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
For the fiscal year ended January 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-16438
NATIONAL TECHNICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4134955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24007 Ventura Boulevard, Suite 200
Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
(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 - No Par Value 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 .....
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at April 15, 1998 was approximately $37,326,000.
The number of shares of Registrant's Common Stock outstanding on April 15, 1998
was 6,970,972.
Portions of the Proxy Statement of Registrant dated January 31, 1998 are
incorporated in Part III of this report.
Exhibit Index on Page 44
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NATIONAL TECHNICAL SYSTEMS, INC.
Annual Report (Form 10-K)
For Year Ended January 31, 1998
PART I
ITEM 1. BUSINESS
A. General
National Technical Systems, Inc. (Registrant) is a diversified
services company which operates in three segments: Technical Services, Technical
Staffing and Quality Registration 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. The executive staff from the Registrant's
corporate headquarters maintains overall supervision, coordination and financial
control.
B. History
The Registrant was incorporated in Delaware in April 1987 to serve as
a holding company for its subsidiaries, including National Technical Systems, a
California corporation, who's name was changed on January 31, 1997 to NTS
Technical Systems, a California corporation ("NTS California"), its principal
operating company. NTS California, doing business as National Technical Systems
("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. On January 31, 1997, NTS,
Inc. was merged into a newly formed California corporation named National
Technical Systems, Inc. ("NTS, Inc.-CA"). Also, in June 1996 the Registrant
acquired a subsidiary of Raytheon Service Company engaged in ISO 9000
registration. The Registrant changed the name of this subsidiary to National
Technical Systems Certification Services, a Delaware Corporation ("NTS-CS"). At
the same time, the Registrant combined its previous PECS-QA operations with
NTS-CS.
Unless indicated otherwise, the term "Registrant" includes NTS,
Inc.-CA 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, National Technical Services, Inc., (formerly S&W Technical
Services) a Florida corporation, National Quality Assurance - USA, Inc. (NQA), a
50% owned Massachusetts corporation and NTS-CS.
Historically, the Registrant's primary businesses have been comprised
of technical services and engineering disciplines. These services were provided
domestically to a wide range of industries (aerospace, defense, nuclear,
automotive and computer, among others) including analysis, engineering and
mechanical and electronic testing to ascertain performance and reliability,
qualification of equipment for nuclear power plants, engineering design,
computer-based structural dynamics and finite element analysis. During calendar
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1997, NTS employed the personnel and leased the laboratory facilities at the
Pinellas Science, Technology & Research Center in Largo, Florida and the
personnel and Science & Engineering Test Laboratories at McClellan Air Force
Base in Sacramento, California, as well as the technical personnel and equipment
of Laboratory Testing Systems, Inc. of Athol, Massachusetts.
The Registrant, now, also performs technical staffing and consulting
through Wise and Associates, Inc. and its operating subsidiary, NTS Technical
Services, Inc. NTS Technical Services initially provided staff augmentation,
but now also provides Information Technology/Information Systems (IT/IS) and
engineering personnel on a temporary or permanent basis throughout the United
States. During fiscal 1998, the Company acquired the Boulder Colorado Staffing
Division of Johnson Engineering Company. This acquisition has enabled the
Company to nationally expand its markets in IT/IS and telecommunications.
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. The distribution of profits and losses is 64% to
the Registrant and 36% to NQA-UK. NQA-USA is a third party registrar for ISO
9000 certification. Its primary offices are in Boxborough, Massachusetts.
Another separate quality registration service that the company now operates and
owns, is National Technical Systems Certification Services (NTS-CS). This
Company is certified by the Netherlands and is located in Boxborough,
Massachusetts.
During fiscal 1995, the Registrant started its Environmental Services
Group which was operated out of Fullerton, California. In January 1997, the
Registrant, after considering the highly competitive and unreliable nature of
the business and the inability to operate at profitable levels, elected to
discontinue and abandon its Environmental Services segment (see Note 2 to the
Consolidated Financial Statements attached hereto as Exhibits A (i) and A (ii)).
All information presented herein has been restated to exclude the effects of the
Environmental Services segment.
C. Financial Information About Industry Segments
See Note 10 to Consolidated Financial Statements attached hereto as
Exhibits A (i) and A (ii).
D. Description of Business
(i) Technical Services. The Technical Services segment provides highly
trained technical personnel for the analysis, engineering, mechanical and
electronic testing to ascertain performance and reliability under induced
environmental stress conditions. These conditions include vibration, extremes of
temperature, acceleration, altitude, shock, acoustic noise and flight dynamics
and provides other related engineering services, including accelerated aging
analysis, and equipment qualification for the energy market. Components tested
include items used in motor vehicles, missile programs, communications products,
satellites, medical equipment, the space program, aircraft and commercial
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electronic equipment for electro-magnetic interference (EMI) safety and
conformance. The Technical Services segment provides such services to its
customers on fixed price, time and material and cost-reimbursement bases. The
Technical Services segment markets these services through a sales force located
throughout the United States and performs these services at its thirteen
facilities or at the clients' facility.
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 renegotiations, and intense competition for
the available defense business.
(ii) Technical Staffing. The Technical Staffing segment locates,
recruits, and hires a wide variety of upper level technical, professional,
IT/IS and telecommunications personnel, such as engineers, drafters, designers,
programmers and project managers and assigns them temporarily to clients, either
individually for staff augmentation or as members of a project team. This
segment also performs specialized services for industry such as safety training
programs and drafting projects, internet development services, payroll
administration for small temporary agencies and permanent placement on a fee
basis. The Technical Staffing segment offers a variety of pricing options,
including time and material, fixed price, contingency and retained search. This
segment currently provides personnel and services to Fortune 500 companies and
other regional entities from a network of regional offices. Personnel are
currently located in over 12 states. NTS Technical Services, Inc. is also a
Lotus business partner and authorized Lotus Notes provider.
(iii) Registration Services. The NTS Registration Services group is
composed of two companies that provide third party registration and whose
business is to evaluate a supplier's quality systems for conformity to ISO 9000
international quality standards. 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 Company 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) 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 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
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this market. The Registrant competes in this segment primarily on the basis of
its high quality support personnel, high technology testing capabilities and
price. In the area of commercial electronic equipment, the Registrant competes
with a host of companies such as Underwriters Laboratories and Southwest
Research.
Potential customers for services offered by the Registrant's Technical
Staffing 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., Adecco, S.A.,
Inc., Olsten Corporation, and Kelly Services, Inc.) is approximately $27 billion
while the Registrant estimates the total market to be in excess of $200 billion.
The Registrant competes in this segment primarily on the basis of its niche
position and of price and high quality service. In addition, the Registrant has
established a strategic alliance with another Technical Staffing company in
order to more effectively compete in the marketplace. The Registrant's Technical
Staffing segment is dependent upon two customers 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.
At this time, the Registrant believes the competitive conditions
surrounding the Registration Services segment are immaterial to the overall
operations of the Company.
(v) Backlog. The Registrant's backlog at January 31, 1998 and 1997 is
as follows:
1998 1997
---- ----
Technical Services $17,191,000 $19,195,000
Technical Staffing 4,628,000 4,003,000
Registration Services 3,168,000 1,840,000
----------- -----------
Total Backlog $24,987,000 $25,038,000
=========== ===========
Registrant estimates that approximately 85% of the backlog at January 31, 1998
will be completed by January 31, 1999.
(vi) 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 539 individuals at January 31,
1998 and 449 in 1997 as follows:
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At January 31,
1998 1997
---- ----
Technical Services 295 281
Technical Staffing (permanent employees) 31 15
Registration Services 25 23
Corporate Administration 13 11
--- ---
Sub-total 364 330
Technical Staffing (temporary employees) 175 119
--- ---
Total 539 449
=== ===
Approximately 120 of the Registrant's Technical Services employees occupy
management and professional positions, and approximately 90 of the Technical
Staffing 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.
