PRELIMINARY PROXY
NATIONAL TECHNICAL SYSTEMS, INC.
24007 Ventura Boulevard
Calabasas, California 91302
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NOTICE OF ANNUAL MEETING
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Dear Shareholder:
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
Santa Clarita facility, 20988 W. Golden Triangle Road Santa Clarita, California,
91350, on Friday, June 28, 2002 at 10:00 a.m. for the purpose of considering and
acting upon the following:
1. To elect four directors for terms expiring in 2005;
2. To approve the 2002 Stock Option Plan;
3. To approve the issuance of 244,643 shares of Common Stock to certain
officers of the Company in lieu of cash compensation.
4. To ratify Ernst & Young LLP as auditors for the year ending January 31,
2003; 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 16, 2002 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, 2002, 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
Andrea Korfin
Secretary
NATIONAL TECHNICAL SYSTEMS, INC.
24007 Ventura Boulevard,
Calabasas, California 91302
PROXY STATEMENT
SOLICITATION
The accompanying Proxy is solicited by the Board of Directors for use at
the annual meeting of shareholders to be held on Friday, June 28, 2002, 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 28, 2002.
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 16, 2002, 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 16,
2002, consisted of 8,662,040 shares of no par value Common Stock. Shareholders
representing a majority of outstanding Common Stock must be present in person or
by proxy to constitute a quorum at the Annual Meeting. 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.
In voting for the election of Directors, shareholders do not have the
right to cumulate their votes.
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 a majority of votes cast at the Annual Meeting is required for
ratification of Ernst & Young LLP as auditors for the year ending January 31,
2003 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
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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 AND MANAGEMENT
The following table shows as of May 16, 2002, shares of the Company's
Common Stock held by directors, officers and those persons known to the Company
to be beneficial owners of five percent or more of the Company's Common Stock.
Number of Shares
Name and Address of Beneficial Owner Beneficially Owned Percent of Class
- ------------------------------------ ------------------ ----------------
Aaron Cohen 1,300,793 (1) 15.0%
24007 Ventura Boulevard
Calabasas, California 91302
Jack Lin 1,119,454 (1) 12.8%
24007 Ventura Boulevard
Calabasas, California 91302
Marvin Hoffman 881,016 (1) 10.2%
24007 Ventura Boulevard
Calabasas, California 91302
Dimensional Fund Advisors Inc. (2) 529,868 6.1%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Luis A. and Jacqueline E. Hernandez (3) 430,425 5.0%
3069 Misty Harbor
Las Vegas, Nevada 89117
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(1) Includes shares covered by options that are exercisable within 60 days as
follows: Cohen 34,317, Lin 69,931 and Hoffman 8,750.
(2) This information is based on a Schedule 13G filed with the Securities and
Exchange Commission on or about January 30, 2002.
(3) This information is based on a 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 (19 persons), owned beneficially as of the record. date a
total of 4,519,702 shares, or 48.8% of the outstanding stock.
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Proposal 1. ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of thirteen
members, who are divided into two classes of four directors and one class of
five directors. Directors are elected for terms of three years. At the Annual
Meeting, the term of office of the Class III 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 III 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.
The Class III nominees, except Sheldon Fechtor and Norman Wolfe, were
elected members of the Board of Directors by the shareholders at the 1999 annual
meeting of shareholders. On February 5, 2001, General Aloysius Casey, Chairman
of the Board, retired. The vacancy on the Board created by his retirement was
filled by the appointment of Sheldon Fechtor. Mr. Wolfe was appointed to the
Board on June 27, 2001, to fill a vacancy. Messrs. Fechtor and Wolfe, as Class
III directors, will be standing for election at this annual meeting of
shareholders. 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.
George Kabouchy, a Class II director, was appointed a director by the
Board on June 27, 2001, to fill a vacancy. Mr. Kabouchy will stand for election
at the June 2003 annual meeting of shareholders.
