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 9 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, 2001 and 2000 is presented below:
B. HOLDERS OF COMMON STOCK.
As of the close of business on April 23, 2001, there were 935 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 February 4, 2000, pursuant to the Company's current dividend policy, the Company's Board of Directors authorized the regular semiannual cash dividend of $0.02 per share, that was paid on March 15, 2000 to shareholders of record at the close of business on February 28, 2000. The second semi-annual dividend of $0.02 per share was paid on August 2, 2000 to shareholders of record at the close of business on July 14, 2000. This brought the total cash dividends for fiscal 2001, to $0.04 per share. On February 6, 2001, the Company's Board of Directors announced the discontinuance of the Company's policy of paying ordinary and special 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 fiscal 2000 to $0.07 per share.
In fiscal 2000, a distribution of $120,000 was made to the former subchapter S shareholders of XXCAL, Inc. This distribution was the last distribution made to these shareholders. In fiscal 1999, $442,000 in distributions were made to subchapter S shareholders of XXCAL, Inc..
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
- ------------------------
* 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 that supplies conformity assessment and personnel to a variety of industries including aerospace, defense, automotive, electronics, computers and telecommunications. Through its wide range of testing facilities, staffing solutions and certification services, NTS helps its customers reduce their time to market and enhance their overall competitiveness.
NTS operates in two segments: "Engineering & 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.
The Engineering & Evaluation segment is one of the largest U. S. based independent product and systems assessment organizations, with facilities throughout the country as well as England and Japan, and provides a complete spectrum of conformity assessment and registration services. These services include physical testing which requires simulation of harsh environments such as high/low temperature, shock, vibration, seismic and electromagnetic interference. Functional testing which requires equipment such as an Agilent 1371A Docsis test set, switches, routers, servers and high bandwidth access to the Internet to subject telecommunication equipment to a full spectrum of performance type testing. Registration services which performs quality management audits to ISO 9000, quality training and laboratory accreditation.
The Technical Staffing segment provides a variety of staffing and workforce management services and solutions, including contract services, temporary and full time placements to meet its clients' information technology ("IT"), information systems ("IS") and software engineering needs. 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.
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. NTS also shut down the Rye Canyon operation as a result of a change in direction by the owner of the use of the property.
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, 2001, total revenues increased $680,000 or 0.8% when compared with fiscal 2000.
For the year ended January 31, 2000, total revenues decreased $2,689,000 or 3.1% when compared with fiscal 1999.
ENGINEERING & EVALUATION:
Revenues in the Engineering & Evaluation segment increased $8,640,000 or 17.4% in fiscal 2001 when compared with fiscal 2000 primarily due to increased business generated from the telecommunications, automotive, aerospace and defense markets as well as an increase in business in registration and certification services. This increase was also due to the addition of a new testing facility in Texas in the fourth quarter of fiscal 2000 and the benefits the Company is receiving from its increased investment in equipment at some of its facilities during the past two years.
For the year ended January 31, 2000, revenues in the Engineering & Evaluation segment remained unchanged 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.
TECHNICAL STAFFING:
Revenues in the Technical Staffing segment decreased by $7,960,000 or 23.1% in fiscal 2001 compared to fiscal 2000 primarily due to the closure of several non-performing staffing offices, the cessation of Year 2000 related projects and competitive pricing pressures in the staffing industry which forced the Company to lower its prices to maintain existing relationships with several valued clients.During the last quarter of fiscal 2001, the Company consolidated its staffing business by moving to a "virtual office" model in anticipation of movement in technology towards the new Internet era of "E-Cruiting" with regional "Hubs"providing the necessary administrative support. The Company believes it is starting to benefit from this new business model by reducing the costs of doing business and at the same time increasing productivity of the staff.
For the year ended January 31, 2000, revenues in the Technical Staffing segment decreased by $2,674,000 or 7.2% when compared with 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.
GROSS PROFIT
For the year ended January 31, 2001, total gross profit decreased 2,211,000 or 9.2% when compared with fiscal 2000.
For the year ended January 31, 2000, total gross profit decreased $1,988,000 or 7.7% when compared with fiscal 1999.
ENGINEERING & EVALUATION:
Gross profit for the Engineering & Evaluation segment increased by $988,000 or 6.7% in fiscal 2001 when compared with fiscal 2000 as a result of the increased revenues and the strong performances in the telecommunications operations. This increase was partially offset by decreases in gross profit, particularly in the fourth quarter, due to unfavorable events that affected the results of two of the testing facilities. These events primarily consisted of the California based Saugus test facility which experienced 20 separate shutdowns during the year, 11 in the fourth quarter due to the current California energy crisis, the inability to perform on two contracts that resulted in cost overruns, the permanent shutdown of the Rye Canyon facility and the ice storm and ensuing flood in Arkansas, which closed our facility in Camden, Arkansas for approximately three weeks.
