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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 April 30, 2000
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
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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 June 5,
2000 was 8,508,500.
Exhibit Index on Page 16
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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
April 30, 2000 (unaudited) and January 31, 2000 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended April 30, 2000 and 1999 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2000 and 1999 5
Notes to the Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION & SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
April 30, January 31,
2000 2000
(unaudited)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 3,373,000 $ 3,133,000
Accounts receivable, less allowance for doubtful
accounts of $1,067,000 at April 30, 2000 and
$803,000 at January 31, 2000 21,645,000 20,114,000
Income taxes receivable - 1,387,000
Inventories 2,386,000 1,804,000
Deferred tax assets 838,000 847,000
Prepaid expenses 832,000 719,000
----------- -----------
Total current assets 29,074,000 28,004,000
Property, plant and equipment, at cost 64,733,000 63,347,000
Less: accumulated depreciation 37,282,000 36,310,000
----------- -----------
Net property, plant and equipment 27,451,000 27,037,000
Property held for sale 544,000 544,000
Intangible assets, net 1,048,000 1,077,000
Other assets 2,042,000 1,969,000
----------- -----------
TOTAL ASSETS $ 60,159,000 $ 58,631,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,911,000 $ 5,249,000
Accrued expenses 3,864,000 2,913,000
Deferred income 1,587,000 309,000
Income taxes payable 157,000 106,000
Current installments of long-term debt 3,222,000 3,195,000
----------- -----------
Total current liabilities 12,741,000 11,772,000
Long-term debt, excluding current installments 18,350,000 18,639,000
Deferred income taxes, net 3,069,000 3,075,000
Deferred compensation 747,000 615,000
Minority interest 63,000 67,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized, 20,000,000;
issued and outstanding 8,509,000 as of April 30,
2000 and 8,404,000 as of January 31, 2000 11,909,000 11,764,000
Retained earnings 13,300,000 12,706,000
Accumulated other comprehensive income (20,000) (7,000)
----------- -----------
Total shareholders' equity 25,189,000 24,463,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,159,000 $ 58,631,000
=========== ===========
See accompanying notes.
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended April 30, 2000 and 1999
2000 1999
------------ ------------
Revenues $ 21,190,000 $ 21,565,000
Cost of sales 15,190,000 14,905,000
------------ ------------
Gross profit 6,000,000 6,660,000
Selling, general and administrative expense 4,170,000 4,963,000
------------ ------------
Operating income 1,830,000 1,697,000
Other expense:
Interest expense, net (490,000) (326,000)
Other (77,000) (6,000)
------------ ------------
Total other expense (567,000) (332,000)
------------ ------------
Income before income taxes and minority interest 1,263,000 1,365,000
Income taxes 505,000 552,000
------------ ------------
Income before minority interest and discontinued
operations 758,000 813,000
Minority interest 4,000 (4,000)
------------ ------------
Income from continuing operations 762,000 809,000
Loss from discontinued operations, net of taxes - (61,000)
------------ ------------
Net income $ 762,000 $ 748,000
============ ============
Basic earnings (loss) per common share:
Continuing operations $ 0.09 $ 0.10
Discontinued operations - (0.01)
------------ ------------
Net income $ 0.09 $ 0.09
============ ============
Diluted earnings (loss) per common share: $ 0.09 $ 0.09
Continuing operations - (0.01)
------------ ------------
Discontinued operations $ 0.09 $ 0.09
============ ============
Net income
Weighted average common shares outstanding 8,460,000 8,321,000
Dilutive effect of stock options 84,000 261,000
------------ ------------
Weighted average common shares outstanding,
assuming dilution 8,544,000 8,582,000
============ ============
See accompanying notes.
