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NATIONAL TECHNICAL SYSTEMS, INC.
FORM 10-K
YEAR ENDED JANUARY 31, 1996
Page 1 of 76
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
..X.. Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended January 31, 1996
..... Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ________ to ________
Commission file number 0-16438
NATIONAL TECHNICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4134955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24007 Ventura Boulevard 91302
Calabasas, CA (Zip Code)
(Address of principal executive offices)
(818) 591-0776
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock -
Par Value $.01 Per share NASDAQ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ..X..
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 .....
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The aggregate market value of the voting stock held by non-
affiliates of the Registrant at April 15, 1996 was approximately
$10,969,387.
The number of shares of Registrant's Common Stock outstanding on
April 15, 1996 was 6,674,383.
Portions of the Proxy Statement of Registrant dated January 31,
1996 are incorporated in Part III of this report.
Total number of pages included in this document 76.
--
Exhibit Index on page 47
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Page 3 of 76
NATIONAL TECHNICAL SYSTEMS, INC.
Annual Report (Form 10-K)
For Year Ended January 31, 1996
PART I
ITEM 1. BUSINESS
--------
A. General
-------
National Technical Systems, Inc. (Registrant) is a
diversified services company which operates in four segments:
technical services (engineering and testing), contract labor
services, quality registration services and environmental
services. The business of the Registrant is conducted by a
number of operating units, each with its own organization. The
management of each operating unit has responsibility for its
operations and for achieving sales and profit goals. Overall
supervision, coordination and financial control are maintained by
the executive staff from corporate headquarters.
B. History
-------
The Registrant was incorporated in April 1987 to serve
as a holding company for its subsidiaries, including National
Technical Systems, a California corporation ("NTS California"),
its principal operating company. NTS California was incorporated
in 1968. On November 16, 1987, the Registrant consummated a
reorganization whereby it issued one share of common stock in
National Technical Systems, Inc., a Delaware corporation ("NTS,
Inc."), to the shareholders of NTS California in exchange for
each share of the common stock of NTS California held by such
shareholders.
Unless indicated otherwise, the term "Registrant"
includes NTS, Inc. and its wholly owned subsidiaries, NTS
California, Acton Environmental Testing Corporation, a
Massachusetts corporation, Approved Engineering Test
Laboratories, Inc., a California corporation, ETCR Inc., a
California corporation, NTS Products, a California corporation,
Wise and Associates, Inc., a Texas corporation, S&W Technical
Services, Inc., a Florida corporation, National Quality
Assurance - USA, Inc. (NQA), a 50% owned Massachusetts
corporation and PECS North America QA, Inc. (formerly NTS
Registration Services, Inc.) a Massachusetts corporation.
Traditionally, the Registrant's primary businesses have
been comprised of technical services and engineering disciplines
provided domestically and internationally to a wide range of
industries (aerospace, defense, nuclear and automotive, among
others) including analysis, engineering and mechanical and
electronic testing to ascertain performance and reliability,
qualification of equipment for nuclear power plants, engineering
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design, computer based structural dynamics and finite element
analysis.
The Registrant also performs contract labor services
through Wise and Associates, Inc. and its operating subsidiary,
S&W Technical Services, Inc. (S&W) which provides staff
augmentation and outage support technical personnel and performs
special projects for nuclear utilities and governmental
facilities throughout the United States. In fiscal 1994, the
Registrant started its quality registration company, NQA-USA, as
a 100% owned subsidiary with an agreement with NQA-UK that for
the first two years of operation NQA-USA would be responsible for
100% of the profits and losses of the company. In December 1994,
50% of the stock of NQA-USA was issued to NQA-UK. In the future,
the distribution of profits and losses will be 65% to NQA-USA and
35% to NQA-UK. NQA-USA is a third party registrar for ISO 9000
certification. Its primary offices are in Boxborough,
Massachusetts. During fiscal 1995, the Registrant started its
environmental services division which is being operated out of
Fullerton, California.
C. Financial Information About Industry Segments
---------------------------------------------
See Note 9 to Consolidated Financial Statements
attached hereto as Exhibits A (i)and A (ii).
D. Description of Business
------------------------
(i) TECHNICAL SERVICES. The Technical Services group
performs analysis, engineering, mechanical and electronic testing
to ascertain performance and reliability under induced
environmental stress conditions, including vibration, extremes of
temperature, hi-g acceleration, altitude, shock, acoustic noise
and flight dynamics and provides other related engineering
services, including accelerated aging analysis, and equipment
qualification for the nuclear power market. Components tested
include items used in motor vehicles, missile programs,
communications products, satellites, medical equipment, the space
shuttle, aircraft and nuclear safety equipment (but excluding
radioactive material). The Technical Services group is staffed
by scientists, specialized engineers and technicians operating
at eleven facilities. The Technical Services group provides such
services to its customers on fixed price, time and material and
cost-reimbursement bases. The Technical Services group markets
these services through a sales force located throughout the
United States.
The Registrant is engaged in supplying services to U.S.
government defense programs in its technical services segment.
These contracts are subject to special risk, including dependence
on government appropriations, contract termination without cause,
contract renegotiation, and intense competition for the available
defense business.
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(ii) CONTRACT LABOR SERVICES. The Contract Labor
Services group locates, recruits, and hires a wide variety of
technical personnel - engineers, drafters, designers and computer
programmer technicians, and assigns them temporarily to clients,
either individually for staff augmentation or as members of a
project team. The Contract Labor Services group also performs
specialized services for industry such as Process Safety
Management and engineering drawing upgrade, and tasks mandated by
the Occupational Safety and Health Administration (OSHA) and
payroll administration for other contract labor companies on a
fee basis. The Contract Labor Services group currently offers a
variety of contract options (i.e., pricing terms) to electric
utility companies, government entities and other commercial
industries.
The Registrant's contract labor services segment is
dependent upon one customer for a material portion of its segment
revenue. None of the Registrant's other business segments are
dependent upon a single customer or a few customers, the loss of
which would have a materially adverse effect on the segment.
(iii) QUALITY REGISTRATION SERVICES. The NTS Quality
Registration Services group is a third party registrar whose
business is to evaluate a supplier's quality systems for
conformity to ISO 9000, the international quality standard. The
evaluations include an examination of a company's quality policy,
quality system documentation and quality records. Part of the
evaluation is a thorough on-site assessment to determine whether
each required quality system element is defined, documented,
deployed and consistently implemented, and the required
documentation and records are current and available. If the
customer's quality system is verified to conform to the
requirements of the applicable standard, the Registrant then
issues a certificate to the customer describing the scope of the
suppliers quality systems which have been certified. The
customer is then allowed to display the registrar's mark on
advertising, stationery, etc., as evidence that they have
achieved ISO 9000 registration.
(iv) ENVIRONMENTAL SERVICES. During fiscal 1995 the
Registrant started its Environmental Services group, which
operates from a leased facility in Fullerton, California. The
Registrant offers a choice of numerous alternative remediation
technologies that facilitate selection of the appropriate
remediation solution. These technologies include: bio-enhanced
air sparging, biological treatment, bio-remediation, chemical
treatment, heavy metal removal, land fill disposal, recycling,
soil washing, thermal treatment and vapor extraction.
The Registrant offers these services to government and
privately owned property owners who are required to meet local,
state and federal environmental laws.
-5-
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(v) COMPETITION. Potential customers for services
offered by the Registrant's technical services segment represent
a variety of divergent industries with the majority of business
concentrated in the aerospace/defense, automotive, commercial
electronics, and nuclear industries. Competition in this segment
comes from many different areas including government and
non-profit testing facilities, major government contractor
testing facilities (e.g., Boeing, Lockheed Martin, McDonnell
Douglas and Northrop-Grumman), customer in-house testing
facilities, and other independent commercial testing companies.
As the competition in this segment is fragmented and there is a
lack of available data on testing performed by government
facilities, contractors and in-house testing facilities, the
Registrant is unable to determine its competitive position in
this market. The Registrant competes in this segment primarily
on the basis of its high technology testing capabilities, high
quality support personnel and price.
Potential customers for services offered by the
Registrant's contract labor services segment are from a broad
base of high technology and manufacturing companies. Competition
in this segment comes from a large number of public and privately
held companies. The estimated aggregate annual revenues of the
four largest publicly held competitors in this segment (Manpower,
Inc., Adia Services, Inc., Olsten Corporation, and Kelly
Services, Inc.) is $14.9 billion while the Registrant estimates
the total market to be in excess of $200.0 billion. The
Registrant competes in this segment primarily on the basis of
price and high quality service. In addition, the Registrant has
established a strategic alliance with another contract labor
services company in order to more effectively compete in the
marketplace.
At this time, the Registrant believes the competitive
conditions surrounding the environmental services segment and
registration services segment are immaterial to the overall
operations of the Company.
(vi) BACKLOG. The Registrant's backlog at January 31,
1996 and 1995 is as follows:
1996 1995
---- ----
Technical Services $ 20,124,000 $ 17,025,000
Contract Labor Services 2,008,000 1,406,000
Environmental Services 1,526,000 1,051,000
Registration Services 1,710,000 1,650,000
Total Backlog $25,368,000 $21,132,000
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Registrant estimates that approximately 85% of the backlog at
January 31, 1996 will be completed by January 31, 1997.
(vii) GENERAL.
(a) SERVICE MARK. The Registrant has registered its
service mark "NTS" with the U.S. Patent and Trademark Office.
(b) ENVIRONMENTAL EFFECT. Compliance with applicable
federal, state and local provisions regulating the discharge of
materials into the environment has not had and is not expected to
have any material effect upon the capital expenditures, earnings
or competitive position of the Registrant.
(c) SEASONAL EFFECT. Registrant's business does not
have material seasonal characteristics.
(d) EMPLOYEES. The Registrant employed 432
individuals at January 31, 1996 and 322 in 1995 as follows:
At January 31,
1996 1995
---- ----
Technical Services 272 248
Contract Labor Services 124 50
Environmental Services 12 5
Registration Services 12 9
Corporate Administration 12 10
--- ---
432 322
=== ===
Approximately 40 of the Registrant's employees occupy management
and professional positions, and approximately 68 of the non
contract labor services employees have degrees in engineering and
other fields. None of the employees of the Registrant is
represented by a union. The Registrant considers its
relationship with its employees to be good.
-7-
Page 8 of 76
ITEM 2. PROPERTIES.
----------
A. Operations. The Registrant owns/leases and operates
----------
the following properties:
Owned
Properties Buildings Land
---------- --------- ----
STATE CITY (SQ.FT.) (ACRES)
California Fullerton 36,000 3
Saugus 60,000 160
Massachusetts Acton 30,000 5
Boxborough 25,000 4
Virginia Hartwood 66,000 87
------- -----
Total owned 217,000 259
properties ======= =====
Leased
Properties Buildings Land
---------- --------- ----
STATE CITY (SQ.FT.) (ACRES)
Arkansas Camden 22,400 216
California Calabasas 4,500 n/a
Fullerton 20,200 n/a
Los Angeles 16,000 2
Valencia 86,000 n/a
Louisiana Zachary 1,500 n/a
Michigan Detroit 45,400 n/a
Texas San Antonio 2,200 n/a
Arizona Tempe 17,100 n/a
------- -----
Total leased 215,300 218
properties ======= =====
B. The Registrant believes that the space occupied by all
of its operations is adequate for its current and near-term
requirements. Should additional space be required, the Registrant
does not anticipate problems in securing such additional space.
C. Investment Properties.
---------------------
The Registrant owns four acres of unimproved real
property in Escondido, California which is currently for sale.
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ITEM 3. LEGAL PROCEEDINGS.
-----------------
The Registrant is, from time to time, the subject of
claims and suits arising out of matters occurring during the
operation of the Registrant's business. In the opinion of
management, no pending claims or suits would materially affect
the financial position or the results of the operations of the
Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable
-9-
Page 10 of 76
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
-------------------------------------------------
A. Principal Market
----------------
The Registrant's common stock is traded in the over-
the-counter market and quoted on the NASDAQ National Market
System under the symbol "NTSC". The range of high and low
quotations as reported by the NASDAQ Intra Dealer Quotation
System for each of the quarters of the fiscal years ended
January 31, 1996 and 1995 is presented below:
1996 1995
High Low High Low
---- --- ---- ---
First Quarter 2-5/8 1-5/8 3-3/8 2-1/2
Second Quarter 2-1/8 1-5/16 3 2-1/4
Third Quarter 2-3/8 1-5/8 3-7/8 2
Fourth Quarter 2-7/8 1-7/8 3-7/8 2-1/8
B. Holders of Common Stock.
-----------------------
As of the close of business on April 15, 1996, there
were 821 holders of record of Registrant's common stock. The
number of holders of record is based on the actual number of
holders registered on the books of the Registrant's transfer
agent and does not reflect holders of shares in "street name" or
persons, partnerships, associations, corporations or other
entities identified in security position listings maintained by
depository trust companies.
C. Dividends.
---------
On January 17, 1995, the Board of Directors declared a
$.01 per share cash dividend to shareholders of record on
February 10, 1995, which was paid February 24, 1995. On
September 26, 1995 the Board of Directors declared a $.01 per
share cash dividend to shareholders of record on October 17,
1995, which was paid October 31, 1995. The Registrant is
permitted to pay cash dividends under the terms of its loan
agreements up to 40% of net income without the prior written
consent of its banks.
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Item 6. SELECTED FINANCIAL DATA.
-----------------------
(in thousands except per share amounts)
Year Ended January 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net revenues $ 44,438 $ 37,917 $ 43,020 $ 41,220 $
41,097
Gross profit 9,744 8,881 8,995 8,296
8,818
Interest expense 1,157 1,032 956 1,070
1,386
Income from continuing
operations before income
taxes 1,744 1,027 1,159 671
156
Income taxes 770 462 523 301
116
Income from continuing
operations 974 565 636 370
40
Minority interest 55 - - - -
Income (loss) from
discontinued operations,
net of income taxes - - 98 -
(369)
Net income (loss) $ 919 $ 565 $ 734 $ 370 $
(329)
======= ======= ======= =======
=======
Primary income (loss) per
common share:
From continuing
operations $ 0.14 $ 0.09 $ 0.10 $ 0.06 $
0.01
From discontinued
operations - - 0.02 -
(0.06)
Total $ 0.14 $ 0.09 $ 0.12 $ 0.06 $
(0.05)
======= ======= ======= =======
=======
Weighted average number of
common shares and common
stock equivalents
outstanding 6,660 6,622 6,295 6,113
6,059
======= ======= ======= =======
=======
Cash dividends paid per
common share $ 0.02 $ 0.02 $ 0.03 $ - $ -
======= ======= ======= =======
=======
BALANCE SHEET DATA:
Working capital $ 8,752 $ 7,932 $ 5,346 $ 3,349 $
7,253
Total assets 33,503 33,088 31,573 28,561
30,650
Long-term debt, excluding
current installments 9,090 10,045 7,616 6,488
12,487
Stockholders' equity 15,651 14,831 14,353 13,103
12,677
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Page 12 of 76
[FN]
Working capital for the year ended January 31, 1993 decreased from
January 31, 1992 due to the reclassification of the line of credit
from long-term debt to short-term borrowings.
