Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001

For the transition period from                                      to                                     

Commission file number 0-13257

NORTECH SYSTEMS INCORPORATED
(Exact name of registrant as specified in its chapter)

Registrant's telephone No., including area code: (952) 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 $10.70 per share average of the closing bid and asked prices, respectively, on March 6, 2002 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 $11,714,456.

        As of March 1, 2002 there were 2,361,192 shares of the Company's $.01 per share par value common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        The following documents are incorporated by reference to the parts indicated of the Annual Report on Form 10-K:

(The remainder of this page was intentionally left blank)

2

NORTECH SYSTEMS INCORPORATED
Annual Report on Form 10-K
for the year ended December 31, 2001

INDEX

3

PART I

ITEM 1. BUSINESS

Description of Business

        Nortech Systems Incorporated and Subsidiary (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 maintains various manufacturing facilities in Minnesota locations of Bemidji, Fairmont, Baxter, and Merrifield as well as Augusta, Wisconsin. The Company manufactures wire harnesses, cables, electronic sub-assemblies and components, and printed circuit board assemblies. The Company provides a full "turnkey" contract manufacturing service to its customers. A majority of revenue is derived from products that are built to the customer's design specifications. Nortech Medical Services, Inc., it's 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, automotive industry, defense industry and industrial products. The Company's 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, Kodak, Thermo King, Polaris, Cubic, Icon Systems, Allen-Bradley, Semitool, Silicon Graphics and United Defense.

        The Company believes that contract manufacturing will continue to grow and expand in the United States and offshore because contract manufacturing provides OEMs 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 with significantly lower overhead costs and ability to solve logistical problems with offshore manufacturing.

        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. and known as the Company's Medical Management operating segment), also provides service bureau and office management services to physicians. During 1999 this subsidiary was designated a discontinued operation and continues to be classified as such in the consolidated financial statements.

        In March 1995, the Company acquired all of the assets of Monitor Technology Corporation. The Company had continued the business of Monitor Technology Corporation, (named Imaging Technologies and known as the Company's Display Products operating segment), which was the manufacturing of large-screen, high-resolution video monitors for radar, document and medical imaging as well as repair services on internally and externally produced monitors. In June 1999, the Company adopted a formal plan to discontinue the Imaging Technologies Division and it was ultimately sold in February of 2000.

        In August 1995, the Company acquired all the assets of the Aerospace Division of Communication Cable, Inc. (CCI). The Company has continued the business formerly conducted by CCI, which involves

4

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. (CSI). The Company has continued the business formerly conducted by CSI, which involves contract manufacturing of electronic sub-assemblies and components.

        At December 31, 1998, the Company had reported segment information of its three identifiable segments; Contract Manufacturing, Display Products and Medical Management. However, on June 30, 1999, the Company formally adopted a plan to dispose of two of the segments, including Display Products and Medical Management. Thus, the Company's remaining continuing operations fall within the Contract Manufacturing segment.

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, and printed circuit board assemblies markets, and intends to expand from this market segment into complete electromechanical assemblies using the resources acquired from the 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 location became ISO 9002 Certified in October 1998, the Aerospace operation became ISO 9001 certified and AS 9000 recognized in April 1999, the Intercon I location became ISO 9002 certified in October 1999. All operations continue to actively maintain their certifications. The Company believes these certifications benefit its current customer base as well as attract new business opportunities.

        The Company will continue its commitment to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, the Company will provide complete manufacturing services to customers, from the procurement of materials to the manufacturing, testing and shipping of products. The Company will continue its efforts to diversify its customer base and expand into other segments of the electronic manufacturing subcontract business.

Marketing

        The Company is continuing to concentrate its marketing activities in the medical, industrial, automotive 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), statistical quality control (SQC), International Standards Organization (ISO) and Aerospace Systems 9100 (AS). The Company has initiated efforts to expand its markets beyond the Upper Midwest area. New market opportunities are being pursued in Mexico, Asia and Europe, as well as industry publications and selected trade shows. The Company markets its products and services through internal sales people and 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

5

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.

