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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 October 31, 1999
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 9, 1999 was 8,352,976.
Exhibit Index on Page 21
1
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
October 31, 1999 (unaudited) and January 31, 1999 3
Unaudited Condensed Consolidated Statements of Income
For the Nine Months Ended October 31, 1999 and 1998 4
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended October 31, 1999 and 1998 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended October 31, 1999 and 1998 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 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
October 31, January 31,
1999 1999
(unaudited)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 2,503,000 $ 2,599,000
Accounts receivable, less allowance for doubtful
accounts of $952,000 at October 31, 1999 and
$904,000 at January 31, 1999 20,972,000 20,120,000
Income taxes receivable 56,000 56,000
Inventories 2,480,000 1,640,000
Deferred tax assets 915,000 919,000
Prepaid expenses 1,637,000 1,099,000
------------ ------------
Total current assets 28,563,000 26,433,000
Property, plant and equipment, at cost 59,489,000 54,223,000
Less: accumulated depreciation 35,556,000 33,402,000
------------ ------------
Net property, plant and equipment 23,933,000 20,821,000
Property held for sale 544,000 544,000
Intangible assets, net 809,000 544,000
Other assets 1,707,000 1,489,000
------------ ------------
TOTAL ASSETS $ 55,556,000 $ 49,831,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,525,000 $ 3,493,000
Accrued expenses 4,746,000 3,785,000
Income taxes payable 491,000 113,000
Current installments of long-term debt 2,272,000 2,091,000
------------ ------------
Total current liabilities 11,034,000 9,482,000
Long-term debt, excluding current installments 15,997,000 13,076,000
Deferred income taxes, net 2,568,000 2,565,000
Deferred compensation 600,000 555,000
Minority interest 52,000 51,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized, 20,000,000;
issued and outstanding 8,352,206 as of October 31,
1999 and 8,319,000 as of January 31, 1999 11,541,000 11,472,000
Retained earnings 13,753,000 12,631,000
Accumulated other comprehensive income 11,000 (1,000)
------------ ------------
Total shareholders' equity 25,305,000 24,102,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 55,556,000 $ 49,831,000
============ ============
See accompanying notes
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Nine Months Ended October 31, 1999 and 1998
1999 1998
------------ ------------
Revenues $ 64,928,000 $ 68,052,000
Cost of sales 46,235,000 49,386,000
------------ ------------
Gross profit 18,693,000 18,666,000
Selling, general and administrative expense 14,633,000 13,554,000
Merger costs - 906,000
------------ ------------
Operating income 4,060,000 4,206,000
Other income (expense):
Interest expense, net (1,027,000) (918,000)
Other 40,000 13,000
------------ ------------
(987,000) (905,000)
------------ ------------
Income before income taxes and minority interest 3,073,000 3,301,000
Income taxes 1,216,000 1,341,000
------------ ------------
Income before minority interest 1,857,000 1,960,000
Minority interest (1,000) (12,000)
------------ ------------
Income before cumulative effect of change in
start-up costs 1,856,000 1,948,000
Cumulative effect of change in accounting for
start-up costs, net of tax - (473,000)
------------ ------------
Net income $ 1,856,000 $ 1,475,000
============ ============
Basic earnings (loss) per common share:
Income before cumulative effect of change for
start-up costs $ 0.22 $ 0.24
Cumulative effect of change for start-up costs,
net of tax - (0.06)
------------ ------------
Net income $ 0.22 $ 0.18
============ ============
Diluted earnings (loss) per common share:
Income before cumulative effect of change for
start-up costs $ 0.22 $ 0.23
Cumulative effect of change for start-up costs,
net of tax - (0.06)
------------ ------------
Net income $ 0.22 $ 0.17
============ ============
Weighted average common shares outstanding 8,337,000 8,210,000
Dilutive effect of stock options 257,000 385,000
------------ ------------
Weighted average common shares outstanding,
assuming dilution 8,594,000 8,595,000
============ ============
See accompanying notes.
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended October 31, 1999 and 1998
1999 1998
------------ ------------
Revenues $ 21,046,000 $ 23,230,000
Cost of sales 15,029,000 16,909,000
------------ ------------
Gross profit 6,017,000 6,321,000
Selling, general and administrative expense 4,970,000 5,152,000
Merger costs - 545,000
------------ ------------
Operating income 1,047,000 624,000
Other income (expense):
Interest expense, net (376,000) (315,000)
Other 14,000 (4,000)
------------ ------------
(362,000) (319,000)
------------ ------------
Income before income taxes and minority interest 685,000 305,000
Income taxes 261,000 297,000
------------ ------------
Income before minority interest 424,000 8,000
Minority interest (1,000) (3,000)
------------ ------------
Income before cumulative effect of change for
start-up costs 423,000 5,000
Cumulative effect of change in accounting for
start-up costs, net of tax - (378,000)
------------ ------------
Net income (loss) 423,000 (373,000)
============ ============
Basic earnings (loss) per common share:
Income before cumulative effect of change for
start-up costs $ 0.05 $ 0.00
Cumulative effect of change for start-up costs,
net of tax - (0.05)
------------ ------------
Net income (loss) $ 0.05 $ (0.05)
============ ============
Diluted earnings (loss) per common share:
Income before cumulative effect of change for
start-up costs $ 0.05 $ 0.00
Cumulative effect of change for start-up costs,
net of tax - (0.04)
------------ ------------
Net income (loss) $ 0.05 $ (0.04)
============ ============
Weighted average common shares outstanding 8,352,000 8,281,000
Dilutive effect of stock options 191,000 325,000
------------ ------------
Weighted average common shares outstanding,
assuming dilution 8,543,000 8,606,000
============ ============
See accompanying notes.
