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, 1999
[ ] 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-NMS
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 20, 1999 was approximately $26,821,000.
The number of shares of Registrant's Common Stock outstanding on April 20, 1999
was 8,321,046.
Portions of the Proxy Statement of Company for the Annual Meeting of
Shareholders to be held on June 25, 1999, are incorporated by reference into
Part III of this report.
Exhibit Index on Page 55
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NATIONAL TECHNICAL SYSTEMS, INC.
Annual Report (Form 10-K)
For Year Ended January 31, 1999
PART I
------
Except for the historical information contained herein, certain
statements in this Form 10-K contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
can be identified by the use of forward-looking words such as "may", "will",
"expect","anticipate", "intend", "estimate", "continue", "behave" and similar
words. Financial information contained herein, to the extent it is predictive of
financial condition and results of operations that would have occurred on the
basis of certain stated assumptions, may also be characterized as
forward-looking statements. Although forward-looking statements are based on
assumptions made, and information believed by management to be reasonable, no
assurance can be given that such statements will prove to be correct. Such
statements are subject to certain risks, uncertainties and assumptions. Actual
outcomes are dependent upon National Technical Systems, Inc's ( "NTS" or "the
Company") successful performance of internal plans, ability to effectively
integrate acquired companies, customer changes in short range and long range
plans, competition in the Company's services areas and pricing, continued
acceptance of new services, performance issues with key customers, and general
economic risks and uncertainties.
1. BUSINESS
A. General
NTS is a diversified services company which operates in two
segments: "IT Solutions" and "Engineering & Evaluation". The business of the
Company 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 Company's corporate headquarters maintains overall supervision, coordination
and financial control.
B. History
The Company was founded in 1961, incorporated in 1968 in California
and subsequently was incorporated in Delaware in April 1987 to serve as a
holding company for its subsidiaries. On January 31, 1997, the Company was
merged into a newly formed California corporation named National Technical
Systems, Inc. On October 30, 1998, the company completed its merger with XXCAL,
Inc. and acquisition of XXCAL Limited (together, "XXCAL"). The merger was
treated as a pooling of interests whereby NTS issued to the shareholders of
XXCAL 1,297,878 shares of NTS common stock constituting 15.6% of the outstanding
common stock of NTS after giving effect to the merger.
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Unless indicated otherwise, the term "Company" or "NTS" includes
National Technical Systems, Inc., a California corporation and its wholly owned
subsidiaries, NTS Technical Systems, a California corporation, Acton
Environmental Testing Corporation, a Massachusetts corporation, Approved
Engineering Test Laboratories, Inc., a California corporation, ETCR Inc., a
California corporation, Wise and Associates, Inc., a Texas corporation, National
Technical Services, Inc., (formerly S&W Technical Services) a Florida
corporation, XXCAL, Inc., a California corporation and XXCAL Limited, a United
Kingdom corporation, National Quality Assurance - USA, Inc. (NQA), a 50% owned
Massachusetts corporation and NTS - CS, a Delaware corporation.
Historically, the Company'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 fiscal
1998, 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. In fiscal 1999, NTS
acquired the assets, customers and personnel of NMi USA, a Netherlands company
located in Tinton Falls, New Jersey.
The Company, now, also performs information technology ("IT")
managed services which includes technical staffing on a temporary or permanent
basis, testing, project management, consulting and quality registration
services.
During fiscal 1995, the Company started its Environmental Services
Group which was operated out of Fullerton, California. 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. 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) IT Solutions
The IT Solutions Group is a provider of information technology, managed
services, staffing, testing, and International Standards Organization (ISO)
registration services to a diverse group of corporate clients. Utilizing
full-time salaried and hourly consultants, the Company offers a wide range of
staffing solutions to meet its clients' IT, information systems ("IS") and
software engineering needs. The Group's technical consultants have expertise on
many hardware platforms utilizing a wide variety of operating systems, languages
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and software applications. It provides services covering all aspects of
development, including planning, design, programming, implementation, testing,
maintenance documentation and ongoing management.
NTS provides support for both software development firms, computer
industry hardware manufacturers and networking companies in the areas of quality
assurance, programming, compatibility and certification testing, functionality
testing, usability testing, test plan development and documentation. Rapid
changes in technology require software manufacturers to ensure that their new
products are compatible with older hardware platforms as well as the variety of
products available to users. Hardware manufacturers need to assure that new
products they develop are compatible with existing operational programs they
embed in their products and network developers must assure compatibility with
the systems used by industry. NTS performs such compatibility testing for the
information technology industry. In addition to performing such services at NTS
facilities in the U. S., Great Britain and Japan, NTS provides trained test
specialists at its client's facilities during their peak demand.
To support these efforts, NTS programming experts have developed firmware,
device drivers, test programs, automated test scripts and benchmark suites for
various manufacturers using Microsoft Visual Studio. NTS engineers can also
create automated test procedures or test scripts which help validate
applications when changes are made or bugs fixed in applications.
NTS also provides other specialty staffing services such as fault-tolerant
application development, network management and desktop services,
internet/intranet testing and support and packaged software testing. Help desk
support engineers, designers and drafters are made available to the energy
generation and petrochemical industries.
With the ever increasing globalization of industry and trade, the
international community has developed a system of quality standards to insure
that products manufactured anywhere in the world conform to acceptable standards
when sold anywhere else in the world. These standards developed by ISO, and
applicable to different industries such as aerospace, automotive and
environmental, have at their core audits by accredited agencies aimed at
registering compliant firms so that they will be able to ship their products
off-shore. NTS provides such third party registrations. To accomplish
registration, NTS audits a company's quality policy, quality system
documentation and quality records through on-site assessment. Such assessment
determines whether the quality system is defined, documented, deployed and
consistently implemented, and that the required documentation and records are
current and available. If the client's quality system is verified to conform to
the requirements of the applicable ISO standard, NTS issues a certificate
describing the scope of the client's quality system which has been certified.
The client is then entitled to display the Registrar's mark on advertising,
stationery and its products as evidence that it has achieved ISO registration.
Following this, NTS performs periodic follow-up audits to assure that the client
remains in compliance.
As of January 31, 1999, the IT Solutions group served its clients from 18
locations in 10 states and through two international testing facilities:
Calabasas, San Francisco, Los Angeles and San Jose, CA; Boulder and Sedalina,
CO; Atlanta, GA; Rye Brook, NY; Raleigh/Durham, NC; Hillsboro, OH; San Antonio,
Irving, Houston, Dallas and Austin, TX; Baton Rouge and Lake Charles, LA; Acton,
MA; Newport News, VA; London, England; and Yokohama, Japan.
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INDUSTRY OVERVIEW
Over the years, businesses have become increasingly dependent on the use
of IT to manage operations more efficiently and remain competitive. Important
internal functions, ranging from financial reporting to production and inventory
management, have become automated through the use of applications software. In
addition, as information systems have become less expensive, more powerful and
easier to use, the number and level of employees who use and depend upon these
systems have significantly increased.
Due to the rapid development of technology and the shift from closed,
proprietary systems to open systems, many companies' computer systems
incorporate a variety of hardware and software components which may span a
number of technology generations. For example, a company may operate
concurrently on mainframe, midrange and client/server hardware platforms running
a variety of operating systems and relational databases. Systems applications
development has become much more important in this environment as IT departments
strive to integrate a company's information processing capabilities into a
single system while providing for ever-changing functionality.
The increase in the use of sophisticated information technologies has
occurred at the same time that economic factors have led to reductions in
corporate workforces and a return by businesses to a focus on their core
competencies. Faced with the challenge of implementing and operating more
complex information systems without enlarging their corporate staffs, businesses
are increasingly using IT staffing companies to supplement their IT operations.
Utilizing outside IT technical consultants allows a company's management to
focus on core business operations, affords greater staffing flexibility in IT
departments and increases a company's ability to adapt to and keep pace with
rapidly changing and increasingly complex technologies. It also provides access
to specialized technical skills on a project-by-project basis, better matches
staffing levels to current needs, converts fixed labor costs into variable
costs, and reduces the cost of recruiting, training and terminating employees as
evolving technologies require new programming skill sets.
According to the May 1998 Staffing Industry Report, revenues from
technical/computer temporary staffing are estimated to have grown from $7.1
billion in 1994 to $18.5 billion in 1998. The report further estimated an annual
growth rate for 1999 of approximately 25%.
BUSINESS STRATEGY
To meet its clients' comprehensive IT needs, the IT Solutions Group is
dedicated to providing solutions to meet its clients' systems, applications,
development, and other specialized technical needs. NTS's business strategy
encompasses the following elements, which management believes are necessary to
ensure high-quality standards and to achieve consistently strong financial
performance:
1) Recruit, develop and retain qualified technical consultants. A key element of
the Company's success is its ability to recruit, develop and retain qualified
technical consultants. Management believes that it has been successful in doing
so by offering its technical consultants competitive wages, offering its
technical consultants an opportunity to purchase a comprehensive employee
benefits package and effectively and consistently communicating with its
technical consultants. However, qualified technical consultants are in great
demand worldwide and, accordingly, competition for individuals with proven
technical skills is intense. NTS attracts new consultants in its established
markets primarily through referrals from other technical consultants and the
Internet via its website and direct and indirect recruiting capabilities outside
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the United States, including its two international offices. Through these
sources, NTS has compiled a database which includes approximately 100,000 highly
qualified technical consultants who become potential resources to place on
assignment. NTS is working to continually improve its recruiting capabilities,
but expects to experience the same types of difficulties competing for technical
consultants as other providers of IT services. NTS competes for technical
consultants with other providers of IT services, providers of outsourcing
services, temporary personnel agencies, systems integrators, computer systems
consultants, clients and potential clients.
2) Emphasize a relationship-oriented approach. NTS serves as an extension of its
clients' internal information systems operations and as a long-term partner to
fulfill its clients' IT staffing requirements. As a result, NTS emphasizes a
relationship-oriented approach to business, rather than the assignment-oriented
approach used by many of its competitors. To develop close client relationships,
NTS's regional managers and account managers regularly meet with both existing
and prospective clients to help design solutions for, and identify the resources
needed to execute their IT strategies.
3) Focus on improving margins. NTS continuously seeks opportunities to enhance
its margins by offering services for which higher margins can be obtained and by
reducing costs. For example, NTS offers network management and desktop services,
Internet/Intranet development and support, packaged software testing, software
engineering and help desk support. In addition, NTS has identified, targeted and
expanded into geographic markets which provide relatively greater profitability.
NTS also actively seeks acquisition candidates with margins that are, at a
minimum, comparable to those of NTS. Finally, NTS focuses on enhancing operating
efficiencies and has made and continues to make a substantial investment in
upgrading its support systems in order to improve the efficiency of its
accounting, sales, recruiting and marketing operations.
4) Provide comprehensive solutions. NTS provides responsive, timely and
comprehensive IT solutions for all aspects of the systems' applications
development life cycle and for other specialized technical needs. NTS believes
that this ability to provide for the full range of such services is an important
competitive advantage. NTS also works to ensure that its technical consultants
have the expertise and skills needed to keep pace with rapidly evolving
information technologies.
GROWTH STRATEGY
NTS's growth strategy is to expand the geographic scope of its business
through internal development and acquisitions and to continue to develop its
existing markets by adding new clients in the geographic markets it currently
serves, increasing the range of services it provides to its existing clients,
attracting and retaining qualified technical consultants from a variety of
sources, both national and international; and pursuing strategic relationships
with non-competing organizations.
