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[June 11, 2013]
NATIONAL TECHNICAL SYSTEMS INC /CA/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Except for the historical information contained herein, the matters addressed in this Item 2 contain forward-looking statements. These forward-looking statements involve risks and uncertainties, including those described in the Company's Annual Report on Form 10-K, filed with the Security and Exchanges Commission April 30, 2013. Actual results, events and performance may differ materially from those anticipated in the forward looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. See the note at the beginning of this report.
General National Technical Systems, Inc. ("NTS" or the "Company") is the leading independent provider of testing, inspection and certification services ("TIC") in the United States, serving numerous attractive and growing end markets. During its more than 50 years in the business, the Company has built the dominant testing platform in the country, with no close second. NTS' expansive geographic presence, experienced sales force, deep client relationships, breadth of capabilities and continuous innovation are unmatched by any competitor, making the Company a unique one-stop resource to meet its clients' demanding and evolving requirements. NTS is accredited by numerous national and international technical organizations which allow the Company to have its test data accepted in most countries.
NTS serves customers primarily in the civil aviation and space, defense, telecommunications, automotive, energy, consumer products, commercial and industrial products and medical markets. The Company operates facilities throughout the United States and in Japan, Vietnam and Germany.
The following discussion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the year ended January 31, 2013 and the consolidated quarterly financial statements and notes thereto contained in this report. All information in this report is based upon unaudited operating results of the Company for the three-month periods ended April 30, 2013 and 2012.
Markets Civil Aviation and Space NTS offers integrated life cycle product services to the civil aviation and space market. These services include engineering, testing, certification, and supply chain management. From concept development and design, through, certification, production and in-service life, NTS provides support throughout the full life cycle of the product. These integrated services fill the capability gaps that have developed in the aerospace supply chains after years of large scale integration, outsourcing and globalization.
NTS designs, builds, and integrates custom test, measurement, automation and data acquisition and control systems for the aerospace industry. These systems integrate diverse hardware platforms, operating systems and instrumentation standards.
Testing services include providing a wide range of test capabilities for space and aircraft vehicles. NTS has extensive capability and expertise in static and fatigue testing, sonic fatigue, vibration, modal, ground vibration, high pressure/high flow air and fluid compatibility. Airborne equipment testing spans the full range of RTCA DO-160 requirements, including static and dynamic, electromagnetic effects (EME, EMI, EMC), electrostatic discharge (ESD), environmental, material and system compatibility, high intensity radiated field (HIRF), direct and indirect lightning effects and highly accelerated life testing/stress screening (HALT/HASS).
NTS' engineering services consist of design and analysis of aerospace structures, systems, components and detailed parts as part of clients' design teams or as a fixed-price work package. Specific capabilities include engineering program management, managed engineering services (on-site management of client engineering teams), design engineering, analysis, test engineering, test system engineering, failure forensics and expert witnessing.
NTS also provides engineering services related to the design, development, testing and integration of pods and payloads for unmanned systems. These services have expanded from airborne platforms into ground, sea (surface and subsurface), and robotic platforms. NTS has conducted test programs for unmanned aerial systems (UAS) components, systems, payloads and completely integrated air vehicles. NTS is actively engaged in a variety of unmanned system test programs, and has performed environmental, vibration and EMI testing on a number of UAS systems.
10 -------------------------------------------------------------------------------- Table of Contents Certification and supply chain management services span a wide range of development, oversight, and registration activities including product inspection, production monitoring and expediting, test witnessing and support, corrective action follow-up, supplier surveillance, sub-tier supplier management, new supplier surveys, systems evaluations and audits (including special processes), development of quality assurance protocols, supplier development and improvement, quality management system audit, certification and registration.
NTS plays an active role in numerous U.S. defense-related programs, performing a wide variety of defense technology research, development, test, and evaluation (RDT&E) services for the Department of Defense (DOD), military and governmental agencies. These services evaluate the weapons, ordnance, munitions, avionics, electronics, hydraulic and pneumatic controls, engines and communication systems that make up the elements of today's modern warfare. The Company's testing platforms for the defense industry include fixed wing aircraft, helicopters, submarines, aircraft carriers and other naval ships, tanks and other tracked vehicles, trucks and road vehicles, command, control and communication systems and missiles and weapons systems. Testing includes associated system and component level tests of structures, hardware, electronics, personal protective equipment, armor, weapons and ammunition.
