10-Q 1 nts04300310q.txt QUARTERLY REPORT ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- (mark one) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from ________________ to _________________ 0-16438 (Commission File Number) NATIONAL TECHNICAL SYSTEMS, INC. ------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 95-4134955 ------------------------ ---------------------- (State of Incorporation) (IRS Employer Identification number) 24007 Ventura Boulevard, Suite 200, Calabasas, California --------------------------------------------------------- (Address of registrant's principal executive office) (818) 591-0776 91302 ------------------------------- ---------- (Registrant's telephone number) (Zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES | | NO |X| The number of shares of common stock, no par value, outstanding as of June 9, 2003 was 8,631,311. NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Index PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of April 30, 2003 (unaudited) and January 31, 2003 3 Unaudited Condensed Consolidated Statements of Income For the Three Months Ended April 30, 2003 and 2002 4 Unaudited Condensed Consolidated Statements of Cash Flows For the Three Months Ended April 30, 2003 and 2002 5 Notes to the Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 4. Controls and Procedures 16 PART II. OTHER INFORMATION & SIGNATURE Item 6. Exhibits and Reports on Form 8-K 17 2 PART I - FINANCIAL ITEM 1. FINANCIAL STATEMENTS NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets

April 30, January 31, 2003 2003 ASSETS (unaudited) ------ --------------------------------- CURRENT ASSETS: Cash $ 2,688,000 $ 3,559,000 Accounts receivable, less allowance for doubtful accounts of $1,362,000 at April 30, 2003 and $1,298,000 at January 31, 2003 20,672,000 20,252,000 Income taxes receivable - 110,000 Inventories 2,539,000 2,471,000 Deferred tax assets 1,302,000 1,469,000 Prepaid expenses 1,350,000 1,110,000 --------------------------------- Total current assets 28,551,000 28,971,000 Property, plant and equipment, at cost 78,092,000 77,634,000 Less: accumulated depreciation (50,046,000) (48,857,000) --------------------------------- Net property, plant and equipment 28,046,000 28,777,000 Goodwill 870,000 870,000 Other assets 2,825,000 2,716,000 --------------------------------- TOTAL ASSETS $ 60,292,000 $ 61,334,000 ================================= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 3,337,000 $ 4,666,000 Accrued expenses 3,225,000 3,585,000 Income taxes payable 64,000 - Deferred income 804,000 175,000 Current installments of long-term debt 1,224,000 1,253,000 --------------------------------- Total current liabilities 8,654,000 9,679,000 Long-term debt, excluding current installments 19,534,000 19,863,000 Deferred income taxes 4,357,000 4,428,000 Deferred compensation 813,000 796,000 Minority interest 154,000 151,000 SHAREHOLDERS' EQUITY: Common stock, no par value. Authorized, 20,000,000 shares; issued and outstanding, 8,629,000 as of April 30, 2003 and 8,610,000 as of January 31, 2003 12,674,000 12,638,000 Retained earnings 14,157,000 13,830,000 Accumulated other comprehensive income (51,000) (51,000) --------------------------------- Total shareholders' equity 26,780,000 26,417,000 --------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,292,000 $ 61,334,000 ================================= See accompanying notes.

