-----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, WHqEIY3SRNK5q2Kx7FVhCfQX9NAwM+B+PPplKsFzXiycsTjstSJLUX+iVSPK3iHU Q8TVfkFuG9pdsJjUyHMePg== 0001047469-99-012819.txt : 19990402 0001047469-99-012819.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012819 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99581861 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, 1998 ( ) 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 ---------------- ---------------- 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 $3.50 per share average of the closing bid and asked prices, respectively, on February 26, 1999 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 $4,313,712. As of February 26, 1999 there were 2,351,377 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 by on Form 10-K Reference Part III Item 10 Reference is made to the Registrant's 11 proxy statements to be used in 12 connection with the 1998 Annual Shareholders' meeting and filed with the Securities and Exchange Commission no later than April 30, 1999. (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, 1998 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 7a. Quantitative and Qualitative Disclosure about Market Risk 14 Item 8. Consolidated Financial Statements and Supplemental Data 15-34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 PART III Item 10. Directors and Executive Officers of the Registrant 35 Item 11. Executive Compensation 35 Item 12. Security Ownership of Certain Beneficial Owners and Management 35 Item 13. Certain Relationships and Related Transactions 35 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 36-39 Signatures 40
4 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS Nortech Systems Incorporated (the "Company") is a Minnesota corporation organized in December 1990. Prior to December 1990, the Company operated as DSC Nortech, Inc., which filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code during 1990. The business and assets of DSC Nortech, Inc., were transferred to Nortech Systems Incorporated during 1990. The Company's headquarters are in Wayzata, Minnesota, a suburb of Minneapolis, Minnesota. The Company's 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 G.E. Medical Systems, Raytheon, SPX Corporation, Imation, Thermo King, Polaris, Fisher-Rosemount, 3M, Allen-Bradley and United Defense. 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. The Company has adopted SFAS No.131, disclosure about segments of an enterprise and related information, the corresponding segmented financial data is shown in Note 8 of the financial statements. 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 Company operates mainly in the wire harness and cable assemblies market, and 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, the Merrifield Division became ISO 9002 Certified in October, 1998, and continue to actively maintain their certification. The Company believes this certification benefits its current customer base as well as attract new business opportunities. 6 The Company will continue it's commitment to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, the Company will provide complete manufacturing services to customers, from the procurement of materials to the manufacturing, testing and shipping of products. The Company will continue its efforts to diversify its customer base and expand into other segments of the electronic manufacturing subcontract business. 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 $7,687,000 on December 31, 1997 and approximately $9,210,000 on December 31, 1998. 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. No customer accounted for more than 10% of revenue, for the year ended December 31, 1998. RESEARCH AND DEVELOPMENT The Company expended $337,093 in 1998, and $258,712 in 1997 and $273,697 in 1996 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 527 full-time and 73 part-time employees as of December 31, 1998, consisting of 555 employees in manufacturing, manufacturing product support and medical support services and 45 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 June 30, 2002. The Company owns its Bemidji, Minnesota facility consisting of eight acres of land and 60,000 square feet of office and manufacturing space and owns another 8,000 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, 1997 $4.750 $6.000 June 30, 1997 $4.500 $5.750 September 30, 1997 $4.500 $5.750 December 31, 1997 $4.500 $5.875 March 31, 1998 $4.266 $5.125 June 30, 1998 $4.750 $6.625 September 30, 1998 $3.625 $5.500 December 31, 1998 $3.438 $4.438
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, 1999, there were approximately 1,301 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 SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED --------------------------------------------------------------------------- Dec 31, 1998 Dec 31, 1997 Dec 31, 1996 Dec 31, 1995 Dec 31, 1994 ------------ ------------ ------------ ------------ ------------ Sales $40,355,867 $36,433,918 $26,182,821 $18,305,928 $12,820,709 Net Income (Loss) 329,867 677,671 446,029 1,331,924 1,183,406 Basic Earnings Per Share of Common Stock 0.14 0.28 0.19 0.55 0.54 Total Assets 24,728,562 24,694,930 22,152,629 13,223,064 6,647,897 Total Long-Term Debt 11,146,537 10,388,620 10,910,757 3,768,685 746,755
- - Company acquired the assets of Zercom Corporation in November, 1996. - - Company acquired the assets of Monitor Technology in March, 1995, and Aerospace Systems in August, 1995. NOTE: For additional selected Financial Data (Past two years by quarter information), see Note 11 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, 1998, 1997, AND 1996 REVENUES For the years ended December 31, 1998, and 1997 the Company had sales of $40,355,867 and $36,433,918 respectively. The increase of $3,921,949 or 10.8% resulted primarily from internal growth of our current customer base. For the year ended December 31, 1996 the Company had sales of $26,182,821. The approximate 39% increase in sales in 1997 was attributable primarily to increased sales from the newly acquired divisions in 1996. GROSS PROFIT The Company had gross profit of $6,597,719 in 1998, $6,795,052 in 1997, and $4,627,362 in 1996. Gross profits as a percentage of gross sales were 16.3% in 1998, 18.7% in 1997, and 17.7% in 1996. 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 $4,842,867 in 1998, $4,542,498 in 1997, and $3,306,311 in 1996. The increases each year reflect additional selling, general and administrative expenses associated with the acquisitions and increased revenues. MISCELLANEOUS INCOME Miscellaneous income was $40,885 in 1998, $53,738 in 1997, and $65,732 in 1996. The miscellaneous income resulted primarily from charges for interest income and miscellaneous services. INTEREST EXPENSE Interest expense was $1,004,777 in 1998, $1,010,909 in 1997, and $475,057 in 1996. The increased expense for 1997 is due to the increased debt from acquired operations. 13 INCOME TAXES Income tax expense for 1998 was $124,000, $359,000 in 1997, and $192,000 in 1996. The Company has recorded deferred tax assets of $1,170,000, 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 1998 was $329,867 or $.14 per common share. 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 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 $9,670,225 as of December 31, 1997, to $10,984,033 on December 31, 1998. Stockholders equity increased from $7,813,823 on December 31, 1997, to $8,364,571 on December 31, 1998 due to the Company's 1998 net income, and conversion of redeemable common stock to stockholders equity. 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. UPDATE ON YEAR 2000 STATUS 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 have completed the inventory and evaluation phase, and are nearing completion of the implementation phase. Testing is nearly completed on most systems. Monitoring and evaluation will continue throughout 1999 and into 2000 until we are sure all issues have been properly resolved. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Upward and downward changes in market interest rates and their impact on the reported interest expense of the Company's variable rate borrowings will effect the Company's future earnings. However, a ten-percent change in the 1998 effective average interest rate on variable earnings should not have a material effect on the Company's earnings for 1999. 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, 1998 and 1997 17 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 18 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 19 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 20-21 Notes to Consolidated Financial Statements 22-34
(The remainder of this page was intentionally left blank.) 15 INDEPENDENT AUDITOR'S REPORT Board of Directors Nortech Systems Incorporated and Subsidiary Bemidji, Minnesota We have audited the accompanying consolidated balance sheets of Nortech Systems Incorporated and Subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota February 12, 1999 16 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
