ITEM 2. PROPERTIES.
A. OPERATIONS. The Company owns/leases and operates the following properties:
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.
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. (See Note 10 to the Consolidated Financial Statements attached hereto as Exhibits A (i) and A (ii)).
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
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, 2000 and 1999 is presented below:
B. HOLDERS OF COMMON STOCK.
As of the close of business on April 20, 2000, 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 January 26, 1999, the Company's Board of Directors adopted a regular annual dividend policy and declared an initial annual dividend of $0.04 per share, payable semi-annually. The initial semi-annual dividend of $0.02 per share was paid on March 2, 1999 to shareholders of record at the close of business on February 15, 1999. The second semi-annual dividend of $0.02 per share was paid on August 4, 1999 to shareholders of record at the close of business on July 15, 1999. In addition, On June 14, 1999, the Company's Board of Directors declared a special cash dividend of $0.03 per share which was paid on August 4, 1999 to shareholders of record at the close of business on July 15, 1999. This brought the total cash dividends for the twelve months ending August 4, 1999, to $0.07 per share.
In fiscal 2000, a distribution of $120,000 was made to the former subchapter S shareholders of XXCAL, Inc. The distribution was made from the accumulated adjustment account in retained earnings and is the last distribution made to these shareholders. In fiscal 1999 and 1998, these distributions were $442,000 and $323,000 respectively.
For the Year ended January 31, 2000, a dividend in the amount of $25,000 was paid to NQA UK, the 50% shareholder of NQA-USA. In fiscal 1999, the dividend paid to NQA-UK was $17,000 and there were no dividends paid to NQA-UK in fiscal 1998.
On June 26, 1998, the Company declared a $0.07 per share cash dividend which was paid on August 4, 1998 to shareholders of record on July 15, 1998.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
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* Per share data may not always add up to total for the year because each figure is independently calculated.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
NTS is a diversified services company which operates in two segments: "Engineering and Evaluation" and "Technical Staffing". The business of the Company is conducted by a number of operating units, each with its own organization. Each segment is under the direction of its own executive and operational management team. During fiscal 2000, the segments were restructured to conform with the new operational management structure. All registration operations and computer testing operations are now under the "Engineering and Evaluation" segment. Prior years segment information have been restated to conform with the new structure.
The Engineering and Evaluation segment performs technical services for a wide range of industries (telecommunications, medical, computer, automotive, aerospace, defense, among others) including analysis, engineering and mechanical and electronic testing to ascertain performance and reliability, computer-based structural dynamics and finite element analysis. In addition, this segment performs quality management registration services.
The Technical Staffing segment is a provider of information technology, managed services and staffing. Utilizing full-time salaried and hourly consultants, the Company offers a wide range of staffing solutions to meet its clients' information technology "IT", information systems ("IS") and software engineering needs.
In fiscal 2000, the Company acquired Reintexas Laboratories, a Plano, Texas facility owned by Reintech Laboratories. The operation performs electromagnetic compatibility testing for the telecommunications industry. Also in fiscal 2000, through its NTS-CS subsidiary, the Company acquired the quality management registration business of Davy Registrar Services and Scott Quality Systems Registrars, a Pittsburgh, Pennsylvania based registration business.
During fiscal 2000, the Company experienced a significant loss of business at its McClellan Air Force base division located in Sacramento, California, due to the government decision to transfer work, planned for that operation, to another Air Force base. The Company, facing losses in attempting to maintain the operation decided to discontinue this line of business and close its operations at Sacramento. All information presented herein has been restated to exclude the effects of the Sacramento discontinued operation.
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). All prior year financial statements include the combined financial statements of NTS and XXCAL.
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
REVENUES
For the year ended January 31, 2000, total net revenues decreased $2,689,000 or 3.1% when compared with fiscal 1999.
For the year ended January 31, 1999, total net revenues increased $5,892,000 or 7.3% when compared with fiscal 1998.
ENGINEERING & EVALUATION:
Revenues in the Engineering and Evaluation segment remained unchanged in fiscal 2000 when compared with fiscal 1999. Revenues in the aerospace and defense industries declined as some of the Company's aerospace customers are retaining programs in-house and government laboratories are becoming more aggressive in competing with private industry for programs. The decline in aerospace and defense revenues was offset by an increase in registration services revenues and an increase from telecommunications and computer hardware testing as a direct result of the strategic focus by the Company on that fast growing market.
