10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

Executive Offices: 1120 Wayzata Blvd E., Suite 201, Wayzata, MN 55391

Telephone number: (952) 345-2244

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 to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o	Accelerated Filer o
Non-accelerated Filer o	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

Number of shares of $.01 par value common stock outstanding at May 3, 2012 - 2,742,992

(The remainder of this page was intentionally left blank.)

TABLE OF CONTENTS

			PAGE
PART I - FINANCIAL INFORMATION
Item 1	-	Financial Statements
		Consolidated Balance Sheets	3 - 4
		Consolidated Statements of Income	5
		Consolidated Statements of Cash Flows	6
		Condensed Notes to Consolidated Financial Statements	7-13
Item 2	-	Management’s Discussion and Analysis of Financial Condition And Results of Operations	13-17
Item 4	-	Controls and Procedures	17
PART II - OTHER INFORMATION
Item 1	-	Legal Proceedings	18
Item 6	-	Exhibits	18
INDEX TO EXHIBITS			18
SIGNATURES			19

2

PART 1

ITEM 1.  FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	MARCH 31		DECEMBER 31
	2012		2011
	(Unaudited)
ASSETS
Current Assets
Cash	$	—	$	—
Accounts Receivable, Less Allowance for Uncollectible Accounts	15,964,152		16,720,462
Inventories	19,016,040		19,029,593
Prepaid Expenses	677,571		572,140
Income Taxes Receivable	—		170,292
Deferred Income Taxes	891,000		805,000
Total Current Assets	36,548,763		37,297,487
Property and Equipment, Net	9,095,919		9,083,874
Finite Life Intangible Assets, Net of Accumulated Amortization	48,947		61,547
Other Assets	339,235		339,235
Total Assets	$	46,032,864	$	46,782,143

See Accompanying Condensed Notes to Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	MARCH 31			DECEMBER 31
	2012			2011
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Line of Credit	$	7,280,235		$	9,345,044
Current Maturities of Long-Term Debt	477,586			1,310,210
Accounts Payable	11,710,603			11,333,013
Accrued Payroll and Commissions	2,929,695			2,170,852
Other Accrued Liabilities	1,129,455			852,936
Income Taxes Payable	8,718			—
Total Current Liabilities	23,536,292			25,012,055
Long-Term Liabilities
Long-Term Debt, Net of Current Maturities	1,519,154			812,917
Deferred Income Taxes	223,000			271,000
Other Long-Term Liabilities	125,820			180,378
Total Long-Term Liabilities	1,867,974			1,264,295
Total Liabilities	25,404,266			26,276,350
Shareholders’ Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250,000			250,000
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,742,992 Shares Issued and Outstanding at both March 31, 2012 and December 31, 2011	27,430			27,430
Additional Paid-In Capital	15,725,392			15,725,392
Accumulated Other Comprehensive Loss	(62,936		)	(62,936		)
Retained Earnings	4,688,712			4,565,907
Total Shareholders’ Equity	20,628,598			20,505,793
Total Liabilities and Shareholders’ Equity	$	46,032,864		$	46,782,143

See Accompanying Condensed Notes to Consolidated Financial Statements

4

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	THREE MONTHS ENDED
	MARCH 31
	2012			2011
Net Sales	$	28,360,914		$	28,998,197
Cost of Goods Sold	25,352,679			25,802,032
Gross Profit	3,008,235			3,196,165
Operating Expenses:
Selling Expenses	1,087,816			929,384
General and Administrative Expenses	1,591,989			1,980,119
Total Operating Expenses	2,679,805			2,909,503
Income From Operations	328,430			286,662
Other Income (Expense)
Interest Expense	(136,779		)	(119,992		)
Bargain Purchase Gain	—			791,615
Miscellaneous Expense, net	(9,846		)	(19,097		)
Total Other Income (Expense)	(146,625		)	652,526
Income Before Income Taxes	181,805			939,188
Income Tax Expense	59,000			313,000
Net Income	$	122,805		$	626,188
Earnings Per Common Share:
Basic and Diluted	$	0.04		$	0.23
Weighted Average Number of Common Shares Outstanding Used for Basic and Diluted Earnings Per Common Share	2,742,992			2,742,992

See Accompanying Condensed Notes to Consolidated Financial Statements

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	THREE MONTHS ENDED
	MARCH 31
	2012			2011
Cash Flows From Operating Activities
Net Income	$	122,805		$	626,188
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation	448,653			488,337
Amortization	12,600			35,151
Stock-Based Compensation	—			7,932
Interest on Swap Valuation	—			(7,842		)
Bargain Purchase Gain	—			(791,615		)
Deferred Income Taxes	(134,000		)	242,000
Loss on Disposal of Property and Equipment	1,878			—
Changes in Current Operating Items, Net of Effects of Business Acquisitions
Accounts Receivable	756,310			(180,468		)
Inventories	13,553			(4,365,914		)
Prepaid Expenses and Other Assets	(105,431		)	(153,017		)
Income Taxes Receivable	179,010			63,935
Accounts Payable	377,590			198,844
Accrued Payroll and Commissions	758,843			54,039
Other Accrued Liabilities	221,960			(128,700		)
Net Cash Provided by (Used in) Operating Activities	2,653,771			(3,911,130		)
Cash Flows from Investing Activities:
Proceeds from Sale of Property and Equipment	—			600
Business Acquisitions	—			(1,042,389		)
Purchase of Property and Equipment	(462,576		)	(219,524		)
Net Cash Used in Investing Activities	(462,576		)	(1,261,313		)
Cash Flows from Financing Activities:
Net Borrowings (Repayments) on Line of Credit	(2,064,809		)	4,109,796
Proceeds from Long-Term Debt	—			1,380,869
Principal Payments on Long-Term Debt	(126,386		)	(292,854		)
Net Cash Provided by (Used in) Financing Activities	(2,191,195		)	5,197,811
Net Increase in Cash	—			25,368
Cash - Beginning	—			230,582
Cash - Ending	$	—		$	255,950
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	102,349		120,997
Cash Paid During the Period for Income Taxes	12,103			—
Supplemental Noncash Investing and Financing Activities
Due to Seller for Business Acquisition	$	—		500,000

See Accompanying Condensed Notes to Consolidated Financial Statements

6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

We recognize revenue upon shipment of manufactured products to customers, when title has passed, all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is recognized upon completion of the engineering process, providing standalone fair value to our customers. Our engineering services are short-term in nature. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized upon completion of the repairs and shipment of product back to the customer. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

7

Stock Options

Following is the status of all stock options as of March 31, 2012, including changes during the three-month period then ended:

	Shares		Weighted-Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2012	623,600		$	7.33
Cancelled	(319,600	)	$	7.43
Outstanding - March 31, 2012	304,000		$	7.21	3.21	$	—
Exercisable - March 31, 2012	304,000		$	7.21	3.21	$	—

There were no options exercised during the three months ended March 31, 2012 and 2011.