1998 1997 ------------ ------------ ASSETS CURRENT ASSETS Cash and Cash Equivalents (Including Interest Bearing Cash of $203,886 and $463,248 at December 31, 1998 and 1997) $ 415,446 $ 714,169 Accounts Receivable, Less Allowance for Uncollectible Accounts (1998 - $151,627; 1997 - $84,128) 5,381,344 5,008,689 Inventories 9,383,875 9,242,467 Prepaid Expenses and Other 325,822 226,387 Deferred Tax Asset 695,000 671,000 ------------ ------------ Total Current Assets $ 16,201,487 $ 15,862,712 ------------ ------------ PROPERTY AND EQUIPMENT (At Cost) Land 141,300 141,300 Building and Leasehold Improvements 3,778,573 3,765,161 Manufacturing Equipment 4,577,838 4,439,401 Office and Other Equipment 3,052,834 2,805,557 ------------ ------------ Total $ 11,550,545 $ 11,151,419 Accumulated Depreciation (4,785,474) (3,851,810) ------------ ------------ Total Property and Equipment (At Depreciated Cost) $ 6,765,071 $ 7,299,609 ------------ ------------ OTHER ASSETS Goodwill and Other Intangible Assets $ 1,229,754 $ 905,359 Deferred Tax Asset 475,000 570,000 Other Assets 57,250 57,250 ------------ ------------ Total Other Assets $ 1,762,004 $ 1,532,609 ------------ ------------ Total Assets $ 24,728,562 $ 24,694,930 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of Credit $ -- $ 500,000 Current Maturities of Long-Term Debt 810,934 1,038,397 Accounts Payable 3,232,593 3,013,131 Accrued Payroll 682,539 1,082,293 Other Liabilities 491,388 558,666 ------------ ------------ Total Current Liabilities $ 5,217,454 $ 6,192,487 ------------ ------------ LONG-TERM DEBT Notes Payable (Net of Current Maturities Shown Above) $ 11,146,537 $ 10,388,620 ------------ ------------ REDEEMABLE COMMON STOCK $.01 Par Value; 0 and 50,000 Shares Issued and Outstanding at December 31, 1998 and 1997 Redeemable at $6 Per Share $ -- $ 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; 2,351,377 and 2,312,362 Shares Issued and Outstanding, Net of Redeemable Shares Reported Above, at December 31, 1998 and 1997, Respectively 23,514 23,124 Additional Paid-In Capital 12,131,045 11,910,554 Accumulated Deficit (4,039,988) (4,369,855) ------------ ------------ Total Stockholders' Equity $ 8,364,571 $ 7,813,823 ------------ ------------ Total Liabilities and Stockholders' Equity $ 24,728,562 $ 24,694,930 ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 17 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ SALES $ 40,355,867 $ 36,433,918 $ 26,182,821 COST OF SALES (33,758,148) (29,638,866) (21,555,459) ------------ ------------ ------------ GROSS PROFIT $ 6,597,719 $ 6,795,052 $ 4,627,362 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (4,842,867) (4,542,498) (3,306,311) RESEARCH AND DEVELOPMENT COSTS (337,093) (258,712) (273,697) INTEREST INCOME 24,832 37,423 33,668 MISCELLANEOUS INCOME 16,053 16,315 32,064 INTEREST EXPENSE (1,004,777) (1,010,909) (475,057) ------------ ------------ ------------ INCOME BEFORE INCOME TAX PROVISION $ 453,867 $ 1,036,671 $ 638,029 INCOME TAX EXPENSE (124,000) (359,000) (192,000) ------------ ------------ ------------ NET INCOME $ 329,867 $ 677,671 $ 446,029 ------------ ------------ ------------ ------------ ------------ ------------ BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.14 $ 0.28 $ 0.19 ------------ ------------ ------------ ------------ ------------ ------------ AVERAGE NUMBER OF COMMON SHARES OUTSTANDING USED FOR BASIC EARNINGS PER SHARE 2,347,391 2,362,362 2,384,512 ------------ ------------ ------------ ------------ ------------ ------------ DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.14 $ 0.28 $ 0.18 ------------ ------------ ------------ ------------ ------------ ------------ AVERAGE NUMBER OF COMMON SHARES OUTSTANDING PLUS DILUTIVE COMMON STOCK OPTIONS 2,372,448 2,387,829 2,429,071 ------------ ------------ ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additional Total Preferred Common Paid-In Accumulated Stockholders' Stock Stock Capital Deficit Equity --------------------------------------------------------------------------------------------- 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 1998 Net Income -- -- -- 329,867 329,867 Issuance of Stock - Stock Options and Other -- 60 22,821 -- 22,881 Conversion of Redeemable Stock -- 330 197,670 -- 198,000 --------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1998 $ 250,000 $ 23,514 $12,131,045 $(4,039,988) $ 8,364,571 --------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 39,999,265 $ 35,137,009 $ 24,375,341 Cash Paid to Suppliers and Employees (38,318,916) (33,970,078) (23,904,901) Interest Expense Paid (1,031,625) (985,519) (403,003) Interest Income Received 24,832 37,423 33,668 Income Taxes Paid (189,843) (56,400) (205,900) ------------ ------------ ------------ Net Cash Provided (Used) by Operating Activities $ 483,713 $ 162,435 $ (104,795) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Businesses $ (24,839) $ -- $ (1,559,492) Proceeds from Sale of Assets 2,500 300,000 -- Acquisition of Property and Equipment (458,551) (753,533) (718,835) Costs to Acquire Product Technology (332,000) -- -- ------------ ------------ ------------ Net Cash Used by Investing Activities $ (812,890) $ (453,533) $ (2,278,327) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net Proceeds Under Line of Credit $ -- $ -- $ 500,000 Payments on Long-Term Debt (1,349,829) (2,720,271) (431,453) Proceeds from Long-Term Debt 1,380,283 2,505,451 3,156,115 Proceeds from Sale of Stock -- -- 597 Purchase of Redeemable Stock -- -- (531,600) Payment of Dividends -- (15,040) -- ------------ ------------ ------------ Net Cash Provided (Used) by Financing Activities $ 30,454 $ (229,860) $ 2,693,659 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (298,723) $ (520,958) $ 310,537 Cash and Cash Equivalents - Beginning 714,169 1,235,127 924,590 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS - ENDING $ 415,446 $ 714,169 $ 1,235,127 ------------ ------------ ------------ ------------ ------------ ------------
NON-CASH TRANSACTIONS 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. During 1998 the Company recorded a reduction of $300,000 in a long-term note pursuant to a 1996 asset purchase agreement. In addition, accounts payable includes $150,000 of costs to acquire product technology. Also goodwill was reduced by $102,000 as a result of an adjustment to the purchase price of an acquired business. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Net Income $ 329,867 $ 677,671 $ 446,029 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 1,073,534 1,145,032 693,456 Deferred Taxes 71,000 209,000 110,000 Compensation from Stock Grants 22,880 -- -- Gain on Sale of Assets (2,500) (299) -- Changes in Current Operating Items: Accounts Receivable (372,655) (1,312,926) (1,839,544) Inventory (141,408) (2,512,967) (482,103) Prepaid Assets (99,435) (137,566) 42,880 Accounts Payable 69,462 1,416,805 541,446 Accrued Payroll (399,754) 408,990 266,287 Accrued Liabilities (67,278) 268,695 116,754 ----------- ----------- ----------- Net Cash Provided (Used) by Operating Activities $ 483,713 $ 162,435 $ (104,795) ----------- ----------- ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 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 has manufacturing facilities and engineering support located in Bemidji, 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 FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 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, 1998, 1997, and 1996. 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 1998, 1997 and 1996 was $67,293, $67,954, and $54,614, 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 Costs related to the conceptual formulation and design of products and processes are expensed as research and development. Costs incurred to acquire product and process technology are capitalized. Capitalized costs are amortized on a straight-line basis over the estimated useful life. The Company acquired intangible assets including patent rights, licenses, design rights and purchased product technology in the amount of $482,000 during 1998. No related amortization expense was recognized at December 31, 1998, as the acquired technology was not yet in production. The remaining intangible assets, including purchased technology and certification costs, are being amortized over a period of 3 to 7 years. The related amortization expense for fiscal years 1998, 1997 and 1996 was $13,152, $52,151, and $13,152 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, 1998 and 1997, the Company had invested excess funds of $0 and $116,219, 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 $119,889, $124,997, and $65,234 for the years ended December 31, 1998, 1997, and 1996, respectively. 23 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 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. PREFERRED STOCK Preferred stock issued is noncumulative and nonconvertible. FAIR VALUE OF 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. RECLASSIFICATIONS Certain reclassifications have been made to the 1997 financial statements to conform with the 1998 presentation. Such reclassifications had no impact on net income or equity. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The Company has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, effective January 1, 1998. SFAS No. 131 establishes disclosure requirements for reportable segments based on how a company is managed rather than on the industry, geographic and major customer approach of SFAS No. 14. NOTE 2 INVENTORIES Inventories consist of the following:
1998 1997 ---------- ---------- Raw Materials $6,259,890 $5,961,221 Work in Process 1,386,502 1,659,244 Finished Goods 1,737,483 1,622,002 ---------- ---------- Total $9,383,875 $9,242,467 ---------- ---------- ---------- ----------
24 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 ACQUISITIONS In 1996 the Company acquired the business described below, which has been accounted for by the purchase method of accounting. The results of the operations of the acquired Company is included in the Company's consolidated statement of income from the dates of the acquisition. 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 ---------- ----------
The following proforma unaudited consolidated statements of income for the Company is presented as though the acquisition of Zercom Corporation had occurred on January 1, 1996.
