding upon and inure to the benefits of the heirs, legal representatives, successors and assigns of Vendor and Purchaser. (If not an owner of the property the spouse of Vendor for a valuable consideration joins herein to release homestead rights in the subject Property and agrees to join in the execution of the deed to be made in fulfillment hereof.) Dated this 4th day of June, 1997, but effective June 1, 1997. /s/ Roger H. Hahn (SEAL) /s/ Quentin E. Finkelson (SEAL) - ------------------------------- ------------------------------- Roger H. Hahn Quentin E. Finkelson - ------------------------------- ------------------------------- /s/ Sandra L. Boettcher (SEAL) (SEAL) - ------------------------------- ------------------------------- Sandra L. Boettcher - ------------------------------- ------------------------------- AUTHENTICATION ACKNOWLEDGMENT Signature(s) of Roger H. Hahn and State of Minnesota ) Sandra L. Boettcher ) ss authenticated County of Hennepin ) this 4th day of June, 1997 Personally came before me this 18th day of June, 1997, /s/ Delton J. Thorson the above name - ------------------------------------- Delton J. Thorson Quentin E. Finkelson ------------------------------------- TITLE: MEMBER STATE BAR OF WISCONSIN ------------------------------------- (If not, ___________________________ authorized by Section 706.06, to me known to be the person ___ who Wis. Stats.) executed the foregoing instrument and acknowledged the same. THIS INSTRUMENT WAS DRAFTED BY /s/ BERT M. GROSS -------------------------------------- Delton J. Thorson, Attorney BERT M. GROSS P.O. Box 31, Augusta, WI 54722 -------------------------------------- - ------------------------------------- Notary Public, Minnesota (Signatures may be authenticated or HENNEPIN COUNTY acknowledged. Both are not necessary) My Commission Expires Jan. 31, 2000 * Names of persons signing in any capacity should be typed or printed below their signatures AND CONTRACT - Individual and Corporate - State Bar of Wisconsin, Form No. 11-1982. EX-23.1 4 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference, in the Registration Statements of Nortech Systems Incorporated on Forms S-8 registered on June 21, 1994 and June 30, 1993, of our reports dated February 13, 1997, in the Annual Report on Form 10-K for the year ended December 31, 1996. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota March 27, 1997 EX-27.1 5 EXHIBIT 27.1
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 714,169 0 5,092,817 84,128 9,242,467 15,862,712 11,151,419 3,851,810 24,694,930 6,192,487 0 0 250,000 23,124 7,840,699 24,694,930 36,433,918 36,433,918 29,638,866 29,638,866 4,747,472 0 1,010,909 1,036,671 359,000 677,671 0 0 0 677,671 .28 .28
EX-27.2 6 EXHIBIT 27.2
5 YEAR 3-MOS 3-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 APR-01-1996 JUL-01-1996 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 1,235,127 589,937 480,889 472,605 0 0 0 0 3,718,064 2,816,629 3,031,130 2,870,570 22,301 0 0 0 6,729,500 4,977,086 4,700,823 4,683,421 12,289,211 8,916,130 8,911,762 8,678,219 10,746,407 6,716,233 6,388,128 6,165,087 2,875,702 2,663,651 2,514,398 2,280,323 22,152,629 14,982,622 14,952,234 14,737,965 3,790,680 2,490,549 2,831,628 3,019,991 0 0 0 0 0 0 0 0 250,000 250,000 250,000 250,000 23,124 22,009 22,009 22,009 7,178,068 7,406,508 7,207,694 7,484,235 22,152,629 14,982,622 14,952,234 14,737,965 26,182,821 6,143,457 6,622,903 5,574,986 26,182,821 6,143,457 6,622,903 5,574,986 21,555,459 5,047,285 5,408,628 4,568,631 21,555,459 5,047,285 5,408,628 4,568,631 3,514,276 749,541 753,082 666,416 0 0 0 0 475,057 88,463 76,441 86,745 638,029 258,168 384,752 253,194 192,000 54,542 96,200 63,300 446,029 203,626 288,552 189,894 0 0 0 0 0 0 0 0 0 0 0 0 446,029 203,626 288,552 189,894 .19 .09 .12 .08 .19 .09 .12 .08
EX-27.3 7 EXHIBIT 27.3
5 3-MOS 3-MOS 3-MOS SEP-30-1997 JUN-30-1997 MAR-31-1997 JUL-01-1997 APR-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 279,511 466,801 1,182,754 0 0 0 4,644,933 5,068,214 4,530,668 0 0 0 8,652,422 7,366,957 7,000,819 14,242,628 13,450,842 13,449,082 11,487,879 11,227,193 11,074,098 3,692,774 3,411,277 3,160,048 23,783,652 23,032,471 23,148,638 4,477,135 4,244,065 4,193,429 0 0 0 0 0 0 250,000 250,000 250,000 23,124 23,124 23,124 7,603,423 7,477,814 7,404,414 23,783,652 23,032,471 23,148,638 8,693,449 9,039,176 8,564,846 8,693,449 9,039,176 8,564,846 7,128,714 7,383,860 7,044,357 7,128,714 7,383,860 7,044,357 1,112,038 1,135,721 1,136,063 0 0 0 236,459 260,264 183,671 216,238 259,331 200,755 75,683 92,079 68,000 140,555 167,252 132,755 0 0 0 0 0 0 0 0 0 140,555 167,252 132,755 .06 .07 .06 .06 .07 .06
-----END PRIVACY-ENHANCED MESSAGE-----