As part of its growth strategy, NTS continually reviews and evaluates
potential acquisition candidates and believes that there are significant
acquisition opportunities throughout the United States. In evaluating potential
acquisition candidates, NTS seeks profitable IT companies with a proven
management team, a core group of highly qualified technical consultants, a
reputation for quality, an attractive service offering and an established client
base. NTS also evaluates the cultural fit of an acquisition candidate, as well
as the candidate's historical growth rates and financial results. NTS believes
that it is an attractive acquirer due to its ability to provide an acquired
company with expanded services and a broader geographic base, the potential for
certain economies of scale and operating efficiencies, its financial strength
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and visibility as a public company, and its decentralized management strategy
pursuant to which NTS's managers are given significant autonomy to make most
day-to-day operating decisions.
In addition to expanding the geographic scope of its business, NTS is
continuously seeking new clients in the geographic markets it currently serves
and to increase the range of services it provides to its existing clients. The
addition of new clients in existing markets enables NTS to utilize more
profitably its administrative and corporate infrastructure. New clients,
particularly in new industries, also permit NTS to diversify its client base and
thus reduce its exposure to fluctuations in industry business cycles. In
addition, NTS continues to add new specialty service offerings as it has done
with fault-tolerant applications development, network management and desktop
services, Internet/Intranet development and support, packaged software
implementation, software engineering and help desk support. NTS is positioned to
provide Year 2000 conversion project management and resources to existing and
new clients.
NTS's growth strategy is also dependent upon NTS's ability to attract and
retain qualified technical consultants in those markets in which the Company has
an established presence, as well as in less established markets. NTS's resource
managers are responsible for recruiting and establishing long-term relationships
with NTS's technical consultants. NTS is implementing a state-of-the-art
integrated information management system which will provide most of its offices
with on-line access to information on existing and prospective technical
consultants and clients.
(ii) Engineering & Evaluation
The Engineering & Evaluation Group of NTS is one of the largest
independent product and systems qualification organization in the U. S. with
facilities throughout the country and provides highly trained technical
personnel for analysis, engineering, and 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 nuclear safety equipment (but
excluding radioactive material). Other services performed include analytical
chemistry and failure analysis.
The tremendous expansion of the IT business directly affecting the
telecommunications industry has led NTS to become actively involved in the
engineering and evaluation of a broad array of telecommunications equipment and
systems for most of the manufacturers of such equipment. NTS's services are
performed in accordance with the Network Equipment Building Systems
specifications, as required by the telecommunications industry.
NTS has achieved certification as a Nationally Recognized Test Laboratory
(NRTL) by the U. S. Government and now performs safety testing and listing for a
variety of product manufacturers including telecommunications, medical,
computers and other business equipment, power supplies and other electrical
system products. In addition, NTS also does conformity assessment testing for
manufacturers for them to attain European Community marking.
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NTS services include the development of effective product screening
procedures, design and fabrication of test fixtures plus failure analysis and
design modification support. NTS is also one of the leading providers of fluid
components and systems testing. NTS designs and builds custom facilities and
advanced instrumentation and data acquisition systems to support all types of
flow testing for gases, liquids and cryogenics. NTS is capable of performing
structural testing and analysis, in particular structural loading of large
articles such as complete airframes. NTS also performs fatigue testing of
critical hardware items such as engine blades and high pressure fluid
components. NTS offers clients a way to minimize their personnel and testing
time and costs by utilizing NTS's on-site climatic, dynamic, safety and
electromagnetic compatibility test capabilities. NTS seeks to provide a "one
stop" resource and single source responsibility for environmental qualification,
compliance, reliability and safety testing.
The Engineering & Evaluation Group provides such services to its
customers on fixed price, time and material and cost-reimbursement bases. The
group markets these services through a sales force located throughout the United
States and performs these services at its facilities or at the client's
facility. The Group also performs quality registration services for various
clients in the aerospace, defense, automotive, telecommunications and
electronics industries.
NTS is engaged in supplying services to U.S. government defense programs
in its Engineering & Evaluation 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.
NTS provides its Engineering & Evaluation services through 13
independent qualification testing facilities in North America. NTS laboratories
in Acton and Boxborough, MA, Los Angeles, Fullerton, Sacramento, Saugus, and
Valencia, CA, Camden, AR, Detroit, MI, Fredericksburg, VI, Largo, FL, Tinton
Falls, NJ and Tempe, AZ offer full-service environmental qualification for items
ranging from circuit boards to entire vehicles, including spacecraft.
INDUSTRY OVERVIEW
Product manufacturers are increasingly fulfilling more of their evaluation
testing on an outsourcing basis in order to reduce costs, avoid large capital
expenditures, save time and remain competitive in a shrinking defense and
aerospace market. In rapidly expanding and short technological life cycles in
the IT industries, manufacturers seek to avoid the rapid obsolescence of special
purpose equipment. Thus, while the industrial product test business has remained
flat over the past ten years, opportunity has arisen for outsourcing firms like
NTS to maintain and even grow their businesses. By diversifying from heavy
dependence on aerospace/defense to commercial industries such as IT, automotive
and medical industries, NTS has avoided the downturn and has even been able to
grow.
BUSINESS STRATEGY
To meet its clients' needs, NTS is committed to maintaining its position
at the cutting-edge of technology by continuously upgrading its facilities and
equipment. In addition, NTS's movement into new technological areas will require
it to invest in equipment needed to adequately service clients' needs. This will
be accomplished through close consultation with NTS's existing and prospective
clients to ascertain their needs for the future. At the same time NTS will
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continue to maintain its relations with its staff of experienced engineers and
technicians by offering attractive benefit programs, opportunities for
advancement and learning, and an incentive plan which is one of the finest
offered by any firm in NTS's industry. The soundness of these approaches can be
demonstrated by the fact that about 25% of NTS's employees have been with the
Company for 20 years or more.
GROWTH STRATEGY
NTS's growth strategy for the Engineering & Evaluations Group is to
expand its geographic scope of business primarily via internal growth as the
availability of acceptable testing business for acquisition is very limited. The
primary method of growth for the Group will be from expansion of NTS's services
to technological areas NTS is not yet serving or has only in recent years begun
to penetrate. The most prominent of these is IT involving telecommunications,
networks, computers and their ancillary equipment and systems. NTS has been
investing heavily in equipment to support these areas and hopes to capitalize
quickly on these expanded capabilities by emphasizing marketing efforts towards
those industries.
(iii) Competition.
Potential customers for services offered by the IT Solutions group 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.
NTS estimates the total market to be in excess of $200 billion for all staffing
and information technology business. The Company competes in this segment
primarily on the basis of its niche position and price and high quality service.
In addition, the Company has established strategic alliances with other
technical staffing companies in order to more effectively compete in the
marketplace.
Potential customers for services offered by the Engineering & Evaluation
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 Company is unable
to determine its competitive position in this market. NTS 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 Company competes with a host of companies such as Underwriters
Laboratories and Southwest Research.
(iv) Backlog.
The Company's backlog at January 31, 1999 and 1998 is as follows:
1999 1998
---- ----
Engineering & Evaluation $28,453,000 $18,059,000
IT Solutions 15,202,000 13,787,000
---------- ----------
Total Backlog $43,655,000 $31,846,000
=========== ===========
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The Company estimates that approximately 85% of the backlog at January 31, 1999
will be completed by January 31, 2000.
(v) General.
(a) Service Mark. The Company has registered its service marks
"NTS" and "XXCAL" 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 Company.
(c) Seasonal Effect. With IT Solutions now accounting for
approximately half of the Company's revenues, NTS generally experiences lower
revenues in the fourth quarter of the fiscal year due to the high number of
holidays during that period which includes Thanksgiving, Christmas and New Year.
(d) Employees. The Company employed 806 individuals at January 31,
1999 and 777 in 1998 as follows:
1999 1998
---- -----
Engineering & Evaluation 305 298
IT Solutions 487 466
Corporate Administration 14 13
----- -----
Total 806 777
===== =====
Approximately 125 of the Company's Engineering & Evaluation employees
occupy management and professional positions, and approximately 300 of the IT
Solutions employees have degrees in engineering and other fields. None of the
employees of the Company is represented by a union. The Company considers its
relationship with its employees to be good.
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ITEM 2. PROPERTIES.
A. Operations. The Company 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)
- --------------------------------------------------------------------------------
Arizona Tempe 17,100 n/a
Arkansas Camden 22,400 216
California Calabasas 6,600 n/a
Fullerton 20,200 n/a
Los Angeles (LAX) 16,000 2
Los Angeles (XXCAL) 22,000 n/a
San Francisco 3,000 n/a
Valencia 45,000 n/a
Colorado Longmont 2,000 n/a
Florida Largo 16,000 n/a
Louisiana Zachary 1,500 n/a
Michigan Detroit 64,900 n/a
New Jersey Tinton Falls 7,600 n/a
North Carolina Raleigh 1,800 n/a
Texas Austin 3,000 n/a
San Antonio 8,000 n/a
------- ---
Total leased properties 257,100 218
======= ===
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B. The Company 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 Company does not anticipate problems in
securing such additional space.
C. Investment Properties.
The Company owns four acres of unimproved real property in
Escondido, California which is currently for sale. In addition, the Company
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
Company.
ITEM 3. LEGAL PROCEEDINGS.
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 pending claims or suits would materially affect
the financial position or the results of the operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
A. Principal Market
The Company'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, 1999 and 1998 is
presented below:
1999 1998
---- ----
High Low High Low
---- --- ---- ---
First Quarter 8-1/2 6-1/8 3-1/16 2-7/16
Second Quarter 9-5/8 6-5/8 7-3/8 2-3/4
Third Quarter 7-1/2 3-7/8 11 4-3/4
Fourth Quarter 6-1/4 4-1/4 9-1/8 6
B. Holders of Common Stock.
As of the close of business on April 20, 1999, there were 740
holders of record of the Company's common stock. The number of holders of record
is based on the actual number of holders registered on the books of the
Company'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 26, 1998, the Company declared a seven cents per share cash
dividend which was paid on August 4, 1998 to shareholders of record on July 15,
1998.
On June 27, 1997, the Company declared a six cents per share cash
dividend which was paid on August 5, 1997 to shareholders of record on July 22,
1997.
The Company 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, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net revenues $ 89,537 $ 81,297 $ 74,413 $ 67,518 $ 57,618
Gross profit 26,554 23,712 20,894 17,634 14,590
Interest expense 1,253 1,245 1,161 1,326 1,165
Income from continuing operations before income taxes
and minority interest 4,887 5,495 4,291 3,597 1,370
Income taxes 1,742 2,014 1,588 1,000 578
-------- -------- -------- -------- --------
Income from continuing operations before minority interest 3,145 3,481 2,703 2,597 792
Minority interest (24) (26) 10 (55) --
Loss from discontinued operations, net of income taxes -- -- (684) (246) (137)
Cumulative effect of change in accounting for start-up
expense, net of income taxes (482) -- -- -- --
-------- -------- -------- -------- --------
Net income $ 2,639 $ 3,455 $ 2,029 $ 2,296 $ 655
======== ======== ======== ======== ========
Basic earnings (loss) per common share:
Continuing operations $ 0.38 $ 0.43 $ 0.34 $ 0.32 $ 0.10
Discontinued operations -- -- (0.09) (0.03) (0.02)
Cumulative effect of change in accounting (0.06) -- -- -- --
-------- -------- -------- -------- --------
Net income * $ 0.32 $ 0.43 $ 0.26 $ 0.29 $ 0.08
======== ======== ======== ======== ========
Diluted earnings (loss) per common share:
Continuing operations $ 0.36 $ 0.41 $ 0.33 $ 0.31 $ 0.10
Discontinued operations -- -- (0.08) (0.03) (0.02)
Cumulative effect of change in accounting (0.06) -- -- -- --
-------- -------- -------- -------- --------
Net income * $ 0.31 $ 0.41 $ 0.25 $ 0.28 $ 0.08
======== ======== ======== ======== ========
Weighted average common shares outstanding 8,236 8,061 7,902 7,860 7,822
Dilutive effect of stock options 374 389 264 221 257
-------- -------- -------- -------- --------
Weighted average common shares outstanding, assuming
dilution 8,610 8,450 8,166 8,081 8,079
======== ======== ======== ======== ========
Cash dividends paid per common share $ 0.07 $ 0.06 $ 0.05 $ 0.02 $ 0.02
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 16,951 $ 15,912 $ 11,265 $ 10,354 $ 8,371
Total assets 49,831 46,112 40,377 39,048 36,905
Long-term debt, excluding current installments 13,076 12,859 9,324 9,376 10,418
Shareholders' equity 24,102 22,042 18,791 17,613 16,045
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.