Working capital for the year ended January 31, 1995 increased from
January 31, 1994 due to the reclassification of the line of credit
from short term to long term borrowings.
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Page 13 of 76
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
---------------------------------------------------------------
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. All information is
based upon National Technical System, Inc.'s fiscal year ending January 31.
RESULTS OF OPERATIONS
---------------------
Net Revenues
(Dollars in thousands)
1996 % chg 1995 % chg 1994
---- ----- ---- ----- ----
Technical Services $34,029 8.9% $31,259 (11.5%) $35,330
Contract Labor Services 5,310 13.7% 4,670 (32.2%) 6,891
Registration Services 2,118 46.0% 1,451 81.6% 799
Environmental Services 2,981 455.1% 537 - -
Total $44,438 17.2% $37,917 (11.9%) $43,020
For the year ended January 31, 1996, consolidated net revenues
increased $6,521,000 or 17.2% when compared with fiscal 1995. Revenues in
the technical services segment increased $2,770,000 due to increases in its
traditional aerospace and defense testing business offset partially by a
continuing decline in the nuclear power testing and dedication business.
Revenues in the contract labor services segment increased
$640,000 due to increases in its expanding staff augmentation business and
the success of its strategic alliances.
Revenues in the Registrant's registration services segment
increased $667,000 as a result of continuing marketing efforts in this
segment, and an increase in demand by U.S. companies for ISO 9000
certification.
In the Registrant's environmental services segment revenues
increased $2,444,000 over the start-up year of 1995. This increase was a
direct result of concentrated marketing efforts and name recognition in
this business.
It is anticipated by the Registrant that revenues in the
technical services and contract labor services segments will continue at
their present levels through fiscal 1997. The Registrant also anticipates
that revenues in the registration services segment will continue to grow
through 1997, though at a more moderate rate, and that the environmental
services segment will continue to grow.
For the year ended January 31, 1995, consolidated net revenues
decreased $5,103,000 or 11.9% when compared with fiscal 1994. In 1995, the
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Page 14 of 76
technical services segment revenues decreased $4,071,000 as a result of a
decline in the nuclear power testing and dedication portion of the
Registrant's business relating directly to the completion of a major
nuclear power plant contract. This particular contract had a value of
$3,000,000 in fiscal 1994 while there were no comparable contracts in 1995.
Increases in the Registrant's automotive testing business partially offset
declines in the aerospace and defense testing related business.
Revenues in the contract labor services segment declined
$2,221,000 primarily related to the completion of an engineering drawing
upgrade project in fiscal 1994 without a comparable contract in the fiscal
year 1995.
Revenues for the registration services segment increased $652,000
in fiscal 1995 over 1994, and revenues in the new environmental services
segment were $537,000 in fiscal 1995. The increase in the registration
services revenues reflects the continuing marketing efforts in that area.
In addition, the revenues achieved by the start up environmental services
segment were ahead of management's goals during 1995.
Gross Profit
------------
(Dollars in thousands)
1996 % chg 1995 % chg 1994
---- ----- ---- ----- ----
Technical Services $ 7,840 7.0% $ 7,326 3.4% $ 7,087
% to segment revenue 23.0% 23.4% 20.1%
Contract Labor Services $ 1,073 (1.5%) $ 1,089 (16.2%) $ 1,299
% to segment revenue 20.2% 23.3% 18.9%
Registration Services $ 737 22.0% $ 604 (0.8%) $ 609
% to segment revenue 34.8% 41.6% 76.2%
Environmental Services $ 94 168.1% $ (138) - -
% to segment revenue 3.2% (25.7%)
------ ------- ------
Total $ 9,744 9.7% $ 8,881 (1.3%) $ 8,995
% to net revenue 21.9% 23.4% 20.9%
Total gross profits increased by $863,000 as a result of
increased revenues in 1996 compared to 1995. Gross profit as a percentage
of net revenues in fiscal 1996 decreased when compared to fiscal 1995.
This decline was due primarily to low margins in the environmental services
segment reflecting the pricing constraints due to competition in order to
obtain new business in the market. The Registrant anticipates, barring
unforseen circumstances, gross profits will improve in the environmental
services segment while continuing at current levels in the other segments
through fiscal 1997.
Total gross profit as a percentage of net revenues increased in
the fiscal year ended January 31, 1995 when compared to fiscal 1994. This
increase was due primarily to management's successful cost containment
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program in the technical services segment along with more profitable lower
volume fixed price programs in the contract labor services segment.
Selling, General and Administrative
(Dollars in thousands)
1996 % chg 1995 % chg 1994
---- ----- ---- ----- ----
Technical Services $ 4,516 (11.1%) $ 5,078 3.7% $ 4,896
% to segment revenue 13.3% 16.2% 13.9%
Contract Labor Services $ 1,122 1.6% $ 1,104 (7.5%) $ 1,193
% to segment revenue 21.1% 23.6% 17.3%
Registration Services $ 580 48.7% $ 390 (35.4%) $ 604
% to segment revenues 27.4% 26.9% 75.6%
Environmental Services $ 535 377.7% $ 112 - -
% to segment revenues 17.9% 20.9%
Corporate $ 113 14.1% $ 99 2.1% $ 97
------ ------ ------
Total $ 6,866 1.2% $ 6,783 (.1%) $ 6,790
% to segment revenue 15.5% 17.9% 15.8%
Selling, general and administrative expenses for the year ended
January 31, 1996 decreased as a percentage of net revenues when compared to
1995. This decrease was due primarily to the Registrant's on-going cost
containment program in its established technical services segment and the
increase in net revenues. These decreases were partially offset by
increases in the newer registration services and environmental services
segments due mainly to the cost of pursuing business in these competitive
markets. The Registrant continues to look for ways to reduce cost yet
remain efficient in all segments of its business.
Selling, general and administrative expenses in fiscal 1995, as a
percentage of net revenues, increased when compared to 1994, due mainly to
the decline in net revenues, the cost of pursuing business in the
registration services and environmental services segments and the cost of
exploring non-aerospace and non-defense related markets in the technical
services segment. Total selling, general and administrative costs
decreased slightly as a result of management's on-going cost containment
program.
Interest Expense
----------------
Interest expense increased $125,000 in fiscal 1996 when compared
to 1995. This increase was principally due to higher interest rates.
Interest expense increased $76,000 in fiscal 1995 compared to
fiscal 1994 due to increased borrowing on the Registrant's lease lines of
credit and slightly higher interest rates.
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Income Taxes
------------
The income tax rate for 1996, 1995 and 1994 reflects a rate in
excess of the U.S. Federal statutory rate primarily due to the inclusion of
state income taxes. The Registrant's fiscal 1996 provision was $308,000
more than fiscal 1995 because of an increase in income from operations
before income taxes.
The fiscal 1995 provision was $61,000 less than fiscal 1994
because of the decrease in income from continuing operations before income
taxes. State income tax returns were examined by the Commonwealth of
Massachusetts for the years 1990, 1989 and 1988 and a notice of intention
to assess additional amounts was received. The Registrant contested these
alleged deficiencies and requested and received an appeal and review
hearing. Management has received a favorable determination from the
Commonwealth and the Registrant has been absolved of any further income tax
liability for the tax years involved. See Note 4 to the Consolidated
Financial Statements for a reconciliation of the effective income tax rate.
Management has determined that it is more likely than not that
the Registrant's deferred tax asset will be realized on the basis of
offsetting it against deferred tax liabilities and future income. It is
the Registrant's intention to evaluate the realizability of the
Registrant's deferred tax asset quarterly by assessing the need for a
valuation allowance based upon future net income of the Registrant.
Discontinued Operations
-----------------------
The fiscal 1994 gain from discontinued operations represents
accounts receivable amounts, net of taxes, that were collected from the
U.S. Government and other former engineering customers. These amounts were
evaluated as uncollectible when the engineering services segment was
discontinued in January 1992.
Net Income
----------
The increase in net income for the year ended January 31, 1996
compared to fiscal 1995 was due primarily to increased revenues partially
offset by slightly lower gross margins.
The decrease in net income for the year ended January 31, 1995
compared to fiscal 1994 was due to decreased revenues partially offset by
operating efficiencies creating a higher gross profit margin.
Business Environment
--------------------
During the course of fiscal 1996, the business climate in the
aerospace and defense industry, which in the past had shown signs of
uncertainty, began to stabilize. During the period of uncertainty the
Registrant developed a strategy of growth through diversification and
taking advantage of opportunities created by the aerospace and defense
industry's downsizing. As a part of this strategy, the Registrant has
consolidated one of its testing operations. This strategy has allowed the
Registrant to more effectively serve its customers and has enhanced revenue
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Page 17 of 76
growth in all segments of the Registrant's business. The Registrant
continues to pursue ISO registration business through its registration
services segment and has entered the remediation business through its
environmental services segment. Because of the foregoing, as well as other
factors affecting the Registrant's operating results, past financial
performance should not be considered to be a reliable indicator of future
performance.
Liquidity and Capital Resources
-------------------------------
In the year ended January 31, 1996, cash provided by operations
increased by $288,000 when compared to 1995. A primary factor contributing
to this was an increase in net income, as well as non-cash expenses
(depreciation and accrued expenses). This was offset to some extent by an
increase in accounts receivable during fiscal 1996, due primarily to an
increase in its accounts receivable in the contract labor services segment
of approximately $857,000. In this segment, the Registrant provides
payroll funding for some of its customers for which a fee is earned. The
fee revenue is accrued upon payroll funding, however, the payroll funds
advanced at the end of the year are also recorded as accounts receivable
until paid by the customer. At January 31, 1996, accounts receivable for
this segment included $971,000 in such funding advances. The Registrant
does not expect this to have a material effect on future liquidity. In
fiscal 1995, cash provided by operations increased by $1,710,000 over 1994,
reflecting an increase in non-cash expenses (depreciation and accrued
expenses) partially offset by an increase in accounts receivable due to
slower collections resulting from the sluggish economy and other mitigating
factors.
Net cash used in investing activities in the year ended January
31, 1996 decreased $1,268,000 as compared to 1995 due to decreased capital
requirements. Net cash used in investing activities in the year ended
January 31, 1995 increased $345,000 as compared to 1994 due to increased
capital requirements.
Net cash provided by financing activities in the year ended
January 31, 1996 consisted principally of proceeds from bank loans and
stock options exercised, partially offset by cash dividends paid and
repayments of current and long-term debt. Long-term debt decreased
$955,000 in fiscal 1996 from 1995. This decrease was principally due to
regularly scheduled payment on long-term debt in excess of new borrowings.
Maturities of long-term debt consist of regularly scheduled payments on
the Registrant's term loans to its banks and notes payable. Of the amounts
due in fiscal 1998, $4,000,000 is the outstanding balance of the
Registrant's revolving lines of credit which were extended to August 1997
during April 1996. All other maturities of long-term debt will be paid
with cash generated from operations. The Registrant also has a term loan
agreement with Bank of America NT&SA and Sanwa Bank California for an
aggregate amount of $5,000,000 payable in monthly installments of $83,333
through August 31, 1998, and an additional $1,000,000 loan with Sanwa Bank
entered into in January 1995, with payments of $16,667 through January 31,
2000.
-17-
Page 18 of 76
In 1995, long term debt increased $2,429,000 from 1994. This
increase was principally due to the reclassification of the registrant's
revolving lines of credit to long term as a result of a change in the
agreements with the banks. Net cash provided by financing activities
consisted of proceeds from bank loans and stock options exercised,
partially reduced by cash dividends and repayments of current and long-
term debt.
Management is not aware of any significant demands for capital
funds that may materially affect short or long term liquidity in the form
of large fixed asset acquisitions, unusual working capital commitments or
contingent liabilities. In addition, the Registrant has made no material
commitments for capital expenditures. The Registrant's future working
capital will be provided from operations, supplemented by its bank credit
lines. The Registrant's current bank revolving lines of credit, which
aggregate $5,000,000 for short-term liquidity needs, had $1,000,000
available at January 31, 1996. In April 1996 these revolving lines of
credit were increased to $6,000,000. Also, the Registrant has available up
to $1,500,000 for an equipment line of credit which expires August 1996.
No amounts have been borrowed against this line of credit.
Environmental Matters
---------------------
An internal environmental compliance group formed in 1991
continues to review environmental matters for the Registrant. It is the
opinion of Management that compliance with applicable environmental
regulations will not have a material effect upon capital expenditures or
future earnings of the Registrant.
Impact of Inflation
-------------------
Registrant has not been adversely affected by inflation during
the past three fiscal years. Registrant continues to incur increased costs
in the areas of wages, operating supplies and utilities. To date, these
increases have been substantially offset by reductions in other operating
areas, and reductions in interest expense. The Registrant can give no
assurances, however, that in the future it can offset such increased costs.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
------------------------------------------
The Registrant's consolidated financial statements together with
the reports thereon by independent auditors, are attached hereto as
Exhibits A (i) and A (ii).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
---------------------------------------------------------------
None.
-18-
Page 19 of 76
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The sections entitled "Nomination and Election of Directors" and
"Remuneration of Directors and Officers" in Registrant's definitive Proxy
Statement to be furnished to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 28, 1996 are incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The section entitled "Remuneration of Directors and Officers" in
Registrant's definitive Proxy Statement to be furnished to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 28,
1996 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The sections entitled "Voting Securities and Principal Holders
Thereof" and "Nomination and Election of Directors" in Registrant's
definitive Proxy Statement to be furnished to shareholders in connection
with the Annual Meeting of Shareholders to be held on June 28, 1996 are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The section entitled "Transaction with Management and Other" in
Registrant's definitive Proxy Statement to be furnished to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 28,
1996 are incorporated herein by reference.