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 31, 1999 and 1998
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,856,000 $ 1,475,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,432,000 2,151,000
Provision for losses on receivables (recoveries) 48,000 72,000
Earnings from merged entity not included in net
income - 181,000
Undistributed earnings of affiliate 1,000 12,000
Deferred income taxes 7,000 15,000
Changes in assets and liabilities:
Accounts receivable (900,000) (1,624,000)
Inventories (840,000) 42,000
Prepaid expenses (538,000) (371,000)
Other assets and intangibles (218,000) (90,000)
Accounts payable 32,000 (375,000)
Accrued expenses 961,000 2,458,000
Deferred compensation 45,000 -
Comprehensive income 1,000 -
Income taxes 359,000 (272,000)
----------- -----------
Net cash provided by operating activities 3,246,000 3,674,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (5,434,000) (2,946,000)
Proceeds from sale of assets - 73,000
Investment in life insurance - (153,000)
Investment in new business (375,000) -
----------- -----------
Net cash used for investing activities (5,809,000) (3,026,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 5,771,000 4,743,000
Repayments of current and long-term debt (2,669,000) (4,689,000)
Cash dividends paid (584,000) (488,000)
Distributions paid (120,000) (362,000)
Proceeds from stock options exercised 69,000 176,000
----------- -----------
Net cash provided by (used in) financing activities 2,467,000 (620,000)
----------- -----------
Net increase (decrease) in cash (96,000) 28,000
Beginning cash balance 2,599,000 2,510,000
----------- -----------
ENDING CASH BALANCE $ 2,503,000 $ 2,538,000
=========== ===========
See accompanying notes
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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 Company's Form 10-K
for the year ended January 31, 1999.
On October 30, 1998, NTS completed its merger with XXCAL, Inc. and
acquisition of XXCAL Limited (together, "XXCAL"). All prior year financial
statements have been restated to reflect the pooling of interests method
of accounting pursuant to Opinion No. 16 of the Accounting Principles
Board (APB 16).
The statements presented as of and for the nine months and three months
periods ended October 31, 1999 and 1998 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.
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. Certain prior year amounts have been reclassified to
conform with the current year presentation.
2. Income Taxes
Income taxes for the interim periods are computed using the effective tax
rates estimated to be applicable for the full fiscal year.
3. Comprehensive Income
In fiscal 1999, the Company adopted Statement No.130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No.130 establishes new rules
for the reporting and display of comprehensive income and its components.
Accumulated other comprehensive income on the Company's condensed
consolidated balance sheets consists of cumulative equity adjustments from
foreign currency translation. During the nine months ended October 31,
1999 and 1998 total comprehensive income was $1,867,000 and $1,475,000,
respectively. For the three months ended October 31, 1999 and 1998 total
comprehensive income was $420,000 and loss of $373,000, respectively. The
reported amount for total comprehensive income differs from net income due
to foreign currency translation adjustments.
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4. Segment Information
In fiscal 1999, the Company adopted Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No.131). SFAS
No.131 supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise" replacing the
industry segment approach with the management approach. The management
approach designates the internal organization that is used by management
for making operating decisions and assessing performance as the source of
the Company's reportable segments. SFAS No.131 also requires disclosures
about products and services, geographic areas and major customers. The
adoption of SFAS No.131 did not affect results of operations or the
financial position of the Company. Management has reorganized the business
among the two core segments: Engineering & Evaluation Group consisting of
testing activities and IT Solutions Group consisting of the staff
augmentation activities. Certain historical segment information was
restated to properly reflect the management approach described above.
5. 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.
6. Interest and Taxes
Cash paid for interest and taxes for the nine months ended October 31,
1999 was $1,101,000 and $885,000, respectively. Cash paid for interest and
taxes for the nine months ended October 31, 1998 was $951,000 and
$1,116,000, respectively.
7. 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 62% to NTS, Inc. and 38%
to National Quality Assurance, Ltd for the fiscal year ending January 31,
2000.
8. Dividends
On January 26, 1999, the Company's Board of Directors adopted a regular
annual dividend policy and declared an initial annual dividend of $0.04
per share, payable semi-annually. The initial semi-annual dividend of
$0.02 per share was paid on March 2, 1999 to shareholders of record at the
close of business on February 15, 1999. The second semi-annual dividend of
$0.02 per share was paid on August 4, 1999 to shareholders of record at
the close of business on July 15, 1999. In addition, On June 14, 1999, the
Company's Board of Directors declared a special cash dividend of $0.03 per
share which was paid on August 4, 1999 to shareholders of record at the
close of business on July 15, 1999. This brought the total cash dividends
for the twelve months ending August 4, 1999, to $0.07 per share.
