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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 July 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.
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(Exact name of registrant as specified in its charter)
California 95-4134955
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(State of Incorporation) (IRS Employer
Identification number)
24007 Ventura Boulevard, Calabasas, California
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(Address of registrant's principal executive office)
(818) 591-0776 91302
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(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 September
8, 1998 was 7,010,128.
Exhibit Index on page 17
1
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page No.
Financial Statements:
Condensed Consolidated Balance Sheets as of
July 31, 1998 (unaudited) and January 31, 1998 3
Unaudited Condensed Consolidated Statements of Income
For the Six Months Ended July 31, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended July 31, 1998 and 1997 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended July 31, 1998 and 1997 6
Notes to the Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION & SIGNATURE
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
2
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PART I -- FINANCIAL INFORMATION
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
July 31, January 31,
1998 1998
(unaudited)
---------- ----------
ASSETS
CURRENT ASSETS:
Cash $ 2,606,000 $ 2,101,000
Receivables, less allowance for doubtful
accounts of $591,000 at July 31, 1998
and $666,000 at January 31,1998 14,404,000 14,880,000
Income taxes receivable 104,000 104,000
Inventories 1,985,000 1,860,000
Deferred tax assets 523,000 523,000
Prepaid expenses 1,048,000 762,000
----------- -----------
Total current assets 20,670,000 20,230,000
Property, plant and equipment, at cost 50,426,000 48,509,000
Less: accumulated depreciation 30,799,000 29,527,000
----------- -----------
Net property, plant and equipment 19,627,000 18,982,000
Property held for sale 544,000 544,000
Intangible assets, net 585,000 637,000
Other assets 604,000 326,000
----------- -----------
TOTAL ASSETS $42,030,000 $40,719,000
=========== ===========
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,053,000 $ 2,974,000
Accrued expenses 2,530,000 1,976,000
Income taxes payable 483,000 69,000
Current installments of long-term debt 1,646,000 1,535,000
----------- -----------
Total current liabilities 6,712,000 6,554,000
Long-term debt, excluding current installments 11,715,000 12,144,000
Deferred tax liabilities 2,319,000 2,303,000
Minority interest 36,000 27,000
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized,
20,000,000; issued and outstanding
6,986,000 as of July 31, 1998 and
6,971,000 as of January 31, 1998 11,098,000 11,069,000
Retained earnings 10,150,000 8,622,000
----------- -----------
Total stockholders' equity 21,248,000 19,691,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $42,030,000 $40,719,000
=========== ===========
See accompanying notes
3
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Six Months Ended July 31, 1998 and 1997
1998 1997
---- ----
Revenues $ 30,346,000 $ 26,694,000
Cost of sales 22,042,000 19,486,000
------------ ------------
Gross profit 8,304,000 7,208,000
Selling, general and administrative expense 5,180,000 4,277,000
------------ ------------
Operating income 3,124,000 2,931,000
Other income (expense):
Interest expense, net (561,000) (548,000)
Other (1,000) (2,000)
------------ ------------
Total other expense (562,000) (550,000)
------------ ------------
Income before income taxes, and minority
interest 2,562,000 2,381,000
Income taxes 1,025,000 1,069,000
------------ ------------
Income before minority interest 1,537,000 1,312,000
Minority interest (9,000) (1,000)
------------ ------------
Net income $ 1,528,000 $ 1,311,000
============ ============
Basic earnings per common share: $ 0.22 $ 0.19
============ ============
Diluted earnings per common share: $ 0.21 $ 0.19
============ ============
Weighted average common shares outstanding 6,975,000 6,768,000
Dilutive effect of stock options 277,000 38,000
------------ ------------
Weighted average common shares outstanding,
assuming dilution 7,252,000 6,806,000
============ ============
See accompanying notes
4
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended July 31, 1998 and 1997
1998 1997
------------ -----------
Revenues $15,417,000 $13,541,000
Cost of sales 11,216,000 9,897,000
------------ ------------
Gross profit 4,201,000 3,644,000
Selling, general and administrative expense 2,628,000 2,152,000
------------ ------------
Operating income 1,573,000 1,492,000
Other income (expense):
Interest expense, net (293,000) (286,000)
Other -- (1,000)
------------ ------------
Total other expense (293,000) (287,000)
------------ ------------
Income before income taxes, and minority
interest 1,280,000 1,205,000
Income taxes 512,000 540,000
------------ ------------
Income before minority interest 768,000 665,000
Minority interest (2,000) (2,000)
------------ ------------
Net income $ 766,000 $ 663,000
============ ============
Basic earnings per common share: $ 0.11 $ 0.10
============ ============
Diluted earnings per common share: $ 0.11 $ 0.10
============ ============
Weighted average common shares outstanding 6,980,000 6,794,000
Dilutive effect of stock options 277,000 75,000
------------ ------------
Weighted average common shares outstanding,
assuming dilution 7,257,000 6,869,000
============ ============
See accompanying notes.