-19-
Page 20 of 76
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------------------------------------
A. Consolidated Financial Statements and Schedules.
-----------------------------------------------
(i) Consolidated Financial Statements and notes thereto as of
January 31, 1996 and 1995 and for each of the years in the
three year period ended January 31, 1996.
(ii) Consolidated Financial Statement Schedule.
II Valuation and Qualifying Accounts and Reserves
B. Reports on Form 8-K.
-------------------
There were no reports on Form 8-K filed for the fourth quarter
ended January 31, 1996.
C. Exhibits.
--------
3(a)1 Restated Certificate of Incorporation amending the
fourth article (filed as exhibit 3(a)1 to the Company's
annual report on form 10-K for the fiscal year ended
January 31, 1995, and is incorporated herein by
reference thereto).
3(b)1 Restated Certificate of Incorporation of the Company
(filed as Appendix B to the Company's Registration
Statement on Form S-4, File No. 33-14045 filed on
June 23, 1987, and is incorporated herein by reference
thereto).
3.2 Restated By-Laws, (filed as Appendix C to the Company's
Registration Statement on Form S-4, File No. 33-14045
filed on June 23, 1987, and is incorporated herein by
reference thereto).
10(a)1 Amendment No. Four dated April 26, 1996 to National
Technical Systems Credit Agreement between Bank of
America NT&SA and Sanwa Bank California dated
September 1, 1993.
10(b)1 Amendment No. One dated July 6, 1994 to National
Technical Systems Credit Agreement between Bank of
America NT&SA and Sanwa Bank California dated
September 1, 1993 (filed as exhibit 10(a)1 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1995, and is incorporated herein
by reference thereto).
10(c)1 National Technical Systems Credit Agreement between
Bank of America NT&SA and Sanwa Bank California dated
-20-
Page 21 of 76
September 1, 1993 (filed as exhibit 10.1 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1994, and is incorporated herein
by reference thereto).
10(a)2 First Amendment dated May 27, 1994 to National
Technical Systems Equipment Financing Agreement between
Bank of America NT&SA dated November 19, 1993 (filed as
exhibit 10(a)2 to the Company's annual report on form
10-K for the fiscal year ended January 31, 1995, and is
incorporated herein by reference thereto).
10(b)2 National Technical Systems Equipment Financing
Agreement between Bank of America NT&SA dated
November 19, 1993 (filed as exhibit 10.2 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1994, and is incorporated herein
by reference thereto).
10.3 National Technical Systems Loan Agreement between
Merchants and Planters Bank, n.a., Camden, Arkansas
dated January 26, 1994 (filed as exhibit 10.3 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1994, and is incorporated herein
by reference thereto).
10(a)4 Form of the Company's 1994 Stock Option Plan (filed as
Appendix B to the Company's Proxy Statement for Annual
Meeting of June 30, 1994, and is incorporated herein by
reference thereto).
10(b)4 Form of the Company's 1988 Stock Option Plan (filed as
Exhibit A to the Company's Proxy Statement for Annual
Meeting of June 18, 1988, and is incorporated herein by
reference thereto).
10.5 National Technical Systems Loan Agreement between Sanwa
Bank California dated January 31, 1995 (filed as
exhibit 10.5 to the Company's annual report on
form 10-K for the fiscal year ended January 31, 1995,
and is incorporated herein by reference thereto).
10.6 National Technical Systems Financing Agreement between
The CIT Group/Equipment Financing, Inc. dated
October 6, 1995.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
99.1 Undertakings is incorporated by reference into Form S-8
Registration Statement No. 33-48211.
-21-
Page 22 of 76
99.2 Undertakings is incorporated by reference into Form S-8
Registration Statement No. 2-83778.
-22-
Page 23 of 76
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
April 26, 1996 NATIONAL TECHNICAL SYSTEMS, INC.
By /s/ Jack Lin
------------------------------
Jack Lin, President
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities
indicated on April 26, 1996.
/s/ Jack Lin /s/ Aloysius Casey
---------------------------- ------------------------------
Jack Lin, President Aloysius Casey, Chairman of the
(Principal Executive Officer) Board
and Director
/s/ Arthur Edelstein /s/ Ralph Clements
---------------------------- ------------------------------
Arthur Edelstein, Director Ralph F. Clements, Director
and Executive Vice President
/s/ Lloyd Blonder /s/ Harry Derbyshire
--------------------------- ------------------------------
Lloyd Blonder, Senior Vice Harry Derbyshire, Director
President and Treasurer (Principal
Financial and Accounting Officer)
/s/ William Traw /s/ Robert Lin
--------------------------- -----------------------------
William Traw, Senior Vice President Robert I. Lin, Director
and Director
/s/ Richard Short /s/ William McGinnis
--------------------------- -----------------------------
Richard Short, Senior Vice William McGinnis, Vice President
President and Director and Director
-23-
Page 24 of 76
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
--------------------------------------------------------
Report of Independent Auditors
Financial Statements:
Consolidated Balance Sheets - January 31, 1996 and 1995
Consolidated Statements of Income - Years ended January 31, 1996, 1995
and 1994
Consolidated Statements of Stockholders' Equity - Years ended January
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended January 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Schedule Supporting Financial Statements: Schedule
--------
Valuation and Qualifying Accounts and Reserves II
All other schedules are omitted as inapplicable or because the required
information is contained in the financial statements or the notes thereto.
-24-
Page 25 of 76
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Technical Systems, Inc.
We have audited the accompanying consolidated balance sheets of National
Technical Systems, Inc. and Subsidiaries as of January 31, 1996 and 1995,
and the related consolidated statements of income, stockholder's equity and
cash flows for each of the three years in the period ended January 31,
1996. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of National Technical Systems, Inc. and Subsidiaries at January
31, 1996 and 1995 and the consolidated results of its operation and its
cash flows for each of the three years in the period ended January 31,
1996, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Woodland Hills, California
April 12, 1996
-25-
Page 26 of 76
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 1996 and 1995
ASSETS 1996 1995
------ ---- ----
CURRENT ASSETS:
Cash $ 1,949,000 $ 1,696,000
Accounts receivable, less allowance for
doubtful accounts of $595,000 in 1996 and
$577,000 in 1995 10,453,000 9,700,000
Income taxes receivable 33,000 -
Inventories 2,220,000 2,082,000
Deferred tax assets 435,000 434,000
Prepaid expenses 687,000 757,000
---------- ----------
Total current assets 15,777,000 14,669,000
Property, plant and equipment
Land 1,267,000 1,267,000
Buildings 7,491,000 7,229,000
Machinery and equipment 29,781,000 28,524,000
Leasehold improvements 3,416,000 3,393,000
---------- ----------
41,955,000 40,413,000
Less: accumulated depreciation 25,398,000 23,500,000
---------- ----------
Net property, plant and equipment 16,557,000 16,913,000
Property held for sale 544,000 544,000
Intangible assets, net 286,000 529,000
Other assets 339,000 433,000
---------- ----------
Total Assets $33,503,000 $33,088,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,197,000 $ 2,866,000
Accrued expenses 2,081,000 1,627,000
Income taxes payable - 184,000
Current installments of long-term debt 1,747,000 2,060,000
---------- ----------
Total Current Liabilities 7,025,000 6,737,000
Long-term debt, excluding current
installments 9,090,000 10,045,000
Deferred tax liabilities 1,662,000 1,455,000
Minority interest 75,000 20,000
Commitments and contingencies
-26-
Page 27 of 76
STOCKHOLDERS' EQUITY:
Common stock $.01 par value. Authorized,
20,000,000 shares; issued and outstanding
6,674,000 in 1996 and 6,649,000 in 1995 67,000 66,000
Additional paid-in capital 10,513,000 10,480,000
Retained earnings 5,071,000 4,285,000
---------- ----------
Total Stockholders' Equity 15,651,000 14,831,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,503,000 $33,088,000
========== ==========
See accompanying notes.
-27-
Page 28 of 76
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended January 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Net revenues $44,438,000 $37,917,000 $43,020,000
Cost of sales 34,694,000 29,036,000 34,025,000
---------- ---------- ----------
Gross profit 9,744,000 8,881,000 8,995,000
Selling, general and
administrative expense 6,866,000 6,783,000 6,790,000
---------- ---------- ----------
Operating income 2,878,000 2,098,000 2,205,000
Other income (expense):
Interest expense (1,157,000) (1,032,000) (956,000)
Interest income - - 24,000
Other 23,000 ( 39,000) (114,000)
---------- ---------- ----------
(1,134,000) (1,071,000) (1,046,000)
Income from continuing
operations before income
taxes & minority interest 1,744,000 1,027,000 1,159,000
Income taxes 770,000 462,000 523,000
---------- ---------- ----------
Income from continuing
operations 974,000 565,000 636,000
Minority interest 55,000 - -
Income from discontinued
operations, net of income
tax - - 98,000
---------- ---------- ----------
Net income $ 919,000 $ 565,000 $ 734,000
========== ========== ==========
Primary and fully diluted
net income per share:
Continuing operations $ 0.14 $ 0.09 $ 0.10
Discontinued operations - - 0.02
---------- ---------- ----------
Total $ 0.14 $ 0.09 $ 0.12
========== ========== ==========
Weighted average number of
common shares and common
stock equivalents
outstanding 6,660,000 6,622,000 6,295,000
========== ========== ==========
See accompanying notes.
-28-
Page 29 of 76
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended January 31, 1996, 1995 and 1994
Common Stock
Total
------------ Additional
Stock-
Number of Paid-in
Retained holders'
Shares Amount Capital
Earnings Equity
--------- ------ ----------
- -------- --------
Balance at January 31, 1993 6,132,000 $ 61,000 $ 9,736,000
$3,306,000 $13,103,000
Net income - - -
734,000 734,000
Common stock exchanges for stock
options exercised (56,000) (1,000) (221,000)
- - (222,000)
Stock options exercised 501,000 5,000 598,000
- - 603,000
Stock issued in lieu of compensation 10,000 1,000 12,000
- - 13,000
Cash dividends - - -
(188,000) (188,000)
Reduction in current income tax related
to stock options exercised - - 310,000
- - 310,000
--------- -------- ----------
- --------- ----------
Balance at January 31, 1994 6,587,000 66,000 10,435,000
3,852,000 14,353,000
Net income - - -
565,000 565,000
Common stock exchanged for stock
options exercised (14,000) (1,000) (41,000)
- - (42,000)
Stock options exercised 76,000 1,000 86,000
- - 87,000
Cash dividends - - -
(132,000) (132,000)
Balance at January 31, 1995 6,649,000 66,000 10,480,000
4,285,000 14,831,000
Net income before minority interest - - -
974,000 974,000
Stock issued in lieu of wages 12,000 1,000 18,000
- - 19,000
Stock options exercised 13,000 - 15,000
- - 15,000
Minority interest - - -
(55,000) (55,000)
Cash dividends - - -
(133,000) (133,000)
Balance at January 31, 1996 6,674,000 $ 67,000 $10,513,000
$5,071,000 $15,651,000
See accompanying notes. ========= ======== ==========
========= ==========
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Page 30 of 76
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended January 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 919,000 $ 565,000 $ 734,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 2,328,000 2,401,000 2,218,000
Stock issued in lieu of
compensation 19,000 - 12,000
Provisions for losses on
receivables 18,000 156,000 183,000
(Gain) loss on disposal
of fixed assets (20,000) 7,000 -
Deferred income taxes 206,000 128,000 225,000
Tax benefit from stock
options exercised - - 310,000
Changes in assets and
liabilities:
Accounts receivable (771,000) (309,000) (1,927,000)
Inventories (138,000) (258,000) (656,000)
Prepaid expenses 70,000 (185,000) (91,000)
Other assets 94,000 (1,000) (215,000)
Accounts payable 331,000 23,000 507,000
Income taxes (217,000) 213,000 27,000
Undistributed
earnings of
affiliate 55,000 - -
Accrued expenses 454,000 320,000 43,000
---------- ---------- ----------
Net cash provided by
operating activities 3,348,000 3,060,000 1,370,000
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property, plant
and equipment (1,735,000) (2,979,000) (2,632,000)
Proceeds from sales of
fixed assets 26,000 2,000 -
Net cash used for investing
activities (1,709,000) (2,977,000) (2,632,000)
-30-
Page 31 of 76
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from current and
long-term debt 1,235,000 2,327,000 2,341,000
Minority interest in
consolidated subsidiary - 20,000 -
Proceeds from stock options
exercised 15,000 45,000 381,000
Cash dividends paid (133,000) (132,000) (188,000)
Repayments of current and
long-term debt (2,503,000) (2,066,000) (1,377,000)
---------- ---------- ----------
Net cash provided by (used
for) financing activities (1,386,000) 194,000 1,157,000
---------- ---------- ----------
Net increase (decrease) in
cash 253,000 277,000 (105,000)
BEGINNING CASH BALANCE 1,696,000 1,419,000 1,524,000
---------- ---------- ----------
ENDING CASH BALANCE $ 1,949,000 $ 1,696,000 $ 1,419,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash payments during the year
for:
Interest $ 1,196,000 $ 1,067,000 $ 995,000
Income taxes 605,000 116,000 90,000
Cash received during the year
for:
Income taxes - - 87,000
-31-
Page 32 of 76
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of National
Technical Systems, Inc. (the "Company") and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. Certain 1995 and 1994 amounts have been
reclassified to conform to the 1996 presentation.
Risks and Uncertainties
-----------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Estimates made by the Company
relate primarily to the recognition of revenue under long-term
contracts, valuation of contract claims and the valuation of certain
real estate held for sale. Actual results could differ from those
estimates.
Revenue Recognition
-------------------
Revenues are derived from development, qualification and production
testing and engineering services for commercial products, space
systems and military equipment of all types. The Company also
provides a variety of services to the nuclear power industry where the
Company supplies nuclear regulation approved spare parts, contract
labor services and qualification of safety related systems and
components. In addition, the Company provides ISO 9000 certification
and environmental services.
Revenue from testing contracts, the Company's primary source of
revenue, is recorded upon completion of the contracts, which are
generally short term, or identifiable contractual tasks. Revenue from
contracts which are cost-based are recorded as effort is expended.