(Unaudited) 1996 ------------ ---- Revenues $39,702,215 Net Income $ 230,045 Net Income Per Share of Common Stock $ 0.10
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. 25 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 2 LONG-TERM DEBT
Description 1998 1997 -------------------------------------------------------- ------------ ------------ Notes Payable - Norwest Bank North Country, N.A., Revolving Lines of Credit, Borrowing Limit of $5,500,000; Promissory Note of $1,500,000; Interest at LIBOR Index Plus 2% and Highest Prime Rate in "Money Rate" Table in Wall Street Journal; Due January 2000; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Personal Guarantee and Stock Pledged By a Shareholder $ 6,675,000 $ 5,069,717 Notes Payable - Norwest Bank North Country, N.A., Interest Ranging From 7.5% to 8.2%, Monthly Installment Payments Through January 2001; Secured by Accounts Receivable, Equipment, Inventory, General Intangibles and Real Estate 1,202,266 1,480,579 Note Payable - Communications Systems, Inc, Interest at Prime as Established by First Bank Minneapolis, Semi-Annual Principal Payments of $200,000; Due November 2001; Secured by Underlying Assets Purchased 3,765,390 4,465,390 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 314,815 411,331 ------------ ------------ Total Long-Term Debt $ 11,957,471 $ 11,427,017 Current Maturities 810,934 1,038,397 ------------ ------------ Long-Term Debt - Net of Current Maturities $ 11,146,537 $ 10,388,620 ------------ ------------ ------------ ------------
26 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 4 LONG-TERM DEBT (CONTINUED) Maturity requirements by year on long-term debt are as follows:
Years Ending December 31, Amounts ------------------------ ---------- 1999 $ 810,934 2000 7,700,705 2001 3,407,399 2002 23,175 2003 15,258
The maximum and average amounts outstanding on the Company's long-term lines of credit were $6,675,000 and $6,317,527 during 1998, and $4,389,281 and $3,804,534 during 1997, respectively. NOTE 5 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, 1998, 1997, and 1996, was $675,200, $548,943, and $451,659, respectively. The future minimum lease payments are as follows:
Years Ending December 31, Amounts ------------------------ ---------- 1999 $ 467,905 2000 325,283 2001 201,483 2002 134,317 2003 51,975 ---------- Total $1,180,963 ---------- ----------
27 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 6 INCOME TAXES The provision for income taxes for each of the three years in the period ended December 31, 1998, consists of the following:
1998 1997 1996 -------- -------- -------- Current Taxes - Federal $ 8,000 $ 31,000 $ 10,000 Current Taxes - State 45,000 119,000 72,000 Deferred Taxes 71,000 209,000 110,000 -------- -------- -------- Total Expense $124,000 $359,000 $192,000 -------- -------- -------- -------- -------- --------
Net deferred tax assets at December 31, 1998 and 1997, consist of the following:
1998 1997 ---------- ---------- Net Operating Loss (NOL) Carryforwards $ 883,000 $1,100,000 Tax Credit Carryforwards 305,000 240,000 Allowance for Doubtful Accounts 60,000 35,000 Inventory Obsolescence Reserve 210,000 125,000 Accrued Vacation 140,000 135,000 Health Insurance Reserve 65,000 55,000 Property and Equipment (328,000) 259,000 Valuation Allowance (165,000) (190,000) ---------- ---------- Total $1,170,000 $1,241,000 ---------- ---------- ---------- ----------
The statutory rate reconciliation for each of the three years in the period ended December 31, 1998 is as follows:
1998 1997 1996 --------- --------- --------- Statutory Tax Provision $ 154,000 $ 353,000 $ 217,000 State Income Taxes 36,000 72,000 78,000 Additional Credit Carryforwards (55,000) -- -- Reduction in Deferred Tax Valuation Allowance (Net of Expired Tax Credit Carryforwards) (25,000) (50,000) (100,000) Other 14,000 (16,000) (3,000) ---------- --------- --------- Income Tax Expense $ 124,000 $ 359,000 $ 192,000 ---------- --------- --------- ---------- --------- ---------
28 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 6 INCOME TAXES (CONTINUED) The Company has available for Federal income tax purposes, operating loss carryforwards, unused investment and other tax credits, and unused research and development credits which may provide future tax benefits, expiring as follows:
Investment and Research and Operating Loss Other Tax Credit Development Tax Year of Expiration Carryforward Carryforwards Credit Carryforward ------------------ -------------- ---------------- ------------------- 1999 $ -- $ 4,000 $ -- 2000 1,221,800 50,900 97,600 2001 767,300 40,000 -- 2002 253,200 -- -- 2003 109,700 -- -- Later Years -- 18,500 -- ---------- ---------- ---------- Totals $2,352,000 $ 113,400 $ 97,600 ---------- ---------- ---------- ---------- ---------- ----------
The Company utilized operating loss carryforwards of $506,000 $1,341,000 and $642,000 for the years ended December 31, 1998, 1997, and 1996, respectively, to offset federal taxable income. At December 31, 1998, the Company has Alternative Minimum Tax credit carryforwards of approximately $94,000. These credits do not expire. NOTE 7 EMPLOYEE STOCK OPTIONS 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. 29 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 7 EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED) 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 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:
1998 1997 1996 -------- -------- -------- Net Earnings - as Reported $329,867 $677,671 $446,029 Net Earnings - Pro Forma $259,366 $612,402 $413,236 Basic Earnings Per Share - as Reported $ 0.14 $ 0.28 $ 0.19 Basic Earnings Per Share - Pro Forma $ 0.11 $ 0.25 $ 0.17 Diluted Earnings Per Share - as Reported $0.14 $0.28 $0.18 Diluted Earnings Per Share - Pro Forma $0.11 $0.25 $0.17
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, 1998 or 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 ---- Expected Lives (Years) 10 Dividend Yield 0.0% Expected Volatility 45% Risk-Free Interest Rate 6.25%
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. 30 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 7 EMPLOYEE STOCK OPTION AND AWARD PLANS (CONTINUED) Information regarding the Company's common stock options is as follows:
1998 1997 1996 ---------------------- ------------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ------- ------- ----------- ------- --------- Options Outstanding, Beginning of Year 252,500 $ 4.61 137,500 $ 4.29 137,500 $ 4.29 Options Exercised 1,000 5.25 -- -- -- -- Options Forfeited 4,000 5.25 -- -- -- -- Options Granted -- -- 115,000 5.00 -- -- Options Outstanding, End of Year 247,500 $ 4.60 252,500 $ 4.61 137,500 $ 4.29 ------- -------- ------- --------- ------- ------- ------- -------- ------- --------- ------- ------- Option Price Range of Exercised Shares $ 5.25 $ -- $ -- Weighted Average Fair Value of Options Granted During the Year $ -- $ 3.31 $ --
The following table summarizes information about fixed-price stock options outstanding at December 31, 1998:
Outstanding Exercisable Remaining Exercise Prices 12/31/98 12/31/98 Contractual Life --------------- ----------- ----------- ---------------- 1.625 15,000 15,000 4 Years 1.75 17,500 17,500 3 Years 3.625 10,000 10,000 5 Years 5.00 115,000 46,000 8 Years 5.25 95,000 57,000 7 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. 5,218 shares have been issued under this Plan through December 31, 1998. 31 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 8 SEGMENT REPORTING INFORMATION Nortech Systems, Inc. manufactures and sells a variety of products used in the computer, medical, government and defense industries, primarily for the commercial industrial market. The Company's principal businesses are based upon the nature of the manufacturing operations of the respective location. The Company has three principal businesses: 1. CONTRACT MANUFACTURING - Includes the manufacture of wire harnesses, cable and electromechanical assemblies, printed circuit board assemblies, and higher-level assemblies, all of which are manufactured under contract specifications. These products are sold primarily to the commercial and defense industries. 2. DISPLAY PRODUCTS - Includes the design, manufacture, and marketing of high-performance display monitors. The products are sold primarily to the medical, industrial, and service industries. 3. MEDICAL MANAGEMENT - Provides service bureau and office management services to physicians and clinics. Each of these is a business segment, with its respective financial performance detailed in this report.