NTS has facilities that are specially constructed to store, handle, and test ordnance, munitions and hazardous materials. Routine testing includes live fire, function, environmental, dynamics, safety, MIL-STD-901 shipboard shock, insensitive munitions, hazard classification, transportation and packaging safety. These tests are done for prototype, developmental, qualification and production/lot acceptance testing. Multiple NTS facilities around the country provide 200 v/m up to 40 GHz EMI/EMC testing of electronic and communications equipment. Custom designed NTS data acquisition systems are capable of collecting data at speeds of 2,000,000 data points per second and digital photography capability of over 160,000 color photos per second.
NTS' defense group provides energetic and prototype engineering services, including 2D and 3D CAD modeling; technical data package development and modification; finite element analysis, projectile design and analysis; interior and exterior ballistics analysis, and design and development of custom test hardware and fixtures. Other services include support, procurement and delivery of precision metal parts and explosive loading of prototype hardware. Additional defense services include design, development, fabrication, and fielding of specialized high speed instrumentation and diagnostics for energetics and hazardous materials and ordnance testing. This includes custom sensor suite design, fabrication and deployment, often through specialized test facility design.
NTS provides engineering design, test evaluation and certification services for manufacturers of a broad array of telecommunications networking and storage equipment intended for commercial data centers, central/telecom offices and client premise environments. The Company's services are performed in accordance with domestic and international regulatory standards, the network equipment building systems (NEBS) specifications, as required by the telecommunications industry. Globally, NTS represents the largest network of independent test laboratories (ITL) certified and recognized by most regional bell operating companies' (RBOCs) carriers. The Company is also certified and accredited to support formal witness testing on behalf of the RBOC carriers at approved manufacturer's internal test facilities. As the wireless telecom industry continues to see significant growth globally, the need for engineering design, testing evaluation and certification services for faster and more robust backhaul networking equipment will continue to increase. The Company is well positioned to support this accelerated growth currently providing accredited ITL services at laboratories in California, Massachusetts, New Jersey, Texas and Germany.
NTS supports the commercial and military vehicle industries with testing, including dynamometer operations on power train components, vibration and shock on mechanical and electrical assemblies, thermal and corrosion exposures on control and monitoring systems, pressure pulsing and burst on fluid handling items and fatigue and ultimate strength on mechanical components. NTS performs testing to support requirements in emerging markets of pure electric vehicles and electric hybrid vehicles. This includes electric motors, integrated motor/transmissions, specialized high speed transmissions, batteries and control/distribution modules. It also performs highly accelerated life tests (HALT) and highly accelerated stress screen (HASS). These tests combine extremes of temperature, rapid temperature change, and multi-axis vibration to rapidly expose design weaknesses and process flaws. NTS is accredited to ISO 17025 through the American Accreditation of Laboratories Association (A2LA). This accreditation allows NTS automotive test reports to be accepted throughout the U.S. and internationally.
11 -------------------------------------------------------------------------------- Table of Contents Energy.
NTS offers multi-disciplinary expertise and capabilities to provide smart solutions to complex engineering, and scientific problems in the areas of nuclear energy, renewable energy, energy storage and smart grid. The services provided are: · Technical functional knowledge of engineering fundamentals: mechanical, structural, electrical, reliability, and high technology communication and security software system test and monitoring solutions.
· Testing on a variety of smart energy/smart grid products with a focus on the communications functionality and network protocols of smart meters, smart outlets, thermostats/in-home displays and smart appliances. · Supply chain management focusing on assuring product integrity through quality process and product auditing, supplier improvement plans, and management of quality systems.
· Multi-disciplinary expertise in global compliance and certification for components, devices, communication products, software/hardware interoperability, and system security vulnerability assessments and validation.
· Seismic, environmental, EMI, radiation, equipment qualification, commercial grade dedication, mechanical aging, thermal aging, vacuum testing, leak detection, and high expansion line breaks. Seismic and vibration simulation tests conducted on our single axis, dependent biaxial systems, or independent tri-axial and electro-mechanical shaker tables are used for a variety of client products. · Certification and evaluation services to nuclear utilities and suppliers worldwide.
· A full range of products, engineering and testing services under our NUPIC and NIAC audited 10CFR50, Appendix B quality program.