In the prior year, the Company paid a cash dividend of $.07 per share on
August 4, 1998 to shareholders of record on July 15, 1998.
8
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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
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. All prior year financial statements have been restated
to reflect the pooling of interests method of accounting. They include the
combined financial statements of NTS and XXCAL. Certain historical information
was restated to properly report segment results.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Nine months ended October 31, 1999 % Change 1998
(Dollars in thousands)
------------------------------------
Engineering & Evaluation $37,876 (4.3)% $39,566
IT Solutions 27,052 (5.0)% 28,486
----------- ------------
Total revenues $64,928 (4.6)% $68,052
=========== ============
For the nine months ended October 31,1999, consolidated revenues decreased by
$3,124,000 or 4.6% when compared to the same period in 1998.
Engineering & Evaluation:
- -------------------------
In 1999, the Engineering and Evaluation segment revenues decreased by $1,690,000
or 4.3% when compared to the same period in 1998, primarily due to the continued
weakness in the aerospace and defense industries, partially offset by an
increase from telecommunications and computer hardware testing. The decline in
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aerospace and defense was primarily caused by delays in development progress on
certain major new projects. In addition, some of the Company's aerospace
customers are now retaining programs in-house and government laboratories are
becoming more aggressive in competing with private industry for programs, thus
increasing the pressure on revenue growth. The increase in telecommunications
and computer testing is a direct result of the strategic focus by the Company on
that fast growing market.
IT Solutions:
- -------------
Revenues in the IT Solutions segment decreased by $1,434,000 or 5.0% due to the
industry-wide Year 2000 projects slowdown coupled with the low availability of
employees resulting from the low level of unemployment.
GROSS PROFIT
Nine months ended October 31, 1999 % Change 1998
(Dollars in thousands)
------------------------------
Engineering & Evaluation $11,336 1.4% $11,183
% to segment revenue 29.9% 28.3%
IT Solutions 7,357 (1.7)% 7,483
% to segment revenue 27.2% 26.3%
--------- ---------
Total gross profit $18,693 0.1% $18,666
========= =========
% to total revenue 28.8% 27.4%
Total gross profit for the nine months ended October 31, 1999 increased by
$27,000 or 0.1% when compared to the same period in 1998.
Engineering & Evaluation:
- -------------------------
Gross profit for the Engineering & Evaluation Group increased by $153,000 or
1.4% for the nine months ended October 31, 1999 when compared to the same period
in 1998, even though revenues decreased by 4.3%. This was due to the higher
margin contracts for testing telecommunications, network equipment and computer
testing. The increase in gross profit was partially offset by the decrease in
the Company's aerospace and defense testing.
IT Solutions
- ------------
Gross profit as a percentage of net revenues in 1999 decreased by $126,000 or
1.7% in the IT Solutions Group, when compared to the same period in 1998, due to
the reduction in revenues.
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SELLING, GENERAL & ADMINISTRATIVE
Nine months ended October 31, 1999 % Change 1998
(Dollars in thousands)
---------------------------------
Engineering & Evaluation $7,486 14.6% $6,535
% to segment revenue 19.8% 16.5%
IT Solutions 7,147 1.8% 7,019
% to segment revenue 26.4% 24.6%
---------- -----------
Total S G & A $14,633 8.0% $13,554
========== ===========
% to total revenue 22.5% 19.9%
Total selling, general and administrative expenses increased $1,079,000 or 8.0%
for the nine months ended October 31, 1999, when compared to the same period in
1998.
Engineering & Evaluation:
- -------------------------
The increase in the Engineering & Evaluation segment was due to efforts to
expand the base of business into new technology areas by engaging specialists in
these new areas to offset the declining opportunities in the Company's
traditional 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 several 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.
OPERATING INCOME
Nine months ended October 31, 1999 % Change 1998
(Dollars in thousands)
-------------------------------
Engineering & Evaluation $3,850 (2.9)% $3,963
% to segment revenue 10.2% 10.0%
IT Solutions 210 (13.6)% 243
% to segment revenue 0.8% 0.9%
------- ----------
Total operating income $4,060 (3.5)% $4,206
======= ==========
% to total revenue 6.3% 6.2%
Operating income for the nine months ended October 31, 1999 decreased by
$146,000 when compared to the same period in 1998.
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Operating income for the nine months ended October 31, 1999 for the Engineering
& Evaluation Group decreased by $113,000 when compared to the same period in
1998 primarily as a result of the net decreases in revenues and increases in
selling, general and administrative expenses.
Operating income for the nine months ended October 31, 1999 decreased by $33,000
in the IT Solutions Group when compared to the same period in 1998 primarily as
a result of the net decreases in revenues and the increases in selling, general
and administrative expenses.
INTEREST EXPENSE
Net interest expense increased $109,000 in the nine months ended October 31,
1999 when compared to the same period in 1998. This increase was principally due
to higher average debt balances for the nine months ended October 31, 1999, when
compared to the same period last year.
