- -------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
(mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended October 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For transition period from ________________ to
_________________
0-16438
(Commission File Number)
NATIONAL TECHNICAL SYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4134955
------------------------ ----------------------
(State of Incorporation) (IRS Employer
Identification number)
24007 Ventura Boulevard, Suite 200, Calabasas, California
---------------------------------------------------------
(Address of registrant's principal executive office)
(818) 591-0776 91302
------------------------------- ----------
(Registrant's telephone number) (Zip code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [x] NO [ ]
The number of shares of common stock, no par value, outstanding as of December
10, 1998 was 8,315,832.
Exhibit Index on Page 20
1
Page 1 of 41
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of
October 31, 1998 and January 31, 1998 3
Unaudited Condensed Consolidated Statements of Income
For the Nine Months Ended October 31, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of Operations
For the Three Months Ended October 31, 1998 and 1997 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended October 31, 1998 and 1997 6
Notes to the Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION & SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 19
2
Page 2 of 41
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
October 31, January 31,
1998 1998
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 2,538,000 $ 2,510,000
Receivables, less allowance for doubtful accounts
of $813,000 at October 31, 1998 and $741,000 at
January 31, 1998 19,934,000 18,382,000
Income taxes receivable 307,000 104,000
Inventories 1,818,000 1,860,000
Deferred tax assets 523,000 523,000
Prepaid expenses 1,290,000 919,000
------------ ------------
Total current assets 26,410,000 24,298,000
Property, plant and equipment, at cost 52,795,000 50,121,000
Less: accumulated depreciation 32,612,000 30,732,000
------------ ------------
Net property, plant and equipment 20,183,000 19,389,000
Property held for sale 544,000 544,000
Intangible assets, net 565,000 637,000
Other assets 1,487,000 1,244,000
------------ ------------
TOTAL ASSETS $ 49,189,000 $ 46,112,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,001,000 $ 3,376,000
Accrued expenses 5,848,000 3,390,000
Income taxes payable 0 69,000
Current installments of long-term debt 1,655,000 1,551,000
------------ ------------
Total current liabilities 10,504,000 8,386,000
Long-term debt, excluding current installments 12,809,000 12,859,000
Deferred income taxes, compensation and other items 2,813,000 2,798,000
Minority interest 39,000 27,000
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized,
20,000,000; issued and outstanding
8,311,000 as of October 31, 1998 and
8,168,000 as of January 31,1998 11,460,000 11,284,000
Retained earnings 11,564,000 10,758,000
------------ ------------
Total stockholders' equity 23,024,000 22,042,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,189,000 $ 46,112,000
============ ============
See accompanying notes.
3
Page 3 of 41
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Nine Months Ended October 31, 1998 and 1997
1998 1997
----------- ------------
Revenues $ 68,052,000 $ 60,532,000
Cost of sales 48,422,000 42,968,000
------------ ------------
Gross profit 19,630,000 17,564,000
Selling, general and administrative expense 14,518,000 12,258,000
Merger costs 906,000 --
------------ ------------
Operating income 4,206,000 5,306,000
Other income (expense):
Interest expense, net (918,000) (958,000)
Other 13,000 82,000
------------ ------------
Total other expense (905,000) (876,000)
------------ ------------
Income before income taxes, minority interest
and cumulative effect of change in accounting
for start-up expenses 3,301,000 4,430,000
Income taxes 1,341,000 1,664,000
------------ ------------
Income before minority interest and cumulative
effect of change in accounting for start-up
expenses 1,960,000 2,766,000
Minority interest (12,000) (10,000)
------------ ------------
Income before cumulative effect of change in
accounting for start-up expenses 1,948,000 2,756,000
Cumulative effect of change in accounting for
start-up expenses, net of taxes (473,000) --
------------ ------------
Net income $ 1,475,000 $ 2,756,000
============ ============
Basic earnings per common share: $ 0.18 $ 0.34
============ ============
Diluted earnings per common share: $ 0.17 $ 0.33
============ ============
Weighted average common shares outstanding 8,210,000 8,026,000
Dilutive effect of stock options 385,000 332,000
------------ ------------
Weighted average common shares outstanding,
assuming dilution 8,595,000 8,358,000
============ ============
See accompanying notes.
4
Page 4 of 41
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended October 31, 1998 and 1997
1998 1997
------------ ------------
Revenues $ 23,230,000 $ 21,443,000
Cost of sales 16,606,000 15,123,000
------------ ------------
Gross profit 6,624,000 6,320,000
Selling, general and administrative expense 5,455,000 4,395,000
Merger costs 545,000 --
------------ ------------
Operating income 624,000 1,925,000
Other income (expense):
Interest expense, net (315,000) (342,000)
Other (4,000) 4,000
------------ ------------
Total other expense (319,000) (338,000)
------------ ------------
Income before income taxes, minority interest and
cumulative effect of change in accounting for
start-up expenses 305,000 1,587,000
Income taxes 297,000 585,000
------------ ------------
Income before minority interest and cumulative
effect of change in accounting for start-up
expenses 8,000 1,002,000
Minority interest (3,000) (9,000)
------------ ------------
Income before cumulative effect of change in
accounting for start-up expenses 5,000 993,000
Cumulative effect of change in accounting for
start-up expenses, net of taxes (378,000) --
------------ ------------
Net income (loss) $ (373,000) $ 993,000
============ ============
Basic earnings (loss) per common share: $ (0.05) $ 0.12
============ ============
Diluted earnings (loss) per common share: $ (0.04) $ 0.12
============ ============
Weighted average common shares outstanding 8,281,000 8,144,000
Dilutive effect of stock options 325,000 472,000
------------ ------------
Weighted average common shares outstanding,
assuming dilution 8,606,000 8,616,000
============ ============
See accompanying notes.
5
Page 5 of 41
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 31, 1998 and 1997
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income from continuing operations $ 1,475,000 $ 2,756,000
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation and amortization 2,151,000 1,787,000
Provision for losses on receivables (recoveries) 72,000 122,000
Deferred income taxes 15,000 (163,000)
Tax benefit from sale of stock options exercised -- 120,000
Net changes in assets and liabilities, net:
Accounts receivable (1,624,000) (1,704,000)
Inventories 42,000 (327,000)
Prepaid expenses (371,000) (257,000)
Other assets and Intangibles (90,000) (84,000)
Accounts payable (375,000) (1,013,000)
Accrued expenses 2,458,000 1,021,000
Undistributed earnings of affiliate 12,000 10,000
Earnings from merged entity due to change
in accounting period 181,000 --
Income taxes (272,000) 217,000
------------ ------------
Net cash provided by operating activities 3,674,000 2,485,000
============ ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,946,000) (3,293,000)
Proceeds from sale of assets 73,000 21,000
Investment in life insurance (153,000) (163,000)
Investment in new business -- (275,000)
------------ ------------
Net cash used for investing activities (3,026,000) (3,710,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 4,743,000 16,181,000
Repayments of current and long-term debt (4,689,000) (14,379,000)
Cash dividends paid (488,000) (415,000)
Distributions paid (362,000) (64,000)
Repurchase of common stock -- (5,000)
Proceeds from stock options exercised 176,000 256,000
------------ ------------
Net cash provided by (used for) financing
activities (620,000) 1,574,000
------------ ------------
Net increase in cash 28,000 349,000
Beginning cash balance 2,510,000 1,430,000
------------ ------------
ENDING CASH BALANCE $ 2,538,000 $ 1,779,000
============ ============
See accompanying notes
6
Page 6 of 41
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
In accordance with instructions to Form 10-Q the accompanying consolidated
financial statements and footnotes of National Technical Systems, Inc.
(NTS or the Company) have been condensed and, therefore, do not contain
all disclosures required by generally accepted accounting principles.
These statements should not be construed as representing pro rata results
of the Company's fiscal year and should be read in conjunction with the
financial statements and notes thereto included in the Registrant's Form
10-K for the year ended January 31, 1998 and the financial statements and
footnotes included in NTS's Form 8-K filed with the Securities and
Exchange Commission on November 3, 1998 and the Registration Statement on
Form S-3 (File No. 333-66795) filed with the Securities and Exchange
Commission on November 4,1998.
On October 30, 1998, NTS completed its merger with XXCAL, Inc. and
acquisition of XXCAL Limited (together, "XXCAL"). The merger was treated
as a pooling of interests whereby NTS issued to the shareholders of XXCAL
1,297,878 shares of NTS common stock constituting 15.6% of the outstanding
common stock of NTS after giving effect to the merger. NTS has also
reserved an additional 214,622 shares of its common stock for issuance
upon exercise of outstanding XXCAL stock options that were assumed by the
Company.
The statements presented as of and for the nine-month and three-month
periods ended October 31, 1998 and 1997 are unaudited and are presented
based on the "pooling of interests" method of accounting pursuant to
Opinion No. 16 of the Accounting Principles Board (APB 16). They include
the combined financial statements of NTS and XXCAL from the beginning of
the fiscal year. All prior year financial statements have also been
restated to reflect the pooling of interests method of accounting. In
management's opinion, all adjustments have been made to present fairly the
results of such unaudited interim periods.