Total compensation expense related to stock options for the three months ended March 31, 2012 and 2011 was $0 and $7,932, respectively.  As of March 31, 2012, there was no unrecognized compensation expense as all options were fully vested.

In January 2012, the Board of Directors terminated the 2007 FOCUS Incentive plan and as a result all 319,600 outstanding stock options under this plan were cancelled.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”).  The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units, of which 100,000 Units were granted during the year ended December 31, 2010 with a vesting date of December 31, 2012.  On March 7, 2012, we granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016.

The 2010 Plan provides that Units granted shall fully vest three years from the grant date unless terminated earlier.  Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date.  Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $2,810 and $26,541 for the three months ended March 31, 2012 and 2011, respectively.  At March 31, 2012 and 2011, approximately $65,000 and $62,000 have been accrued under this plan.  As of March 31, 2012, approximately $60,000 of this balance is

8

included in Other Accrued Liabilities as it is an estimate of the amount to be paid within 12 months.  The remaining $5,000 balance at March 31, 2012 and all of the balance at March 31, 2011 are included in Other Long-Term Liabilities.

Earnings per Common Share

For the three months ended March 31, 2012 and 2011, the effect of all stock options is antidilutive.  Therefore, no outstanding options were included in the computation of per-share amounts.

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain management, cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC reporting and corporate accounting.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

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).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	March 31			December 31
	2012			2011
Raw Materials	$	14,305,411		$	13,056,955
Work in Process	2,924,446			3,202,002
Finish Goods	3,046,453			3,880,764
Reserve	(1,260,270		)	(1,110,128		)
Total	$	19,016,040		$	19,029,593

Finite Life Intangible Assets

Finite life intangible assets at March 31, 2012 and December 31, 2011 are as follows:

9

	March 31, 2012
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	9	$	79,373	$	30,426	$	48,947
Customer Base	0	676,557		676,557		—
Totals		$	755,930	$	706,983	$	48,947

	December 31, 2011
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	10	$	79,373	$	29,106	$	50,267
Customer Base	1	676,557		665,277		11,280
Totals		$	755,930	$	694,383	$	61,547

Amortization expense for the three months ended March 31, 2012 and 2011 was $12,600 and $35,151, respectively.  Estimated future amortization expense related to these assets is as follows:

Remainder of 2012	4,000
2013	5,000
2014	5,000
2015	5,000
2016	5,000
Thereafter	25,000
Total	$	49,000

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.  With regard to cash, we maintain our excess cash balances in checking accounts at one high-credit quality financial institution.  These accounts may at times exceed federally insured limits.  We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

One customer accounted for 10% or more of our net sales for the three months ended March 31, 2012 and 2011.  G.E.’s Medical Division accounted for 17% and 15% of net sales for the three months ended March 31, 2012 and 2011, respectively.  GE’s Transportation Division accounted for 5% and 4% of net sales for the three months ended March 31, 2012 and 2011, respectively.  GE’s Medical and Transportation Divisions combined accounted for 22% and 19% of net sales

10

for the three month periods ended March 31, 2012 and 2011, respectively.  Accounts receivable from G.E.’s Medical and Transportation Divisions represented 15% and 17% of total accounts receivable at March 31, 2012 and December 31, 2011, respectively.

Export sales represented 7% and 6% of consolidated net sales for the three months ended March 31, 2012 and 2011, respectively.

NOTE 3. FINANCING ARRANGEMENTS

On May 2, 2012 we entered into the fourth amendment to the third amended and restated credit agreement with Wells Fargo Bank (WFB).  The credit agreement with WFB provides for a line of credit arrangement of $13.5 million, which expires if not renewed, on May 31, 2015.  The credit arrangement also has a $1.8 million real estate term note with a maturity date of March 31, 2027 which replaces the $0.9 million real estate term note that was to expire on May 31, 2012, and a new term loan of up to $2.0 million for capital expenditures to be made prior to December 31, 2013 with a maturity date of May 31, 2015.  The accompanying financial statements reflect the refinancing as if it occurred on March 31, 2012.

Both the line of credit and real estate term note are subject to variations in LIBOR rates.  The weighted-average interest rate on our line of credit was 3.9% for the three months ended March 31, 2012, while the weighted-average rate on our real estate term loan was 4.4% for the same period.  The line of credit, real estate term note, and equipment term loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.  On March 31, 2012, we had an outstanding balance of $7.3 million under the line of credit, with unused availability of $5.9 million supported by our borrowing base and we were in compliance with all covenants.

NOTE 4.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.  As the year progresses, we refine our estimate based on the facts and circumstances by each tax jurisdiction.  Our effective tax rate for the three months ended March 31, 2012 was 32%, compared with 33% for the three months ended March 31, 2011, respectively.  The effective tax rate for the year ended December 31, 2012 is expected to be 35% compared to 34% for the year ended December 31, 2011.

The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended March 31, 2012 and 2011 are as follows:

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	Three Months Ended
	March 31
	2012			2011
Statutory federal tax provision	$	62,000		$	319,000
State income taxes	4,000			27,000
Income tax credits	(3,000		)	(16,000		)
Reserve for uncertain tax positions	10,000			(7,000		)
Other	(14,000		)	(10,000		)
Income tax expense	$	59,000		$	313,000

At March 31, 2012 we had $121,000 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.  The $3,000 increase from December 31, 2011 was related to 2012 R&E credits.

NOTE 5. ACQUISITIONS

On January 1, 2011, we completed the purchase of certain assets and certain liabilities relating to Winland Electronics, Inc.’s EMS operations (Winland) located in Mankato, MN.  Winland is a designer and manufacturer of custom electronic control products and systems.  This purchase provided needed manufacturing capacity, particularly for supporting medical and industrial customers with printed circuit board assemblies and higher-level builds.  The acquisition was accounted for as a business combination and results of operations since the date of acquisition are included in the consolidated financial statements.

We paid $1,042,389 in cash at closing, $212,233 on July 1, 2011 and $250,000 on October 1, 2011.  As provided for in the purchase agreement, our July 1, 2011 required payment of $250,000 was reduced by $37,767 for acquired accounts receivable which were deemed uncollectible in the second quarter and assigned back to Winland.  As part of the acquisition we also agreed to purchase from Winland a minimum of $2,200,000 of inventories to be consumed over a period of 24 months.  We have exceeded this minimum requirement as of March 31, 2012.