For the year ended January 31, 1999, revenues in the Engineering and Evaluation segment decreased $1,252,000 or 2.5% when compared with fiscal 1998 primarily due to 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 were experiencing difficulties producing new products due to technological problems thus delaying production of hardware for evaluation and testing.
TECHNICAL STAFFING:
Revenues in the Technical Staffing segment decreased by $2,674,000 or 7.2% in fiscal 2000 compared to fiscal 1999 due to the industry-wide Year 2000 projects slowdown coupled with the low availability of employees resulting from the reduced level of unemployment. In addition, fiscal 2000 revenues were affected by a significant reduction in fees at two of the Company's largest customers and the loss of a major contract, which the company had for a number of years, due to increased competition. In an effort to reposition itself in this industry and become more competitive, the Company made structural changes which resulted in the closing of four offices.
For the year ended January 31, 1999, revenues in the Technical Staffing segment increased $7,144,000 or 23.8% when compared with fiscal 1998 due to the 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.
GROSS PROFIT
For the year ended January 31, 2000, total gross profit decreased $1,988,000 or 7.7% when compared with fiscal 1999.
For the year ended January 31, 1999, total gross profit increased 2,323,000 or 9.8% when compared with fiscal 1998.
ENGINEERING & EVALUATION:
Gross profit for the Engineering and Evaluation segment slightly decreased by $438,000 or 2.9% in fiscal 2000 when compared with fiscal 1999 as a result of the competitive pressures from other companies and government laboratories, which are becoming more aggressive in competing with private industry, combined with the revenue slowdown in the aerospace and defense industries discussed above. This decrease was partially offset by increases in gross profit generated from registration services and telecommunications testing.
For the year ended January 31, 1999, gross profits for the Engineering and Evaluation segment increased by $1,174,000 or 8.4% due primarily due to the success of the Company in obtaining more profitable fixed price contracts and the success of its continued cost containment programs.
TECHNICAL STAFFING
Gross profit for the Technical Staffing segment decreased by $1,550,000 or 14.3% in fiscal 2000 when compared to the same period in 1999 due primarily to the decrease in revenues and competitive pricing pressures due to the tight recruiting market.
For the year ended January 31, 1999, gross profit for the Technical Staffing segment increased by $1,149,000 or 11.8% when compared to the same period in 1999 as a result of increased revenues in fiscal 1999 and obtaining more fee placements and permanent placement contracts.
SELLING, GENERAL AND ADMINISTRATIVE
For the year ended January 31, 2000, total selling, general and administrative expenses decreased $678,000 or 3.5% when compared with fiscal 1999.
For the year ended January 31, 1999, total selling, general and administrative expenses increased $2,495,000 or 14.6% when compared with fiscal 1998.
ENGINEERING & EVALUATION:
Selling, general and administrative expenses slightly decreased by $225,000 or 2.4% in fiscal 2000 when compared with fiscal 1999. This decrease was primarily due to the Company's cost containment efforts offset by increases in costs to expand the base of business into new technology areas. The Company is continuing to redirect its sales efforts to procure larger evaluation programs which require a greater depth of technical knowledge.
For the year ended January 31, 1999, selling, general and administrative expenses for the Engineering and Evaluation segment increased by $1,520,000 or 19.3% when compared to fiscal 1998 due to efforts to expand the base of business into new technology areas by engaging specialists in these new areas to offset the declining opportunities in the Company's traditional testing business. The Company was redirecting some of its sales efforts to procure larger evaluation programs which require a greater depth of technical knowledge. Thus, the Company hired several specialists which caused selling expenses to increase in advance of achieving results from their work.
TECHNICAL STAFFING:
Selling, general and administrative expenses decreased by $453,000 or 4.5% in fiscal 2000 when compared with fiscal 1999 primarily due to the cost reduction efforts made to partially offset the reduction in revenues.
For the year ended January 31, 1999, selling, general and administrative expenses for the Technical Staffing segment increased by $975,000 or 10.6% when compared to fiscal 1998 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.
OPERATING INCOME (LOSS)
For the year ended January 31, 2000, operating income decreased $403,000 or 7.3% when compared with fiscal 1999.
For the year ended January 31, 1999, operating income decreased $1,079,000 or 16.4% when compared with fiscal 1998.