* Per share data may not always add up to total for the year because each
figure is independently calculated.
</TABLE>
Page 14 of 68
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
On October 30, 1998, the Company completed its merger with XXCAL. The
transaction was treated as a pooling of interests whereby NTS issued to the
shareholders of XXCAL 1,297,878 shares of NTS common stock constituting 15.6% of
the outstanding common stock of NTS after giving effect to the merger.
XXCAL is principally engaged in outsourcing personnel for a wide variety
of temporary technical and professional positions into the IT and IS industries
including compatibility testing of hardware and software components. XXCAL has
approximately 300 employees and has offices in Los Angeles, San Francisco and
San Jose, California; Austin and Houston, Texas; London, England; and Yokohama,
Japan.
After the merger, the Company reorganized itself into two major
operational groups: (1) The Engineering & Evaluation Group which includes all
the technical services testing facilities and the certification services unit;
and (2) The IT Solutions Group which combines XXCAL with the NTS technical
staffing and registration businesses. Each group is under the direction of its
own executive and operational management team. Accordingly, the Company's
segment reporting reflects this new structure.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. All information is based
upon the "pooling of interests" method of accounting pursuant to Opinion No. 16
of the Accounting Principles Board. They include the combined financial
statements of NTS and XXCAL from the beginning of the current fiscal year ended
January 31, 1999. All prior year financial statements have also been restated to
reflect the pooling of interests method of accounting and are based on fiscal
years ended as of January 31 for NTS and December 31 for XXCAL.
RESULTS OF OPERATIONS
Net Revenues
(Dollars in thousands)
1999 % chg 1998 % chg 1997
---- ----- ---- ----- ----
Engineering & Evaluation $43,684 2.2% $42,750 13.3% $37,716
IT Solutions 45,853 19.0% 38,547 5.0% 36,697
------- ------- -------
Total $89,537 10.1% $81,297 9.3% $74,413
For the year ended January 31, 1999, total net revenues increased
$8,240,000 or 10.1% when compared with fiscal 1998.
For the year ended January 31, 1998, total net revenues increased
$6,884,000 or 9.3% when compared with fiscal 1997.
Page 15 of 68
<PAGE>
ENGINEERING & EVALUATION:
Revenues in the Engineering & Evaluation segment increased by $934,000
or 2.2% in fiscal 1999 compared to fiscal 1998 primarily due to the additional
revenues generated from two new testing facilities which commenced operations
during fiscal 1998. This increase was partially offset by decreases in revenues
generated by some of the facilities which have experienced a slowdown in their
production activities as some programs reached maturity. Also, certain of the
newer research and development programs being conducted by the Company's clients
are experiencing difficulties producing new products due to technological
problems thus delaying production of hardware for evaluation and testing. This
trend is expected to improve as some of the newer programs are starting to go
into full production.
For the year ended January 31, 1998, revenues in the Engineering and
Evaluation segment increased $5,034,000 or 13.3% when compared with fiscal 1997
primarily 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
and an increase in outsourcing of engineering and evaluation services by
commercial customers.
IT SOLUTIONS:
Revenues in the IT Solutions segment increased by $7,306,000 or 19.0% in
fiscal 1999 compared to fiscal 1998 due to successful alliances with major high
technology companies and other major technical staffing companies, the increase
in fee placements and permanent placements and the opening of offices in new
markets. In addition, there was an increase in registration revenues due to
increased demand by U.S. companies for ISO 9000 certification.
For the year ended January 31, 1998, revenues in the IT Solutions segment
increased $1,850,000 or 5.0% when compared with fiscal 1997 due to the
continuing success of the Company's strategic alliances with major technical
staffing companies, the opening of three new staffing offices during the first
six months of fiscal 1997 and the acquisition of the staffing division of
Texas-based Johnson Engineering Corporation in the third quarter of fiscal 1997.
Gross Profit
(Dollars in thousands)
1999 % chg 1998 % chg 1997
---- ----- ---- ----- ----
Engineering & Evaluation $12,530 4.8% $11,953 26.0% $9,486
% to segment revenues 28.7% 28.0% 25.2%
IT Solutions 14,024 19.3% 11,759 3.1% 11,408
% to segment revenues 30.6% 30.5% 31.1%
--------- ------- -------
Total $ 26,554 12.0% $23,712 13.5% $20,894
% to net revenues 29.7% 29.2% 28.1%
For the year ended January 31, 1999, total gross profit increased
$2,842,000 or 12.0% when compared with fiscal 1998.
For the year ended January 31, 1998, total gross profit increased
2,818,000 or 13.5% when compared with fiscal 1997.
Page 16 of 68
<PAGE>
ENGINEERING & EVALUATION:
Gross profit for the Engineering & Evaluation segment slightly increased
by $577,000 or 4.8% in fiscal 1999 when compared with fiscal 1998 as a result of
the increase of 2.2% in revenues. Despite the competitive pressures from other
companies and government laboratories, which are becoming more aggressive in
competing with private industry, combined with the slowdown in revenues
discussed above, gross profits as a percentage of net revenues slightly
increased in fiscal 1999 when compared with fiscal 1998 as a result of the
Company's continuing successful cost containment programs.
For the year ended January 31, 1998, gross profits for the Engineering and
Evaluation segment increased by $2,467,000 or 26.0% as a result of increased
revenues in fiscal 1998 compared to fiscal 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 and the success of its continued cost
containment programs.
IT SOLUTIONS
Gross profit for the IT Solutions segment increased by $2,265,000 or 19.3%
in fiscal 1999 when compared to the same period in 1998 due to the continued
growth in this segment of the business and obtaining more fee placements and
permanent placement contracts. Gross profit as a percentage of net revenues
remained approximately the same in fiscal 1999 when compared to the same period
in 1998.
For the year ended January 31, 1998, gross profit for the IT Solutions
segment increased by $351,000 or 3.1% as a result of increased revenues in
fiscal 1998 compared to fiscal 1997. Gross profit as a percentage of net
revenues in fiscal 1998 slightly decreased when compared to fiscal 1997 due
primarily to labor costs associated with opening four new offices in fiscal
1998.
Selling, General and Administrative
(Dollars in thousands)
1999 % chg 1998 % chg 1997
----- ----- ----- ----- ----
Engineering & Evaluation $7,421 17.5% $6,315 11.0% $5,690
% to segment revenues 17.0% 14.8% 15.1%
IT Solutions 12,177 13.0% 10,775 11.0% 9,708
% to segment revenues 26.6% 28.0% 26.5%
------- ------- -------
Total $19,598 14.7% $17,090 11.0% $15,398
% to net revenues 21.9% 21.0% 20.7%
For the year ended January 31, 1999, total selling, general and
administrative expenses increased $2,508,000 or 14.7% when compared with fiscal
1998.
For the year ended January 31, 1998, total selling, general and
administrative expenses increased $1,692,000 or 11% when compared with fiscal
1997.
Page 17 of 68
<PAGE>
ENGINEERING & EVALUATION:
Selling, general and administrative expenses increased by $1,106,000 or
17.5% in fiscal 1999 when compared with fiscal 1998. This increase was primarily
due to efforts to expand the base of business into new technology areas by
engaging specialists in these new areas to offset the relatively flat growth in
the basic testing business. The Company is redirecting some of its sales efforts
to procure larger evaluation programs which require a greater depth of technical
knowledge. Thus, the Company has hired a number of such specialists which has
caused selling, general and administrative expenses to increase in advance of
achieving results from their work.
For the year ended January 31, 1998, selling, general and administrative
expenses for the Engineering & Evaluation segment increased by $625,000 or
11.0% when compared to fiscal 1997. This increase was primarily due to the
increase in incentive sales compensation to the Company's sales representatives
and managers, increases in marketing and advertising costs as well as expenses
related to the opening of a new testing facility in Largo Florida and taking
over the test laboratory facilities at McClellan Air Force Base in Sacramento,
California in fiscal 1998.
IT SOLUTIONS:
Selling, general and administrative expenses increased by $1,402,000 or
13.0% in fiscal 1999 when compared with fiscal 1998. This increase was primarily
due to costs related to the planned expansion of the sales and marketing
capabilities through new marketing programs and expansion efforts in new
markets. Selling, general and administrative expenses as a percentage of net
revenues decreased in fiscal 1999 when compared to the same period in 1998.
For the year ended January 31, 1998, selling, general and administrative
expenses for the IT solutions segment increased by $1,067,000 or 11.0% when
compared to fiscal 1997. Selling, general and administrative expenses as a
percentage of net revenues also increased in 1998 when compared to the same
period in 1997. These increases were primarily due to the addition of expenses
related to the acquisition of the staffing division of Texas-based Johnson
Engineering Corporation in Boulder, Colorado along with expenses related to the
opening of three new staffing offices. The Company continues to look for new
ways to reduce costs yet remain effective in all segments of its business.
MERGER COSTS
During the current fiscal year, the Company incurred $907,000 in one-time
costs related to the merger of NTS and XXCAL. These costs are related to outside
consulting, accounting, and legal fees and other fees and expenses specifically
associated with the merger. In accordance with APB 16, these costs were expensed
as incurred.
INTEREST EXPENSE
Interest expense increased $8,000 in fiscal 1999 when compared to fiscal
1998. This small increase was due primarily to slightly higher weighted average
debt balances in fiscal 1999 partially offset by slightly lower interest rates.
Interest expense increased $84,000 in fiscal 1998 when compared to fiscal 1997.
This increase was principally due to higher weighted average debt balances in
fiscal 1998 along with comparable interest rates.
INCOME TAXES
The income tax rate for fiscal years 1999, 1998 and 1997 reflects a rate
in excess of the federal statutory rate primarily due to the inclusion of state
income taxes. The Company's fiscal 1999 income tax provision was $272,000 less
than fiscal 1998 because of a decrease in income.
Page 18 of 68
<PAGE>
The fiscal 1998 income tax provision was $426,000 more than fiscal 1997
due to the increase in income. 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
Company's deferred tax asset will be realized on the basis of offsetting it
against deferred tax liabilities and future income. It is the Company's
intention to evaluate the realizability of the deferred tax asset quarterly by
assessing the need for a valuation allowance based upon future net income of the
Company.