The consolidated financial statements include the accounts of the Company
and its wholly owned and financially controlled subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
2 Merger Costs
For the nine months ended October 31, 1998, the Company incurred $906,000
in one-time merger costs related to outside consulting, accounting, legal
fees and other fees and expenses specifically associated with the merger
between NTS and XXCAL and in accordance with APB 16 these costs were
expensed as incurred. The majority of these merger costs are
non-deductible for tax purposes.
7
Page 7 of 41
<PAGE>
3. Start-Up Expenses
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting the Costs of Start-Up
Activities", which requires that costs related to start-up activities be
expensed as incurred. The Company adopted the provisions of the SOP in its
financial statements during the third quarter of its current fiscal year
ending January 31, 1999. The effect of adoption of SOP 98-5 was to record
a one-time charge of the cumulative effect of changes in accounting of
$473,000 ($0.06 per basic share and $0.05 per diluted share) net of taxes
to expense all start-up costs. $95,000 ($0.01 per basic and diluted share)
in start-up costs will be retroactively expensed in the first quarter of
the current fiscal year and the remaining $378,000 ($0.05 per basic share
and $0.04 per diluted share) is expensed in the third quarter of the
current fiscal year.
4. Income Taxes
Income taxes for the interim periods are computed using the effective tax
rates estimated to be applicable for the full fiscal year based on the
provision accrued for the Company's year ended January 31, 1998. However
the combined tax provision is less than the expected statutory rate as
XXCAL had elected to be taxed as an S Corporation for the period preceding
the merger.
5. New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement No.128,
"Earnings Per Share". The statement replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been presented, and where appropriate, restated to
conform to the statement's requirements.
As of February 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income
or shareholders' equity. Statement 130 requires display of unrealized
gains or losses on available-for-sale securities and foreign currency
translation adjustments. The Company does not have these accounting
transactions. Prior year financial statements have not been reclassified
to conform to the requirements of statement 130 since there is no impact.
6. Inventories
Inventories consist of accumulated costs applicable to uncompleted
contracts and are stated at actual cost which is not in excess of
estimated net realizable value.
8
Page 8 of 41
<PAGE>
7. Interest and Taxes
Cash paid for interest and taxes for the nine months ended October 31,1998
was $951,000 and $1,116,000 respectively. Cash paid for interest and taxes
for the nine months ended July 31, 1997 was $907,000 and $944,000
respectively.
8. Minority Interest
Minority interest in the Company's NQA-USA, Inc. subsidiary is a result of
50% of the stock of NQA-USA, Inc. being issued to National Quality
Assurance, Ltd. Profits and losses are allocated 63% to NTS, Inc. and 37%
to National Quality Assurance, Ltd for the fiscal year ending January 31,
1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
addressed in this Item 2 contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements can be
identified by the use of forward-looking words such as "may", "will",
"expect", "anticipate", "intend", "estimate", "continue", "behave" and similar
words. Financial information contained herein, to the extent it is predictive of
financial condition and results of operations that would have occurred on the
basis of certain stated assumptions, may also be characterized as
forward-looking statements. Although forward-looking statements are based on
assumptions made, and information believed by management to be reasonable, no
assurance can be given that such statements will prove to be correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties occur, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated.
GENERAL
On October 30, 1998, the Company completed its merger with XXCAL. The
transaction was treated as a pooling of interests whereby NTS issued to the
shareholders of XXCAL 1,297,878 shares of NTS common stock constituting 15.6% of
the outstanding common stock of NTS after giving effect to the merger. NTS has
also reserved an additional 214,622 shares of its common stock for issuance upon
exercise of outstanding XXCAL, Inc. stock options that were assumed by the
Company.
XXCAL is principally engaged in outsourcing personnel for a wide variety of
temporary technical and professional positions into the information technology
and information systems industries including compatibility testing of hardware
and software components. XXCAL has approximately 300 employees and has offices
in Los Angeles, San Francisco, San Jose, Austin, Houston, London, England and
Yokohama, Japan.
9
Page 9 of 41
<PAGE>
The statements presented as of and for the nine-month and three-month periods
ended October 31, 1998 and 1997 are unaudited and are presented based on the
"pooling of interests" method of accounting pursuant to Opinion No. 16 of the
Accounting Principles Board. They include the combined financial statements of
NTS and XXCAL from the beginning of the fiscal year. All prior year financial
statements have also been restated to reflect the pooling of interests method of
accounting.
The consolidated balance sheets presented herein for the prior year are as of
January 31, 1998 for NTS and December 31, 1997 for XXCAL. The consolidated
statements of income and operations presented herein for the prior year are for
the nine months and three months ended October 31, 1997 for NTS and nine months
and three months ended September 30, 1997 for XXCAL. The consolidated statements
of cash flows presented herein for the prior year are for the nine months ended
October 31, 1997 for NTS and nine months ended September 30, 1997 for XXCAL. All
financial statements presented herein for the current year are as of and for the
nine and three months ended October 31, 1998 for both entities.
The Company has reorganized itself into two major operational groups: 1) The
Evaluation and Engineering Group which includes all the Technical Services
testing facilities and the Certification Services unit. 2) The IT Solutions
Group which combines XXCAL with the NTS Technical Staffing and Registration
businesses. Each group is under the direction of its own executive management
team. Accordingly, the Company's segment reporting has been changed to reflect
this new structure.
The following discussion should be read in conjunction with the consolidated
quarterly financial statements and notes thereto. All information is based upon
operating results of National Technical Systems, Inc. for the nine months ended
October 31.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Nine months ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Evaluation & Engineering $32,904 4.0% $31,631
IT Solutions 35,148 21.6% 28,901
----------- ------------
Total net revenues $68,052 12.4% $60,532
=========== ============
For the nine months ended October 31, 1998, consolidated revenues increased by
$7,520,000 or 12.4% when compared to the same period in 1997.
Evaluation & Engineering:
- -------------------------
In 1998, the Evaluation and Engineering segment revenues increased by $1,273,000
primarily due to the additional revenues generated from two new testing
facilities added during 1997. This increase was partially offset by decreases in
the revenues generated by some of the facilities which have experienced a
slowdown in their production activities as some programs are reaching maturity
and as some of the newer research and development programs being conducted by
the Company's clients are experiencing difficulties producing new products due
10
Page 10 of 41
<PAGE>
to technological problems thus delaying production of hardware for evaluation
and testing.
IT Solutions:
- -------------
Revenues in the IT Solutions segment increased by $6,247,000 or 21.6% due to
increases in fee placements in the IT portion of its business, the continuing
success of its strategic alliances with Fortune 500 companies and other major
technical staffing companies, an aggressive expansion into new markets in the IT
business and an increase in registration revenues due to increased demand by
U.S. companies for ISO 9000 certification. The Company has increased its efforts
in the permanent placement market due to customer demand and has enjoyed growth
in that area. Because of the Asian economic decline, several key programs in the
hardware and software compatibility testing area have been delayed or canceled.
This has particularly affected the growth of the revenues from the Japanese
market. In order to mitigate this downturn, the Company is now 52% owner in a
Japanese company based in Yokohama. This will allow Japanese customers to work
directly with our Company in Japan thus reducing their export costs and the
delays associated with exporting.
GROSS PROFIT
Nine months ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Evaluation & Engineering $8,605 -1.0% $8,694
% to segment revenue 26.2% 27.5%
IT Solutions 11,025 24.3% 8,870
% to segment revenue 31.4% 30.7%
--------- ---------
Total $19,630 11.8%
$17,564
========= =========
% to total net revenue 28.8% 29.0%
Total gross profit for the nine-month period ended October 31, 1998 increased by
$2,066,000 or 11.8% when compared to 1997 primarily as a result of increased
revenues in the IT Solutions Group.
Evaluation & Engineering:
- -------------------------
Gross profit for the Evaluation and Engineering Group slightly decreased as a
result of the slowdown in revenues and competitive pressures which had an
adverse effect on margins. The slowdown in revenues was partially due to the
delays in the production of hardware for evaluation and testing discussed above,
while some of the labor costs remained constant and thus had an adverse effect
on margins. In addition, government laboratories are becoming more aggressive in
competing with private industry for programs, thus increasing the pressure on
profits.
IT Solutions:
- -------------
Gross profit as a percentage of net revenues in 1998 increased by $2,155,000 or
24.3% in the IT Solutions Group when compared to the same period in 1997 due to
the continued growth in this segment of the business and the success in
obtaining more permanent placement contracts. However, the slowdown in revenues
from the Japanese market discussed above had an adverse impact on profits.
