PRELIMINARY
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NATIONAL TECHNICAL SYSTEMS, INC.
24007 Ventura Boulevard
Calabasas, California 91302
NOTICE OF ANNUAL MEETING
To the Shareholders:
Notice is hereby given that the annual meeting of shareholders of
National Technical Systems, Inc., a California corporation, will be held at the
Company's Los Angeles Precision Cleaning Test Facility and Technical Staffing
Offices, on Friday, June 26, 1998 at 11:00 A.M. for the purpose of considering
and acting upon the following:
1. To approve an amendment to the Company's Articles of Incorporation
to provide for majority rule voting in lieu of cumulative voting in
the election of directors.
2. To elect four directors for terms expiring in 2001;
3. To consider and act upon a proposal to amend the Company's 1994
Employee Incentive Stock Option Plan (the "1994 Plan") to increase
the number of shares reserved for issuance under the 1994 plan from
700,000 to 1,500,000.
4. To ratify Ernst & Young LLP as auditors for the year ending
January 31, 1999; and
5. To transact such other business and to consider and take action
upon any and all matters that may properly come before the meeting
or any adjournment or adjournments thereof. Management has no
information of any such other matters.
Pursuant to the provisions of the Company's Bylaws, the Board of
Directors has fixed the close of business on May 15, 1998 as the record date for
the determination of shareholders entitled to notice of and to vote at the
meeting or any adjournment thereof.
Financial information concerning the Company is contained in the Annual
Report for the fiscal year ended January 31, 1998, which accompanies this Notice
of Annual Meeting.
If you are unable to attend the meeting in person, please execute the
enclosed Proxy and return it in the enclosed self-addressed, stamped envelope.
If you later find that you can be present, you may, if you wish, vote in person,
or you may revoke your proxy or file a new proxy bearing a later date with the
Secretary at any time before the voting.
By Order of the Board of Directors
Harold Lipchik
Secretary
Dated: May 26, 1998
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PRELIMINARY
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NATIONAL TECHNICAL SYSTEMS, INC.
24007 Ventura Boulevard,
Calabasas, California 91302
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PROXY STATEMENT
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SOLICITATION
The accompanying Proxy is solicited by the Board of Directors for use at the
annual meeting of shareholders to be held on Thursday, June 26, 1998, or any
adjournment thereof. A Proxy may be revoked by the person giving it at any time
before it is exercised, either by giving another proxy bearing a later date or
by notifying the Secretary of the Company in writing of such revocation. The
giving of the Proxy will not affect your right to vote in person if you later
should find it convenient to attend the meeting. The Proxy will be voted in
accordance with the specifications made.
The Company will bear the entire cost of preparing, assembling, printing,
and mailing this Proxy Statement, the Proxy, and any additional material which
may be furnished to shareholders by the Company. Copies of solicitation material
may be furnished to brokerage houses, fiduciaries, and custodians to forward to
their principals, and the Company may reimburse them for their expenses in so
doing. The Company does not expect to pay any commission or remuneration to any
person for solicitation of proxies.
This Proxy Statement and the Proxy are being mailed to shareholders on or
about May 26, 1998.
Solicitation may be made by mail, personal interview, telephone, and
telegraph by officers and regular employees of the Company.
The close of business on May 15, 1998, has been fixed as the record date for
the determination of shareholders entitled to notice of and to vote at the
Annual Meeting. The outstanding voting securities of the Company at May 15,
1998, consisted of 6,974,722 shares of no par value Common Stock. Each share is
entitled to one vote except that cumulative voting is permitted for the election
of directors under the circumstances described below. Shareholders representing
a majority of outstanding Common Stock must be present in person or by proxy to
constitute a quorum at the Annual Meeting. In voting for the election of
Directors, each shareholder has the right to cumulate his or her votes and give
one nominee a number of votes equal to the number of Directors to be elected,
multiplied by the number of shares he or she holds, or to distribute his or her
votes on the same principle among the nominees to be elected in such manner as
he or she may see fit. A shareholder may only cumulate his or her votes if his
or her candidate or candidates' names have been placed in nomination prior to
the voting and any share holder gives notice at the meeting prior to the voting
of that shareholder's intention to cumulate his or her votes. The persons named
in the enclosed proxy may or may not elect to give such notice and vote the
shares they represent in such a manner.
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote, will constitute a quorum for the transaction of
business at the Annual Meeting.
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A plurality of the votes cast in person or by proxy and entitled to vote at
the Annual Meeting is required for the election of directors. The affirmative
vote of the holders of shares of Common Stock representing a majority of shares
outstanding is required to approve the proposed amendment to the Articles of
Incorporation to eliminate cumulative voting. The affirmative vote of a majority
of votes cast at the Annual Meeting is required for approval of the proposed
amendment to the 1994 Stock Option Plan and for ratification of Ernst & Young
LLP as auditors for the year ending January 31, 1999 and the approval of such
other matters as may properly come before the Annual Meeting.