ENGINEERING & EVALUATION:
Operating income increased by $473,000 in fiscal 2000 when compared with fiscal 1999 primarily due to the lack of merger costs in fiscal 2000 compared to $686,000 in merger costs in fiscal 1999. This increase was offset by a slight decrease in gross profit in fiscal 2000 when compared to fiscal 1999.
For the year ended January 31, 1999, operating income decreased by $1,032,000 when compared to fiscal 1998 primarily due to merger costs of $686,000 in fiscal 1999 and the increase in selling, general and administrative expenses in fiscal 1999, offset by an increase in gross profit.
TECHNICAL STAFFING:
Operating income decreased by $876,000 in fiscal 2000 when compared with fiscal 1999 primarily due to the lower revenues and gross profit in fiscal 2000 offset by a reduction in selling, general and administrative expenses in fiscal 2000 as well as the lack of merger costs in fiscal 2000.
For the year ended January 31, 1999, operating income decreased slightly by $47,000 when compared to fiscal 1998 primarily due to the increase in selling, general and administrative expenses in fiscal 1999 and merger costs of $221,000 incurred in fiscal 1999, offset by an increase in gross profit.
MERGER COSTS
During fiscal year 1999, 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, legal and other fees and expenses specifically associated with the merger (accounted for as a pooling). In accordance with APB 16, these costs were expensed as incurred.
INTEREST EXPENSE
Interest expense increased $291,000 in fiscal 2000 when compared to fiscal 1999. This increase was principally due to higher weighted average debt balances in fiscal 2000 along with slightly higher interest rates. 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.
SETTLEMENT AND RELATED LEGAL EXPENSES
During the fourth quarter of fiscal 2000, the Company recorded an unusual charge of $1,598,000 which included a one time cash payment of $1,020,000 to Tecstar and $578,000 for the Company's legal and defense costs. The Company has retained legal counsel on a contingent-fee basis to pursue a possible recovery from its insurance companies. (See Note 10 to the Consolidated Financial Statements attached hereto as Exhibits A (i) and A (ii))
INCOME TAXES
The income tax rate for fiscal years 2000, 1999 and 1998 reflects a rate in excess of the federal statutory rate primarily due to the inclusion of state income taxes and certain non-deductible expenses. The Company's fiscal 2000 income tax provision was $822,000 less than fiscal 1999 because of a decrease in income.
The fiscal 1999 income tax provision was $452,000 less than fiscal 1998 due to the decrease 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 anticipated 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 discontinued operations represents the results of operations of the Company's McClellan Air Force base facility in Sacramento, California. During fiscal 1998, the Company took over the operations and employees of the Science and Engineering Test Laboratories at McClellan. This facility allowed the Company to enter a new segment of business which provided chemical, materials and electronic analysis for the government, including failure analysis of fuels and lubricants, electronic components, materials and processes, metal fatigue simulation and corrosion analysis. This was the only facility in the Company that had the necessary equipment and knowledge to perform these types of testing services.
During the fourth quarter of fiscal 2000 the Company decided to discontinue this line of business and close its operations in Sacramento as it experienced a significant loss of business due to the government decision to transfer work, planned for that operation, to another Air Force base. (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 Sacramento discontinued operation.
NET INCOME
The decrease in net income for fiscal 2000 compared to fiscal 1999 was due primarily to the legal and settlement expense discussed above, the decrease in revenues and the losses from McClellan Air Force base, offset by the absence of merger costs and start-up expenses in fiscal 2000.
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.
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. The financial impact of addressing the Year 2000 issue had no material impact on the Company's financial condition, results of operations or cash flows. The Company has funded these costs from its operating and financing cash flows.
BUSINESS ENVIRONMENT
ENGINEERING & EVALUATION:
The Company's basic service to industry is to support the development of new products. Much of that effort in basic industries such as automotive, aerospace and defense was not evident in fiscal 2000 except for research and development on new spacecraft such as X-33, DeltaIV and Atlas V. For those programs, the Company expects to see increased workload in the cryogenics evaluation during next year.
The information technology market, on the other hand, is in a rapid technological growth cycle due to the use of computers, wireless, cell phones, e-mail and faxes. The Company is serving this growing market in four of its locations and anticipates significant growth for the next 18 to 24 months. Competition is more limited in these markets for two reasons. First, when international standards and approval are required, only third party laboratories such as the Company's can perform this service. Second, information technology companies need all their scientists and engineers working on the design and manufacturing of their evolving products, and will make more "make or buy" decisions to use independent, qualified test labs to evaluate and test their products.