START-UP EXPENSES
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting the Costs of Start-Up Activities"
(SOP 98-5), which requires that costs related to start-up activities be expensed
as incurred. The Company adopted the provisions of SOP 98-5 in its financial
statements during the year ended January 31, 1999, which resulted in a one-time
charge of $482,000 (net of taxes) in start-up related expenses.
DISCONTINUED OPERATIONS
The loss from discontinued operations represents the operating results of
the Company's Environmental Services segment prior to its discontinuance in
fiscal 1997.
NET INCOME
The decrease in net income for fiscal 1999 compared to fiscal 1998 was due
primarily to merger costs of $907,000, the cumulative effect of a change in
accounting of start-up expenses of $482,000 ( net of taxes) and higher selling,
general and administrative expenses, offset by higher gross profit margins and
lower income taxes.
The increase in net income for fiscal 1998 compared to fiscal 1997 was due
primarily to higher gross profit margins in both segments of the Company's
business, and the lack of losses from the discontinuance of the Environmental
Services segment in fiscal 1997, partially offset by higher selling, general and
administrative expenses and income taxes.
YEAR 2000
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the Year 1900 rather than the Year 2000.
The Company has assessed and identified to the best of its knowledge all
requirements needed to fix potential problems related to the Year 2000 issue.
This includes: (1) the Company's business software and hardware at all of its
locations, (2) the Company's test equipment used in all the laboratories and (3)
communications with third party vendors to ensure they will meet their Year 2000
requirements.
Much of the hardware used by the Company has already been upgraded to be
Year 2000 compliant. Certain test equipment at the laboratories has been
identified to be date sensitive and vendors are supplying new Year 2000
compliant software. In situations where the software is not available, the
Company is replacing the equipment. To complete the necessary remediation of its
business systems software, the Company has identified new Year 2000 compliant
Page 19 of 68
<PAGE>
software that will replace certain crucial software applications it currently
uses. All other identified existing systems will be fixed internally. The
Company expects to complete its software remediation by June 30, 1999.
The estimated total cost for the Year 2000 project is approximately
$400,000 for new hardware, software and in-house programming. The Company has
incurred $322,000 through January 31, 1999. The Company does not expect these
costs to have a material impact on its financial position, results of operations
or cash flows. The Company has funded and will continue to fund these costs from
its operating and financing cash flows.
The Company has also contacted its major third-party vendors and is in the
process of obtaining assurances that their systems are Year 2000 compliant.
Although the Company does not anticipate any material problems resulting from
the Year 2000 issues, it is taking steps to establish a contingency plan prior
to September 1999 in the event of system failures beyond the Company's control
or in the event of failure by other companies or governmental entities to
remediate their own systems.
Business Environment
ENGINEERING & EVALUATION:
The business climate which has in the past shown signs of uncertainty and
which had appeared to stabilize last year, has again become uncertain in the
aerospace and defense industries in contrast with IT industries such as
telecommunications, electronics and medical, which have been growing rapidly.
This has occurred due to program delays in new research and development projects
caused by technical difficulties being experienced by the Company's aerospace
and defense clients. In addition, the trend to outsourcing, which started when
many aerospace contractors began downsizing, has begun to reverse. Some of the
Company's aerospace customers are now retaining programs in-house. Also,
government laboratories are becoming more aggressive in competing with private
industry for programs. All these factors have rendered the market more
competitive with an attendant pressure on profits.
IT SOLUTIONS:
The Company has aggressively pursued additional business in the growing IT
market. The Company supplies IT professionals in support of customers who need
help-desk analysts and managers; relational database administrators and
developers; application and systems programmers; configuration and project
managers; and multiple levels of system operations personnel. The Company
believes the growth in this sector will be accompanied by higher margins that
will contribute favorably to the overall product mix. Also, the Company
continues to pursue ISO registration business 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
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, cash provided by operations increased by $1,211,000 when
compared to fiscal 1998. Primary factors contributing to this were an increase
in depreciation, as well as increases in the change in accounts receivable,
accounts payable, accrued expenses, income taxes, reserve for doubtful
Page 20 of 68
<PAGE>
accounts and the inclusion in earnings of $181,000 from the merged entity that
was not included in net income. These increases were partially offset by a
decrease in net income and decreases in the change in inventories, prepaid
expenses and deferred taxes. In fiscal 1998, cash provided by operations
decreased by $326,000 over fiscal 1997, reflecting decreases from changes in
accounts receivable, other assets, accounts payable, accrued expenses and income
taxes, partially offset by an increase in net income, inventories and the lack
of loss from discontinued operations in fiscal1998.
Net cash used in investing activities in fiscal 1999 decreased $59,000 as
compared to fiscal 1998. Net cash used in investing activities in fiscal 1998
increased $1,555,000 as compared to fiscal 1997, primarily due to increased
capital requirements to continue the Company's business expansion.
Net cash used by financing activities in fiscal 1999 consisted principally
of repayments of debt and cash dividends to shareholders and subchapter S
shareholders offset by proceeds from bank loans and issuance of stock upon the
exercise of stock options. Net cash provided by financing activities in fiscal
1998 consisted of proceeds from bank loans and stock options exercised,
partially offset by cash dividends and distributions paid and repayments of
debt. Long-term debt increased $217,000 in fiscal 1999 from fiscal 1998. This
increase was principally due to new borrowings in excess of regularly scheduled
payments on long-term debt.
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 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 Company negotiated with Sanwa Bank California as
agent and Mellon Bank for a new credit agreement which replaces all of the above
agreements. The 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.
On October 30, 1998, the Sanwa and Mellon credit agreement was amended to
extend the term of the revolving line to September 8, 2000 and to increase the
revolving line amount from $6,000,000 to $8,000,000 at an interest rate equal to
the Bank's reference rate. The outstanding balance at January 31, 1999 is
$4,107,000 compared with an outstanding balance of $4,830,000 at January 31,
1998. In addition, the Company added a new term loan in the principal amount of
$2,000,000 at an interest rate equal to the Bank's reference rate plus 0.25% and
a maturity date of November 1, 2003.
XXCAL, Inc. had a line of credit agreement with Sanwa Bank under which
they could borrow up to $3,250,000, limited to a maximum of 80% of its eligible
accounts receivable. At December 31, 1997, the balance of advances made under
this line of credit was $500,000 at the fixed rate of 8.22%. On October 30,
1998, NTS paid off the balance due on this line of credit which amounted to
$1,207,000.
Page 21 of 68
<PAGE>
In July 1997, the Company entered into an equipment line of credit
agreement with Mellon US Leasing (interest rates of 7.60 % to 10.25%) to finance
various test equipment with terms of 60 months for each equipment schedule. The
outstanding balance at January 31, 1999 is $1,606,000. In April 1999, Mellon US
Leasing extended an additional $2,000,000 of credit under the same terms of the
original agreement. The note payable to Mellon Bank is collateralized by
equipment with a net book value of $1,483,000 at January 31, 1999.
Maturities of long-term debt consist of regularly scheduled payments on
the Company's term loans to its banks and notes payable. Of the $6,712,000 shown
in the maturities of long term debt (see note 3 to the consolidated financial
statements) due in fiscal 2001, $4,107,000 is the outstanding balance of the
Company's revolving line of credit. All other maturities of long-term debt will
be paid with cash generated from operations.
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 Company has made no material commitments for
capital expenditures. The Company's future working capital will be provided from
operations and the current bank revolving line of credit, which had $3,893,000
available at January 31, 1999.
MANAGEMENT RISK AND RISK MANAGEMENT POLICY
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point adverse move in interest rates along the
entire interest rate yield curve would adversely affect the net fair value of
all interest sensitive financial instruments by $41,000 at January 31, 1999.
ENVIRONMENTAL MATTERS
An internal environmental compliance group formed in 1991 continues to
review environmental matters for the Company. 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 Company.
IMPACT OF INFLATION
The Company has not been adversely affected by inflation during the past
three fiscal years. The Company 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 Company can give no assurances, however, that in the
future it can offset such increased costs.
Page 22 of 68
<PAGE>
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
The Company'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 23 of 68
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The sections entitled "Nomination and Election of Directors" and
"Remuneration of Directors and Officers" in the Company's definitive Proxy
Statement to be furnished to shareholders in connection with the Annual Meeting
of Shareholders to be held on June 25, 1999 are incorporated herein by
reference.
Executive Officers of the Company
---------------------------------
Name Age Position
- ------------------- ---- --------------------------------------------------
Lloyd Blonder 59 Senior Vice President and Chief Financial Officer,
Treasurer. Has been associated with the Company
since 1983.
Aaron Cohen 62 Group President, IT Solutions Group. Has been
associated with the Company since 1961.
Arthur Edelstein 61 Senior Vice President, Chief Technical Officer of
the Company. Has been associated with the Company
since 1961.
Jack Lin 66 President and Chief Executive Officer of the
Company. Has been associated with the Company
continuously since 1961.
Harold Lipchik 70 Vice President Administration and Corporate
Secretary of the Company. Has been associated with
the Company since 1984.
William McGinnis 40 Executive Vice President of the Company. Has been
associated with the Company since 1980.
Richard Short 56 Group President, Engineering & Evaluation Group.
Has been associated with the Company since 1961.
William Traw 61 Senior Vice President, Chief of Operations,
Engineering & Evaluation Group. Has been
associated with the Company since 1963.
ITEM 11. EXECUTIVE COMPENSATION.
The section entitled "Remuneration of Directors and Officers" in the
Company's definitive Proxy Statement to be furnished to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 25, 1999
is incorporated herein by reference.
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<PAGE>
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 the Company's definitive
Proxy Statement to be furnished to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 25, 1999 are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Transactions with Management and Other" in the
Company's definitive Proxy Statement to be furnished to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 25, 1999
are incorporated herein by reference.
Page 25 of 68
<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, 1999 and 1998 and for
each of the years in the three year period ended
January 31, 1999.
(ii) Consolidated Financial Statement Schedule.
II Valuation and Qualifying Accounts and Reserves
B. Reports on Form 8-K.
The following reports on Form 8-K were filed during the fourth
quarter ended January 31, 1999:
On November 3, 1998, the Company filed a Current Report on
Form 8-K with respect to Item 2, reporting the Agreement and
Plan of Merger and acquisition of XXCAL, Inc. and XXCAL
Limited, effective on October 30, 1998.
On December 23, 1998, the Company filed a Current Report on
Form 8-K with respect to Item 5, reporting the unaudited
consolidated results of its operations for the month ended
November 30, 1998, the first month since it completed its
merger and acquisition of XXCAL, effective on October 30,
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).
2.1 Agreement and Plan of Merger dated as of August 21,
1998, by and between National Technical Systems, Inc.
and XXCAL, Inc., a California Corporation filed as
Exhibit 2.1 to the Company's Form 8-K, (filed November
3, 1998 and is incorporated herein by reference
thereto).
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as
of October 19, 1998, by and between National Technical
Systems, Inc. and XXCAL, Inc., a California Corporation
filed as Exhibit 2.2 to the Company's Form 8-K, (filed
November 3, 1998 and is incorporated herein by reference
thereto).
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<PAGE>
2.3 Share Purchase Agreement, dated as of August 21, 1998,
by and between National Technical Systems, Inc. and the
holders of all of the outstanding Ordinary Shares of
XXCAL Limited, a United Kingdom corporation, to acquire
all of the outstanding Ordinary Shares, filed as Exhibit
2.3 to the Company's Form 8-K, (filed November 3, 1998
and is incorporated herein by reference thereto).