The names of the nominees for Class III directors and the Class I and
Class II 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:
Common Stock
of The Company
Year Term Beneficially
Director Will Owned as of Percent
Name Age Position or Office Since Expire May 14, 2002(1) of Class
- ---- --- ------------------ ----- ------ --------------- --------
Nominees For Class III Directors
Sheldon Fechtor 68 Retired founder and Chief 2001 2005* 5,000 **
Executive Officer of
Fechtor, Detwiler & Co.
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Jack Lin 69 Chairman of the Board and 1975 2005* 1,119,454 12.8%
Chief Executive Officer of
the Company
Robert Lin 44 Founder, President and 1988 2005* 112,130 1.3%
Chief Executive Officer of
MTI Marketing Techniques,
Inc.
Norman Wolfe 54 Vice President Operations 2001 2005* 1,100 **
of Select University
Technologies, Inc.
Common Stock
of The Company
Year Term Beneficially
Director Will Owned as of Percent
Name Age Position or Office Since Expire May 14, 2002(1) of Class
- ---- --- ------------------ ----- ------ --------------- --------
Directors Continuing in Office:
Class I Directors
Marvin Hoffman 68 Vice Chairman of the 1999 2003 881,016 10.2%
Board and Senior Vice
President and Chief
Information Officer of the
Company
George Kabouchy 62 President GFK Co. 2003 3,170 **
William McGinnis 43 President and Chief 1994 2003 136,523 1.6%
Operating Officer of the
Company
Richard Short 59 Senior Vice President 1988 2003 191,503 2.2%
of the Company
William Traw 64 Senior Vice President 1988 2003 110,009 1.3%
of the Company
Class II Directors:
Ralph Clements 69 President of Clements 1975 2004 7,227 **
and Associates
Aaron Cohen 65 Vice Chairman of the 1997 (2) 2004 1,300,793 15.0%
Board and Senior Vice
President, Corporate
Development
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Arthur Edelstein 64 Senior Vice President 1980 2004 389,989 4.5%
of the Company
Donald Tringali 44 Management Consultant 1999 2004 28,120 **
* If Elected at the annual meeting
** Less than 1%
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(1) Includes shares covered by options exercisable within 60 days, as follows:
Clements, 6,718; Edelstein, 89,925; Cohen, 34,317; Short, 77,750; Traw,
67,750; McGinnis, 66,737; J. Lin, 69,931; R. Lin, 8,125; Hoffman, 8,750;
Fechtor, 3,125 and Tringali, 10,000.
(2) Mr. Cohen previously served as a director of the Company during the period
1975-1985.
Mr. Clements has been President of Clements and Associates, a Sherman
Oaks, California financial and economic consulting firm, for more than five
years.
Mr. Cohen is a founder, a Vice Chairman of the Board and Senior Vice
President, Corporate Development of the Company. He has been associated with the
Company since 1961.
Mr. Edelstein is a Senior Vice President of the Company and has been
associated with the Company continuously since 1962.
Mr. Fechtor is the founder and was for over 36 years the chief executive
officer of Fechtor, Detwiler & Co., a New England-based regional investment
banking and brokerage firm. Mr. Fechtor retired in February 2000.
Mr. Hoffman is a Vice Chairman of the Board and a Senior Vice President
and the Chief Information Officer of the Company. He has been associated with
the Company since 1998. Mr. Hoffman is the founder and President of XXCAL, Inc.
and has been associated with XXCAL, Inc. since 1977. Mr. Hoffman currently
serves on the board of directors of Rainbow Technologies, Inc., a manufacturer
of computer network security products.
Mr. Kabouchy is the founder and President of GFK & Associates, a
consulting firm specializing in telecommunications and transportation projects,
with which he has been associated since 1991. Prior to founding GFK &
Associates, Mr. Kabouchy was a founder and chief operating officer of Quotron
Systems, Inc., a company offering financial networks, databases, news services
and trading systems.
Mr. Jack Lin is a founder, Chairman of the Board and Chief Executive
Officer of the Company and has been associated with the Company continuously
since 1961.