Competition among the quality audit companies is expected to be similar to last year.
TECHNICAL STAFFING:
The Company has aggressively pursued additional business in the growing Technical Staffing market. The Company supplies professionals in support of customers who need help-desk analysts and managers; relational database administrators and developers; application and systems programmers; configuration and project managers; and multiple levels of system operations personnel. The shortage of qualified
temporary and permanent candidates may bring additional pressure on earnings to this highly competitive business. The Company expects competition to be similar to last year.
Notwithstanding the foregoing, and because of factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 2000, cash provided by operations increased by $100,000 when compared to fiscal 1999. Primary factors contributing to this were an increase in depreciation, as well as increases in the change in accounts receivable, prepaid expenses and accounts payable. These changes were partially offset by a decrease in net income and decreases in the change in inventories, accrued expenses and income taxes. In fiscal 1999, cash provided by operations increased by $1,211,000 over fiscal 1998, reflecting increases in depreciation, provision for losses on receivables and an increase in changes in accounts receivable, accounts payable and accrued expenses, partially offset by a decrease in net income, inventories and prepaid expenses.
Net cash used in investing activities in fiscal 2000 increased by $5,881,000 as compared to fiscal 1999, primarily due to increases in purchases of telecommunications testing equipment, increases in computer hardware and software, the acquisition of the assets of Reintexas Laboratories in Plano, Texas and the acquisitions of Davy Registrar Services and Scott Quality Systems Registrars. Net cash used in investing activities in fiscal 1999 decreased $59,000 as compared to fiscal 1998.
Net cash provided by financing activities in fiscal 2000 consisted principally of proceeds from bank loans and issuance of stock upon the exercise of stock options and related tax benefit, offset by repayments of debt and cash dividends to shareholders and subchapter S shareholders. 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.
In September 1997, the Company negotiated with Sanwa Bank California, as agent, and Mellon Bank, for a credit agreement which included a $6,000,000 revolving line of credit at an interest equal to the bank's reference rate plus 0.25%. On October 30, 1998, the credit agreement was amended to extend the term of the revolving line to September 8, 2000 and to increase the revolving line amount from $6,000,000 to $8,000,000 at an interest rate equal to the bank's reference rate. A flat fee of $18,750 was charged to set up the new revolving line and a facility fee of 0.5% of the total line is charged on a quarterly basis. On October 29, 1999, the credit agreement was amended again to extend the term of the revolving line to September 8, 2001and to increase the revolving line amount from $8,000,000 to $10,000,000 at an interest rate equal to the bank's reference rate. The outstanding balance at January 31, 2000 was $7,507,000 compared with an outstanding balance of $4,107,000 at January 31, 1999. This balance is reflected in the accompanying consolidated balance sheets as long-term.
In November 1997, the Company entered into an equipment line of credit agreement with Mellon US Leasing (interest rates of 7.60% to 10.25%) to finance various test equipment with terms of 60 months for each equipment schedule. In April 1999, Mellon US Leasing extended an additional $2,000,000 of credit under the same terms as the original agreement. The outstanding balance at January 31, 2000 is $3,665,000. The note payable to Mellon Bank is collateralized by equipment with a net book value of $3,595,000 at January 31, 2000. Other secured notes payable at January 31, 2000 includes auto loans of $22,000 and $147,000 in capital equipment leases acquired with the purchase of Reintexas Laboratories with terms of 24 months to 60 months and an average interest rate of 15.7%.
Maturities of long-term debt consist of regularly scheduled payments on the Company's term loans to its banks and notes payable. Of the $12,709,000 shown in the maturities of long term debt (see note 3 to the consolidated financial statements) due in fiscal 2002, $7,507,000 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 $2,493,000 available at January 31, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 $75,000 at January 31, 2000.
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.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10.
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 23, 2000 are incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11.
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 23, 2000 is incorporated herein by reference.
ITEM 12.
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 23, 2000 are incorporated herein by reference.
ITEM 13.
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 23, 2000 are incorporated herein by reference.
PART IV
ITEM 14.
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, 2000 and 1999 and for each of the years in the three-year period ended January 31, 2000.
(ii) Consolidated Financial Statement Schedule.
II Valuation and Qualifying Accounts and Reserves
B. REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the fourth quarter ended January 31, 2000.
C. EXHIBITS.
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.
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, 2000.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
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All other schedules are omitted as inapplicable or because the required information is contained in the financial statements or the notes thereto.