2.4 Amendment No. 1 to Share Purchase Agreement dated as of
October 19, 1998 by and between National Technical
Systems, Inc. and the holders of all of the outstanding
Ordinary Shares of XXCAL Limited, a United Kingdom
corporation, to acquire all of the outstanding Ordinary
Shares, filed as Exhibit 2.4 to the Company's Form 8-K,
(filed November 3,1998 and is incorporated herein by
reference thereto).
3.1 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).
3.2 Amendment No. 1 to Articles of Incorporation of National
Technical Systems, Inc., a California corporation
(formerly NTS Merger corporation), (filed as Appendix A
to the Company's Proxy Statement for Annual Meeting of
June 26, 1998, and is incorporated herein by reference
thereto).
3.3 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).
10.1 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).
10.2 Amendment to the Company's 1994 Stock Option Plan (filed
as Proposal No. 3 to the Company's Proxy Statement for
Annual Meeting of June 26, 1998, and is incorporated
herein by reference thereto).
10.3 Form of the Company's 1988 Stock Option Plan (filed as
Exhibit A to the Company's Proxy Statement for Annual
Meeting of June 18, 1988, and is incorporated herein by
reference thereto
10.4 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).
Page 27 of 68
<PAGE>
10.5 Second Amendment to Credit Agreement between Sanwa Bank
California, Mellon Bank and NTS dated October 30, 1998
Exhibit 10.(c)(2) to the Company's Form 8-K, (filed
November 3, 1998 and is incorporated herein by reference
thereto)
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Duitch, Franklin & Co., 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.
99.4 Undertakings incorporated by reference into Form S-8
Registration Statement No. 333-67743.
Page 28 of 68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
April 28, 1999 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 Company and in the capacities indicated on
April 28, 1999.
<TABLE>
<S> <C>
/s/ Jack Lin /s/ Aloysius Casey
- ---------------------------------------- -------------------------------------
Jack Lin, President Aloysius Casey, Chairman of the Board
(Principal Executive Officer & Director)
/s/ Arthur Edelstein /s/ Aaron Cohen
- ---------------------------------------- -------------------------------------
Arthur Edelstein, Director Aaron Cohen, Vice Chairman of the Board
and Executive Vice President and Senior Executive Vice President
/s/ Lloyd Blonder /s/ William McGinnis
- ---------------------------------------- -------------------------------------
Lloyd Blonder, Senior Vice President William McGinnis, Group Vice President and
and Treasurer (Principal Financial and Accounting Director
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
</TABLE>
Page 29 of 68
<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, 1999 and 1998
Consolidated Statements of Income - Years ended January 31, 1999, 1998
and 1997
Consolidated Statements of Shareholders' Equity - Years ended January 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended January 31, 1999, 1998
and 1997
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 30 of 68
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National Technical Systems, Inc.
We have audited the accompanying consolidated balance sheets of National
Technical Systems, Inc. and Subsidiaries as of January 31, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended January 31, 1999. 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, 1999 and 1998
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended January 31, 1999, 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.
We previously audited and reported on the consolidated balance sheet and the
related consolidated statements of income, shareholders' equity, and cash flows
of National Technical Systems, Inc. and Subsidiaries for the years ended January
31, 1998 and 1997, prior to their restatement for the 1999 pooling of interests
as described in Note 2. The contribution of National Technical Systems, Inc. and
subsidiaries to total assets, revenues, and net income represented 88%, 69%, and
85% of the respective restated totals in 1998 and 63% and 75% of the respective
restated revenues and net income totals in 1997. Financial statements of the
other pooled companies included in the 1998 and 1997 restated consolidated
statements were audited and reported on separately by other auditors. We also
have audited, as to combination only, the accompanying consolidated balance
sheet as of January 31, 1998 and the related consolidated statements of income,
shareholders' equity, and cash flows for the years ended January 31, 1998 and
1997, after restatement for the 1999 pooling of interests; in our opinion, such
consolidated financial statements have been properly combined on the basis
described in Note 2 to the consolidated financial statements.
As discussed in Note 1 to the financial statements, in 1999 National Technical
Systems, Inc. changed its method of accounting for start up costs.
/s/ Ernst & Young LLP
Woodland Hills, California
April 9, 1999
Page 31 of 68
<PAGE>
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 1999 and 1998
<CAPTION>
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,599,000 $ 2,510,000
Accounts receivable, less allowance for doubtful accounts
of $904,000 in 1999 and $741,000 in 1998 20,120,000 18,382,000
Income taxes receivable 56,000 104,000
Inventories 1,640,000 1,860,000
Deferred tax assets 919,000 523,000
Prepaid expenses 1,099,000 919,000
----------- -----------
Total current assets 26,433,000 24,298,000
Property, plant and equipment
Land 1,306,000 1,306,000
Buildings 8,200,000 7,976,000
Machinery and equipment 40,545,000 36,864,000
Leasehold improvements 4,172,000 3,975,000
----------- -----------
Total property, plant and equipment 54,223,000 50,121,000
Less: accumulated depreciation 33,402,000 30,732,000
----------- -----------
Net property, plant and equipment 20,821,000 19,389,000
Property held for sale 544,000 544,000
Intangible assets, net 544,000 637,000
Other assets 1,489,000 1,244,000
----------- -----------
TOTAL ASSETS $49,831,000 $46,112,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,493,000 $ 3,376,000
Accrued expenses 3,785,000 3,390,000
Income taxes payable 113,000 69,000
Current installments of long-term debt 2,091,000 1,551,000
----------- -----------
Total current liabilities 9,482,000 8,386,000
Long-term debt, excluding current installments 13,076,000 12,859,000
Deferred income taxes, net 2,565,000 2,303,000
Deferred compensation 555,000 495,000
Minority interest 51,000 27,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized, 20,000,000 shares; issued
and outstanding 8,319,000 in 1999 and 8,168,000 in 1998 11,472,000 11,119,000
Paid-in-capital -- 165,000
Retained earnings 12,630,000 10,758,000
----------- -----------
Total shareholders' equity 24,102,000 22,042,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $49,831,000 $46,112,000
=========== ===========
See accompanying notes.
</TABLE>
Page 32 of 68
<PAGE>
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended January 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 89,537,000 $ 81,297,000 $ 74,413,000
Cost of sales 62,983,000 57,585,000 53,519,000
------------ ------------ ------------
Gross profit 26,554,000 23,712,000 20,894,000
Selling, general and administrative expense 19,598,000 17,090,000 15,398,000
Merger costs 907,000 -- --
------------ ------------ ------------
Operating income 6,049,000 6,622,000 5,496,000
Other income (expense):
Interest expense (1,253,000) (1,245,000) (1,161,000)
Other 91,000 118,000 (44,000)
------------ ------------ ------------
(1,162,000) (1,127,000) (1,205,000)
Income from continuing operations before income taxes and minority interest 4,887,000 5,495,000 4,291,000
Income taxes 1,742,000 2,014,000 1,588,000
------------ ------------ ------------
Income from continuing operations before minority interest 3,145,000 3,481,000 2,703,000
Minority interest (24,000) (26,000) 10,000
------------ ------------ ------------
Income from continuing operations 3,121,000 3,455,000 2,713,000
Loss from discontinued operations, net of income tax -- -- (684,000)
Cumulative effect of change in accounting for start-up costs, net of income
taxes (482,000) -- --
------------ ------------ ------------
Net income $ 2,639,000 $ 3,455,000 $ 2,029,000
============ ============ ============
Basic earnings (loss) per common share:
Continuing operations $ 0.38 $ 0.43 $ 0.34
Discontinued operations -- -- (0.09)
Cumulative effect of change in accounting (0.06) -- --
------------ ------------ ------------
Net income * $ 0.32 $ 0.43 $ 0.26
============ ============ ============
Diluted earnings (loss) per common share:
Continuing operations $ 0.36 $ 0.41 $ 0.33
Discontinued operations -- -- (0.08)
Cumulative effect of change in accounting (0.06) -- --
------------ ------------ ------------
Net income * $ 0.31 $ 0.41 $ 0.25
============ ============ ============
Weighted average common shares outstanding 8,236,000 8,061,000 7,902,000
Dilutive effect of stock options 374,000 389,000 264,000
------------ ------------ ------------
Weighted average common shares outstanding, assuming dilution 8,610,000 8,450,000 8,166,000
============ ============ ============
* Per share data may not always add up to total for the year because each figure
is independently calculated
See accompanying notes.
</TABLE>
Page 33 of 68
<PAGE>
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended January 31, 1999, 1998 and 1997
<CAPTION>
COMMON STOCK
------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996 7,874,000 $ 134,000 $ 10,546,000 $ 6,933,000 $ 17,613,000
Net income -- -- -- 2,029,000 2,029,000
Foreign currency translation -- -- -- 4,000 4,000
Stock options exercised 62,000 -- 64,000 -- 64,000
Distributions to subchapter S shareholders -- -- -- (584,000) (584,000)
Cash dividends -- -- -- (335,000) (335,000)
-----------------------------------------------------------------------------
Balance at January 31, 1997 7,936,000 134,000 10,610,000 8,047,000 18,791,000
Net income -- -- -- 3,455,000 3,455,000
Foreign currency translation -- -- -- (5,000) (5,000)
Stock issued in lieu of wages 40,000 92,000 -- -- 92,000
Stock options exercised 195,000 175,000 -- -- 175,000
Repurchase of common stock (2,000) (5,000) -- -- (5,000)
Tax benefit from stock options exercise -- 159,000 -- -- 159,000
Extension of stock options -- 119,000 -- -- 119,000
Common stock change to no par -- 10,610,000 (10,610,000) -- --
XXCAL Paid-in-capital (165,000) 165,000 -- --
Distributions to subchapter S shareholders -- -- -- (323,000) (323,000)
Cash dividends -- -- -- (416,000) (416,000)
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1998 8,169,000 11,119,000 165,000 10,758,000 22,042,000
Net income -- -- 2,639,000 2,639,000
Earnings from merged entity not included
in net income -- -- -- 181,000 181,000
Stock options exercised 150,000 188,000 -- -- 188,000
XXCAL Common stock change to no par -- 165,000 (165,000) -- --
Distributions to subchapter S shareholders -- -- -- (442,000) (442,000)
Cash dividends -- -- -- (506,000) (506,000)
-----------------------------------------------------------------------------
Balance at January 31, 1999 8,319,000 $ 11,472,000 $ -- $ 12,630,000 $ 24,102,000
=============================================================================
See accompanying notes.