11
Page 11 of 41
<PAGE>
SELLING, GENERAL & ADMINISTRATIVE
Nine months ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Evaluation & Engineering $5,190 7.7% $4,817
% to segment revenue 15.8% 15.2%
IT Solutions 9,328 25.4% 7,441
% to segment revenue 26.5% 25.7%
--------- ---------
Total S G & A $14,518 18.4% $12,258
========= =========
% to total net revenue 21.3% 20.3%
Total selling, general and administrative expenses increased $2,260,000 or 18.4%
for the nine-month period ended October 31, 1998 when compared to the same
period in 1997.
Evaluation & Engineering:
- -------------------------
The increase in the Evaluation and Engineering segment was due to efforts to
expand the base of business into new technological areas by engaging specialists
in these new areas to offset the relatively flat growth in the basic testing
business. The Company is redirecting some of its sales efforts to procure larger
evaluation programs which require a greater depth of technical knowledge. Thus
the Company has hired a number of such specialists which has caused selling
expenses to increase in advance of achieving results from their work.
IT Solutions:
- -------------
The increase in the IT Solutions segment was due primarily to costs related to
the planned expansion of the sales and marketing capabilities through new
marketing programs and expansion efforts in new markets.
The Company continues to look for new ways to reduce costs yet remain effective
in all segments of its business.
MERGER COSTS
Nine months ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Merger Costs $906 N/A $0
During the nine months period ended October 31, 1998, the Company incurred
$906,000 in one-time costs related to the merger with XXCAL. These costs are
related to outside consulting, accounting, legal fees and other fees and
expenses specifically associated with the merger and in accordance with APB 16,
they were expensed as incurred.
INTEREST EXPENSE
Net interest expense decreased $40,000 in the nine months ended October 31,
1998, when compared to the same period in 1997. This decrease was principally
due to lower interest rates offset by slightly higher average debt balances.
12
Page 12 of 41
<PAGE>
INCOME TAXES
The income tax provisional rate for the first nine months of 1998 (40.6%) and
1997 (37.6%) reflects a rate in excess of the U.S. federal statutory rate
primarily due to the inclusion of state income taxes. The estimate for fiscal
year ending January 31, 1999 is based on the actual provision accrued for fiscal
year ended January 31, 1998 and XXCAL's projected income tax rate which is lower
since it had elected to be taxed as an S Corporation for the period preceding
the merger. Additional adjustments were made to the current year provision to
account for the non-deductibility for tax purposes of certain merger costs.
Management has determined that it is more likely than not that the deferred tax
asset will be realized on the basis of offsetting it against deferred tax
liabilities. It is the Company's intention to evaluate the realizability of the
deferred tax asset quarterly by assessing the need for a valuation account based
upon future net income of the Company.
START-UP EXPENSES
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up activities", which
requires that costs related to start-up activities be expensed as incurred. The
Company adopted the provisions of the SOP in its financial statements during the
quarter ended October 31, 1998 which resulted in a one-time charge of $473,000
net of taxes in start-up related expenses. (See note 3)
NET INCOME
The decrease in net income for the nine months ended October 31, 1998, compared
to the same period in 1997, was primarily due to the one-time merger costs and
start-up expenses discussed above. In addition, the Company experienced higher
selling, general and administrative expenses, offset partially by higher gross
profit margins due to increased revenues.
YEAR 2000
The Company has assessed and identified to the best of its knowledge all
requirements needed to fix potential problems related to the Year 2000 issue.
This includes: (1) the Company's business software and hardware at all its
locations, (2) the Company's test equipment used in all the laboratories and (3)
communications with third party vendors to ensure they will meet their Year 2000
requirements.
Much of the hardware used by the Company has already been upgraded to become
Year 2000 compliant or will become compliant by March 31, 1999. Certain test
equipment at the laboratories has been identified to be date sensitive and
vendors are supplying new Year 2000 compliant software. In situations where the
software is not available, the Company is replacing the equipment. To complete
the necessary remediation of its business systems software, the Company has
identified new Year 2000 compliant software that will replace certain crucial
software applications it currently uses. All other identified existing systems
will be fixed internally. The Company expects to complete its software
remediation by June 30, 1999.
13
Page 13 of 41
<PAGE>
The estimated total cost for the Year 2000 project is approximately $400,000 for
new hardware, software and in-house programming. The Company does not expect
these costs to have a material impact on the Company's financial position,
results of operations or cash flows.
The Company has also contacted its major third-party vendors and is in the
process of obtaining assurances that their systems are Year 2000 compliant.
Although the Company does not anticipate any material problems resulting from
the Year 2000 issues, it is taking steps to establish a contingency plan in the
event of system failures beyond the Company's control or in the event of failure
by other companies or governmental entities to remediate their own systems.
The following information is based upon results for National Technical Systems,
Inc. for the three months ended October 31.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Quarter ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Evaluation & Engineering $10,718 -2.6% $11,003
IT Solutions 12,512 19.8% 10,440
--------- ----------
Total Revenues $23,230 8.3% $21,443
========= ==========
For the three months ended October 31, 1998, consolidated revenues increased by
$1,787,000 or 8.3% when compared to the same period in 1997.
Evaluation & Engineering:
- -------------------------
Revenues in the Evaluation and Engineering segment decreased $285,000 primarily
due to decreases in the revenues generated by some of the facilities which have
experienced a slowdown in their production activities as some programs are
reaching maturity and as some of the newer research and development programs
being conducted by the Company's clients are experiencing difficulties producing
new products due to technological problems thus delaying production of hardware
for evaluation and testing. This decrease was partially offset by revenues from
a new test facility opened during the fourth quarter of last year.
IT Solutions:
- -------------
Revenues in the IT Solutions segment increased $2,072,000 or 19.8% due to
increases in fee placements in the IT portion of its business, the continuing
success of its strategic alliances with Fortune 500 companies and other major
technical staffing companies, the expansion into new markets and an increase in
registration revenues due to increased demand by U.S. companies for ISO 9000
certification. The Company has increased its efforts in the permanent placement
market due to customer demand and has enjoyed growth in that area. Because of
the Asian economic decline, several key programs in the hardware and software
compatibility testing area have been delayed or canceled. This has particularly
14
Page 14 of 41
<PAGE>
affected the growth of the revenues from the Japanese market. In order to
mitigate this downturn, the Company is now 52% owner in a Japanese company based
in Yokohama. This will allow Japanese customers to work directly with our
Company in Japan thus reducing their export costs and the delays associated with
exporting.
GROSS PROFIT
Quarter ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Evaluation & Engineering $2,532 -16.6% $3,035
% to segment revenue 23.6% 27.6%
IT Solutions 4,092 24.6% 3,285
% to segment revenue 32.7% 31.5%
--------- ---------
Total Gross Profit $6,624 4.8% $6,320
========= =========
% to total revenues 28.5% 29.5%
Total gross profit for the three months ended October 31, 1998 increased by
$304,000 or 4.8% primarily as a result of increased revenues in the IT Solutions
Group which carry a higher gross margin.
Evaluation & Engineering:
- -------------------------
Gross profit for the Evaluation and Engineering Group decreased as a result of
the slowdown in revenues and competitive pressures which had an adverse effect
on margins. The slowdown in revenues was partially due to the delays in the
production of hardware for evaluation and testing discussed above, while some of
the labor costs remained constant and thus had an adverse effect on margins. In
addition, government laboratories are becoming more aggressive in competing with
private industry for programs, thus increasing the pressure on profits.
IT Solutions:
- ------------
Gross profit as a percentage of net revenues in 1998 increased 24.3% in the IT
Solutions Group when compared to the same period in 1997 due to the continued
growth in this segment of the business and the success in obtaining more
permanent placement contracts. However, the slowdown in revenues from the
Japanese market discussed above had an adverse impact on profits.
SELLING, GENERAL & ADMINISTRATIVE
Quarter ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Evaluation & Engineering $1,971 14.7% $1,718
% to segment revenue 18.4% 15.6%
IT Solutions 3,484 30.1% 2,677
% to segment revenue 27.8% 25.6%
--------- --------
Total S G & A $5,455 24.1% $4,395
========= ========
% to total revenues 23.5% 20.5%
15
Page 15 of 41
<PAGE>
Total selling, general and administrative expenses increased by $1,060,000 or
24.1% for the quarter ended October 31, 1998 when compared to the same period in
1997.
Evaluation & Engineering:
- -------------------------
The increase in the Evaluation and Engineering segment was due to efforts to
expand the base of business into new technological areas by engaging specialists
in these new areas to offset the relatively flat growth in the basic testing
business. The Company is redirecting some of its sales efforts to procure larger
evaluation programs which require a greater depth of technical knowledge. Thus
the Company has hired a number of such specialists which has caused selling
expenses to increase in advance of achieving results from their work
IT Solutions:
- -------------
The increase in the IT Solutions segment was due primarily to costs related to
the planned expansion of the sales and marketing capabilities through new
marketing programs and expansion efforts in new markets.
The Company continues to look for new ways to reduce costs yet remain effective
in all segments of its business.