For the year ended January 31, 2000, gross profits for the Engineering & Evaluation segment slightly decreased by $438,000 or 2.9% when compared with fiscal 1999 as a result of the competitive pressures from other companies and government laboratories, 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.
TECHNICAL STAFFING
Gross profit for the Technical Staffing segment decreased by $3,199,000 or 34.3% in fiscal 2001 when compared to the same period in 2000 due to the decrease in revenues and increased competitive pricing pressures. Gross profit was also affected by costs incurred in servicing one customer which were deemed to be un-reimbursable as a result of fraud perpetrated against the Company (see operating income below).
For the year ended January 31, 2000, gross profit for the Technical Staffing segment decreased by $1,550,000 or 14.3% 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.
SELLING, GENERAL AND ADMINISTRATIVE
For the year ended January 31, 2001, total selling, general and administrative expenses decreased $320,000 or 1.7% when compared with fiscal 2000.
For the year ended January 31, 2000, total selling, general and administrative expenses decreased $678,000 or 3.5% when compared with fiscal 1999.
ENGINEERING & EVALUATION:
Selling, general and administrative expenses increased by $2,098,000 or 22.9% in fiscal 2001 when compared with fiscal 2000 primarily due to the programs established by the Company to hire specialists to expand the base of business into new technology areas and increases in bad debt expense. The Company has now accomplished its goal in expanding into new technology areas and becoming a more diversified organization with added testing capabilities particularly in the telecommunications and computer testing fields and becoming one of the largest certification and evaluation companies in the United States. Thus, while it continues to look for talented specialists, the Company has ended the previously established expansion programs to hire additional specialists until such time the economic climate shows significant improvement.
For the year ended January 31, 2000, selling, general and administrative expenses for the Engineering and Evaluation segment 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.
TECHNICAL STAFFING:
Selling, general and administrative expenses decreased by $2,418,000 or 24.9% in fiscal 2001 when compared with fiscal 2000 as a result of the closure of several non-performing staffing offices and the consolidation of its operations in an effort to streamline this business. This decrease was offset by an increase in bad debt expense as a result of fraud perpetrated against the Company (see Operating Income (Loss)--Technical Staffing).
For the year ended January 31, 2000, selling, general and administrative expenses for the Technical Staffing segment decreased by $453,000 or 4.5% when compared with fiscal 1999 primarily due to the cost reduction efforts made to partially offset the reduction in revenues.
OPERATING INCOME (LOSS)
For the year ended January 31, 2001, operating income decreased $1,891,000 or 37.2% when compared with fiscal 2000.
For the year ended January 31, 2000, operating income decreased $403,000 or 7.3% when compared with fiscal 1999.
ENGINEERING & EVALUATION:
Operating income decreased by $1,110,000 or 20.2% in fiscal 2001 when compared with fiscal 2000 primarily due to the increase in selling, general and administrative expenses discussed above.
For the year ended January 31, 2000, operating income increased by $473,000 or 9.4% 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.
TECHNICAL STAFFING:
Operating income decreased by $781,000 in fiscal 2001 or 194.3%when compared with fiscal 2000 primarily as a result of the decrease in gross profit partially offset by a decrease in selling and general and administrative expenses discussed above. Operating income (loss) was also affected by costs incurred in servicing one customer which were deemed to be un-reimbursable as a result of fraud perpetrated against the Company. The Company has concluded its investigation into this matter and has submitted a claim to its insurance carrier under its employee dishonesty policy. The effect on operating loss was approximately $880,000. The Company has provided for the balance of this customer's accounts receivable in the second quarter and does not anticipate any additional bad debt expense related to this customer.
For the year ended January 31, 2000,operating income decreased by $876,000 when compared to 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.
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 $506,000 in fiscal 2001 when compared to fiscal 2000. This increase was principally due to higher average debt balances in fiscal 2001 along with slightly higher interest rates. Interest expense increased $291,000 in fiscal 2000 when compared to fiscal 1999. This increase was principally due to higher average debt balances in fiscal 2000 along with slightly higher 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. Action has been brought against the Company's insurance carrier.
INCOME TAXES
The income tax rate for fiscal years 2001, 2000 and 1999 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 2001 income tax provision was $369,000 less than fiscal 2000 because of a decrease in income.