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 properties 217,000 259
======= ===
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 142,000 50
Colorado Longmont 2,000 n/a
Florida Largo 16,000 n/a
Louisiana Zachary 1,500 n/a
Michigan Detroit 45,400 n/a
North Carolina Raleigh 1,800 n/a
Texas San Antonio 4,000 n/a
Arizona Tempe 17,100 n/a
------- -----
Total leased properties 292,900 268
======= ===
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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. In addition, the Registrant
owns, for investment purposes, a condominium located in Palm Desert, California.
The facility is rented to the public and, on occasion, used by employees of the
Registrant.
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.
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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 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, 1998 and 1997 is
presented below:
1998 1997
---- ----
High Low High Low
---- --- ---- ---
First Quarter 3-1/16 2-7/16 3-1/4 1-5/8
Second Quarter 7-3/8 2-3/4 4 2-3/8
Third Quarter 11 4-3/4 3-9/16 2-7/16
Fourth Quarter 9-1/8 6 2-15/16 2-1/16
B. Holders of Common Stock.
As of the close of business on April 15, 1998, there were 708 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 June 27, 1997, the Registrant declared a six cents per share
special dividend payable on August 5, 1997 to shareholders of record on July 22,
1997.
The Registrant is permitted to pay cash dividends under the terms of
its loan agreements up to 40% of the 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)
<TABLE>
<CAPTION>
Year Ended January 31, 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues $ 56,114 $ 47,069 $ 41,457 $ 37,380 $ 43,020
Gross profit 15,251 12,144 9,650 9,019 8,995
Interest expense 1,135 1,021 1,157 1,032 956
Income from continuing operations before income
taxes and minority interest 4,941 3,590 2,192 1,276 1,159
Income taxes 1,968 1,561 972 574 523
-------- -------- -------- -------- --------
Income from continuing operations before minority
interest 2,973 2,029 1,220 702 636
Minority interest (26) 10 (55) -- --
Income (loss) from discontinued operations, net of
income taxes 0 (684) (246) (137) 98
-------- -------- -------- -------- --------
Net income $ 2,947 $ 1,355 $ 919 $ 565 $ 734
======== ======== ======== ======== ========
Basic earnings (loss) per common share:
Continuing operations $ 0.43 $ 0.30 $ 0.17 $ 0.11 $ 0.10
Discontinued operations 0.00 (0.10) (0.04) (0.02) 0.02
-------- -------- -------- -------- --------
Total * $ 0.43 $ 0.20 $ 0.14* $ 0.09 $ 0.12
======== ======== ======== ======== ========
Diluted earnings (loss) per common share:
Continuing operations $ 0.42 $ 0.30 $ 0.17 $ 0.10 $ 0.10
Discontinued operations 0.00 (0.10) (0.04) (0.02) 0.02
-------- -------- -------- -------- --------
Total * $ 0.42 $ 0.20 $ 0.14* $ 0.08 $ 0.11*
======== ======== ======== ======== ========
Weighted average common shares outstanding 6,863 6,702 6,660 6,622 6,295
Dilutive effect of stock options 131 39 -- 136 175
-------- -------- -------- -------- --------
Weighted average common shares outstanding,
assuming dilution 6,994 6,741 6,660 6,758 6,470
======== ======== ======== ======== ========
Cash dividends paid per common share $ 0.06 $ 0.05 $ 0.02 $ 0.02 $ 0.03
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital(1) $ 13,676 $ 9,700 $ 8,752 $ 7,932 $ 5,346
Total assets 40,719 35,296 33,503 33,088 31,573
Long-term debt, excluding current installments 12,144 9,183 9,090 10,045 7,616
Stockholders' equity 19,691 16,735 15,651 14,831 14,353
The earnings per share amounts prior to 1998 have been restated as required to comply with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings and the impact of Statement
No. 128, see the notes to the consolidated financial statements.
(1) 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.
* Per share data may not always add up to total for the year because each figure is independently calculated.
</TABLE>
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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 (NTS or the Company) fiscal year ending
January 31.
RESULTS OF OPERATIONS
Net Revenues
- ------------
(Dollars in thousands)
1998 % chg 1997 % chg 1996
---- ----- ---- ----- ----
Technical Services $42,401 12.8% $37,597 10.5% $34,029
Technical Staffing 10,430 46.2% 7,135 34.4% 5,310
Registration Services 3,283 40.5% 2,337 10.3% 2,118
------- ------- -------
Total $56,114 19.2% $47,069 13.5% $41,457
For the year ended January 31, 1998, consolidated net revenues
increased $9,045,000 or 19.2% when compared with fiscal 1997. Revenues in the
Technical Services segment increased $4,804,000 due to increases in its
traditional aerospace and defense testing business resulting from increased
research and development budgets of government defense and aerospace
contractors, the addition of two new testing facilities in 1998 as well as an
increase in outsourcing of engineering and evaluation services by commercial
customers.
Revenues in the Technical Staffing segment increased $3,295,000 due to
increases in the expanding information technology portion of its business, the
continuing success of its strategic alliances with major technical staffing
companies, the opening of three new staffing offices during the first six months
of 1997 and the acquisition of the staffing division of Texas-based Johnson
Engineering Corporation in the third quarter of 1997. The Company considers this
to be a continuing growth industry.
Revenues in the Company's Registration Services segment increased
$946,000 as a result of continuing marketing efforts in this segment and an
increase in demand by U.S. companies for ISO 9000 certification.
It is anticipated by the Company that revenues in the Technical
Services and Technical Staffing segments will continue to increase through
fiscal 1999. The Company also anticipates that revenues in the Registration
Services segment will continue to grow moderately through 1999.
For the year ended January 31, 1997, consolidated net revenues
increased $5,612,000 or 13.5% when compared with fiscal 1996. Revenues in the
Technical Services segment increased $3,568,000 due to increases in its
traditional aerospace and defense testing business. Revenues in the Technical
Staffing segment increased $1,825,000 due to increases in its expanding staff
augmentation business and the success of its strategic alliances with a major
technical staffing company. Revenues in the Company's Registration Services
segment increased $219,000 as a result of continuing marketing efforts in this
segment, and an increase in demand by U.S. companies for ISO 9000 certification.
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Gross Profit
- ------------
(Dollars in thousands)
1998 % chg 1997 % chg 1996
---- ----- ---- ----- ----
Technical Services $11,853 24.7% $ 9,502 21.2% $ 7,840
% to segment revenue 28.0% 25.3% 23.0%
Technical Staffing $ 2,334 29.8% $ 1,798 67.6% $ 1,073
% to segment revenue 22.4% 25.2% 20.2%
Registration Services $ 1,064 26.1% $ 844 14.5% $ 737
% to segment revenue 32.4% 36.1% 34.8%
------- ------- -------
Total $15,251 25.6% $12,144 25.8% $ 9,650
% to net revenue 27.2% 25.8% 23.3%
Total gross profits increased by $3,107,000 as a result of increased
revenues in 1998 compared to 1997. Gross profit as a percentage of net revenues
in fiscal 1998 also increased when compared to fiscal 1997. This increase was
due primarily to the success of the Company in obtaining more profitable fixed
price contracts in its Technical Services segment and the success of its
continued cost containment programs. In the Technical Staffing segment, gross
profit as a percentage of net revenues in fiscal 1998 decreased when compared to
fiscal 1997 due primarily to the opening of three new staffing offices in the
first six months of 1997 and the acquisition of the staffing division of
Texas-based Johnson Engineering Corporation in the third quarter of 1997.