NTS provides engineering design, test evaluation and domestic and international certification services to manufacturers of a broad array of consumer products normally procured for use in a residence, school or recreation environment. This typically includes personal computing, PC peripheral, residential networking and personal wireless devices. These products are subjected to a wide range of electromagnetic compatibility, product safety, reliability, usability and interoperability tests and certifications to assure market compliance, reliability and effective use. The Company has been approved as an exclusive independent test laboratory (ITL) to offer internet TV set-top box multimedia over coax (MoCA) certification. The Company is the exclusive certifications provider for the Sirius/XM radio ready program and holds a number of domestic and international test accreditations throughout its network of commercial laboratories. NTS is an accredited telecommunication certification body (TCB) in North America and an appointed notified body for wireless devices in the European Union. With the increased integration of wireless technology into traditional consumer products, the dramatic population growth, income gains, global macroeconomic shifts and the urbanization in regions throughout Asia, Central and South America and Africa, NTS is well positioned to support the growing market spaces to which manufacturers are seeking to sell. The Company's service offerings offer a 'one-stop-shop' to the consumer product market, ensuring a shorter time to market in the fierce 'to market' race manufacturers find themselves competing within.
Commercial & Industrial.
NTS provides engineering design, test evaluation and domestic and international certification services to manufacturers of a broad array of commercial and industrial products normally procured for light and heavy industrial applications. This covers a wide range of industries from shipbuilding, semiconductor manufacturing equipment, automation, robotics, laboratory and materials handling devices. Various types of commercial grade electronic, hydraulic and pneumatic systems are subjected to electrical, environmental and safety testing to ensure regulatory compliance and safe and reliable use. Special combined mechanical and environmental testing processes, such as highly accelerated life testing (HALT), are used to accelerate the effects of aging and wear to allow manufacturers to produce a more reliable product. Once this has been accomplished, similar highly accelerated stress screening (HASS) testing can be used to ensure consistent quality on the production line. Market trends are showing increased integration of Wireless Local Area Network (WLAN) and Wide Wireless Access Network (WWAN) communication technologies in such product lines.
12 -------------------------------------------------------------------------------- Table of Contents Medical.
NTS provides engineering design, testing evaluation and domestic and international certification services to manufacturers of a broad array of medical products typically including non-invasive devices. Services are limited to include electromagnetic compatibility, electrical product safety and quality control/risk analysis consultation. Through various industry partnerships, the Company has affiliations with consultants and notified bodies to support medical approval in North America and throughout the European Union. With the increased integration of wireless communications into traditional medical device products, NTS is also well equipped to support domestic and international testing and approvals.
Growth Strategy NTS' growth strategy is to provide significant focus on corporate development activities within the mid-to longer-term time horizon, while continuing to drive efficiencies and market penetration within the shorter-term fiscal planning time horizon.
NTS' strategies for continued growth include: · increasing market share through leveraging its geographic reach and providing superior service that distinguishes it from its competition; · investing in human and capital resources to strengthen existing capabilities; · enhancing utilization of resources; · adding new, innovative service offerings to the Company's repertoire; · continuing to seek, evaluate and acquire companies that can add significant value upon integration with NTS; and · continuing to integrate companies recently acquired.
Recent Developments Consolidated revenues for the three months ended April 30, 2013, were $45,017,000, an increase of $1,564,000 or 3.6% over the same period last year.
The majority of this increase came from organic growth particularly in the civil aviation and space and energy markets, partially offset by a decrease in defense. The increased revenues combined with prudent cost controls resulted in net income for the period of $1,616,000.
Unaudited Results of Operations for the Three Months Ended April 30, 2013 Revenues REVENUES Three months ended April 30, 2013 2012 % Change (Dollars in thousands) Total revenues $ 45,017 $ 43,453 3.6 % For the three months ended April 30, 2013, consolidated revenues increased by $1,564,000 or 3.6% when compared to the same period in fiscal year 2013.
Organic growth (revenues from businesses owned throughout both reporting periods) accounted for the majority of the increase and was primarily related to an increase in the civil aviation and space and energy markets, partially offset by a decrease in defense.
Gross Profit GROSS PROFIT Three months ended April 30, 2013 2012 % Change (Dollars in thousands) Total $ 13,530 $ 11,321 19.5 % Gross profit for the three months ended April 30, 2013 increased by $2,209,000 or 19.5% when compared to the same period in fiscal 2013. This increase in gross profit was primarily due to the higher volume, price increases and project mix.