The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values at the time of the acquisition:

Accounts receivable	$	1,914,723
Property, plant and equipment	2,451,000
Accounts payable assumed	(1,772,334		)
Lease payoff	(259,385		)
Net assets acquired	2,334,004
Purchase price	1,542,389
Bargain purchase gain	$	791,615

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We recognized a $791,615 bargain purchase gain related to the excess fair value over the purchase price for the assets acquired in the first quarter of 2011.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:

We are a Wayzata, Minnesota based full-service Electronics Manufacturing Services (EMS) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries.  We provide value added services and technical support including design, testing, prototyping and supply chain management to customers mainly in the Aerospace and Defense, Medical, and Industrial Equipment markets. We maintain manufacturing facilities in Baxter, Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota; Augusta, Wisconsin; and Monterrey, Mexico.

Summary of Results:

For the quarter ended March 31, 2012, we reported net sales of $28.4 million compared to $29.0 million reported in the same quarter of 2011, a 2% decrease.  Our 90-day backlog remained relatively flat at $18.4 from where we started the year.  Both our sales and backlog position is showing mixed results due to the sluggish economy and its impact on many of our customers.

Our gross profit in the first quarter of 2012 was 10.6% compared to 11.0% in the first quarter of 2011 due to product and service mix and unabsorbed capacity.

Income from operations was approximately $328,000 for the three months ended March 31, 2012 and $287,000 for the same period in 2011.

Net income for the first quarter of 2012 totaled $0.1 million or $0.04 per diluted common share.  Net income for the same period in 2011 totaled $0.6 million or $0.23 per diluted common share.  The net after tax impact of the non-operating gain was to increase net income by $0.5 million or $0.19 per diluted common share.

Cash provided from operating activities was $2.7 million in the first quarter of 2012.  Cash used in operating activities for the three months ended March 31, 2011 was $3.9 million.  The cash used in 2011 was needed to fund the working capital needs of our acquisition.

(1.)Results of Operations:

The following table presents statements of income data as percentages of total net sales for the periods indicated:

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	Three Months Ended
	March 31
	2012		2011
Net Sales	100.0	%	100.0	%
Cost of Goods Sold	89.4		89.0
Gross Profit	10.6		11.0
Selling Expenses	3.8		3.2
General and Administrative Expenses	5.6		6.8
Income from Operations	1.2		1.0
Bargain Purchase Gain	0.0		2.7
Other Expense, Net	(0.5	)	(0.5	)
Income Before Income Taxes	0.7		3.2
Income Tax Expense	0.3		1.1
Net Income	0.4	%	2.2	%

Net Sales:

We reported net sales of $28.4 million and $29.0 million for the three months ended March 31, 2012 and 2011, respectively, a 2% decrease with results mixed by customer and industry.

Net sales by industry markets for the three month periods ended March 31, 2012 and 2011 are as follows:

	Three Months Ended
	March 31
	2012	2011	%
(in thousands)	$	$	Change
Aerospace and Defense	4,668	4,410	6
Medical	7,814	8,009	(2	)
Industrial	15,879	16,579	(4	)
Total Sales	28,361	28,998	(2	)

Backlog:

Our 90-day order backlog as of March 31, 2012 was approximately $18.4 million, compared to approximately $18.5 million at the beginning of the quarter and $20.0 million at March 31, 2011.  Backlog by industry market is shown below.

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	Backlog as of the Quarter Ended
	March 31		December 31		March 31
(in thousands)	2012		2011		2011
Aerospace and Defense	$	2,954	$	3,855	$	2,796
Medical	5,858		5,657		5,325
Industrial	9,632		9,016		11,895
Total Backlog	$	18,444	$	18,528	$	20,016

We are gaining traction with our Medical Device customers and several of our larger Industrial customers have increased their order position since the beginning of the year. The Aerospace and Defense orders are down from December 31, 2011 but consistent with March 31, 2011.  Two of our largest Defense customers account for the fluctuations.

Our backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next.

Gross Profit:

Gross profit percentage for the three months ended March 31, 2012 and 2011 was 10.6% and 11.0% of net sales, respectively.  Mix of product and services along with underutilized capacity accounts for the majority of the change in gross margin percentage and to a lesser extent people related costs.

Selling Expense:

Our selling expenses were $1.1 million or 3.8% of net sales and $0.9 million or 3.2% of net sales for the three months ended March 31, 2012 and 2011, respectively.  Our selling expense increase in the first quarter of 2012 comes from investing in more resources for our business development infrastructure and marketing initiatives.

General and Administrative Expense:

Our general and administrative expenses were $1.6 million or 5.6% of net sales and $2.0 million or 6.8% of net sales for the three months ended March 31, 2012 and 2011, respectively.  People related expenses for open positions and redeployment into manufacturing and sales functions account for the majority of the decrease.

Other Income (Expense):

Other expense for the three months ended March 31, 2012 was $0.1 million compared to other income of $0.7 million for the three months ended March 31, 2011.  Other income in the first quarter of 2011 relates primarily to a bargain purchase gain of $0.8 million from the Mankato acquisition in the first quarter of 2011.

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Income Taxes:

Our effective tax rate for the three months ended December 31, 2012 and 2011 was 32% and 33%, respectively.  The effective tax rate for the year ended December 31, 2012 is expected to be 35% compared to 34% for the year ended December 31, 2011.

Liquidity and Capital Resources:

We have satisfied our liquidity needs over the past several years through revenue generated from operations and an operating line of credit through WFB.  We also have real estate and equipment term loans.  Both the line of credit and real estate term note are subject to fluctuations in the LIBOR rates.  The line of credit, real estate term note, and equipment loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.  The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender.  The line of credit is secured by substantially all of our assets.

On March 31, 2012, we had an outstanding balance of $7.3 million under the line of credit and unused availability of $5.9 million supported by our borrowing base.  We believe our financing arrangements (see Note 3) and cash flows provided by operations will be sufficient to satisfy our future working capital needs.  Our working capital was $13.0 million and $12.3 million as of March 31, 2012 and December 31, 2011.  The increase in working capital relates primarily to the reclassification of the real estate term note from current liabilities to long term liabilities as a result of our new financing arrangement.

Net cash provided by operating activities for the three months ended March 31, 2012 was $2.7 million.  Income, non-cash items, timing of our payroll accruals, along with strong collections of accounts receivable accounted for the majority of the operating cash provided in the quarter.  Net cash used in operating activities for the three months ended March 31, 2011 was $3.9 million.  The cash flow used in operations for the three months ended March 31, 2011 was primarily the result of working capital requirements needed to support the newly acquired Mankato operation, which included the purchase of approximately $4.0 million of inventory.

Net cash used in investing activities of $0.5 million for the three months ended March 31, 2012 is comprised of $0.5 million in property and equipment purchases to support the business.

Net cash used in financing activities for the three months ended March 31, 2012 was $2.2 million, mainly due to repayments on the line of credit of $2.1 million and payments on long-term debt of $0.1 million.

Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011.  There have been no significant changes in these critical accounting policies since December 31, 2011.  Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates.  Such judgments are subject to an inherent degree of uncertainty.  These judgments are based on our historical experience, known trends in our industry, terms of existing

16

contracts and other information from outside sources, as appropriate.  Actual results could differ from these estimates.

Forward-Looking Statements:

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes.  Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate.  Forward-looking statements involve a number of risks and uncertainties.  Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

·Volatility in the marketplace which may affect market supply and demand for our products;

·Increased competition;

·Changes in the reliability and efficiency of operating facilities or those of third parties;

·Risks related to availability of labor;

·Increase in certain raw material costs such as copper;

·Commodity and energy cost instability;

·General economic, financial and business conditions that could affect our financial condition and results of operations;

·Successful integration of recent acquisitions

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us.  Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.  All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements.  We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our report on Form 10-K for the fiscal year ended December 31, 2011.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Executive Vice President and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the

17

Exchange Act).  Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting:

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1.    LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims that arise in the ordinary course of business.

ITEM 6. EXHIBITS

Exhibits

10.10Fourth Amendment to Third Amended and Restated Credit and Security Agreement between the Company and Wells Fargo Bank, National Association

31.1Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Consolidated Financial Statements tagged as blocks of text.

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Signatures

Pursuant to the requirements 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 and Subsidiary

Date: May 11, 2012	by	/s/ Michael J. Degen
	Michael J. Degen
	President and Chief
	Executive Officer
Date: May 11, 2012	by	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Financial Officer

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EX-10.10

Exhibit 10.10

FOURTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

THIS FOURTH AMENDMENT (the “Amendment”), dated effective as of May 2, 2012, is entered into by and between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (“Company”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Wells Fargo”), acting through its Wells Fargo Business Credit operating division.

RECITALS

A.Company and Wells Fargo are parties to a Third Amended and Restated Credit and Security Agreement dated May 27, 2010 (as amended from time to time, the “Credit Agreement”). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified.

B.The Company has requested that certain amendments be made to the Credit Agreement, which Wells Fargo is willing to make pursuant to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows:

1.Definitions.  The following definitions are hereby amended or added to Exhibit A to the Credit Agreement as appropriate:

“Fourth Amendment” means that certain Fourth Amendment to Third Amended and Restated Credit and Security Agreement by and between the Company and Wells Fargo and dated as of May 2, 2012.

“Mankato Real Estate Reserve” means $842,000.

“Maturity Date” means (a) with respect to the Line of Credit, May 31, 2015, (b) with respect to the Term Loan, March 31, 2027, (c) with respect to the Equipment Term Loan, May 31, 2015, and (d) with respect to the Capex Term Loan, May 31, 2015.

2.Borrowing Base.  Section 1.2 of the Credit Agreement is hereby deleted in its entirety and replaced with the following:

1.2Borrowing Base; Mandatory Prepayment.

(a)Borrowing Base.  The borrowing base (the “Borrowing Base”) is an amount equal to:

(i)80% or such lesser percentage of Eligible Accounts as Wells Fargo in its sole discretion may deem appropriate; provided that this rate may be reduced at any time by Wells Fargo’s in its sole discretion by one (1) percent for

each percentage point by which Dilution on the date of determination is in excess of five percent (5.00%), plus

(ii)The lesser of $1,000,000 or 80% or such lesser percentage of Eligible Foreign Accounts as Wells Fargo in its sole discretion may deem appropriate; provided that this rate may be reduced at any time by Wells Fargo’s in its sole discretion by one (1) percent for each percentage point by which Dilution on the date of determination is in excess of five percent (5.00%), plus

(iii)the lesser of $3,000,000 or the sum of:

a.30% or such lesser percentage of Eligible Finished Goods Inventory as Wells Fargo in its sole discretion may deem appropriate, plus

b.the lesser of $2,000,000, or 20% or such lesser percentage of Eligible Raw Materials Inventory as Wells Fargo in its sole discretion may deem appropriate; less

(iv)the Availability Reserve; less

(v)the Borrowing Base Reserve, less

(vi)the Foreign Receivable Reserve, less

(vii)the L/C Amount, less

(viii)Indebtedness (other than the L/C Amount and Indebtedness evidenced by the Term Note and/or the Reimbursement Agreement) that Company owes Wells Fargo that has not been advanced on the Revolving Note, less

(ix)Indebtedness (other than the L/C Amount and Indebtedness evidenced by the Term Note and/or the Reimbursement Agreement) that is not otherwise described in Section 1, including Indebtedness that Wells Fargo in its sole discretion finds on the date of determination to be equal to Wells Fargo’s net credit exposure with respect to any Rate Hedge Agreement, derivative, foreign exchange, deposit, treasury management or similar transaction or arrangement extended to Company by Wells Fargo, less

(x)The Mankato Real Estate Reserve.

3.Term Loan.  Sections 1.7(a) and 1.7(b) of the Loan Agreement are hereby deleted in their entirety and replaced with the following:

(a)Existing Term Loan/Additional Term Loan Advance.  Wells Fargo previously extended the Term Loan to the Company as evidenced by the Existing Term Note, repayable in accordance with the terms set forth therein and in this Agreement.  As of the date of the Fourth Amendment, the outstanding principal balance under the Term

2

Note is $934,633.71.  Contemporaneously with the execution of the Fourth Amendment, Wells Fargo will make an additional Term Loan Advance to Borrower in an amount not to exceed $842,366.29.

(b)Term Note.  Company’s obligation to repay the Term Loan and each Term Loan Advance (if any) shall be evidenced by an Amended and Restated Real Estate Term Note dated as of May 2, 2012 made payable to the order of Wells Fargo in the original principal amount of $1,777,000 (as renewed, amended, substituted or replaced from time to time, the “Term Note”).

4.Equipment Term Loan.  Section 1.7A(d) is hereby deleted in its entirety and replaced with the following:

(d)Payments and Adjustments to Payments.  The unpaid principal amount of the Equipment Term Note shall be paid in equal monthly installments of $7,916.67, beginning on January 31, 2011, and on the first calendar day of each succeeding month until the earlier of the Maturity Date or the Termination Date, when the unpaid principal and interest evidenced by the Equipment Term Note shall be fully due and payable.  Installment payments may be adjusted by Wells Fargo from time to time to an amount that would fully amortize the Equipment Term Note in substantially equal payments of principal through December 31, 2015 (the “Assumed Maturity Date”).  Payments shall be collected by Wells Fargo through a debit to the Equipment Term Note and a simultaneous Line of Credit Advance in the same amount, or by such other method as the parties may agree in an Authenticated Record.  Proceeds from the liquidation of Collateral acquired with Equipment Term Loan proceeds will be applied to the Equipment Term Note.