The Company measures progress on long-term contracts on the basis of
efforts-expended (hours charged). Billings in excess of amounts
earned are deferred. The Company has entered into fixed-price
contracts. Accounting for these contracts involves considerable cost
and revenue estimation. Such estimates are reviewed periodically over
the life of the contracts and any changes in projected cost and
revenue are appropriately reflected in income. Any anticipated losses
on contracts are charged to income when identified. All selling,
general and administrative costs are treated as period costs and
expensed as incurred.
-32-
Page 33 of 76
Inventories
-----------
Inventories consist of accumulated costs including direct labor,
material and overhead applicable to uncompleted contracts and are
stated at actual cost which is not in excess of estimated net
realizable value.
Property Held for Sale
----------------------
The Company owns a parcel of land in San Diego County, California,
which was offered for sale in the fourth quarter of fiscal 1988. The
property was acquired for approximately $544,000. The Company
anticipates that sales proceeds will exceed the net book value of the
property.
Property, Plant and Equipment
-----------------------------
Property, plant, and equipment is stated at actual cost and is
depreciated and amortized using the straight-line method over the
following estimated useful lives:
Buildings 30 to 35 years
Machinery and equipment 3 to 20 years
Leasehold improvements Terms of lease
The Company capitalizes certain machinery and equipment repair costs
which are irregular in occurrence. These costs are charged to expense
over a one-year period.
Intangible Assets
-----------------
Intangible assets consist primarily of the excess of cost over net
assets acquired and a covenant not to compete and are amortized over 5
to 20 years using the straight-line method. Accumulated amortization
was $2,251,000 as of January 31, 1996 and $2,006,000 as of January 31,
1995. In accordance with Statement of Financial Accounting Standards
No. 121 "Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" ("SFAS No. 121"), which the Company adopted in the fourth
quarter of fiscal 1996, long-lived and certain identifiable intangible
assets held and used by the Company will be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The recoverability test
will be performed on undiscounted net cash flows of the entities
acquired over the remaining amortization period. Based on the
Company's analysis under SFAS No. 121, the Company believes that no
impairment of the carrying value of its long-lived assets, inclusive
of goodwill and covenants, existed at January 31, 1996.
Earnings Per Share
------------------
Primary income per common share is computed based on the weighted
average number of shares of common stock and common stock equivalents
(stock options) outstanding. The effect of stock options on the fully
diluted calculations was either immaterial or antidilutive.
-33-
Page 34 of 76
(2) Business Disposition
--------------------
In 1994, the Company collected $180,000 ($98,000 after tax) from the
U.S. Government in billings which had previously been written off as
uncollectible when the Company's Engineering Services segment was
discontinued in fiscal 1992.
(3) Debt
----
Long-term debt consists of the following:
1996 1995
---- ----
Term loans payable to banks $ 3,383,000 $ 4,583,000
Capital lease obligations - 1,000
Notes payable (interest rates
of 9.25% to 11.0%),
collateralized by land and
buildings, with a net book
value of $2,200,000, payable
in monthly installments of
$22,000 through 2014 1,947,000 2,004,000
Secured notes payable 1,507,000 1,917,000
Revolving lines of credit 4,000,000 3,600,000
---------- ----------
Subtotal 10,837,000 12,105,000
Less current installments 1,747,000 2,060,000
---------- ----------
Total $ 9,090,000 $10,045,000
========== ==========
[FN]
The Company has a line of credit with Bank of America NT&SA and Sanwa
Bank California which provides an aggregate availability of
$5,000,000. In April 1996, the Registrant renegotiated its revolving
lines of credit extending them to August 1, 1997 and increasing the
aggregate availability to $6,000,000. The outstanding balance at
January 31, 1996 and 1995 is $4,000,000 and $3,600,000, respectively,
and is reflected in the accompanying consolidated balance sheets as
long term debt in 1996. The interest rate is at the banks' prime rate
(8.5% at January 31, 1996) plus 1/2 of 1%. The Company is required
to maintain an average net collected compensating balance equal to 5%
of the average daily outstanding principal borrowed on these lines. A
commitment fee of approximately 1/2 of 1% is charged on the daily
average balance of the unused portion of these credit lines. Any
balance deficiencies and the commitment fees are payable on a
quarterly basis. In October 1995, the Company entered into an
equipment line of credit available for up to $1,500,000. The
agreement extends to August 1996 and the aggregate principal balance
-34-
Page 35 of 76
is subject to an interest rate equal to the three year Treasury Rate
plus 2.96%. No amounts were borrowed during fiscal 1996 and as such,
$1,500,000 was available at January 31, 1996.
Term loans payable to Bank of America NT&SA and Sanwa Bank California
have monthly principal payments of an aggregate of $83,333, and are
due through 1999. The interest rate is fixed at 7.37%. The Company
paid a one time facility fee of 1% of the $5,000,000 commitment upon
closing in December 1993. The Company has an additional $1,000,000
loan with Sanwa Bank California with monthly payments of $16,667 that
are due through January 2000 at an interest rate of .75% over the
bank's Prime Rate. The Company paid a one-time facility fee of 3/4 of
1% of the $1,000,000 commitment upon closing in January 1995.
The term loan and line of credit noted above require the maintenance
of certain working capital, debt-to-equity, earnings-to-expense and
cash flow ratios. Under these agreements, the Company may declare and
pay cash dividends up to 40% of net income. The Company may not make
any distribution other than dividends to its stockholders or
repurchase any of the Company's stock without the banks' prior
approval. Except for the $1,000,000 term loan, Bank of America NTSA
and Sanwa Bank California share 50% participation in these loan
agreements. These loan agreements are collateralized by substantially
all of the Company's accounts receivable and machinery and equipment
other than those which serve as collateral for the notes in (c) below.
Notes payable (interest rates of 7.8% to 11%) to Bank of America NT&SA
and Merchants & Planters Bank are collateralized by equipment with a
net book value of $1,424,000 at January 31, 1996, payable in monthly
and quarterly installments which vary through 1999.
The weighted average interest rate on the Company's long term debt is
approximately 8.75%
Maturities of long-term debt for five years subsequent to January 31,
1996 are as follows:
1997 $ 1,747,000
1998 5,784,000
1999 1,238,000
2000 422,000
2001 94,000
Thereafter 1,552,000
-----------
$ 10,837,000
In accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of
Financial Instruments", a reasonable estimate of fair value for the
Company's fixed rate debt was based on a discounted cash flow
analysis. The carrying amount of other debt, including borrowings
under the Company's revolving lines of credit, approximate its fair
value.
-35-
Page 36 of 76
The carrying amounts and estimated fair values of the Company's
financial instruments are:
1996 1996
Carrying Estimated
amount fair value
------------ ----------
Term loans payable to Banks $ 3,383,000 $ 3,572,000
Notes payable 1,947,000 1,740,000
Secured notes payable 1,507,000 1,519,000
Revolving lines of credit 4,000,000 4,000,000
(4) Income Taxes
------------
The provision for income tax expense from continuing operations
consists of:
Current: 1996 1995 1994
Federal $ 308,000 $ 233,000 $ 64,000
State 256,000 101,000 41,000
-------- -------- --------
564,000 334,000 105,000
Deferred:
Federal 270,000 137,000 351,000
State (64,000) (9,000) 67,000
206,000 128,000 418,000
-------- -------- --------
Income tax expense $ 770,000 $ 462,000 $ 523,000
======== ======== ========
-36-
Page 37 of 76
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the
federal statutory tax rate on income from continuing operations before
income taxes:
1996 1995 1994
Income from
continuing
operations before
income taxes $1,744,000 $1,027,000 $1,159,000
Federal income tax
computed at
statutory rate $ 593,000 $ 349,000 $ 394,000
Amortization of
goodwill 15,000 15,000 17,000
State income taxes,
net of federal
benefits 108,000 67,000 74,000
Other 54,000 31,000 38,000
Income tax expense $ 770,000 $ 462,000 $ 523,000
========= ========= =========
Deferred income taxes on the consolidated balance sheets reflect the
net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The primary components of the
Company's deferred tax assets and liabilities at January 31 were as
follows:
1996 1995
Deferred tax liabilities:
Tax over book depreciation $ 2,185,000 $ 2,177,000
Other - 91,000
---------- ----------
Total deferred tax liabilities 2,185,000 2,268,000
Deferred tax assets:
Vacation and bad debt reserves not
deductible 435,000 434,000
Investment tax and alternative
minimum tax credit carry-forwards 523,000 813,000
---------- ----------
Total deferred tax assets 958,000 1,247,000
---------- ----------
Net deferred tax liabilities $ 1,227,000 $ 1,021,000
========== ==========
-37-
Page 38 of 76
As of January 31, 1996, investment tax credit carry forwards of
approximately $14,000 are available to reduce future federal income
taxes. If not used, the credits will expire through 2002.
(5) Stock Options and Pension Plans
-------------------------------
The Company has a 1981 employee incentive stock option plan, a 1982
non-qualified stock option plan, and 1988 and 1994 stock option
plans. The 1981, 1982 and 1988 plans have expired and no new options
may be granted thereunder.
Outstanding options under all plans are exercisable at 100% or more of
fair market (as determined by the Board of Directors) at the date of
grant. The options are contingent upon continued employment and are
exercisable, unless otherwise specified, on a cumulative basis of one-
fourth (or more for the 1982 plan) of the total shares each year,
commencing one year from the date of grant. Options expire five to
ten years from the date of grant. At January 31, 1996, options for
490,838 shares were outstanding at an average price per share of $1.95
(range from $1.00 to $2.75), of which 285,916 were exercisable.
During the year ended January 31, 1996, 12,489 options were exercised
under these plans at an average price of $1.20 (range from $1.00 to
$1.38) per share. There are 424,687 shares available for future
grant.
The Company has an employee stock ownership plan covering all
employees. Contributions by the Company are at the discretion of the
Board of Directors. The Company did not make contributions in 1996,
1995 or 1994.
The Company offers a 401 (k) profit sharing plan. The purpose of the
plan is to provide retirement benefits to all employees of the
Company. The Companies employees can contribute up to 10% of their
salary into the 401(k) plan and the Company's Board of Directors, at
its discretion, will determine each year the amount of matching
contribution the Company will make. All employer contributions are
allocated in the ratio that a participant's compensation bears to
total plan compensation. In 1996 the Board of Directors of the Company
approved a contribution to the 401(k) profit sharing plan of $50,000.
The Company did not make contributions in 1995 or 1994.
(6) Commitments
-----------
The Company leases certain of its operating facilities and equipment
under operating leases which principally expire at various dates to
fiscal year 2003. The leases are generally on a net-rent basis,
whereby the Company pays taxes, maintenance, insurance and other
operating expenses. Management expects that, in the normal course of
business, leases that expire will be renewed or replaced by other
leases. Gross rental expense was $602,000 in 1996, $498,000 in 1995
and $668,000 in 1994. Rental income was $41,000 in 1996, $82,000 in
1995 and $43,000 in 1994.
-38-
Page 39 of 76
At January 31, 1996, minimum rental payment obligations under
operating leases were as follows:
1997 $ 514,000
1998 495,000
1999 425,000
2000 151,000
2001 144,000
Thereafter 115,000
---------
$1,844,000
=========
In May 1992, the Company entered into a five year lease agreement for
operating facilities located in Valencia, California. The lease
payments are based upon an escalating percentage of revenue at that
facility for the five year period. The future lease payments are
dependent upon sales volume during the lease and as such are
contingent rentals. Thus, these future payments are excluded from the
minimum rental payment obligations disclosed above.
(7) Accrued Expenses
----------------
A summary of accrued expenses at January 31 is as follows:
1996 1995
Compensation and employee benefits $1,807,000 $1,411,000
Other 274,000 216,000
---------- ----------
$2,081,000 $1,627,000
========= =========
(8) Contingencies
-------------
The Company is, from time to time, the subject of claims and suits
arising out of matters occurring during the operation of the Company's
business. In the opinion of management, no claims or suits would
materially affect the financial position or the results of the
operations of the Company.
(9) Segment of Business Information
-------------------------------
Technical Services involve technical support and technical support
personnel to assist clients in a broad range of industries in the
solving of technical problems via analysis and testing of materials,
components, subsystems and systems.
Contract Labor Services locates, recruits, and hires a wide variety of
technical personnel, engineers, drafters, designers, computer
programmer technicians and others and assigns them temporarily to
clients either individually for staff augmentation, or as members of a
project team. The Company assumes the normal responsibilities of an
employer.
-39-
Page 40 of 76
Registration Services is a third party registrar whose business is to
evaluate a supplier's quality systems for conformity to ISO 9000, the
international quality standard. The evaluations include an
examination of the companies quality policy, quality system
documentation and quality records. Part of the evaluation is a
thorough on-site assessment to determine whether each required quality
system element is defined, documented, deployed and consistently
implemented and the required documentation and records are current and
available.
Environmental Services provides environmental clean up services
through a choice of numerous alternative remediation technologies.
Some of these technologies are: bio-enhanced air sparging, biological
treatment, bio-remediation, chemical treatment, heavy metal removal,
land fill disposal, recycling, soil washing, thermal treatment, and
vapor extraction.
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets consist of
cash, accounts receivable, investments in securities, real estate, oil
drilling programs, fixed assets not allocated to segments and net
assets of discontinued operations. Corporate general and
administrative expenses were allocated on the basis of sales, fixed
assets and payroll expenses of the respective segments. Interest
expense is allocated to the segments based on average borrowing rates
and segment advances.
Direct and indirect revenues of Technical Services from federal
agencies were approximately $17,883,000 in 1996, $16,317,000 in 1995,
and $20,546,000 in 1994, consist principally of sales under
subcontracts to customers with government contracts. One major
customer represents $2,021,000 of the 1996 Contract Labor Services net
revenues and two major customers represent $1,922,000 and $1,930,000
of the 1995, and $2,280,000 and $687,000 of the 1994 Contract Labor
Services net revenues, respectively.
NTS performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral.
