PRELIMINARY PROXY
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
Fullerton Test Facility, 1536 East Valencia Drive, Fullerton, California, 92831,
on Friday, June 27, 2003 at 10:00 a.m. for the purpose of considering and acting
upon the following:
1. To elect five directors for terms expiring in 2006;
2. To approve an amendment to the Company's Articles of Incorporation
to authorize a class of 2,000,000 shares of preferred stock;
3. To ratify Ernst & Young LLP as auditors for the year ending January
31, 2004; and
4. 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, 2003 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, 2003, 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
May 27, 2003
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 27, 2003, 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 27, 2003.
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, 2003, 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,
2003, consisted of 8,628,811 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 approval
of the amendment of the articles of incorporation authorizing 2,000,000 shares
of preferred stock and for ratification of Ernst & Young LLP as auditors for the
year ending January 31, 2004 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.
-1-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tabulation indicates as of May 15, 2003, those persons known
to the Company to be beneficial owners of five percent or more of the Company's
Common Stock.
Number of Shares
Beneficially Percent of
Name and Address of Beneficial Owner Owned Class
- ----------------------------------- ---------------- ----------
Aaron Cohen. . . . . . . . . . . . . . . . . (1) 1,314,043 15.1%
24007 Ventura Boulevard
Calabasas, California 91302
Jack Lin. . . . . . . . . . . . . . . . . . . (1) 1,152,377 13.2%
24007 Ventura Boulevard
Calabasas, California 91302
Marvin Hoffman. . . . . . . . . . . . . . . . (1) 894,891 10.3%
24007 Ventura Boulevard
Calabasas, California 91302
Dimensional Fund Advisors Inc (2) . . . . . . 491,968 5.7%
1299 Ocian 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
(1) Includes shares covered by options that are exercisable within 60 days as
follows: Cohen 47,567, Lin 99,883 and Hoffman 22,625.
(2) This information is based on a Schedule 13G filed with the Securities and
Exchange Commission on or about February 2, 2003.
(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 (18 persons), owned beneficially as of the record date a
total of 3,637,244 shares, or 42.2% of the outstanding stock.
-2-
Proposal 1. ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of twelve
members, who are divided into one class of three directors, one class 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 I directors
will expire and five 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 five persons named below
for election as Class I 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 I nominees, except George Kabouchy, were elected members
of the Board of Directors by the shareholders at the 2000 annual meeting of
shareholders. Mr. Kabouchy was appointed to the Board by the Directors on June
27, 2001, to fill a vacancy. 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 I directors and the Class II (reduced
to three directors as a result of the retirement from the Board of Arthur
Edelstein) 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 each of 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 15, 2003(1) of Class
- ---- --- ------------------ ----- ------ --------------- --------
Class I Directors
Marvin Hoffman 69 Senior Vice President 1999 2006* 894,891 10.3%
and Chief Information
Officer of the
Company
George Kabouchy 63 President of GFK Co. 2001 2006* 11,295 **
William McGinnis 44 President and Chief 1994 2006* 176,636 2.0%
Operating Officer of
the Company
Richard Short 60 Senior Vice President 1988 2006* 216,628 2.5%
of the Company
William Traw 65 Senior Vice President 1988 2006* 122,634 1.4%
of the Company
</table>
-3-
Common Stock
of The Company
Year Term Beneficially
Director Will Owned as of Percent
Name Age Position or Office Since Expire May 15, 2003(1) of Class
- ---- --- ------------------ ----- ------ --------------- --------
Directors Continuing in Office:
Class II Directors
Ralph Clements 70 President of Clements 1975 2004 13,696 **
and Associates
Aaron Cohen 66 Vice Chairman of the 1997(2) 2004 1,314,043 15.1%
Board and Senior Vice
President, Corporate
Development
Donald Tringali 45 President of Augusta 1999 2004 46,745 **
Advisory Group
Directors Continuing in Office:
Class III Directors
Sheldon Fechtor 69 Retired Chief Executive 2001 2005 12,458 **
Officer of Fechtor,
Detwiler & Co.
Jack Lin 70 Chairman of the Board 1975 2005 1,152,377 13.2%
and Chief Executive
Officer of the Company
Robert Lin 45 President and Chief 1988 2005 118,130 1.4%
Executive Officer of MTI
Marketing Techniques,
Inc.