</TABLE>
Page 34 of 68
<PAGE>
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended January 31, 1999, 1998 and 1997
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 2,639,000 $ 3,455,000 $ 2,713,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 2,934,000 2,437,000 2,390,000
Stock issued in lieu of compensation -- 210,000 --
Provisions for losses on receivables 163,000 (37,000) 108,000
Loss on retirement of assets 100,000 3,000 8,000
Earnings from merged entity not included in net income 181,000 -- --
Distributed earnings of affiliate -- -- (51,000)
Undistributed earnings of affiliate 24,000 26,000 (23,000)
Deferred income taxes (134,000) 163,000 390,000
Changes in assets and liabilities:
Accounts receivable (1,901,000) (2,586,000) (1,317,000)
Inventories 220,000 411,000 (51,000)
Prepaid expenses (180,000) 26,000 (132,000)
Other assets (90,000) (139,000) 135,000
Deferred revenues -- (20,000) (118,000)
Accounts payable 117,000 (457,000) 225,000
Income taxes 92,000 (75,000) 73,000
Deferred compensation 60,000 99,000 24,000
Accrued expenses 395,000 (107,000) 45,000
------------ ------------ ------------
Cash provided by continuing operations 4,620,000 3,409,000 4,419,000
Loss from discontinued operations -- -- (684,000)
------------ ------------ ------------
Cash provided by operating activities 4,620,000 3,409,000 3,735,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,397,000) (4,125,000) (2,669,000)
Investment in life insurance (155,000) (192,000) (143,000)
Investment in new business -- (275,000) (208,000)
Net cash paid on employee loans and notes receivable -- (13,000) (14,000)
Proceeds from sale of assets 24,000 18,000 2,000
------------ ------------ ------------
Cash used for investing activities (4,528,000) (4,587,000) (3,032,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 7,283,000 17,627,000 2,673,000
Proceeds from stock options exercised 188,000 175,000 65,000
Tax benefit from stock options exercised -- 159,000 --
Cash dividends paid (506,000) (416,000) (335,000)
Repurchase of common stock -- (5,000) --
Distributions to subchapter S shareholders (442,000) (323,000) (584,000)
Repayments of current and long-term debt (6,526,000) (14,960,000) (3,103,000)
------------ ------------ ------------
Cash provided by (used for) financing activities (3,000) 2,257,000 (1,284,000)
------------ ------------ ------------
Net increase (decrease) in cash 89,000 1,079,000 (581,000)
BEGINNING CASH BALANCE 2,510,000 1,431,000 2,012,000
------------ ------------ ------------
ENDING CASH BALANCE $ 2,599,000 $ 2,510,000 $ 1,431,000
============ ============ ============
Page 35 of 68
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments during the year for:
Interest 1,271,000 1,348,000 1,193,000
Income taxes 1,301,000 1,757,000 673,000
Cash received during the year for:
Income taxes 2,000 4,000 43,000
Non-cash items:
Deferred revenue in connection with acquisition of business -- -- 45,000
</TABLE>
Page 36 of 68
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of National
Technical Systems, Inc. (NTS or the "Company") and its subsidiaries. On
October 30, 1998, NTS completed its merger with XXCAL, Inc. and
acquisition of XXCAL Limited (together, "XXCAL"). The statements are
presented based on the "pooling of interests" method of accounting
pursuant to Opinion No. 16 of the Accounting Principles Board (APB 16).
They include the combined financial statements of NTS and XXCAL from the
beginning of the fiscal year. All prior year financial statements have
also been restated to reflect the pooling of interests method of
accounting. In management's opinion, all adjustments have been made to
present fairly the results of the combined financial statements.
The Company has consolidated NQA-USA, a 50% owned subsidiary for which the
distribution of profits and losses is 63% to the Company, and 37% to the
other shareholder. NTS controls the management decisions and elects the
president of NQA who has complete operating control of the subsidiary.
XXCAL Japan is a 52% owned subsidiary which started in fiscal 1999 and is
accounted for under the equity method since NTS does not have management
or board control. The equity investment is $75,000. All significant
intercompany balances and transactions have been eliminated in
consolidation. Certain 1997 and 1998 amounts have been reclassified to
conform with the 1999 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 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 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
Page 37 of 68
<PAGE>
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.
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, or estimated useful
life (whichever is less)
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 $612,000 as of January 31, 1999 and
$519,000 as of January 31, 1998. 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, 1999.
COMPREHENSIVE INCOME
As of February 1, 1998, the Company adopted Statement No.130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No.130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
income or shareholders' equity. SFAS No.130 requires display of unrealized
gains or losses on available-for-sale securities and foreign currency
translation adjustments. The Company does not have these accounting
transactions. Prior year financial statements have not been reclassified
to conform to the requirements of SFAS No.130 since there is no impact.
Page 38 of 68
<PAGE>
SEGMENT INFORMATION
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No.131). SFAS No.131 supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments
of a Business Enterprise" replacing the industry segment approach with the
management approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
SFAS No.131 also requires disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No.131 did not
affect results of operations or the financial position of the Company.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS 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.
FOREIGN CURRENCY TRANSLATION
The accounts of the foreign divisions are translated into United States
dollars in accordance with Statement of Financial Accounting Standard No.
52, "Foreign Currency Translation" (FAS 52). All balance sheet accounts
have been translated using the current rate of exchange at the balance
sheet date. Results of operations have been translated using the average
rates prevailing throughout the year. Translation gains or losses
resulting from the changes in the exchange rates from year-to-year are
accumulated in a separate component of shareholders' equity. Translation
gains and losses are immaterial.
MERGER COSTS
In fiscal 1999, the Company incurred $907,000 in one-time merger costs
related to outside consulting, accounting and, legal fees and other costs
and expenses specifically associated with the merger between NTS and XXCAL
and in accordance with APB 16 these costs were expensed as incurred. The
majority of these merger costs are non-deductible for tax purposes.
START-UP EXPENSES
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting the Costs of Start-Up
Activities" (SOP 98-5), which requires that costs related to start-up
activities be expensed as incurred. The Company adopted the provisions of
the SOP in its financial statements during the third quarter of fiscal
year ending January 31, 1999. The effect of adoption of SOP 98-5 was to
record a one-time charge of the cumulative effect of changes in accounting
of $482,000 ($0.06 per basic share and diluted share) net of taxes of
$483,000 to expense all start-up costs.
Page 39 of 68
<PAGE>
(2) Business Disposition and Acquisition
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, 1999 the Environmental Services
segment had contract claims totaling $245,000 and net accounts receivable
of $180,000 relative to completed contracts. As of January 31, 1998 the
contract claims were $245,000 and the net accounts receivable were
$684,000. Management of the Company, on the advice of legal counsel,
believes the amounts recorded will be fully realized.
Results of operations in fiscal 1997 related to the discontinued
operations are as follows:
Net Revenues $ 1,683,000
==========
Loss from discontinued operations:
Environmental Services operating
losses and other expenses (1,093,000)
Estimated future shutdown
expenses (116,000)
Tax benefit from discontinued
operations 525,000
----------
$ (684,000)
==========
On October 30, 1998, NTS completed its merger with XXCAL. The merger was
treated as a pooling of interests whereby NTS issued to the shareholders
of XXCAL 1,297,878 shares of NTS common stock constituting 15.6% of the
outstanding common stock of NTS after giving effect to the merger. NTS has
also reserved an additional 214,622 shares of its common stock for
issuance upon exercise of outstanding XXCAL stock options that were
assumed by the Company.
The financial statements are presented based on the "pooling of interests"
method of accounting pursuant to Opinion No. 16 of the Accounting
Principles Board (APB 16). They include the combined financial statements
of NTS and XXCAL from the beginning of the fiscal year. All prior year
financial statements have also been restated to reflect the pooling of
interests method of accounting. There have been no intercompany
transactions. In management's opinion, all adjustments have been made to
present fairly the results of the combined financial statements, none of
which impacted the financial results or position of the Company. The one
month results for XXCAL in January 1998 are excluded from the results of
operations in order to reflect the same twelve month period in fiscal
1999. The resulting net income of $181,000 on net revenues of $2,297,000
for the one month is included in equity.
Page 40 of 68
<PAGE>
The separate unaudited results for XXCAL and NTS for the period from
February 1, 1998 through October 30, 1998 prior to the business
combination were as follows:
NTS XXCAL
----------- -----------
Revenue $ 45,639,000 $ 22,413,000
Net Income $ 695,000 $ 780,000
(3) Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Term loans payable to banks (b) $ 7,133,000 $ 6,500,000
Notes payable (interest rates of 8.50% to 10.25%), collateralized
by land and buildings, with a net book value of $3,095,000 1,857,000 1,950,000
Secured notes payable (c) 1,640,000 915,000
Revolving lines of credit (a) 4,107,000 4,830,000
Loans from employee and officers (d) 430,000 215,000
----------- -----------
Subtotal 15,167,000 14,410,000
Less current installments 2,091,000 1,551,000
----------- -----------
Total $13,076,000 $12,859,000
=========== ===========
</TABLE>
In September 1997, the Company negotiated with Sanwa Bank California as
agent and Mellon Bank a new "Credit Agreement" which replaced all prior
agreements.
(a) The Credit Agreement included 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. On October 30, 1998, the credit agreement was amended to
extend the term of the revolving line to September 8, 2000 and to increase
the revolving line amount from $6,000,000 to $8,000,000 at an interest
rate equal to the Bank's reference rate. The outstanding balance at
January 31, 1999 is $4,107,000 compared with an outstanding balance of
$4,330,000 at January 31, 1998. 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.
XXCAL, Inc. had its own line of credit agreement with Sanwa Bank under
which, they could borrow up to $3,250,000, limited to a maximum of 80% of
its eligible accounts receivable. At December 31, 1997, the balance of
advances made under this line of credit was $500,000 at the fixed rate of
8.22%. On October 30, 1998 NTS paid off the balance due on this line of
credit which amounted to $1,207,000.
Page 41 of 68
<PAGE>
(b) The Credit Agreement also called for a $6,500,000 term loan at an interest
rate of 8.31% which expires in January 2003. On October 30, 1998, the
Company added a new term loan for $2,000,000 at an interest rate equal to
the Bank's reference rate plus 0.25% and a maturity date of November 1,
2003.
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 shareholders or repurchase any of
the Company's stock without the banks' prior approval. Sanwa Bank
California and Mellon Bank share 60% and 40% 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 an equipment line of credit
agreement with Mellon US Leasing (interest rates of 7.60 % to 10.25%) to
finance various test equipment with terms of 60 months for each equipment
schedule. The outstanding balance at January 31, 1999 is $1,606,000. In
April of 1999 Mellon US Leasing extended an additional $2,000,000 of
credit under the same terms of the original agreement. The note payable to
Mellon Bank is collateralized by equipment with a net book value of
$1,483,000 at January 31, 1999.
(d) The Company has unsecured demand notes payable to two officers of the
Company and one employee in the aggregate amount of $430,000 as of January
31, 1999. The interest on the officer note is payable monthly and is based
on the bank's reference rate less three basis points and the interest on
the other two notes is payable monthly and ranges from 8% to 9% per annum.
The weighted average interest rate on all of the Company's long-term debt
in 1999 and 1998 is approximately 8.45% and 8.85% respectively.
Maturities of long-term debt for five years subsequent to January 31, 1999
are as follows:
2000 $ 2,091,000
2001 6,712,000
2002 3,671,000
2003 2,100,000
2004 441,000
Thereafter 152,000
-----------
$15,167,000
===========
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.
Page 42 of 68
<PAGE>
The carrying amounts and estimated fair values of the Company's financial
instruments are:
<TABLE>
<CAPTION>
1999 1999 1998 1998
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Term loans payable to banks $7,133,000 $7,310,000 $6,500,000 $6,471,000
Notes payable 1,857,000 1,929,000 1,950,000 2,029,000
Secured notes payable 1,640,000 1,653,000 915,000 942,000
Revolving lines of credit 4,107,000 4,107,000 4,830,000 4,830,000
Loans from employee and officer 430,000 430,000 215,000 215,000
</TABLE>
(4) Income Taxes
Until the merger with NTS, XXCAL had elected to be taxed as an S
Corporation, whereby the entire federal and California taxable income or
loss of XXCAL was reportable by the shareholders. XXCAL incurred a
corporate franchise tax to the state of Texas and a 1.5% California
surtax.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Pre-tax income generated from foreign operations was $252,000,
$130,000, and $47,000 in fiscal 1999, 1998 and 1997, respectively. The
earnings associated with the Company's foreign subsidiary are considered
to be permanently invested and no provision for U.S. federal or state
income taxes is provided.