-40-
Page 41 of 76
January 31, 1996
----------------
Technical Contract Labor Registration
Environmental
Services Services Services
Services Corporate Total
-------- -------------- ------------
- ------------- --------- -------
Net revenues $34,029,000 $ 5,310,000 $ 2,118,000 $
2,981,000 $ - $44,438,000
========== ========== ==========
========== ========== ==========
Gross profit $ 7,840,000 $ 1,073,000 $ 737,000 $
94,000 $ - $ 9,744,000
Selling, general and
administrative expense 4,516,000 1,122,000 580,000
535,000 113,000 6,866,000
---------- ---------- ----------
- ---------- ---------- ----------
Operating income (loss) 3,324,000 (49,000) 157,000
(441,000) (113,000) 2,878,000
Other income(expense):
Interest expense, net (900,000) (161,000) -
- (96,000) (1,157,000)
Other 84,000 (49,000) (6,000)
(7,000) 1,000 23,000
---------- ---------- ----------
- ---------- ---------- ----------
(816,000) (210,000) (6,000)
(7,000) (95,000) (1,134,000)
---------- ---------- ----------
- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes $ 2,508,000 $ (259,000) $ 151,000 $
(448,000) $ (208,000) $ 1,744,000
========== ========== ==========
========== ========== ==========
Identifiable assets $25,786,000 $ 2,627,000 $ 1,066,000 $
1,641,000 $ 2,383,000 $33,503,000
========== ========== ==========
========== ========== ==========
Capital expenditures $ 1,566,000 $ - $ 37,000 $
10,000 $ 122,000 $ 1,735,000
========== ========== ==========
========== ========== ==========
Depreciation and amortization $ 1,975,000 $ 286,000 $ 7,000 $
4,000 $ 56,000 $ 2,328,000
========== ========== ==========
========== ========== ==========
-41-
Page 42 of 76
January 31, 1995
----------------
Technical Contract Labor Registration
Environmental
Services Services Services
Services Corporate Total
-------- -------------- ------------
- ------------- --------- -------
Net revenues $31,259,000 $ 4,670,000 $ 1,451,000 $
537,000 $ - $37,917,000
========== ========== ==========
========== ========== ==========
Gross profit $ 7,326,000 $ 1,089,000 $ 604,000 $
(138,000) $ - $ 8,881,000
Selling, general and administrative
expense 5,078,000 1,104,000 390,000
112,000 99,000 6,783,000
---------- ---------- ----------
- ---------- ---------- ----------
Operating income (loss) 2,248,000 (15,000) 214,000
(250,000) (99,000) 2,098,000
Other income (expense):
Interest expense, net (817,000) (74,000) -
- (141,000) (1,032,000)
Other 21,000 (61,000) -
1,000 - (39,000)
---------- ---------- ----------
- ---------- ---------- ----------
(796,000) (135,000) -
1,000 (141,000) (1,071,000)
---------- ---------- ----------
- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes $ 1,452,000 $ (150,000) $ 214,000 $
(249,000) $ (240,000) $ 1,027,000
========== ========== ==========
========== ========== ==========
Identifiable assets $27,952,000 $ 2,208,000 $ 546,000 $
551,000 $ 1,831,000 $33,088,000
========== ========== ==========
========== ========== ==========
Capital expenditures $ 2,743,000 $ 6,000 $ 8,000 $
9,000 $ 213,000 $ 2,979,000
========== ========== ==========
========== ========== ==========
Depreciation and amortization $ 2,029,000 $ 301,000 $ 3,000 $
1,000 $ 67,000 $ 2,401,000
========== ========== ==========
========== ========== ==========
-42-
Page 43 of 76
January 31, 1994
----------------
Technical Contract Labor Registration
Environmental
Services Services Services
Services Corporate Total
-------- -------------- ------------
- ------------- --------- -------
Net revenues $35,330,000 $ 6,891,000 $ 799,000 $
- $ - $43,020,000
========== ========== ==========
========== ========== ==========
Gross profit $ 7,087,000 $ 1,299,000 $ 609,000 $
- $ - $ 8,995,000
Selling, general and administrative
expense 4,856,000 1,193,000 644,000
- 97,000 6,790,000
---------- ---------- ----------
- ---------- ---------- ----------
Operating income (loss) 2,231,000 106,000 $ (35,000)
- (97,000) 2,205,000
Other income(expense):
Interest expense, net (716,000) (2,000) -
- (214,000) (932,000)
Other 37,000 (156,000) -
- 5,000 (114,000)
---------- ---------- ----------
- ---------- ---------- ----------
(679,000) (158,000) -
- (209,000) (1,046,000)
---------- ---------- ----------
- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes $ 1,552,000 $ (52,000) $ (35,000) $
- $ (306,000) $ 1,159,000
========== ========== ==========
========== ========== ==========
Identifiable assets $27,295,000 $ 2,104,000 $ 186,000 $
- $ 1,988,000 $31,573,000
========== ========== ==========
========== ========== ==========
Capital expenditures $ 2,457,000 $ 166,000 $ 9,000 $
- $ - $ 2,632,000
========== ========== ==========
========== ========== ==========
Depreciation and amortization $ 1,875,000 $ 296,000 $ 1,000 $
- $ 46,000 $ 2,218,000
========== ========== ==========
========== ========== ==========
(10) Quarterly Financial Data (Unaudited)
------------------------------------
Three months ended
------------------
1996 April 30 July 31 October 31 January 31
---- -------- ------- ---------- ----------
Net revenues $ 9,605,000 $10,883,000 $12,876,000 $11,074,000
Gross profit $ 2,072,000 2,466,000 2,649,000 2,557,000
Net income $ 14,000 288,000 343,000 274,000
Net income per
share $ 0.00 0.04 0.05 0.04
Weighted average number
of common shares
outstanding 6,651,000 6,652,000 6,661,000 6,674,000
========== ========== ========== ==========
-43-
Page 44 of 76
Three months ended
------------------
1995 April 30 July 31 October 31 January 31
---- -------- ------- ---------- ----------
Net revenues $10,132,000 $ 9,134,000 $ 9,368,000 $ 9,283,000
Gross profit $ 2,330,000 2,410,000 2,188,000 1,953,000
Net income $ 186,000 179,000 107,000 93,000
Net income per
share $ 0.03 0.03 0.02 0.01
Weighted average number
of common shares
outstanding 6,606,000 6,614,000 6,623,000 6,636,000
========== ========== ========== ==========
[FN]
Per share data may not always add to the total for the year because
each figure is independently calculated.
-44-
Page 45 of 76
Schedule II
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended January 31, 1996, 1995 and 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Description Balance at Additions - Deductions Balance at
beginning charged to - describe end of
of period costs and period
expenses
Allowance for
doubtful
accounts
receivable:
1996 $ 577,000 $ 319,000 $ (301,000) $ 595,000
========= ========= ========= =========
1995 $ 417,000 $ 156,000 $ 4,000 $ 577,000
========= ========= ========= =========
1994 $ 443,000 $ 183,000 $ (209,000) $ 417,000
========= ========= ========= =========
[FN]
Write-off of uncollectible accounts receivable, net of recoveries.
-45-
Page 46 of 76
EXHIBIT INDEX
No. Description Page
----------------------------------------------------------------------
10(a)1 Amendment No. Four dated April 24, 1996 to National
Technical Systems Credit Agreement between Bank of
America NT&SA and Sanwa Bank California dated
September 1, 1993 48
10.6 National Technical Systems Financing Agreement
between The CIT Group/Equipment Financing, Inc.
dated October 6, 1995 51
21 Subsidiaries of the Registrant 70
23.1 Consent of Ernst & Young LLP, Independent Auditors 71
27 Financial Data Schedule 76
99.1 Undertakings is incorporated by reference into
Form S-8 Registration Statement No. 33-48211 72
99.2 Undertakings is incorporated by reference into
Form S-8 Registration Statement No. 2-83778 74
Page 47 of 76
EXHIBIT 10(a)1
AMENDMENT NO. FOUR TO BUSINESS LOAN AGREEMENT
This Amendment No. Four (the "Amendment") dated as of
April 26, 1996, is between Bank of America National Trust and
Savings Association ("BofA") and Sanwa Bank California ("Sanwa")
(each a "Bank" and collectively the "Banks") and National
Technical Systems (the "Borrower").
RECITALS
--------
A. The Banks and the Borrower entered into a certain
Business Loan Agreement dated as of September 1, 1993, as
modified by amendments dated July 6, 1994, March 6, 1995, and
December 31, 1995 (as amended, the "Agreement").
B. The Banks and the Borrower desire to further amend the
Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in
this Amendment shall have the meaning given to them in the
Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Paragraph 2.1(a) is amended and restated to read
in its entirety as follows:
"(a) During the availability period described below,
the Banks will each severally provide a line of credit to the
Borrower, each of which shall be in the amount of Three Million
Dollars ($3,000,000), and which shall not exceed in the aggregate
at any time Six Million Dollars ($6,000,000) (collectively, the
'Facility 2 Commitment')."
2.2 In Paragraph 2.2, the date "August 1, 1997" is
substituted for the date "June 30, 1996".
2.3 Paragraph 6.4 is amended and restated to read in
its entirety as follows:
"6.4 GUARANTIES. Guaranties in favor of both Banks,
each in the amount of Ten Million Dollars ($10,000,000), from
each of National Technical Systems, Inc., Wise & Associates,
Inc., Acton Environmental Testing Corporation, Approved
Engineering Test Laboratories, Inc., ETCR Inc., S&W Technical
Services, Inc., and PECS (QA) North America, Inc."
-1-
Page 48 of 76
2.4 Paragraph 8.6 is amended and restated to read in
its entirety as follows:
"8.6 DEBT COVERAGE RATIO. To maintain on a
consolidated basis a Debt Coverage Ratio of at least 1.25:1.0.
'Debt Coverage Ratio' means the ratio of (a) net after tax profit
PLUS depreciation, interest expense, increase in deferred income
taxes, and non-cash expenses, MINUS any decrease in deferred
income taxes to (b) the sum of current portion of long-term debt,
interest expense, and dividends. This ratio will be calculated
at the end of each fiscal quarter, using the results of that
quarter and each of the 3 immediately preceding quarters, except
that the current portion of long term debt will be measured as of
the last day of the most recent fiscal quarter."
2.5 Paragraph 8.9 is amended and restated to read in
its entirety as follows:
"8.9 CAPITAL EXPENDITURES. Not to spend or incur
obligations (including the total amount of any capital leases)
for more than One Million Six Hundred Thousand Dollars
($1,600,000) in any single fiscal year to acquire fixed or
capital assets."
2.6 Paragraph 8.10 is amended and restated to read in
its entirety as follows:
"8.10 DIVIDENDS. Not to declare or pay any dividends
on any of its shares, except from earnings available for
dividends and earned during the immediately preceding fiscal
year, and, in any event, not in excess of forty percent (40%) of
the Borrower's net income for such preceding fiscal year."
2.6 Paragraph 8.22 is deleted in its entirety and
"Intentionally Deleted" is substituted in its stead.
3. REPRESENTATIONS AND WARRANTIES. When the Borrower
signs this Amendment, the Borrower represents and warrants to the
Banks that: (a) there is no event which is, or with notice or
lapse of time or both would be, a default under the Agreement,
(b) the representations and warranties in the Agreement are true
as of the date of this Amendment as if made on the date of this
Amendment, (c) this Amendment is within the Borrower's powers,
has been duly authorized, and does not conflict with any of the
Borrower's organizational papers, and (d) this Amendment does not
conflict with any law, agreement, or obligation by which the
Borrower is bound.
4. CONDITIONS. This Amendment will be effective when the
Bank receives the following items, in form and content acceptable
to the Bank:
-2-
Page 49 of 76
4.1 This Amendment duly executed by the Borrower and
the Banks.
4.2 A copy of the Borrower's C.P.A. audited fiscal
year end January 31, 1996 financial statements.
5. EFFECT OF AMENDMENT. Except as provided in this
Amendment, all of the terms and conditions of the Agreement shall
remain in full force and effect.
This Amendment is executed as of the date stated at the
beginning of this Amendment.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Brian C. Roche
-------------------------------
Brian C. Roche
Vice President
SANWA BANK CALIFORNIA
By: /s/ Michael W. Platt
-------------------------------
Michael W. Platt
Vice President
NATIONAL TECHNICAL SYSTEMS
By: /s/ Lloyd Blonder
-------------------------------
Lloyd Blonder
Senior Vice President &
Chief Financial Officer
-3-
Page 50 of 76
EXHIBIT 10.6
LOAN AND SECURITY AGREEMENT
---------------------------
SECTION 1. DEFINITIONS.
All capitalized terms which are not defined herein are
defined in Rider A attached hereto and made a part hereof
("RIDER A"). Accounting terms not specifically defined shall
be construed in accordance with generally accepted accounting
principles.
SECTION 2. AMOUNT AND TERMS OF LOANS; GRANT OF SECURITY
INTEREST.
Subject to the terms and conditions hereof, CIT agrees
to make Loans to Debtor from time to time, in the amount
described in paragraph 2 of Rider A. Each Loan shall be evidenced
by Debtor's Note, which Note shall set forth the repayment terms
and Interest Rate for such Loan.
As security for the prompt and complete payment and
performance when due of all the Obligations and in order to
induce CIT to enter into this Agreement and make the Loans and to
extend other credit from time to time to Debtor, whether under
this Agreement or otherwise, Debtor hereby grants to CIT a first
priority security interest in all Debtor's right, title and
interest in, to and under the Collateral.
SECTION 3. CONDITIONS OF BORROWING.