Norman Wolf 55 President of Quantum 2001 2005 6,725 **
Leaders, Inc.
</table>
- -------------------------------
* If elected at the annual meeting
** Less than 1%
(1) Includes shares covered by options exercisable within 60 days, as
follows: Clements, 13,187; Cohen, 47,567; Fechtor, 7,458, Hoffman,
22,625, Kabouchy, 5,625, J. Lin, 99,883; R. Lin, 14,125; McGinnis,
106,850, Short, 102,875; Traw, 80,375; and Tringali, 28,625.
(2) Mr. Cohen previously served as a Director of the Company during the
period 1975-1985.
-4-
Mr. Clements has been President of Clements and Associates, a Sherman
Oaks, California financial and economics consulting firm, for more than five
years.
Mr. Cohen is a founder, Vice Chairman of the Board and Senior Vice
President, Corporate Development of the Company. He has been associated with the
Company since 1961.
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 2000.
Mr. Hoffman is Senior Vice President and Chief Information Officer of the
Company. He has been associated with the Company since 1998. Mr. Hoffman is the
President of XXCAL, Inc., a subsidiary of the Company, with which he has been
associated since 1977. Mr. Hoffman is a director of Rainbow Technologies, Inc.,
a publicly-traded manufacturer of computer network security products.
Mr. Kabouchy is President of GFK & Associates, a management consulting
firm specializing in telecommunications and transportation projects, and has
been associated with GFK & Associates for more than five years.
Mr. Jack Lin is Chairman of the Board and Chief Executive Officer of the
Company and has been associated with the Company continuously since 1961. Jack
Lin is the father of Robert Lin.
Mr. Robert Lin has for more than five years 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. Robert Lin is the son of Jack Lin.
Mr. McGinnis is President and Chief Operating Officer of the Company. He
has been associated with the Company continuously since 1980.
Mr. Short is Senior Vice President of the Company and has been associated
with the Company continuously since 1975.
Mr. Traw is Senior Vice President of the Company and has been associated
with the Company continuously since 1963.
Mr. Tringali is President of the Augusta Advisory Group, a management
consulting company since 2001. Prior to forming Augusta Advisory Group, Mr.
Tringali was for more than five years the Executive Vice President of Telemundo
Network Group, LLC.
Mr. Wolfe is President of Quantum Leaders, Inc., a management consulting
firm. Prior to joining Quantum Leaders, Inc. in January 2002, Mr. Wolfe was Vice
President of Operations of Select University Technologies, Inc. for more than
five years.
The Board of Directors of the Company held four meetings during the last
fiscal year.
-5-
The Company's Board of Directors has an Audit Committee consisting of
Messrs. Clements, Fechtor, Tringali and Wolfe. 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 10
meetings during the year.
The Compensation Committee of the Board of Directors administers the
Company's stock option plans, including reviewing and granting stock options to
officers and other employees under the plans. 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 consists of Messrs. Clements, Kabouchy and Tringali.
The Compensation Committee met three times during the year. For further
information, see "Report of the Compensation Committee on Executive
Compensation" on page [7].
The Nominating Committee, which consists of Messrs. Cohen, J. Lin, 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 non-employee directors receives $11,406 in annual retainer
fees, except members of the audit committee who receive $24,000 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, 2003, the Company paid $50,601 to Mr. Clements and
$17,601 to Mr. Wolfe for consulting services.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR ITS NOMINEES
FOR CLASS I DIRECTORS.