5
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended July 31, 1998 and 1997
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income from continuing operations $ 1,528,000 $ 1,311,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,324,000 1,080,000
Provision for losses on receivables (recoveries) (75,000) 89,000
Deferred income taxes 16,000 13,000
Tax benefit from sale of stock options exercised -- 84,000
Net changes in assets and liabilities, net:
Accounts receivable 551,000 (75,000)
Inventories (125,000) (208,000)
Prepaid expenses (286,000) (317,000)
Other assets and Intangibles (278,000) (92,000)
Accounts payable (921,000) (1,217,000)
Accrued expenses 554,000 788,000
Undistributed loss of affiliate 9,000 1,000
Income taxes 414,000 20,000
----------- -----------
Net cash provided by operating activities 2,711,000 1,477,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,917,000) (2,407,000)
----------- -----------
Net cash used for investing activities (1,917,000) (2,407,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,608,000 4,151,000
Repayments of current and long-term debt (2,926,000) (4,060,000)
Proceeds from stock options exercised 29,000 225,000
----------- -----------
Net cash provided by (used for)
financing activities (289,000) 316,000
----------- -----------
Net increase (decrease) in cash 505,000 (614,000)
Beginning cash balance 2,101,000 1,204,000
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ENDING CASH BALANCE $ 2,606,000 $ 590,000
=========== ===========
See accompanying notes
6
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
1. 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 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.
2. The statements presented as of and for the six-month and three-month
periods ended July 31, 1998 and 1997 are unaudited. In Management's
opinion, all adjustments have been made to present fairly the results of
such unaudited interim periods. All such adjustments are of a normal
recurring nature.
3. While the Registrant's business is not materially seasonal, the
quarterly results of operations should not be construed as representing
pro rata results of the Company's fiscal year.
4. 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.
5. 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.
6. 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.
7. 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. Cash paid for interest and taxes for the six months ended July 31,1998
was $578,000 and $600,000 respectively. Cash paid for interest and taxes
for the six months ended July 31, 1997 was $502,000 and $582,000
respectively.
9. 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.
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10. 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.
11. On June 26, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per share which was paid on August 4, 1998 to
shareholders of record at the close of business on July 15, 1998. Last
year, the Company paid a cash dividend of $.06 per share on August 5,
1997 to shareholders of record on July 22, 1997.
12. During August 1998, the Company signed definitive acquisition agreements
with XXCAL, Inc. and XXCAL, Limited ("XXCAL"). Under the terms of the
agreements, the Company will issue a total of 1,201,000 shares of its
common stock upon closing of the transactions, and will reserve an
additional 311,500 shares of its common stock for issuance upon exercise
of outstanding XXCAL stock options to be assumed by the Company. The
transaction will be accounted for as a pooling of interests and is
subject to the approval of the shareholders of the Company and the
shareholders of XXCAL.
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. The XXCAL companies
together have approximately 250 employees. XXCAL has offices in Los
Angeles, San Francisco, San Jose, Austin, Houston, London and Yokohama.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 six months ended
July 31.
RESULTS OF OPERATIONS
REVENUES
Six months ended July 31 1998 % Change 1997
(Dollars in thousands)
----------------------------------
Technical Services $21,986 7.4% $20,464
Technical Staffing 6,427 36.3% 4,715
Registration Services 1,933 27.6% 1,515
----------- -----------
Total net revenue $30,346 13.7% $26,694
=========== ===========
For the six months ended July 31, 1998, consolidated revenues increased by
$3,652,000 or 13.7% when compared to the same period in 1997.
In 1998, the Technical Services segment revenues increased by $1,522,000
primarily due to the additional revenues generated from two new testing
facilities added during 1997.