The fiscal 2000 income tax provision was $822,000 less than fiscal 1999 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 taxable 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)). NTS also shut down the Rye Canyon operation in fiscal 2001 as a result of a change in direction by the owner of the use of the property.
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 2001 compared to fiscal 2000 was due primarily to the decrease in gross profits and the increase in interest expense.
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.
BUSINESS ENVIRONMENT
ENGINEERING & EVALUATION:
The Company's basic service is to provide conformity assessment services. The Company is well positioned to service the needs of each of these markets with its current locations and certification, registration and test capability. Market needs do change, and NTS is well positioned to reallocate resources which include test equipment and personnel to meet the market demands.
The Company anticipates that its growth in fiscal year 2002 will be derived primarily from the functional certification and test activity, provided to its customers in the telecommunication market.
TECHNICAL STAFFING:
The Company provides a variety of staffing and workforce management services and solutions, including contract, contract-to- hire and full time placements to meet its clients' needs. The Company has moved from the traditional "bricks and mortar" model of a business to a "virtual office" model with regional "Hubs"providing the necessary administrative support to the virtual offices. The Company believes that this new business model will reduce the costs of doing business and at the same time increase productivity of the staff. However, the shortage of qualified temporary and permanent candidates is still an obstacle to a healthy growth in this highly competitive business. The opportunity for growth is a strategy to leverage off our Engineering & Evaluation clients and provide technical and engineering personnel as a complete package to the certification, registration and test services we currently provide. The goal is to align NTS as a complete solution to the clients' product development needs which will include consultants and technical experts provided by our staffing division.
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 2001, cash provided by operations increased by $924,000 when compared to fiscal 2000. Primary factors contributing to this were an increase in depreciation, provision for losses on receivables as well as increases in the change in income taxes, inventories, accrued expenses and deferred compensation. These changes were partially offset by a decrease in net income and decreases in the change in accounts receivable, prepaid expenses and accounts payable. In fiscal 2000, cash provided by operations increased by $66,000 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, accounts payable and accrued expenses offset by a decrease in net income and decreases in the change in inventories, prepaid expenses and income taxes.
Net cash used in investing activities in fiscal 2001 decreased by $3,211,000 as compared to fiscal 2000, primarily due to decreases in purchases of property, plant and equipment. Net cash used in investing activities in fiscal 2000 increased by $5,670,000 as compared to fiscal 1999, primarily due to increases in purchases of property, plant and equipment, 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 provided by financing activities in fiscal 2001 consisted principally of proceeds from bank loans, the equity infusion from NQA-UK and issuance of stock upon the exercise of stock options and related tax benefit, offset by repayments of debt and cash dividends to shareholders. Net cash provided by financing activities decreased by $4,420,000 in fiscal 2001 as compared to fiscal 2000 primarily due to the decrease in borrowings in current and long term debt in fiscal 2001 as compared to fiscal 2000 and the increase in repayments in current and long term debt in fiscal 2001 as compared to fiscal 2000.
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 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, 2001 and 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. Effective October 31, 2000, the credit agreement was amended again to extend the term of the revolving line to November 1, 2002 and to increase the line amount to $11,000,000 which was amended back to $10,000,000 on April 24, 2001. The outstanding balance at January 31, 2001 was $9,157,000 compared with an outstanding balance of $7,507,000 at January 31, 2000. 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 10.21%) 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, 2001 is $2,400,000. The note payable to Mellon Bank is collateralized by equipment with a net book value of $2,300,000 at January 31, 2001. During fiscal 2001, the Company entered into new equipment line of credit agreements with Bank of America and the Fifth Third Leasing Company. The outstanding balances at January 31, 2001on these notes were $827,000 and $791,000, respectively. Other secured notes payable at January 31, 2001 amounted to $708,000.
Maturities of long-term debt consist of regularly scheduled payments on the Company's term loans to its banks and notes payable. Of the $13,991,000 shown in the maturities of long term debt (see note 3 to the consolidated financial statements) due in fiscal 2003, $9,157,000 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.
Historically, the Company has relied on debt financing to meet its capital requirements. As of January 31, 2001, the Company was out of compliance with two of its covenants. The Company requested and received a waiver from its Bank and negotiated a new set of covenants to its credit agreement. Management is not aware of any significant demands for capital funds that may adversely affect its covenants 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 has substantially reduced its capital expenditures commitments for fiscal year 2002, which will improve working capital requirements. The Company's future working capital will be provided from operations and the current bank revolving line of credit, which had $1,843,000 available at January 31, 2001.