Abstention and broker non-votes have the same effect as votes against
proposals presented to shareholders other than the election of directors. They
have no effect on the election of directors. A broker non-vote occurs when a
nominee holding shares for a beneficial owner votes on one proposal, but does
not vote on another proposal because the nominee does not have discretionary
voting power and has not received instructions from the beneficial owner.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following tabulation indicates as of May 15, 1998, those persons known
to the Company to be beneficial owners of five percent or more of the Company's
Common Stock.
Number of Shares Percent of
Name and Address of Beneficial Owner Beneficially Owned (1) Class
- ------------------------------------ ---------------------- -----
Aaron Cohen.............................. 1,174,110 16.8%
24007 Ventura Boulevard
Calabasas, California 91302
Jack Lin................................. 1,007,388 14.4%
24007 Ventura Boulevard
Calabasas, California 91302
Luis A. and Jacqueline E. Hernandez(2)... 430,425 6.2%
3069 Misty Harbor
Las Vegas, Nevada 89117
Arthur Edelstein......................... 349,273 5.0%
24007 Ventura Boulevard
Calabasas, California 91302
- -------------
(1) Includes shares covered by options that are exercisable within 60 days as
follows: Cohen 23,000, Lin, 12,505 and Edelstein 27,250 and shares in the
National Technical Systems Employee Stock Ownership Plan, as follows: Lin
6,503 and Edelstein 4,722.
(2) This information is based on Schedule 13D filed with the Securities and
Exchange Commission on or about November 13, 1995.
To the knowledge of management, no other person owns beneficially as much as
5% of the outstanding stock of the Company. The tabulation under "Nomination and
Election of Directors" indicates the number of shares owned beneficially by each
nominee as of the record date. The directors and executive officers of the
Company, as a group (13 persons), owned beneficially as of the record date a
total of 2,923,070 shares, or 41.0% of the outstanding stock.
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Proposal 1. APPROVAL OF ELIMINATION OF CUMULATIVE VOTING
A 1991 amendment to the California General Corporation Law permits a
California corporation whose voting securities are widely traded, with the
approval of its shareholders, to provide for majority rule voting in the
election of directors in lieu of cumulative voting.
Prior to this change in the California General Corporation Law, cumulative
voting in electing directors was mandatory for California corporations upon
proper notice by any shareholder of the corporation. By permitting shareholders
of California corporations to provide for majority rule voting in lieu of
cumulative voting in electing directors, the California law substantially
conformed with the corporate law of approximately 40 other states (including
Delaware, Illinois, Michigan, New Jersey, New York, Ohio, Pennsylvania and
Texas) which either provide that cumulative voting is optional or make no
provision for cumulative voting at all. The Business Law Section of the State
Bar of California sponsored the amendment to change the law and requested that
the amendment be introduced into the California legislature. The amendment,
which was also supported by the California Chamber of Commerce, was
overwhelmingly approved by the California Assembly and the California Senate and
signed into law by the Governor, became effective on January 1, 1990.
The Board of Directors believes that cumulative voting is not an
appropriate method of corporate governance for the Company. Accordingly, the
Board of Directors had adopted and is submitting for shareholder approval an
amendment to the Company's Articles of Incorporation which, if approved by the
shareholders, would provide for majority rule voting in electing the Company's
directors by eliminating cumulative voting, as now permitted under California
law. The text of the proposed amendment is set forth in Appendix A to this Proxy
Statement.
Mandatory Cumulative Voting and Majority Rule Voting
Any shareholder of the Company who complies with certain statutory notice
requirements currently may invoke mandatory cumulative voting in the election of
directors. When cumulative voting is requested by a shareholder, holders of
shares of the Company's Common Stock are entitled to a number of votes per share
equal to the number of directors to be elected and all such directors are voted
upon simultaneously. Shareholders may cast all of their votes for a single
director nominee or distribute them among two or more director nominees.
When cumulative voting is in effect, shareholders representing far less
than a majority of the voting shares have the power to nominate and elect one or
more directors. For example, if four directors (the current number of Class II
and Class III directors of the Company) are to be elected at an annual meeting,
shareholders holding 25% of the voting shares could nominate and elect one
director by cumulating and casting their four votes per share only for their
single candidate. This may occur even if shareholders holding 75% of the voting
shares are opposed to the election of that candidate and cast their votes to
elect four other director candidates.
Under majority rule voting, a nominee for director cannot be elected
without relatively wide support. Shareholders are entitled to only one vote per
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share in the election of directors and each director is voted upon separately.
Consequently, through majority rule voting, the only director candidates who can
be elected are those who receive support from shareholders holding the greatest
number of voting shares, and shareholders holding a majority of the voting
shares would be able to elect all of the directors.
Reasons For The Proposed Amendment
The Board of Directors of the Company believes that every director of a
publicly-held corporation should represent the interests of all shareholders.
The Board is concerned that directors elected by a minority shareholder or group
of shareholders through cumulative voting are likely to be biased in favor of
the interests of the particular interest group that elected them rather than
serving on behalf of all shareholders of the Company. Such bias could disrupt
the management of the Company and prevent it from operating most effectively.