Total gross profits increased by $2,494,000 as a result of increased
revenues in 1997 compared to 1996. Gross profit as a percentage of net revenues
in fiscal 1997 also increased when compared to fiscal 1996.This increase was due
primarily to the success of the Company in obtaining more profitable fixed price
contracts in its Technical Services segment and Technical Staffing segment and
the success of its continued cost containment programs in these segments.
Selling, General and Administrative
- -----------------------------------
(Dollars in thousands)
1998 % chg 1997 % chg 1996
---- ----- ---- ----- ----
Technical Services $ 6,047 10.6% $ 5,468 21.1% $ 4,516
% to segment revenue 14.3% 14.5% 13.3%
Technical Staffing $ 1,954 55.1% $ 1,260 12.3% $ 1,122
% to segment revenue 18.7% 17.7% 21.1%
Registration Services $ 1,036 44.5% $ 717 23.6% $ 580
% to segment revenues 31.6% 30.7% 27.4%
Corporate $ 136 3.8% $ 131 15.9% $ 113
------- ------- -------
Total $ 9,173 21.1% $ 7,576 19.7% $ 6,331
% to net revenue 16.3% 16.1% 15.3%
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Total selling, general and administrative expenses increased
$1,597,000 for the year ended January 31, 1998, compared with fiscal 1997. This
increase was due primarily to the increase in revenues in addition to expenses
related to the acquisition of the staffing division of Texas-based Johnson
Engineering Corporation located in Boulder, Colorado, along with expenses
related to opening three new staffing offices, one new testing facility in
Largo, Florida and the taking over of the test laboratory facilities at
McClellan Air Force Base in Sacramento, California in November of 1997. Selling,
general and administrative expenses increased slightly as a percentage of net
revenues in 1998 when compared to 1997 primarily due to increased incentive
compensation to the Company's sales representatives and managers as well as
increased marketing and advertising costs. The Registrant continues to look for
new ways to reduce costs yet remain effective in all segments of its business.
Total selling, general and administrative expenses increased
$1,245,000 for the year ended January 31, 1997 compared with fiscal 1996.
Selling, general and administrative expenses increased as a percentage of net
revenues in 1997 when compared to 1996 due primarily to the Registrant's
increased incentive compensation to its sales representatives and managers as
well as increased marketing costs in its Technical Services segment and
increased costs of administering the on-going activities in the Registration
Services segment.
Year 2000
The Company is in the process of conducting a comprehensive review of
its computer systems to identify the systems that could be affected by the "Year
2000" issue and will develop an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the Year 1900 rather than the Year 2000. This could result in a system failure
or miscalculations. Maintenance or modification costs are expensed as incurred,
while the costs of new information technology systems will be capitalized and
amortized in accordance with Company policy. Although management does not expect
the associated incremental costs to have a material impact on the Company's
consolidated financial position, liquidity, cash flows or results of operations,
the related potential effect on the Company's earnings has not yet been
assessed.
Interest Expense
Interest expense increased $114,000 in fiscal 1998 when compared to
1997. This increase was principally due to higher weighted average debt balances
along with comparable interest rates.
Interest expense decreased $136,000 in fiscal 1997 when compared to
1996. This decrease was principally due to lower weighted average debt balances
along with slightly lower interest rates.
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Income Taxes
The income tax rate for 1998, 1997 and 1996 reflects a rate in excess
of the federal statutory rate primarily due to the inclusion of state income
taxes. The Registrant's fiscal 1998 income tax provision was $407,000 more than
fiscal 1997 because of an increase in income from continuing operations before
income taxes.
The fiscal 1997 income tax provision was $589,000 more than fiscal
1996 because of the increase in income from continuing operations before income
taxes. See Note 4 to the Consolidated Financial Statements for a reconciliation
of the provision for income taxes from continuing operations at the statutory
rate to the provision for income taxes from continuing operations.
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 loss from discontinued operations represents the operating results
of the Registrant's Environmental Services segment prior to its discontinuance
in fiscal 1997.
Net Income
The increase in net income for the year ended January 31, 1998
compared to fiscal 1997 was due primarily to increased revenues in all segments
of the Registrant's business and higher gross profit margins in the Technical
Services segment partially offset by higher selling, general and administrative
expenses and income taxes, in addition to the discontinuance of the
Environmental Services segment in fiscal 1997.
The increase in net income for the year ended January 31, 1997
compared to fiscal 1996 was due primarily to increased revenues and higher gross
profit margins partially offset by slightly higher selling, general and
administrative expenses.
Business Environment
During the course of fiscal 1998, the business climate in the
aerospace and defense industry, which in the past had shown signs of
uncertainty, seems to have stabilized and, in several areas, shows signs of
strengthening. Various major prime government contractors have won significant
development contracts, which increases the market for the Registrant's Technical
Services segment. During the period of uncertainty the Registrant developed a
strategy of growth through diversification and taking advantage of opportunities
created by the aerospace and defense industry's merger activities and ultimate
downsizing. In addition, increased activity in commercial satellite and launch
vehicles has increased demand for component and systems testing. As the demand
Page 13 of 53
<PAGE>
for nuclear staff augmentation has decreased, the Registrant has aggressively
pursued additional business in the growing IT/IS portion of its Technical
Staffing segment's business. The Registrant supplies IT professionals in support
of customers who need help-desk analysts and managers; relational database
administrators and developers; application and systems programmers;
configuration and project managers; and multiple levels of system operations
personnel. Also, the Registrant continues to pursue ISO registration business
through its Registration Services segment as demand for these services continues
to increase as more companies must compete for business in the global market
place. Notwithstanding the foregoing, and because of factors affecting the
Registrant's operating results, past financial performance should not be
considered to be a reliable indicator of future performance.
Liquidity and Capital Resources
In the year ended January 31, 1998, cash provided by operations
increased by $581,000 when compared to 1997. A primary factor contributing to
this was an increase in net income, as well as a decrease in inventories
partially offset by an increase in accounts receivable and a decrease in
accounts payable. The increase in accounts receivable was due primarily to
increases in the Technical Services segment accounts receivable as a result of
the increase in net revenues. In fiscal 1997, cash provided by operations
decreased by $1,190,000 over 1996, reflecting an increase in accounts receivable
as well as increases in prepaid expenses and decreases in accrued expenses. This
decrease was partially offset by an increase in net income.
Net cash used in investing activities in the year ended January 31,
1998 increased $1,522,000 as compared to 1997 due to increased capital
requirements to continue the Company's business expansion and the acquisition of
a new division in the Registrant's Technical Staffing segment. Net cash used in
investing activities in the year ended January 31, 1997 increased $1,147,000 as
compared to 1996 due to increased capital requirements to continue the Company's
business expansion and the acquisition of a new subsidiary in the Registrant's
Registration Services segment.
Net cash provided by financing activities in the year ended January
31, 1998 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 increased $2,618,000 in fiscal 1998 from 1997.
This increase was principally due to new borrowings in excess of regularly
scheduled payments on long-term debt.
In May 1997, the Registrant paid off its revolving lines of credit and
term loans with Bank of America NT & SA and replaced them with a new $6,000,000
revolving line of credit with Sanwa Bank California at an interest rate of prime
plus 0.5% and a $3,250,000 term loan with Sanwa Bank California at an interest
rate of prime plus 0.75% which matures on May 1, 2002. In addition, the
Registrant entered into an agreement with Sanwa Bank California for a $2,000,000
equipment line of credit which matures on February 1, 2003 with interest only
payments through January 31, 1998. This line was used to retire the leases
outstanding with Bank of America NT & SA which were approximately $1,170,000 at
May 31, 1997, and to finance a portion of future requirements. In September
1997, the Registrant negotiated with Sanwa Bank California as agent and Mellon
Bank for a new credit agreement which replaces all of the above agreements. The
Page 14 of 53
<PAGE>
new agreements include a new $6,000,000 revolving line of credit at an interest
rate equal to the bank's reference rate plus 0.25% which expires in September
1999. Also included in the new agreements is a $6,500,000 term loan at an
interest rate of 8.31% which expires in January 2003. In addition, the
Registrant entered into an agreement with Mellon US Leasing for a $1,500,000
equipment line of credit. The outstanding balance on the equipment line of
credit at January 31, 1998 was $906,000.