Revenues in the Technical Staffing segment increased by $1,712,000 or 36.3% due
to increases in the expanding Information Technology ("IT") portion of its
business, the continuing success of its strategic alliances with Fortune 500
companies and other major technical staffing companies, the opening of three new
staffing offices during the first six months of 1997 and the acquisition of the
staffing division of Texas-based Johnson Engineering Corporation in the third
quarter of 1997.
Revenues in the Registration Services segment increased $418,000 or 27.6% as a
result of continuing marketing efforts and an increase in demand by U.S.
companies for ISO 9000 certification.
It is anticipated by the Registrant that revenues in the Technical Staffing
segment will continue to increase at about the same rate through fiscal 1999.
The Registrant also anticipates that revenues in the Technical Services and
Registration Services segments will continue to grow moderately through 1999.
9
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GROSS PROFIT
Six months ended July 31 1998 % Change 1997
(Dollars in thousands)
=========== ============ ==========
Technical Services $6,117 9.0% $5,614
% to segment revenue 27.8% 27.4%
Technical Staffing 1,599 55.8% 1,026
% to segment revenue 24.9% 21.8%
Registration Services 588 3.5% 568
% to segment revenue 30.4% 37.5%
----------- ----------
Total $8,304 15.2% $7,208
=========== ==========
% to total net revenue 27.4% 27.0%
Total gross profit for the six-month period ended July 31, 1998 increased by
$1,096,000 or 15.2% when compared to 1997 primarily as a result of increased
revenues in the IT portion of the Technical Staffing segment which carry a
higher gross margin. Gross profit as a percentage of net revenues in 1998
slightly increased when compared to the same period in 1997.
SELLING, GENERAL & ADMINISTRATIVE
Six months ended July 31 1998 % Change 1997
(Dollars in thousands)
=========== ============== ===========
Technical Services $3,099 4.7% $2,961
% to segment revenue 14.1% 14.5%
Technical Staffing 1,341 62.9% 823
% to segment revenue 20.9% 17.5%
Registration Services 446 4.9% 425
% to segment revenue 23.1% 28.1%
Corporate 294 332.4% 68
----------- -----------
Total S G & A $5,180 21.1% $4,277
=========== ===========
% to total net revenue 17.1% 16.0%
Total selling, general and administrative expenses increased $903,000 or 21.1%
for the six-month period ended July 31, 1998 when compared to the same period in
1997. This increase was due primarily to the marketing costs related to new
marketing programs in its Technical Staffing segment in addition to the opening
of an additional staffing office, the acquisition of Texas-based Johnson
Engineering Corporation in Boulder, Colorado and merger expenses included in
Corporate as discussed below. The Company continues to look for new ways to
reduce costs yet remain effective in all segments of its business.
During the six month period ended July 31, 1998, the Company incurred $225,000
of costs related to the pending merger with XXCAL. These costs are included in
Corporate and are generally related to outside consulting, accounting and legal
fees associated with the merger and in accordance with APB 16 are being expensed
as incurred. In connection with the merger, additional costs of approximately
$500,000 are expected to be incurred in the third fiscal quarter.
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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.
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.
INTEREST EXPENSE
Net interest expense increased $13,000 in the six months ended July 31, 1998,
when compared to the same period in 1997. This increase was principally due to
slightly higher average debt balances offset to some extent by lower interest
rates.
INCOME TAXES
The income tax provisional rate for the first six months of 1998 and 1997
reflects a rate in excess of the U.S. federal statutory rate primarily due to
the inclusion of state income taxes. The Registrant's provision for the second
quarter ended July 31, 1998 was lower than the same period in 1997 due to a
lower estimate for fiscal year ending January 31, 1999 as compared to the same
period the prior year. The estimate for fiscal year ending January 31, 1999 is
based on the actual provision accrued for fiscal year ended January 31, 1998.
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 Registrant'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 Registrant.
NET INCOME
The increase in net income for the six months ended July 31, 1998, compared to
the same period in 1997, was primarily due to increased revenues, higher gross
profit margins and lower taxes, offset partially by higher Selling, General and
Administrative expenses.
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The following information is based upon results for National Technical Systems,
Inc. for the three months ended July 31.
