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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) For the fiscal year ended January 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transition period from
- ----------- to --------------- COMMISSION FILE NUMBER 0-16438
NATIONAL TECHNICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4134955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24007 VENTURA BOULEVARD, SUITE 200 91302
CALABASAS, CA (Zip Code)
(Address of principal executive offices)
(818) 591-0776
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
Common Stock - Par Value $.01 Per Share NASDAQ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
Page 1 of 102
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ X ] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at April 17, 1997 was approximately $12,156,000.
The number of shares of Registrant's Common Stock outstanding on April 17, 1997
was 6,746,442.
Portions of the Proxy Statement of Registrant dated January 31, 1997 are
incorporated in Part III of this report.
Total number of pages included in this document 102.
Page 2 of 102
NATIONAL TECHNICAL SYSTEMS, INC.
ANNUAL REPORT (FORM 10-K)
FOR YEAR ENDED JANUARY 31, 1997
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business. 4
ITEM 2. Properties 8
ITEM 3. Legal Proceedings. 9
ITEM 4. Submission of Matters to a Vote of Security Holders. 9
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 10
ITEM 6. Selected Financial Data. 11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
ITEM 8. Financial Statement and Supplemental Data. 17
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure. 17
PART III
ITEM 10. Directors and Executive Officers of the Registrant. 18
ITEM 11. Executive Compensation. 18
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management. 18
ITEM 13. Certain Relationships and Related Transactions. 18
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 19
Page 3 of 102
NATIONAL TECHNICAL SYSTEMS, INC.
ANNUAL REPORT (FORM 10-K)
FOR YEAR ENDED JANUARY 31, 1997
PART I
ITEM 1. BUSINESS
A. GENERAL
National Technical Systems, Inc. (Registrant) is a diversified
services company which operates in three segments: Technical Services
(engineering and testing), Technical Staffing and Quality Registration Services.
The business of the Registrant is conducted by a number of operating units,
each with its own organization. The management of each operating unit has
responsibility for its operations and for achieving sales and profit goals.
Overall supervision, coordination and financial control are maintained by the
executive staff from the Registrant's corporate headquarters.
B. HISTORY
The Registrant was incorporated in April 1987 to serve as a holding
company for its subsidiaries, including National Technical Systems, a California
corporation, who's name was changed on January 31, 1997 to NTS Technical
Systems, a California corporation ("NTS California"), its principal operating
company. NTS Technical Systems doing business as National Technical Systems
("NTS California") was incorporated in 1968. On November 16, 1987, the
Registrant consummated a reorganization whereby it issued one share of common
stock in National Technical Systems, Inc., a Delaware corporation ("NTS, Inc."),
to the shareholders of NTS California in exchange for each share of the common
stock of NTS California held by such shareholders. On January 31, 1997 ("NTS,
Inc.") was merged into a newly formed California corporation named National
Technical Systems, Inc ("NTS, Inc.- CA"). Also, in June 1996 the Registrant
acquired a subsidiary of Raytheon Service Company engaged in ISO 9000
registration. The Registrant changed the name of this subsidiary to National
Technical Systems Certification Services, a Delaware Corporation ("NTS-CS").
At the same time the Registrant combined its previous PECS-QA operations with
("NTS-CS").
Unless indicated otherwise, the term "Registrant" includes NTS,
Inc. - CA and its wholly owned subsidiaries, NTS California, Acton
Environmental Testing Corporation, a Massachusetts corporation, Approved
Engineering Test Laboratories, Inc., a California corporation, ETCR Inc., a
California corporation, NTS Products, a California corporation, Wise and
Associates, Inc., a Texas corporation, National Technical Services, Inc.,
(formerly S&W Technical Services) a Florida corporation, National Quality
Assurance - USA, Inc. (NQA), a 50% owned Massachusetts corporation and National
Technical Systems Certification Systems ("NTS - CS") a Delaware corporation.
Page 4 of 102
Traditionally, the Registrant's primary businesses have been
comprised of technical services and engineering disciplines provided
domestically to a wide range of industries (aerospace, defense, nuclear,
automotive and computer, among others) including analysis, engineering and
mechanical and electronic testing to ascertain performance and reliability,
qualification of equipment for nuclear power plants, engineering design,
computer based structural dynamics and finite element analysis.
The Registrant also performs technical staffing and consulting
through Wise and Associates, Inc. and its operating subsidiary, NTS Technical
Services, Inc., which provides upper level Information Technology/Information
Systems (IT/IS) and engineering personnel on a project, temporary or permanent
basis throughout the United States. In fiscal 1994, the Registrant started its
quality registration company, NQA-USA, as a 100% owned subsidiary with an
agreement with NQA-UK that for the first two years of operation NQA-USA would be
responsible for 100% of the profits and losses of the company. In December 1994,
50% of the stock of NQA-USA was issued to NQA-UK. The distribution of profits
and losses is 65% to the Registrant and 35% to NQA-UK. NQA-USA is a third party
registrar for ISO 9000 certification. Its primary offices are in Boxborough,
Massachusetts.