MERGER COSTS
Three months ended October 31 1998 % Change 1997
(Dollars in thousands) -----------------------------------
Merger Costs $545 N/A $0
During the three months period ended October 31, 1998, the Company incurred
$545,000 in one-time costs related to the merger with XXCAL. These costs are
related to outside consulting, accounting, legal fees and other fees and
expenses specifically associated with the merger and in accordance with APB 16,
they were expensed as incurred.
INTEREST EXPENSE
Net interest expense decreased $27,000 in the quarter ended October 31, 1998,
when compared to the same period in 1997. This decrease was principally due to
lower interest rates offset by slightly higher average debt balances.
INCOME TAXES
The income tax provisional rate for the quarters ended October 31, 1998 and 1997
reflects a rate in excess of the U.S. federal statutory rate primarily due to
the inclusion of state income taxes and adjustments that were made to the
current year provision to account for the non-deductibility for tax purposes of
certain merger costs. The estimate for fiscal year ending January 31, 1999 is
based on the actual provision accrued for fiscal year ended January 31, 1998 and
XXCAL's projected income tax rate which is lower since it had elected to be
taxed as an S Corporation for the period preceding the merger. Management has
determined that it is more likely than not that the deferred tax asset will be
16
Page 16 of 41
<PAGE>
realized on the basis of offsetting it against deferred tax liabilities. It is
the Company's intention to evaluate the realizability of the deferred tax asset
quarterly by assessing the need for a valuation account based upon future net
income of the Company.
START-UP EXPENSES
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up activities", which
requires that costs related to start-up activities be expensed as incurred. The
Company adopted the provisions of the SOP in its financial statements during the
quarter ended October 31, 1998 which resulted in a one-time charge of $378,000
net of taxes in start-up related expenses during the third quarter of the
current fiscal year. $95,000 in start-up costs will be retroactively expensed in
the first quarter of the current fiscal year. (See note 3)
NET INCOME (LOSS)
The decrease in net income (loss) for the three months ended October 31, 1998,
compared to the same period in 1997, was primarily due to the one-time merger
costs and start-up expenses discussed above. In addition, the Company
experienced higher selling, general and administrative expenses, offset
partially by higher gross profit margins due to increased revenues.
BUSINESS ENVIRONMENT
Evaluation & Engineering:
- -------------------------
The business climate which has in the past shown signs of uncertainty and which
had appeared to stabilize last year, has again become uncertain. This has
occurred due to program delays in new research and development projects caused
by technical difficulties being experienced by the Company's clients. In
addition, the trend to outsourcing, which started when many contractors began
downsizing, has begun to reverse. Some are now keeping programs in-house. Also,
government laboratories are becoming more aggressive in competing with private
industry for programs. All these factors have rendered the market more
competitive with an attendant pressure on profits.
IT Solutions:
- -------------
The Company has aggressively pursued additional business in the growing IT
market. The Company supplies IT professionals in support of customers who need
help-desk analysts and managers; relational database administrators and
developers; application and systems programmers; configuration and project
managers; and multiple levels of system operations personnel. The Company
believes the growth in this sector will be accompanied by higher margins and
contribute favorably to the overall product mix. Also, the Company continues to
pursue ISO registration business as demand for these services continues to
increase as more companies must compete for business in the global market place.
Notwithstanding the foregoing, and because of factors affecting the Company's
operating results, past financial performance should not be considered to be a
reliable indicator of future performance.
17
Page 17 of 41
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended October 31, 1998, cash provided by operations
increased by $1,189,000 when compared to the same period in 1997. Major items
contributing to this increase were increases in accrued expenses, depreciation
and amortization and the effect of changes in accounts payable and inventories
partially offset by a decrease in net income and income taxes.
Net cash used in investing activities in the nine-month period ended October 31,
1998 decreased $684,000 over the same period in 1997 due to reduced capital
requirements for fiscal year 1999 as compared to fiscal year 1998. The actual
level of capital spending will be dependent on a variety of factors, including
general economic conditions, bank covenants and the Company's operating
requirements.
In the nine-month period ended October 31, 1998, net cash used for financing
activities consisted of debt reduction on lines of credit and short term and
long term debt of $4,689,000 and cash dividends paid of $488,000 and
distributions of $362,000 offset by increases in lines of credit and term loans
of $4,743,000 and proceeds from issuance of common stock of $176,000. In
September 1997, the Company negotiated with Sanwa Bank California as agent and
Mellon Bank for a new credit agreement which includes a $6,000,000 revolving
line of credit at an interest rate equal to the Bank's reference rate plus 0.25%
which expires in September 1999. Also included in the new agreements is a
$6,500,000 term loan at an interest rate of 8.31% which expires in January 2003.
On October 30, 1998, the credit agreement was amended: 1) to extend the term of
the revolving line to September 8, 2000 2) to increase the revolving line amount
from $6,000,000 to $8,000,000 at an interest rate equal to the Bank's reference
rate and 3) to add a new term loan for $2,000,000 at an interest rate equal to
the Bank's reference rate plus 0.25% and a maturity date of November 1, 2003.
Management is not aware of any significant demands for capital funds that may
materially affect the short or long-term liquidity in the form of large fixed
asset acquisitions, unusual working capital commitments or contingent
liabilities. In addition, the Company has made no material commitments for
capital expenditures. The Company's future working capital will be provided from
operations and the current bank revolving line of credit which had $4,100,000
available at October 31, 1998.
18
Page 18 of 41
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10(c)2 - Second Amendment to Credit Agreement between Sanwa
Bank California, Mellon Bank and NTS dated October 30, 1998.
Exhibit 27 - Financial Data Schedule
(b) Form 8-K
During the quarter ended October 31, 1998, the registrant did not file
a current report on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL TECHNICAL SYSTEMS, INC.
Date: December 11, 1998 By: /s/ Lloyd Blonder
----------------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
19
Page 19 of 41
<PAGE>
Exhibit Index
Exhibit No. Description Page No.
- ----------- -------------- ---------
10(c)(2) Second Amendment to Credit Agreement between
Sanwa Bank California, Mellon Bank and NTS
dated October 30, 1998 21
27 Financial Data Schedule 42
Page 20 of 41
<PAGE>
Exhibit 10(c)(2)
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Second Amendment") is made
and dated as of the 30th day of October, 1998, by and among SANWA BANK
CALIFORNIA ("Sanwa"), those other banks (each, including Sanwa, a "Lender" and,
collectively, the "Lenders"), party with Sanwa to the Agreement defined in
Recital A below, SANWA, as agent for the Lenders (in such capacity, the "Agent")
and as the L/C Bank (as defined in the Agreement), and NTS TECHNICAL SYSTEMS, a
California corporation (the "Borrower").
RECITALS
A. Pursuant to that certain Credit Agreement dated as of September 8, 1997
among the Agent, the Lenders and the Borrower (as amended, modified, or waived,
the "Agreement"), the Lenders agreed to extend credit to the Borrower on the
terms and subject to the conditions set forth therein. All capitalized terms not
otherwise defined herein shall have the meanings given to such terms in the
Agreement.
B. The Borrower, the Agent and the Lenders desire to amend the Agreement
as more particularly described below.
NOW, THEREFORE, in consideration of the foregoing Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Extension of Term and Increase in Amount of Revolving Loans. To reflect
the agreement of the parties hereto to extend the term during which Revolving
Loans are available and to increase the amount thereof, effective as of the
Effective Date (as defined in Paragraph 10 below):
(a) The definition of "Revolving Credit Limit" set forth in
Paragraph 1 of the Agreement is hereby amended to read in its entirety as
follows:
"'Revolving Credit Limit' shall mean $8,000,000, as such
amount may be increased or decreased by written agreement of the Agent, the
Borrower and one hundred percent (100%) of the Lenders."
(b) The definition of "Revolving Loan Maturity Date" set forth in
Paragraph 1 of the Agreement is hereby amended to read in its entirety as
follows:
"'Revolving Loan Maturity Date' shall mean the earliest of:
(i) September 8, 2000, as such date may be extended from time to time in writing
by the Borrower and one hundred percent (100%) of the Lenders, in their sole
discretion, (ii) the date the Lenders terminate their obligation to make further
Loans hereunder pursuant to Paragraph 8 below, or (iii) the date the Revolving
Credit Limit is reduced to $0.00."
1
Page 21 of 41
<PAGE>
2. Addition of New Credit Facility. To reflect the agreement of the
Lenders hereto to provide an additional term loan facility, effective as of the
Effective Date:
(a) A new Paragraph 2(a)(4) is hereby added to Paragraph 2(a) of the
Agreement to read in its entirety as follows:
"(4) 1998 Term Loans. On the terms and subject to the
conditions set forth herein, each Lender agrees that it shall make 1998
Term Loans (the '1998 Term Loans' or a '1998 Term Loan') to the
Borrower in one disbursement made within fifteen (15) days of the
Effective Date of the Second Amendment to this Agreement in an aggregate
amount with all its other outstanding 1998 Term Loans not to exceed its
Percentage Share of the 1998 Term Loan Credit Limit. Once borrowed, the
1998 Term Loans may not be repaid and reborrowed."
(b) A new Paragraph 2(b)(3) is hereby added to Paragraph 2(b) of the
Agreement to read in its entirety as follows:
"(3) 1998 Term Loans. 1998 Term Loans shall be maintained,
at the election of the Borrower made from time to time as permitted
herein, as Reference Rate Loans, Eurodollar Loans, or Fixed Rate Loans."