-6-
EXECUTIVE COMPENSATION
The following information is furnished with respect to the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company (the "Named Executive Officers")
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------------------------
Annual Compensation Awards Baseline Payouts
-------------------- ----------------------- -------------------
Other Annual Restricted
Name and Principal Compensation Stock Options/ LTIP All Other
Position Year Salary($) Bonus($) ($)(1)(2) Award(S)($) SARs(#) Payouts Compensation
- ------------------ ---- ---------- -------- ------------ ----------- ------- ------- -------------
Jack Lin 2003 360,940 14,390 0 0 0 0 0
Chairman of the 2002 282,528 0 62,472 0 0 0 0
Board and Chief 2001 345,479 0 0 0 0 0 0
Executive Officer
William C. McGinnis 2003 236,847 9,823 0 0 0 0 0
President and 2002 172,000 0 48,000 0 0 0 0
Chief Operating 2001 184,992 0 0 0 0 0 0
Officer/Director
Lloyd Blonder 2003 170,580 7,072 0 0 0 0 0
Senior Vice 2002 136,742 0 26,457 0 0 0 0
President and 2001 147,381 0 0 0 0 0 0
Chief Financial
Officer
Richard Short 2003 208,107 8,306 0 0 0 0 0
Senior Vice 2002 158,455 0 57,696 0 0 0 0
President/ 2001 177,870 0 0 0 0 0 0
Director
Marvin Hoffman 2003 228,540 8,970 0 0 0 0 0
Vice President, 2002 200,001 0 48,999 0 0 0 0
Chief Information 2001 249,228 0 0 0 0 0 0
Officer/Director
</table>
- ------------------------
(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) The number of shares of restricted National Technical Systems, Inc. common
stock taken in lieu of Compensation is as follows: Lin, 49,581; McGinnis,
38,095; Blonder, 20,997; Short, 45,791 and Hoffman, 38,888.
-7-
REPORT OF THE COMPENSATION COMMITTEE
During the fiscal year ended January 31, 2003, the Compensation Committee
of the Board of Directors (the "Compensation Committee") was composed of Messrs.
Clements, Kabouchy and Tringali, each of whom is an 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 2003 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
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 2003.
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
-7-
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 2003, the Compensation
Committee awarded bonuses to executive officers as indicated in the Summary
Compensation Table above.
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 2003,
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 2003 performance, Mr.
J. Lin's base salary was increased by 5.7%, the amount by which the consumer
price index increased during 2000 and 2001, and he was awarded a performance
bonus based on an executive bonus plan approved by the Compensation Committee
during its June 2002 meeting. Mr. J. Lin was granted stock options on the
same basis as other executives in the company.
COMPENSATION COMMITTEE
Ralph Clements
George Kabouchy
Donald Tringali
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 hereunder 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.
-8-
INFORMATION CONCERNING STOCK OPTIONS
The following table sets forth certain information at January 31, 2003 and
for the fiscal year then ended with respect to stock options granted to the
individuals named in the Summary Compensation Table above. 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.
OPTION GRANTS IN THE LAST FISCAL YEAR
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
- ----------------- ------------- -------------- --------- ---------- ------ ------- -------
Jack Lin ........... 20,000 6.49 % $1.485 04/09/2012 -- $18,652 $47,312
Jack Lin ........... 22,000 7.14 % $2.409 06/25/2012 -- $33,283 $84,426
William McGinnis.... 23,000 7.47 % $2.190 06/25/2012 -- $31,632 $80,239
Marvin Hoffman...... 20,000 6.49 % $1.485 04/05/2012 -- $18,652 $47,312
Marvin Hoffman...... 13,000 4.22 % $2.409 06/25/2012 -- $19,667 $49,888
Richard Short....... 13,000 4.22 % $2.190 06/25/2012 -- $17,879 $45,353
Lloyd Blonder....... 13,000 4.22 % $2.190 06/25/2012 -- $17,879 $45,353
</table>
(1) All options become exercisable at 25% per year commencing on the first
anniversary of the date of the option grant.
-9-
The following table sets forth information concerning the exercise of
stock options during the fiscal year ended January 31, 2003 by each of the named
executive officers and the fiscal year end spread on unexercised "in-the-money"
options.
<table>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE
<caption>
Value of
Unexercised
Number of Securities In-the-money
Underlying Unexercised Options/SARs
Options at FY-End(1) at FY-End ($)(1)
--------------------------- ------------------
Value
Shares Acquired Realized Jan-31-03 Jan-31-03 Jan-31-03 Jan-31-03
Name of Executive On Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- --------------- -------- ----------- ------------- ----------- -------------
Jack Lin ............... -- -- 94,383 62,000 0 17,100
William C. McGinnis..... -- -- 94,850 68,650 750 5,700
Marvin Hoffman ......... -- -- 14,375 41,125 0 17,100
Richard Short .......... -- -- 94,625 29,875 375 3,075
Lloyd Blonder .......... -- -- 76,125 27,375 375 3,075
</table>
(1) These amounts represent the total number of shares subject to stock
options held by the named executives at January 31, 2003. These options
were granted on various dates during the years 1994 through 2002.