Mr. Robert Lin is the founder, and has been the President and Chief
Executive Officer of MTI-Marketing Techniques, Inc. a privately-owned
manufacturer and distributor of products for the advertising specialty and
premium markets, for more than five years. Robert Lin is the son of Jack Lin.
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Mr. McGinnis is President and Chief Operating Officer of the Company. He
has been associated with the Company since 1980.
Mr. Short is a Senior Vice President of the Company and has been
associated with the Company continuously since 1975.
Mr. Traw is a Senior Vice President of the Company and has been associated
with the Company continuously since 1963.
Mr. Tringali has been an independent management consultant since February
2001. Prior to February 2001, he was an Executive Vice President of Telemundo
Network Group, LLC for more than five years.
Mr. Wolfe is Vice President Operations of Select University Technologies,
Inc., a developer of new products and markets for technologies licensed from
universities. He has been associated with that company for the past five years.
The Board of Directors of the Company held seven meetings during fiscal
year 2002.
The Company's Board of Directors has an Audit Committee consisting of
Messrs. Clements, Tringali and Fechtor. 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 five
meetings during the year.
The Compensation Committee of the Board of Directors administers the
National Technical Systems Inc., stock option plan, including reviewing and
granting stock options to officers and other employees under the plan. The
Compensation Committee also 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 currently consists of
Messrs. Clements, Tringali and Kabouchy, none of whom are employees of the
Company. The Compensation Committee met twice during the year. For further
information, see "Report of the Compensation Committee on Executive
Compensation" on page ___.
The Nominating Committee, which currently consists of Messrs. J. Lin,
Cohen, Hoffman and Wolfe, selects nominees for election to the Board of
Directors. The Nominating Committee met twice during the year.
Employee-directors receive no additional compensation for serving on the
Board. Each of the other directors received $11,406 in annual retainer fees.
Directors are also 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, 2002, the Company paid $54,665 to Mr. Clements and $12,000 to
Mr. Tringali for consulting services.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR ITS NOMINEES
FOR CLASS III DIRECTORS.
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PROPOSAL 2 -- APPROVAL OF 2002 STOCK OPTION PLAN
The Company currently has one employee incentive stock option plan, the 1994
Stock Option Plan (the "1994 Plan"). Under the 1994 Plan, officers, key
employees, non-employee directors and consultants may be granted options to
purchase shares of the Company's authorized but unissued common stock.
At May 24, 2002, options outstanding under the 1994 Plan and previous
option plans were 1,792,036 shares at an average exercise price of $3.31 (range
$1.45 to $7.00), of which 831,362 are exercisable. There are 61,272 shares
available for future grant under the 1994 Plan which will be eliminated if the
2002 Stock Option Plan is approved by the shareholders and no further options
will be granted under the 1994 Plan.
On April 12, 2002, the Board of Directors adopted, subject to approval by
the shareholders, the National Technical Systems, Inc. 2002 Stock Option Plan,
hereinafter referred to as the "2002 Plan." The 2002 Plan provides for the
issuance of incentive stock options (i.e., options under Section 422 of the
Internal Revenue Code) and non-qualified stock options to selected directors,
officers, key employees of and consultants to the Company. The Board of
Directors believes the establishment of a new stock option plan to be a
necessary adjunct to the existing compensation package designed to attract and
retain directors, officers, key employees and consultants of ability and
experience.
Administration.
The 2002 Plan is to be administered by the Board of Directors, or a
committee of the Board ("Committee"). The Board or Committee shall, in its sole
discretion, determine 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 2002
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 2002 Plan.
Option Terms.
The exercise price for shares to be covered by an incentive stock option
granted under the 2002 Plan 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 to be
covered by a non-qualified stock option shall be not less than 100% of the fair
market value of the shares on the date the option is granted, as determined by
the Board or the Committee. On May ___, 2002 the closing price of the common
Stock of the Company, as reported on the Nasdaq National Market System, was
$_____ per share.