CIT shall not be required to make any Loan hereunder
unless on the Closing Date thereof all legal matters with respect
to, and all legal documents executed in connection with, the
contemplated transactions are satisfactory to CIT and all of the
following conditions are met to the satisfaction of CIT (except
that (a), (b) and (c) are required in connection with the initial
Loan only): (a) CIT has received a satisfactory Secretary's
Certificate certified by Debtor's Secretary or Assistant
Secretary; (b) if requested by CIT, CIT shall have received the
written opinion addressed to it of counsel for Debtor
satisfactory to CIT as matters contained in Section 4(a)-(e), (g)
and (i) hereof, and as to such other matters as CIT may
reasonably request; (c) CIT shall have received (i) a Guaranty,
duly executed by each Guarantor, and (ii) a satisfactory
Secretary's Certificate certified by each corporate Guarantor's
Secretary or Assistant Secretary; (d) Debtor has executed and
delivered to CIT the Note evidencing, and a Supplement describing
the Equipment to be financed by, such Loan; (e) the Equipment
being financed by such Loan has been delivered to, and accepted
-1-
Page 51 of 76
by, Debtor and CIT has received satisfactory evidence that the
Equipment is insured in accordance with the provisions hereof and
that the Cost thereof has been, or concurrently with the making
of the Loan shall be, fully paid; (f) CIT has received copies of
the invoices and bills of sale, if any, with respect to the
Equipment being financed by such Loan; (g) all filings,
recordings and other actions (including the obtaining of landlord
and/or mortgagee waivers) deemed necessary or desirable by CIT in
order to perfect a first (and only) priority security interest in
the Equipment being financed by such Loan have been duly
effected, and all fees, taxes and other charges relating to such
filings and recordings have been paid by Debtor; (h) the
representations and warranties contained in this Agreement and
any Guaranty are true and correct with the same effect as if made
on and as of such date, and no Default or Event of Default is in
existence on such date or shall occur as a result of such Loan;
(i) in the sole judgment of CIT, there has been no material
adverse change in the financial condition, business or operations
of Debtor or any Guarantor from the date referred to in Section
4(j) hereof; (j) CIT has received from Debtor and each Guarantor
such other documents and information as CIT has requested;
(k) CIT has inspected and appraised the Equipment and found it
satisfactory in value and condition; (1) CIT has received
satisfactory bank and/or customer references on Debtor and on
each Guarantor; and (m) CIT has received and found satisfactory
Debtor's and, if required, each Guarantor's most recent quarterly
financial statement.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
In order to induce CIT to enter into this Agreement and
to make each Loan, each Debtor represents and warrants to CIT
that: (a) Debtor is a corporation duly organized, validly
existing and in good standing under the laws of its State of
incorporation, has the necessary authority and power to own the
Equipment and its other assets and to transact the business in
which it is engaged, is duly qualified to do business in each
jurisdiction where the Equipment is located and in each other
jurisdiction in which the conduct of its business or the
ownership of its assets requires such qualification, and its
chief executive office is located at the address set forth in
paragraph 5 of Rider A; (b) Debtor has full power, authority and
legal right to execute and deliver this Agreement and the Notes,
to perform its obligations hereunder and thereunder, to borrow
hereunder and to grant the security interest created hereby;
(c) this Agreement has been (and each Note when executed and
delivered shall have been) duly authorized, executed and
delivered by Debtor and constitutes (and each Note when executed
and delivered shall constitute) a legal, valid and binding
obligation of Debtor enforceable in accordance with its terms
except as such rights may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights
generally; (d) the execution, delivery and performance by Debtor
-2-
Page 52 of 76
of this Agreement and the Notes do not and will not violate any
provision of any applicable law or regulation or of any judgment
or order of any court or governmental instrumentality, and will
not violate any provision of, or cause a default under, any loan,
other agreement, contract or judgment to which Debtor is a party
and do not and will not require the consent, license, approval or
authorization of, or registration with, any Person; (e) Debtor is
not in default under any material agreement, contract or judgment
to which Debtor is a party; (f) Debtor has filed all tax returns
that are required to be filed and has paid all taxes as shown on
said returns and all assessments received by it to the extent
such taxes and assessments have become due other than those which
are being contested in good faith by appropriate proceedings and
as to which appropriate reserves are being maintained by Debtor
in accordance with generally accepted accounting principles and
so long as such proceedings operate during the pendency thereof
to prevent the sale, forfeiture, or loss of the Collateral, and
Debtor does not have any knowledge of any actual or proposed
deficiency or additional assessment in connection therewith;
(g) there is no action, audit, investigation or proceeding
pending against or affecting Debtor or any of its assets which
involves any of the Equipment or any of the contemplated
transactions hereunder or which, if adversely determined, could
have a material adverse effect on Debtor's business, operations
or financial condition; (h) on each Closing Date, Debtor shall
have good and marketable title to the Equipment being financed on
such date and CIT shall have a perfected first (and only) Lien on
such Equipment; and (i) (i) the operations of Debtor comply in
all material respects with all applicable Environmental Laws; and
(ii) except as disclosed to CIT, (A) none of the operations of
Debtor are subject to any judicial or administrative proceeding
alleging the violation of any Environmental Laws; (B) none of the
operations of Debtor is the subject of an investigation to
determine whether any remedial action is needed to respond to a
release of any Hazardous Material into the environment; and
(C) Debtor has no known material contingent liability in
connection with any release of any Hazardous Material into the
environment: (j) all financial statements of Debtor and/or any
Guarantor which have been delivered to CIT have been prepared in
accordance with generally accepted accounting principles
consistently applied, and present fairly Debtor's and/or
Guarantor's financial position as at, and the results of its
operations for, the periods ended on the dates set forth on such
financial statements, and there has been no material adverse
change in Debtor's and/or any Guarantor's financial condition,
business or operations since January 31, 1995, as reflected in
such financial statements; and (k) Debtor has not changed its
name in the last five years or done business under any other name
except as previously disclosed in writing to CIT.
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SECTION 5. COVENANTS.
Each Debtor covenants and agrees that from and after
the date hereof and so long as the Commitment or any of the Notes
is outstanding:
A. It will: (1) promptly give written notice to CIT of
the occurrence of any Event of Loss; (2) observe all material
requirements of any governmental authorities relating to the
conduct of its business, to the performance of its obligations
hereunder, to the use, operation or ownership of the Equipment,
or to its other properties or assets, maintain its existence as a
legal entity and obtain and keep in full force and effect all
rights, franchises, licenses and permits which are necessary to
the proper conduct of its business, and pay all fees, taxes,
assessments and governmental charges or levies imposed upon any
of the Equipment; (3) at any reasonable time or times, permit CIT
or its authorized representative to inspect the Equipment and,
following the occurrence and during the continuation of an Event
of Default, to inspect the books and records of Debtor; (4) in
accordance with generally accepted accounting principles, keep
proper books of record and account in which entries will be made
of all dealings or transactions in relation to its business and
activities; (5) cause NTS to furnish to CIT the following
financial statements, all in reasonable detail, prepared in
accordance with generally accepted accounting principles applied
on a basis consistently maintained throughout the period
involved, (a) as soon as available, but not later than 120 days
after the end of each fiscal year, NTS's consolidated balance
sheet as at the end of such fiscal year, and NTS's consolidated
statements of income and consolidated statements of cash flow and
all footnotes of such fiscal year together with comparative
information for the prior fiscal year, audited by either a Big
Six or a major regional firm of certified public accountants;
and (b) as soon as available, but not later than 90 days after
the end of each of the first three quarterly periods of each
fiscal year, NTS's consolidated balance sheet as at the end of
such quarterly period and its consolidated statements of income
and consolidated statements of cash flow for such quarterly
period and for the portion of the fiscal year then ended together
with comparative information for the prior comparable period,
certified as to their accuracy by NTS's chief financial officer;
(6) (i) furnish to CIT, together with the financial statements
described in clauses 5(a) and 5(b) above, a statement signed by
each Debtor's and NTS's chief financial officer certifying that
Debtor or NTS, as applicable, is in compliance with all financial
covenants contained in any documents evidencing a financial
obligation to which Debtor or NTS is a party, or if Debtor is not
in compliance, the nature of such noncompliance or default, and
the status thereof (such statement shall set forth the actual
calculations of any financial covenants and the details of any
amendments or modifications of any financial covenants), and
(ii) promptly, such additional financial and other information as
CIT may from time to time reasonably request; (7) promptly, at
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Debtor's expense, execute and deliver to CIT such instruments and
documents, and take such action, as CIT may from time to time
reasonably request in order to carry out the intent and purpose
of this Agreement and to establish and protect the rights,
interest and remedies created, or intended to be created, in
favor of CIT hereby, including, without limitation, the
execution, delivery, recordation and filing of financing
statements (hereby authorizing CIT, in such jurisdictions where
such action is authorized by law, to effect any such recordation
or filing of financing statements without Debtor's signature, and
to file as valid financing statements in the applicable financing
statement records, photocopies hereof, of the Supplements and of
any other financing statement executed in connection herewith);
(8) warrant and defend its good and marketable title to the
Equipment, and CIT's perfected first (and only) priority security
interest in the Collateral, against all claims and demands
whatsoever (hereby agreeing that the Equipment shall be and at
all times remain separately identifiable personal property, and
shall not become part of any real estate), and will, at its
expense, take such action as may be necessary to prevent any
other Person from acquiring any right or interest in the
Equipment; (9) at Debtor's expense, if requested by CIT in
writing, attach to the Equipment a notice satisfactory to CIT
disclosing CIT's security interest in the Equipment; (10) at
Debtor's expense, maintain the Equipment in good condition and
working order and furnish all parts, replacements and servicing
required therefor so that the value, condition and operating
efficiency thereof will at all times be maintained, normal wear
and tear excepted, and any repairs, replacements and parts added
to the Equipment in connection with any repair or maintenance or
with any improvement, change, addition or alteration shall
immediately, without further act, become part of the Equipment
and subject to the security interest created by this Agreement;
and (11) obtain and maintain at all times on the Collateral, at
Debtor's expense, "All-Risk" physical damage and, if required by
CIT, liability insurance (including bodily injury and property
damage) in such amounts, against such risks, in such form and
with such insurers as shall be satisfactory to CIT; provided,
however, that the amount of physical damage insurance shall not
be less than the then aggregate outstanding principal amount of
the Notes. All physical damage insurance policies shall be made
payable to CIT as its interest may appear; if liability insurance
is required by CIT, the liability insurance policies shall name
CIT as an additional insured. Debtor shall maintain and deliver
to CIT the original certificates of insurance or other documents
satisfactory to CIT prior to policy expiration or upon CIT's
request, but CIT shall bear no duty or liability to ascertain the
existence or adequacy of such insurance. Each insurance policy
shall, among other things, require that the insurer give CIT at
least 30 days' prior written notice of any alteration in the
terms of such policy or the cancellation thereof and that the
interests of CIT be continued insured regardless of any breach of
or violation by Debtor of any warranties, declarations or
conditions contained in such insurance policy. The insurance
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maintained by the Debtor shall be primary with no other insurance
maintained by CIT (if any) contributory.
B. It will not: (1) sell, convey, transfer, exchange,
lease or otherwise relinquish possession or dispose of any of the
Collateral or attempt or offer to do any of the foregoing;
(2) create, assume or suffer to exist any Lien upon the
Collateral except for the security interest created hereby;
(3) liquidate or dissolve; (4) change the form of organization of
its business; or (5) without thirty (30) days prior written
notice to CIT, change its name or its chief executive office;
(6) move (or in the case of titled vehicles, change the principal
base of) any of the Equipment from the location specified on the
Supplement relating thereto without the prior written consent of
CIT; or (7) make or authorize any improvement, change, addition
or alteration to the Equipment which would impair its originally
intended function or use or its value.
SECTION 6. EVENTS OF DEFAULT; REMEDIES.
The following events shall each constitute an "EVENT OF
DEFAULT" hereunder with respect to each Debtor: (a) Debtor shall
fail to pay any Obligation within 10 days after the same becomes
due (whether at the stated maturity, by acceleration or
otherwise); (b) any representation or warranty made by Debtor in
this Agreement, or made by any Guarantor in any Guaranty, or made
by Debtor or any Guarantor in any document, certificate or
financial or other statement now or hereafter furnished by Debtor
or any Guarantor in connection with this Agreement, any Guaranty
or any Loan shall at any time prove to be untrue or misleading in
any material respect as of the time when made; (c) Debtor or
Guarantor shall fail to observe any covenant, condition or
agreement contained in Sections 5.A(11) or 5.B hereof or in
paragraphs 4(b) and 7 of Rider A; (d) Debtor shall fail to
observe or perform any other covenant or condition contained in
this Agreement, and such failure shall continue unremedied for a
period of 30 days after the earlier of the date on which Debtor
obtains knowledge of such failure or the date on which notice
thereof shall be given by CIT to Debtor; (e) Debtor or any
Guarantor or any affiliate of any of them shall default in the
payment of, or other performance under, any obligation for
payment or lease (whether or not capitalized) or any guarantee
(i) to CIT or any affiliate of CIT beyond the period of grace, if
any, provided with respect thereto, or (ii) to any Person beyond
the period of grace, if any, provided with respect thereto, where
such obligation or amount guaranteed is in excess of $1,000,000;
(f) a complaint in bankruptcy or for arrangement or
reorganization or for relief under any insolvency law is filed by
or against Debtor or any Guarantor (and when filed against Debtor
or any Guarantor is in effect for 60 days) or Debtor or any
Guarantor admits its inability to pay its debts as they mature;
or (g) any Guarantor shall fail to observe or perform any of the
terms or conditions of its respective Guaranty, or any Guaranty
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shall cease to be in full force and effect or shall be declared
null and void, or the validity or enforceability thereof shall be
contested by any Guarantor, or any Guarantor shall deny that such
Guarantor has any further liability to CIT with respect thereto.
If an Event of Default shall occur, CIT may, by notice
of default given to Debtor, do any one or more of the following:
(a) terminate the Commitment and/or (b) declare the Notes to be
due and payable, whereupon the principal amount of the Notes,
together with accrued interest thereon and all other amounts
owing under this Agreement and the Notes, shall become
immediately due and payable without presentment, demand, protest
or other notice of any kind, all of which are hereby expressly
waived (and in the case of any Event of Default specified in
clause (f) of the above paragraph, such acceleration of the Notes
shall be automatic, without any notice by CIT). In addition, if
an Event of Default shall occur and be continuing, CIT may
exercise all other rights and remedies available to it, whether
under this Agreement, under any other instrument or agreement
securing, evidencing or relating to the Obligations, under the
Code, or otherwise available at law or in equity. Without
limiting the generality of the foregoing, Debtor agrees that in
any such event, CIT, without demand of performance or other
demand, advertisement or notice of any kind (except the notice
specified below of time and place of public or private sale) to
or upon Debtor and any other Person (all and each of which
demands, advertisements and notices are hereby expressly waived),
may forthwith do any one or more of the following: collect,
receive, appropriate and realize upon the Collateral or any part
thereof, and sell, lease, assign, give an option or options to
purchase or otherwise dispose of and deliver, the Collateral (or
contract to do so), or any part thereof, in one or more parcels
at public or private sale or sales at such places and at such
prices as it may deem best, for cash or on credit or for future
delivery without the assumption of any credit risk. CIT shall
have the right upon any such public sale or sales, and, to the
extent permitted by law, upon any such private sale or sales, to
purchase the whole or any part of the Collateral so sold, free of
any right or equity of redemption of Debtor, which right or
equity is hereby expressly released. Debtor further agrees, at
CIT's request, to assemble (at Debtor's expense) the Collateral
and make it available to CIT at such places which CIT shall
select, whether at Debtor's premises or elsewhere. CIT shall
apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale (after deducting all
reasonable costs and expenses of every kind incurred therein or
incidental to the care, safekeeping or otherwise of any or all of
the Collateral or in any way relating to the rights of CIT
hereunder, including reasonable attorney's fees and legal
expenses) to the payment in whole or in part of the Obligations,
in such order as CIT may elect. Debtor agrees that CIT need not
give more than 10 days' notice of the time and place of any
public sale or of the time after which a private sale may take
place and that such notice is reasonable notification of such
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matters. Debtor shall be liable for any deficiency if the
proceeds of any sale or disposition of the Collateral are
insufficient to pay all amounts to which CIT is entitled. Debtor
agrees to pay all costs of CIT, including reasonable attorneys'
fees, incurred with respect to collection of any of the
Obligations and enforcement of any of CIT's rights hereunder. To
the extent permitted by law, Debtor hereby waives presentment,
demand, protest or any notice (except as expressly provided in
this Section 6) of any kind in connection with this Agreement or
any Collateral.