INCOME TAXES
The income tax provisional rate of 40.0% for the nine months ended October 31,
1999 reflects a rate in excess of the U.S. federal statutory rate primarily due
to the inclusion of state income taxes. This rate is based on the estimated
provision for fiscal year ending January 31, 2000. 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.
NET INCOME
The increase in net income for the nine months ended October 31, 1999, compared
to the same period in 1998, was primarily due to the lack of start-up costs and
merger costs in the current year and improved gross margins, offset by higher
general and administrative expenses.
The following information is based upon results for National Technical Systems,
Inc. for the three months ended October 31.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Three months ended October 31, 1999 % Change 1998
(Dollars in thousands)
-----------------------------------
Engineering & Evaluation $12,518 (4.3)% $13,086
IT Solutions 8,528 (15.9)% 10,144
----------- ------------
Total revenues $21,046 (9.4)% $23,230
=========== ============
For the three months ended October 31,1999, consolidated revenues decreased by
$2,184,000 or 9.4% when compared to the same period in 1998.
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Engineering & Evaluation:
- -------------------------
In 1999, the Engineering and Evaluation segment revenues decreased by $568,000
or 4.3% primarily due to the continued weakness in the aerospace and defense
industries, partially offset by increases in telecommunications and computer
hardware testing revenues. In addition, some of the Company's aerospace
customers are now retaining programs in-house and government laboratories are
becoming more aggressive in competing with private industry for programs, thus
increasing the pressure on revenues. The increase in telecommunications and
computer testing is a direct result of the strategic focus on that fast growing
market.
IT Solutions:
- -------------
Revenues in the IT Solutions segment decreased by $1,616,000 or 15.9% due to the
industry-wide Year 2000 projects slowdown coupled with the low availability of
employees resulting from the low level of unemployment.
GROSS PROFIT
Three months ended October 31, 1999 % Change 1998
(Dollars in thousands)
-----------------------------
Engineering & Evaluation $3,586 1.7% $3,526
% to segment revenue 28.6% 26.9%
IT Solutions 2,431 (13.0)% 2,795
% to segment revenue 28.5% 27.6%
-------- ---------
Total gross profit $6,017 (4.8)% $6,321
======== =========
% to total revenue 28.6% 27.2%
Total gross profit for the three months ended October 31, 1999 decreased by
$304,000 or 4.8% when compared to the same period in1998.
Engineering & Evaluation:
- -------------------------
Gross profit for the Engineering & Evaluation Group increased by $60,000 or 1.7%
for the three months ended October 31, 1999 when compared to the same period in
1998, even though revenues decreased by 4.3%. This was due to the higher margin
contracts for telecommunications, network equipment and computer hardware
testing.
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IT Solutions
- ------------
Gross profit in 1999 decreased by $364,000 or 13.0% in the IT Solutions Group
when compared to the same period in 1998 due to lower revenues.
SELLING, GENERAL & ADMINISTRATIVE
Three months ended October 31, 1999 % Change 1998
(Dollars in thousands)
-----------------------------
Engineering & Evaluation $2,610 6.4% $2,454
% to segment revenue 20.9% 18.8%
IT Solutions 2,360 (12.5)% 2,698
% to segment revenue 27.7% 26.6%
------- ---------
Total S G & A $4,970 (3.5)% $5,152
======= =========
% to total revenue 23.6% 22.2%
Total selling, general and administrative expenses decreased $182,000 or 3.5%
for the three months ended October 31, 1999 when compared to the same period in
1998.
Engineering & Evaluation:
- -------------------------
Selling, general and administrative expenses increased $156,000 or 6.4% due to
efforts to expand the base of business into new technology areas by engaging
specialists in these new areas to offset the weakness in the basic aerospace and
defense 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. The Company has also taken steps to cut costs in several areas of its
operations.
IT Solutions:
- -------------
Selling, general and administrative expenses decreased by $338,000 or 12.5% in
the IT Solutions segment due primarily to the cost reduction efforts made to
partially offset the reduction in revenues.
OPERATING INCOME
Three months ended October 31, 1999 % Change 1998
(Dollars in thousands) -----------------------------
Engineering & Evaluation $976 59.5% $612
% to segment revenue 7.8% 4.7%
IT Solutions 71 491.7% 12
% to segment revenue 0.8% 0.1%
-------- ---------
Total operating income $1,047 67.8% $624
======== =========
% to total revenue 5.0% 2.7%
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<PAGE>
Operating income for the three months ended October 31, 1999 increased by
$423,000 or 67.8% when compared to the same period in1998 primarily due to
merger costs of $545,000 incurred in the prior year third quarter.
Operating income for the three months ended October 31, 1999 for the Engineering
& Evaluation Group increased by $364,000 when compared to the same period in
1998 due to merger costs incurred in the prior year third quarter. This was
partially offset by increased selling, general and administrative expenses in
the Engineering & Evaluation Group discussed above.
Operating income for the three months ended October 31, 1999 increased by
$59,000 in the IT Solutions Group when compared to the same period in 1998 due
to merger costs incurred in the prior year third quarter, decreased selling,
general and administrative expenses, partially offset by lower gross profit.