Maturities of long-term debt consist of regularly scheduled payments
on the Registrant's term loans to its banks and notes payable. Of the $5,889,000
shown in the maturities of long term debt (see footnote 3(c) of the Consolidated
Financial Statements) due in fiscal 2000, $4,330,000 is the outstanding balance
of the Registrant's revolving line of credit. All other maturities of long-term
debt will be paid with cash generated from operations.
In 1997, long-term debt increased $224,000 from 1996. This increase
was principally due to new borrowings in excess of regularly scheduled payments
on long-term debt. 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 and the current bank revolving line of credit, which had
$1,670,000 available at January 31, 1998.
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.
Forward-Looking Information
Certain statements or assumptions in Management's Discussion and
Analysis contain or are based on "forward-looking" information (as defined in
the Private Securities Litigation and Reform Act of 1995) that involve risk and
uncertainties inherent in the Registrant's business. Actual outcomes are
dependent upon the Registrant's successful performance of internal plans,
customer changes in short range and long range plans, competition in the
Registrant's services areas and pricing, continued acceptance of new services,
performance issues with key customers, and general economic risks and
uncertainties.
Page 15 of 53
<PAGE>
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.
Page 16 of 53
<PAGE>
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 26, 1998 are incorporated herein by
reference.
Executive Officers of the Registrant
Name Age Position
---- --- --------
Jack Lin 65 President and Chief Executive Officer of the
Company. Has been associated with the Company
continuously since 1961.
Aaron Cohen 61 Senior Executive Vice President. One of the
founders of the Company. Has been associated
with the Company since 1961.
Arthur Edelstein 60 Executive Vice President of the Company. Has
been associated with the Company since 1961.
Lloyd Blonder 58 Senior Vice President and Chief Financial
Officer, Treasurer and Assistant Secretary.
Has been associated with the Company since
1983.
Richard Short 55 Group Vice President of the Company. Has been
associated with the Company since 1961.
William Traw 60 Group Vice President of the Company. Has been
associated with the Company since 1963.
William McGinnis 39 Group Vice President of the Company. Has been
associated with the Company since 1980.
Harold Lipchik 70 Vice President Administration and Corporate
Secretary of the Company. Has been associated
with the Company since 1984.
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 26, 1998
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
Page 17 of 53
<PAGE>
Proxy Statement to be furnished to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 26, 1998 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 26, 1998
are incorporated herein by reference.
Page 18 of 53
<PAGE>
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, 1998 and 1997 and for each of the years in the
three year period ended January 31, 1998.
(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, 1998.
C. Exhibits.
2 Agreement and plan of merger of National Technical Systems,
Inc., a Delaware corporation into National Technical
Systems, Inc., a California corporation (formerly NTS
Merger corporation), (filed as Exhibit 2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
January 31, 1997, and is incorporated herein by reference
thereto).
3(i) Articles of incorporation of National Technical Systems,
Inc., a California corporation (formerly NTS Merger
corporation), (filed as Exhibit 3(i) to the Company's
Annual Report on Form 10-K for the fiscal year ended
January 31, 1997, and is incorporated herein by reference
thereto).
3(ii) Bylaws of National Technical Systems, Inc., a California
corporation (formerly NTS Merger corporation), (filed as
Exhibit 3(ii) to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1997, and is
incorporated herein by reference thereto).
10(a)1 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)1 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).
Page 19 of 53
<PAGE>
10(c)1 National Technical Systems Credit Agreement between Sanwa
Bank California and Mellon Bank dated September 8, 1997
(filed as exhibit 10.7 to the Company's form 10-Q for the
fiscal quarter ended October 31, 1997, and is incorporated
herein by reference thereto).
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule
99.1 Undertakings incorporated by reference into Form S-8
Registration Statement No. 33-48211.
99.2 Undertakings incorporated by reference into Form S-8
Registration Statement No. 2-83778.
99.3 Undertakings incorporated by reference into Form S-8
Registration Statement No. 333-04905.
Page 20 of 53
<PAGE>
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 28, 1998 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 28, 1998.
/s/ Jack Lin /s/ Aloysius Casey
- ------------------------------ ------------------------------
Jack Lin, President Aloysius Casey, Chairman
(Principal Executive of the Board
Officer & Director)
/s/ Arthur Edelstein /s/ Aaron Cohen
- ------------------------------ ------------------------------
Arthur Edelstein, Director Aaron Cohen, Vice Chairman of
and Executive Vice President the Board and Senior
Executive Vice President
/s/ Lloyd Blonder /s/ Harry Derbyshire
- ------------------------------ ------------------------------
Lloyd Blonder, Senior Vice President Harry Derbyshire, Director
and Treasurer
(Principal Financial and Accounting
Officer)
/s/ William L. Traw /s/ Robert I. Lin
- ------------------------------ ------------------------------
William L. Traw, Group Vice President Robert I. Lin, Director
and Director
/s/ Richard D. Short /s/ Ralph F. Clements
- ------------------------------ ------------------------------
Richard D. Short, Group Vice President Ralph F. Clements, Director
and Director
/s/ William McGinnis /s/ Stanley Schoen
- ------------------------------ ------------------------------
William McGinnis, Group Vice President Stanley Schoen, Director
and Director
Page 21 of 53
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Report of Independent Auditors
Financial Statements:
Consolidated Balance Sheets - January 31, 1998 and 1997
Consolidated Statements of Income - Years ended January 31, 1998, 1997 and
1996
Consolidated Statements of Stockholders' Equity - Years ended January 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended January 31, 1998, 1997
and 1996
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.