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 2002 Plan may, subject to certain
limitations, 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
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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 options shall be
exercisable after ten years from the date of grant. Expect as otherwise provided
for in the optionee's option agreement, in the event of a change in control, the
Company and the successor corporation, if any, may agree:
(i) that subject to the limitation provided for below, all options
that are outstanding shall become exercisable;
(ii) to terminate the 2002 Plan and cancel all outstanding options
without the payment of any consideration;
(iii) that the successor corporation or its parent shall assume the
2002 Plan and all outstanding options;
(iv) to terminate the 2002 Plan and cancel all outstanding options
and replace such options with comparable options in the successor corporation or
parent thereof;
(v) to terminate the 2002 Plan and cancel all outstanding options
and, subject to the limitation below, deliver to the optionee in lieu thereof
the difference between the fair market value of a share on the date of the
change in control and the exercise price of the optionee's option, multiplied by
the number of shares to which the option relates; or
(vi) to terminate the 2002 Plan and cancel all outstanding options
and deliver to the optionee in lieu thereof the difference between the fair
market value of a share on the date of the change in control and the exercise
price of the optionee's option, multiplied by the number of vested shares that
the optionee would have received had he or she exercised the option.
Notwithstanding the foregoing, no acceleration of exercisability or
payment shall occur to the extent that such acceleration or payment would, after
taking into account any other payments in the nature of compensation to which
the optionee would have a right to receive from the Company and any other person
contingent upon the occurrence of such change in control, result in a "parachute
payment" as defined in Section 280G(b)(2) of the Internal Revenue Code. In the
event of the dissolution or liquidation of the Company, the Company may provide
for an optionee to fully vest in his or her option.
Stock Subject to Plan.
The total number of shares of the Company's Common Stock, no par value, to
be reserved for options under the 2002 Plan will be 1,000,000, which is
equivalent to approximately 8.7% of the Company's currently outstanding shares.
Of the total number of shares reserved for issuance under the 2002 Plan, 61,272
shares are equal to the number of shares in the aggregate eliminated from the
1994 Plan. Therefore, the 2002 Plan includes a 938,728 share increase in the
number of shares reserved for issuance upon exercise of stock options over the
number of shares previously available for grant in the aggregate under the 1994
Plan, which increase is equivalent to approximately 10.8% of the Company's
currently outstanding shares. Provision is made for adjustment in the number of
option shares and exercise prices in the event of recapitalization.
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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 of and consultants to the Company, including those who have been
granted options under other stock options plans of the Company.
Termination of Options.
If the optionee's employment is terminated for any reason other than death
or disability, the options may be exercised at any time within three months
after the date of termination, but not beyond the option period such options are
exercisable, on the date of termination. If an optionee dies or becomes disabled
while in the employ of the Company, the optionee or his estate may exercise the
options within 12 months from such date, 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
of or consultant to the Company. In no case may an option be exercised more than
ten years after it is granted. Options granted under the 2002 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.
Amendment and Termination of the Plan.
The 2002 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 2002 Plan shall, without the consent of the optionee, alter
or impair any rights or obligations under any options granted under the 2002
Plan. 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 2002 Plan beyond the expiration date set forth below.
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 shares on the date of exercise less the exercise price
paid, and the Company will be allowed 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
discussed below, recognize no income for federal income tax purposes. The
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difference between the fair market value of the shares on the date of exercise
and the exercise price paid will be included in the employee's 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 shares 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 at the time of the disposition of the shares. Generally, if the
optionee disposes of the shares 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 fair market value of the shares 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 2002
Plan does not purport to be complete, and reference is made to the applicable
provisions of the Internal Revenue Code.
Effective Date and Termination of Plan.
Unless sooner terminated, the 2002 Plan's authority to grant options shall
expire on April 12, 2012 ("Expiration Date"), but the 2002 Plan shall remain in
full force and effect beyond the Expiration Date for all options granted prior
to the Expiration Date.
No options have yet been authorized for issuance under the 2002 Plan.
The following table shows outstanding options, their weighted exercise
price, and options remaining available for issuance under the Company's existing
compensation plans (excluding the 2002 Plan).