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 2000 and 1999
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 762,000 $ 809,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,001,000 775,000
Provision for losses on receivables 264,000 12,000
Loss on retirement of assets - -
Earnings from merged entity not included in net
income - -
Undistributed earnings of affiliate (4,000) 4,000
Deferred income taxes 3,000 -
Changes in assets and liabilities:
Accounts receivable (1,795,000) 284,000
Inventories (582,000) (600,000)
Prepaid expenses (113,000) (696,000)
Other assets and Intangibles (73,000) (42,000)
Accounts payable (1,338,000) (753,000)
Accrued expenses 951,000 1,908,000
Deferred income 1,278,000 -
Deferred compensation 132,000 15,000
Income taxes 1,438,000 423,000
----------- ------------
Cash provided by continuing operations 1,924,000 2,139,000
Loss from discontinued operations - (61,000)
----------- ------------
Cash provided by operating activities 1,924,000 2,078,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,386,000) (1,041,000)
Investment in new business - (375,000)
----------- ------------
Net cash used for investing activities (1,386,000) (1,416,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 1,480,000 112,000
Repayments of current and long-term debt (1,742,000) (935,000)
Cash dividends paid (168,000) (166,000)
Distributions paid - (120,000)
Proceeds from stock options exercised 145,000 5,000
----------- ------------
Net cash used for financing activities (285,000) (1,104,000)
----------- ------------
Effect of exchange rate changes on cash and
cash equivalents (13,000) -
----------- ------------
Net increase in cash 240,000 (442,000)
Beginning cash balance 3,133,000 2,599,000
----------- ------------
ENDING CASH BALANCE $ 3,373,000 $ 2,157,000
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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, 2000.
The statements presented as of and for the three months ended April 30,
2000 and 1999 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
Accumulated other comprehensive income on the Company's Condensed
Consolidated Balance Sheets consists of cumulative equity adjustments from
foreign currency translation. During the three months ended April 30, 2000
and 1999 total comprehensive income was $749,000 and $759,000
respectively. The reported amount for total comprehensive income differs
from net income for the three months ended April 30, 2000 due to foreign
currency translation adjustments. The tax effect related to foreign
currency translation adjustments is immaterial and has not been recognized
as part of comprehensive income or in accumulated other comprehensive
income.
4. Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement will require the recognition of all derivatives on the Company's
balance sheet at fair value. The Financing Accounting Standards Board has
subsequently delayed implementation of the standard for the financial
years beginning after June 15, 2000. The Company expects to adopt the new
Statement effective February 1, 2001. The impact on the Company's
financial statements is not expected to be material.
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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 three months ended April 30, 2000
was $518,000 and $22,000 respectively. Cash paid for interest and taxes
for the three months April 30, 1999 was $332,000 and $76,000 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 61% to NTS, Inc. and 39%
to National Quality Assurance, Ltd for the fiscal year ending January 31,
2001.
8. Dividends
On February 4, 2000, pursuant to the Company's current dividend policy,
the Company's Board of Directors authorized the regular semiannual cash
dividend of $0.02 per share, that was paid on March 15, 2000 to
shareholders of record at the close of business on February 28, 2000.
7
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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
-------
NTS is a diversified services company which operates in two segments:
"Engineering & Evaluation" and "Technical Staffing". The business of the
Company is conducted by a number of operating units, each with its own
organization. Each segment is under the direction of its own executive and
operational management team.
The Engineering & Evaluation segment performs technical services for a
wide range of industries (telecommunications, medical, computer, automotive,
aerospace, defense, among others) including analysis, engineering and mechanical
and electronic testing to ascertain performance and reliability, computer-based
structural dynamics and finite element analysis. In addition, this segment
performs quality management registration services.
The Technical Staffing segment is a provider of information technology,
managed services and staffing. Utilizing full-time salaried and hourly
consultants, the Company offers a wide range of staffing solutions to meet its
clients' information technology "IT", information systems ("IS") and software
engineering needs.
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
three months ended April 30.
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RESULTS OF OPERATIONS
---------------------
REVENUES
Three months ended April 30, 2000 % Change 1999
(Dollars in thousands)
-----------------------------------
Engineering & Evaluation $14,491 20.0% $12,079
Technical Staffing 6,699 (29.4)% 9,486
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Total net revenues $21,190 (1.7)% $21,565
=========== ============
For the three months ended April 30, 2000, consolidated revenues decreased by
$375,000 or 1.7% when compared to the same period in 1999.
Engineering & Evaluation:
-------------------------
For the three months ended April 30, 2000, Engineering and Evaluation revenues
increased by $2,412,000 primarily due to the growth in telecommunications and
computer hardware and software testing as the Company is benefitting from the
increased investment in telecommunications testing equipment at some of its
facilities during the past two years. Revenues in the aerospace and defense
industries also increased when compared to the same period last year as a result
of increased bookings.
Technical Staffing:
-------------------
Revenues in Technical Staffing decreased by $2,787,000 or 29.4% due to the
cessation of Year 2000 related projects, the low availability of employees
resulting from the reduced level of unemployment, the reduction in fees at two
of the Company's largest customers and the loss of a major contract. In an
effort to reposition itself in this industry and become more competitive, the
Company closed several non-performing staffing offices in recent months and is
in the process of streamlining and consolidating its operations to control costs
and focus on quality service.