Page 22 of 53
<PAGE>
REPORT OF ERNST & YOUNG LLP, 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, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 1998. 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, 1998 and 1997
and the consolidated results of its operation and its cash flows for each of the
three years in the period ended January 31, 1998, 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 10, 1998
Page 23 of 53
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 1998 and 1997
ASSETS
1998 1997
CURRENT ASSETS: ---- ----
Cash $ 2,101,000 $ 1,204,000
Accounts receivable, less allowance for
doubtful accounts of $666,000 in 1998 and
$703,000 in 1997 14,880,000 12,292,000
Income taxes receivable 104,000 --
Inventories 1,860,000 2,271,000
Deferred tax assets 523,000 440,000
Prepaid expenses 762,000 813,000
----------- -----------
Total current assets 20,230,000 17,020,000
Property, plant and equipment
Land 1,306,000 1,306,000
Buildings 7,976,000 7,780,000
Machinery and equipment 35,334,000 31,722,000
Leasehold improvements 3,893,000 3,601,000
----------- -----------
48,509,000 44,409,000
Less: accumulated depreciation 29,527,000 27,309,000
----------- -----------
Net property, plant and equipment 18,982,000 17,100,000
Property held for sale 544,000 544,000
Intangible assets, net 637,000 438,000
Other assets 326,000 194,000
----------- -----------
TOTAL ASSETS $40,719,000 $35,296,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,974,000 $ 3,395,000
Accrued expenses 1,976,000 2,007,000
Income taxes payable 69,000 40,000
Current installments of long-term debt 1,535,000 1,878,000
----------- -----------
Total current liabilities 6,554,000 7,320,000
Long-term debt, excluding current installments 12,144,000 9,183,000
Deferred tax liabilities, net 2,303,000 2,057,000
Minority interest 27,000 1,000
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized,
20,000,000 shares; issued and outstanding
6,971,000 in 1998 and 6,736,000 in 1997 11,069,000 10,644,000
Retained earnings 8,622,000 6,091,000
----------- -----------
Total stockholders' equity 19,691,000 16,735,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,719,000 $35,296,000
=========== ===========
See accompanying notes
Page 24 of 53
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended January 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 56,114,000 $ 47,069,000 $ 41,457,000
Cost of sales 40,863,000 34,925,000 31,807,000
------------ ------------ ------------
Gross profit 15,251,000 12,144,000 9,650,000
Selling, general and administrative
expense 9,173,000 7,576,000 6,331,000
------------ ------------ ------------
Operating income 6,078,000 4,568,000 3,319,000
Other income (expense):
Interest expense (1,135,000) (1,021,000) (1,157,000)
Other (2,000) 43,000 30,000
------------ ------------ ------------
(1,137,000) (978,000) (1,127,000)
Income from continuing operations
before income taxes and minority interest 4,941,000 3,590,000 2,192,000
Income taxes 1,968,000 1,561,000 972,000
------------ ------------ ------------
Income from continuing operations before
minority interest 2,973,000 2,029,000 1,220,000
Minority interest (26,000) 10,000 (55,000)
------------ ------------ ------------
Income from continuing operations 2,947,000 2,039,000 1,165,000
Loss from discontinued operations,
net of income tax 0 (684,000) (246,000)
------------ ------------ ------------
Net income $ 2,947,000 $ 1,355,000 $ 919,000
============ ============ ============
Basic earnings (loss) per common share:
Continuing operations $ 0.43 $ 0.30 $ 0.17
Discontinued operations 0.00 (0.10) (0.04)
------------ ------------ ------------
Total * $ 0.43 $ 0.20 $ 0.14
============ ============ ============
Diluted earnings (loss) per common share:
Continuing operations $ 0.42 $ 0.30 $ 0.17
Discontinued operations 0.00 (0.10) (0.04)
------------ ------------ ------------
Total * $ 0.42 $ 0.20 $ 0.14
============ ============ ============
Weighted average common shares outstanding 6,863,000 6,702,000 6,660,000
Dilutive effect of stock options 131,000 39,000 0
------------ ------------ ------------
Weighted average common shares outstanding,
assuming dilution 6,994,000 6,741,000 6,660,000
============ ============ ============
* Per share data may not always add up to total for the year because each figure is independently calculated.
See accompanying notes.
</TABLE>
Page 25 of 53
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended January 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------------- ------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1995 6,649,000 $ 66,000 $ 10,480,000 $ 4,285,000 $ 14,831,000
Net income -- -- -- 919,000 919,000
Stock issued in lieu of wages 12,000 1,000 18,000 -- 19,000
Stock options exercised 13,000 -- 15,000 -- 15,000
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
Net income -- -- -- 1,355,000 1,355,000
Stock options exercised 62,000 -- 64,000 -- 64,000
Cash dividends -- -- -- (335,000) (335,000)
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1997 6,736,000 67,000 10,577,000 6,091,000 16,735,000
Net income -- -- -- 2,947,000 2,947,000
Stock issued in lieu of wages 40,000 91,000 -- -- 91,000
Stock options exercised 105,000 175,000 -- -- 175,000
Stock exchanged for option exercise 115,000 253,000 -- -- 253,000
Stock retired for option exercise (25,000) (253,000) -- -- (253,000)
Tax benefit from stock options exercised -- 159,000 -- -- 159,000
Common stock change to no par -- 10,577,000 (10,577,000) -- --
Cash dividends -- -- -- (416,000) (416,000)
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1998 6,971,000 $ 11,069,000 $ -- $ 8,622,000 $ 19,691,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
Page 26 of 53
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended January 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 2,947,000 $ 2,039,000 $ 1,165,000
Adjustments to reconcile net income to net
cash provided by operating activities: -- -- 2,328,000
Depreciation and amortization 2,297,000 2,204,000
Stock issued in lieu of compensation 91,000 -- 19,000
Provisions for losses on receivables (37,000) 108,000 18,000
(Gain) loss on disposal of fixed assets -- 2,000 (20,000)
Deferred income taxes 163,000 390,000 206,000
Changes in assets and liabilities:
Accounts receivable (2,551,000) (1,947,000) (771,000)
Inventories 411,000 (51,000) (138,000)
Prepaid expenses 51,000 (126,000) 70,000
Other assets (132,000) 145,000 94,000
Deferred revenues -- (45,000) --
Accounts payable (421,000) 198,000 331,000
Income taxes (75,000) 73,000 (217,000)
Distributed earnings of affiliate -- (51,000) --
Undistributed earnings of affiliate 26,000 (23,000) 55,000
Accrued expenses (31,000) (74,000) 454,000
------------ ------------ ------------
Net cash provided by continuing operations 2,739,000 2,842,000 3,594,000
Loss from discontinued operations -- (684,000) (246,000)
------------ ------------ ------------
Net cash provided by operating activities 2,739,000 2,158,000 3,348,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,103,000) (2,650,000) (1,735,000)
Investment in new business (275,000) (208,000) --
Proceeds from sales of fixed assets -- 2,000 26,000
------------ ------------ ------------
Net cash used for investing activities (4,378,000) (2,856,000) (1,709,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 17,527,000 2,673,000 1,235,000
Proceeds from stock options exercised 175,000 64,000 15,000
Tax benefit from stock options exercised 159,000 -- --
Cash dividends paid (416,000) (335,000) (133,000)
Repayments of current and long-term debt (14,909,000) (2,449,000) (2,503,000)
------------ ------------ ------------
Net cash provided by (used for) financing
activities 2,536,000 (47,000) (1,386,000)
------------ ------------ ------------
Net increase (decrease) in cash 897,000 (745,000) 253,000
BEGINNING CASH BALANCE 1,204,000 1,949,000 1,696,000
------------ ------------ ------------
ENDING CASH BALANCE $ 2,101,000 $ 1,204,000 $ 1,949,000
============ ============ ============
Page 27 of 53
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments during the year for:
Interest $ 1,238,000 $ 1,053,000 $ 1,196,000
Income taxes 1,711,000 646,000 605,000
Cash received during the year for:
Income taxes 4,000 43,000 --
Non-cash items:
Deferred revenue in connection with acquisition
of business $ -- $ 45,000 $ --
</TABLE>
Page 28 of 53
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1998, 1997 and 1996
(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. In addition,
the Company has consolidated NQA-USA, a 50% owned subsidiary for which the
distribution of profits and losses is 64% to the Company, and 36% to the
other shareholder. All significant intercompany balances and transactions
have been eliminated in consolidation. Certain 1996 and 1995 amounts have
been reclassified to conform with 1997 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, the valuation of certain real estate held for sale and estimates
for future shutdown expenses related to discontinued operations. 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 technical
staffing, qualification of safety related systems and components, and ISO
9000 certification 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.
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.
Page 29 of 53
<PAGE>
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 are amortized over 5 to 20 years using the straight-line
method. Accumulated amortization was $519,000 as of January 31, 1998 and
$443,000 as of January 31, 1997. 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"), 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 existed at January 31, 1998.
New pronouncements
------------------
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income". The statement establishes components
in a full set of general purpose financial statements. The statement is
effective for the Company in fiscal 1999. The Company does not anticipate
that adoption of this statement will have a material impact on the current
presentation of its financial statements.
In June 1997, the Financial Accounting Standards Board Issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is effective for years beginning after December 15, 1997. This
Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. It also establishes
Page 30 of 53
<PAGE>
standards for related disclosures about products and services, geographic
areas, and major customers. The Company will adopt the new requirements in
fiscal 1999. Management does not anticipate that the adoption of this
statement will have a significant effect on the Company's reported
segments.
Earnings Per Share
------------------
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share". The statement replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the
statement's requirements.