Further, the election of directors who view themselves as representing or
answerable to a particular constituency could introduce an element of discord on
the Board of Directors, impair the ability of the directors to work together
effectively and may discourage qualified individuals from serving as directors.
Approval of the proposed amendment providing for majority rule voting in the
election of directors will help ensure that each director acts in the best
interests of all shareholders, because shareholders holding a majority of the
voting shares will have the power to elect each of the directors to be elected
at any annual meeting.
The proposal to eliminate cumulative voting is not in response to any
effort by a minority shareholder or group of shareholders to attain
representation on the Board of Directors or acquire greater influence in the
management of the Company's business, nor is the Company aware of any such
effort. Further, it is not in response to any attempt to acquire control of the
Company, nor is the Company aware of any such attempt.
Other Effects of the Proposed Amendment; Other Provisions in Effect
Approval of the proposed amendment to eliminate mandatory cumulative
voting may make it more difficult for a shareholder or group of shareholders
holding a significant number of voting shares, but less than a majority, to
monitor, change or influence the management or policies of the Company. In
addition, under certain circumstances, the proposed amendment may discourage an
attempt to take over or form a business combination involving the Company. For
example, the proposed amendment may discourage the accumulation of large
minority shareholdings (as a prelude to a takeover or business combination or
otherwise) by persons who would not make that acquisition without being assured
of representation on the Board of Directors.
Shareholders should also note that the Board of Directors has adopted
certain other measures that have or may be viewed as having takeover-resistive
effects. These consist of provisions in the Articles of Incorporation
eliminating, subject to certain exceptions, the liability of directors for
monetary damages and provisions in the By-laws and other agreements providing
for indemnification of directors and officers. The By-laws also provide for the
classification of the Board of Directors. See "Nomination and Election of
Directors".
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The Board of Directors believes that the advantages of the proposed
amendment implementing majority rule voting greatly outweigh the possible
disadvantages of the amendment. Approval of the proposed amendment requires the
favorable vote of the holders of a majority of the shares of the Company's
Common Stock entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED AMENDMENT AND
RECOMMENDS A VOTE FOR THIS PROPOSAL. PROXIES SOLICITED BY THE BOARD OF DIRECTORS
WILL BE VOTED FOR THIS PROPOSAL UNLESS SHAREHOLDERS SPECIFY OTHERWISE IN THEIR
PROXIES.
Proposal No. 2 ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of eleven members,
who are divided into three classes. Directors are elected for terms of three
years. At the Annual Meeting, the term of office of the Class II directors will
expire and four directors will be elected to serve for a term of three years and
until their respective successors are elected.
The Board intends to cause the nomination of the four persons named below
for election as Class II directors. The directors will be elected by the holders
of the Common Stock. The persons named as proxy holders in the accompanying form
of proxy have advised the Company that they intend at the Annual Meeting to vote
the shares covered by proxies held by them for the election of the nominees
named below. If any or all of such nominees should for any reason become unable
to serve or for good cause will not serve, the persons named in the accompanying
form of proxy may vote for the election of such substitute nominees, and for
such lawful term or terms, as the Board may propose. The accompanying form of
proxy contains a discretionary grant of authority with respect to this matter.
The Board of Directors has no reason to believe the nominees named, or any of
them, will be unable to serve if elected.
All of the Class II nominees, except Mr. Cohen, were elected members of the
Board of Directors by the shareholders at the 1995 annual meeting of
shareholders. Mr. Cohen and Mr. Schoen, a Class III director, were appointed by
the Board of Directors to fill vacancies on the Board on October 30, 1997. No
arrangement or understanding exists between any of the nominees and any other
person or persons pursuant to which any nominee was or is to be selected as a
director or nominee.
The names of the nominees for Class II directors and the Class I and Class
III directors who will continue in office after the Annual Meeting until the
expiration of their respective terms, together with certain information
regarding them, including the amount of Common Stock beneficially owned by them,
are as follows:
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<TABLE>
<CAPTION>
Common Stock
of the Company
Beneficially
Year Owned as
Director Term Will of May 15, Percent
Name Age Position or Office Since Expire 1998(1)(2) of Class
------ --- -------------------- ----- --------- --------------- --------
Nominees for Class II Directors
- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ralph Clements 65 President of Clements and Associates; 1975 2001* 1,134 **
Director
Harry Derbyshire 72 Chairman of the Board of J.C. Carter 1983 2001* 2,412 **
Company, Inc.; Director
Arthur Edelstein 60 Executive Vice President of the 1980 2001* 349,273 5.0%
Company; Director
Aaron Cohen 61 Senior Executive Vice President of the 1997 2001* 1,174,110 16.8%
Company, Vice Chairman of the
Board
Directors Continuing in Office:
- -------------------------------
Class I Directors
- -----------------
Richard Short 55 Group Vice President of 1988 2000 93,931 1.3%
the Company; Director
William Traw 60 Group Vice President of 1988 2000 69,858 1.0%
the Company; Director
William McGinnis 39 Group Vice President of the 1994 2000 36,105 **
Company; Director
Class III Directors
- -------------------
Aloysius Casey 66 Chairman of the Board of the 1988 1999 24,321 **
Company
Jack Lin 65 President and Chief Executive Officer 1975 1999 1,007,388 14.4%
of the Company; Director
Robert Lin 40 Founder and President of the Trilin 1988 1999 103,505 1.5%
Group, Inc.; Director
Stanley Schoen 75 Member of the Board of Directors of 1997 1999 16,781 **
Vista Hill Foundation and Emeritus
College; Director
- --------------------------
* If elected at the annual meeting
** Less than 1%
(1) Includes shares covered by options exercisable within 60 days, as follows: Clements, 625; Derbyshyre, 1,500;
Edelstein, 27,250; Cohen, 23,000; Short, 26,000; Traw, 26,000; McGinnis, 7,437; Casey, 3,000; J. Lin, 12,505; R.