BUSINESS SEGMENT NET REVENUES 1998 1997 1996 ----------------------------- ----------- ----------- ------------ Contract Manufacturing $35,356,813 $32,907,137 $ 23,600,741 Display Products 4,577,625 3,085,129 2,094,395 Medical Management 421,429 441,652 487,685 Total $40,355,867 $36,433,918 $26,182,821 ----------- ----------- ------------ ----------- ----------- ------------ BUSINESS SEGMENT PROFIT (LOSS) 1998 1997 1996 ----------- ----------- ------------ Contract Manufacturing $1,009,898 $ 1,221,901 $ 964,346 Display Products (540,339) (433,380) (441,962) Medical Management (139,692) (110,850) (76,355) Total $329,867 $ 677,671 446,029 ----------- ----------- ------------ ----------- ----------- ------------ BUSINESS SEGMENT ASSETS 1998 1997 1996 ----------- ----------- ------------ Contract Manufacturing $20,737,352 $21,016,701 $ 19,238,772 Display Products 3,846,402 3,408,630 2,680,254 Medical Management 144,808 269,599 233,603 Total $24,728,562 $24,694,930 $ 22,152,629 ----------- ----------- ------------ ----------- ----------- ------------
32 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 8 BUSINESS SEGMENT INFORMATION (CONTINUED)
BUSINESS SEGMENT PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS 1998 1997 1996 ----------- ----------- ------------ Depreciation and Amortization: Contract Manufacturing $ 874,360 $ 914,264 $ 466,668 Display Products 186,613 182,929 150,454 Medical Management 12,561 47,839 76,334 Total $ 1,073,534 $1,145,032 $ 693,456 ----------- ----------- ------------ ----------- ----------- ------------ Additions: Contract Manufacturing $ 428,396 $ 725,777 $ 670,383 Display Products 512,155 13,707 87,472 Medical Management -- 14,049 20,472 Total $ 940,551 $ 753,533 $ 778,327 ----------- ----------- ------------ ----------- ----------- ------------ GEOGRAPHIC AREA NET TRADE REVENUES 1998 ----------- United States $38,403,780 Foreign 1,952,087 Total $40,355,867 ----------- ----------- ------------ ----------- ----------- ------------
NOTE 9 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 $166,225 and $540,000 at December 31, 1998 and 1997, 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. NOTE 10 PREFERRED STOCK TRANSACTIONS The holders of the preferred stock are entitled to a non-cumulative dividend of 12% when and as declared. In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. Preferred stock dividends of $0, $15,040, and $0 were paid during the years ended December 31, 1998, 1997, and 1996, respectively. 33 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 12 SUPPLEMENTARY FINANCIAL INFORMATION
Quarter Ending Quarter Ending Quarter Ending Quarter Ending Total 3/31/98 6/30/98 9/30/98 12/31/98 1998 -------------- -------------- -------------- -------------- ------------- NET SALES $ 10,491,792 $ 9,582,777 $ 9,625,049 $ 10,656,249 $ 40,355,867 GROSS PROFIT 1,750,416 1,778,825 1,735,116 1,333,362 6,597,719 NET INCOME 246,430 187,840 126,719 (231,122) 329,867 BASIC EARNINGS PER SHARE OF COMMON STOCK 0.11 0.08 0.05 (0.10) 0.14
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
In the 4th quarter of 1998, the Company had an inventory write down of approximately $240,000 of pretax income. This reduced basic and diluted earnings per share by .07. 34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 1998 proxy statement to be filed with the Securities and Exchange Commission not later than April 30, 1999 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 1998 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1999 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 1998 proxy statements to be filed with the Securities and Exchange Commission not later than April 30, 1999 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.) 35 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 15. (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 41 Consolidated Financial Statement Schedule for the years ended December 31, 1998, 1997 and 1996 II Valuation and Qualifying Accounts 42 All other schedules are omitted since they are not applicable, not required, or the required information is included in the financial statements or notes thereto. (a) 3. THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS REPORT: The following exhibits are incorporated by reference to exhibits 10.1, 10.2 and 23.1 respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 10.1 Master lease agreement for equipment Amplicon Financial and the Company. 10.2 Amendments to Promissory Notes, Loan Agreement Mortgage and Guaranty between Norwest Bank Minnesota South, N.A. (formerly Northern National Bank), and the Company. 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 and 23.1 respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 36 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. 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 respectively, 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. 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, and 10.6, respectively, 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. 37 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. The following exhibits are incorporated by reference to exhibits 10.2, 10.3, and 10.5, respectively, 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 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. The following exhibits are incorporated by reference to Exhibits 3.1, 3.2 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. 38 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.) 39 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTECH SYSTEMS INCORPORATED March 31, 1999 By: /s/ GARRY M. ANDERLY -------------------------------- Garry M. Anderly Principal Financial Officer and Principal Accounting Officer March 31, 1999 By: /s/ QUENTIN E FINKELSON -------------------------------- Quentin E. Finkelson 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 31, 1999 By: /s/ QUENTIN E FINKELSON -------------------------------- Quentin E. Finkelson President, Chief Executive Officer and Director March 31, 1999 /s/ MYRON KUNIN -------------------------------- Myron Kunin, Director March 31, 1999 /s/ RICHARD W. PERKINS -------------------------------- Richard W. Perkins, Director March 31, 1999 /s/ MICHAEL J. DEGEN -------------------------------- Michael J. Degen, Director 40 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 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 1998, 1997 and 1996, 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 states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota February 12, 1999 41 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 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, 1998: Allowance for Doubtful Accounts $ 84,128 $ 67,499 $ $151,627 - Inventory Obsolescence Reserve 320,000 200,000 520,000 - Deferred Tax Valuation Allowance 190,000 (25,000) 165,000 - --------- ---------- ----------- --------- $594,128 $ 267,499 $ (25,000) $836,627 --------- ---------- ----------- --------- --------- ---------- ----------- --------- 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 --------- ---------- ----------- --------- --------- ---------- ----------- ---------