5.Capex Term Loan.  Sections 1.7B(a) and 1.7B(d) of the Credit Agreement are hereby deleted in their entirety and replaced with the following:

(a)Capex Term Loan.  Wells Fargo shall extend the Capex Term Loan to Company through one or more Advances which must be requested no later than December 31, 2013, in an aggregate amount not to exceed Two Million Dollars ($2,000,000).  Each Capex Term Loan Advance must be in multiples of $1,000 and in the minimum amount of at least $100,000, provided, however, that Wells Fargo shall make no Capex Term Loan Advance if, after making it, the unpaid principal amount of the Capex Term Note would exceed (i) eighty percent (80%) of the all newly acquired Eligible Equipment or (ii) eighty-five percent of used Eligible Equipment reduced by the aggregate amount of principal payments scheduled in the Capex Term Note.

*****

(d)Payments and Adjustments to Payments.  The unpaid principal amount of each Capex Term Loan Advance made under the Capex Term Note shall be paid in monthly installments equal to 1/60th of the, then-outstanding, principal balance of the Capex Term Note, beginning on the last day of the month following the date of the Fourth Amendment and on the last calendar day of each succeeding month until the

3

earlier of the Maturity Date, or the Termination Date, when the unpaid principal and interest evidenced by the Capex Term Note shall be fully due and payable.  If Wells Fargo disburses multiple Capex Term Loan Advances, the amount of subsequent payments may be increased to fully amortize each Capex Term Loan Advance over a five-year period.  Payments shall be collected by Wells Fargo through a debit to the Capex Term Note and a simultaneous Line of Credit Advance in the same amount, or by such other method as the parties may agree in an Authenticated Record.  Proceeds from the liquidation of Collateral acquired with Capex Term Loan proceeds will be applied to the Capex Term Note.

6.Note Payments.  Section 1.10(b) of the Credit Agreement is hereby deleted in its entirety and replace with the following:

(b)Payment of Revolving Note and Term Notes Principal.  The principal amount of the Revolving Note and the Term Note(s) shall be paid from time to time as provided in this Agreement and, in any event, shall be fully due and payable on the Termination Date.

7.Call Option.  Section 1.11(d) is hereby added to the Credit Agreement as follows:

(d)Call Option.  Company acknowledges and agrees if at any time the Line of Credit or the Credit Agreement shall be voluntarily or involuntarily terminated in accordance with its terms and provisions, Wells Fargo shall have the right and option to terminate the Term Loan(s) and demand immediate payment of the outstanding principal balance of the Term Note(s), accrued interest thereon and all other amounts owing to Wells Fargo under the Loan Documents and any other documents, agreements or instruments related thereto.

8.Financial Covenants.  Section 5.2 of the Credit Agreement is hereby deleted in its entirety and replaced with the following:

(a)Minimum Earnings Before Taxes.  Company shall achieve, during each period described below, Earnings Before Taxes of not less than the amount set forth for each such period (numbers appearing between “< >“ are negative):

Period	Min. Earnings Before Taxes
Through March 31, 2012	$	100,000
Through June 30, 2012	$	250,000
Through September 30, 2012	$	500,000
Through December 31, 2012	$	750,000

(b)Minimum Debt Service Coverage Ratio.  Company shall maintain, during each period described below, a Debt Service Coverage Ratio, determined on a rolling twelve-month basis, of not less than the ratio set forth for each such period:

4

Period	Min. Debt Service Coverage Ratio
Through March 31, 2012	1.00 to 1.00
Through June 30, 2012	1.00 to 1.00
Through September 30, 2012	1.00 to 1.00
Through December 31, 2012	1.20 to 1.00

(c)Capital Expenditures.  Company shall not incur or contract to incur Capital Expenditures of more than (i) $6,000,000 in the aggregate during Company’s fiscal year ending December 31, 2012 if Borrower closes on the acquisition of its leased Mankato real estate or $3,000,000 in the aggregate during Company’s fiscal year ending December 31, 2012 if Company does not close on such acquisition, and (ii) zero for each subsequent year until Company and Wells Fargo agree on limits on Capital Expenditures for subsequent periods based on Company’s projections for such periods.

(d)Stop Loss.  Company shall not, during any single month, suffer a pre-tax Net Loss in excess of $100,000.00, commencing with the month of January, 2012.

(e)New Covenants.  On or before January 31, 2013, the Company and Wells Fargo shall agree on new covenant levels for Section 5.2, for periods after December 31, 2012.  The new covenant levels will be based on the Borrowers’ projections for such periods and shall be no less stringent than the present levels.  The failure of agreement between Borrowers and Wells Fargo to set reasonable covenants shall be deemed an Event of Default.

9.Compliance Certificate.  Exhibit E to the Credit Agreement is hereby replaced with Exhibit E attached hereto.

10.Amendment Fee.  In consideration of Wells Fargo entering into this Amendment, the Company agrees to pay to Wells Fargo a fully earned non-refundable amendment fee of $15,000 to be delivered on the date hereof (the “Amendment Fee”).

11.Waiver of Defaults.  The Company is in default of the following provision of the Credit Agreement (the “Existing Default”):

Section/Covenant	Required Performance	Actual Performance
5.2(e) New Covenants
January 31, 2012	Establish Covenants for fiscal year 2012 by or before January 31, 2012	Covenants were not established for fiscal year 2012 until after the January 31, 2012 deadline

The Existing Default constitutes an Event of Default under the Credit Agreement.  Subject to the terms and conditions set forth in this Amendment, Wells Fargo hereby waives the

5

Existing Default as of the date hereof.  This waiver shall be effective only in this specific instance and for the specific purpose for which it is provided, and this waiver shall not entitle the Company to any other or further waiver in any similar or other circumstances.

12.Conditions Precedent. This Amendment shall be effective when Wells Fargo shall have received an executed original hereof, together with the following:

(a)An Amended and Restated Real Estate Term Note and an Amended and Restated Capex Term Note.

(b)Payment of the Amendment Fee.

(c)A Fourth Amendment to Letter of Credit and Reimbursement Agreement.

(d)A Sixth Amendment to Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents (MN Properties).

(e)A Fourth Amendment to Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents (Blue Earth, MN).

(f)A Fourth Amendment to Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents (Wisconsin).

(g)Such other matters as Wells Fargo may require.

13.Representations and Warranties. The Company hereby represents and warrants to Wells Fargo as follows:

(a)The Company has all requisite power and authority to execute this Amendment and any other agreements or instruments required hereunder and to perform all of its obligations hereunder, and this Amendment and all such other agreements and instruments has been duly executed and delivered by the Company and constitute the legal, valid and binding obligation of the Company, enforceable in accordance with its terms.