GROSS PROFIT
Three months ended April 30, 2000 % Change 1999
(Dollars in thousands)
------------------------------
Engineering & Evaluation $4,228 15.6% $3,659
% to segment revenue 29.2% 30.3%
Technical Staffing 1,772 (41.0)% 3,001
% to segment revenue 26.5% 31.6%
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Total $6,000 (9.9)% $6,660
========= =========
% to total net revenue 28.3% 30.9%
Total gross profit for the three months ended April 30, 2000 decreased by
$660,000 or 9.9% when compared to 1999.
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Engineering & Evaluation:
------------------------
For the three months ended April 30, 2000, gross profit for the Engineering &
Evaluation Group increased by $569,000 or 15.6% when compared to the same period
in 1999, as a result of the increased revenues, particularly in the
telecommunications business.
Technical Staffing:
-------------------
For the three months ended April 30, 2000, gross profit decreased by $1,229,000
or 41.0% in the Technical Staffing Group when compared to the same period in
1999. This was due to the decrease in revenues and increased competitive pricing
pressures due to the tight recruiting market.
SELLING, GENERAL & ADMINISTRATIVE
Three months ended April 30, 2000 % Change 1999
(Dollars in thousands)
--------------------------------
Engineering & Evaluation $2,264 (6.9)% $2,433
% to segment revenue 15.6% 20.1%
Technical Staffing 1,906 (24.7)% 2,530
% to segment revenue 28.5% 26.7%
--------- ---------
Total S G & A $4,170 (16.0)% $4,963
========= =========
% to total net revenue 19.7% 23.0%
Total selling, general and administrative expenses decreased $793,000 or 16.0%
for the three months ended April 30, 2000 when compared to the same period in
1999.
Engineering & Evaluation:
------------------------
For the three months ended April 30, 2000, selling, general and administrative
expenses decreased by $169,000 or 6.9% when compared to the same period in 1999,
as the programs established by the Company in the prior year to hire specialists
to expand the base of business into new technology areas are starting to take
effect by improving sales while containing costs.
Technical Staffing:
------------------
For the three months ended April 30, 2000, selling, general and administrative
expenses decreased by $624,000 or 24.7% when compared to the same period in
1999, due to the closure of several non-performing staffing offices and the
consolidation of its operations in an effort to streamline this business.
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OPERATING INCOME
Three months ended April 30, 2000 % Change 1999
(Dollars in thousands)
--------------------------------
Engineering & Evaluation $1,964 60.2% $1,226
% to segment revenue 13.6% 10.2%
Technical Staffing (134) (128.5)% 471
% to segment revenue (2.0)% 5.0%
--------- ---------
Total operating income $1,830 7.8% $1,697
========= =========
% to total net revenue 8.6% 7.9%
Operating income for the three months ended April 30, 2000 increased by $133,000
or 7.8% when compared to 1999.
Operating income for the three months ended April 30, 2000 increased by $737,000
or 60.2% in the Engineering & Evaluation Group when compared to the same period
in 1999, as a result of the increase in gross profit and the decrease in selling
and general and administrative expenses discussed above.
Operating income for the three months ended April 30, 2000 decreased by $604,000
or 128.5% in the Technical Staffing Group when compared to the same period in
1999, as a result of the decrease in gross profit partially offset by a decrease
in selling and general and administrative expenses.
INTEREST EXPENSE
Net interest expense increased by $164,000 in the three months ended April 30,
2000 when compared to the same period in 1999. This increase was principally due
to higher average debt balances for the three months ended April 30, 2000 along
with slightly higher interest rates when compared to the same period last year.
INCOME TAXES
The income tax provisional rate of 40.0% for the three months ended April 30,
2000 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 accrual for fiscal year ending January 31, 2001. 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.
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DISCONTINUED OPERATIONS
The discontinued operations represents the results of operations of the
Company's McClellan Air Force base facility in Sacramento, California. During
fiscal 1998, the Company took over the operations and employees of the Science
and Engineering Test Laboratories at McClellan. This facility allowed the
Company to enter a new segment of business which provided chemical, materials
and electronic analysis for the government, including failure analysis of fuels
and lubricants, electronic components, materials and processes, metal fatigue
simulation and corrosion analysis. This was the only facility in the Company
that had the necessary equipment and knowledge to perform these types of testing
services.