3 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Income for Three Months Ended April 30, 2003 and 2002 2003 2002 ---------------------------- Net revenues $ 26,812,000 $ 19,268,000 Cost of sales 21,166,000 14,529,000 ---------------------------- Gross profit 5,646,000 4,739,000 Selling, general and administrative expense 4,759,000 3,936,000 ---------------------------- Operating income 887,000 803,000 Other income (expense): Interest expense, net (307,000) (321,000) Other 1,000 (2,000) ---------------------------- Total other expense (306,000) (323,000) Income before income taxes and minority interest 581,000 480,000 Income taxes 251,000 205,000 ---------------------------- Income before minority interest 330,000 275,000 Minority interest (3,000) 5,000 ---------------------------- Net income $ 327,000 $ 280,000 ============================ Net income per common share: Basic $ 0.04 $ 0.03 ============================ Diluted $ 0.04 $ 0.03 ============================ Weighted average common shares outstanding 8,616,000 8,667,000 Dilutive effect of stock options 288,000 - ---------------------------- Weighted average common shares outstanding, assuming dilution 8,904,000 8,667,000 ============================ See accompanying notes. 4 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2003 and 2002

2003 2002 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $ 327,000 $ 280,000 Adjustments to reconcile net income from continuing operations to cash provided by operating activities: Depreciation and amortization 1,189,000 1,154,000 Provisions for losses on receivables 64,000 70,000 Undistributed earnings of affiliate 3,000 (5,000) Deferred income taxes 96,000 187,000 Changes in assets and liabilities: Accounts receivable (484,000) 964,000 Inventories (68,000) 288,000 Prepaid expenses (240,000) (197,000) Other assets and intangibles (71,000) (180,000) Accounts payable (1,329,000) (433,000) Accrued expenses (360,000) 332,000 Income taxes payable 64,000 - Deferred income 629,000 806,000 Deferred compensation 17,000 21,000 Income taxes receivable 110,000 (64,000) --------------------------- Cash provided by (used for) operating activities (53,000) 3,223,000 --------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (458,000) (724,000) Investment in life insurance (38,000) (38,000) --------------------------- Net cash used for investing activities (496,000) (762,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from current and long-term debt 4,000 114,000 Repayments of current and long-term debt (362,000) (1,230,000) Proceeds from stock options exercised 36,000 - Common stock repurchase - (7,000) --------------------------- Net cash used for financing activities (322,000) (1,123,000) --------------------------- Net increase (decrease) in cash (871,000) 1,338,000 Beginning cash balance 3,559,000 3,783,000 --------------------------- ENDING CASH BALANCE $ 2,688,000 $ 5,121,000 =========================== See accompanying notes

5 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Notes to the Unaudited Condensed Consolidated Financial Statements 1. Basis of Presentation In accordance with instructions to Form 10-Q, the accompanying consolidated financial statements and footnotes of National Technical Systems, Inc. (NTS or the Company) have been condensed and, therefore, do not contain all disclosures required by generally accepted accounting principles. These statements should not be construed as representing pro rata results of the Company's fiscal year and should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended January 31, 2003. The statements presented as of and for the three months ended April 30, 2003 and 2002 are unaudited. In Management's opinion, all adjustments have been made to present fairly the results of such unaudited interim periods. All such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of the Company and its wholly owned and financially controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation. 2. Income Taxes Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year. 3. Inventories Inventories consist of accumulated costs applicable to uncompleted contracts and are stated at actual cost which is not in excess of estimated net realizable value. 4. Interest and Taxes Cash paid for interest and taxes for the three months ended April 30, 2003 was $361,000 and $71,000, respectively. Cash paid for interest and taxes for the three months ended April 30, 2002 was $371,000 and $85,000 respectively. 5. Minority Interest Minority interest in the Company's NQA, Inc. subsidiary is a result of 50% of the stock of NQA, Inc. being issued to National Quality Assurance, Ltd. Effective with fiscal 2002, profits and losses are allocated 51% to NTS, and 49% to National Quality Assurance, Ltd. 6. Stock Repurchase On February 6, 2001, the Company's Board of Directors authorized the repurchase of shares in the Company's common stock in open market purchases. As of April 30, 2003, the Company had purchased 145,600 shares at an average price of $2.24 per share. The Company's covenants with its banks permit the use in fiscal 2004 of an additional maximum amount equal to 75% of the Company's net profit for fiscal year 2003. 6 7. 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 have 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. 8. Intangible Assets The Company adopted the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003 in accordance with Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will no longer be amortized but will be tested at least annually for impairment. The goodwill test for impairment consists of a two-step process that begins with an estimation of the fair value of the reporting unit. The first step of the test is a screen for potential impairment and the second step measures the amount of impairment, if any. SFAS No. 142 requires an entity to complete the first step of the transitional goodwill impairment test within six months of adopting the Statement. The first step of the transitional goodwill impairment test includes a comparison of the fair value of each reporting unit that has associated goodwill with the carrying value of the reporting unit. The Company adopted SFAS No. 142 in the first quarter of fiscal 2003. In accordance with SFAS No. 142, the Company identified two reporting units in the Engineering and Evaluation segment and one reporting unit in the Technical Staffing segment, which constitute components of its business that include goodwill. The Company completed the goodwill impairment test as of January 31, 2003 and has determined that the fair value of each of the reporting units exceeded the reporting unit's carrying amount, and no impairment was indicated. There have been no indications of any impairments through April 30, 2003. As of April 30, 2003 and January 31, 2003, the Company had the following acquired intangible assets:

April 30, 2003 January 31, 2003 ------------------------------------------ -------------------------------------------- Gross Net Estimated Gross Net Estimated Carrying Accum. Carrying Useful Carrying Accum. Carrying Useful Amount Amort. Amount Life Amount Amort. Amount Life Intangible assets subject to amortization: Covenant not to compete 89,000 16,000 73,000 3 years 89,000 9,000 80,000 3 years ============================== ================================ Intangible assets not subject to amortization: Goodwill 1,667,000 797,000 870,000 1,667,000 797,000 870,000 ============================== ================================ Amortization expense for Intangible assets subject to amortization was $7,000 and $0 for the three months ended April 30, 2003 and 2002 respectively.