Lin, 2,500 and Schoen, 4,000.
(2) Includes shares in the National Technical Systems Employee Stock Ownership Plan, as follows: Edelstein, 4,722;
Short, 2,953; Traw, 3,093; McGinnis, 1,843 and J. Lin, 6,503.
</TABLE>
Mr. Clements has been President of Clements and Associates, a Sherman Oaks,
California management consulting firm, for more than five years.
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Mr. Derbyshire was Chairman of the Board of J. C. Carter Company, Inc., a
manufacturer of aerospace products from January 1987 until September 1997 when
the Company was sold. Prior to his retirement in 1985, Mr. Derbyshire was
Executive Vice President, Chief Financial Officer and a director of Whittaker
Corporation, a Los Angeles, California aerospace company.
Mr. Edelstein is Executive Vice President of the Company and has been
associated with the Company and it predecessors continuously since 1961.
Mr. Cohen is a founder and Senior Executive Vice President of the Company
and has been associated with the Company since 1961.
Mr. Short is Group Vice President of the Company and has been associated
with the Company and its predecessors continuously since 1961.
Mr. Traw is Group Vice President of the Company and has been associated with
the Company and its predecessors continuously since 1963.
Mr. McGinnis is Group Vice President of Company and has been associated with
the Company since 1980.
General Casey retired from the United States Air Force on July 1, 1988 after
a 34-year career. At the time of his retirement he was the Commander of the
Space Division, Air Force Systems Command, Los Angeles Air Force Base
California.
Mr. Jack Lin is a founder and President of the Company and has been
associated with the Company and its predecessors continuously since 1961.
Mr. Robert Lin is a founder and President, of Trilin Group, Inc., a
privately-owned manufacturer and distributor of products for the advertising
specialty and premium markets. Robert Lin is the son of Jack Lin.
Mr. Schoen is a member of the Board of Directors of Vista Hill Foundation
and Emeritus College.
The Board of Directors of the Company held three regular meetings and one
special meeting during the last fiscal year. One Director, Mr. Derbyshire,
attended 50% of the meetings and no other Director attended fewer than 75% of
the meetings of the Board or of the Committees of which he was a member.
The Company's Board of Directors has an Audit Committee which consists of
Messrs. Casey, Clements and Derbyshire. The function of the Audit Committee is
to meet with the independent certified public accountants engaged by the Company
to review (a) the scope and findings of the annual audit, (b) accounting
policies and procedures and the Company's financial reports, and (c) the
internal controls employed by the Company. The Audit Committee held two meetings
during the year.
The Compensation Committee of the Board of Directors considers and makes
recommendations to the Board of Directors on salaries, bonuses and other forms
of compensation for the Company's executive officers. The Compensation
Committee, which consists of Messrs. Clements and Derbyshire, met twice during
the year.
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The Stock Option Committee of the Board of Directors makes recommendations
regarding the grant of stock options. The Committee, which consists of Messrs.
R. Lin and Clements met three times during the year.
The Nominating Committee which consists of Messrs. J. Lin and Derbyshire
selects nominees for election to the Board of Directors. The Nominating
Committee met twice during the year.
Directors, other than employee-directors who receive no additional
compensation for serving on the Board, received $10,845 in annual retainer and
$2,057 in bonuses. In his capacity as Chairman of the Board, Mr. Casey was paid
an annual fee of $39,065 and a bonus of $7,409. Directors also are reimbursed
for expenses which they reasonably incur in the performance of their duties as
directors of the Company. During the fiscal year ended January 31, 1998, a total
of $2,000 was paid to General Casey and $30,906 was paid to Ralph Clements for
consulting services.
Proposal 3 - APPROVAL OF AMENDMENT TO 1994 STOCK OPTION PLAN
Under the 1994 Stock Option Plan (the "1994 Plan"), 700,000 shares of the
Company's Common Stock were initially reserved for issuance upon the exercise of
options which may be granted from time-to-time to officers, key employees,
directors and consultants of the Company. The proposed amendment to the 1994
Plan, approved by the Board of Directors, would increase the number of shares
reserved for issuance under the 1994 Plan by 800,000 and is subject to approval
by the shareholders of the Company. The 1994 Plan permits the award of both
Non-Qualified and Incentive Stock Options.