During the fourth quarter of fiscal 2000 the Company decided to discontinue this
line of business and close its operations in Sacramento as it experienced a
significant loss of business due to the government decision to transfer work,
planned for that operation, to another Air Force base.
NET INCOME
The slight increase in net income for the three months ended April 30, 2000,
compared to the same period in 1999, was primarily due to lower selling and
general and administrative expenses in the current quarter when compared to the
same period last year, partially offset by higher interest expense and lower
gross profit.
YEAR 2000
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
BUSINESS ENVIRONMENT
Engineering & Evaluation:
-------------------------
The Company's basic service to industry is to support the development of new
products. Much of that effort in basic industries such as automotive, aerospace
and defense was not evident in fiscal 2000 except for research and development
on new spacecraft such as X-33, DeltaIV and Atlas V. For those programs, the
Company expects to see increased workload in cryogenics evaluation.
12
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The information technology market, on the other hand, continues its
technological growth cycle due to the use of computers, wireless systems, cell
phones, e-mail and faxes. The Company is serving this growing market in four of
its locations and anticipates significant growth for the next 18 to 24 months.
Competition is more limited in these markets for two reasons. First, when
international standards and approval are required, only third party laboratories
such as the Company's can perform this service. Second, information technology
companies need all their scientists and engineers working on the design and
manufacturing of their evolving products, and will make more "make or buy"
decisions to use independent, qualified test labs to evaluate and test their
products.
Technical Staffing:
-------------------
The Company has aggressively pursued additional business in the Technical
Staffing market. The Company supplies 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 shortage of
qualified temporary and permanent candidates may bring additional pressure on
earnings to this highly competitive business. The Company expects competition to
be similar to last year.
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 three months ended April 30, 2000, cash provided by operations decreased
by $154,000 when compared to the same period in 1999. This decrease was
primarily due to the effect of changes in accounts receivable, accounts payable
and accrued expenses partially offset by increases in depreciation and
amortization, provision for losses on receivables and the effect of changes in
prepaid expenses, deferred income and income taxes.
Net cash used in investing activities in the three-month period ended April 30,
2000 decreased $30,000 over the same period in 1999, primarily due to the
acquisition of two quality-registration and certification services companies
during the three-month period ended April 30, 1999 offset by an increase in
capital purchases during the same period in 2000.
In the three-month period ended April 30, 2000 net cash used for financing
activities decreased by $819,000 over the same period in 1999. Net cash used for
financing activities consisted of debt reduction on lines of credit and short
term and long term debt of $1,742,000 and cash dividends paid of $168,000,
offset by increases in proceeds from lines of credit and term loans of
$1,480,000 and proceeds from issuance of common stock of $145,000.
13
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In September 1997, the Company negotiated with Sanwa Bank California, as agent,
and Mellon Bank, for a credit agreement which included a $6,000,000 revolving
line of credit at an interest equal to the bank's reference rate plus 0.25%. On
October 30, 1998, the credit agreement was amended to extend the term of the
revolving line to September 8, 2000 and 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. A flat fee of $18,750 was charged to set up the new revolving line and a
facility fee of 0.5% of the total line is charged on a quarterly basis. On
October 29, 1999, the credit agreement was amended again to extend the term of
the revolving line to September 8, 2001 and 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.
In November 1997, the Company entered into an equipment line of credit agreement
with Mellon US Leasing (interest rates of 7.60 % to 10.25%) to finance various
test equipment with terms of 60 months for each equipment schedule. In April
1999, Mellon US Leasing extended an additional $2,000,000 of credit under the
same terms as the original agreement. The outstanding balance at April 30, 2000
is $3,486,000.
Management is not aware of any significant demands for capital funds that may
materially affect the short or long-term liquidity in the form of large fixed
asset acquisitions, unusual working capital commitments or contingent
liabilities. In addition, the Company has made no material commitments for
capital expenditures. The Company's future working capital will be provided from
operations and the current bank revolving line of credit which had $2,493,000
available at April 30, 2000.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Form 8-K
During the quarter ended April 30, 2000 the registrant did not file a
current report on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL TECHNICAL SYSTEMS, INC.
Date: June 13, 2000 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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Exhibit Index
Exhibit No. Description Page No.
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27 Financial Data Schedule 17
16