(2) Business Disposition
In January 1997, the Company, after considering the highly competitive and
unreliable nature of the business and the inability to operate at
profitable levels, elected to discontinue and abandon its Environmental
Services segment. As of January 31, 1998 the Environmental Services segment
had contract claims totaling $245,000 and net accounts receivable of
$684,000 relative to completed contracts. As of January 31, 1997 the
contract claims were $449,000, of which the Company had recorded $200,000
in inventory and the net accounts receivable were $1,124,000. Management
of the Company, on the advice of legal counsel, believes the amounts
recorded will be fully realized.
Results of operations related to the discontinued operations are as
follows:
1998 1997 1996
---- ---- ----
Net Revenues $ -- $ 1,683,000 $ 2,981,000
Loss from discontinued operations:
Environmental Services operating
losses and other expenses -- (1,093,000) (448,000)
Estimated future shutdown
expenses -- (116,000) --
Tax benefit from discontinued
operations -- 525,000 202,000
----------- ----------- -----------
$ -- $ (684,000) $ (246,000)
=========== =========== ===========
Page 31 of 53
<PAGE>
(3) Debt
Long-term debt consists of the following:
1998 1997
---- ----
Term loans payable to banks (b) $ 6,500,000 $ 2,183,000
Notes payable (interest rates of 8.5% to 11.0%),
collateralized by land and buildings, with a
net book value of $2,197,000 1,934,000 2,006,000
Secured notes payable (c) 915,000 1,472,000
Revolving lines of credit (a) 4,330,000 5,400,000
----------- -----------
Subtotal 13,679,000 11,061,000
Less current installments 1,535,000 1,878,000
----------- -----------
Total $12,144,000 $ 9,183,000
=========== ===========
In May 1997, the Company paid off its revolving lines of credit and term
loans with Bank of America NT & SA and replaced them with a new $6,000,000
revolving line of credit with Sanwa Bank California at an interest rate of
prime plus 0.5% and a $3,250,000 term loan with Sanwa Bank California at an
interest rate of prime plus 0.75% which matures on May 1, 2002. In
addition, the Company entered into an agreement with Sanwa Bank California
for a $2,000,000 equipment line of credit which matures on February 1, 2003
with interest only payments through January 31, 1998. This line was used to
retire the equipment financing leases outstanding with Bank of America NT &
SA which were approximately $1,170,000 at May 31, 1997, and to finance a
portion of future requirements. Also included in the new agreements is a
$6,500,000 term loan at an interest rate of the Bank's reference rate plus
0.50% which expires in January 2003. The Company entered into an agreement
with Mellon US Leasing for a $1,500,000 equipment line of credit. In
September 1997, the Company negotiated with Sanwa Bank California as agent
and Mellon Bank a new agreement which replaces all of the above agreements.
(a) The new agreement includes a $6,000,000 revolving line of credit at an
interest rate of the bank's reference rate plus 0.25% which expires in
September 1999. The outstanding balance at January 31, 1998 is $4,330,000
compared with an outstanding balance of $5,400,000 at January 31, 1997 on
the old revolving line of credit agreement. This balance is reflected in
the accompanying consolidated balance sheets as long-term. A flat fee of
$18,750 was charged to set up the new revolving line and a facility fee of
0.5% of the total line is charged on a quarterly basis.
(b) The agreement also calls for a $6,500,000 term loan at an interest rate of
8.31% which expires in January 2003. 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. Sanwa Bank California and Mellon Bank share 60% and 40%
Page 32 of 53
<PAGE>
respectively 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.
(c) In November 1997, the Company entered into a $1,500,000 equipment line of
credit agreement with Mellon US Leasing (interest rates of 9.95% to 10.25%)
which expires in December 2002. The outstanding balance at January 31, 1998
is $906,000. In addition, there is an outstanding balance of $9,000 on the
note payable to Bank of America NT & SA which expires in February 2003. The
note payable to Mellon Bank is collateralized by equipment with a net book
value of $901,000 at January 31, 1998, payable in monthly and quarterly
installments which vary through 2003.
The weighted average interest rate on the Company's long-term debt is
approximately 8.85%.
Maturities of long-term debt for five years subsequent to January 31, 1998
are as follows:
1999 $ 1,535,000
2000 5,889,000
2001 1,582,000
2002 3,071,000
2003 1,486,000
Thereafter 116,000
-----------
$13,679,000
===========
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.
The carrying amounts and estimated fair values of the Company's financial
instruments are:
1998 1998 1997 1997
Carrying Estimated Carrying Estimated
amount fair value amount fair value
--------------------------------------------------
Term loans payable to banks $6,500,000 $6,471,000 $2,183,000 $2,370,000
Notes payable 1,934,000 2,013,000 2,006,000 1,722,000
Secured notes payable 915,000 942,000 1,472,000 1,207,000
Revolving lines of credit 4,330,000 4,330,000 5,400,000 5,400,000
Page 33 of 53
<PAGE>
(4) Income Taxes
The provision for income tax expense from continuing operations consists
of:
1998 1997 1996
-----------------------------------------
Current:
Federal $1,425,000 $ 625,000 $ 388,000
State 380,000 282,000 323,000
---------- ---------- ----------
1,805,000 907,000 711,000
Deferred:
Federal 137,000 638,000 341,000
State 26,000 16,000 (80,000)
---------- ---------- ----------
163,000 654,000 261,000
---------- ---------- ----------
Income tax expense $1,968,000 $1,561,000 $ 972,000
========== ========== ==========
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:
1998 1997 1996
-----------------------------------------
Income from continuing operations
before income taxes $4,941,000 $3,590,000 $2,192,000
========== ========== ==========
Federal income tax computed at
statutory rate $1,680,000 $1,221,000 $ 746,000
Amortization of goodwill 17,000 15,000 15,000
State income taxes, net of federal
benefits 268,000 197,000 152,000
Other 3,000 128,000 59,000
---------- ---------- ----------
Income tax expense $1,968,000 $1,561,000 $ 972,000
========== ========== ==========
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:
Page 34 of 53
<PAGE>
<TABLE>
<CAPTION>
1998 1997
Current Non-current Current Non-current
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Deferred tax asset:
Bad debt reserve $ 203,000 $ -- $ 190,000 $ --
Vacation accrual 185,000 -- 138,000 --
AMT credit -- -- -- 120,000
State taxes 135,000 37,000 60,000 33,000
Other -- -- 52,000 --
----------- ----------- ----------- -----------
Total deferred tax asset 523,000 37,000 440,000 153,000
Valuation allowance -- -- -- --
Deferred tax liability:
Tax over book depreciation -- (2,340,000) -- (2,210,000)
----------- ----------- ----------- -----------
Net Deferred tax asset (liability) $ 523,000 $(2,303,000) $ 440,000 $(2,057,000)
=========== =========== =========== ===========
</TABLE>
(5) Stock Options and Pension Plans
The Company has two employee incentive stock option plans: the 1988 and
1994 stock option plans. The 1988 plan has expired and no new options may
be granted thereunder. Under the 1994 plan, officers, key employees,
non-employee directors and consultants may be granted options to purchase
shares of the Company's authorized but unissued common stock.
Outstanding options under all plans are exercisable at 100% or more of fair
market (as determined by the stock option committee of 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 of the total shares each year, commencing one year from
the date of grant. Options currently expire five to ten years from the date
of grant. Proceeds received by the Company from the exercises are credited
to common stock and capital in excess of par value. Additional information
with respect to the option plans as of January 31, are as follows:
1998 1997
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Beginning Balance 643,545 $2.38 490,838 $1.95
Grants 98,469 5.38 239,000 2.91
Exercises (219,486) 1.94 (61,511) 1.22
Canceled or expired (31,562) 2.24 (24,782) 1.83
-------- ----- -------- -----
Ending balance 490,966 $3.19 643,545 $2.38
======== ===== ======== =====
Reserve for future
grants at year end 121,198 195,777
Exercisable 145,168 $2.43 307,762 $2.09
======== ===== ======== =====
Page 35 of 53
<PAGE>
The range of exercise prices for options outstanding at January 31, 1998
was $1.19 to $7.00. The range of exercise prices for options is wide due
primarily to the increasing price of the Company's stock over the period of
the grants.