Approximately $700,000 of support-related expenses were included in cost of sales in the first quarter of the prior year, which due to the centralization of administrative functions that began in the current quarter is recorded to SG&A in the current quarter. Gross profit as a percentage of revenue, or gross margin, increased from 26.1% to 30.1%.
13 -------------------------------------------------------------------------------- Table of Contents Selling, General & Administrative SELLING, GENERAL & ADMINISTRATIVE Three months ended April 30, 2013 2012 % Change (Dollars in thousands) Total $ 10,039 $ 8,412 19.3 % % to total revenues 22.3 % 19.4 % Total selling, general and administrative expenses increased by $1,627,000 or 19.3% for the three months ended April 30, 2013 when compared to the same period in fiscal 2013. With the centralization of administrative functions which began in the current quarter almost complete, SG&A expense for the first quarter of fiscal year 2014 has approximately $700,000 of support-related and other administrative expenses that were included in cost of sales in the earlier quarters. Additionally, the year-over-year increase in SG&A was also impacted by higher compensation and incentive-related expense, especially in the sales and marketing areas where the Company has expanded its resources to access growing market opportunities, and higher stock-based compensation expense.
Operating Income OPERATING INCOME Three months ended April 30, 2013 2012 % Change (Dollars in thousands) Total $ 3,459 $ 2,896 19.4 % % to total revenues 7.7 % 6.7 % Operating income for the three months ended April 30, 2013 increased by $563,000 or 19.4% when compared to the same period in fiscal 2013, primarily as a result of the increase in gross profit, partially offset by the increase in selling, general and administrative expense.
Interest Expense Net interest expense decreased by $86,000 to $791,000 in the three months ended April 30, 2013 when compared to the same period in fiscal 2013. The decrease was due to lower debt balances in the current quarter.
Other Income Other income was $14,000 for the three months ended April 30, 2013, consisting of various minor transactions.
Income Taxes The income tax provision rate for the three months ended April 30, 2013 was 39.7% compared to 40.7% for the same period in the prior year. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities. The Company analyzes the value of the deferred income tax asset quarterly.
Net Income Net income for the three months ended April 30, 2013 was $1,616,000 compared to $1,222,000 for the same period in fiscal 2013. This increase was primarily due to higher operating income, partially offset by higher income taxes.
14 -------------------------------------------------------------------------------- Table of Contents For the three months ended April 30, 2013, net income attributable to noncontrolling interests was $185,000 compared to $268,000 in the prior year, a decrease of $83,000 or 31.0%. The decrease was due to the Company's purchase of the 49.9% minority interest of Unitek Technical Services, a consolidated subsidiary, on November 8, 2012. Income related to Unitek is no longer included in noncontrolling interests.
Net income attributable to NTS for the three months ended April 30, 2013 was $1,431,000 compared to $954,000 for the same period in fiscal 2013. This increase was primarily due to higher net income and the decrease in net income attributable to noncontrolling interests.
Adjusted EBITDA EBITDA (earnings before interest, taxes, depreciation and amortization) as adjusted to remove the effect of share based compensation expense or "adjusted EBITDA", was $6,659,000 for the first three months of fiscal year 2014 compared to $5,518,000 in the same period for the prior year.
Management uses adjusted EBITDA to evaluate the Company's core operations without reference to the impact of interest and tax payments resulting from its capital structure and tax jurisdictions, or depreciation and amortization which can fluctuate based on acquisition activity. The Company's senior credit facility also includes covenants related to adjusted EBITDA.
Adjusted EBITDA is a non-GAAP financial measure. The Company calculates adjusted EBITDA by taking net income, and adding back the expenses related to interest, taxes, depreciation, amortization, share based compensation expense and non-cash impairment loss, as each of those elements are calculated in accordance with GAAP. A reconciliation of the Company's adjusted EBITDA to net income for the three months ended April 30, 2013 and 2012 is included in the table below.
(Dollars in thousands) Three months ended April 30, 2013 2012 Net Income $ 1,616 $ 1,222 Add Interest 791 877 Taxes 1,066 833 Depreciation 2,088 1,931 Amortization 510 503 EBITDA 6,071 5,366 Add Share based compensation 588 152 Adjusted EBITDA $ 6,659 $ 5,518 Off Balance Sheet Arrangements None.