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------
a b c
- ------------------------------------------------------------------------------
Plan Category (1) Number of Weighted Number of Securities
Securities to be Average Remaining Available
Issued Upon Exercise Price for Future Issuance
Exercise of under Equity
Outstanding Compensation Plans
Options, Warrants (excluding
and Rights securities reflected
in column (a))
- ------------------------------------------------------------------------------
Plans Approved by 1,792,036 $3.31 61,272 (2)
Shareholders
- ------------------------------------------------------------------------------
(1) All equity compensation plans of the Company have been approved by the
shareholders.
(2) The shares remaining available for future issuance are available under the
Company's 1994 Plan. The 1994 Plan will be terminated and no further
options will be granted under it if the 2002 Plan is approved by the
shareholders.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR ADOPTION OF
THE 2002 STOCK OPTION PLAN.
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EXECUTIVE COMPENSATION
The following information is furnished with respect to the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------------------------
Annual Compensation Awards Baseline Payouts
---------------------------------------- ---------------------------------------------
Name and Other Annual Restricted
Principal Compensation Stock Options/ LTIP All Other
Position Year Salary($) Bonus($) ($)(1)(2) Award(S)($) SARs(#) Payouts Compensation
- -------- ---- ------------------ ------------ ----------- ------- ------- -------------
Jack Lin 2002 282,528 0 62,472 0 0 0 0
Chairman of the 2001 345,479 0 0 0 0 0 0
Board and Chief 2000 322,512 0 0 0 0 0 0
Executive
Officer
William C. 2002 172,000 0 48,000 0 0 0 0
McGinnis 2001 184,992 0 0 0 0 0 0
President and 2000 122,508 0 0 0 0 0 0
Chief Operating
Officer and
Director
Aaron Cohen 2002 150,766 0 33,850 0 0 0 0
Vice Chairman 2001 196,720 0 0 0 0 0 0
of the Board and 2000 198,076 0 0 0 0 0 0
Senior Vice
President
Marvin Hoffman 2002 200,001 0 48,999 0 0 0 0
Vice Chairman 2001 249,228 0 0 0 0 0 0
of the Board and 2000 0 0 0 0 0 0 0
Senior Vice
President, Chief
Information
Officer
Richard Short 2002 158,455 0 57,696 0 0 0 0
Senior Vice 2001 177,870 0 0 0 0 0 0
President and 2000 134,674 0 0 0 0 0 0
Director
- ----------------------
(1) Does not include perquisites or personal benefits which are the lesser of
$50,000 or 10% of total annual salary and Bonus reported for the named
Executive Officer.
(2) Fair market value of shares of restricted National Technical Systems, Inc.
common stock taken in lieu of Compensation as follows: Lin, 49,581;
McGinnis, 38,095; Cohen, 26,865; Short, 45,791 and Hoffman, 38,888.
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REPORT OF THE COMPENSATION COMMITTEE
During the fiscal year ended January 31, 2002, the Compensation Committee
of the Board of Directors (the "Compensation Committee") was composed of Messrs.
Tringali, Clements and Kabouchy who are independent, non-employee directors.
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 2002 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 with 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
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 and decreases in
base salary for the executive officers in fiscal 2002.
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
-13-
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 2002, the Compensation
Committee did not award bonuses to executive officers.
Long-term Incentives--As an important element in 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 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. J. Lin's compensation is determined pursuant to the principles noted
above. The Committee, in considering his compensation for fiscal 2002, reviewed
his existing compensation arrangements, comparable compensation for chief
executive officers of other companies and the performance of both Mr. J. Lin and
the Company. The Committee made the following determinations regarding Mr. J.
Lin's compensation:
Based upon Mr. J. Lin's and the Company's fiscal 2002 performance, Mr. J.
Lin's base salary was not increased and he was not awarded a performance bonus.
He was also not granted stock options.
COMPENSATION COMMITTEE
Donald Tringali
Ralph Clements
George Kabouchy
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.