RESULTS OF OPERATIONS
REVENUES
Quarter ended July 31
(Dollars in thousands) 1998 % Change 1997
=========== ============ ===========
Technical Services $10,982 7.4% $10,227
Technical Staffing 3,468 36.8% 2,535
Registration Services 967 24.1% 779
----------- -----------
Total Revenues $15,417 13.9% $13,541
=========== ===========
For the three months ended July 31, 1998, consolidated revenues increased by
$1,876,000 or 13.9% when compared to the same period in 1997.
Revenues in the Technical Services segment increased $755,000 primarily due to
the addition of two new testing facilities in 1997.
Revenues in the Technical Staffing segment increased $933,000 or 36.8% due to
increases in the expanding IT portion of its business, the continuing success of
its strategic alliances with Fortune 500 companies and other major technical
staffing companies, the opening of three new staffing offices during the first
six months of 1997 and the acquisition of the staffing division of Texas-based
Johnson Engineering Corporation in the third quarter of 1997.
Revenues in the Registration Services segment increased $188,000 or 24.1% as a
result of continuing marketing efforts and an increase in demand by U.S.
companies for ISO 9000 certification.
GROSS PROFIT
Quarter ended July 31
(Dollars in thousands) 1998 % Change 1997
=========== ============ ==========
Technical Services $3,079 11.2% $2,769
% to segment revenue 28.0% 27.1%
Technical Staffing 846 59.0% 532
% to segment revenue 24.4% 21.0%
Registration Services 276 -19.5% 343
% to segment revenue 28.5% 44.0%
----------- ----------
Total Gross Profit $4,201 15.3% $3,644
=========== ==========
% to total revenues 27.2% 26.9%
Total gross profit for the period ended July 31, 1998 increased by $557,000 or
15.3% primarily as a result of increased revenues in the IT portion of the
Technical Staffing segment which carry a higher gross margin. Gross profit as a
percentage of net revenues in 1998 slightly increased when compared to the same
period in 1997 due primarily to the success of the Company in obtaining more
profitable fixed price contracts in its Technical Services and Technical
Staffing segments partially offset by increased overhead in the Registration
Services segment.
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SELLING, GENERAL & ADMINISTRATIVE
Quarter ended July 31
(Dollars in thousands) 1998 % Change 1997
=========== ============= ==========
Technical Services $1,430 -3.0% $1,474
% to segment revenue 13.0% 14.4%
Technical Staffing 708 65.4% 428
% to segment revenue 20.4% 16.9%
Registration Services 230 6.5% 216
% to segment revenue 23.8% 27.7%
Corporate 260 664.7% 34
----------- ----------
Total S G & A $2,628 22.1% $2,152
=========== ==========
% to total revenues 17.0% 15.9%
Total selling, general and administrative expenses increased by $476,000 or
22.1% for the quarter ended July 31, 1998 when compared to the same period in
1997. This increase was due primarily to the marketing costs related to new
marketing programs in its Technical Staffing segment in addition to the opening
of an additional staffing office, the acquisition of Texas-based Johnson
Engineering Corporation in Boulder, Colorado and merger expenses included in
Corporate as discussed below. The Company continues to look for new ways to
reduce costs yet remain effective in all segments of its business.
During the three month period ended July 31, 1998, the Company incurred $225,000
of costs related to the pending merger with XXCAL. These costs are included in
Corporate and are generally related to outside consulting, accounting and legal
fees associated with the merger and in accordance with APB 16 are being expensed
as incurred. In connection with the merger, additional costs of approximately
$500,000 are expected to be incurred in the third fiscal quarter.
INTEREST EXPENSE
Net interest expense increased $7,000 in the quarter ended July 31, 1998, when
compared to the same period in 1997. This increase was principally due to
slightly higher average debt balances offset to some extent by lower interest
rates.
INCOME TAXES
The income tax provisional rate for the second quarters of 1998 and 1997
reflects a rate in excess of the U.S. federal statutory rate primarily due to
the inclusion of state income taxes. The Registrant's provision for the second
quarter ending July 31, 1998 was lower than the same period in 1997 due to a
lower estimate for fiscal year ending January 31, 1999 as compared to the same
period the prior year. The estimate for fiscal year ending January 31, 1999 is
based on the actual provision accrued for fiscal year ending January 31, 1998.
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 Registrant'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 Registrant.