Liquidity and Capital Resources Liquidity 15 -------------------------------------------------------------------------------- Table of Contents A summary of key balance sheet items affecting liquidity at April 30, 2013 and January 31, 2013 is as follows: (Dollars in thousands) April 30, 2013 January 31, 2013 Cash and cash equivalents $ 7,971 $ 8,875 Investments $ 3,441 $ 3,410 Accounts receivable $ 36,082 $ 33,573 Unbilled receivable $ 8,567 $ 8,073 Working capital $ 32,464 $ 33,338 A summary of cash flows at April 30, 2013 and January 31, 2013 is as follows: (Dollars in thousands) January 31, April 30, 2013 2013 Change Net cash provided by operating activities $ 4,195 $ 206 $ 3,989 Net cash used in investing activities (1,406 ) (4,641 ) 3,235 Net cash (used) provided by financing activities (3,653 ) 5,007 (8,660 ) Effect of exchange rate changes on cash (40 ) 121 (161 ) Net (decrease) increase in cash and cash equivalents $ (904 ) $ 693 $ (1,597 ) Net cash provided by operating activities was $4.2 million in the three months ended April 30, 2013 and primarily consisted of net income of $1.6 million, depreciation and amortization of $2.6 million, share-based compensation of $588,000 and allowance for doubtful accounts of $403,000, offset by changes in working capital.
Net cash used in investing activities in the three months ended April 30, 2013 was $1.4 million, which was related to capital expenditures.
Net cash used by financing activities in the three months ended April 30, 2013 was $3.7 million and consisted of net repayments of long-term debt.
Capital Resources At April 30, 2013, the Company had cash and cash equivalents of $8.0 million and working capital of $32.5 million. In addition to its cash and cash generated from operations, the Company has a $65 million senior credit facility, including a $25 million revolving credit line, that is described in more detail under "Long-term Debt" below.
Under the revolving credit line the Company can borrow up to 85% of eligible accounts receivable. At April 30, 2013, 85% of eligible accounts receivable was $23,419,000 and the amount of available credit under the revolving credit line on that date was $17,419,000.
The term loan and the acquisition line have been fully utilized as of April 30, 2013 and the Company is making periodic payments as required by the credit facility.
Long-term Debt The Company has a senior credit facility of up to $65 million from a banking group led by Comerica Bank that includes Bank of the West and U.S. Bank. The credit facility includes a $20 million term loan, a $25 million revolving credit line and a $20 million acquisition line. Interest rates under the credit agreement are at either LIBOR plus a range of 175 to 275 basis points, or at Comerica Bank's prime rate plus a range of 75 to 175 basis points. Commitment fees on the revolving credit line and acquisition line are 25 basis points and 35 basis points, respectively.
On June 27, 2011, the Company completed a $14 million private placement of debt and equity with Mill Road Capital (MRC). Of the $14 million, $7 million was in the form of an interest-bearing, five-year subordinated note.
16-------------------------------------------------------------------------------- Table of Contents Long-term Debt as of April 30, 2013 and January 31, 2013 consisted of the following: April 30, 2013 January 31, 2013 Revolving credit line (a) $ 6,000,000 $ 8,500,000 Term loan (b) 13,800,000 14,300,000 Acquisition and equipment credit line (c) 18,062,000 18,447,000 Mill Road debt (d) 7,143,000 6,983,000 Secured and other notes payable (e) 5,282,000 5,721,000 Subtotal 50,287,000 53,951,000 Less current installments 5,804,000 5,572,000 Total $ 44,483,000 $ 48,379,000 (a) The Company is required to repay the outstanding principal under the revolving credit line on November 10, 2015. Interest accrues at the Company's option at either (i) the Base Rate plus a specified margin ranging between 75 and 150 basis points depending on the Company's consolidated total debt to consolidated EBITDA ratio or (ii) the Eurodollar Rate plus a specified margin ranging between 175 and 250 basis points depending on the Company's consolidated total debt to consolidated EBITDA ratio. When interest is incurred at the Base Rate, interest is payable monthly in arrears on the first day of each month. When interest is incurred at the Eurodollar Rate, interest is payable at the end of each interest period, which is defined as one, two, three or six months after the applicable advance is disbursed to the Company (except that with respect to six month interest periods, interest is payable at three month intervals). The outstanding balance from revolving credit lines at April 30, 2013 was $6,000,000. The revolving credit line is limited to 85% of eligible accounts receivable, which equates to $23,419,000 as of April 30, 2013. The available amount on the revolving credit line was $17,419,000 as of April 30, 2013.