The following tables summarize information about options outstanding at
January 31, 1998:
<TABLE>
<CAPTION>
Weighted Avg. Weighted Weighted
Outstanding at Remaining Avg. Avg.
Range of January 31, contract Exercise Number Exercise
exercise prices 1998 life in yrs. Price Exercisable Price
- --------------- ---- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.00 to $2.00 38,176 3.4 $1.74 25,426 $1.61
$2.01 to $3.00 336,351 8.9 $2.72 119,737 $2.60
$3.01 to $4.00 23,720 3.6 $3.16 5 $3.16
$5.01 to $6.00 75,719 9.4 $5.19 -- --
$6.01 to $7.00 17,000 9.7 $7.00 -- --
</TABLE>
These options will expire if not exercised at specific dates ranging from
June 1998 to October 2007. Prices for options exercised during the two-year
period ended January 1998 ranged from $1.00 to $3.16. The Company has
elected to continue to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees", in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided under
SFAS No. 123, "Accounting for Stock Based Compensation," requires the use
of option valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25, no compensation expense is
recognized in the Company's financial statements, since the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as
if the Company had accounted for its employee stock options granted
subsequent to January 31, 1995 under the fair value method of that
statement. The fair value of options granted in fiscal 1998 and 1997
reported below has been estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Page 36 of 53
<PAGE>
1998 1997 1996
---- ---- ----
Expected life (in years) 5 5 5
Risk-free interest rate 6.01% 6.14% 5.23%
Expected volatility 62% 78% 78%
Expected dividend yield 72% 86% 64%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of the traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair value of
its options. The weighted average estimated fair value of employee stock
options granted during 1998 and 1997 was $2.98 and $2.07 per share,
respectively. Had compensation cost for the Company's stock option plan
been determined consistent with the fair value method outlined in SFAS No.
123, the impact on the Company's net income and earnings per share
would not have been material.
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 1998, 1997 or 1996.
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
Company's 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 401(k) contribution bears to total 401(k) contributions for
all participants during a plan year. In 1998, the Board of Directors of the
Company approved a contribution to the 401(k) profit sharing plan of
$200,000 as compared to $100,000 in 1997 and $50,000 in 1996.
(6) Capital Stock
As of January 31, 1998 and 1997, the Company had 20,000,000 authorized
common shares with no par value at January 31, 1998 (par value of $0.01 at
January 31, 1997); 6,971,000 shares and 6,736,000 shares were issued and
outstanding at January 31, 1998 and January 31, 1997, respectively.
Holders of common stock generally vote together on matters submitted to
shareholders, including the election of directors. Except as required by
law, the powers, preferences and rights of all common stock and the
qualifications, limitations or restrictions thereof, shall in all respects
be identical. The common stock shareholders will be entitled to receive,
to the extent permitted by law, and to share equally and ratably, share for
share, any such dividends as may be declared from time to time by the board
of directors.
Page 37 of 53
<PAGE>
(7) 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 $996,000 in
1998, $786,000 in 1997, and $602,000 in 1996. There was rental income of
$41,000 in 1996 and there was no rental income in 1997 and 1998.
At January 31, 1998, minimum rental payment obligations under operating
leases were as follows:
1999 $ 776,000
2000 553,000
2001 434,000
2002 288,000
2003 205,000
Thereafter 66,000
----------
$2,322,000
==========
In June 1997, the Company renewed its lease agreement for operating the
facilities located in Valencia, California for another five years. 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.
(8) Accrued Expenses
A summary of accrued expenses at January 31 is as follows:
1998 1997
---------- ----------
Compensation and employee benefits $1,430,000 $1,177,000
Other 546,000 830,000
---------- ----------
$1,976,000 $2,007,000
========== ==========
(9) 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 or cash flows of the
Company.
Page 38 of 53
<PAGE>
(10) 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.
Technical Staffing 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.
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.
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 of
approximately $25,290,000 in 1998, $23,024,000 in 1997 and $17,883,000 in
1996, consist principally of sales under subcontracts to customers with
government contracts. Three major customers represented $2,763,000,
$1,639,000 and $1,517,000 of the 1998 Technical staffing net revenues. Two
major customers represented $1,758,000 and $1,060,000 of the 1997 Technical
Staffing net revenues and one major customer represented $2,021,000 of the
1996 Technical Staffing net revenues.
NTS performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral.
Page 39 of 53
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
TECHNICAL TECHNICAL REGISTRATION DISCONTINUED
SERVICES STAFFING SERVICES OPERATIONS CORPORATE TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 42,401,000 $ 10,430,000 $ 3,283,000 $ -- $ -- $ 56,114,000
============ ============ ============ ============ ============ ============
Gross profit 11,853,000 2,334,000 1,064,000 -- -- 15,251,000
Selling, general and
administrative expense 6,047,000 1,954,000 1,036,000 -- 136,000 9,173,000
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) 5,806,000 380,000 28,000 -- (136,000) 6,078,000
Other income (expense):
Interest expense, net (924,000) (155,000) 43,000 -- (99,000) (1,135,000)
Other (1,000) -- -- -- (1,000) (2,000)
------------ ------------ ------------ ------------ ------------ ------------
(925,000) (155,000) 43,000 -- (100,000) (1,137,000)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes $ 4,881,000 $ 225,000 $ 71,000 $ -- $ (236,000) $ 4,941,000
============ ============ ============ ============ ============ ============
Identifiable assets $ 29,577,000 $ 3,804,000 $ 997,000 $ 929,000 $ 5,412,000 $ 40,719,000
============ ============ ============ ============ ============ ============
Capital expenditures $ 3,938,000 $ 104,000 $ 27,000 $ -- $ 34,000 $ 4,103,000
============ ============ ============ ============ ============ ============
Depreciation and amortization $ 2,094,000 $ 85,000 $ 28,000 $ -- $ 90,000 $ 2,297,000
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1997
TECHNICAL TECHNICAL REGISTRATION DISCONTINUED
SERVICES STAFFING SERVICES OPERATIONS CORPORATE TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 37,597,000 $ 7,135,000 $ 2,337,000 $ -- $ -- $ 47,069,000
============ ============ ============ ============ ============ ============
Gross profit 9,502,000 1,798,000 844,000 -- -- 12,144,000
Selling, general and administrative
expense 5,468,000 1,260,000 717,000 -- 131,000 7,576,000
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) 4,034,000 538,000 127,000 -- (131,000) 4,568,000
Other income (expense):
Interest expense, net (804,000) (151,000) 28,000 -- (94,000) (1,021,000)
Other 41,000 1,000 -- -- 1,000 43,000
------------ ------------ ------------ ------------ ------------ ------------
(763,000) (150,000) 28,000 -- (93,000) (978,000)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes $ 3,271,000 $ 388,000 $ 155,000 $ -- $ (224,000) $ 3,590,000
============ ============ ============ ============ ============ ============
Identifiable assets $ 25,653,000 $ 3,542,000 $ 879,000 $ 1,336,000 $ 3,886,000 $ 35,296,000
============ ============ ============ ============ ============ ============
Capital expenditures $ 2,262,000 $ 58,000 $ 74,000 $ 1,000 $ 255,000 $ 2,650,000
============ ============ ============ ============ ============ ============
Depreciation and amortization $ 1,971,000 $ 150,000 $ 19,000 $ 5,000 $ 59,000 $ 2,204,000
============ ============ ============ ============ ============ ============