INTEREST EXPENSE
Net interest expense increased $61,000 in the three months ended October 31,
1999 when compared to the same period in 1998. This increase was principally due
to higher average debt balances for the three months ended October 31, 1999,
when compared to the same period last year.
INCOME TAXES
The income tax provisional rate of 40.0% for the three months ended October 31,
1999 reflects a rate in excess of the U.S. federal statutory rate primarily due
to the inclusion of state income taxes. This rate is based on the estimated
provision for fiscal year ending January 31, 2000. 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.
NET INCOME
The increase in net income for the three months ended October 31, 1999, compared
to the same period in 1998, was primarily due to the lack of start-up costs and
merger costs in the current period, lower selling, general and administrative
expenses, partially offset by a reduction in revenues.
BUSINESS ENVIRONMENT
The business climate in the Engineering & Evaluation segment which has in the
past shown signs of uncertainty and which had appeared to stabilize last year,
has again become uncertain in the aerospace and defense industries. This has
occurred primarily due to program delays in new research and development
projects caused by technical difficulties being experienced by the Company's
aerospace and defense clients. In addition, the trend to outsourcing, which
started when many aerospace contractors began downsizing, has begun to reverse.
Some of the Company's aerospace customers are now retaining 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.
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<PAGE>
On the other hand, the business climate in the information technology (IT)
business has been improving in the United States and abroad. The Company
services this market through its high technology laboratories and its software
and computer hardware evaluation laboratories. Areas that are showing
significant growth are the telecommunications and electronics industries. The
Company has been purchasing capital equipment to establish its position in these
rapidly growing markets and has recently received Nationally Recognized Test
Laboratory (NRTL) approval which gives it opportunity to provide accreditation
as a third party agency. The Company also has been approved to perform
"Bellcore" testing and performs these tests at two of its laboratories. The
Company believes these industries have much higher profit margins and that
increased sales in these industries will offset the decline in the traditional
aerospace market. The Company also believes that in the future, both sales and
higher margins will continue in the information technology industries,
especially the computer, software and telecommunications sectors. Thus, the
Company believes it will be in a better position to service these markets as the
capital equipment and facilities come on line, which is starting to occur in the
second half of the year and are expected to positively affect financial results
in fiscal year 2001.
The Company also believes demand for ISO registration will continue to increase
as more companies must compete for business in the global market place.
The Company is pursuing additional business in the IT staffing 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 that will contribute
favorably to the overall product mix.
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.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended October 31, 1999, cash provided by operations
decreased by $428,000 when compared to the same period in 1998. This decrease
was primarily due to the effect of changes in inventories, prepaid expenses and
accrued expenses partially offset by higher net income and the effect of changes
in accounts payable, depreciation and income taxes.
Net cash used in investing activities in the nine-month period ended October 31,
1999 increased by $2,783,000 over the same period in 1998 due to capital
purchases of telecommunications testing equipment, the upgrading of the computer
systems and the acquisition of two quality-registration and certification
services companies. 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.
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<PAGE>
In the the nine-month period ended October 31, 1999, net cash provided by
financing activities consisted of increases in lines of credit and term loans of
$5,771,000 and proceeds from the exercise of stock options of $69,000, offset by
debt reduction on lines of credit and short term and long term debt of
$2,669,000 and cash dividends paid of $584,000 and distributions of $120,000 to
stockholders of an S corporation acquired by the Company.
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%. Also included in the 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. On October 29, 1999, the credit
agreement was amended again: 1) to extend the term of the revolving line to
September 8, 2001, 2) to increase the revolving line amount from $8,000,000 to
$10,000,000 at an interest rate equal to the Bank's reference rate and 3) to add
a new term loan for $3,000,000 at an interest rate equal to the Bank's reference
rate plus 0.50% and a maturity date of October 31, 2004. On November 5, 1999,
the interest rate for the new term loan was converted from the reference rate
base to a fixed rate base at an annual rate of 8.88%. The current bank revolving
line of credit had $2,993,000 available at October 31, 1999. Management believes
these changes will not materially affect the short or long-term liquidity of the
Company.
YEAR 2000
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the Year 1900 rather than the Year 2000.
The Company has assessed and identified to the best of its knowledge all
requirements needed to correct potential problems related to the Year 2000
issue. This includes: (1) the Company's business software and hardware at all of
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 and software used by the Company has already been upgraded
to be Year 2000 compliant. Certain test equipment at the laboratories has been
identified to be date sensitive and vendors have supplied new Year 2000
compliant software. In situations where the software is not available, the
Company has replaced the equipment. To complete the necessary remediation of its
business systems software, the Company has identified new Year 2000 compliant
software and replaced certain crucial software applications it currently uses.
All other identified existing systems were fixed internally. 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.
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<PAGE>
The total cost for the Year 2000 project will be approximately $500,000 for new
hardware, software and in-house programming. The Company does not consider these
costs to have a material impact on its financial position, results of operations
or cash flows. The Company has funded and will continue to fund these costs from
its operating and financing cash flows.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about April 30, 1999, TECSTAR, Inc., a manufacturer of flight
hardware for use in satellites filed a complaint against the Company in
the Superior Court of the State of California for Los Angeles County, Case
No. BC 209645. The complaint alleges that TECSTAR contracted with the
Company to test hardware in accordance with certain agreed upon test
specifications. TECSTAR alleges that during a test cycle the temperature
of the hardware exceeded the specifications and that as a result the
hardware was rejected by TECSTAR's customer as allegedly being unsuitable
for flight. As a consequence, TECSTAR asserts that it scrapped the
hardware.