(b) The Company is required to repay the $20 million five-year term loan in equal quarterly principal installments of $500,000 commencing on February 1, 2011 until November 10, 2015, the maturity date, when all remaining outstanding principal plus accrued interest thereon is due and payable in full. Interest accrues at a specified margin plus either: (i) the greatest of (a) the prime rate announced by Comerica Bank, (b) the federal funds effective rate as published by the Federal Reserve Bank of New York plus 1.0%, and (c) a daily adjusting LIBOR rate plus 1.0%; or (ii) a rate based on LIBOR. The Company refers to the rates described in clauses (i) and (ii) in the preceding sentence, respectively, as the "Base Rate" and as the "Eurodollar Rate." The specific per annum interest rate will be, at the Company's option, either the Base Rate plus a specified margin ranging between 100 and 175 basis points depending on the Company's consolidated total debt to consolidated EBITDA ratio or the Eurodollar Rate plus a specified margin ranging between 200 and 275 basis points depending on the company's consolidated total debt to consolidated EBITDA ratio. When interest is based on the Base Rate, interest is payable monthly in arrears on the first day of each month. When interest is based on the Eurodollar Rate, interest is payable at the end of each interest period, which is defined as one, two, three or six months after the applicable loan is disbursed to the Company (except that with respect to six month interest periods, interest is payable at three month intervals). Excess cash flow payments as required under the credit agreement are applied to the term loan. The outstanding balance from term loans at April 30, 2013 was $13,800,000.
(c) With respect to any credit advance under this line that is used to finance eligible acquisitions, the Company is required to make quarterly principal payments commencing one year after the date such credit advance is made, until November 10, 2015, the maturity date, when all remaining outstanding principal plus accrued interest thereon is due and payable in full. No principal payments are due during the first year following an advance. The amount of such quarterly principal payments is 1.25% of the aggregate original principal amount of such credit advance during the second year, increasing to 2.50% during the third year and increasing to 3.75% during the fourth and fifth years.
Interest on the acquisition credit line accrues at the Company's option at either (i) the Base Rate plus a specified margin ranging between 100 and 175 basis points depending on the Company's consolidated total debt to consolidated EBITDA ratio or (ii) the Eurodollar Rate plus a specified margin ranging between 200 and 275 basis points depending on the Company's consolidated total debt to consolidated EBITDA ratio. When interest is based on the Base Rate, interest is payable monthly in arrears on the first day of each month following the disbursement of an advance. When interest is based on the Eurodollar Rate, interest is payable at the end of each interest period, which is defined as one, two, three or six months after the applicable advance is disbursed to us (except that with respect to six month interest periods, interest is payable at three month intervals). The outstanding balance from acquisitions at April 30, 2013 was $16,459,000.
17 -------------------------------------------------------------------------------- Table of Contents With respect to any credit advance under this line that is used to finance the purchase of eligible machinery and equipment, the Company is required to make quarterly principal payments in an amount equal to 5% of the aggregate original principal amount of such credit advance. Such principal payments are due quarterly after the date such credit advance is made, until November 10, 2015, the maturity date, when all remaining outstanding principal plus accrued interest thereon is due and payable in full. The outstanding balance from equipment credit advances at April 30, 2013 was $1,603,000.
(d) The outstanding principal and accrued and unpaid interest on the Mill Road subordinated note is due and payable on June 27, 2016. Cash based interest accrues at a rate of 10.0% per annum and is payable quarterly. Additional interest accrues at a rate of 5.0% per annum and is added automatically to the unpaid principal amount of the subordinated note on each date that cash interest is payable. The outstanding balance at April 30, 2013 was $7,143,000 calculated based on the fair value of the debt.
(e) The Company has an additional $4,532,000 at April 30, 2013 in equipment line balances which were used to finance various test equipment with terms of 60 months for each equipment schedule at interest rates ranging from 0.00% to 5.24%.
The Company's 50% owned subsidiary, NQA, Inc., has total borrowings of $750,000 at April 30, 2013. Advances under the business acquisitions line of credit bear interest, at the option of NQA, at a fluctuating rate equal to the lender's corporate base rate plus 0.5% or at a fixed rate based on the Federal Home Loan Bank Advance Rate plus 3.0%. Advances under the business acquisitions line of credit are due and payable, at the option of NQA, 3 or 5 years from the advance date and are subject to additional interest charges in the event of prepayment.
Substantially all the assets of the Company are pledged as collateral.
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