(2) These amounts represent the difference between the exercise price of the
stock options and the closing price of the Company's common stock on
January 31, 2003.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Mr. Hoffman to
serve 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, the Company
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 after July 31,
2002, he will receive a severance benefit 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 great of (a) $4.50 per share, or (b) 10% less than the average
per share closing price of the Company's Common Stock for the five trading days
preceding the Company's election to exercise its option.
-10-
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.
[GRAPHIC OMITTED]
NATIONAL TECHNICAL SYS INC
Cumulative Total Return
----------------------------------------------
1/98 1/99 1/00 1/01 1/02 1/03
NATIONAL TECHNICAL SYSTEMS, INC. 100.00 70.51 61.64 51.72 20.69 35.86
RUSSELL 2000 100.00 100.33 118.14 122.50 118.09 92.26
S & P INFORMATION TECHNOLOGY 100.00 192.70 271.13 204.66 130.43 79.17
-11-
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
2003 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 four
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.
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,
2003 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 2004, subject to shareholder notification of that appointment.
AUDIT COMMITTEE
Ralph Clements
Sheldon Fechtor
Norman Wolfe
Donald Tringali
-12-
Proposal 2. AMENDMENT TO ARTICLES OF INCORPORATION TO AUTHORIZE A CLASS OF
PREFERRED STOCK
The Board of Directors has recommended an amendment to the Company's Articles of
Incorporation to authorize a class of 2,000,000 shares of preferred stock. The
Board believes such action to be in the best interest of the Company for the
reasons set forth below.
The authorized capital stock of the Company currently consists of 20,000,000
shares of Common Stock. As of May 15, 2003, there were 8,628,811 shares of
Common Stock issued and outstanding and 775,000 shares of Common Stock reserved
for issuance pursuant to the Company's existing stock option plan. No preferred
stock is authorized by the Company's Articles of Incorporation.
The preferred stock to be authorized is commonly referred to as "blank check"
preferred stock. ("Blank Check Preferred") because the preferred stock would
have such voting rights, designations, preferences, and relative, participating,
option and conversion or other special rights, and such qualifications,
limitations or restrictions, as the Board of Directors may designate for each
class or series issued from time to time. As such, the preferred stock would be
available for issuance without further action by the Company's shareholders,
except as may be required by applicable law or pursuant to the requirements of
NASDAQ or such other exchange upon which the Company's securities are then
trading.
The Board of Directors believes that the creation of a class of preferred stock
is advisable and in the best interests of the Company and its shareholders for
several reasons. The authorization of the Blank Check Preferred would permit the
Board of Directors to issue such stock without shareholder approval and,
thereby, provide the Company with maximum flexibility in structuring
acquisitions, joint ventures, strategic alliances, capital-raising transactions
and for other corporate purposes. The Blank Check Preferred would enable the
Company to respond promptly to and take advantage of market conditions and other
favorable opportunities without incurring the delay and expense associated with
calling a special shareholders' meeting to approve a contemplated stock
issuance.
The authorization of the Blank Check Preferred would also afford the Company
greater flexibility in responding to unsolicited acquisition proposals and
hostile takeover bids. The issuance of preferred stock could have the effect of
making it more difficult or time consuming for a third party to acquire a
majority of the outstanding voting stock of the Company or otherwise effect a
change of control. Shares of preferred stock may also be sold to third parties
who indicate that they would support the Board in opposing a hostile takeover
bid. The availability of preferred stock could have the effect of delaying a
change of control and of increasing the consideration ultimately paid to the
Company and its shareholders. The proposed Blank Check Preferred amendment to
the existing Articles of Incorporation is not intended to be an anti-takeover
measure, and the Company is not aware of any present third party plans to gain
control of the Company.
The actual effect of the issuance of any shares of preferred stock upon the
rights of holders of the Common Stock cannot be stated until the Board
determines the specific rights of the holders of such preferred stock. However,
the effects might include, among other things, restricting dividends on the
Common Stock, diluting the voting power of the Common Stock, reducing the market
price of the Common Stock, or impairing the liquidation rights of the Common
Stock, without further action by the shareholders. Holders of the Common Stock
will not have preemptive rights with respect to the preferred stock.