The purpose of the 1994 Plan is to attract and retain executives and
certain other employees and to secure for the Company the benefits of the
incentive inherent in equity ownership by employees and others who are
responsible for the continuing growth and success of the Company. The Company
believes that equity based compensation arrangements such as stock options
enhance the Company's ability to attract and retain key technical, engineering
and management personnel who can make significant contributions to its future
success.
The Company has considered prevailing compensation practices in the
industry in which it competes for these people and, particularly, compensation
and benefits being offered by companies engaged in recruitment efforts affecting
both the Company's personnel and those employment candidates whom the Company
itself, may, from time-to-time, seek to recruit. On the basis of these
considerations, the Company believes that stock options are important
compensation elements, particularly during periods, such as those recently
experienced, when there is increased compensation for attracting and retaining
key technical, management and scientific resources. Moreover, this form of
compensation closely aligns employees' interests in the Company's success and
growth with similar interests of the Company's shareholders.
As of the date of this proxy statement, options have been granted under
the 1994 Plan to purchase 578,802 shares of Common Stock, 109,325 options have
been exercised and 469,477 shares are currently reserved for issuance upon
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exercise of outstanding options. A total of 121,198 shares are reserved for
future grants.
The following description summarizes certain provisions of the 1994 Plan.
This description is subject to, and is qualified in its entirety by, the full
text of the 1994 Plan and the defined terms used therein.
Administration.
The 1994 Plan is administered by the Board of Directors, or a committee of
the Board ("Committee"). The Board or Committee, in its sole discretion,
determines the directors, officers, key employees and consultants to whom
options are to be granted, the type of stock options to be granted, the number
of shares to be optioned, the time of exercise and other terms and provisions of
each option. The Board is to be empowered to interpret the 1994 Plan, prescribe,
amend, and rescind the rules and regulations relating to the Plan, amend the
Plan, subject to certain limitations, and make all other determinations
necessary or advisable for the administration of the 1994 Plan.
Option Terms.
The exercise price for shares to be covered by an incentive stock option
shall be no less than 100% of the fair market value of the shares (or 110% if
the optionee at the time the option is granted owns stock representing more than
10% of the total combined voting power of all classes of stock of the Company)
on the date the option is granted, as determined by the Board or, the Committee.
The exercise price for shares be covered by a non-qualified stock option shall
be not less than 50% of the fair market value of the shares on the date the
option is granted, as determined by the Board or the Committee, except that,
with respect to non-qualified stock options granted to directors, the exercise
price shall not be less than 100% of the fair market value of the shares on the
date the option is granted, as determined by the Board or Committee.
The price of any shares purchased upon exercise of an option is to be paid
in full at the time of the purchase. Payment for any number of shares purchased
upon exercise of options granted under the 1994 Plan may, at the option of the
optionee, be made by delivery to the Company of shares of the Common Stock of
the Company having a fair market value equal to the exercise price of the option
shares. Options shall be exercisable at such times and for such periods as may
be fixed by the Board or the Committee, provided that no option shall be
exercisable after ten years from the date of grant. In the event of dissolution
of the Company, or a merger or consolidation where the Company is not the
surviving corporation and the surviving corporation does not agree to exchange
its options for options granted under the 1994 Plan, all options granted under
the 1994 Plan shall terminate, but an optionee shall have the right to exercise
any then outstanding option immediately prior to such dissolution, merger or
consolidation without regard to restrictions on time of exercise, except
expiration of the option period.
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Stock Subject to Plan.
Providing the amendment to the 1994 Plan is approved by the shareholders,
the aggregate number of shares of Common Stock reserved for issuance upon
exercise of options granted under the 1994 Plan shall not exceed 1,390,675,
which is equivalent to 19.9% of the total currently outstanding shares of the
Company's Common Stock. Provision is made for adjustment in the number of option
shares and exercise prices in the event of recapitalization.
Eligibility.
Incentive stock options may be granted only to key employees of the
Company. Non-qualified stock options may be granted to officers, key employees,
directors and consultants of the Company.
Termination of Options.
If the optionee's employment is terminated for any reason other than
death, the options may be exercised at any time within 90 days after the date of
termination, but not beyond the period such options are exercisable, on the date
of termination. If an optionee dies while in the employ of the Company, the
optionee's estate may exercise the options within 12 months from the date of
death, but not beyond the option period. Options shall not be affected by
authorized leaves of absence or by a change of employment so long as the
optionee continues to be a director, officer, employee or consultant of the
Company. In no case may an option be exercised more than ten years after it is
granted. Options granted under the 1994 Plan are not transferable except to the
executor or administrator of the optionee's duly appointed and acting guardian
or conservator, and shall be exercisable during the optionee's lifetime only by
the optionee or by such guardian or conservator for the benefit of the optionee.
Suspension, Modification and Termination.