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 believes that foreign competitors do provide a substantial competitive threat as shown by the commoditization of PC/printer cable and the "bargain basement" prices. Many OEM's have moved their manufacturing to foreign soil, and in doing so have minimized freight costs to ship to their locations. Technical support from foreign competition has improved greatly along with their ability to be more responsive to engineering and schedule changes. The willingness of foreign competitors to "stock" finished product at warehouse locations in the United States is another competitive move.

        The Company has contractual agreements that allow its products to be manufactured in both China and Mexico, thereby making itself competitive with foreign low cost competitors.

        The Company will pursue acquisitions, mergers, or joint ventures of manufacturing companies/facilities in low cost countries to retain and grow its customer/revenue base and support its strategic vision to be a competitive world class Electronic Manufacturing Services provider.

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 $10.6 million on December 31, 2000 and approximately $10.8 million on December 31, 2001. This backlog will be realized as revenue within the first quarter of 2002.

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 on customer receivable collections in any particular industry or geographic area.

        One customer, G.E. Medical, accounted for 24% and 13% of sales for the years ended December 31, 2001 and 2000, respectively. This reflects Nortech Systems, Inc. position as a key supplier to G.E. Medical and the increased growth rate for the medical industry.

Research and Development

        The Company expended no dollars in 2001, 2000 and 1999, on Company-sponsored research and development.

6

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 484 full-time, 119 part-time and 112 temporary employees as of December 31, 2001. Manufacturing, manufacturing product support and medical support services comprise 664 employees while general administration comprises 51 employees.

ITEM 2. PROPERTIES

        The Company's Corporate Headquarters consist of approximately 3,648 square feet located in Wayzata, Minnesota, a western suburb of Minneapolis, Minnesota. The Corporate Headquarters has a lease with a five-year term that expires in July 31, 2005. The Company owns its Bemidji, Minnesota facility consisting of eight acres of land and 60,000 square feet of office and manufacturing space and leases another 20,000 square feet of manufacturing and office space in Augusta, Wisconsin.

        The Company's Medical Management operating segment operates from a facility shared with Corporate Headquarters located in Wayzata, Minnesota.

        The Company also owns three buildings, which contain approximately 46,900 square feet, and are located in Fairmont, Minnesota. The buildings contain the manufacturing activities of Aerospace Systems operation, including 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. The Company also assumed the lease of a building in Aitkin, Minnesota, which provides 10,750 square feet, which, was used for video cable assembly and storage. The lease is scheduled to expire December 1, 2005 at which time the Company has an option to purchase.

        The Company also leases a 7,500 square foot building in Baxter, Minnesota for electronic board repair for medical equipment. The lease is scheduled to expire June 30, 2006.

        The Company believes that each of these locations is adequate and that space is available if needed 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 required to be reported under the instructions to this item have been submitted to a vote of security holders.

        (The remainder of this page was intentionally left blank)

7

PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock is traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Small Cap Market under the symbol "NSYS".

        The high and low closing sales prices for the Company's Common Stock, as reported on the NASDAQ, for each quarterly period within the two most recent years were as follows:

        These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions.

        As of March 9, 2002, there were approximately 1,161 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.

ITEM 6. SELECTED FINANCIAL DATA

        The following selected historical financial data set forth below have been derived from, and are qualified by reference to the audited Consolidated Financial Statements of Nortech Systems Incorporated and Subsidiary as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001. The audited financial statements of Nortech Systems Incorporated and Subsidiary referred to above are included elsewhere herein. The selected historical financial data set forth below as of December 31, 1999, 1998 and 1997 and for each of the two years in the period ended December 31, 1998 have been derived from the audited financial statements of Nortech Systems Incorporated and Subsidiary not included herein. The selected financial data set forth below should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and accompanying notes thereto of Nortech Systems Incorporated and Subsidiary included elsewhere herein.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

        Certain amounts above have been restated to reflect the results of continuing operations.

        For additional selected Financial Data (Past two years by quarter information), see Note 13 of the Consolidated Financial Statements.