(c) Paragraph 2(d) is hereby amended to add the following clause
immediately prior to the period at the end of the first sentence therein: "and,
with respect to 1998 Term Loans, on the 1998 Term Loan Maturity Date".
(d) A new Paragraph 2(e)(1)(iii) is hereby added to Paragraph 2(e)
of the Agreement to read in its entirety as follows:
"(iii) the principal amount of the 1998 Term Loans in sixty
(60) equal installments of $33,333.33 on the first Business Day of each
month, commencing December 1, 1998 until the 1998 Term Loan Maturity Date
when the 1998 Term Loans remaining outstanding shall be due and payable."
(e) Paragraph 3(c)(1) of the Agreement is hereby amended to delete
the first sentence thereof and to replace the same with the following language
to read in its entirety as follows:
"The obligation of the Borrower to repay the Loans may at the
request of any Lender be evidenced by notes payable to the order of such
Lender in the form of that attached hereto as Exhibit A-1, Exhibit A-2,
and Exhibit A-3, respectively (a "Note" or the "Notes")."
(f) A new Exhibit A-3 in the form of that attached hereto as
Amendment Exhibit 1 is hereby added to the Agreement.
(g) Paragraph 1 of the Agreement is hereby amended to add the
following new definitions, in correct alphabetical order, to read in its
entirety as follows:
"'1998 Term Loans' shall have the meaning given such term in
Paragraph 2(a) below."
2
Page 22 of 41
<PAGE>
"'1998 Term Loan Credit Limit' shall mean $2,000,000, as such
amount may be increased or decreased by written agreement of the Agent,
the Borrower and one hundred percent (100%) of the Lenders."
"'1998 Term Loan Maturity Date' shall mean the earlier of (i)
November 1, 2003, as such date may be extended from time to time in
writing by the Borrower and one hundred percent (100%) of the Lenders in
their sole discretion and (ii) the date the Lenders terminate their
obligation to permit the 1998 Term Loans to remain outstanding pursuant to
Paragraph 8 below."
"'1998 Term Loan Note' shall mean that note substantially in
the form of Exhibit A-3 attached hereto."
(h) The following existing definitions set forth in Paragraph 1 of
the Agreement are hereby amended to read in their entirety as follows:
"'Loans' shall mean Revolving Loans, Term Loans and 1998 Term
Loans."
"'Interest Period' shall mean (i) with respect to any Fixed
Rate Loan, a period not less than one year agreed upon by the Lenders and
(ii) with respect to any Eurodollar Loan, the period commencing on the
date advanced and ending one, two, three or six months thereafter or, if
applicable, on the 1998 Term Loan Maturity Date, all as designated in the
related Loan Request; provided, however, that (a) any Interest Period
applicable to a Eurodollar Loan which would otherwise end on a day which
is not a Eurodollar Business Day shall be extended to the next succeeding
Eurodollar Business Day unless by such extension it would fall in another
calendar month, in which case such Interest Period shall end on the
immediately preceding Eurodollar Business Day, (b) any Interest Period
applicable to a Eurodollar Loan which begins on a day for which there is
no numerically corresponding day in the calendar month during which such
Interest Period is to end shall, subject to the provisions of clause (a)
hereof, end on the last day of such calendar month, (c) no such Interest
Period applicable to Revolving Loans shall extend beyond the Revolving
Loan Maturity Date, (d) no Interest Period applicable to Term Loans shall
extend beyond the Term Loan Maturity Date, and (e) no Interest Period
applicable to 1998 Term Loans shall extend beyond the 1998 Term Loan
Maturity Date."
3. Modification of Pricing Provisions. To reflect the agreement of the
parties hereto to modify the pricing provisions applicable to the Revolving
Loans and to provide pricing provisions applicable to the 1998 Term Loans,
effective as of the Effective Date, the following existing definitions set forth
in Paragraph 1 of the Agreement are hereby amended to read in their entirety as
follows:
"'Applicable Reference Rate' shall mean the Reference Rate, as
from time to time in effect, plus (i) in the case of Revolving Loans,
0.00% per annum, (ii) in the case of Term Loans, 0.50% per annum, and
(iii) in the case of 1998 Term Loans, 0.25% per annum.
3
Page 23 of 41
<PAGE>
"'Adjusted LIBOR Spread' shall mean (i) in the case of
Revolving Loans, 2.00% per annum, (ii) in the case of Term Loans, 2.50%
per annum, and (iii) in the case of 1998 Term Loans, 2.25% per annum."
"'Fixed Rate' shall mean a per annum rate equal to the sum of
(i) a fixed rate agreed upon by the Lenders for a given Interest Period
plus (ii) in the case of Term Loans, 2.50% per annum, and (iii) in the
case of 1998 Term Loans, 2.25% per annum."
4. Acquisition of XXCAL, INC. and XXCAL, LIMITED by Parent. To reflect the
agreement of the parties hereto regarding certain acquisitions by the Parent and
to modify certain provisions of the Agreement affected by such acquisitions,
effective as of the Effective Date:
(a) Pursuant to Paragraph 7(d) of the Agreement, the Lenders hereby
consent to the acquisition by the Parent of XXCAL, INC., a California
corporation, and XXCAL, LIMITED, a United Kingdom corporation, in accordance
with the terms of the XXCAL Agreements.
(b) Exhibit I of the Agreement is hereby amended and restated to
read as set forth as Amendment Exhibit 2 to this Agreement.
(c) Paragraph 1 of the Agreement is hereby amended to add the
following new definitions, in correct alphabetical order, to read in their
entirety as follows:
"'XXCAL Acquisitions' shall mean the acquisition by the Parent
of all of the issued shares of (i) XXCAL, INC., a California corporation,
under the terms of the XXCAL, INC. Agreement and (ii) XXCAL, LIMITED, a
United Kingdom corporation, under the terms of the XXCAL, LIMITED
Agreement."
"'XXCAL Closing Date' shall mean the date upon which the
Closings of the transactions contemplated by the XXCAL Agreements have
occurred (as such terms are defined therein)."
"'XXCAL, INC.' shall mean XXCAL, INC., a California
corporation."
"'XXCAL, INC. Agreement' shall mean that certain Agreement
and Plan of Merger dated as of August 21, 1998 by and among Parent, XXCAL,
INC., and NTS Acquisition Corp., as amended."
"'XXCAL, Japan K.K.' shall mean XXCAL, Japan K.K., a Japanese
corporation."
"'XXCAL, LIMITED' shall mean XXCAL, LIMITED, a United Kingdom
corporation."
"'XXCAL, LIMITED Agreement' shall mean that certain Share
Purchase Agreement dated as of August 21, 1998 by and among Parent, XXCAL,
LIMITED, and XXCAL Shareholders, as amended."
4
Page 24 of 41
<PAGE>
"'XXCAL Agreements' shall mean the XXCAL, INC. Agreement and
the XXCAL, LIMITED Agreement."
(d) The existing definition of "Guarantors" as set forth in
Paragraph 1 of the Agreement is hereby amended to read in its entirety as
follows:
"'Guarantors shall mean the Parent, its Subsidiaries (except
NQA USA, a Massachusetts corporation, XXCAL, LIMITED, a United Kingdom
corporation, and XXCAL, Japan K.K., a Japanese corporation) and each of
the Borrower's Subsidiaries."
(e) Paragraph 8(m) of the Agreement is deleted in its entirety.
5. Modification of Letters of Credit. To reflect the agreement of the
parties hereto to amend certain provisions applicable to Letters of Credit,
effective as of the Effective Date:
(a) Paragraph 2(a)(2) of the Agreement is hereby amended to add the
following sentence immediately following the period of the last sentence
thereof:
"At the election of the Borrower, Letters of Credit may be
issued in an Optional Currency, so long as the Equivalent Amount of the
face amount of such Letters of Credit in an aggregate amount with other
Outstanding Letters of Credit does not exceed the L/C Sublimit."
(b) Paragraph 3(c)(2) of the Agreement is hereby amended to add the
following sentence immediately following the period of the first sentence
therein:
"If, at any time, the Equivalent Amount of Letters of Credit
outstanding in an Optional Currency and all other Outstanding Letters of
Credit exceed the L/C Sublimit, the Borrower shall cause such excess
amount to be reduced in accordance with the conditions and terms hereof.
If the amount of (i) Revolving Loans outstanding, (ii) the Equivalent
Amount of Letters of Credit outstanding and (iii) all other Outstanding
Letters of Credit exceed the Revolving Credit Limit, the Borrower shall
repay such amount in excess of the Revolving Credit Limit to the Lenders
in the manner provided for herein."