-14-
OPTION GRANTS IN FISCAL YEAR 2002
The following table sets forth certain information at January 31, 2002 and
for the fiscal year then ended with respect to stock options granted to the
individuals named in the Summary Compensation Table above. No options were
granted to Messrs. Cohen and Hoffman during fiscal 2002. No stock appreciation
rights have been granted and no options have been granted at an option price
below fair market value on the date of the grant.
Potential Realizable Value
At Assumed Annual Rates
Stock Appreciation
Individual Grants for the Option Term (1)
--------------------------------------------------- ----------------------------
Number of
Securities % of total Exercise At 0% At 5% At 10%
Underlying Options/SAR's or Base Annual Annual Annual
Options/SAR's Granted to all Price Per Expiration Growth Growth Growth
Name of Executive Granted Employees Share Date Rate Rate Rate
- ----------------- ------------- -------------- --------- ---------- ------ ------- -------
William McGinnis 10,000 (1) 2.94% $2.04 06/25/2011 - $12,892 $32,512
Richard Short 5,000 (1) 1.47% $2.04 06/25/2011 - $6,412 $16,256
(1) All options become exercisable at 25% per year starting one year following
the date of grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE
There were no stock option exercises during fiscal year 2002 by the named
executive officers and no options granted to the named executive officers were
in the money at fiscal year end.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Mr. Hoffman to
act as Vice Chairman, Senior Vice President and Chief Information Officer for an
indefinite term at a base annual salary of $216,000. Mr. Hoffman will be
eligible for a bonus at the discretion of the Board of Directors, based on a
recommendation of the Compensation Committee. Under the agreement, NTS also pays
premiums on certain life insurance policies with the beneficiaries designated by
Mr. Hoffman.
In the event Mr. Hoffman's employment as an "at will" employee is
terminated, other than "for cause," as defined in the agreement, prior to July
31, 2002, he will receive a severance benefit equal to 24 months of base salary.
If the termination of his employment occurs after July 31, 2002, the severance
benefit will be equal to 12 months of base salary.
Pursuant to the agreement, the Company has an option to purchase all, but
not less than all, of the shares of the Company's Common Stock owned by Mr.
Hoffman, at the greater of (a) $4.50 per share, or (b) 10% less than the average
-15-
per share closing price of the Company's Common Stock for the five trading days
preceding the Company's election to exercise its option.
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.
NATIONAL TECHNICAL SYS INC
Cumulative Total Return
----------------------------------------------------
1/97 1/98 1/99 1/00 1/01 1/02
NATIONAL TECHNICAL SYSTEMS 100.00 287.05 202.41 176.95 148.47 59.39
RUSSELL 2000 100.00 118.07 118.47 139.49 144.64 139.43
S & P INFORMATION TECHNOLOGY 100.00 122.90 236.83 333.21 251.53 160.30
-16-
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
2002 all filing requirements applicable to officers and directors have been
complied with.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is composed of three
directors who are independent directors as defined under the rules of the
National Association of Securities Dealers, Inc. The Audit Committee operates
under a written charter adopted by the Board of Directors in 2000, a copy of
which is included as Appendix A to this Proxy Statement.
The Audit Committee recommends to the Board of Directors the appointment
of the independent auditors, reviews the scope of audits, reviews significant
changes to the Company's accounting principles and practices, reviews
significant issues encountered in the course of audit work related to the
adequacy of internal controls and reviews the scope and results of procedures
for internal auditing.
The Audit Committee reviewed and discussed the audited financial
statements with management of the Company and representatives of Ernst & Young
LLP. The discussions with Ernst & Young LLP included the matters required to be
discussed by Statement on Auditing Standards No. 61. In addition, the Audit
Committee received the written disclosures and the letter regarding independence
from Ernst & Young LLP as required by Independence Standards Board Standard No.
1 and discussed with Ernst & Young LLP their independence, including considering
the compatibility of non-audit services with the auditors independence.
Based on the review and discussions referred to above, the Audit Committee
recommended to the Board of Directors that the audited financial statements be
included in the Annual Report on Form 10-K for the fiscal year ended January 31,
2002 for filing with the Securities and Exchange Commission.