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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2000. 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 did not audit the 1998 financial statements of XXCAL, Inc., a wholly-owned subsidiary, which statement reflects revenues constituting 31% of the related consolidated revenues. That income statement was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the income statement data included for XXCAL, Inc., is based solely on the report of other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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, 2000 and 1999 and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Woodland Hills, California April 14, 2000, except for the third paragraph of Note 3, as to which the date is April 27, 2000
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
ASSETS
See accompanying notes.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
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* Per share data may not always add up to total for the year because each figure is independently calculated
See accompanying notes.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
See accompanying notes.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
See accompanying notes.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000, 1999 AND 1998
(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. All significant intercompany balances and transactions have been eliminated in consolidation. Certain 1998 and 1999 amounts have been reclassified to conform with the 2000 presentation.
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 62% to the Company, and 38% 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 $120,000.
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 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.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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:
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 $465,000 as of January 31, 2000 and $232,000 as of January 31, 1999.
LONG-LIVED ASSETS
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, 2000.
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. It requires display of unrealized gains or losses on available-for-sale
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) securities and foreign currency translation adjustments. Accumulated other comprehensive loss as of January 31, 2000 was $7,000 due to foreign currency translation adjustments. Prior year financial statements have not been reclassified to conform to the requirements of SFAS No. 130 since these accounting transactions were not material.
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
Basic and diluted net income per common share is presented in conformity with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"(FAS 128) for all periods presented. In accordance with FAS 128, basic earnings per share has been computed using the weighted average number of shares of common stock outstanding during the year. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities.
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 losses of $7,000 were recorded in fiscal year 2000.Prior years translation gains and losses were 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
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statements during the third quarter of fiscal year ending January 31, 1999. The effect of adoption of SOP 98-5 was to record as a one-time charge 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. The Statement will require the recognition of all derivatives on the Company's balance sheet at fair value. The Financing Accounting Standards Board has subsequently delayed implementation of the standard for the financial years beginning after June 15, 2000. The Company expects to adopt the new Statement effective February 1, 2001. The impact on the Company's financial statements is not expected to be material.
(2) BUSINESS DISPOSITION AND ACQUISITION
MCCLELLAN AIR FORCE BASE, SACRAMENTO, CALIFORNIA
During fiscal 1998, the Company took over the operations and employees of the Science and Engineering Test Laboratories at McClellan Air Force base located in Sacramento, California. This facility allowed the Company to enter a new segment of business which provided chemical, materials and electronic analysis for the government, including failure analysis of fuels and lubricants, electronic components, materials and processes, metal fatigue simulation and corrosion analysis. This was the only facility in the Company that had the necessary equipment and knowledge to perform these types of testing services.
During the fourth quarter of fiscal 2000 the Company decided to discontinue this line of business and close its operations in Sacramento as it experienced a significant loss of business due to the government decision to transfer work, planned for that operation, to another Air Force base.
Results of operations related to the discontinued operations are as follows:
TELECOMMUNICATIONS TESTING LABORATORY
In November 1999, the Company acquired the assets and assumed certain liabilities of Reintexas Laboratories, a Plano, Texas facility owned by Reintech Laboratories for $1,300,000 cash and an additional
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(2) BUSINESS DISPOSITION AND ACQUISITION (CONTINUED) consideration not to exceed $300,000 if the revenues exceed certain targeted levels. Such additional consideration will be paid in cash and recorded when earned as additional purchase price. As of January 31, 2000, nothing was earned. The operation performs electromagnetic compatibility testing for the telecommunications industry. The fixed assets consisted primarily of electromagnetic compatibility testing equipment which complement one of the Company's primary business segments. The transaction was accounted for as a purchase of assets and resulted in goodwill of $313,000.
QUALITY REGISTRATION AND CERTIFICATION COMPANIES
In March 1999, NTS-CS a subsidiary of the Company acquired the Assets of Davy Registrar Services and Scott Quality Systems Registrars, a Pittsburgh, Pennsylvania based quality registration business, for $482,000 cash. The companies acquired provide quality registration and certification services including electronics, telecommunications, and medical products. The transaction was accounted for as a purchase of assets and resulted in goodwill of $483,000.
INFORMATION TECHNOLOGY MANAGED SERVICES COMPANY
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.