42 INDEX TO EXHIBITS DESCRIPTIONS OF EXHIBITS 10.1 Master lease agreement for equipment Amplicon Financial and the Company. 10.2 Amendments to Promissory Notes, Loan Agreement Mortgage and Guaranty between Norwest Bank Minnesota South, N.A. (formerly Northern National Bank), and the Company. 23.1 Letter of Consent from Larson, Allen, Weishair & Company in reference to the S-8 Forms filed June 21, 1994 and June 30, 1993. 43 EX-10.1 2 EXHIBIT 10.1 [LOGO] AMPLICON FINANCIAL 5 HUTTON CENTRE DRIVE, SUITE 500 - SANTA ANA, CALIFORNIA 92707 LEASE AGREEMENT 714.751-7551 - 800.755-5055 - FACSIMILE 714.751-7557 ORDER NO. OL-10154 --------- - -------------------------------------------------------------------------------- LESSEE NORTECH SYSTEMS, INC. - -------------------------------------------------------------------------------- STREET CITY STATE COUNTY ZIP 641 E. LAKE STREET, SUITE 244 WAYZATA MN HENNEPIN 55391 - -------------------------------------------------------------------------------- 1. AGREEMENT/LEASE: Amplicon, Inc. ("Amplicon") agrees to lease to Lessee the hardware, software and/or other equipment ("Property") described on the Lease Schedule(s) ("Schedule(s)") referencing this Lease Agreement ("Agreement") and Lessee agrees to lease from Amplicon the Property subject to the terms set forth herein and on each Schedule(s) that the parties may from time to time enter into with respect to this Agreement. Each Schedule identified as being a part of this Agreement incorporates the terms of this Agreement and constitutes a separate lease agreement and is referred to herein as the "Lease". The Lease is in force and is binding upon Lessee and Amplicon upon signed acceptance by Amplicon. 2. UNIFORM COMMERCIAL CODE ACKNOWLEDGMENT: Lessee acknowledges that it has received and approved any written "Supply Contract" covering the Property purchased from the Supplier for lease and Amplicon has informed or advised Lessee, either previously or by this Lease, of the following: (i) the identity of the Supplier; (ii) that Lessee may have rights under the Supply Contract and (iii) that Lessee may contact the Supplier for a description of any such rights. This Lease is a "Finance Lease". (The terms "Finance Lease", "Supply Contract" and "Supplier" as used in this Lease have the meanings only as ascribed to them under Division 10 of the California Uniform Commercial Code and have no effect on any tax or accounting treatment of the Lease). This provision survives termination of the Lease. 3. NO WARRANTIES: AMPLICON IS NOT THE MANUFACTURER, DEVELOPER, PUBLISHER, DISTRIBUTOR, LICENSOR OR "SUPPLIER" OF THE PROPERTY AND MAKES NO EXPRESS OR IMPLIED WARRANTY OR REPRESENTATION AS TO FITNESS, QUALITY, DESIGN, CONDITION, CAPACITY, SUITABILITY, VALUE, MERCHANTABILITY, OR PERFORMANCE OF THE PROPERTY OR THE MATERIAL OR WORKMANSHIP THEREOF OR AGAINST INTERFERENCE BY LICENSORS OR OTHER THIRD PARTIES, IT BEING AGREED THAT THE PROPERTY IS LEASED "AS IS" AND THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. Lessee selected the Property and represents that all the Property is suitable for Lessee's purposes. Amplicon assigns to Lessee during the term of the Lease any warranty rights it may have received from the Supplier as a result of Amplicon's purchase of the Property. If Lessee has any claims regarding the Property or any other matter arising from Lessee's relationship with the Supplier, Lessee must make them against the Supplier. This provision survives termination of the Lease. 4. AUTHORIZATION DATE AND LEASE DURATION: A Schedule commences and rent is due beginning on the date that Lessee certifies in writing to Amplicon that all of the Property has been received and accepted by Lessee as installed, tested and ready for use, and Lessee authorizes Amplicon in writing to disburse payment to the Supplier ("Authorization Date"). Unless and until Lessee provides such written authorization, Amplicon will not disburse payment to Suppliers. The Term of each Schedule is reflected on the Schedule and begins on the first day of the calendar quarter following the Authorization Date. A calendar quarter commences on the first day of January, April, July and October. Lessee has the right to use the Property at the specific locations shown on the Schedule throughout the duration of this Lease in accordance with the provisions of this Lease. The Term extends for an additional twelve month period ("Extension Term") at the rental rate delineated on the Schedule unless Lessee provides to Amplicon written notice of Lessee's election not to extend the Term at least one hundred eighty days prior to the expiration of the Term. 5. RENTALS: The rent payable is shown on the Schedule(s). The monthly rent is due to Amplicon, in advance, for each month or portion of a month beginning on the Authorization Date and continuing for each month that this Lease is in effect. Rent for portions of a month are based on a daily rental equal to one-thirtieth of the monthly rent. ALL RENTS SHALL BE PAID WITHOUT NOTICE OR DEMAND AND WITHOUT ABATEMENT, DEDUCTION OR SETOFF OF ANY AMOUNT WHATSOEVER. THE OPERATION AND USE OF THE PROPERTY IS SOLELY AT THE RISK OF LESSEE AND THE OBLIGATION OF LESSEE TO PAY RENT UNDER THE LEASE SHALL BE ABSOLUTE AND UNCONDITIONAL. Rents will be paid to Amplicon unless otherwise instructed in writing by Amplicon or its assignee. * * * * * * * * * * * * * * * * * * * * TO THE EXTENT PERMITTED BY APPLICABLE LAW, LESSEE HEREBY WAIVES THE FOLLOWING RIGHTS AND REMEDIES CONFERRED UPON LESSEE BY LAW: (I) RIGHT TO CANCEL, OR TERMINATE THIS LEASE, (II) RIGHT TO REJECT THE PROPERTY, (III) RIGHT TO REVOKE ACCEPTANCE OF THE PROPERTY, (IV) RIGHT TO RECOVER DAMAGES FROM AMPLICON FOR ANY BREACH OF WARRANTY, (V) RIGHT TO RECOVER ANY GENERAL, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES WHATSOEVER, AND (VI) RIGHT TO SPECIFIC PERFORMANCE, REPLEVIN, DETINUE, SEQUESTRATION, CLAIM AND DELIVERY OR THE LIKE FOR THE PROPERTY SUBJECT TO THIS LEASE. THIS LEASE AGREEMENT AND THE APPLICABLE SCHEDULE(S) CONTAIN THE ENTIRE AGREEMENT BETWEEN AMPLICON AND LESSEE WITH RESPECT TO THE SUBJECT MATTER HEREOF. THE LEASE CAN ONLY BE MODIFIED IN WRITING, WITH SUCH MODIFICATIONS SIGNED BY A PERSON AUTHORIZED TO SIGN AGREEMENTS ON BEHALF OF LESSEE AND BY AN AUTHORIZED SIGNER OF AMPLICON. NO ORAL OR OTHER WRITTEN AGREEMENTS, REPRESENTATIONS OR PROMISES SHALL BE RELIED UPON BY, OR BE BINDING ON, THE PARTIES UNLESS MADE A PART OF THIS LEASE BY A WRITTEN MODIFICATION SIGNED BY AN AUTHORIZED SIGNER OF LESSEE AND AMPLICON. LESSEE: /s/ G. M. Anderly AMPLICON, INC. /s/ J. Kevin Adkins ----------------------------- -------------------------- (Signature) (Signature) This Lease is subject to acceptance by Amplicon's Finance Committee. By signing below, the signer certifies that he or she has read this Lease Agreement. INCLUDING THE REVERSE SIDE, has had an opportunity to discuss its terms with Amplicon, and is authorized to sign on behalf of Lessee. Until this Lease has been signed by an authorized signer of Amplicon, it will constitute a firm offer by Lessee. LESSEE/OFFERER AMPLICON, INC. OFFER: NORTECH SYSTEM, INC. ACCEPTANCE: By: /s/ G. M. Anderly By: /s/ J. Kevin Adkins ----------------------------------------- ------------------------------- Name: G. M. Anderly Name: J. Kevin Adkins --------------------------------------- ----------------------------- Title: Sr. V.P. Corporate Finance/Treasurer Title: Assistant Vice President -------------------------------------- ---------------------------- Date: 1/27/98 Date: 2/19/98 --------------------------------------- ----------------------------- [LOGO] AMPLICON FINANCIAL LEASE 5 HUTTON CENTRE DRIVE, SUITE 500 - SANTA ANA, CALIFORNIA 92707 SCHEDULE 714.751-7551 - 800.755-5055 - FACSIMILE 714.751-7557 NO. 01 ------------ - -------------------------------------------------------------------------------- LESSEE CONTACT NORTECH SYSTEMS, INC. GARY ANDERLY - -------------------------------------------------------------------------------- STREET PHONE NO. 641 E. Lake Street, Suite 244 (218) 751-0110 - -------------------------------------------------------------------------------- CITY STATE COUNTY ZIP FACSIMILE NO. Wayzata MN Hennepin 55391 (218) 751-8662 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS SCHEDULE IS ISSUED WITH RESPECT TO THE LEASE AGREEMENT ORDER NO. OL-10154 DATED 02/19/98. All of the terms of the Lease Agreement are incorporated into this Schedule as if fully reflected on the Schedule. The terms of this Schedule and the Lease Agreement combine to form an individual Lease with an independent Term. Any Deposit under this Schedule shall be returned to Lessee (without interest thereon) if Amplicon does not accept this Schedule. Upon acceptance of this Lease by Amplicon any such Deposit shall be treated as a Transaction Fee earned by Amplicon and unless otherwise specified herein shall not be applied to any rentals or other payments due under the Lease.