The 1994 Plan may at any time, or from time to time, be terminated,
suspended, modified or amended by the Board. No amendment, suspension or
termination of the 1994 Plan shall, without the consent of the optionee, alter
or impair any rights or obligations under any options granted under the 1994
Plan, except as may be occasioned by the dissolution, or upon the merger or
consolidation of the Company where the Company is not the surviving corporation
and the surviving corporation does not agree to exchange its options for options
granted under the 1994 Plan, or in the event the Board determines, in its sole
discretion, that the Company cannot reasonably comply with the applicable laws
and rules in order to implement the 1994 Plan or issue stock upon the exercise
of outstanding options. In addition, no such modification or amendment shall,
without shareholder approval, increase the number of shares authorized for
issuance upon the exercise of options, provide for the grant of options with an
exercise price per share less than the amount set forth above or postpone the
date of the expiration of the Plan beyond the expiration date set forth below.
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Non-Qualified Stock Options.
There will be no federal income tax consequences to an optionee upon the
grant of a non-qualified stock option. Upon the exercise of a non-qualified
option, the optionee will recognize taxable income in an amount equal to the
fair market value of the stock on the date of exercise less the exercise price
paid, and the Company will be allowed (subject to the satisfaction of any
withholding obligation, a corresponding tax deduction for compensation expense
in an amount equal to the taxable income recognized by the optionee. Upon the
subsequent sale of shares acquired upon the exercise of a non-qualified stock
option, the optionee generally will recognize additional gain or loss in an
amount equal to the difference between the proceeds received upon sale and the
fair market value of such shares on the date of exercise.
Incentive Stock Options
An optionee who exercises an incentive stock option, both at the time of
the initial grant of the option and at the time of its exercise will, except as
provided in the next sentence, recognize no income for federal income tax
purposes. The difference between the fair market value of the stock on the date
of exercise and the exercise price paid will be included in the employees income
for alternative minimum tax purposes. The Company will generally not be entitled
to a tax deduction for compensation expense at the time of exercise of an
incentive stock option, except upon a disqualifying disposition as described
below. If an optionee holds stock acquired through exercise of an incentive
stock option for more than two years from the date on which the option is
granted and more than one year from the date on which the shares are transferred
to the optionee upon exercise of the option, all gain or loss will be recognized
at long-term capital gains rates the time of the disposition of the stock.
Generally, if the optionee disposes of the stock before the expiration of either
of these holding periods (a "disqualifying disposition"), at the time of
disqualifying disposition the optionee will realize ordinary income equal to the
lesser of (i) the excess of the stock's fair market value on the date of
exercise over the exercise price or (ii) the optionee's actual gain, if any,
resulting from the purchase. and sale. To the extent the optionee recognizes
income by reason of a disqualifying disposition, the Company will be entitled
(subject to the satisfaction of any withholding obligation) to the corresponding
business expense deduction in the tax year in which the disqualifying
disposition occurs.
The foregoing summary of the effects of current federal income taxation
upon, an optionee and the Company with respect to shares issued under the 1994
Plan does not purport to be complete, and reference is made to the applicable
provisions of the Internal Revenue Code.
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Effective Date and Termination of Plan
The 1994 Plan will become effective upon approval by affirmative vote of
the holders of a majority of the outstanding shares of the Common Stock of the
Company present and voting at the Annual Meeting of Shareholders. Unless sooner
terminated, the 1994 Plan's authority to grant options shall expire on April 18,
2004 ("Expiration Date"), but the 1994 Plan shall remain in full force and
effect beyond the Expiration Date for all options granted prior to the
Expiration Date.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE FOR
THIS PROPOSAL. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR
THIS PROPOSAL UNLESS SHAREHOLDERS SPECIFY OTHERWISE IN THEIR PROXIES.
EXECUTIVE COMPENSATION
The following information is furnished with respect to the Chief Executive
Officer and the other most highly compensated executive officers of the Company
whose aggregate direct remuneration from the Company during the fiscal year
ended January 31, 1998 exceeded $100,000.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
-------------------- -------------------------- -------------------------
Name and Principal Other Annual Restricted Stock Options/ LTIP All Other
Position Year Salary ($) Bonus ($) Compensation ($)(1) Award(s) ($) SARs(#) Payouts($) Compensation($)
- --------------------- ---- ---------- --------- ------------------- ------------ ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack Lin 1998 316,650 82,500 0 0 0 0 0
President and Chief 1997 294,097 60,000(2) 0 0 0 0 0
Executive Officer 1996 275,357 24,000 14,457(3) 0 0 0 0
Arthur Edelstein 1998 192,487 50,000 0 0 0 0 0
Executive Vice 1997 179,637 36,000 0 0 0 0 0
President 1996 174,126 16,000 0 0 0 0 0
Richard Short 1998 124,759 32,500 0 0 0 0 0
Group Vice President 1997 115,905 23,000 0 0 0 0 0
1996 111,393 12,000 0 0 0 0 0
William Traw 1998 124,759 32,500 0 0 0 0 0
Group Vice President 1997 115,905 23,000 0 0 0 0 0
1996 111,393 12,000 0 0 0 0 0
Aaron Cohen 1998 124,759 32,500 0 0 0 0 0
Senior Executive Vice 1997 - - 0 0 0 0 0
President 1996 - - 0 0 0 0 0
</TABLE>
13
<PAGE>
(1) Does not include perquisites or personal benefits which are the lesser of
$50,000 or 10% of the total annual salary and bonus reported for the named
Executive Officer.