The provision (benefit) for income tax expense from continuing operations
consists of:
Current: 1999 1998 1997
---------------------------------------------
Federal $1,502,000 $1,425,000 $625,000
State 323,000 400,000 297,000
Foreign 51,000 26,000 12,000
---------- ---------- ----------
1,876,000 1,851,000 934,000
Deferred:
Federal (102,000) 137,000 638,000
State (32,000) 26,000 16,000
---------- ---------- ----------
(134,000) 163,000 654,000
---------- ---------- ----------
Income tax expense $1,742,000 $2,014,000 $1,588,000
========== ========== ==========
Page 43 of 68
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Income from continuing operations before income
taxes $ 4,887,000 $ 5,495,000 $ 4,291,000
=========== =========== ===========
Federal income tax computed at statutory rate 1,662,000 1,868,000 1,459,000
Amortization of goodwill 31,000 17,000 15,000
State income taxes, net of federal benefits 184,000 268,000 197,000
XXCAL, Inc. Sub chapter S non-taxable income (196,000) (144,000) (211,000)
Other 61,000 5,000 128,000
----------- ----------- -----------
Income tax expense $ 1,742,000 $ 2,014,000 $ 1,588,000
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
------------------------ -------------------------
Deferred tax asset: Current Non-current Current Non-current
------------------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Bad debt reserve $ 304,000 $ -- $ 203,000 $ --
Vacation accrual 192,000 -- 185,000 --
State taxes 91,000 27,000 135,000 37,000
Deferred compensation 332,000 -- -- --
---------- ----------- ---------- -----------
Total deferred tax asset 919,000 27,000 523,000 37,000
Valuation allowance -- -- -- --
Deferred tax liability:
Tax over book depreciation -- (2,592,000) -- (2,340,000)
---------- ----------- ---------- -----------
Net deferred tax asset (liability) $ 919,000 ($2,565,000) $ 523,000 ($2,303,000)
========== =========== ========== ===========
</TABLE>
Page 44 of 68
<PAGE>
(5) Stock Options and Pension Plans
The Company has one employee incentive stock option plan: the 1994 stock
option plan. The Company also has a new qualified plan related to the
XXCAL, Inc. pooling of interest transaction as of October 31, 1998. The
XXCAL, Inc. stock options were exchanged for options of National Technical
Systems, Inc.
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. Additional information with
respect to the option plans as of January 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
----------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Balance 490,966 $3.19 643,545 $2.38
Grants 854,755 4.61 98,469 5.38
Exercises (50,346) 2.20 (219,486) 1.94
Canceled or expired (7,450) 4.39 (31,562) 2.24
--------- ----- ------- -----
Ending balance 1,287,925 $4.16 490,966 $3.19
========= ===== ======= =====
Reserve for future grants at year end 121,198 121,198
Exercisable 404,075 $2.25 145,168 $2.43
========= ===== ======= =====
</TABLE>
The range of exercise prices for options outstanding at January 31, 1999
was $0.70 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.
Page 45 of 68
<PAGE>
The following tables summarize information about options outstanding at
January 31, 1999:
<TABLE>
<CAPTION>
Outstanding at Weighted Avg.
Range of January Remaining contract Weighted Avg. Number Weighted Avg.
exercise prices 31,1999 life in yrs. Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.70 to $2.00 220,121 3.4 $1.40 160,421 $1.30
$2.01 to $3.00 316,882 6.1 $2.71 213,977 $2.66
$3.01 to $4.00 23,720 2.6 $3.16 11,860 $3.16
$5.01 to $6.00 548,969 9.3 $5.46 17,817 $5.19
$6.01 to $7.00 178,223 9.3 $6.29 -- --
</TABLE>
These options will expire if not exercised at specific dates ranging from
June 1999 to November 2008. Prices for options exercised during the
two-year period ended January 1999 ranged from $2.00 to $3.16. The Company
has elected to continue to follow APB Opinion No. 25,"Accounting for Stock
Issued to Employees" (APB No.25), 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"
(SFAS No.123), 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 reported below has been
estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
1999 1998 1997
---- ---- ----
Expected life (in years) 5 5 5
Risk-free interest rate 4.99% 6.01% 6.14%
Expected volatility 61% 62% 78%
Expected dividend yield 82% 72% 86%
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
Page 46 of 68
<PAGE>
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 1999 and 1998 was $4.47 and $2.98 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 Company's net income and earnings per share would have been as
indicated below:
<TABLE>
<CAPTION>
January 31, 1999 January 31, 1998 January 31, 1997
-----------------------------------------------------
<S> <C> <C> <C>
Net Income
As reported $2,639,000 $3,455,000 $2,029,000
Pro forma $2,528,000 $3,367,000 $1,999,000
Basic earnings per common share
As reported $0.32 $0.43 $0.26
Pro forma $0.31 $0.42 $0.25
Diluted earnings per common share
As reported $0.31 $0.41 $0.25
Pro forma $0.29 $0.40 $0.24
</TABLE>
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 1999, 1998 or 1997.
The Company offers four 401(k) profit sharing plans: National Technical
Systems 401(k) Profit Sharing Plan, XXCAL 401(k) Profit Sharing Plan, NTS
Technical Services Employees' Profit Sharing Plan and NQA 401(k) Pension
Plan. The purpose of these plans is to provide retirement benefits to all
employees of the Company. The Company's employees can contribute up to 15%
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. Employer contributions are allocated
based on participants own contribution percentage amount to the total
amount contributed by all employees in each plan. In 1999, the Board of
Directors and management of the Company approved a contribution to the
401(k) profit sharing plan of $253,600 as compared to $258,500 in 1998 and
$155,400 in 1997.
The Company provides nonqualified discretionary deferred compensation
benefits to certain employees of XXCAL. Except for the president of XXCAL,
the benefits are payable over a period of 10 years in the event of death,
disability, or retirement at ages between 62 and 65 and range between
$7,800 and $60,000 annually. The benefits are funded by life insurance
contracts purchased by the Company.
Page 47 of 68
<PAGE>
The president of XXCAL has elected to receive the cash surrender value of
life insurance owned by the Company on his life, in lieu of lifetime
periodic deferred compensation payments. The cash surrender value is
included in other assets and the deferred compensation liability is
included in current liabilities, as the president is eligible to retire
within the next 12 months.
The deferred compensation benefits are accrued and recognized over each
employee's expected term of employment. The Company's total deferred
compensation expenses were $67,000, $119,000 and $46,000 for the years
ended January 31, 1999, 1998 and 1997, respectively. Included in other
assets is $1,150,000 and $995,000 for the cash surrender value as of
January 31, 1999 and 1998, respectively.
(6) Capital Stock
As of January 31, 1999 and 1998, the Company had 20,000,000 authorized
common shares with no par value. 8,319,000 shares and 8,168,000 shares
were issued and outstanding at January 31, 1999 and January 31, 1998,
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.
(7) Commitments
The Company leases certain of its operating facilities and equipment under
operating leases which principally expire at various dates to fiscal year
2007. 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 $1,843,000 in 1999, $1,542,000 in 1998, and $1,311,000 in 1997.
At January 31, 1999, minimum rental payment obligations under operating
leases were as follows:
2000 $ 1,684,000
2001 1,012,000
2002 843,000
2003 761,000
2004 490,000
Thereafter 421,000
-----------
$ 5,211,000
===========
Page 48 of 68
<PAGE>
(8) Accrued Expenses
A summary of accrued expenses at January 31 is as follows:
1999 1998
------------------------------
Compensation and employee benefits $2,734,000 $2,318,000
Other 1,051,000 1,072,000
--------- ---------
$3,785,000 $3,390,000
(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.
On or about February 12, 1999, a customer of the Company asserted a
written claim against the Company for damages in the amount of
approximately $2.4 million allegedly resulting from damage caused to
certain customer hardware while it was being tested by the Company. The
Company believes that the damages asserted by the customer greatly exceed
the actual cost of replacing the hardware. The Company has denied that
damage to the customer hardware, if any, was caused by any negligence or
failure of the Company to exercise reasonable care in testing the customer
hardware. No formal action has been taken by the customer. In the event
formal action is commenced, the Company believes it has meritorious
defenses to such action and would vigorously defend any such action. The
Company believes that all or a substantial portion of any damages that
might be assessed against the Company as a result of such action would be
covered by insurance. Failure of the Company to obtain a favorable
resolution of the claim, unless covered by insurance, could have a
material adverse effect on the Company's results of operations. Currently,
the amount of such material adverse effect cannot be reasonably estimated.
(10) Segment of Business Information
The Company maintains two core operating segments: Engineering &
Evaluation and IT Solutions.
The Engineering & Evaluation segment operates test laboratories in
various states and provides technical support and technical support
personnel to assist clients in a broad range of industries (aerospace,
defense, telecommunications, nuclear, automotive and computer, among
others) in the solving of technical problems via analysis and testing of
materials, components, subsystems and systems, electro-magnetic
interference testing and product safety testing under its newly granted
NRTL status by the United States' Department of Labor, Occupational Safety
and Health Administration. This segment also provides registration,
certification and conformance evaluation services to its clients,
particularly with regard to EU standards.
Page 49 of 68
<PAGE>
The IT Solutions segment includes the newly acquired XXCAL which was
combined with the operations of the NTS Technical Staffing division. This
segment operates in various states in the U.S. and the United Kingdom and
Japan. IT Solutions locates, recruits, and hires a wide variety of
technical personnel, engineers, drafters, designers, computer programmer
technicians and others and assigns them to clients either on a temporary
or permanent basis. In addition, it performs compatibility testing of
hardware and software components. This segment also performs quality
registration services by evaluating a supplier's 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.
The Company's reportable segments each represent strategic business units
that offer different, yet related services. They are managed differently
because each requires differing technical skills and sales strategies.
Each segment is led by a chief operating decision maker, who, in
coordination with the Company's Chief Executive Officer utilizes the
information reported below in evaluating results and allocating resources
pertaining to segment operations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in footnote 1.
The following table illustrates each segments operating income for 1999,
1998 and 1997. 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, 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 Engineering & Evaluation from federal
agencies of approximately $25,945,000 in 1999, $25,290,000 in 1998 and
$23,024,000 in 1997, consist principally of sales under subcontracts to
customers with government contracts. The Company did not have any revenues
from single customers which represented in excess of 10% of total segment
revenues. Total revenues from customers in foreign (UK) operations were
$548,000, $369,000 and $253,000 in 1999, 1998, and 1997, respectively.
Assets utilized in the foreign (UK) subsidiaries were $485,000, $257,000
and $151,000 as of January 31, 1999, 1998, and 1997, respectively.
The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral.