7 9. Long-Lived Assets: Adoption of Statement 144 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30. The Company has adopted SFAS 144 beginning in the first quarter of fiscal year 2003. The adoption had no impact on the Company's consolidated financial position or results of operations. 10. Stock-Based Compensation As of April 30, 2003, the Company had two stock-based employee compensation plans, the Amended and Restated 1994 stock option plan and the 2002 stock option plan. The Company accounts for these plans under the intrinsic value method recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation using the Black-Scholes option pricing model: April 30, 2003 April 30, 2002 Net Income -------------- -------------- As reported $ 327,000 $ 280,000 Stock compensation expense, net of tax $ (74,000) $ (85,000) ------------------------------- Pro forma $ 253,000 $ 195,000 Basic earnings per common share As reported $ 0.04 $ 0.03 Pro forma $ 0.03 $ 0.02 Diluted earnings per common share As reported $ 0.04 $ 0.03 Pro forma $ 0.03 $ 0.02 11. Recently Issued Accounting Standards In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement, among other amendments and corrections, rescinds Statement 4, "Reporting Gains and Losses from Extinguishment of Debt - an amendment of APB Opinion 30," which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with early application encouraged. The Company adopted SFAS No. 145 the first quarter of fiscal 2004. The impact of its application requires the reclassification of the loss related to early retirement of debt, which occurred in fiscal 2002, into other income (expense). 8 In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146,"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and did not have a material impact on the results of operations or the financial position of the Company. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide three alternative methods of transition for an entity that voluntarily adopts the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The provisions related to the alternative transition methods and the new disclosure requirements were effective for the Company as of December 31, 2002. There was no impact on the Company's financial condition or results of operations as a result of the adoption of SFAS No. 148, but the Company's disclosures related to stock-based compensation have been modified in accordance with the new requirements. The interim reporting provisions of SFAS No. 148 were effective for the Company as of April 30, 2003, and management has modified the Company's quarterly disclosures in accordance with the new requirements. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", effective as of the first interim period beginning after June 15, 2003. The impact upon adoption of the standard is not expected to have a material impact on the results of operations or the financial position of the Company. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters addressed in this Item 2 contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking words such as "may", "will", "expect", "anticipate", "intend", "estimate", "continue", "behave" and similar words. Financial information contained herein, to the extent it is predictive of financial condition and results of operations that would have occurred on the basis of certain stated assumptions, may also be characterized as forward-looking statements. Although forward-looking statements are based on assumptions made, and information believed by management to be reasonable, no assurance can be given that such statements will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. GENERAL ------- The Company is a diversified business to business services organization that supplies technical services and solutions to a variety of industries including aerospace, defense, automotive, power products, electronics, computers and telecommunications. Through its wide range of testing facilities, staffing solutions and certification services, the Company provides its customers a market channel to sell their products globally and enhance their overall competitiveness. NTS is accredited by numerous national and international technical organizations which allows the Company to become the gateway for customers to sell their regulated products in world markets. The Company 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 independent conformity assessment and management system registration organizations in the U. S., with facilities throughout the country, Japan and Germany serving a large variety of high technology industries, including aerospace, defense, automotive, power products, electronics, computers and telecommunications. This segment provides highly trained technical personnel for product certification, product safety testing and product evaluation to allow clients to sell their products in world markets. In addition, it performs management registration and certification services to ISO related standards. The Technical Staffing segment is a national provider of professional and specialty staffing services including contract services, temporary and full time placements, providing specialty staffing services to its customers specifically in the area of information technology, information systems, software engineering and construction needs. Technical Staffing 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, engineering personnel and multiple levels of system operations personnel. 