Term (months) : Thirty Six (36) Deposit : $14,663.19 (Applied to the Last Term Rental Payment) Monthly Rent : $14,663.19 (Monthly Lease Rate Factor .0269) Property : $545,000.00 +/- 10%
Quantity Property Description Serial # -------- -------------------- -------- PROPERTY MORE FULLY DESCRIBED ON EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF. LESSEE HAS THE RIGHT TO QUIETLY ENJOY THE USE OF THE PROPERTY WITHOUT INTERFERENCE BY AMPLICON OR ITS ASSIGNEE PROVIDED LESSEE IS IN COMPLIANCE WITH THE TERMS OF THIS LEASE. AT THE EXPIRATION OF THE TERM OR, IF EXTENDED PURSUANT TO SECTION 4 OF THE LEASE AGREEMENT, AT THE EXPIRATION OF THE EXTENSION TERM LESSEE SHALL: (I) PURCHASE THE PROPERTY FOR A MUTUALLY AGREEABLE PRICE; (II) PROMPTLY RETURN ALL, BUT NOT LESS THAN ALL, OF THE PROPERTY ACCORDING TO THE TERMS AND CONDITIONS OF THIS LEASE AND LEASE REPLACEMENT PROPERTY FROM AMPLICON WHICH HAS A COST EQUAL TO OR GREATER THAN THE ORIGINAL COST OF THE PROPERTY; OR (III) EXTEND THE SCHEDULE FOR A PERIOD OF ONE ADDITIONAL YEAR AT THE RENTAL RATE DELINEATED HEREIN. WITH RESPECT TO OPTIONS (I) AND (II), AMPLICON AND LESSEE SHALL HAVE ABSOLUTE DISCRETION REGARDING THEIR AGREEMENT OR LACK OF AGREEMENT TO THE TERMS OF EITHER SUCH ARRANGEMENT. IF THE PARTIES HAVE NOT AGREED TO EITHER OPTION (I) OR OPTION (II) BY THE EXPIRATION OF THE APPLICABLE TERM, THEN OPTION (III) SHALL PREVAIL. AT THE END OF THE EXTENSION PROVIDED BY OPTION (III), THIS LEASE SHALL CONTINUE SUBJECT TO TERMINATION BY EITHER LESSEE OR AMPLICON AT THE END OF ANY MONTH, PROVIDED AT LEAST NINETY DAYS' PRIOR WRITTEN NOTICE IS DELIVERED TO THE OTHER PARTY. - -------------------------------------------------------------------------------- THE INDIVIDUAL SIGNING BELOW CERTIFIES THAT HE OR SHE HAS READ THIS SCHEDULE (INCLUDING THE TERMS ON THE REVERSE SIDE) AND THE LEASE AGREEMENT, AND IS AUTHORIZED TO SIGN THIS SCHEDULE ON BEHALF OF LESSEE. THIS SCHEDULE ALONG WITH THE LEASE AGREEMENT CONTAIN THE ENTIRE AGREEMENT BETWEEN AMPLICON AND LESSEE WITH RESPECT TO THE SUBJECT MATTER HEREOF. THIS AGREEMENT CAN ONLY BE MODIFIED IN WRITING, WITH SUCH MODIFICATIONS SIGNED BY A PERSON AUTHORIZED TO SIGN AGREEMENTS ON BEHALF OF LESSEE AND BY AN AUTHORIZED SIGNER OF AMPLICON. NO ORAL OR OTHER WRITTEN AGREEMENTS, REPRESENTATIONS OR PROMISES SHALL BE RELIED UPON OR BE BINDING ON THE PARTIES UNLESS MADE A PART OF THIS LEASE BY A WRITTEN MODIFICATION SIGNED BY AN AUTHORIZED SIGNER OF BOTH LESSEE AND AMPLICON. LESSEE/OFFERER AMPLICON, INC. OFFER: NORTECH SYSTEMS, INC. ACCEPTANCE: Signature: /s/ G. M. Anderly Signature: /s/ J. Kevin Adkins ---------------------------------- ---------------------- Name: G. M. Anderly Name: J. Kevin Adkins --------------------------------------- ----------------------------- Title: Sr. V.P. Corporate Finance/Treasurer Title: Assistant Vice President -------------------------------------- ---------------------------- Date: 1/27/98 Date: 2/19/98 --------------------------------------- ----------------------------- ADDENDUM "A" WITH RESPECT TO LEASE AGREEMENT ORDER NO. OL-10154 AND LEASE SCHEDULE NO. 01 This Addendum is supplemental to and made a part of Lease Agreement Order No. OL-10154, dated 2/19/98 (the "Agreement"), Lease Schedule No. 01, dated 2/19/98 and other related documents under the Agreement and Lease Schedule (collectively the "Lease"). The parties to the Lease include Nortech Systems, Inc. ("Lessee") and Amplicon, Inc. ("Amplicon"). Capitalized terms used in this Addendum without definition shall have the meanings set forth in the Lease, unless specifically modified. This Addendum is to be construed as supplemental to, and a part of, the Lease. Lessee and Amplicon acknowledge and agree that the Lease is hereby amended with respect to Lease Schedule No. 01, as follows: SECTION H. RETURN OF PROPERTY: Modify the first sentence by deleting the words: "pay to Amplicon an inspection, refurbishment and restocking fee equal to three percent of the property's original cost," In all other respects, the terms and conditions of the Lease, as originally written, shall remain in full force and effect. The Lease, as amended herein, sets forth the entire and final understanding between the parties with respect hereto. The terms of this Addendum have been negotiated and jointly drafted by Amplicon and Lessee and, therefore, the language of the Addendum shall not be construed in favor or against either party. The undersigned represent that they have the authority to enter into the Lease, and that the same shall be legally binding and enforceable on the respective principals. IN WITNESS WHEREOF the parties hereto, by their authorized signatories, have executed this Addendum at the date set forth below their respective signatures. LESSEE: Nortech Systems, Inc. Amplicon, Inc. -------------------------------------- ------------------------------ BY: /s/ G. M. Anderly BY: /s/ J. Kevin Adkins ---------------------------------------- ---------------------------- NAME: G. M. Anderly NAME: J. Kevin Adkins ---------------------------------------- -------------------------- TITLE: Sr. V.P. Corporate Finance/Treasurer TITLE: Assistant Vice President --------------------------------------- ------------------------- DATE: 1/27/98 DATE: 02/19/98 ---------------------------------------- -------------------------- [LOGO] AMPLICON FINANCIAL LEASE 5 HUTTON CENTRE DRIVE, SUITE 500 - SANTA ANA, CALIFORNIA 92707 SCHEDULE 714.751-7551 - 800.755-5055 - FACSIMILE 714.751-7557 NO. 02 ----------- - -------------------------------------------------------------------------------- LESSEE CONTACT Nortech Systems, Inc. Gary Anderly - -------------------------------------------------------------------------------- STREET PHONE NO. 641 E. Lake Street, Suite 244 (218) 751-0110 - -------------------------------------------------------------------------------- CITY STATE COUNTY ZIP FACSIMILE NO. Wayzata MN Hennepin 55391 (218) 751-8662 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS SCHEDULE IS ISSUED WITH RESPECT TO THE LEASE AGREEMENT ORDER NO. OL-10154 DATED 02/19/98. All of the terms of the Lease Agreement are incorporated into this Schedule as if fully reflected on the Schedule. The terms of this Schedule and the Lease Agreement combine to form an individual Lease with an independent Term. Any Deposit under this Schedule shall be returned to Lessee (without interest thereon) if Amplicon does not accept this Schedule. Upon acceptance of this Lease by Amplicon any such Deposit shall be treated as a Transaction Fee earned by Amplicon and unless otherwise specified herein shall not be applied to any rentals or other payments due under the Lease. Term (months) : Forty Eight (48) Deposit : $12,486.50 (Applied to the Last Term Rental Payment) Monthly Rent : $12,486.50 (Monthly Lease Rate Factor .0221) Property : $565,000.00 +/- 10% Quantity Property Description Serial # -------- -------------------- -------- PROPERTY MORE FULLY DESCRIBED ON EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF. LESSEE HAS THE RIGHT TO QUIETLY ENJOY THE USE OF THE PROPERTY WITHOUT INTERFERENCE BY AMPLICON OR ITS ASSIGNEE PROVIDED LESSEE IS IN COMPLIANCE WITH THE TERMS OF THIS LEASE. AT THE EXPIRATION OF THE TERM OR, IF EXTENDED PURSUANT TO SECTION 4 OF THE LEASE AGREEMENT, AT THE EXPIRATION OF THE EXTENSION TERM LESSEE SHALL: (I) PURCHASE THE PROPERTY FOR A MUTUALLY AGREEABLE PRICE; (II) PROMPTLY RETURN ALL BUT NOT LESS THAN ALL, OF THE PROPERTY ACCORDING TO THE TERMS AND CONDITIONS OF THIS LEASE AND LEASE REPLACEMENT PROPERTY FROM AMPLICON WHICH HAS A COST EQUAL TO OR GREATER THAN THE ORIGINAL COST OF THE PROPERTY; OR (III) EXTEND THE SCHEDULE FOR A PERIOD OF ONE ADDITIONAL YEAR AT THE RENTAL RATE DELINEATED HEREIN. WITH RESPECT TO OPTIONS (I) AND (II), AMPLICON AND LESSEE SHALL HAVE ABSOLUTE DISCRETION REGARDING THEIR AGREEMENT OR LACK OF AGREEMENT TO THE TERMS OF EITHER SUCH ARRANGEMENT. IF THE PARTIES HAVE NOT AGREED TO EITHER OPTION (I) OR OPTION (II) BY THE EXPIRATION OF THE APPLICABLE TERM, THEN OPTION (III) SHALL PREVAIL. AT THE END OF THE EXTENSION PROVIDED BY OPTION (III), THIS LEASE SHALL CONTINUE SUBJECT TO TERMINATION BY EITHER LESSEE OR AMPLICON AT THE END OF ANY MONTH, PROVIDED AT LEAST NINETY DAYS' PRIOR WRITTEN NOTICE IS DELIVERED TO THE OTHER PARTY. - -------------------------------------------------------------------------------- THE INDIVIDUAL SIGNING BELOW CERTIFIES THAT HE OR SHE HAS READ THIS SCHEDULE (INCLUDING THE TERMS ON THE REVERSE SIDE) AND THE LEASE AGREEMENT, AND IS AUTHORIZED TO SIGN THIS SCHEDULE ON BEHALF OF LESSEE. THIS SCHEDULE ALONG WITH THE LEASE AGREEMENT CONTAIN THE ENTIRE AGREEMENT BETWEEN AMPLICON AND LESSEE WITH RESPECT TO THE SUBJECT MATTER HEREOF. THIS