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:
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(3) DEBT
Long-term debt consists of the following:
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(a) The Credit Agreement includes a $6,000,000 revolving line of credit at an interest rate equal to the bank's reference rate plus 0.25%. On October 30, 1998, the Credit Agreement was amended to extend the term of the revolving line to September 8, 2000 and to increase the revolving line amount from $6,000,000 to $8,000,000 at an interest rate equal to the bank's reference rate. A flat fee of $18,750 was charged to set up the new revolving line and a facility fee of 0.5% of the total line is charged on a quarterly basis. On October 29, 1999, the Credit Agreement was amended again to extend the term of the revolving line to September 8, 2001and to increase the revolving line amount from $8,000,000 to $10,000,000 at an interest rate equal to the bank's reference rate. The outstanding balance at January 31, is $7,507,000 compared with an outstanding balance of $4,107,000 at January 31, 1999. This balance is reflected in the accompanying consolidated balance sheets as long-term.
(b) The Credit Agreement also includes 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. On October 29, 1999, the Company added another new term loan for $3,000,000 at an interest rate equal to the bank's reference rate plus 0.50% and a maturity date of October 31, 2004. On November 5, 1999, the interest rate for the new term loan was converted from the reference rate base to a fixed rate base at an annual rate of 8.88%.
The term loan and line of credit noted above are subject to certain covenants and 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. As of January 31, 2000 the Company was in violation of certain of those covenants, for which the Company has received a waiver and amended the covenants on April 27, 2000 in order for the Company to be in compliance through January 31, 2001, based on the Company's projections for the year ended January 31, 2001. 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.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(3) DEBT (CONTINUED) (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. In April of 1999, Mellon US Leasing extended an additional $2,000,000 of credit under the same terms of the original agreement. The outstanding balance at January 31, 2000 is $3,665,000. The note payable to Mellon Bank is collateralized by equipment with a net book value of $3,595,000 at January 31, 2000. Other secured notes payable at January 31, 2000 includes auto loans of $22,000 and $147,000 in capital equipment leases acquired with the purchase of Reintexas Laboratories with terms of 24 months to 60 months and an average interest rate of 15.7%.
(d) The Company has unsecured demand notes payable to two officers of the Company and one employee in the aggregate amount of $388,000 as of January 31, 2000. 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 the Company's short-term debt in 2000 and 1999 is approximately 8.82% and 8.45%, respectively.
Maturities of long-term debt for five years subsequent to January 31, 2000 are as follows:
In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments", a reasonable estimate of fair value for the Company's fixed rate debt was based on a discounted cash flow analysis. The carrying amount of other debt, including borrowings under the Company's revolving lines of credit, approximate its fair value.
The carrying amounts and estimated fair values of the Company's financial instruments are:
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(4) INCOME TAXES
Until the merger with NTS, XXCAL had elected to be taxed as a subchapter 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 $354,000, $252,000 and $130,000 in fiscal 2000, 1999 and 1998, respectively. Accumulated foreign earnings were $734,000 as of January 31, 2000. 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:
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:
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
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(4) INCOME TAXES (CONTINUED) amounts used for income tax purposes. The primary components of the Company's deferred tax assets and liabilities at January 31 were as follows:
(5) STOCK OPTIONS AND PENSION PLANS
The Company has one employee incentive stock option plan: the 1994 stock option plan. The XXCAL, Inc. stock options were exchanged for options of National Technical Systems, Inc.
Under the 1994 stock option 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, is as follows:
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(5) STOCK OPTIONS AND PENSION PLANS (CONTINUED) The range of exercise prices for options outstanding at January 31, 2000 was $1.20 to $7.00. The range of exercise prices for options is wide due primarily to the fluctuating price of the Company's stock over the period of the grants.
The following tables summarize information about options outstanding at January 31, 2000:
These options will expire if not exercised at specific dates ranging from March 2000 to December 2009. Prices for options exercised during the two-year period ended January 31, 2000 ranged from $0.70 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:
The Black-Scholes option valuation model was developed for use in estimating the fair value of the traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(5) STOCK OPTIONS AND PENSION PLANS (CONTINUED) 2000 and 1999 was $3.72 and $4.47 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:
The Company had an employee stock ownership plan covering all employees. Contributions by the Company were at the discretion of the Board of Directors. The Company did not make contributions in 2000, 1999 or 1998 and the Board of Directors voted to terminate the Plan as of December 31, 1999 and distribute the shares in the Plan to the participants.
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 fiscal 2000, the Board of Directors and management of the Company approved a contribution to the 401(k) profit sharing plan of $152,100 as compared to $253,600 in 1999 and $258,500 in 1998.