</TABLE>
Page 40 of 53
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31, 1996
TECHNICAL TECHNICAL REGISTRATION DISCONTINUED
SERVICES STAFFING SERVICES OPERATIONS CORPORATE TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 34,029,000 $ 5,310,000 $ 2,118,000 $ -- $ -- $ 41,457,000
============ ============ ============ ============ ============ ============
Gross profit 7,840,000 1,073,000 737,000 -- -- 9,650,000
Selling, general and administrative
expense 4,516,000 1,122,000 580,000 -- 113,000 6,331,000
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) 3,324,000 (49,000) 157,000 -- (113,000) 3,319,000
Other income (expense):
Interest expense, net (900,000) (161,000) -- -- (96,000) (1,157,000)
Other 84,000 (49,000) (6,000) -- 1,000 30,000
------------ ------------ ------------ ------------ ------------ ------------
(816,000) (210,000) (6,000) -- (95,000) (1,127,000)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes $ 2,508,000 $ (259,000) $ 151,000 $ -- $ (208,000) $ 2,192,000
============ ============ ============ ============ ============ ============
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
============ ============ ============ ============ ============ ============
</TABLE>
Page 41 of 53
<PAGE>
(11) Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1998 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 13,153,000 $ 13,541,000 $ 14,970,000 $ 14,450,000
Gross profit 3,564,000 3,644,000 4,069,000 3,974,000
Net income 648,000 663,000 681,000 955,000
Basic earnings per common share 0.10 0.10 0.10 0.14
Diluted earnings per common share 0.10 0.10 0.09 0.13
Weighted average common shares outstanding 6,742,000 6,794,000 6,946,000 6,968,000
Dilutive effect of stock options -- 75,000 248,000 201,000
Weighted average common shares outstanding,
assuming dilution 6,742,000 6,869,000 7,194,000 7,169,000
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1997 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 11,149,000 $ 11,400,000 $ 12,308,000 $ 12,212,000
Gross profit 2,720,000 2,801,000 3,046,000 3,577,000
Income from continuing operations 353,000 395,000 500,000 791,000
Loss from discontinued operations (15,000) (49,000) (145,000) (475,000)
Net income 338,000 346,000 355,000 316,000
Basic earnings (loss) per common share:
Continuing operations 0.05 0.06 0.07 0.12
Discontinued operations 0.00 (0.01) (0.02) (0.07)
Total * 0.05 0.05 0.05 0.05
Diluted earnings (loss) per common share:
Continuing operations 0.05 0.06 0.07 0.12
Discontinued operations 0.00 (0.01) (0.02) (0.07)
Total * 0.05 0.05 0.05 0.05
Weighted average common shares outstanding 6,676,000 6,704,000 6,710,000 6,719,000
Dilutive effect of stock options -- -- 42,000 39,000
Weighted average common shares outstanding,
assuming dilution 6,676,000 6,704,000 6,752,000 6,758,000
============ ============ ============ ============
</TABLE>
* Per share data may not always add to the total for the year because each
figure is independently calculated.
Page 42 of 53
<PAGE>
Schedule II
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended January 31, 1998, 1997 and 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions -
Balance at charged to Deductions Balance
beginning to costs - describe at end
Description of period and expenses (a) of period
- --------------------------------------------------------------------------------
Allowance for
doubtful accounts
receivable:
1998 $ 703,000 $ 207,000 $(244,000) $ 666,000
========= ========= ========= =========
1997 $ 595,000 $ 349,000 $(241,000) $ 703,000
========= ========= ========= =========
1996 $ 577,000 $ 319,000 $(301,000) $ 595,000
========= ========= ========= =========
(a) Write-off of uncollectible accounts receivable, net of recoveries.
Page 43 of 53
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- --------------------------------------------------------------------------------
2 Agreement and plan of merger of National Technical n/a
Systems, Inc., a Delaware corporation into National
Technical Systems, Inc., a California corporation
(formerly NTS Merger corporation), (filed as Exhibit
2 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1997, and is
incorporated herein by reference thereto).
3(i) Articles of incorporation of National Technical n/a
Systems, Inc., a California corporation (formerly
NTS Merger corporation), (filed as Exhibit 3(i) to
the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997, and is
incorporated herein by reference thereto).
3(ii) Bylaws of National Technical Systems, Inc., a n/a
California corporation (formerly NTS Merger
corporation), (filed as Exhibit 3(ii) to the
Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1997, and is incorporated
herein by reference thereto).
10(a)1 Form of the Company's 1994 Stock Option Plan (filed as n/a
Appendix B to the Company's Proxy Statement for
Annual Meeting of June 30, 1994, and is incorporated
herein by reference thereto).
10(b)1 Form of the Company's 1988 Stock Option Plan (filed as n/a
Exhibit A to the Company's Proxy Statement for
Annual Meeting of June 18, 1988, and is incorporated
herein by reference thereto).
10(c)1 National Technical Systems Credit Agreement between n/a
Sanwa Bank California and Mellon Bank dated
September 8, 1997 (filed as exhibit 10.7 to the
Company's form 10-Q for the quarter ended October 31,
1997, and is incorporated herein by reference thereto).
21 Subsidiaries of the Registrant. ___
23.1 Consent of Ernst & Young LLP, Independent Auditors. ___
99.1 Undertakings incorporated by reference into ___
Form S-8 Registration Statement No. 33-48211.
99.2 Undertakings incorporated by reference into ___
Form S-8 Registration Statement No. 2-83778.
99.3 Undertakings incorporated by reference into ___
Form S-8 Registration Statement No. 333-04905.
27 Financial Data Schedule ___
Page 44 of 53
<PAGE>
EXHIBIT 21
NATIONAL TECHNICAL SYSTEMS, INC.
LIST OF SUBSIDIARIES
NTS, Technical Systems, a California Corp.
(Formerly 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.
NTS Technical Services, Inc., a Florida Corp.
(Formerly 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.) (Operations combined with National
Technical Systems - Certification Services)
National Quality Assurance - USA, Inc., a Massachusetts Corp.
(50% owned)
National Technical Systems-Certification Services, a Delaware Corporation
Page 45 of 53
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 2-83778, Form S-8 No. 33-48211, and Form S-8 No. 333-04905)
pertaining to the National Technical Systems, Inc. Employee Stock Ownership
Plan, the National Technical Systems, Inc. 1988 Stock Option Plan and the
National Technical Systems, Inc. 1994 Stock Option Plan in the related
Prospectuses of our report dated April 10, 1998, 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, 1998.
/s/ Ernst & Young LLP
Woodland Hills, California
April 28, 1998
Page 46 of 53
<PAGE>
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 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
Page 47 of 53
<PAGE>
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
Page 48 of 53
<PAGE>
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 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.
Page 49 of 53
<PAGE>
(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
Page 50 of 53
<PAGE>
EXHIBIT 99.3
To be Incorporated By Reference Into Form S-8
Registration Statement No. 333-04905
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 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
Page 51 of 53
<PAGE>
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 99.3
Page 52 of 53
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 2,101
<SECURITIES> 0
<RECEIVABLES> 15,546
<ALLOWANCES> 666
<INVENTORY> 1,860
<CURRENT-ASSETS> 20,230
<PP&E> 48,509
<DEPRECIATION> 29,527
<TOTAL-ASSETS> 40,719
<CURRENT-LIABILITIES> 6,554
<BONDS> 0
0
0
<COMMON> 11,069
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,719
<SALES> 56,114
<TOTAL-REVENUES> 56,114
<CGS> 40,863
<TOTAL-COSTS> 40,863
<OTHER-EXPENSES> 9,173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,135
<INCOME-PRETAX> 4,941
<INCOME-TAX> 1,968
<INCOME-CONTINUING> 2,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,947
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