(b)The execution, delivery and performance by the Company of this Amendment and any other agreements or instruments required hereunder have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Company, or the articles of incorporation or by-laws of the Company, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Company is a party or by which it or its properties may be bound or affected.

(c)All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of

6

such date, except to the extent that such representations and warranties relate solely to an earlier date.

14.References.  All references in the Credit Agreement to “this Agreement” shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby.

15.No Other Waiver. Except as set forth in Paragraph 11 above, The execution of this Amendment and the acceptance of all other agreements and instruments related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or a waiver of any breach, default or event of default under any Security Document or other document held by Wells Fargo, whether or not known to Wells Fargo and whether or not existing on the date of this Amendment.

16.Release. The Company hereby absolutely and unconditionally releases and forever discharges Wells Fargo, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Company has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown.

17.Costs and Expenses. The Company hereby reaffirms its agreement under the Credit Agreement to pay or reimburse Wells Fargo on demand for all costs and expenses incurred by Wells Fargo in connection with the Loan Documents, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Company specifically agrees to pay all fees and disbursements of counsel to Wells Fargo for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Company hereby agrees that Wells Fargo may, at any time or from time to time in its sole discretion and without further authorization by the Company, make a loan to the Company under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under Paragraph 9 of this Amendment.

18.Miscellaneous. This Amendment may be executed in any number of counterparts including by facsimile or electronic (pdf) transmission, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

WELLS FARGO BANK, NATIONAL ASSOCIATION		NORTECH SYSTEMS INCORPORATED
By:		By:
	Thomas G. Hedberg	Name: Richard G. Wasielewski
	Its Vice President	Its: Chief Financial Officer

[Signature Page to Fourth Amendment to Third Amended
and Restated Credit and Security Agreement dated as of May 2, 2012]

Exhibit E to Credit and Security Agreement

COMPLIANCE CERTIFICATE

To:Wells Fargo Bank, National Association
Date:                              , 201

Subject:Financial Statements

In accordance with our Third Amended and Restated Credit and Security Agreement dated May 27, 2010 (as amended from time to time, the “Credit Agreement”), attached are the financial statements of Nortech Systems Incorporated (the “Company”) dated [                              , 201    ] (the “Reporting Date”) and the year-to-date period then ended (the “Current Financials”).  All terms used in this certificate have the meanings given in the Credit Agreement.

A.Preparation and Accuracy of Financial Statements.  I certify that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present Company’s financial condition as of the Reporting Date.

B.Name of Company; Merger and Consolidation.  I certify that:

(Check one)

oCompany has not, since the date of the Credit Agreement, changed its name or jurisdiction of organization, nor has it consolidated or merged with another Person.

oCompany has, since the date of the Credit Agreement, either changed its name or jurisdiction of organization, or both, or has consolidated or merged with another Person, which change, consolidation or merger: o was consented to in advance by Wells Fargo in an Authenticated Record, and/or o is more fully described in the statement of facts attached to this Certificate.

C.Events of Default.  I certify that:

(Check one)

oI have no knowledge of the occurrence of an Event of Default under the Credit Agreement, except as previously reported to Wells Fargo in a Record.

oI have knowledge of an Event of Default under the Credit Agreement not previously reported to Wells Fargo in a Record, as more fully described in the statement of facts attached to this Certificate, and further, I acknowledge that Wells Fargo may under the terms of the Credit Agreement impose the Default Rate at any time during the resulting Default Period.

D.Litigation Matters.  I certify that:

(Check one)

oI have no knowledge of any material adverse change to the litigation exposure of Company or any of its Affiliates or of any Guarantor.

oI have knowledge of material adverse changes to the litigation exposure of Company or any of its Affiliates or of any Guarantor not previously disclosed in Exhibit D, as more fully described in the statement of facts attached to this Certificate.

E.Financial Covenants.  I further certify that:

(Check and complete each of the following)

1.Minimum Earnings Before Taxes.  Pursuant to Section 5.2(a) of the Credit Agreement, Company’s Earnings Before Taxes for the fiscal year-to-date period ending on the Reporting Date, was $                          , which o satisfies o does not satisfy the requirement that such amount be not less than the applicable amount set forth in the table below (numbers appearing between “< >“ are negative) on the Reporting Date:

Period	Min. Earnings Before Taxes
Through March 31, 2012	$	100,000
Through June 30, 2012	$	250,000
Through September 30, 2012	$	500,000
Through December 31, 2012	$	750,000

2.Minimum Debt Service Coverage Ratio.  Pursuant to Section 5.2(b) of the Credit Agreement, as of the Reporting Date, Company’s Debt Service Coverage Ratio measured on a rolling twelve-month basis was              to 1.00, which o satisfies o does not satisfy the requirement that such ratio be not less than the applicable ratio set forth in the table below for such period as of the Reporting Date:

Period	Min. Debt Service Coverage Ratio
Through March 31, 2012	1.00 to 1.00
Through June 30, 2012	1.00 to 1.00
Through September 30, 2012	1.00 to 1.00
Through December 31, 2012	1.20 to 1.00

3.Capital Expenditures.  Pursuant to Section 5.2(c) of the Credit Agreement, for the year-to-date period ending on the Reporting Date, Company has expended or contracted to expend during the fiscal year ended December 31, 2012 for Capital Expenditures, $                                 in the aggregate, which o satisfies o does not satisfy the requirement that such expenditures not exceed $3,000,000 in the aggregate.

4.Stop Loss.  Pursuant to Section 5.2(d) of the Credit Agreement, for the month ending on the Reporting Date, Company has suffered a Net Loss of $                            , which

o satisfies o does not satisfy the requirement that Company suffer a Net Loss in any single month not in excess of $100,000.

5.Salaries.  Company o has o has not paid excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation to any Director, Officer or consultant, or any member of their families, as of the Reporting Date, and o has o has not paid any increase in such amounts (on a year over year basis, as of the Reporting Date) from any source other than profits earned in the year of payment, and as a consequence Company o is o is not in compliance with Section 5.8 of the Credit Agreement.

Attached are statements of all relevant facts and computations in reasonable detail sufficient to evidence Company’s compliance with the financial covenants referred to above, which computations were made in accordance with GAAP.

By:
Its:	Chief Financial Officer

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Michael J. Degen, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about

the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2012	By:	/s/ Michael J. Degen
		Michael J. Degen
		Chief Executive Officer
		Nortech Systems Incorporated

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Richard G. Wasielewski, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2012	By:	/s/ Richard G. Wasielewski
		Richard G. Wasielewski
		Chief Financial Officer
		Nortech Systems Incorporated

EX-32

Exhibit 32

Written Statement of the President and Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Michael J. Degen, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2012 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   May 11, 2012
By:	/s/ Michael J. Degen
	Michael J. Degen
	Chief Executive Officer
	Nortech Systems Incorporated

Exhibit 32

Written Statement of the Executive Vice President and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Richard G. Wasielewski, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2012 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 11, 2012
By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Financial Officer
	Nortech Systems Incorporated

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INCOME TAXES

3 Months Ended

Mar. 31, 2012

INCOME TAXES

INCOME TAXES

NOTE 4.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.  As the year progresses, we refine our estimate based on the facts and circumstances by each tax jurisdiction.  Our effective tax rate for the three months ended March 31, 2012 was 32%, compared with 33% for the three months ended March 31, 2011, respectively.  The effective tax rate for the year ended December 31, 2012 is expected to be 35% compared to 34% for the year ended December 31, 2011.