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NET INCOME
The increase in net income for the second quarter ended July 31, 1998, compared
to the same period in 1997, was primarily due to increased revenues, higher
gross profit margins and lower taxes, offset partially by higher Selling,
General and Administrative expenses.
BUSINESS ENVIRONMENT
During the course of the last fiscal year, the business climate in the aerospace
and defense industry, which in the past had shown signs of uncertainty, seems to
have stabilized and, in several areas, shows signs of strengthening. Various
major prime government contractors have won significant development contracts
which increases the market for the Registrant's Technical Services segment.
During the period of uncertainty the Registrant developed a strategy of growth
through diversification and taking advantage of opportunities created by the
aerospace and defense industry's merger activities and ultimate downsizing. In
addition, increased activity in commercial satellite and launch vehicles has
increased demand for component and systems testing.
As the demand for nuclear staff augmentation has decreased, the Registrant has
aggressively pursued additional business in the growing IT portion of its
Technical Staffing segment's business. The Registrant 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. Also, the Registrant continues to pursue ISO registration business
through its Registration Services segment 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
Registrant's operating results, past financial performance should not be
considered to be a reliable indicator of future performance.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended July 31, 1998, cash provided by operations increased by
$1,234,000 when compared to the same period in 1997. Major items contributing to
this increase were increases in net income, depreciation and amortization and
accounts receivable collections, offset by increases in other assets, prepaid
expenses and a decrease in accounts payable.
Net cash used in investing activities in the six-month period ended July 31,
1998 decreased $490,000 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 six-month period ended July 31, 1998, net cash used for financing
activities consisted of debt reduction on lines of credit and short term and
long term debt of $2,926,000 offset by increases in lines of credit and term
loans of $2,608,000 and proceeds from the exercise of stock options of $29,000.
In September 1997, the Registrant 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.
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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 Registrant has made no material commitments for
capital expenditures. The Registrant's future working capital will be provided
from operations and the current bank revolving line of credit which had
$2,030,000 available at July 31, 1998.
FORWARD-LOOKING INFORMATION
Certain statements or assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the Private
Securities Litigation and Reform Act of 1995) that involve risk and
uncertainties inherent in the Registrant's business. Actual outcomes are
dependent upon the Registrant's successful performance of internal plans,
customer changes in short range and long range plans, competition in the
Registrant's service areas and pricing, continued acceptance of new services,
performance issues with key customers and general economic risks and
uncertainties.
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of shareholders held on June 26, 1998,
the shareholders of the Company voted to: (1) approve an amendment to
the Company's Articles of Incorporation to provide for majority rule
voting in lieu of cumulative voting in the election of directors and (2)
amend the Company's 1994 Employee Incentive Stock Option Plan (the "1994
Plan") to increase the number of shares reserved for issuance under the
1994 Plan from 700,000 to 1,500,000. As of the record date, there were
6,974,347 shares outstanding and eligible to vote. The results of the
vote of the shareholders were as follows:
For Against Abstain Broker non-votes
--------- ------- ------- ----------------
1) Amendment to the Company's
Articles of Incorporation 4,512,453 553,017 14,103 773,658
2) Amendment to the Company's
1994 Employee Incentive
Stock Option Plan 4,369,483 565,361 18,411 899,976
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Form 8-K
During the quarter ended July 31, 1998, the registrant filed one current
report on Form 8-K with respect to item 5, to announce that it entered
into an agreement in principle to acquire Los Angeles based XXCAL,
Inc. and XXCAL Ltd.
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: September 8, 1998 By: /s/ Lloyd Blonder
------------------- -----------------------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- --------------------------------------------------------------------------------
27 Financial Data Schedule 18
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1998
<CASH> 2,606
<SECURITIES> 0
<RECEIVABLES> 14,995
<ALLOWANCES> 591
<INVENTORY> 1,985
<CURRENT-ASSETS> 20,670
<PP&E> 50,426
<DEPRECIATION> 30,799
<TOTAL-ASSETS> 42,030
<CURRENT-LIABILITIES> 6,712
<BONDS> 0
<COMMON> 11,098
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,030
<SALES> 30,346
<TOTAL-REVENUES> 30,346
<CGS> 22,042
<TOTAL-COSTS> 22,042
<OTHER-EXPENSES> 5,180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 561
<INCOME-PRETAX> 2,562
<INCOME-TAX> 1,025
<INCOME-CONTINUING> 1,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,528
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