The Audit Committee also recommended to the Board, and the Board has
appointed, Ernst & Young LLP to audit the corporation's financial statements for
fiscal 2003, subject to shareholder notification of that appointment.
AUDIT COMMITTEE
Ralph Clements
Sheldon Fechtor
Donald Tringali
-17-
Audit and Consulting Fees Paid to Auditors
Ernst & Young LLP acts as the independent auditor for the Company and
provides certain other services. The following table sets forth the fees charged
by Ernst & Young LLP for fiscal 2001.
Fees Billed
Audit Fees (including quarterly reviews) $175,500
Financial Information Systems Design and Implementation Fee --
All Other Fees $24,093
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.
Proposal 3. APPROVAL OF THE ISSUANCE OF 244,643 SHARES OF COMMON STOCK
IN LIEU OF CASH COMPENSATION TO OFFICERS
Commencing in April 2001 and periodically thereafter through January 9,
2002, as a partial response to decreased financial results experienced by the
Company and as a temporary cost-cutting measure, certain officers of the
Company, some of whom are also directors of the Company, agreed to reductions in
their salaries in the aggregate amount of $308,023, which they would otherwise
have been entitled to receive during fiscal year 2002. In return for their
salary reductions, the officers agreed to accept an aggregate of 244,643 shares
of the Company's Common Stock on the basis of one share of Common Stock for each
$1.26 in salary reduction (the "Stock Payment"). The value of the shares issued
to the officers was based on the average closing price of the Common Stock on
the Nasdaq National Market, weighted for trading volume, for the 15 days
preceding the Board of Directors' authorization of the issuance of the shares
on January 9, 2002.
Under Nasdaq Marketplace Rule 4350(i)(1)(A), an arrangement whereby
officers or directors acquire stock of the Company in excess of 25,000 shares,
other than through a broadly based plan, must be approved by the shareholders.
Accordingly, the Company is presenting the Stock Payment to the shareholders for
their approval. If the shareholders fail to approve the Stock Payment, then the
Company will rescind the Stock Payment and pay to the officers their salary in
cash. The minimum vote required for shareholder approval is a majority of the
total votes cast on this Proposal 3, whether in person or by proxy.
The amount of unpaid cash compensation, and the number of shares received
in lieu thereof, for each of the Named Executive Officers of the Company (each
of whom is also a director) is listed above in the table "Summary Compensation,"
in the column headed "Other Compensation" and in footnote (2) to the table. In
addition, William Traw, who is a director of the Company as well as its Senior
Vice President, received 3,372 shares of Common Stock in lieu of $4,249 in cash
compensation.
As the issuance of stock in the Stock Payment was not registered under the
Securities Act of 1933 (the "Act"), the shares received by officers in the Stock
Payment will be "restricted securities" within the meaning of Rule 144 under the
Act and be subject to restrictions on resale.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF 244,643
SHARES OF COMMON STOCK IN LIEU OF CASH COMPENSATION TO OFFICERS.
-18-
Proposal 4. RATIFICATION OF AUDITORS
Based on the recommendation of the Audit Committee, the Board of Directors
has selected Ernst & Young LLP as auditors for the Company for the year ending
January 31, 2003. That firm became auditors for the Company during the fiscal
year ended January 31, 1990.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR RATIFICATION
OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS
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 2003) must be received by the Company at its
principal executive office located at 24007 Ventura Boulevard, Calabasas,
California 91302, not later than January 24, 2003.
-19-
APPENDIX A
National Technical Systems, Inc.
Audit Committee Charter
Organization
This charter governs the operations of the audit committee. The committee
shall review and reassess the charter at least annually and obtain the approval
of the board of directors. The committee shall be appointed by the board of
directors and shall comprise at least three directors, each of whom are
independent of management and the Company. Members of the committee shall be
considered independent if they have no relationship that may interfere with the
exercise of their independence from management and the Company. All committee
members shall be financially literate, or shall become financially literate
within a reasonable period of time after appointment to the committee and at
least one member shall have accounting or related financial management
expertise.