The complaint alleges breach of contract, breach of implied warranty,
breach of bailment agreement, negligence, negligent bailment and
professional negligence. The complaint seeks monetary damages of
$2,488,700 plus costs of suit and interest, including prejudgment
interest, as provided by law. The Company believes that the damages
claimed by TECSTAR greatly exceed the cost of replacing the hardware.
The Company has filed and served a cross-complaint against Research, Inc.,
manufacturer of a temperature control device utilized during the test.
The Company believes that it has meritorious defenses to the complaint and
intends to vigorously defend against TECSTAR's claims. The Company also
intends to vigorously prosecute the cross-complaint against Research, Inc.
The Company has also submitted the TECSTAR claims to its property loss
insurance carrier for coverage determination.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.4 - Amendment to Section 3.2 of the Bylaws of National Technical
Systems, Inc.
Exhibit 10.6 - Third Amendment to Credit Agreement between Sanwa Bank
California, Mellon Bank and NTS dated October 29, 1999.
Exhibit 27 - Financial Data Schedule
(b) Form 8-K
During the quarter ended October 31, 1999 the registrant did not file a
current report on Form 8-K.
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<PAGE>
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 13, 1999 By: /s/ Lloyd Blonder
----------------- ---------------------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
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<PAGE>
Exhibit Index
Exhibit No. Description Page No.
- --------------------------------------------------------------------------------
3.4 Amendment to Section 3.2 of the Bylaws of National
Technical Systems, Inc. 22
10.6 Third Amendment to Credit Agreement between Sanwa Bank
California, Mellon Bank and NTS dated October 29, 1999 23
27 Financial Data Schedule 37
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<PAGE>
Exhibit 3.4
-----------
Amendment to Section 3.2 of the Bylaws
of
NATIONAL TECHNICAL SYSTEMS, INC.
The full text of Section 3.2 of the Company's Bylaws, as currently in effect,
reads as follows:
Section 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of directors shall be NINE (9) until changed by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw adopted by the vote
or written consent of holders of a majority of the outstanding shares entitled
to vote; provided, however, that an amendment reducing the fixed number of
directors to a number less than five (5) cannot be adopted if the votes cast
against its adoption at a meeting, or the shares not consenting in the case of
action by written consent, are equal to more than 16-2/3% of the outstanding
shares entitled to vote.
The full text of Section 3.2 of the Company's Bylaws, as proposed to be amended,
reads as follows:
Section 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of directors shall be not less than NINE (9) nor more than SEVENTEEN (17). The
exact number of authorized directors shall be set from time to time by the board
of directors. An amendment to this bylaw adopted by the vote or written consent
of holders of a majority of the outstanding shares entitled to vote which
reduces the number of directors to a number less than five (5) cannot be adopted
if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of action by written consent, are equal to more than
16-2/3% of the outstanding shares entitled to vote.
Page 22 of 37
<PAGE>
Exhibit 10.6
------------
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Third Amendment") is made
and dated as of the 29th day of October, 1999, 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. Increase in Amount of Revolving Credit Limit and extension of
Revolving Loan Maturity Date. To reflect the agreement of the parties hereto to
increase the amount of the Revolving Credit Limit and to extend the Revolving
Loan Maturity Date, effective as of the Effective Date (as defined in Paragraph
7 below), the definitions of "Revolving Credit Limit" and "Revolving Loan
Maturity Date" set forth in Paragraph 1 of the Agreement are hereby amended to
read in their entirety as follows:
"'Revolving Credit Limit' shall mean $10,000,000, as such
amount may be increased or decreased by written agreement of the Agent,
the Borrower and one hundred percent (100%) of the Lenders."
"'Revolving Loan Maturity Date' shall mean the earliest of:
(i) September 8, 2001, as such date may be extended from time to time in
writing by the Agent, 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."
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<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)(5) is hereby added to Paragraph 2(a) of the
Agreement to read in its entirety as follows:
"(5) 1999 Term Loans. On the terms and subject to the
conditions set forth herein, each Lender agrees that it shall make 1999
Term Loans (the '1999 Term Loans' or a '1999 Term Loan') to the Borrower
in one disbursement made within fifteen (15) days of the Effective Date of
the Third Amendment to this Agreement in an aggregate amount with all its
other outstanding 1999 Term Loans not to exceed its Percentage Share of
the 1999 Term Loan Credit Limit. Once borrowed, the 1999 Term Loans may
not be repaid and reborrowed."
(b) A new Paragraph 2(b)(4) is hereby added to Paragraph 2(b) of the
Agreement to read in its entirety as follows:
"(4) 1999 Term Loans. 1999 Term Loans shall be maintained,
at the election of the Borrower made from time to time as permitted
herein, as Reference Rate Loans or Eurodollar Loans."