8

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Continuing Operations For Years Ended December 31, 2001, 2000, and 1999

Revenues

        For the years ended December 31, 2001 and 2000, the Company had sales of $58.5 million and $54.8 million, respectively. The increase of $3.7 million or 6.8%, resulted primarily from internal growth of our current customer base. The major increases were in the medical and defense industries. The Company's emphasis is to continually seek mature companies that require a contract manufacturer with a high degree of manufacturing and quality sophistication. For the year ended December 31, 1999 the Company had sales of $38.5 million. The approximate 42.4% increase in sales in 2000 was attributable primarily to internal growth of our current customer base. The Company expects revenue growth to continue at a moderate rate for the year 2002.

Gross Profit

        For the years ended December 31, 2001, 2000 and 1999, the Company had gross profit of $10.4 million, $10.3 million, and $6.5 million, respectively. Gross profits as a percentage of gross sales were 17.9%, 18.7%, and 16.7% for the years ended December 31, 2001, 2000 and 1999, respectively. As revenues grow, the Company continues to strive to hold down cost levels by improving productivity and reducing material costs in order to help offset the request for price reductions from customers. The price competitive nature of the business requires the use of service, quality and timely delivery to help attract customers.

Selling

        Selling expenses were $2.8 million, $2.2 million, and $1.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. The majority of the increase from 1999 to 2000 and from 2000 to 2001 reflected the costs related to additional internal sales force and commissioned sales on revenue growth.

General and Administrative

        For the years ended December 31, 2001, 2000 and 1999, general and administrative expenses were $3.4 million, $4.0 million and $2.4 million, respectively. The reduction in expenses from 2000 to 2001 reflected the use of cost cutting methods and a reduction in administrative staff. The increase in expenses from 1999 to 2000 reflected the costs related to succession planning and incentive compensation.

Interest Income

        Interest income for the years ended December 31, 2001, 2000 and 1999 were $.018 million, $.028 million and $.027 million, respectively. The interest income was realized as a result of various investments of cash.

Miscellaneous Income

        Miscellaneous income was $.003 million, $.016 million and $.039 million for the years ended December 31, 2001, 2000 and 1999, respectively. The miscellaneous income resulted primarily from charges for miscellaneous services that vary by year.

9

Interest Expense

        Interest expense was $.78 million, $1.0 million, and $.82 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company has maintained level debt by reinvesting the profits in the growth of the Company. However, prime lending rates decreased in 2001 resulting in lower interest expense.

Income Taxes

        Income tax expense was $1.4 million, $1.1 million, and $.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.

        All of the Alternative Minimum and other tax credits available at the end of December 31, 2000 were used to offset federal income taxes due in 2001.

        The Company utilized operating loss carryforwards of $1.5 million and $.9 million for the years ended December 31, 2000, and 1999, respectively, to offset federal taxable income. The Company also utilized $.001million of an expiring investment tax credit to offset federal tax and forfeited an additional $.039 million of credits due to expiration in 2000.

Net Income

        The Company's net income from continuing operations in 2001 was $2.1 million or $.89 per common share. The Company's net income from continuing operations in 2000 was $2.0 million or $.86 per common share. The Company's net income from continuing operations in 1999 was $1.1 million or $.46 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 increased from $9.6 million as of December 31, 2000, to $14.5 million on December 31, 2001. Increase in working capital is due to refinancing majority of its debt with Wells Fargo Bank, N.A on January 31, 2002 (refer to Note 4 in the notes to Consolidated Financial Statements for further disclosures). Stockholders equity increased from $8.5 million on December 31, 2000, to $10.6 million on December 31, 2001 as a result of the Company's 2001 net profit from continuing operations. The Company's liquidity and capital resources are strong, 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.

Provision for the Private Securities Litigation Reform Act of 1995

        While this release is based on management's best judgment and current expectations, actual results may differ based on many factors, including the Company's competitive performance and changes in market conditions.

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 2001 effective average interest rate on variable earnings should not have a material effect on the Company's earnings for 2002.

        (The remainder of this page was intentionally left blank)

10

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

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

11

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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

LARSON, ALLEN, WEISHAIR & CO., LLP

St. Cloud, Minnesota
February 13, 2002

12

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 AND 2000

See accompanying Notes to Consolidated Financial Statements.

13

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See accompanying Notes to Consolidated Financial Statements.

14

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999