Statement of Policy
The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the company's
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the internal audit function, the
annual independent audit of the Company's financial statements, and the legal
compliance and ethics programs as established by management and the board. In so
doing, it is the responsibility of the committee to maintain free and open
communication between the committee, independent auditors, the internal auditors
and management of the Company. In discharging its oversight role, the committee
is empowered to investigate any matter brought to its attention with full access
to all books, records, facilities, and personnel of the Company and the power to
retain outside counsel or other experts for this purpose.
Responsibilities and Processes
The primary responsibility of the audit committee is to oversee the
Company's financial reporting process on behalf of the board and report the
results of their activities to the board. Management is responsible for
preparing the Company's financial statements, and the independent auditors are
responsible for auditing those financial statements. The committee in carrying
out its responsibilities believes its policies and procedures should remain
flexible, in order to best react to changing conditions and circumstances. The
committee should take the appropriate actions to set the overall corporate
"tone" for quality financial reporting, sound business risk practices, and
ethical behavior.
The following shall be the principal recurring processes of the audit
committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the committee may supplement them
as appropriate.
A-1
The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately
accountable to the board and the audit committee, as representatives of
the Company's shareholders. The committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate, replace
the independent auditors. The committee shall discuss with the auditors
their independence from management and the Company and the matters
included in the written disclosures required by the Independence Standards
Board. Annually, the committee shall review and recommend to the board the
selection of the Company's independent auditors, subject to shareholders'
approval.
o The committee shall discuss with the internal auditors and the independent
auditors the overall scope and plans for their respective audits including
the adequacy of staffing and compensation. Also, the committee shall
discuss with management, the internal auditors, and the independent
auditors the adequacy and effectiveness of the accounting and financial
controls, including the Company's system to monitor and manage business
risk, and legal and ethical compliance programs. Further, the committee
shall meet separately with the internal auditors and the independent
auditors, with and without management present to discuss the results of
their examinations.
o The committee shall review the interim financial statements with
management and the independent auditors prior to the filing of the
Company's Quarterly Report on Form 10-Q. Also, the committee shall discuss
the results of the quarterly review and any other matters required to be
communicated to the committee by the independent auditors under generally
accepted auditing standards. The chair of the committee may represent the
entire committee for the purposes of this review.
o The committee shall review with management and the independent auditors
the financial statements to be included in the Company's Annual Report on
Form 10-K (or the annual report to shareholders if distributed prior to
the filing of Form 10-K), including their judgment about the quality, not
just acceptability, of accounting principles, the reasonableness of
significant judgments, and the clarity of the disclosures in the financial
statements. Also, the committee shall discuss the results of the annual
audit and any other matters required to be communicated to the committee
by the independent auditors under generally accepted auditing standards.
A-2
P R O X Y
NATIONAL TECHNICAL SYSTEMS, INC.
BOARD OF DIRECTORS PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
Friday, June 28, 2002 at 10:00 a.m
The undersigned hereby appoints Jack Lin and William McGinnis, 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) Election of Directors
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees
contrary below) [ ] listed below [ ]
Sheldon Fechtor, Jack Lin, Robert Lin, Norman Wolfe
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
-------------------------------------------------------------
(2) To approve the 2002 Stock Option Plan
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(3) To approve the issuance of 244,643 shares of Common Stock to certain
officers of the Company in lieu of cash compensation.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(4) To ratify the selection of Ernst & Young LLP as auditors for the fiscal
year ending January 31, 2003.
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)
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE NOMINEES
FOR DIRECTOR AND FOR RATIFICATION OF THE SELECTION OF ERNST& YOUNG AS AUDITORS.
Dated _______________________, 2002
-----------------------------------
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
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS, AND MAY BE REVOKED
BY THE SHAREHOLDER DELIVERING IT PRIOR TO ITS EXERCISE BY FILING WITH THE
CORPORATE SECRETARY OF THE COMPANY AN INSTRUMENT REVOKING THIS PROXY OR A DULY
EXECUTED PROXY BEARING A LATER DATE OR BY APPEARING AND VOTING IN PERSON AT THE
MEETING.