(c) Paragraph 3(d) of the Agreement is hereby amended to delete the
first sentence thereof and to replace same with the following:
"All payments made on account of the Obligations shall be made
by the Borrower, without setoff or counterclaim, in lawful money of the
United States of America in immediately available funds (except for the
XXCAL Letter of Credit and those Letters of Credit in which the Borrower
elected issuance of such Letters of Credit in an Optional Currency, as to
which Letters of Credit, all reimbursements of L/C Drawings shall be made
in the currency in which such Letter of Credit is then denominated), free
and clear of and without deduction for any taxes, fees or other charges of
any nature whatsoever imposed by any taxing authority and must be received
5
Page 25 of 41
<PAGE>
by the Agent by 12:00 noon (Los Angeles time) on the day of payment, it
being expressly agreed and understood that if a payment is received after
12:00 noon (Los Angeles time) by the Agent, such payment will be
considered to have been made by the Borrower on the next succeeding
Business Day and interest thereon shall be payable by the Borrower at the
Applicable Reference Rate during such extension. If any L/C Drawing in an
Optional Currency is not repaid when due, the Borrower's reimbursement
Obligation shall immediately be converted into a United States Dollar
Obligation in the Equivalent Amount."
(d) Paragraph 1 of the Agreement is hereby amended to add the
following new definitions, in correct alphabetical order, to read in their
entirety as follows:
"'Dollar' and '$' shall mean United States dollars."
"'Equivalent Amount' shall mean, on the date any such
determination is made, the equivalent of Dollars and an Optional Currency
calculated at the spot rate for the purchase of such Optional Currency
with Dollars quoted by Sanwa's Los Angeles foreign currency exchange
desk."
"'Optional Currency' shall mean English pounds sterling, Swiss
francs, French francs, Federal Republic of Germany deutschmarks, Japanese
yen, the European Euro or, at the option of the Lenders, any other
currency which is freely transferable and convertible into Dollars."
"'XXCAL Letter of Credit' shall mean that certain Letter of
Credit issued by Sanwa for the account of XXCAL, INC., in the amount of
20,000,000 Japanese yen."
(e) The existing definition of "Outstanding Letter of Credit" as set
forth in Paragraph 1 of the Agreement is hereby amended to read in its entirety
as follows:
"'Letters of Credit' shall mean (i) those letters of credit
issued by the L/C Bank for the account of the Borrower from time to time
from the date hereof to and including the 30th day immediately preceding
the Revolving Loan Maturity Date and (ii) the XXCAL Letter of Credit."
"'Outstanding Letter of Credit' shall mean (i) any Letter of
Credit which has not been canceled, expired un-utilized or fully drawn
down and (ii) the amount of any unreimbursed L/C Drawings. The amount of
Outstanding Letters of Credit in an Optional Currency shall equal the
Equivalent Amount thereof."
6. Modification of Reporting Requirements. To reflect the agreement of the
parties hereto to amend certain of the reporting requirements set forth in the
Agreement, effective as of the Effective Date:
(a) Paragraph 6(b)(3) of the Agreement is hereby amended to read in
its entirety as follows:
6
Page 26 of 41
<PAGE>
"(3) Within 60 days after the last day of the first three
fiscal quarters of the fiscal year and within 120 days after the last day
of the fiscal year of the Parent, a summary accounts receivable aging for
the Parent and its Subsidiaries;"
(b) Paragraph 6(b)(4) of the Agreement is hereby amended to read in
its entirety as follows:
"(4) Within 60 days after the last day of each of the first
three fiscal quarters of the fiscal year and within 120 days after the
last day of the fiscal year of the Parent, backlog reports for the Parent
and its Subsidiaries;"
7. Modification of Financial Covenants: To reflect the agreement of the
parties hereto to amend certain of the financial covenants set forth in the
Agreement, effective as of the Effective Date, Paragraph 7(j) of the Agreement
is hereby amended to read in its entirety as follows:
"7(j) Financial Covenants. For the Parent and its Consolidated
Subsidiaries calculated on a consolidated basis in accordance with GAAP:
(1) permit its Tangible Net Worth at any one time to be less
than the sum of (A) until the XXCAL Closing Date, $15,750,000 and,
thereafter, $21,000,000 plus (B) as at the end of each fiscal quarter, 60%
of net income after taxes and dividends for the fiscal quarter just ended
(but, in each case, only if a positive number). Additions to Tangible Net
Worth shall be made as at the end of each fiscal quarter commencing August
1, 1998 and shall be cumulative for each successive quarter;
(2) at any one time, permit the ratio of (i) all liabilities
which in accordance with GAAP and industry practices are shown on the
liability side of a balance sheet to (ii) Tangible Net Worth at any one
time to be greater than 1.50 to 1.00;
(3) make capital expenditures in aggregate in excess of (i)
$4,350,000 in the fiscal year ending January 31, 1999 or (ii) $2,500,000
in any fiscal year thereafter;
(4) permit at any time the Quick Ratio to be less than 1.10
to 1.00; or
(5) as at the end of any fiscal quarter, permit the Debt
Coverage Ratio for the preceding four fiscal quarters, to be less than
1.30 to 1.00."
8. Modification of Additional Covenants: To reflect the agreement of the
parties hereto to amend certain additional covenants set forth in the Agreement,
effective as of the Effective Date:
(a) Paragraph 7(a) of the Agreement is hereby amended to read in its
entirety:
"7(a) Liens. Create, incur, assume or suffer to exist, any
Lien upon any of its property or assets except:
7
Page 27 of 41
<PAGE>
(1) Liens or charges for current taxes, assessments or other
governmental charges which are not delinquent or which remain payable
without penalty, or the validity of which are contested in good faith by
appropriate proceedings upon stay of execution of the enforcement thereof,
provided the Borrower or relevant Guarantor shall have set aside on its
books and shall maintain adequate reserves for the payment of same in
conformity with GAAP;
(2) Liens, deposits or pledges made to secure statutory
obligations, surety or appeal bonds, or bonds for the release of
attachments or for stay of execution, or to secure the performance of
bids, tenders, contracts (other than for the payment of borrowed money),
leases or for purposes of like general nature in the ordinary course of
the Borrower's or relevant Guarantor's business;
(3) Liens in favor of the Lenders and the Agent;
(4) Liens in existence on the date hereof as set forth on
Exhibit E;
(5) purchase money Liens on assets securing Indebtedness
incurred in purchasing or leasing such assets; and
(6) Liens as disclosed in the XXCAL, INC. Agreement in an
aggregate amount not to exceed $100,000 (in addition to Funded Debt
secured by purchase money Liens described in Paragraph 7(a)(5) above)."
(b) Paragraph 7(b) of the Agreement is hereby amended to read in its
entirety as follows:
"7(b) Funded Debt. Create, incur, assume or suffer to exist,
or otherwise become or be liable in respect of any Funded Debt except:
(1) The Obligations;
(2) Indebtedness on endorsements of instruments for collection
in the ordinary course of business;
(3) Funded Debt reflected in the financial statements referred
to in Paragraph 5(a) above;
(4) Funded Debt of NQA USA;
(5) Funded Debt of the Borrower and of the Guarantors payable
to the Borrower or any Guarantor;
(6) Funded Debt of XXCAL, LIMITED and XXCAL, Japan K.K. in an
aggregate amount outstanding not to exceed $500,000; and
(7) Other Funded Debt of the Borrower and the Guarantors in an
aggregate amount outstanding not to exceed $750,000, excluding Funded Debt
secured by purchase money Liens described in Paragraph 7(a)(5) above."
8
Page 28 of 41
<PAGE>
(c) Paragraph 7(d) of the Agreement is hereby amended to read in its
entirety as follows:
"7(d) Acquisitions; Investments; Advances. Without the prior consent
of the Lenders, purchase or acquire or incur liability for the purchase or
acquisition of any or all of the assets or business of any Person, other
than purchases, acquisitions, and incurrences of liability not in the
nature of a business acquisition and made in the ordinary course of
business as conducted on the date of this Agreement; or, make or commit to
make any advance, loan or extension of credit or capital contributions to,
or purchase any stock, bonds, notes, debentures, or other securities of,
forgive any Indebtedness of, or make any other investment in, any Person
other than:
(1) Investments reflected in the financial statements
referred to in Paragraph 5(a) above;
(2) Investments in marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by
any agency thereof and backed by the full faith and credit of the United
States, in each case maturing within one (1) year of the acquisition
thereof;
(3) Investments in marketable direct obligations issued by any
state of the United States of America or any political subdivision
thereof, in each case maturing within one (1) year of the acquisition
thereof and having the highest rating obtainable from either Standards &
Poor's Corporation or Moody's Investors Service, Inc.;
(4) Investments in certificates of deposit or bankers'
acceptances maturing within one (1) year from the date of acquisition
issued by commercial banks organized under the laws of the United States
of America or any state thereof or the District of Columbia, each having
combined capital and surplus of not less than Two Hundred Fifty Million
Dollars ($250,000,000.00);
(5) (i) Acquisitions by the Parent of XXCAL, INC. and XXCAL,
LIMITED and (ii) other acquisitions by the Borrower and the Guarantors in
an aggregate amount not to exceed $2,500,000 in any fiscal year;
(6) Investments in the Borrower and Guarantors; and
(7) Investment in XXCAL, LIMITED and XXCAL, Japan K.K. in an
aggregate amount not to exceed $300,000 after the Second Amendment
Effective Date and the XXCAL Letter of Credit.