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 $92,000 at January 31, 2001.
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 27, 2001 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 27, 2001 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 27, 2001 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 27, 2001 is 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, 2001 and 2000 and for each of the years in the three-year period ended January 31, 2001.
(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, 2001.
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 27, 2001.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
- ------------------------
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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2001. 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 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 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, 2001 and 2000 and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2001, 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 13, 2001, except for item (b) of Note 3, as to which the date is April 24, 2001
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 AND 2000
See accompanying notes.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
* 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, 2001, 2000 AND 1999
See accompanying notes.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
See accompanying notes.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001, 2000 AND 1999
(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 1999 amounts have been reclassified to conform with the 2001 and 2000 presentation.
The Company has consolidated NQA-USA, a 50% owned subsidiary for which the distribution of profits and losses is 61% to the Company, and 39% 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 $132,000. On October 30, 1998, NTS completed its merger with XXCAL, Inc. and acquisition of XXCAL Limited (together, "XXCAL"). The statements for fiscal 1999 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.
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.
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.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $602,000 as of January 31, 2001 and $465,000 as of January 31, 2000.
The carrying value of goodwill and intangible assets is reviewed on a regular basis for the existence of facts and circumstances, both internally and externally, that may suggest impairment. To date, no such impairment has been indicated. Should there be an impairment in the future, the Company will measure the amount of the impairment based on undiscounted expected future cash flows from the impaired asset. The cash flow estimates that will be used will contain management's best estimate, using appropriate and customary assumptions and projections at the time.
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, 2001.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 securities and foreign currency translation adjustments. Accumulated other comprehensive loss was $52,000 as of January 31, 2001 due to foreign currency translation adjustments and $7,000 as of January 31, 2000 due to foreign currency translation adjustments.
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 were $45,000 in fiscal year 2001and $7,000 in fiscal year 2000.
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.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 as 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 requires the recognition of all derivatives on the Company's balance sheet at fair value. The Company adopted the new Statement effective February 1, 2001. There was no impact on the Company's financial statements.
In July 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-15, "Classification in the Statement of Cash Flows of the Income Tax Benefit Realized by a Company upon Employee Exercise of Nonqualified Stock Options", which requires companies to classify the income tax benefits related to employee exercises of nonqualified stock options as an operating activity in the statement of cash flows for both current and prior periods. Prior to the adoption of EITF 00-15, the Company had classified these amounts in financing activities in the statement of cash flows. In addition, the Company has included the income tax benefits related to disqualifying dispositions of incentive stock options within this reclassification. The adoption of EITF 00-15 had no effect on the Company's results of operations or financial position.
(2) BUSINESS DISPOSITION AND ACQUISITION
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 for various industries including electronics, telecommunications, and medical products. The transaction was accounted for as a purchase of assets and resulted in goodwill of $483,000. Additional consideration of $26,000 was paid in fiscal 2001 as additional purchase price.
On October 31, 2000, NTS, Inc. sold its wholly owned subsidiary NTS-CS to NQA, Inc. which is 50% owned by NTS, Inc. and 50% owned by NQA Limited, a British Company. NTS-CS provides ISO 9000 certification audits and on-going surveillance site visits. NTS-CS's name was changed to NQA Training and Development (NQA T&D). The accounting transaction consisted of transferring the net book value of NTS-CS at October 31, 2000 of $77,000 to NQA T&D. In connection with this transaction, NQA Limited contributed $300,000 to NQA, Inc. as an equity infusion.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(2) BUSINESS DISPOSITION AND ACQUISITION (CONTINUED) 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 consideration not to exceed $300,000 if the revenues exceed certain targeted levels. Such additional consideration amounted to $55,000 and was paid and recorded in fiscal 2001 as additional purchase price. 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 $368,000.
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
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(2) BUSINESS DISPOSITION AND ACQUISITION (CONTINUED) 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:
(3) DEBT
Long-term debt consists of the following:
- ------------------------
(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, 2001 and 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. Effective October 31, 2000, the credit agreement was amended again to extend the term of the revolving line to November 1, 2002 and to increase the line amount to $11,000,000. The outstanding balance at January 31, 2001 is $9,157,000 compared with an outstanding balance of $7,507,000 at January 31, 2000. This balance is reflected in the accompanying consolidated balance sheets as long-term.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(3) DEBT (CONTINUED) (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, 2001, the Company was in violation of certain of these covenants for which the Company has received a waiver and amended the covenants on April 24, 2001 in order for the Company to be in compliance through January 31, 2002, based on the Company's projections for the year ended January 31, 2002. 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. In accordance with the amendment, the line of credit was reduced from $11,000,000 to $10,000,000.