SECTION 7. MISCELLANEOUS.
No failure or delay by CIT in exercising any right,
remedy or privilege hereunder or under any Note shall operate as
a waiver thereof, nor shall any single or partial exercise of any
right, remedy or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other
right, remedy or privilege. No right or remedy in this Agreement
is intended to be exclusive but each shall be cumulative and in
addition to any other remedy referred to herein or otherwise
available to CIT at law or in equity; and the exercise by CIT of
any one or more of such remedies shall not preclude the
simultaneous or later exercise by CIT of any or all such other
remedies. No express or implied waiver by CIT of an Event of
Default shall in any way be, or be construed to be, a waiver of
any other or subsequent Event of Default. The acceptance by CIT
of any regular installment payment or any other sum owing
hereunder shall not (a) constitute a waiver of any Event of
Default in existence at the time, regardless of CIT's knowledge
or lack of knowledge thereof at the time of such acceptance, or
(b) constitute a waiver of any Event of Default unless CIT shall
have agreed in writing to waive the Event of Default.
All notices, requests and demands to or upon any party
hereto shall be deemed duly given or made when sent, if given by
telecopier, when delivered, if given by personal delivery or
overnight commercial carrier, or the third calendar day after
deposit in the United States mail, certified mail, return receipt
requested, addressed to such party at its address (or telecopier
number) set forth in paragraph 5 of Rider A or such other address
or telecopier number as may be hereafter designated in writing by
such party to the other party hereto.
Debtor agrees, whether or not the contemplated
transactions are consummated, (A) to pay or reimburse CIT for
(i) all expenses of CIT in connection with the documentation
thereof; (ii) all fees, taxes and expenses of whatever nature
incurred in connection with the creation, preservation and
protection of CIT's security interest in the Collateral,
including, without limitation, all filing and lien search fees,
payment or discharge of any taxes or Liens upon, or in respect
to, the Collateral, and all other fees and expenses in connection
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with protecting or maintaining the Collateral or in connection
with defending or prosecuting any actions, suits or proceedings
arising out of, or related to, the Collateral (provided, however,
that the expenses, fees and taxes that Debtor is required to pay
or reimburse CIT for in (i) and (ii) above shall not exceed
$10,000.00 without the prior written consent of Debtor); and
(iii) all costs and expenses (including reasonable legal fees and
disbursements) of CIT in connection with the enforcement of this
Agreement and the Notes, and (B) to pay, and to indemnify and
hold CIT harmless from and against any and all liabilities,
obligations, losses, damages, penalties, claims, actions,
judgments, suits, out-of-pocket costs, expenses (including
reasonable legal expenses) or disbursements of any kind or nature
whatsoever arising out of or with respect to (a) this Agreement,
the Collateral or CIT's interest therein, including, without
limitation, the execution, delivery, enforcement, performance or
administration of this Agreement and the Notes and the
manufacture, purchase, ownership, possession, use, selection,
operation or condition of the Collateral or any part thereof, or
(b) Debtor's violation or alleged violation of any Environmental
Laws or any law or regulation relating to Hazardous Materials
(the foregoing being referred to as the "indemnified
liabilities"), provided, that Debtor shall have no obligation
hereunder with respect to indemnified liabilities arising from
the gross negligence or willful misconduct of CIT. If Debtor
fails to perform or comply with any of its agreements contained
in this Agreement and CIT shall itself perform, comply or cause
performance or compliance, the expenses of CIT so incurred,
together with interest thereon at the Late Charge Rate, shall be
payable by Debtor to CIT on demand and until such payment is made
shall constitute Obligations hereunder. The agreements and
indemnities contained in this paragraph shall survive termination
of this Agreement and payment of the Notes.
This Agreement contains the complete, final and
exclusive statement of the terms of the agreement between CIT and
Debtor related to the contemplated transactions, and neither this
Agreement, nor any terms hereof, may be changed, waived,
discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of a
change, waiver, discharge or termination is sought.
This Agreement shall be binding upon, and inure to the
benefit of, Debtor and CIT and their respective successors and
assigns, except that Debtor may not assign or transfer its rights
hereunder or any interest herein without the prior written
consent of CIT.
Headings of sections and paragraphs are for convenience
only, are not part of this Agreement and shall not be deemed to
affect the meaning or construction of any of the provisions
hereof. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or
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unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
The obligations of each Debtor are independent of the
obligations of all of the other Debtors. Each Debtor expressly
waives any right to require CIT to proceed against any other
Debtor to proceed against or exhaust any Collateral or any other
security for the Obligations or to pursue any remedy CIT may have
at any time. Each Debtor agrees that CIT may proceed against any
one or more of the Debtors and/or the Collateral in such order
and manner as CIT shall determine in its sole and absolute
discretion. A separate action or actions may be brought and
prosecuted against any one or more of the Debtors whether an
action is brought or prosecuted against any other Debtor or with
respect to any Collateral or whether any other Person shall be
joined in any such action or actions. CIT's rights hereunder and
under any Note shall be reinstated and revived, and the
obligations and liability of each Debtor hereunder and under any
Note shall continue, with respect to any amount at any time paid
on account of the Obligations which thereafter shall be required
to be restored or returned by CIT upon the bankruptcy, insolvency
or reorganization of any Debtor, or otherwise, all as though such
amount had not been paid.
Each Debtor expressly waives any and all defenses now
or hereafter arising or asserted by reason of (i) any disability
or other defense of any other Debtor or with respect to the
Obligations; (ii) the cessation for any cause whatsoever of any
liability of any other Debtor and (iii) any act or omission of
CIT or others that directly or indirectly results in or aids the
discharge or release of any other Debtor or the Obligations or
any Collateral or guaranty therefor by operation of law or
otherwise. Each Debtor agrees that any amounts received by CIT
from whatever source on account of the Obligations may be applied
by CIT toward the payment of such of the Obligations and in such
order of application as CIT may from time to time elect; and,
notwithstanding any payments made by any Debtor, such Debtor
shall have no right of subrogation, reimbursement, exoneration,
indemnity, contribution or any other rights that would result in
such Debtor being deemed a creditor of any other Debtor under the
federal Bankruptcy Code or any other law or for any other purpose
and such Debtor hereby irrevocably waives all such rights, the
right to assert any such rights and any right to enforce any
remedy which CIT now or may hereafter have against any Debtor and
hereby irrevocably waives any benefit of and any right to
participate in, any security now or hereafter held by CIT,
whether any of the foregoing rights arise in equity, at law or by
contract.
Each Debtor represents and warrants to CIT that it has
established adequate means of obtaining from each of the other
Debtors, on a continuing basis, financial and other information
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pertaining to the businesses, operations and condition (financial
and otherwise) of each of the other Debtors and their properties,
and each Debtor now is and hereafter will be completely familiar
with the businesses, operations and condition (financial and
otherwise) of each of the other Debtors and their properties.
Each Debtor hereby expressly waives and relinquishes any duty on
the part of CIT (should any such duty exist) to disclose to any
Debtor any matter, fact or thing related to the businesses,
operations or condition (financial or otherwise) of any Debtor or
their properties, whether now known or hereafter known by CIT.
Each Debtor represents and warrants that each of the
waivers set forth herein are made with each Debtor's full
knowledge of their significance and consequences; and that under
the circumstances the waivers are reasonable. If any of said
waivers are determined to be contrary to any applicable law or
public policy, such waivers shall be effective only to the
maximum extent permitted by law.
THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS
OF THE STATE OF CALIFORNIA. DEBTOR HEREBY IRREVOCABLY CONSENTS
AND AGREES THAT ANY LEGAL ACTION IN CONNECTION WITH THIS
AGREEMENT MAY BE INSTITUTED IN THE COURTS OF THE STATE OF
CALIFORNIA, IN THE COUNTY OF LOS ANGELES OR THE UNITED STATES
COURTS FOR THE CENTRAL DISTRICT OF CALIFORNIA, AS CIT MAY ELECT,
AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, DEBTOR HEREBY
IRREVOCABLY ACCEPTS AND SUBMITS TO, FOR ITSELF AND IN RESPECT OF
ITS PROPERTY, THE NON-EXCLUSIVE JURISDICTION OF ANY SUCH COURT,
AND TO ALL PROCEEDINGS IN SUCH COURTS. DEBTOR AND CIT
ACKNOWLEDGE THAT JURY TRIALS OFTEN ENTAIL ADDITIONAL EXPENSES AND
DELAYS NOT OCCASIONED BY NONJURY TRIALS. DEBTOR AND CIT AGREE
AND STIPULATE THAT A FAIR TRIAL MAY BE HAD BEFORE A STATE OR
FEDERAL JUDGE BY MEANS OF A BENCH TRIAL WITHOUT A JURY. IN VIEW
OF THE FOREGOING, AND AS A SPECIFICALLY NEGOTIATED PROVISION OF
THIS AGREEMENT, DEBTOR AND CIT HEREBY EXPRESSLY WAIVE ANY RIGHT
TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
ARISING UNDER THIS AGREEMENT, OR THE TRANSACTIONS RELATED HERETO,
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING
IN CONTRACT OR TORT OR OTHERWISE; AND DEBTOR AND CIT HEREBY AGREE
AND CONSENT THAT DEBTOR OR CIT MAY FILE AN ORIGINAL COUNTERPART
OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF
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THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered by their duly
authorized officers as of October 6, 1995.
CIT: Debtor:
THE CIT GROUP/EQUIPMENT NATIONAL TECHNICAL SYSTEMS,
FINANCING, INC., a California corporation
a New York corporation
By: /s/ Walter Impey By: /s/ Lloyd Blonder
-------------------------- ----------------------------
Title: Sr. V.P. Regional Mgr. Title: V.P.
----------------------- -------------------------
WISE AND ASSOCIATES, INC.,
a Texas corporation
By: /s/ Lloyd Blonder
----------------------------
Title: V.P.
-------------------------
ACTON ENVIRONMENTAL TESTING
CORPORATION,
a Massachusetts corporation
By: /s/ Lloyd Blonder
----------------------------
Title: V.P.
-------------------------
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Rider A to
Loan and Security Agreement
dated as of October 6, 1995
between The CIT Group/Equipment Financing, Inc. ("CIT"),
National Technical Systems, a California corporation,
Wise and Associates, Inc., a Texas corporation and
Acton Environmental Testing Corporation,
a Massachusetts corporation (collectively, "Debtor").
1. DEFINITIONS. As used in the Loan and Security
Agreement, the following terms shall have the following defined
meanings (applicable to both singular and plural forms), unless
the context otherwise requires:
"AGREEMENT" "hereof", "hereto", "hereunder" and words
of similar meaning: the Loan and Security Agreement of even
date herewith between Debtor and CIT including this Rider A
and any other rider, schedule and exhibit executed by Debtor
and CIT in connection herewith, as from time to time
amended, modified or supplemented.
"BUSINESS DAY": a day other than a Saturday, Sunday or
legal holiday under the laws of the State of California.
"CLOSING DATE": each date on which a Loan is made.
"CODE": the Uniform Commercial Code as from time to
time in effect in any applicable jurisdiction.
"COLLATERAL": the Equipment and the Proceeds thereof.
"COMMITMENT": CIT's obligation to make Loans in the
aggregate principal amount stated in paragraph 2 of this
Rider A.
"COST": (A) with respect to any item of new Equipment,
the lesser of (i) the seller's invoiced purchase price
therefor (after giving effect to any discount or other
reduction) payable by the applicable Debtor, or (ii) two
times the orderly liquidation value of such new Equipment
(based on a desk top appraisal), and (B) with respect to any
item of used Equipment, the fair market value of such used
Equipment, as determined by CIT. The Cost shall be set
forth in the applicable Supplement.
"DEFAULT": any event which with notice, lapse of time,
or both would constitute an Event of Default.
"EQUIPMENT": any and all items of property which are
listed on Supplements, together with all now owned or
hereafter acquired accessories, parts, repairs,
replacements, substitutions, attachments, modifications,
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additions, improvements, upgrades and accessions of, to or
upon such items of property.
"ENVIRONMENTAL LAWS": the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, any so-called "Superfund" or
"Superlien" law, the Toxic Substances Control Act, or any
other federal, state or local statute, law, ordinance, code,
rule, regulation, order or decree regulating, relating to,
or imposing liability or standards of conduct concerning,
any hazardous, toxic or dangerous waste, substance or
material, as now or at any time hereafter in effect.
"EVENT OF DEFAULT": as set forth in Section 6 of
the Agreement.
"EVENT OF LOSS": with respect to any item of
Equipment, (i) the actual or constructive loss or loss of
use thereof, due to theft, destruction, damage beyond repair
or to an extent which makes repair uneconomical, or (ii) the
condemnation, confiscation or seizure thereof, or
requisition of title thereto, or use thereof, by any Person.
"GUARANTOR": any and all guarantors of Debtors'
Obligations under the Agreement and the Notes, specifically
including National Technical Systems, Inc., a Delaware
corporation ("NTS").
"GUARANTY": an agreement, in form and substance
satisfactory to CIT, made by each Guarantor in favor of CIT
guaranteeing the payment and performance of any and all
Obligations.