For purposes of this definition, (i) 'Second Amendment
Effective Date' shall mean the Effective Date as defined in Paragraph 10
of that certain Second Amendment to Credit Agreement dated as of October
__, 1998 by and among Sanwa, the Lenders, the Agent and the Borrower, and
(ii) 'Investment' shall mean any direct or indirect purchase or other
acquisition by that Person of, or a beneficial interest in, stock, or
9
Page 29 of 41
<PAGE>
other securities of any other Person, or any direct or indirect loan,
advance (other than advances to employees for moving and travel expenses,
drawing accounts and similar expenditures in the ordinary course of
business), or transfer of assets, or capital contribution by that Person
to any other Person, including all indebtedness and accounts receivable
from that other Person which are not current assets or did not arise from
sales to that other Person in the ordinary course of business. The amount
of any Investment shall be the original cost of such Investment plus the
cost of all additions thereto, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect
to such Investment."
(d) Paragraph 7(g) of the Agreement is hereby amended to read in its
entirety as follows:
"7(g) Sale of Assets. In any fiscal year, sell, lease, assign,
transfer or otherwise dispose of any of its assets (other than (i)
inventory held for sale, (ii) assets of the Borrower and the Guarantors
disposed of in the ordinary course of business as presently conducted for
an aggregate sales price not in excess of $200,000, and (iii) real
property held for sale as of the date of this Agreement in Vista,
California), whether now owned or hereafter acquired and not enter into
any sale and leaseback agreement relating to its assets without the prior
written consent of the Majority Lenders."
9. Reaffirmation of Security Agreements. The Borrower hereby affirms and
agrees that (a) the execution and delivery by the Borrower of and the
performance of its obligations under this Amendment shall not in any way amend,
impair, invalidate or otherwise affect any of the obligations of the Borrower or
the rights of the Lenders under the Security Documents or any other document or
instrument made or given by the Borrower in connection therewith, (b) the term
"Obligations" as used in the Security Agreement includes, without limitation,
the Obligations of the Borrower under the Agreement as amended hereby, and (c)
the Security Documents remain in full force and effect and constitutes a
continuing first priority security interest in and lien upon the Collateral
described therein.
10. Effective Date. As conditions precedent to the effectiveness of this
Second Amendment:
(a) The Borrower shall have delivered or shall have had delivered to
the Agent each of the following (with sufficient copies for each of the
Lenders):
(i) A duly executed copy of this Second Amendment;
(ii) Copies of the XXCAL Agreements, certified by the Borrower
as true and correct copies of each such agreement;
(iii) Duly executed copies of a Guaranty, Security Agreement
and UCC-1 Financing Statement by XXCAL, INC.;
10
Page 30 of 41
<PAGE>
(iv) Such credit applications, financial statements,
authorizations, environmental reviews of the Property, and such information
concerning the Borrower and its Guarantors and their business, operations and
condition (financial and otherwise) as any Lender may reasonably request;
(v) Certified copies of resolutions of the Board of Directors
of the Borrower and of XXCAL, INC. approving the execution and delivery of the
Second Amendment and related Loan Documents to which it is a party;
(vi) Certificates of the Secretary or an Assistant Secretary
of the Borrower and of XXCAL, INC. certifying the names and true signatures of
its officers authorized to sign this Second Amendment and related Loan Documents
to which it is a party;
(vii) A copy of the Certificate of Incorporation of XXCAL,
INC., certified by the Secretary of State of the State of its incorporation as
of a recent date;
(viii)A copy of each of the Certificate of Incorporation (if
required by the Lenders) and Bylaws of XXCAL, INC., certified by the Secretary
or an Assistant Secretary of XXCAL, INC. as of the date of this Second Amendment
as being accurate and complete;
(ix) A certificate of good standing or status of XXCAL, INC.
from the Secretary of State of the State of its incorporation as of a recent
date;
(x) Search reports for XXCAL, INC. for those jurisdictions
notified by the Borrower to the Agent in writing as the only jurisdictions in
which filings or recordings are necessary to perfect a security interest in the
Collateral, which reports shall show only such financing statements and other
filings of record as to the Collateral as shall be acceptable to the Agent and
each Lender; and
(xi) An opinion of Sheppard, Mullin, Richter & Hampton, LLP,
counsel to the Parent, the Borrower and their respective Subsidiaries, in form
and substance satisfactory to the Lenders, addressing the due authorization,
execution and delivery of this Second Amendment and related documents and such
other matters as the Lenders shall reasonably request.
(b) All fees and other amounts payable hereunder prior to such date
shall have been paid, and all acts and conditions (including, without
limitation, the obtaining of any necessary regulatory approvals and the making
of any required filings, recordings or registrations) required to be done and
performed and to have happened precedent to the execution, delivery and
performance of this Second Amendment and to constitute the same legal, valid and
binding obligations, enforceable in accordance with their respective terms,
shall have been done and performed and shall have happened in due and strict
compliance with all applicable laws.
(c) The representations and warranties made by or on behalf of the
Borrower and each Guarantor in or pursuant to the Loan Documents shall be
accurate and complete in all material respects as if made on and as of such
date.
11
Page 31 of 41
<PAGE>
(d) There shall not have occurred an Event of Default or Potential
Default not otherwise cured or waived.
If this Second Amendment shall not have become effective on or before
November 15, 1998, then this Second Amendment shall, at the election of the
Lenders as evidenced by written notice to such effect given by the Lenders to
the Borrower, terminate and be of no further force or effect.
11. Representations and Warranties. As an inducement to the Agent, the L/C
Bank and each Lender to enter into this Amendment, the Borrower represents and
warrants to the Agent, the L/C Bank and each Lender that:
(a) Corporate Existence; Compliance with Law. The Borrower and each
Guarantor (1) is duly organized, validly existing and in good standing as a
corporation under the laws of the state of its incorporation and is qualified to
do business in each jurisdiction where its ownership of property or conduct of
business requires such qualification and where failure to qualify would have a
material adverse effect on it or its property and/or business or on its ability
to pay or perform the Obligations, (2) has the corporate power and authority and
the legal right to own and operate its property and to conduct business in the
manner in which it does and proposes so to do, and (3) is in compliance with all
Requirements of Law and Contractual Obligations.
(b) Corporate Power; Authorization; Enforceable Obligations. The
Borrower and each Guarantor has the corporate power and authority and the legal
right to execute, deliver and perform this Second Amendment and the Agreement as
amended hereby to which it is a party and has taken all necessary corporate
action to authorize the execution, delivery and performance of this Second
Amendment and the Agreement as amended hereby. This Second Amendment and the
Agreement as amended hereby have been duly executed and delivered on behalf of
the Borrower and each Guarantor party thereto and constitute such Person's
legal, valid and binding obligations enforceable against it in accordance with
their respective terms, subject to the effect of applicable bankruptcy and other
similar laws affecting the rights of creditors generally and the effect of
equitable principles whether applied in an action at law or a suit in equity.
(c) No Legal Bar. The execution, delivery and performance of this
Second Amendment and the Agreement as amended hereby, the borrowings hereunder
and the use of the proceeds thereof, will not violate any Requirement of Law or
any Contractual Obligations of the Borrower or any Guarantor or create or result
in the creation of any Lien on any assets of the Borrower or any Guarantor
except as contemplated thereby.
(d) No Material Litigation. Except as disclosed on Amendment Exhibit
3 hereto, no litigation, investigation or proceeding of or before any arbitrator
or Governmental Authority is pending or, to the knowledge of the Borrower or any
Guarantor, threatened by or against the Borrower or any Guarantor or against any
of the Borrower's or any Guarantor's properties or revenues which is likely to
be adversely determined and which, if adversely determined, is likely to have a
material adverse effect on the business, operations, property or financial or
other condition of the Parent and its Subsidiaries, taken as a whole.
12
Page 32 of 41
<PAGE>
(e) Consents, etc. No consent, approval, authorization of, or
registration, declaration or filing with any Governmental Authority is required
on the part of the Borrower or any Guarantor in connection with the execution
and delivery of this Second Amendment and the Agreement as amended hereby or the
performance of or compliance with the terms, provisions and conditions hereof or
thereof.
(f) No Default. No Potential Default or Event of Default has
occurred under the Agreement which has not otherwise been cured or waived.
(g) Full Disclosure. None of the representations or warranties made
by the Borrower or any Guarantor in the Loan Documents as of the date such
representations and warranties are made or deemed made, and none of the
statements contained in any exhibit, report, statement or certificate furnished
by or on behalf of the Borrower or any Guarantor in connection with the Loan
Documents. contains any untrue statement of a material fact or omits any
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they are made, not
misleading as of the time when made or delivered.