(2) Fair market value of 26,608 shares of restricted National Technical
Systems, Inc. common stock at a value of $60,000 taken as a bonus in lieu
of cash in 1997.
(3) Fair market value of 9,638 shares of restricted National Technical
Systems, Inc. common stock at a value of $14,457 taken in lieu of cash
compensation.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Compensation
Committee") is composed of the two independent, non-employee directors named
below. See the description of the Compensation Committee functions above.
COMPENSATION POLICIES. Policies governing the compensation of the Company's
executives are established and monitored by the Compensation Committee. All
decisions relating to the compensation of the Company's executives during 1998
were made by the Compensation Committee.
In administering its compensation program, the Compensation Committee
follows its belief that compensation should reflect the value created for
shareholders while supporting the Company's strategic goals. In doing so, the
compensation programs reflect the following themes:
1. The Company's compensation programs should be effective in attracting,
motivating, and retaining key executives;
2. There should be a correlation of the compensation awarded to an
executive, the performance of the Company as a whole, and the executive's
individual performance;
3. The Company's compensation programs should provide the executives a
financial interest in the Company similar to the interests of the
Company's shareholders; and
4. The Company's compensation program should strike an appropriate balance
between short and long term performance objectives.
Elements of Compensation Programs
At least annually, the Committee reviews the Company's executive officer
compensation programs to ensure that pay levels and incentive opportunities are
competitive and reflect the performance of the Company. The three basic
components of the program, each of which is intended to serve the overall
compensation philosophy, are as follows:
Base Salary - Base salary levels are, in part, established through
comparisons with companies of similar size engaged in the same or similar
business as that of the Company. Actual salaries are based on individual
14
<PAGE>
performance of the executive officer within the salary range reflecting job
evaluation and market comparisons. Base salary levels for executive officers are
reviewed annually and established within a range deemed by the Committee to be
reasonable and competitive. The Committee recommended increases in base salary
for the executive officers in fiscal 1998 of approximately 11%.
Annual Incentives - The Company's executive officers are eligible to
participate in the annual incentive compensation program whose awards are based
on the attainment of certain operating and individual goals. The objective of
this program is to provide competitive levels of compensation in return for the
attainment of certain financial objectives that the Committee believes are
primary factors in the enhancement of shareholder value. In particular, the
program seeks to focus the attention of executive officers towards earnings
growth. Bonuses for executive officers of the Company under this program are
intended to be consistent with targeted awards of companies of similar size and
engaged in the same or similar business as that of the Company. Actual awards
are subject to adjustment up or down, at the discretion of the Committee, based
on the Company's overall performance. For fiscal 1998, the Compensation
Committee awarded bonuses to executive officers, based upon the performance
measures discussed above, equal to 25% of the executive officer's base salary.
The bonuses are reflective of the Company's overall improvement in earnings and
total shareholder return in fiscal 1998.
Long-term Incentives - As an important element retaining and motivating
the Company's senior management, the Committee believes that those persons who
have substantial responsibility for the management and growth of the Company
should be provided with an opportunity to increase their ownership of Company
stock. Therefore, executive officers and certain other key employees are
eligible to receive stock options from time to time, giving them the right to
purchase shares of Common Stock of the Company at a specified price in the
future. The number of stock options granted to executive officers is based on
various factors, including the respective scope of accountability, strategic and
operational goals and anticipated performance and contributions of the
individual executive.
Chief Executive Officer's Compensation
Mr. Lin's compensation is determined pursuant to the principles noted
above. The Committee, in considering his compensation for fiscal 1998, reviewed
his existing compensation arrangements, comparable compensation for chief
executive officers of other companies and the performance of both Mr. Lin and
the Company. The Committee made the following determinations regarding Mr. Lin's
compensation:
o Based upon Mr. Lin's and the Company's fiscal 1998 performance, the
Company increased Mr. Lin's base salary by 11%.
o Based upon Mr. Lin's and the Company's fiscal 1998 performance, the
Company increased Mr. Lin a cash bonus in the amount of $82,500.
o In order to provide a long-term incentive to Mr. Lin, the
Committee awarded him non-qualified stock options to purchase 22,600
shares of the Company's Common Stock at fair market value on the
date of grant.
15
<PAGE>
POLICY WITH RESPECT TO INTERNAL REVENUE CODE SECTION 162(m). In 1993, the
Internal Revenue Code of 1986 (the "Code") was amended to add Section 162(m).
Section 162(m), and regulations thereunder adopted in 1995, place a limit of
$1,000,000 on the amount of compensation that may be deducted by the Company in
any year with respect to certain of the Company's most highly compensated
officers. Section 162(m) does not, however, disallow a deduction for qualified
"performance-based compensation" the material terms of which are disclosed to
and approved by shareholders. At the present time, the Company's executive
officer compensation levels are substantially below the $1,000,000 pay limit and
the Company believes that it will most likely not be affected by the regulation
in the near future. Where appropriate in light of specific compensation
objectives, the Board intends to take necessary actions in the future to
minimize the loss of tax deductions related to compensation.