AGREEMENT CAN ONLY BE MODIFIED IN WRITING, WITH SUCH MODIFICATIONS SIGNED BY A PERSON AUTHORIZED TO SIGN AGREEMENTS ON BEHALF OF LESSEE AND BY AN AUTHORIZED SIGNER OF AMPLICON. NO ORAL OR OTHER WRITTEN AGREEMENTS, REPRESENTATIONS OR PROMISES SHALL BE RELIED UPON OR BE BINDING ON THE PARTIES UNLESS MADE A PART OF THIS LEASE BY A WRITTEN MODIFICATION SIGNED BY AN AUTHORIZED SIGNER OF BOTH LESSEE AND AMPLICON. LESSEE/OFFEROR AMPLICON, INC. OFFER: NORTECH SYSTEM, INC. ACCEPTANCE: Signature: /s/ G. M. Anderly Signature: /s/ J. Kevin Adkins ---------------------------------- ------------------------ Name: G. M. Anderly Name: J. Kevin Adkins --------------------------------------- ----------------------------- Title: Sr. V.P. Corporate Finance/Treasurer Title: Assistant Vice President -------------------------------------- ---------------------------- Date: 1/27/98 Date: 2/19/98 --------------------------------------- ----------------------------- ADDENDUM "A" WITH RESPECT TO LEASE AGREEMENT ORDER NO. OL-10154 AND LEASE SCHEDULE NO. 02 This Addendum is supplemental to and made a part of Lease Agreement Order No. OL-10154, dated 2/19/98 (the "Agreement"), Lease Schedule No. 02, dated 2/19/98 and other related documents under the Agreement and Lease Schedule (collectively the "Lease"). The parties to the Lease include NORTECH SYSTEMS, INC. ("Lessee") and Amplicon, Inc. ("Amplicon"). Capitalized terms used in this Addendum without definition shall have the meanings set forth in the Lease, unless specifically modified. This Addendum is to be construed as supplemental to, and a part of, the Lease. Lessee and Amplicon acknowledge and agree that the Lease is hereby amended with respect to Lease Schedule No. 02, as follows: SECTION H. RETURN OF PROPERTY: Modify the first sentence by deleting the words: "pay to Amplicon an inspection, refurbishment and restocking fee equal to three percent of the property's original cost," In all other respects, the terms and conditions of the Lease, as originally written, shall remain in full force and effect. The Lease, as amended herein, sets forth the entire and final understanding between the parties with respect hereto. The terms of this Addendum have been negotiated and jointly drafted by Amplicon and Lessee and, therefore, the language of the Addendum shall not be construed in favor or against either party. The undersigned represent that they have the authority to enter into the Lease, and that the same shall be legally binding and enforceable to the respective principals. IN WITNESS WHEREOF the parties hereto, by their authorized signatories, have executed this Addendum at the date set forth below their respective signatures. LESSEE: NORTECH SYSTEMS, INC. AMPLICON, INC. ------------------------------------- ------------------------------ BY: /s/ G. M. Anderly BY: /s/ J. Kevin Adkins --------------------------------------- ----------------------------- NAME: G. M. Anderly NAME: J. Kevin Adkins --------------------------------------- ---------------------------- TITLE: Sr. V.P. Corporate Finance/Treasurer TITLE: Assistant Vice President -------------------------------------- ---------------------------- DATE: 1/27/98 DATE: 02/19/98 --------------------------------------- ---------------------------- EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 AMENDMENT OF $3,000,000 PROMISSORY NOTE This AMENDMENT of $3,000,000 PROMISSORY NOTE made and entered into effective this 30th day of December, 1998, by and between Nortech Systems Incorporated and Nortech Medical Services, Inc. ("BORROWER") and Norwest Bank Minnesota South, N.A., formerly known as Norwest Bank North Country, N.A., a national banking association ("LENDER"). RECITALS: 1. Borrower executed and delivered that certain Commercial/Agricultural Revolving Note Variable Rate dated December 31, 1997 in the original principal amount of $3,000,000.00 (the "$3,000,000 Note"). 2. The parties desire to enter into this modification agreement to amend and modify the Principal Amount/Credit Limit and Maturity Date under the $3,000,000 Note. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. The Principal Amount/Credit Limit under the $3,000,000 Note shall be and hereby is amended to be $5,000,000.00. 2. The Maturity Date under the $3,000,000 Note shall be and hereby is amended to be the date of January 1, 2000, and all outstanding principal and accrued interest shall be due and payable in full on such date. Dated: December 30, 1998 NORWEST BANK MINNESOTA SOUTH, N.A. By: /s/ Barbara A. Smith ----------------------------------- Its Sr. Vice President ----------------------------------- Dated: December 30, 1998 NORTECH SYSTEMS INCORPORATED By: /s/ G. M. Anderly ----------------------------------- Its Sr. V.P. Corporate Finance/Treasurer ----------------------------------- Dated: December 30, 1998 NORTECH MEDICAL SERVICES, INC. By: /s/ G. M. Anderly ----------------------------------- Its Sr. V.P. Corporate Finance/Treasurer ----------------------------------- 2 FIFTH AMENDMENT TO LOAN AGREEMENT This Fifth Amendment is made and entered into as of December 30, 1998, by and among Norwest Bank Minnesota South, N.A., a national banking association, formerly known as Norwest Bank North Country, N.A. and as Northern National Bank ("Lender"), Nortech Systems Incorporated, a Minnesota corporation ("Systems"), and Nortech Medical Services, Inc., a Minnesota corporation ("Medical"; which together with Systems shall hereinafter be referred to collectively as "Borrower"). RECITALS A. Borrower and Lender are parties to a Commercial Loan Agreement dated December 29, 1995 (the "Original Loan Agreement"), in connection with which Lender extended certain financial accommodations to Borrower. B. The Original Loan Agreement was amended pursuant to an Amendment to Loan Agreement dated November 4, 1996, by and between Systems and Lender (the "First Amendment"), a Second Amendment to Loan Agreement, dated as of December 31, 1996, by and among Systems, Medical and Lender (the "Second Amendment"), a Third Amendment to Loan Agreement, dated as of December 31, 1997, by and among Systems, Medical and Lender (the "Third Amendment"), and a Fourth Amendment to Loan Agreement dated as of September 29, 1998, by and among Systems Medical and Lender (the "Fourth Amendment") which together with the Original Loan Agreement, the First Amendment, the Second Amendment, and the Third Amendment shall hereinafter be referred to collectively as the "Loan Agreement"). C. By this Fifth Amendment, Borrower and Lender wish to amend certain terms of the Loan Agreement. NOW, THEREFORE, in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower, Lender, and Systems agree as follows: 1. Schedule A to the Loan Agreement is amended to read as follows:
TYPE INTEREST PRINCIPAL FUNDING/ MATURITY CUSTOMER LOAN OF RATE AMOUNT/ AGREEMENT DATE NUMBER NUMBER LOAN CREDIT DATE LIMIT - -------------------------------------------------------------------------------- Revolving Variable $5,000,000 12/31/97 01/01/00 237945 Term Variable $ 510,000 12/29/95 01/01/01 237945 9003 Term Variable $ 640,000 12/29/95 01/01/01 237945 9004 Term Variable $ 500,000 12/31/97 01/01/00 237945 9005 Term Variable $1,500,000 12/31/97 01/01/00 237945 Term Fixed $ 300,000 09/24/93 05/01/99 237945 9001 Draw Variable $ 400,000 11/25/96 01/01/00 237945 9006 Term Variable $ 125,000 03/18/93 04/01/00 237945 9002
2. Paragraph I.3 of the Financial Covenants Schedule of the Loan Agreement is amended to read as follows: "DEBT TO WORTH. A ratio of total liabilities to tangible net worth of not greater than 2.5:1.0" 3. Paragraph III of the Financial Covenants Schedule of the Loan Agreement shall be amended to read as follows: "CASH FLOW COVERAGE; Borrower shall maintain a minimum cash-flow-to-debt service coverage ratio of 1.5:1.0. The ratio shall be calculated on a four quarter trailing basis. The cash flow ratio shall be calculated as net income after taxes + interest expense + depreciation/amortization expense + non-cash tax expense - dividends divided by all principal + interest payable during the time period being measured." 