12. Miscellaneous Provisions.
(a) Expenses. In accordance with Paragraph 6(g) of the Agreement,
the Borrower agrees to pay all reasonable out-of-pocket expenses of the Agent
incident to the preparation and negotiation of this Second Amendment.
(b) Entire Agreement. This Second Amendment embodies the entire
agreement and understanding between the parties hereto and supersedes all prior
agreements and understandings relating to the subject matter hereof and thereof.
(c) Governing Law. This Second Amendment shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to choice of law rules.
(d) Counterparts. This Second Amendment may be executed in any
number of counterparts, all of which together shall constitute one agreement.
(e) Disputed Claims Arbitration.
(1) This Paragraph 12(e) concerns the resolution of any
controversies or claims between the Borrower and the Agent and/or any Lender
and/or the L/C Bank, including but not limited to those that arise from:
(i) This Second Amendment (including any renewals,
extensions or modifications of this Agreement or any other Loan Document);
(ii) Any document, agreement or procedure related to or
delivered in connection with this Second Amendment;
(iii) Any violation of this Second Amendment; or
13
Page 33 of 41
<PAGE>
(iv) Any claims for damages resulting from any business
conducted between the Borrower, the Agent and/or any Lender and/or the L/C
Bank, including claims for injury to persons, property or business
interests (torts).
(2) At the request of the Borrower or the Agent and/or any
Lender and/or the L/C Bank, any such controversies or claims will be settled by
arbitration in accordance with the United States Arbitration Act. The United
States Arbitration Act will apply even though this Second Amendment provides
that it is governed by California law.
(3) Arbitration proceedings will be administered by the
American Arbitration Association and will be subject to its commercial rules of
arbitration.
(4) For purposes of the application of the statute of
limitations, a demand for arbitration with the offices of the American
Arbitration Association in Los Angeles pursuant to this paragraph is the
equivalent of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether any such
claim or controversy is barred by the statute of limitations and, if so, to
dismiss the arbitration on that basis.
(5) If there is a dispute as to whether an issue is
arbitrable, the arbitrators will have the authority to resolve any such dispute.
(6) The decision that results from an arbitration proceeding
may be submitted to any authorized court of law to be confirmed and enforced.
(7) This provision does not limit the right of the Borrower,
the Agent or any Lender or the L/C Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any Collateral; or
(iii) act in a court of law, before, during or after the
arbitration proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(8) The pursuit of or successful action for interim,
additional or supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower, the Agent or any Lender or the
L/C Bank, including the suing party, to submit the controversy or claim to
arbitration if the other party contests the lawsuit.
14
Page 34 of 41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed as of the day and year first above written.
NTS TECHNICAL SYSTEMS, a California corporation
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Sr. VP
SANWA BANK CALIFORNIA, as Agent and the L/C
Bank
By: /s/ R L Schnurr
-----------------------------
Name: Roger L. Schnurr
Title: Vice President
SANWA BANK CALIFORNIA, as a Lender
By: /s/ R L Schnurr
-----------------------------
Name: Roger L. Schnurr
Title: Vice President
MELLON BANK, N.A., as a Lender
By: /s/ K D Kelly
-----------------------------
Name: Kevin D. Kelly
Title: Vice President
15
Page 35 of 41
<PAGE>
REAFFIRMATION OF GUARANTIES
Each of the undersigned Subsidiaries and Guarantors agrees to the terms of this
Second Amendment and hereby ratifies and reaffirms its Guaranty of the
Obligations of the Borrower and its grant of a security interest in certain
property to secure such Guaranty in favor of the Agent, on behalf of itself, the
Lender, and the L/C Bank and agrees that, notwithstanding this Second Amendment
and any other amendment or supplement to the Agreement entered into prior to
this Second Amendment, its Guaranty shall remain in full force and effect with
respect to the Agreement as amended hereby.
NATIONAL TECHNICAL SYSTEMS, INC.
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Sr. Vice President
NTS TECHNICAL SYSTEMS (CALIFORNIA)
DBA "NATIONAL TECHNICAL SYSTEMS"
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Sr. Vice President
ETCR, INC.
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Vice President
16
Page 36 of 41
<PAGE>
APPROVED ENGINEERING TEST
LABORATORIES, INC.
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Vice President
ACTON ENVIRONMENTAL TESTING
CORPORATION
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Vice President
NATIONAL TECHNICAL SYSTEMS
- CERTIFICATION SERVICES, INC.
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Vice President
WISE AND ASSOCIATES, INC.
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Vice President
NTS TECHNICAL SERVICES, INC.
By: /s/ Lloyd Blonder
-----------------------------
Name: Lloyd Blonder
Title: Vice President
17
Page 37 of 41
<PAGE>
AMENDMENT
EXHIBIT 1
---------
EXHIBIT A-3
TO CREDIT AGREEMENT
-------------------
FORM OF 1998 TERM LOAN NOTE
$_______________ _______________, 1998
FOR VALUE RECEIVED, the undersigned NTS TECHNICAL SYSTEMS, a
California corporation ("Borrower"), hereby unconditionally promises to pay to
the order of _________________ ("Lender") the unpaid principal amount of each
1998 Term Loan made by Lender under the Credit Agreement referred to below in
accordance with the provisions of such Credit Agreement, provided that on or
before the 1998 Term Loan Maturity Date, Borrower shall pay in full the unpaid
principal amount of all 1998 Term Loans made by Lender to Borrower under the
Credit Agreement referred to below.
Borrower also promises to pay interest on the unpaid principal
amount hereof from the date hereof until paid at the rates and at the times
which shall be determined in accordance with the provisions of that certain
Credit Agreement dated as of September 8, 1997 entered into among Borrower,
Sanwa Bank California, as Agent ("Agent"), Lender and the other lenders named
therein (as the same may be amended from time to time, the "Credit Agreement"),
and to pay all sums owed to Lender under the Credit Agreement. Any amounts not
paid when due under this 1998 Term Loan Note shall bear interest at the rate
specified in the Credit Agreement.
All payments of principal and interest shall be made to Agent for
the account of Lender in United States Dollars in immediately available funds at
Sanwa Bank California, Sherman Oaks Commercial Banking Center, 15165 Ventura
Boulevard, Sherman Oaks, California 91403.
The type, amounts and dates of all 1998 Term Loans and the amounts
and dates of all payments and prepayment hereon shall be endorsed by the holder
hereof on a schedule to be attached hereto; provided, however, that the failure
by the holder to make such endorsements shall in no way detract from Borrower's
obligations hereunder.
This 1998 Term Loan Note is one of the "Notes" referred to in the
Credit Agreement and is subject to the terms and conditions thereof. The Credit
Agreement provides, inter alia, for the prepayment in whole or in part hereof or
the acceleration of the maturity hereof upon the occurrence of certain events
stated therein and for the payment of attorneys' fees incurred to enforce
payment hereof. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned in the Credit Agreement.
The undersigned hereby waives notice of default, presentment, demand
for performance, notice of nonpayment, protest, notice of protest and all other
18
Page 38 of 41
<PAGE>
notices in connection with the delivery, acceptance, performance, default or
enforcement of this 1998 Term Loan Note.
This 1998 Term Loan Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California.
NTS TECHNICAL SYSTEMS, a California
corporation
By: _________________________
Print Name: _________________
Title: ______________________
19
Page 39 of 41
<PAGE>
AMENDMENT
EXHIBIT 2
---------
EXHIBIT I
TO CREDIT AGREEMENT
-------------------
LIST OF SUBSIDIARIES
(Including Parent and its Subsidiaries)
National Technical Systems, Inc.
NTS Technical Systems (California) dba
"National Technical Systems"
ETCR, Inc.
Approved Engineering Test Laboratories, Inc.
Acton Environmental Testing Corporation
National Technical Systems - Certification Services, Inc.
Wise & Associates, Inc.
NTS Technical Services, Inc.
XXCAL, INC.
XXCAL, LIMITED
XXCAL, Japan K.K.
20
Page 40 of 41
<PAGE>
AMENDMENT
EXHIBIT 3
---------
SCHEDULE OF LITIGATION
NONE
21
Page 41 of 41
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 2,538
<SECURITIES> 0
<RECEIVABLES> 20,747
<ALLOWANCES> 813
<INVENTORY> 1,818
<CURRENT-ASSETS> 26,410
<PP&E> 52,795
<DEPRECIATION> 32,612
<TOTAL-ASSETS> 49,189
<CURRENT-LIABILITIES> 10,504
<BONDS> 0
0
0
<COMMON> 11,460
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 49,189
<SALES> 68,052
<TOTAL-REVENUES> 68,052
<CGS> 48,422
<TOTAL-COSTS> 48,422
<OTHER-EXPENSES> 15,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 918
<INCOME-PRETAX> 3,301
<INCOME-TAX> 1,341
<INCOME-CONTINUING> 1,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (473)
<NET-INCOME> 1,475
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