(c) The first sentence in Paragraph 2(d) is hereby amended to read
as follows:
"Interest accruing on Reference Rate Loans and Fixed Rate
Loans outstanding hereunder shall be payable monthly, in arrears, for each
month on the first Business Day of the next succeeding month and a final
payment shall be payable, with respect to Revolving Loans, on the
Revolving Loan Maturity Date; with respect to Term Loans, on the Term Loan
Maturity Date; with respect to 1998 Term Loans, on the 1998 Term Loan
Maturity Date; and with respect to 1999 Term Loans, on the 1999 Term Loan
Maturity Date."
(d) A new Paragraph 2(e)(1)(iv) is hereby added to Paragraph 2(e) of
the Agreement to read in its entirety as follows:
"(iv) the principal amount of the 1999 Term Loans in sixty
(60) equal installments of $50,000 on the last Business Day of each month,
commencing November 30, 1999 until the 1999 Term Loan Maturity Date when
the 1999 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,
Exhibit A-3, and Exhibit A-4 respectively (a "Note" or the "Notes")."
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<PAGE>
(f) A new Exhibit A-4 in the form of that attached hereto as
Amendment Exhibit 1 is hereby added to the Third Amendment.
(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:
"'1999 Term Loans' shall have the meaning given such term in
Paragraph 2(a) below."
"'1999 Term Loan Credit Limit' shall mean $3,000,000, as such
amount may be increased or decreased by written agreement of the Agent,
the Borrower and one hundred percent (100%) of the Lenders."
"'1999 Term Loan Maturity Date' shall mean the earlier of (i)
October 31, 2004, 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 1999 Term Loans to remain outstanding pursuant to
Paragraph 8 below."
"'1999 Term Loan Note' shall mean that note substantially in
the form of Exhibit A-4 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, 1998 Term
Loans, and 1999 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 or the 1999 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, (e) no Interest Period applicable to 1998 Term Loans shall extend
beyond the 1998 Term Loan Maturity Date, and (f) no Interest Period
applicable to 1999 Term Loans shall extend beyond the 1999 Term Loan
Maturity Date.."
3
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<PAGE>
3. Modification of Pricing Provisions. To provide pricing provisions
applicable to the 1999 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 and 1999 Term Loans, 0.25% per annum.
"'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 and 1999 Term Loans,
2.25% per annum."
4. Modification of Capital Expenditure Covenants: To reflect the
agreement of the parties hereto to amend capital expenditure covenant set forth
in the Agreement, effective as of the Effective Date, Paragraph 7(j)(3) of the
Agreement is hereby amended to read as follows:
"(3) make capital expenditures in aggregate in excess of (i)
$4,350,000 in the Borrower's fiscal year ending January 31, 1999, (ii)
$8,250,000 in the Borrower's fiscal year ending January 31, 2000; (iii)
$5,000,000 in the Borrower's fiscal year ending January 31, 2001, and
(iv) $2,500,000 thereafter."
5. Modification of Additional Covenants: To reflect the agreement of
the parties hereto to add negative covenants:
(a) New Paragraphs 7(k) and 7(l) are added at the end of Paragraph 7
to read as follows:
"7(k) No Restrictions on Dividends. Grant, enter into or permit to
remain in effect any agreement with any Person which would have the effect
of prohibiting or restricting in any manner Subsidiaries of the Borrower
from declaring or paying any dividends upon their shares of stock now or
hereafter outstanding or from making any distribution of assets to the
Borrower, whether in cash, property or securities.
"7(l) Limitation on Contingent Obligations. The Borrower shall not,
and shall not permit any of its Subsidiaries to, directly or indirectly,
create or become liable with respect to any Contingent Obligation except:
"(i) Subsidiaries of the Borrower may become and remain liable
with respect to Contingent Obligations pursuant to Guaranties of the
Obligations delivered to the Lenders pursuant to this Agreement;
"(ii) The Borrower may become and remain liable with respect to
Contingent Obligations under this Agreement; or
"(iii) As set forth on Schedule 7(l) hereto."
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<PAGE>
(b) Paragraph 1 is amended to add in correct alphabetical order the
following new definition:
"'Contingent Obligation' shall mean, with respect to any Person, any
direct or indirectly liability, contingent or otherwise (i) with
respect to any Indebtedness, lease, dividend or other obligation of
another if the primary purpose or intent thereof is to provide
assurance to the obligee of such obligation of another that such
obligation will be paid or discharged, or that any agreements
relating thereto will be complied with, or that the holders of such
obligation will be protected (in whole or in part) against loss in
respect thereof, (ii) with respect to any letter of credit issued
for the account of such Person or as to which such Person is
otherwise liable for reimbursement of drawings. Contingent
Obligations shall include (a) the direct or indirect guaranty,
endorsement (otherwise than for collection or deposit in the
ordinary course of business), co-making, discounting with recourse
or sale with recourse by such Person of the obligation of another,
(b) the obligation to make take or pay or similar payments if
required regardless of non-performance by another party or parties
to an agreement, and (c) any liability of such Person for the
obligation of another through any agreement (contingent or
otherwise) (x) to purchase, repurchase or otherwise acquire such
obligation or any security therefor, or to provide funds for the
payment or discharge of such obligation (whether in the form of
loans, advances, stock purchases, capital contributions or
otherwise) or (y) to maintain the solvency or any balance sheet
item, level of income or financial condition of another if, in the
case of any agreement described under clauses (x) or (y) of this
sentence, the primary purpose or intent thereof is as described in
the preceding sentence."