10 The following discussion should be read in conjunction with the consolidated quarterly financial statements and notes thereto. All information is based upon operating results of the Company for the three months ended April 30. RESULTS OF OPERATIONS --------------------- REVENUES Three months ended April 30, 2003 % Change 2002 (Dollars in thousands) --------------------------------- Engineering & Evaluation $ 14,219 3.4% $ 13,756 Technical Staffing 12,593 128.5% 5,512 ------------ ------------ Total revenues $ 26,812 39.2% $ 19,268 ============ ============ For the three months ended April 30, 2003, consolidated revenues increased by $7,544,000 or 39.2% when compared to the same period in fiscal 2003. Engineering & Evaluation: ------------------------- For the three months ended April 30, 2003, Engineering and Evaluation revenues increased by $463,000 or 3.4% when compared to the same period in fiscal 2003, primarily due to an increase in the Company's defense related testing business at its Camden, Arkansas facility, partially offset by a decrease in business in the computer testing and automotive markets due to a continuing weakness in these markets. Revenues were also adversely impacted by the taking of a portion of the Company's land at the Santa Clarita facility by eminent domain for a new highway (see business environment section). Technical Staffing: ------------------- For the three months ended April 30, 2003, Technical Staffing revenues increased by $7,081,000 or 128.5% when compared to the same period in fiscal 2003, due to the acquisition of the staffing and engineering business of TRS Staffing Solutions effective October 14, 2002. GROSS PROFIT Three months ended April 30, 2003 % Change 2002 (Dollars in thousands) --------------------------------- Engineering & Evaluation $ 3,692 2.1% $ 3,615 % to segment revenue 26.0% 26.3% Technical Staffing 1,954 73.8% 1,124 % to segment revenue 15.5% 20.4% ------------ ------------ Total $ 5,646 19.1% $ 4,739 ============ ============ % to total revenue 21.1% 24.6% Total gross profit for the three months ended April 30, 2003 increased by $907,000 or 19.1% when compared to the same period in fiscal 2003. 11 Engineering & Evaluation: ------------------------- For the three months ended April 30, 2003, gross profit for the Engineering & Evaluation Group increased by $77,000 or 2.1% when compared to the same period in fiscal 2003, primarily as a result of the revenue increase in the Company's Camden, Arkansas, facility offset by the decrease in revenue from the automotive and computer testing business. Gross profit as a percentage of revenue remained approximately the same at 26.0% when compared to the same period in the prior year. Technical Staffing: ------------------- For the three months ended April 30, 2003, gross profit increased by $830,000 or 73.8% in the Technical Staffing Group when compared to the same period in fiscal 2003. This increase was due to the acquisition of the ongoing information technology staffing and engineering business of TRS Staffing Solutions. Gross profit as a percentage of revenue decreased to 15.5 % from 20.4% when compared to the same period in the prior year, primarily due to the competitive pricing pressures in the staffing industry, and a historically lower average gross margin percentage from the newly acquired business. SELLING, GENERAL & ADMINISTRATIVE Three months ended April 30, 2003 % Change 2002 (Dollars in thousands) --------------------------------- Engineering & Evaluation $ 2,947 0.0% $ 2,947 % to segment revenue 20.7% 21.4% Technical Staffing 1,812 83.2% 989 % to segment revenue 14.4% 17.9% ------------ ------------ Total $ 4,759 20.9% $ 3,936 ============ ============ % to total revenue 17.7% 20.4% Total selling, general and administrative expenses increased 823,000 or 20.9% for the three months ended April 30, 2003 when compared to the same period in fiscal 2003. Engineering & Evaluation: ------------------------- For the three months ended April 30, 2003, selling, general and administrative expenses were unchanged when compared to the same period in fiscal 2003. A slight increase in selling expenses was offset by a decrease in general and administrative expenses. Technical Staffing: ------------------- For the three months ended April 30, 2003, selling, general and administrative expenses increased by $823,000 or 83.2% when compared to the same period in fiscal 2003, due to the additional expenses related to the newly acquired staffing and engineering business of TRS Staffing Solutions which has allowed Technical Staffing to expand into new geographic markets with a significantly expanded sales force. Technical Staffing now operates sales and recruiting business centers in ten locations and it has fully integrated the accounting and operating systems. 