"HAZARDOUS MATERIALS": any pollutant or contaminant
defined as such in (or for the purposes of) any
Environmental Laws including, but not limited to, petroleum,
any radioactive material, and asbestos in any form or
condition.
"INSTALLMENT PAYMENT DATE": with respect to any Note,
each date on which a regular installment of principal is
due.
"INTEREST RATE": as set forth in paragraph 3 of this
Rider A.
"LATE CHARGE RATE": a rate per annum equal to the
higher of 3% over the applicable Interest Rate or 14%, but
not to exceed the highest rate permitted by applicable law.
"LIENS": liens, mortgages, security interests,
financing statements or other encumbrances of any kind
whatsoever.
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"LOAN": each loan made pursuant to the Agreement.
"NOTE": each promissory note executed and delivered by
Debtor pursuant hereto, satisfactory in form and substance
to CIT.
"NTS": National Technical Systems, Inc., a Delaware
corporation.
"OBLIGATIONS": all indebtedness, obligations,
liabilities and performance of Debtor to CIT, now existing
or hereafter incurred under, arising out of, or in
connection with, the Agreement or any Note; and any and all
other present and future indebtedness, obligations,
liabilities and performance of any kind whatsoever of Debtor
to CIT, whether direct or indirect, joint or several,
absolute or contingent, liquidated or unliquidated, secured
or unsecured, matured or unmatured and whether originally
contracted with CIT or otherwise acquired by CIT.
"PARENT COMPANY": any Person having beneficial
ownership (directly or indirectly) of 25% or more of
Debtor's shares of voting stock.
"PERSON": an individual, partnership, corporation,
trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"PREPAYMENT PERCENTAGE": on the date of the required
prepayment of any Note pursuant to the Agreement, the
product obtained by multiplying 5% by a fraction, the
numerator of which is the number of Installment Payment
Dates remaining as of the date of prepayment (including the
Installment Payment Date, if any, on which prepayment is
made) and the denominator of which is the total number of
Installment Payment Dates.
"PROCEEDS": the meaning assigned to it in the Code,
and in any event, including, without limitation, (i) any and
all proceeds of any insurance, indemnity, warranty or
guaranty payable to Debtor from time to time with respect to
any of the Equipment; (ii) any and all payments made, or due
and payable from time to time, in connection with any
requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Equipment by any
Person; (iii) any and all accounts arising out of, or
chattel paper evidencing a lease of, any of the Equipment;
and (iv) any and all other rents or profits or other amounts
from time to time paid or payable in connection with any of
the Equipment.
"PROHIBITED TRANSACTION": a transaction in which:
(i) Debtor enters into any transaction of merger or
consolidation where (x) it shall not be the surviving
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corporation or (y) if it is the surviving corporation, after
giving effect to such merger or consolidation its tangible
net worth does not equal or exceed that which existed prior
to such merger or consolidation; or (ii) Debtor sells,
transfers or otherwise disposes of all or any substantial
part of its assets; or (iii) any Person, or group of Persons
acting together, becomes or agrees to become the beneficial
owner (directly or indirectly) of 25% or more of Debtor's or
any Parent Company's shares of voting stock (excluding
current shareholders as of the date of this Agreement owning
25% or more of Debtor's or any Parent Company's shares of
voting stock).
"PROHIBITED TRANSACTION FEE": on the date of the
required prepayment of the Notes pursuant to the provisions
of paragraph 4(b) of this Rider A, the product obtained by
multiplying 5% by a fraction, the numerator of which is the
number of Installment Payment Dates remaining as of the date
of prepayment (including the Installment Payment Date, if
any, on which prepayment is made) and the denominator of
which is the total number of Installment Payment Dates.
"SUPPLEMENT": each supplement executed and delivered
by Debtor pursuant hereto, satisfactory in form and
substance to CIT.
"TREASURY RATE": with respect to any Loan made
hereunder, the rate per annum. equal to the yield to
maturity for the U.S. Treasury Security having a remaining
term to maturity closest to 3 years as at (and shall be
fixed as of) the close of business on the third Business Day
prior to the making of such Loan as reported on page 5
("U.S. Treasury and Money Markets") of the information
ordinarily provided by Telerate Systems Incorporated.
2. LOAN AND COMMITMENT. The aggregate principal
amount of all Loans shall not exceed $1,500,000. Each Loan shall
be in a principal amount of not less than $200,000 and shall not
exceed the amount of the Cost for the Equipment to be acquired
with the proceeds of such Loan. No Loan shall have a term in
excess of 60 months. CIT's Commitment shall terminate on
August 4, 1996.
3. INTEREST RATE. The interest rate per annum on the
unpaid principal amount of each Loan shall be equal to the
Treasury Rate plus 2.96%.
4. PREPAYMENT.
(a) Should any item of Equipment suffer an Event of
Loss, Debtor shall make a prepayment on the corresponding
Note within 30 days thereafter. The amount to be prepaid
shall be (i) the unpaid principal amount of such Note
multiplied by a fraction the numerator of which is the Cost
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of the item of Equipment which suffered the Event of Loss
and the denominator of which is the original principal
amount of the Note less the Cost of each item of Equipment
which previously suffered an Event of Loss or for which a
prepayment has otherwise previously been made (the "Prepaid
Principal Amount"), (ii) all other amounts then due and
owing hereunder and under the Notes and (iii) an amount
equal to the product of the Prepayment Percentage and the
Prepaid Principal Amount.
(b) A Prohibited Transaction may be consummated only
with CIT's prior written consent. Not less than twenty (20)
Business Days prior to the date the proposed Prohibited
Transaction is expected to be consummated, Debtor shall give
CIT written notice of the proposed Prohibited Transaction.
In the event CIT does not consent to the Prohibited
Transaction and the Prohibited Transaction is nonetheless to
be consummated, Debtor shall, on or prior to the date the
Prohibited Transaction is to be consummated, prepay the
outstanding principal under all Notes together with (1) all
interest accrued thereon, (2) all other amounts then due and
owing hereunder and under the Notes, and (3) an amount equal
to the product of the Prohibited Transaction Fee and the
outstanding principal amount of the Notes.
(c) Debtor may not, except as provided in Section 4(a)
above, prepay any Note during the first 30 months from the
date of such Note. Thereafter, on any Installment Payment
Date, Debtor may, at its option, on at least 30 days' prior
written notice to CIT, prepay all, but not less than all, of
the outstanding principal under such Note together with
(i) all interest accrued thereon to the date of prepayment,
(ii) all other amounts then due and owing hereunder or under
such Note, and (iii) an amount equal to 5% of the then
outstanding principal under such Note, such percentage, as
of the 30th month, to decline ratably over the remaining
term of such Note.
(d) Except as provided in (a), (b) or (c) of this
paragraph 4, the Note may not be prepaid in whole or in
part.
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5. ADDRESSES FOR NOTICE PURPOSES AND DEBTORS' CHIEF EXECUTIVE
OFFICES.
CIT: Debtor:
The CIT Group/ National Technical Systems
Equipment Financing, Inc. Wise and Associates, Inc.
Acton Environmental Testing
Corporation
c/o National Technical Systems, Inc.
Address: Address:
1211 Avenue of the Americas 24007 Ventura Boulevard
21st Floor Calabasas, California 91302
New York, New York 10036
Telecopier No. (212) 536-1385 Telecopier No. (818) 591-0899
Attention: Senior Vice Attention: Chief Financial Officer
President/Credit
6. COMMITMENT FEE. CIT acknowledges receipt from Debtor
of a commitment fee in the amount of $10,000 (the "Commitment Fee").
CIT agrees, however, to refund to Debtor the Commitment Fee, net of
any out-of-pocket fees, costs, disbursements or expenses incurred by
CIT in connection with the closing of this transaction, on a calendar
quarterly basis proportionate to the borrowing of the first $750,000
(for example, if Debtor, as of December 31, 1995 has obtained $375,000
in Loans, half of the Commitment Fee will be remitted to Debtor (less
the above-referenced expenses) and if by March 30, 1996, $750,000 in
Loans have been borrowed, the entire remaining Commitment Fee shall be
remitted (less the above-referenced expenses)). In the event no Loan
is made hereunder, CIT shall retain the entire Commitment Fee.
7. FINANCIAL COVENANTS. Debtor agrees that so long as any
Note remains outstanding and unpaid, (a) NTS shall not, directly or
indirectly, permit its consolidated ratio of Total Liabilities divided
by Tangible Net Worth to be greater than 1.50:1 (Total Liabilities
shall be defined according to GAAP and Tangible Net Worth shall be
defined as total stockholders' equity less the sum of all intangible
assets and all outstanding notes receivable due from officers,
affiliates and shareholders); (b) NTS shall not, directly or
indirectly, permit its Debt Coverage Ratio, defined as the sum of net
income plus depreciation and amortization less dividends and
nonrecurring income in the prior four quarters divided by the sum of
the current portion of long term debt and capitalized leases due in
the following four quarters, to be less than 1.30:1; and (c) NTS shall
at all times maintain in full force and effect, a working capital
borrowing facility of $5,000,000 or more.
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THE PROVISIONS SET FORTH IN THIS RIDER A ARE INCORPORATED IN AND MADE
A PART OF THE LOAN AND SECURITY AGREEMENT BETWEEN CIT AND DEBTOR DATED
AS OF OCTOBER 6, 1995.
CIT: Debtor:
THE CIT GROUP/EQUIPMENT NATIONAL TECHNICAL SYSTEMS,
FINANCING, INC., a New York a California corporation
corporation
By: /s/ Walter Impey By: /s/ Lloyd Blonder
-------------------------- ----------------------------
Title: Sr. V.P. Regional Mgr. Title: V.P.
----------------------- -------------------------
WISE AND ASSOCIATES, INC.,
a Texas corporation
By: /s/ Lloyd Blonder
----------------------------
Title: V.P.
-------------------------
ACTON ENVIRONMENTAL TESTING
CORPORATION,
a Massachusetts corporation
By: /s/ Lloyd Blonder
----------------------------
Title: V.P.
-------------------------
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EXHIBIT 21
NATIONAL TECHNICAL SYSTEMS, INC.
LIST OF SUBSIDIARIES
National Technical Systems, a California Corp.
Acton Environmental Testing Corporation, a Massachusetts Corp.
Approved Engineering Test Laboratories, Inc., a California Corp.
ETCR Inc., a California Corp.
NTS Products, a California Corp.
S&W Technical Services, Inc., a Florida Corp.
Wise and Associates, Inc., a Texas Corp.
PECS (QA) North America, Inc. formerly
NTS Registration Services, Inc., a Massachusetts Corp.
National Quality Assurance - USA, Inc., a Massachusetts Corp.
(50% owned at January 31, 1996 and 1995)
Page 70 of 76
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 2-83778 and Form S-8 No. 33-48211) pertaining
to the National Technical Systems, Inc. Employee Stock Ownership Plan
and the National Technical Systems, Inc. 1988 Stock Option Plan in the
related Prospectus of our report dated April 12, 1996, with respect to
the consolidated financial statements of National Technical Systems,
Inc. and Subsidiaries included in the Annual Report (Form 10-K) for
the year ended January 31, 1996.
/s/ Ernst & Young LLP
Woodland Hills, California
April 26, 1996
Page 71 of 76
EXHIBIT 99.1
TO BE INCORPORATED BY REFERENCE INTO FORM S-8
REGISTRATION STATEMENT NO. 33-48211
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represents a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purposes of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) EMPLOYEE PLANS ON FORM S-8.
(1) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus to each employee to whom the
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prospectus is sent or given a copy of the registrant's annual report
to stockholders for its last fiscal year, unless such employee
otherwise has received a copy of such report, in which case the
registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of
the employee. If the last fiscal year of the registrant has ended
within 120 days prior to the use of the prospectus, the annual report
of the registrant for the preceding fiscal year may be so delivered,
but within such 120 day period the annual report for the last fiscal
year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or
cause to be transmitted to all employees participating in the plan who
do not otherwise receive such material as stockholders, copies of all
reports, proxy statements and other communications distributed to its
stockholders generally.
(3) Where interests in a plan are registered herewith, the
undersigned registrant and plan hereby undertake to transmit or cause
to be transmitted promptly, without charge, to any participant in the
plan who makes a written request; a copy of the then latest annual
report of the plan filed pursuant to section 15(d) of the Securities
Exchange Act of 1934 (Form 11-K). If such report is filed separately
on Form 11-K, such form shall be delivered upon written request. If
such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered
upon written request. If such report is filed as a part of the
registrant's annual report to stockholders delivered upon written
request. If such report is filed as a part of the registrant's annual
report to stockholders delivered upon written request. If such report
is filed as a part of the registrant's annual report to stockholders
delivered pursuant to paragraph 91) or (2) of this undertaking,
additional delivery shall be required.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Exhibit 99.1
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EXHIBIT 99.2
TO BE INCORPORATED BY REFERENCE INTO FORM S-8
REGISTRATION STATEMENT NO. 2-83778
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represents a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purposes of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) EMPLOYEE PLANS ON FORM S-8.
(1) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus to each employee to whom the
prospectus is sent or given a copy of the registrant's annual report
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Page 74 of 76
to stockholders for its last fiscal year, unless such employee
otherwise has received a copy of such report, in which case the
registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of
the employee. If the last fiscal year of the registrant has ended
within 120 days prior to the use of the prospectus, the annual report
of the registrant for the preceding fiscal year may be so delivered,
but within such 120 day period the annual report for the last fiscal
year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or
cause to be transmitted to all employees participating in the plan who
do not otherwise receive such material as stockholders, copies of all
reports, proxy statements and other communications distributed to its
stockholders generally.
(3) Where interests in a plan are registered herewith, the
undersigned registrant and plan hereby undertake to transmit or cause
to be transmitted promptly, without charge, to any participant in the
plan who makes a written request; a copy of the then latest annual
report of the plan filed pursuant to section 15(d) of the Securities
Exchange Act of 1934 (Form 11-K). If such report is filed separately
on Form 11-K, such form shall be delivered upon written request. If
such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered
upon written request. If such report is filed as a part of the
registrant's annual report to stockholders delivered upon written
request. If such report is filed as a part of the registrant's annual
report to stockholders delivered upon written request. If such report
is filed as a part of the registrant's annual report to stockholders
delivered pursuant to paragraph 91) or (2) of this undertaking,
additional delivery shall be required.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Exhibit 99.2
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