The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended March 31, 2012 and 2011 are as follows:

	Three Months Ended
	March 31
	2012			2011
Statutory federal tax provision	$	62,000		$	319,000
State income taxes	4,000			27,000
Income tax credits	(3,000		)	(16,000		)
Reserve for uncertain tax positions	10,000			(7,000		)
Other	(14,000		)	(10,000		)
Income tax expense	$	59,000		$	313,000

At March 31, 2012 we had $121,000 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.  The $3,000 increase from December 31, 2011 was related to 2012 R&E credits.

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FINANCING ARRANGEMENTS

3 Months Ended

Mar. 31, 2012

FINANCING ARRANGEMENTS

FINANCING ARRANGEMENTS

NOTE 3. FINANCING ARRANGEMENTS

On May 2, 2012 we entered into the fourth amendment to the third amended and restated credit agreement with Wells Fargo Bank (WFB).  The credit agreement with WFB provides for a line of credit arrangement of $13.5 million, which expires if not renewed, on May 31, 2015.  The credit arrangement also has a $1.8 million real estate term note with a maturity date of March 31, 2027 which replaces the $0.9 million real estate term note that was to expire on May 31, 2012, and a new term loan of up to $2.0 million for capital expenditures to be made prior to December 31, 2013 with a maturity date of May 31, 2015.  The accompanying financial statements reflect the refinancing as if it occurred on March 31, 2012.

Both the line of credit and real estate term note are subject to variations in LIBOR rates.  The weighted-average interest rate on our line of credit was 3.9% for the three months ended March 31, 2012, while the weighted-average rate on our real estate term loan was 4.4% for the same period.  The line of credit, real estate term note, and equipment term loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.  On March 31, 2012, we had an outstanding balance of $7.3 million under the line of credit, with unused availability of $5.9 million supported by our borrowing base and we were in compliance with all covenants.

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CONSOLIDATED BALANCE SHEETS (USD $)	Mar. 31, 2012	Dec. 31, 2011
Current Assets
Cash	$ 0
Accounts Receivable, Less Allowance for Uncollectible Accounts	15,964,152	16,720,462
Inventories	19,016,040	19,029,593
Prepaid Expenses	677,571	572,140
Income Taxes Receivable		170,292
Deferred Income Taxes	891,000	805,000
Total Current Assets	36,548,763	37,297,487
Property and Equipment, Net	9,095,919	9,083,874
Finite Life Intangible Assets, Net of Accumulated Amortization	48,947	61,547
Other Assets	339,235	339,235
Total Assets	46,032,864	46,782,143
Current Liabilities
Line of Credit	7,280,235	9,345,044
Current Maturities of Long-Term Debt	477,586	1,310,210
Accounts Payable	11,710,603	11,333,013
Accrued Payroll and Commissions	2,929,695	2,170,852
Other Accrued Liabilities	1,129,455	852,936
Income Taxes Payable	8,718
Total Current Liabilities	23,536,292	25,012,055
Long-Term Liabilities
Long-Term Debt, Net of Current Maturities	1,519,154	812,917
Deferred Income Taxes	223,000	271,000
Other Long-Term Liabilities	125,820	180,378
Total Long-Term Liabilities	1,867,974	1,264,295
Total Liabilities	25,404,266	26,276,350
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250,000	250,000
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,742,992 Shares Issued and Outstanding at both March 31, 2012 and December 31, 2011	27,430	27,430
Additional Paid-In Capital	15,725,392	15,725,392
Accumulated Other Comprehensive Loss	(62,936)	(62,936)
Retained Earnings	4,688,712	4,565,907
Total Shareholders' Equity	20,628,598	20,505,793
Total Liabilities and Shareholders' Equity	$ 46,032,864	$ 46,782,143

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

We recognize revenue upon shipment of manufactured products to customers, when title has passed, all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is recognized upon completion of the engineering process, providing standalone fair value to our customers. Our engineering services are short-term in nature. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized upon completion of the repairs and shipment of product back to the customer. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stock Options

Following is the status of all stock options as of March 31, 2012, including changes during the three-month period then ended:

	Shares		Weighted-Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2012	623,600		$	7.33
Cancelled	(319,600	)	$	7.43
Outstanding - March 31, 2012	304,000		$	7.21	3.21	$	—
Exercisable - March 31, 2012	304,000		$	7.21	3.21	$	—

There were no options exercised during the three months ended March 31, 2012 and 2011.

Total compensation expense related to stock options for the three months ended March 31, 2012 and 2011 was $0 and $7,932, respectively.  As of March 31, 2012, there was no unrecognized compensation expense as all options were fully vested.

In January 2012, the Board of Directors terminated the 2007 FOCUS Incentive plan and as a result all 319,600 outstanding stock options under this plan were cancelled.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”).  The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units, of which 100,000 Units were granted during the year ended December 31, 2010 with a vesting date of December 31, 2012.  On March 7, 2012, we granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016.

The 2010 Plan provides that Units granted shall fully vest three years from the grant date unless terminated earlier.  Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date.  Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $2,810 and $26,541 for the three months ended March 31, 2012 and 2011, respectively.  At March 31, 2012 and 2011, approximately $65,000 and $62,000 have been accrued under this plan.  As of March 31, 2012, approximately $60,000 of this balance is included in Other Accrued Liabilities as it is an estimate of the amount to be paid within 12 months.  The remaining $5,000 balance at March 31, 2012 and all of the balance at March 31, 2011 are included in Other Long-Term Liabilities.

Earnings per Common Share

For the three months ended March 31, 2012 and 2011, the effect of all stock options is antidilutive.  Therefore, no outstanding options were included in the computation of per-share amounts.