6. 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 Third 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.
7. Effective Date. This Third Amendment shall be effective on the date
(the "Effective Date") when all of the following conditions precedent have been
satisfied:
(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 Third Amendment;
(ii) 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;
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<PAGE>
(iii) Certified copies of resolutions of the Board of
Directors of the Borrower approving the execution and delivery of the Third
Amendment and related Loan Documents to which it is a party;
(iv) Certificates of the Secretary or an Assistant Secretary
of the Borrower certifying the names and true signatures of its officers
authorized to sign this Third Amendment and related Loan Documents to which it
is a party;
(v) 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 Third 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 Third 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 (and by
executing and delivering this Third Amendment, the Borrower represents that all
such representations and warranties) shall be accurate and complete in all
material respects as if made on and as of such date.
(d) There shall not have occurred an Event of Default or Potential
Default not otherwise cured or waived.
If this Third Amendment shall not have become effective on or before
November 15, 1999, then this Third 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.
8. 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.
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<PAGE>
(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 Third 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 Third
Amendment and the Agreement as amended hereby. This Third 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
Third 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.
(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 Third 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.
9. 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 Third Amendment.
7
Page 29 of 37
<PAGE>
(b) Entire Agreement. This Third 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 Third 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 Third Amendment may be executed in any number
of counterparts, all of which together shall constitute one agreement.
8
Page 30 of 37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be executed as of the day and year first above written.
NTS TECHNICAL SYSTEMS, a California corporation
By:____________________________________
Name: Lloyd Blonder
Title: Vice President
SANWA BANK CALIFORNIA, as Agent and the L/C
Bank
By:____________________________________
Name: Robert Ligon
Title: Vice President
SANWA BANK CALIFORNIA, as a Lender
By:____________________________________
Name: Robert Ligon
Title: Vice President
MELLON BANK, N.A., as a Lender
By:____________________________________
Name: Garry Handelman
Title: Vice President
9
Page 31 of 37
<PAGE>
REAFFIRMATION OF GUARANTIES
Each of the undersigned Subsidiaries and Guarantors agrees to the terms of this
Third 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 Third Amendment
and any other amendment or supplement to the Agreement entered into prior to
this Third Amendment, its Guaranty shall remain in full force and effect with
respect to the Agreement as amended hereby.
NATIONAL TECHNICAL SYSTEMS, INC.
By:____________________________________
Name: Lloyd Blonder
Title: Vice President
ETCR, INC.
By:____________________________________
Name: Lloyd Blonder
Title: Vice President
APPROVED ENGINEERING TEST
LABORATORIES, INC.
By:____________________________________
Name: Lloyd Blonder
Title: Vice President
ACTON ENVIRONMENTAL TESTING
CORPORATION
By:____________________________________
Name: Lloyd Blonder
Title: Vice President
10
Page 32 of 37
<PAGE>
NATIONAL TECHNICAL SYSTEMS
- CERTIFICATION SERVICES, INC.
By:____________________________________
Name: Lloyd Blonder
Title: Vice President
WISE AND ASSOCIATES, INC.
By:____________________________________
Name: Lloyd Blonder
Title: Vice President
NTS TECHNICAL SERVICES, INC.
By:_____________________________________
Name: Lloyd Blonder
Title: Vice President
XX CAL, INC.
By:______________________________________
Name: Lloyd Blonder
Title: Vice President
11
Page 33 of 37
<PAGE>
AMENDMENT
EXHIBIT 1
---------
EXHIBIT A-4
-----------
TO CREDIT AGREEMENT
-------------------
FORM OF 1999 TERM LOAN NOTE
$_______________ _______________, 1999
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
1999 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 1999 Term Loan Maturity Date, Borrower shall pay in full the unpaid
principal amount of all 1999 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 1999 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 1999 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 1999 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
notices in connection with the delivery, acceptance, performance, default or
enforcement of this 1999 Term Loan Note.
12
Page 34 of 37
<PAGE>
This 1999 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:_________________________________
13
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<PAGE>
SCHEDULE 7(l)
-------------
OTHER CONTINGENT OBLIGATIONS
NONE
14
Page 36 of 37
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 2,503
<SECURITIES> 0
<RECEIVABLES> 21,924
<ALLOWANCES> 952
<INVENTORY> 2,480
<CURRENT-ASSETS> 28,563
<PP&E> 59,489
<DEPRECIATION> 35,556
<TOTAL-ASSETS> 55,556
<CURRENT-LIABILITIES> 11,034
<BONDS> 0
11,541
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 55,556
<SALES> 64,928
<TOTAL-REVENUES> 64,928
<CGS> 46,235
<TOTAL-COSTS> 46,235
<OTHER-EXPENSES> 14,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,027
<INCOME-PRETAX> 3,073
<INCOME-TAX> 1,216
<INCOME-CONTINUING> 1,856
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,856
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