12 OPERATING INCOME Three months ended April 30, 2003 % Change 2002 (Dollars in thousands) --------------------------------- Engineering & Evaluation $ 745 11.5% $ 668 % to segment revenue 5.2% 4.9% Technical Staffing 142 5.2% 135 % to segment revenue 1.1% 2.4% ------------ ------------ Total $ 887 10.5% $ 803 ============ ============ % to total revenue 3.3% 4.2% Operating income for the three months ended April 30, 2003 increased by $84,000 or 10.5% when compared to fiscal 2003. Engineering & Evaluation: ------------------------- For the three months ended April 30, 2003, operating income in the Engineering & Evaluation Group increased by $77,000 or 11.5% when compared to the same period in fiscal 2003, as a result of the increase in gross profit. Technical Staffing: ------------------- For the three months ended April 30, 2003, operating income in the Technical Staffing Group increased by $7,000 or 5.2% when compared to the same period in fiscal 2003, as a result of the increase in gross profit offset by the increase in selling and general and administrative expenses discussed above. INTEREST EXPENSE Net interest expense decreased by $14,000 in the three months ended April 30, 2003 when compared to the same period in fiscal 2003. This decrease was principally due to lower interest rate levels for the three months ended April 30, 2003 offset by higher average debt balances for the three months ended April 30, 2003 when compared to the same period last year. INCOME TAXES The income tax provision rate of 43.2% for the three months ended April 30, 2003 reflects a rate in excess of the U.S. federal statutory rate primarily due to the inclusion of state income taxes. This rate is based on the estimated provision accrual for fiscal year ending January 31, 2004. Management has determined that it is more likely than not that the deferred tax asset will be realized on the basis of offsetting it against deferred tax liabilities. It is the Company's intention to assess the need for a valuation account by evaluating the realizability of the deferred tax asset quarterly based upon projected future taxable income of the Company. NET INCOME The increase in net income for the three months ended April 30, 2003, compared to the same period in fiscal 2003, was primarily due to the higher gross profit, offset by higher selling and administrative expenses. 13 BUSINESS ENVIRONMENT Engineering & Evaluation: ------------------------- The Company provides product certification, product safety testing and product evaluation to ensure its clients' products meet established specifications or standards. In recent years, domestic and worldwide political and economic developments have significantly affected the markets for defense and advanced technology systems. Homeland security and defeating terrorism are among the Department of Defense's main initiatives. The Company anticipates budget increases for operational readiness spending as well as research and development spending. The Company has realized a significant increase in sales at its military/aerospace facilities since the September 11, 2001 catastrophe. The Company's Camden facility has experienced a major increase in bookings of significant military testing. One major military contract is in excess of $1 million. During the first quarter, based upon these programs, Camden revenues have more than doubled. The Company's Santa Clarita facility, its largest military/aerospace facility, has, however, experienced a decline in sales during this period, following construction of a public highway immediately adjacent to the Santa Clarita facility. A portion of the highway was built on real property taken from the Company by eminent domain. The Company is seeking, through the legal process, appropriate compensation for the taking of the Company's property. In an effort to maintain the economic viability of the facility, several new capabilities have been added which include fuel cell testing, upgraded acoustical testing, clean environment satellite testing and installation of a high pressure air system. Although the Company expects, based on its current bookings, to have increased military weapons testing activity, especially at its Camden location, growth for the balance of the year will be largely dependent on improved economic conditions. 