COMPENSATION COMMITTEE
Ralph Clements
Harry Derbyshire
16
<PAGE>
INFORMATION CONCERNING STOCK OPTIONS
There were no stock options or stock appreciation rights granted for the
fiscal year ended January 31, 1998.
The following table sets forth information concerning the exercise of stock
options during the fiscal year ended January 31, 1998 by each of the named
executive officers and the fiscal year end spread on unexercised "in-the-money"
options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
In-the-money Options/ In-the-money Options/
SARs at FY-End SARs at FY-End($)(1)
--------------------------- ---------------------------
Shares Acquired Value
Name on Exercise(#) Realized ($)(2) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack Lin 49,495 196,778 12,505 36,000 50,874 132,682
Art Edelstein 22,659 126,664 22,250 26,750 91,844 105,531
Richard Short - - 23,500 23,000 100,906 91,000
William Traw 9,423 44,488 26,000 23,000 114,813 91,000
Aaron Cohen - - 18,000 14,000 75,375 56,125
</TABLE>
(1) Market Value of underlying securities at exercise date, minus the exercise
or base price of "in-the-money" options/SARs. "Value Realized" is on a
pre-tax basis.
(2) Represents the difference between the closing price of the Company's Stock
on January 31, 1998 and the exercise of the options.
17
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph shows a five-year comparison of cumulative total returns
on investment for the Company, the Russell 2000 Index and the S&P Technology
Sector (formerly S&P High Tech Composite) Index. The stock price performance
shown on the graph below is not necessarily indicative of future price
performance.
Cumulative Total Return
---------------------------------------
1/93 1/94 1/95 1/96 1/97 1/98
---------------------------------------
National Technical Systems, Inc. 100 210 163 148 159 457
Russell 2000 100 118 111 145 172 203
S&P Technology Sector 100 123 137 203 314 380
18
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
The Company's officers, directors and consultants are required to file
initial reports of ownership and reports of change in ownership with the
Securities and Exchange Commission. Officers and directors are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on information provided to the Company by individual officers,
directors and consultants, the Company believes that during fiscal 1998 all
filing requirements applicable to officers and directors have been complied
with.
Proposal No. 4 - RATIFICATION OF AUDITORS
The Board of Directors has selected Ernst & Young LLP as auditors for the
Company for the year ending January 31, 1999. That firm became auditors for the
Company during the fiscal year ended January 31, 1990. The Board recommends
ratification of this action.
Representatives of Ernst & Young LLP are expected to be present at the
meeting and will be given the opportunity to make a statement if they desire to
do so. It is also expected that they will be available to respond to appropriate
questions from shareholders at the meeting.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE FOR THIS
PROPOSAL. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR THIS
PROPOSAL UNLESS SHAREHOLDERS SPECIFY OTHERWISE IN THEIR PROXIES.
OTHER MATTERS
Management is not aware of any other matters to be presented for action at
the meeting or any adjournment thereof. However, if any matters come before the
meeting, it is intended that shares represented by Proxy will be voted in
accordance with the judgment of the persons voting them.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Any proposals of shareholders intended to be presented at the next annual
meeting (to be held in June 1999) must be received by the Company at its
principal executive office located at 24007 Ventura Boulevard, Calabasas,
California 91302, not later than February 1, 1999.
19
<PAGE>
P R O X Y
NATIONAL TECHNICAL SYSTEMS, INC.
BOARD OF DIRECTORS PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
Friday, June 26, 1998, at 11:00 a.m.
The undersigned hereby appoints Aloysius Casey and Jack Lin, and each of
them, attorneys and agents with power of substitution, to vote, as designated
below, all stock of the undersigned at the above meeting and at any adjournment
or adjournments thereof.
1. To approve an amendment to the Company's Articles of Incorporation
to provide for majority rule voting in lieu of cumulative voting in
the election of directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. Election of Directors
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees
contrary below) [ ] listed below [ ]
Ralph Clements, Harry Derbyshire, Arthur Edelstein and Aaron Cohen
(INSTRUCTION: to withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below.)
_____________________________________________________________
3. To consider and act upon a proposal to amend the Company's 1994
Employee Incentive Stock Option Plan (the "1994 Plan") to increase
the number of shares reserved for issuance under the 1994 plan from
700,000 to 1,500,000.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To ratify the selection of Ernst & Young LLP as auditors for the
fiscal year ending January 31, 1999.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting or any
adjournment or adjournments thereof.
(OVER)
<PAGE>
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE NOMINEES
FOR DIRECTOR AND FOR EACH OF THE PROPOSALS SET FORTH IN THE PROXY STATEMENT.
Dated _______________________, 1998
___________________________________
Signature of Shareholder
___________________________________
Signature of Shareholder
Please sign exactly as your name
appears hereon. Please date, sign
and return the Proxy promptly in
the enclosed envelope. When signing
as attorney, executor, administrator,
trustee or guardian, please give
full title. If the signature is for
a corporation, please sign full
corporate name by authorized
officer. If the shares are
registered in more than one name,
all holders must sign.