-13-
Although the Company may consider issuing preferred stock in the future for
purposes of raising additional capital or in connection with acquisition
transactions, the Company currently has no arrangements, understandings,
agreements or commitments with respect to the issuance of the Blank Check
Preferred, and the Company may never issue any preferred stock. The complete
text of the proposed amendment to the Company's Articles of Incorporation, which
includes the Blank Check Preferred amendment, is attached as Appendix B. You
should read Appendix B in its entirety.
THE BOARD OF DIRECTORS OF THE COMPANY 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 3. 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, 2004. That firm became auditors for the Company during the fiscal
year ended January 31, 1990.
The following table sets forth the fees billed for fiscal 2003.
Fees Billed
Audit Fees $239,007
Financial Information Systems Design and Implementation Fee --
All Other Fees $ 32,388
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 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 2003) must be received by the Company at its
principal executive office located at 24007 Ventura Boulevard, Calabasas,
California 91302, not later than January 23, 2004.
-14-
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.
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
A-1
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.
. 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.
. 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.
. 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
APPENDIX B
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
NATIONAL TECHNICAL SYSTEMS, INC.
Jack Lin and Andrea Korfin certify that:
1. They are the president and secretary, respectively, of National Technical
Systems, Inc., a California corporation.
2. Article Three of the Articles of Incorporation of this corporation is
hereby amended in its entirety to read as follows:
"The number of authorized shares of this corporation is 22,000,000 shares,
20,000,000 shares of which shall be Common Stock, and 2,000,000 shares of
which shall be Preferred Stock.
Authority is vested in the Board of Directors to divide any or all of the
authorized shares of Preferred stock into series and, within the
limitations provided by law, to fix and determine the designations,
preferences, qualifications, privileges, limitations, options, conversion
rights, and other special rights of each such series, including but not
limited to the right to fix and determine the designation of and the
number of shares issuable in each such series and any and all such other
provisions as may be fixed or determined by the Board of Directors of the
corporation pursuant to California law."
3. The foregoing amendment of articles of incorporation has been duly
approved by the board of directors.
4. The foregoing amendment of articles of incorporation has been duly
approved by the required vote of shareholders in accordance with Section
902 of the Corporations Code. The total number of outstanding shares of
the corporation is 8,628,811. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote
required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: ______________, 2003
_______________________________
Jack Lin, President
_______________________________
Andrea Korfin, Secretary
<table>
<caption>
1. Board of Directors recommends a vote FOR the nominees and FOR Proposals 2 and 3.
ELECTION OF DIRECTORS |_| FOR all nominees listed below |_| WITHHOLD AUTHORITY to vote |_| *EXCEPTIONS
(except as marked to the contrary below) for all nominees listed below
Nominees: 01 Marvin Hoffman 02 George Kabouchy 03 William McGiness 04 Richard Short 05 William Traw
(INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name on the space provided below.)
EXCEPTIONS__________________________________________________________________________________________________________________________
|_| FOR |_| AGAINST |_| ABSTAIN 2. To approve an amendment to the Company's Articles of Incorporation to
authorize a class of 2,000,000 shares of preferred stock.
|_| FOR |_| AGAINST |_| ABSTAIN 3. To ratify the selection of Ernst & Young LLP as auditors for the
fiscal year ending January 31, 2004.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE
VOTED FOR EACH OF THE NOMINEES FOR DIRECTOR, 4. In their discretion, the proxies are authorized to vote upon such
FOR APPROVAL OF THE AMENDMENT TO THE other business as may properly come before the meeting or any
ARTICLES AUTHORIZING A CLASS OF PREFERRED SHARES adjournment or adjournments thereof.
AND RATIFICATION OF THE SELECTION OF
ERNST & YOUNG LLP AS AUDITORS. 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.
Dated:_________________________________________________, 2003
_____________________________________________________________
Signature of Shareholder
_____________________________________________________________
Signature of Shareholder
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.
</table>
PROXY
NATIONAL TECHNICAL SYSTEMS, INC.
BOARD OF DIRECTORS PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
Friday, June 27, 2003 at 10:00 a.m.
The undersigned hereby appoints Jack Lin and Aaron Cohen, 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.
This proxy is valid only when signed and dated.
See Reverse Side