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 customers' needs. One of the strategies for growth is to extend the offering of the Company's technical staffing services to the Engineering & Evaluations segment's customers to provide them with technical and engineering personnel as part of a complete suite of certification, registration and test services. The goal is to offer a complete solution to the customers' product development needs, which will include consultants and technical experts provided by the Technical Staffing segment. 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. 14 LIQUIDITY AND CAPITAL RESOURCES For the three months ended April 30, 2003, cash provided by operations decreased by $3,276,000 when compared to the same period in fiscal 2003. This decrease was primarily due to an increase in accounts receivables and inventories and a decrease in accounts payable and accrued expenses. Net cash used in investing activities in the three-month period ended April 30, 2003 decreased by $266,000 when compared to the same period in fiscal 2003, primarily due to a decrease in cash paid for the purchase of equipment, during the three-month period ended April 30, 2003. In the three-month period ended April 30, 2003, net cash used by financing activities decreased by $801,000 over the same period in fiscal 2003. Net cash used by financing activities consisted of the repayment of lines of credit and short term and long term debt of $362,000, partially offset by proceeds from stock options exercised of $36,000 and proceeds from lines of credit and term loans of $4,000. On November 21, 2001, the Company replaced the outstanding debt to United California Bank and Mellon Bank with a $16,000,000 reducing revolving line of credit with Comerica Bank California and First Bank, expiring on August 1, 2004. On November 25, 2002, the Company amended the revolving line of credit with Comerica Bank California and First Bank increasing it to $20,000,000. Comerica Bank California, as the agent Bank, is sharing 60% of the line with First Bank, as the participant Bank, sharing 40% of the line. The revolving line of credit will be reduced by $1,750,000 on August 1, 2003 and each year thereafter. If during any fiscal year, the Company's net income equals or exceeds $2,000,000, there will be no required reduction in the revolving line of credit. The interest rate is at the agent bank's prime rate, with an option for the Company to convert to loans at the Libor rate plus 250 basis points for 30, 60, 90, 180 or 365 days, with minimum advances of $1,000,000. The Company paid a 0.5% commitment fee of the total line amount and is paying an additional 0.25% of the commitment amount annually and a 0.25% fee for any unused line of credit. The outstanding balance on the revolving line of credit at April 30, 2003 was $14,502,000. This balance is reflected in the accompanying consolidated balance sheets as long-term. This agreement is subject to certain covenants, which require the maintenance of certain working capital, debt-to-equity, earnings-to-expense and cash flow ratios. The Company was in full compliance with all of the covenants with its banks as of April 30, 2003. The Company has additional equipment line of credit agreements (at interest rates of 7.60 % to 10.21%) to finance various test equipment with terms of 60 months for each equipment schedule. The outstanding balance at April 30, 2003 was $2,296,000. At April 30, 2003, the balance of other notes payable collateralized by land and building was $3,370,000, and the balance of unsecured notes was $590,000. 15 ITEM 4. CONTROLS AND PROCEDURES Evaluation Of Disclosure Controls And Procedures Within the 90-day period prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of evaluation, our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's Exchange Act filings. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. Changes in Internal Controls There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or Chief Financial Officer, subsequent to the date we carried out its evaluation. 16 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On May 1, 2003, the Company filed a current report on Form 8-K related to the announcement of its financial results for the year ended January 31, 2003. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL TECHNICAL SYSTEMS, INC. Date: June 12, 2003 By: /s/ Lloyd Blonder ------------- ------------------------------- Lloyd Blonder Senior Vice President Chief Financial Officer (Signing on behalf of the registrant and as principal financial officer) 17 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES CERTIFICATION I, Jack Lin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Technical Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Jack Lin ------------------------------- Jack Lin Principal Executive Officer and Chairman of the Board June 12, 2003 18 CERTIFICATION I, Lloyd Blonder, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Technical Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Lloyd Blonder ----------------------------------- Lloyd Blonder Senior Vice President and Treasurer (Principal Financial Officer) June 12, 2003 19