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain management, cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC reporting and corporate accounting.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

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).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	March 31			December 31
	2012			2011
Raw Materials	$	14,305,411		$	13,056,955
Work in Process	2,924,446			3,202,002
Finish Goods	3,046,453			3,880,764
Reserve	(1,260,270		)	(1,110,128		)
Total	$	19,016,040		$	19,029,593

Finite Life Intangible Assets

Finite life intangible assets at March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	9	$	79,373	$	30,426	$	48,947
Customer Base	0	676,557		676,557		—
Totals		$	755,930	$	706,983	$	48,947

	December 31, 2011
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	10	$	79,373	$	29,106	$	50,267
Customer Base	1	676,557		665,277		11,280
Totals		$	755,930	$	694,383	$	61,547

Amortization expense for the three months ended March 31, 2012 and 2011 was $12,600 and $35,151, respectively.  Estimated future amortization expense related to these assets is as follows:

Remainder of 2012	4,000
2013	5,000
2014	5,000
2015	5,000
2016	5,000
Thereafter	25,000
Total	$	49,000

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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

3 Months Ended

Mar. 31, 2012

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.  With regard to cash, we maintain our excess cash balances in checking accounts at one high-credit quality financial institution.  These accounts may at times exceed federally insured limits.  We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

One customer accounted for 10% or more of our net sales for the three months ended March 31, 2012 and 2011.  G.E.’s Medical Division accounted for 17% and 15% of net sales for the three months ended March 31, 2012 and 2011, respectively.  GE’s Transportation Division accounted for 5% and 4% of net sales for the three months ended March 31, 2012 and 2011, respectively.  GE’s Medical and Transportation Divisions combined accounted for 22% and 19% of net sales for the three month periods ended March 31, 2012 and 2011, respectively.  Accounts receivable from G.E.’s Medical and Transportation Divisions represented 15% and 17% of total accounts receivable at March 31, 2012 and December 31, 2011, respectively.

Export sales represented 7% and 6% of consolidated net sales for the three months ended March 31, 2012 and 2011, respectively.

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
CONSOLIDATED BALANCE SHEETS
Preferred Stock, par value (in dollars per share)	$ 1	$ 1
Preferred Stock, Shares Authorized	1,000,000	1,000,000
Preferred Stock, Shares Issued	250,000	250,000
Preferred Stock, Shares Outstanding	250,000	250,000
Common Stock - par value (in dollars per share)	$ 0.01	$ 0.01
Common Stock - Shares Authorized	9,000,000	9,000,000
Common Stock - Shares Issued	2,742,992	2,742,992
Common Stock - Shares Outstanding	2,742,992	2,742,992

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 03, 2012
Document and Entity Information
Entity Registrant Name	NORTECH SYSTEMS INC
Entity Central Index Key	0000722313
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,742,992
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1

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CONSOLIDATED STATEMENTS OF INCOME (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Net Sales	$ 28,360,914	$ 28,998,197
Cost of Goods Sold	25,352,679	25,802,032
Gross Profit	3,008,235	3,196,165
Operating Expenses:
Selling Expenses	1,087,816	929,384
General and Administrative Expenses	1,591,989	1,980,119
Total Operating Expenses	2,679,805	2,909,503
Income From Operations	328,430	286,662
Other Income (Expense)
Interest Expense	(136,779)	(119,992)
Bargain Purchase Gain		791,615
Miscellaneous Expense, net	(9,846)	(19,097)
Total Other Income (Expense)	(146,625)	652,526
Income Before Income Taxes	181,805	939,188
Income Tax Expense	59,000	313,000
Net Income	$ 122,805	$ 626,188
Earnings Per Common Share:
Basic and Diluted (in dollars per share)	$ 0.04	$ 0.23
Weighted Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share (in shares)	2,742,992	2,742,992
Weighted Average Number of Common Shares Outstanding Used for Diluted Earnings Per Common Share (in shares)	2,742,992	2,742,992

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash Flows From Operating Activities
Net Income	$ 122,805	$ 626,188
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation	448,653	488,337
Amortization	12,600	35,151
Stock-Based Compensation		7,932
Interest on Swap Valuation		(7,842)
Bargain Purchase Gain		(791,615)
Deferred Income Taxes	(134,000)	242,000
Loss on Disposal of Property and Equipment	1,878
Changes in Current Operating Items, Net of Effects of Business Acquisitions
Accounts Receivable	756,310	(180,468)
Inventories	13,553	(4,365,914)
Prepaid Expenses and Other Assets	(105,431)	(153,017)
Income Taxes Receivable	179,010	63,935
Accounts Payable	377,590	198,844
Accrued Payroll and Commissions	758,843	54,039
Other Accrued Liabilities	221,960	(128,700)
Net Cash Provided by (Used in) Operating Activities	2,653,771	(3,911,130)
Cash Flows from Investing Activities:
Proceeds from Sale of Property and Equipment		600
Business Acquisitions		(1,042,389)
Purchase of Property and Equipment	(462,576)	(219,524)
Net Cash Used in Investing Activities	(462,576)	(1,261,313)
Cash Flows from Financing Activities:
Net Borrowings (Repayments) on Line of Credit	(2,064,809)	4,109,796
Proceeds from Long-Term Debt		1,380,869
Principal Payments on Long-Term Debt	(126,386)	(292,854)
Net Cash Provided by (Used in) Financing Activities	(2,191,195)	5,197,811
Net Increase in Cash		25,368
Cash - Beginning		230,582
Cash - Ending	0	255,950
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	102,349	120,997
Cash Paid During the Period for Income Taxes	12,103
Supplemental Noncash Investing and Financing Activities
Due to Seller for Business Acquisition		$ 500,000

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ACQUISITIONS

3 Months Ended

Mar. 31, 2012

ACQUISITIONS

ACQUISITIONS

NOTE 5. ACQUISITIONS

On January 1, 2011, we completed the purchase of certain assets and certain liabilities relating to Winland Electronics, Inc.’s EMS operations (Winland) located in Mankato, MN.  Winland is a designer and manufacturer of custom electronic control products and systems.  This purchase provided needed manufacturing capacity, particularly for supporting medical and industrial customers with printed circuit board assemblies and higher-level builds.  The acquisition was accounted for as a business combination and results of operations since the date of acquisition are included in the consolidated financial statements.

We paid $1,042,389 in cash at closing, $212,233 on July 1, 2011 and $250,000 on October 1, 2011.  As provided for in the purchase agreement, our July 1, 2011 required payment of $250,000 was reduced by $37,767 for acquired accounts receivable which were deemed uncollectible in the second quarter and assigned back to Winland.  As part of the acquisition we also agreed to purchase from Winland a minimum of $2,200,000 of inventories to be consumed over a period of 24 months.  We have exceeded this minimum requirement as of March 31, 2012.

The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values at the time of the acquisition:

Accounts receivable	$	1,914,723
Property, plant and equipment	2,451,000
Accounts payable assumed	(1,772,334		)
Lease payoff	(259,385		)
Net assets acquired	2,334,004
Purchase price	1,542,389
Bargain purchase gain	$	791,615

We recognized a $791,615 bargain purchase gain related to the excess fair value over the purchase price for the assets acquired in the first quarter of 2011.