(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, 2001 is $2,400,000. The note payable to Mellon Bank is collateralized by equipment with a net book value of $2,300,000 at January 31, 2001.
During fiscal 2001 the Company entered into new equipment line of credit agreements with Bank of America and the Fifth Third Leasing Company (interest rates of 7.47% to 9.81%) in order to finance various equipment with terms of 60 months for each equipment schedule. The outstanding balances at January 31, 2001 on these notes were $827,000 and $791,000, respectively.
Other secured notes payable at January 31, 2001 amounted to $708,000.
(d) The Company has unsecured demand notes payable to two officers of the Company and one employee in the aggregate amount of $363,000 as of January 31, 2001. 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 2001 and 2000 is approximately 8.83% and 8.82%, respectively.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(3) DEBT (CONTINUED) Maturities of long-term debt for five years subsequent to January 31, 2001 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:
(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 ($51,000), $354,000 and $252,000 in fiscal 2001, 2000 and 1999, respectively. Accumulated foreign earnings were $683,000 as of January 31, 2001. 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. As of January 31, 2001, the company has net operating loss carryforward of approximately $1,611,037 for Federal purpose, which begin to expire in 2020.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(4) INCOME TAXES (CONTINUED)
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, 2001, 2000 AND 1999
(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. At the annual meeting held on June, 23, 2000, the number of shares reserved for issuance under the 1994 plan was increased by 500,000 shares.
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
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(5) STOCK OPTIONS AND PENSION PLANS (CONTINUED) 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:
- ------------------------
* Includes 1,092 cancelled options from the stock option plan from the XXCAL merger in 1998.
The range of exercise prices for options outstanding at January 31, 2001 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, 2001:
These options will expire if not exercised at specific dates ranging from September 2001 to December 2010. Prices for options exercised during the two-year period ended January 31, 2001 ranged from $0.70 to $2.88. 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
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(5) STOCK OPTIONS AND PENSION PLANS (CONTINUED) 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 2001 was $2.96 per share. 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 2001, 2000 or 1999 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 three 401(k) profit sharing plans: National Technical Systems 401(k) Profit Sharing Plan, XXCAL 401(k) 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 2001, the Board of Directors and
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(5) STOCK OPTIONS AND PENSION PLANS (CONTINUED) management of the Company approved a contribution to the 401(k) profit sharing plan of $151,600 as compared to $152,100 in 2000 and $253,600 in 1999.
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 deferred compensation.
The deferred compensation benefits are accrued and recognized over each employee's expected term of employment. The Company's total deferred compensation expenses were $65,000, $94,000 and $67,000 for the years ended January 31, 2001, 2000 and 1999, respectively. Included in other assets is $1,510,000 and $1,324,000 for the cash surrender value as of January 31, 2001 and 2000, respectively.
(6) CAPITAL STOCK
As of January 31, 2001 and 2000, the Company had 20,000,000 authorized common shares with no par value. At January 31, 2001 and January 31, 2000, 8,512,000 shares and 8,404,000 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 $2,676,000 in 2001, $2,228,000 in 2000 and $1,843,000 in 1999.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(7) COMMITMENTS (CONTINUED) At January 31, 2001, 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 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.
(10) SEGMENT OF BUSINESS INFORMATION
The Company maintains two core operating segments: Engineering & Evaluation and Technical Staffing.
The Engineering & 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.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(10) SEGMENT OF BUSINESS INFORMATION (CONTINUED) The Technical Staffing segment 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 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 & Evaluation Group from federal agencies of approximately $26,019,000 in 2001, $25,933,000 in 2000 and $25,945,000 in 1999, consist principally of sales under subcontracts to customers with government contracts. One major customer represented $3,336,000 of the 2001 Technical staffing net revenues. Total revenues from customers in foreign (UK) operations were $394,000, $867,000 and $548,000 in 2001, 2000, and 1999, respectively. Assets utilized in the foreign (UK) subsidiaries were $528,000, $807,000 and $485,000 as of January 31, 2001, 2000 and 1999, 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 2001, 2000 and 1999. 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, 2001, 2000 AND 1999
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001, 2000 AND 1999
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------
* 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, 2001, 2000 AND 1999
(11) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
- ------------------------
* 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, 2001, 2000 AND 1999
- ------------------------
(a) Write-off of uncollectible accounts receivable, net of recoveries.