Page 50 of 68
<PAGE>
<TABLE>
JANUARY 31, 1999
----------------
<CAPTION>
ENGINEERING
& EVALUATION IT SOLUTIONS CORPORATE TOTAL
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 43,684,000 $ 45,853,000 $ -- $ 89,537,000
============ ============ ========== ============
Gross profit 12,530,000 14,024,000 -- 26,554,000
Selling, general and administrative expense 7,421,000 12,177,000 -- 19,598,000
Merger costs 686,000 221,000 -- 907,000
------------ ------------ ---------- ------------
Operating income 4,423,000 1,626,000 -- 6,049,000
Other Income (expense):
Interest expense, net (1,191,000) (62,000) -- (1,253,000)
Other 555,000 (464,000) -- 91,000
------------ ------------ ---------- ------------
Income before income taxes, minority interest and cumulative
effect of change in accounting for start-up expenses $ 3,787,000 $ 1,100,000 $ -- $ 4,887,000
============ ============ ========== ============
Assets $ 31,579,000 $ 12,344,000 $5,908,000 $ 49,831,000
============ ============ ========== ============
Equity Investments $ -- $ 75,000 $ -- $ 75,000
============ ============ ========== ============
Expenditures for long-lived assets $ 3,770,000 $ 359,000 $ 268,000 $ 4,397,000
============ ============ ========== ============
Depreciation and amortization $ 2,364,000 $ 392,000 $ 178,000 $ 2,934,000
============ ============ ========== ============
</TABLE>
<TABLE>
JANUARY 31, 1998
----------------
<CAPTION>
ENGINEERING
& EVALUATION IT SOLUTIONS CORPORATE TOTAL
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 42,750,000 $ 38,547,000 $ -- $ 81,297,000
============ ============ ========== ============
Gross profit 11,953,000 11,759,000 -- 23,712,000
Selling, general and administrative expense 6,315,000 10,775,000 -- 17,090,000
------------ ------------ ---------- ------------
Operating income 5,638,000 984,000 -- 6,622,000
Other Income (expense):
Interest expense, net (1,135,000) (110,000) -- (1,245,000)
Other 536,000 (418,000) -- 118,000
------------ ------------ ---------- ------------
Income before income taxes and minority interest $ 5,039,000 $ 456,000 $ -- $ 5,495,000
============ ============ ========== ============
Assets $ 29,770,000 $ 10,001,000 $6,341,000 $ 46,112,000
============ ============ ========== ============
Expenditures for long-lived assets $ 3,938,000 $ 153,000 $ 34,000 $ 4,125,000
============ ============ ========== ============
Depreciation and amortization $ 2,095,000 $ 252,000 $ 90,000 $ 2,437,000
============ ============ ========== ============
</TABLE>
Page 51 of 68
<PAGE>
<TABLE>
JANUARY 31, 1997
----------------
<CAPTION>
ENGINEERING
& EVALUATION IT SOLUTIONS CORPORATE TOTAL
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 37,716,000 $ 36,697,000 $ -- $ 74,413,000
============ ============ ========== ============
Gross profit 9,486,000 11,408,000 -- 20,894,000
Selling, general and administrative expense 5,690,000 9,708,000 -- 15,398,000
------------ ------------ ---------- ------------
Operating income 3,796,000 1,700,000 -- 5,496,000
Other Income (expense):
Interest expense, net (1,021,000) (140,000) -- (1,161,000)
Other 545,000 (589,000) -- (44,000)
------------ ------------ ---------- ------------
Income before income taxes and minority interest $ 3,320,000 $ 971,000 $ -- $ 4,291,000
============ ============ ========== ============
Assets $ 25,913,000 $ 9,242,000 $5,222,000 $ 40,377,000
============ ============ ========== ============
Expenditures for long-lived assets $ 2,268,000 $ 146,000 $ 255,000 $ 2,669,000
============ ============ ========== ============
Depreciation and amortization $ 1,948,000 $ 378,000 $ 64,000 $ 2,390,000
============ ============ ========== ============
</TABLE>
Page 52 of 68
<PAGE>
(11) Quarterly Financial Data (Unaudited)
<TABLE>
THREE MONTHS ENDED
------------------
<CAPTION>
1999 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 21,669,000 $ 23,153,000 $ 23,230,000 $ 21,485,000
Gross profit 6,356,000 6,650,000 6,624,000 6,924,000
Income before cumulative effect of change in accounting 1,047,000 896,000 5,000 1,173,000
Net income 1,047,000 801,000 (373,000) 1,164,000
Basic earnings (loss) per common share 0.13 0.10 (0.05) 0.14
Diluted earnings (loss) per common share 0.12 0.09 (0.04) 0.14
Weighted average common shares outstanding 8,168,000 8,180,000 8,281,000 8,318,000
Dilutive effect of stock options 447,000 291,000 325,000 291,000
Weighted average common shares outstanding,
assuming dilution 8,615,000 8,471,000 8,606,000 8,609,000
============ ============ ============ ============
</TABLE>
<TABLE>
THREE MONTHS ENDED
------------------
<CAPTION>
1998 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 18,932,000 $ 20,157,000 $ 21,443,000 $ 20,765,000
Gross profit 5,345,000 5,899,000 6,320,000 6,148,000
Net income 860,000 903,000 993,000 699,000
Basic earnings per common share 0.11 0.11 0.12 0.09
Diluted earnings per common share 0.11 0.11 0.12 0.08
Weighted average common shares outstanding 7,941,000 7,994,000 8,144,000 8,166,000
Dilutive effect of stock options 176,000 283,000 486,000 445,000
Weighted average common shares outstanding,
assuming dilution 8,117,000 8,277,000 8,630,000 8,611,000
=========== =========== =========== ===========
* Per share data may not always add to the total for the year because each figure is independently calculated.
</TABLE>
Page 53 of 68
<PAGE>
<TABLE>
Schedule II
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended January 31, 1999, 1998 and 1997
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Description Balance at beginning Additions - charged to costs Deductions - describe Balance at end
of period and expenses (a) of period
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful
accounts receivable:
<S> <C> <C> <C> <C>
1999 $ 741,000 $ 289,000 $ (126,000) $ 904,000
=========== =========== =========== ==========
1998 $ 750,000 $ 235,000 $ (244,000) $ 741,000
=========== =========== =========== ==========
1997 $ 642,000 $ 349,000 $ (241,000) $ 750,000
=========== =========== =========== ==========
(a) Write-off of uncollectible accounts receivable, net of recoveries.
</TABLE>
Page 54 of 68
<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).
2.1 Agreement and Plan of Merger dated as of August 21, n/a
1998, by and between National Technical Systems, Inc.
and XXCAL, Inc., a California Corporation filed as
Exhibit 2.1 to the Company's Form 8-K, (filed November
3, 1998 and is incorporated herein by reference
thereto).
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as n/a
of October 19, 1998, by and between National Technical
Systems, Inc. and XXCAL, Inc., a California
Corporation filed as Exhibit 2.2 to the Company's Form
8-K, (filed November 3, 1998 and is incorporated
herein by reference thereto).
2.3 Share Purchase Agreement, dated as of August 21, 1998, n/a
by and between National Technical Systems, Inc. and the
holders of all of the outstanding Ordinary Shares of
XXCAL Limited, a United Kingdom corporation, to acquire
all of the outstanding Ordinary Shares, filed as Exhibit
2.3 to the Company's Form 8-K, (filed November 3, 1998
and is incorporated herein by reference thereto).
2.4 Amendment No. 1 to Share Purchase Agreement dated as of n/a
October 19, 1998 by and between National Technical
Systems, Inc. and the holders of all of the
outstanding Ordinary Shares of XXCAL Limited, a United
Kingdom corporation, to acquire all of the outstanding
Ordinary Shares, filed as Exhibit 2.4 to the Company's
Form 8-K, (filed November 3,1998 and is incorporated
herein by reference thereto).
3.1 Articles of Incorporation of National Technical Systems, n/a
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).
Page 55 of 68
<PAGE>
3.2 Amendment No. 1 to Articles of Incorporation of National n/a
Technical Systems, Inc., a California corporation
(formerly NTS Merger corporation), (filed as Appendix A
to the Company's Proxy Statement for Annual Meeting of
June 26, 1998, and is incorporated herein by reference
thereto).
3.3 Bylaws of National Technical Systems, Inc., a California n/a
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).
10.1 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).
10.2 Amendment to the Company's 1994 Stock Option Plan (filed n/a
as Proposal No. 3 to the Company's Proxy Statement for
Annual Meeting of June 26, 1998, and is incorporated
herein by reference thereto).
10.3 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
10.4 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 fiscal quarter ended October 31, 1997, and is
incorporated herein by reference thereto).
10.5 Second Amendment to Credit Agreement between Sanwa Bank n/a
California, Mellon Bank and NTS dated October 30, 1998
Exhibit 10.(c)(2) to the Company's Form 8-K, (filed
November 3, 1998 and is incorporated herein by
reference thereto)
21 Subsidiaries of the Company. 57
23.1 Consent of Ernst & Young LLP, Independent Auditors. 58
23.2 Consent of Duitch, Franklin & Co., LLP, Independent
Auditors. 59
27 Financial Data Schedule. 68
99.1 Undertakings incorporated by reference into Form S-8
Registration Statement No. 33-48211. 60
99.2 Undertakings incorporated by reference into Form S-8
Registration Statement No. 2-83778. 62
99.3 Undertakings incorporated by reference into Form S-8
Registration Statement No. 333-04905. 64
99.4 Undertakings incorporated by reference into Form S-8
Registration Statement No. 333-67743. 66
Page 56 of 68
<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 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 Technical Systems-Certification Services, a Delaware Corp.
XXCAL, Inc., a California Corp.
XXCAL Limited, a UK Corp.
National Quality Assurance - USA, Inc., a Massachusetts Corp.
(50% owned)
Page 57 of 68
<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, Form S-8 No. 333-04905 and Form
S-8 No. 333-67743) pertaining to the National Technical Systems, Inc. Employee
Stock Ownership Plan, the National Technical Systems, Inc. 1988 Stock Option
Plan, the National Technical Systems, Inc. 1994 Stock Option Plan and the XXCAL,
Inc. Stock Option Plan in the related Prospectuses of our report dated April 9,
1999, with respect to the consolidated financial statements of National
Technical Systems, Inc. included in the Annual Report (Form 10-K) for the year
ended January 31, 1999.
/s/ Ernst & Young LLP
Woodland Hills, California
April 28, 1999
Page 58 of 68
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As the independent certified public accountants, we hereby consent to the
incorporation in the form 10-K of National Technical Systems, Inc. for the
fiscal year ended January 31, 1999 of our report June 19, 1998 on the financial
statements of XXCAL, Inc. as of and for the year ended December 31, 1997.
/s/ Duitch, Franklin & Co, LLP
Los Angeles, California
April 28, 1999
Page 59 of 68
<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 60 of 68
<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 61 of 68
<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 62 of 68
<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 63 of 68
<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 64 of 68
<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 65 of 68
<PAGE>
EXHIBIT 99.4
To be Incorporated By Reference Into Form S-8
Registration Statement No. 333-67743
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 shareholders 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 66 of 68
<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 shareholders, copies of all reports, proxy statements
and other communications distributed to its shareholders 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 shareholders delivered upon written request. If such report is
filed as a part of the registrant's annual report to shareholders delivered upon
written request. If such report is filed as a part of the registrant's annual
report to shareholders 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 99.4
Page 67 of 68
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 2,599
<SECURITIES> 0
<RECEIVABLES> 21,024
<ALLOWANCES> 904
<INVENTORY> 1,640
<CURRENT-ASSETS> 26,433
<PP&E> 54,223
<DEPRECIATION> 33,402
<TOTAL-ASSETS> 49,831
<CURRENT-LIABILITIES> 9,482
<BONDS> 0
0
0
<COMMON> 11,472
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 49,831
<SALES> 89,537
<TOTAL-REVENUES> 89,537
<CGS> 62,983
<TOTAL-COSTS> 62,983
<OTHER-EXPENSES> 20,505
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,253
<INCOME-PRETAX> 4,887
<INCOME-TAX> 1,742
<INCOME-CONTINUING> 3,121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (482)
<NET-INCOME> 2,639
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