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.
The former 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 he is eligible to retire at any time.
The deferred compensation benefits are accrued and recognized over each employee's expected term of employment. The Company's total deferred compensation expenses were $94,000, $67,000 and $119,000 for the years ended January 31, 2000, 1999 and 1998, respectively. Included in other assets is $1,324,000 and $1,150,000 for the cash surrender value as of January 31, 2000 and 1999, respectively.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(6) CAPITAL STOCK
As of January 31, 2000 and 1999, the Company had 20,000,000 authorized common shares with no par value. At January 31, 2000 and January 31, 1999, 8,404,000 shares and 8,319,000 shares were issued and outstanding, respectively.
Holders of common stock 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 2011. 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 $2,228,000 in 2000, $1,843,000 in 1999, and $1,542,000 in 1998.
At January 31, 2000, minimum rental payment obligations under operating leases were as follows:
(8) ACCRUED EXPENSES
A summary of accrued expenses at January 31 is as follows:
(9) CONTINGENCIES
The Company is, from time to time, the subject of claims and suits (see Note 10) arising out of matters occurring during the operation of the Company's business. In the opinion of management, no claims or suits would materially affect the financial position or the results of the operations or cash flows of the Company.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(10) SUBSEQUENT EVENTS
LITIGATION SETTLEMENT AND OTHER CONTINGENCIES
On or about April 30, 1999, Tecstar, Inc., a manufacturer of flight hardware for use in satellites filed a complaint against the Company in the Superior Court of the State of California for Los Angeles County. The complaint alleged that during a test cycle, the Company damaged hardware provided by Tecstar and as a result the hardware was rejected by Tecstar's customer as allegedly being unsuitable for flight. Tecstar sought monetary damages of $2,488,700 plus the costs of litigation and interest, including prejudgment interest, as provided by law.
During the fourth quarter ended January 31, 2000, the Company's Board of Directors authorized management to engage in settlement discussions with Tecstar. In March 2000, the Company and Tecstar agreed to terms of a settlement based on the mounting legal costs, distraction of management focus and the uncertainty present in any litigation. The Company recorded an unusual charge of $1,598,000 as of the fourth quarter of fiscal 2000. This included a one time cash payment of $1,020,000 to Tecstar and $578,000 for the Company's legal and defense costs. The Company also received the alleged damaged flight hardware.
The Company has retained legal counsel on a contingent-fee basis to pursue a possible recovery from its insurance carriers.
(11) SEGMENT OF BUSINESS INFORMATION
The Company maintains two core operating segments: Engineering & Evaluation and Technical Staffing.
The Engineering and Evaluation segment operates test laboratories in various states in the U.S., the United Kingdom and Japan 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. 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 Technical Staffing segment includes the newly acquired XXCAL which was combined with the operations of the NTS Technical Staffing division. This segment operates in various states. Technical Staffing 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.
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
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(11) SEGMENT OF BUSINESS INFORMATION (CONTINUED) Company's Chief Executive Officer utilizes the information reported below in evaluating results and allocating resources pertaining to segment operations.
Direct and indirect revenues of the Engineering and Evaluation Group from federal agencies of approximately $25,933,000 in 2000, $25,945,000 in 1999 and $25,290,000 in 1998, 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 $867,000, $548,000 and $369,000 in 2000, 1999, and 1998, respectively. Assets utilized in the foreign (UK) subsidiaries were $807,000, $485,000 and $257,000 as of January 31, 2000, 1999 and 1998, respectively.
The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral.
The following table illustrates each segment's operating income for 2000, 1999 and 1998. Assets by segment are those assets that are used in the Company's operations in each segment. Corporate assets consist of cash, accounts receivable, income taxes receivable, investments in securities, real estate, fixed assets not allocated to segments. Corporate general and administrative expenses were allocated on the basis of revenues, gross profit, net property, plant and equipment and payroll expenses of the respective segments. Interest expense is allocated to the segments based on average borrowing rates and segment advances.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(11) SEGMENT OF BUSINESS INFORMATION (CONTINUED)
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
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* Per share data may not always add to the total for the year because each figure is independently calculated.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000, 1999 AND 1998
(12) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
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* Per share data may not always add to the total for the year because each figure is independently calculated.
SCHEDULE II
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
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(a) Write-off of uncollectible accounts receivable, net of recoveries.