4. Schedule B of the Loan Agreement is amended to add the following Loan Documents: "Fifth Amendment to Loan Agreement Amendment of Guaranty Second Amendment to Mortgage Amendment of $3,000,000 Promissory Note Amendment of $1,500,000 Promissory Note" 2 5. Schedule B of the Loan Agreement is amended to delete the following Loan Document: $1,500,000 Commercial/Agricultural Revolving Note - Variable Rate Loan Number 533909" 6. All the terms, covenants and conditions of the Loan Agreement remain in full force and effect except as specifically modified herein. IN WITNESS WHEREOF, the parties have executed this Fifth Amendment to Loan Agreement as of the day and year first above written. NORWEST BANK MINNESOTA SOUTH, N.A., A NATIONAL BANKING ASSOCIATION By: /s/ Barbara A. Smith ------------------------------- Its: Sr. Vice President ---------------------------- NORTECH SYSTEMS INCORPORATED, A MINNESOTA CORPORATION By: /s/ G. M. Anderly -------------------------------- Its: Sr. V.P. Finance/Treasurer ---------------------------- NORTECH MEDICAL SERVICES, INC. A MINNESOTA CORPORATION By: /s/ G. M. Anderly -------------------------------- Its: Sr. V.P. Finance/Treasurer ---------------------------- 3 U.S. Bank #000034 SECOND AMENDMENT TO MORTGAGE This Second Amendment to Mortgage is made and entered into as of December 30, 1998, by and between Nortech Systems Incorporated, a Minnesota corporation ("Mortgagor"), and Norwest Bank Minnesota South, N.A., formerly known as Norwest Bank North Country, N.A. and as Northern National Bank, a national banking association, ("Mortgagee"). R E C I T A L S A. Mortgagor and Mortgagee are parties to a Combination Mortgage, Security Agreement and Fixture Financing Statement dated December 29, 1995, and recorded on January 3, 1996, in the Office of the County Recorder for the County of Martin, Minnesota, as Document No. 323918, as amended by Amendment to Mortgage dated December 31, 1996, and recorded on __________, in the Office of the County Recorder for the County of Martin, Minnesota, as Document No. ____________(the "Mortgage"). B. The Mortgage encumbers the real property legally described on EXHIBIT A attached hereto. C. The Mortgage secures, INTER ALIA, the repayment of indebtedness evidenced by certain promissory notes payable to the order of Mortgagee. D. Mortgagor has requested that Mortgagee increase the original principal amount from $3,000,000 to $5,000,000 of that certain Commercial/Agricultural Revolving Note-Variable Rate dated December 31, 1997 by Mortgagor payable to the order of Mortgagee (the "$5,000,000 Note") and extend the time within which to repay the $5,000,000 Note from June 30, 1999 to January 1, 2000. E. Mortgagor and Mortgagee desire to amend the Mortgage to conform to and secure repayment of the $5,000,000 Note. NOW, THEREFORE, in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Mortgagor hereby certifies and acknowledges that no Event of Default has occurred or is continuing under the Mortgage and no event has occurred which with the giving of notice or the passage of time would mature into such an Event of Default. 2. Mortgagor restates and reaffirms all of the representations and warranties contained in the Mortgage the same as if they were made on the date hereof and were fully set forth herein. 3. All the terms, covenants and conditions of the Mortgage remain in full force and effect except as specifically modified herein. 4. All references in the Mortgage to the Notes shall be deemed to include the $5,000,000 Note and the Mortgage shall secure, INTER ALIA, the repayment of all indebtedness evidenced thereby whether payable to Mortgagee by Mortgagor or by Nortech Medical Services, Inc., a Minnesota corporation. IN WITNESS WHEREOF, the parties have caused this Second Amendment to Mortgage to be duly executed as of the day and year first above written. NORTECH SYSTEMS INCORPORATED By: /s/ G. M. Anderly --------------------------------------- Its Sr. V.P. Corporate Finance/Treasurer ------------------------------------ NORWEST BANK MINNESOTA SOUTH, N.A. By: /s/ Barbara A. Smith ------------------------------------- Its Sr. Vice President ---------------------------------- STATE OF MINNESOTA ) )ss. COUNTY OF BELTRAMI ) The foregoing instrument was acknowledged before me this 30th day of December, 1998, by Garry Anderly as Sr. V.P./Treasurer of Nortech Systems Incorporated, a Minnesota corporation, on behalf of such corporation. /s/ Julie A. Valentine -------------------------------- [Notary Seal] Notary Public 2 STATE OF MINNESOTA ) )ss. COUNTY OF BELTRAMI ) The foregoing instrument was acknowledged before me this 30th day of December, 1998, by Barbara A. Smith as Sr. V.P. of Norwest Bank Minnesota South, N.A., a national banking association, on behalf of the bank. /s/ Julie A. Valentine -------------------------------- [Notary Seal] Notary Public This instrument was drafted by: Robins, Kaplan, Miller & Ciresi L.L.P. 2800 LaSalle Plaza 800 LaSalle Avenue Minneapolis, MN 55402-2015 3 U.S. BANK #000083 AMENDMENT OF $1,500,000 PROMISSORY NOTE This Amendment of $1,500,000 Promissory Note made and entered into effective this 30th day of December, 1998, by and between Nortech Systems Incorporated and Nortech Medical Services, Inc. ("BORROWER") and Norwest Bank Minnesota South, N.A., formerly known as Norwest Bank North Country, N.A., a national banking association ("LENDER"). RECITALS: 1. Borrower executed and delivered that certain Variable Rate Commercial Promissory Note dated December 31, 1997 in the original principal amount of $1,500,000.00, payable to the order of Lender (the "$1,500,000 Note"). 2. The parties desire to enter into this modification agreement to amend and modify the Maturity Date under the $1,500,000 Note. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: The Maturity Date under the $1,500,000 Note shall be and hereby is amended to be the date of January 1, 2000, and all outstanding principal and accrued interest shall be due and payable in full on such date. Dated: December 30, 1998 NORWEST BANK MINNESOTA SOUTH, N.A. By: /s/ Barbara A. Smith ------------------------------------- Its Sr. Vice President ---------------------------------- Dated: December 30, 1998 NORTECH SYSTEMS INCORPORATED By: /s/ G. M. Anderly ---------------------------------------- Its Sr. V.P. Corporate Finance/Treasurer ------------------------------------- Dated: December 30, 1998 NORTECH MEDICAL SERVICES, INC. By: /s/ G. M. Anderly ---------------------------------------- Its Sr. V.P. Corporate Finance/Treasurer ------------------------------------- CONSENT The undersigned being Guarantor of the above-referenced $1,500,000 Note pursuant to that certain Commercial Continuing Guaranty (Limited) dated December 31, 1997 in favor of Norwest Bank Minnesota South, N.A., formerly known as Norwest Bank North Country, N.A., does hereby consent to the foregoing Amendment of $1,500,000 Note. -------------------------------- Myron Kunin CONSENT The undersigned being Guarantor of the above-referenced $1,500,000 Note pursuant to that certain Commercial Continuing Guaranty (Limited) dated December 31, 1997 in favor of Norwest Bank Minnesota South, N.A., formerly known as Norwest Bank North Country, N.A., does hereby consent to the foregoing Amendment of $1,500,000 Note. Curtis Squire, Inc. By: -------------------------- Myron Kunin, Chairman 2 AMENDMENT OF GUARANTY Norwest Bank Minnesota South, N.A., a national banking association, formerly known as Norwest Bank North Country, N.A. and as Northern National Bank (the "Bank") hereby amends that certain Commercial Continuing Guaranty (Limited) of Myron Kunin ("Guarantor") to the Bank dated December 31, 1997, guaranteeing the obligations of Nortech Systems, Incorporated (the "Guaranty") to release from the obligations of the Guarantor that certain Commercial/Agricultural Revolving Note-Variable Rate dated December 31, 1997 by Nortech Systems Incorporated and Nortech Medical Services, Inc. payable to the order of the Bank in the original principal amount of $1,500,000; PROVIDED, HOWEVER, that such release shall not effect Guarantor's obligation for that certain Variable Rate Commercial Promissory Note dated December 31, 1997 by Nortech Systems Incorporated payable to the order of the Bank in the original principal amount of $1,500,000. Dated this 30th day of December, 1998. NORWEST BANK MINNESOTA SOUTH, N.A. By: /s/ Barbara A. Smith ------------------------- Its: Sr. Vice President ------------------------- EX-23.1 4 EXHIBIT 23-1 [LETTERHEAD] INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference, in the Registration Statements of Nortech Systems Incorporated on Forms S-8 registered on June 21, 1994 and June 30, 1993, of our reports dated February 12, 1999, in the Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Larson, Allen, Weishair & Co., LLP -------------------------------------- LARSON, ALLEN, WEISHAIR & CO., LLP St. Cloud, Minnesota March 31, 1999 EX-27 5 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 415,448 0 5,532,971 151,627 9,383,875 16,201,487 11,550,545 4,785,474 24,728,562 5,217,454 0 0 250,000 23,514 8,091,057 24,728,562 40,355,867 40,355,867 33,758,148 33,758,148 5,139,075 0 1,004,777 453,867 124,000 329,867 0 0 0 329,867 .14 .14
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