During fiscal 1995, the Registrant started its Environmental
Services Group which was operated out of Fullerton, California. In January
1997, the Registrant, after considering the highly competitive and unreliable
nature of the business and the inability to operate at profitable levels,
elected to discontinue and abandon its Environmental Services segment (see
Note 2 to the Consolidated Financial Statements attached hereto as Exhibits A
(i) and A (ii)). All information presented herein has been restated to exclude
the effects of the Environmental Services segment.
C. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 9 to Consolidated Financial Statements attached hereto as
Exhibits A (i) and A (ii).
D. DESCRIPTION OF BUSINESS
(i) TECHNICAL SERVICES. The Technical Services group provides
highly qualified scientific and technical personnel and test facilities in the
performance of analysis, engineering, mechanical and electronic testing to
ascertain performance and reliability under induced environmental stress
conditions, including vibration, extremes of temperature, acceleration,
altitude, shock, acoustic noise and flight dynamics and provides other related
engineering services, including accelerated aging analysis, and equipment
qualification for the nuclear power market. Components tested include items used
in motor vehicles, missile programs, communications products, satellites,
medical equipment, the space shuttle, aircraft and nuclear safety equipment (but
excluding radioactive material). The Technical Services group provides such
services to its customers on fixed price, time and material and
cost-reimbursement bases. The Technical Services group markets these services
through a sales force located throughout the United States and performs these
services at its eleven facilities or at the clients' facility.
Page 5 of 102
The Registrant is engaged in supplying services to U.S. government
defense programs in its Technical Services segment. These contracts are subject
to special risk, including dependence on government appropriations, contract
termination without cause, contract renegotiation, and intense competition for
the available defense business.
(ii) TECHNICAL STAFFING. The Technical Staffing group locates,
recruits, and hires a wide variety of upper level technical and professional
personnel - engineers, drafters, designers, programmers and project managers -
and assigns them to clients either individually as staff augmentation or as
members or managers of a project team. This group also performs specialized
services for industry such as safety training programs and drafting projects,
Internet development services, payroll administration for small temporary
agencies and permanent placement on a fee basis. The Technical Staffing group
offers a variety of pricing options, including time and material, fixed price,
contingency and retained search. This group currently provides personnel and
services to large Fortune 500 companies and other regional entities from a
network of regional offices. Personnel are currently located in over 12 states.
NTS Technical Services, Inc. is also a Lotus Business Partner and authorized
Lotus Notes provider.
(iii) REGISTRATION SERVICES. The NTS Registration Services
group is a third party registrar whose business is to evaluate a supplier's
quality systems for conformity to ISO 9000 international quality standards. The
evaluations include an examination of a company's quality policy, quality
system documentation and quality records. Part of the evaluation is a thorough
on-site assessment to determine whether each required quality system element is
defined, documented, deployed and consistently implemented, and the required
documentation and records are current and available. If the customer's quality
system is verified to conform to the requirements of the applicable standard,
the Registrant then issues a certificate to the customer describing the scope
of the suppliers quality systems which have been certified. The customer is
then allowed to display the registrar's mark on advertising, stationery, etc.,
as evidence that they have achieved ISO 9000 registration.
(iv) COMPETITION. Potential customers for services offered by
the Registrant's Technical Services segment represent a variety of divergent
industries with the majority of business concentrated in the aerospace/defense,
automotive, commercial electronics, and nuclear industries. Competition in this
segment comes from many different areas including government and non-profit
testing facilities, major government contractor testing facilities (e.g.,
Boeing, Lockheed Martin, McDonnell Douglas and Northrop-Grumman), customer
in-house testing facilities, and other independent commercial testing companies.
As the competition in this segment is fragmented and there is a lack of
available data on testing performed by government facilities, contractors and
in-house testing facilities, the Registrant is unable to determine its
competitive position in this market. The Registrant competes in this segment
primarily on the basis of its high technology testing capabilities, high
quality support personnel and price.
Page 6 of 102
Potential customers for services offered by the Registrant's
Technical Staffing segment are from a broad base of high technology and
manufacturing companies. Competition in this segment comes from a large number
of public and privately held companies. The estimated aggregate annual revenues
of the four largest publicly held competitors in this segment (Manpower, Inc.,
ADECCO, S.A., Inc., Olsten Corporation, and Kelly Services, Inc.) is
approximately $20.8 billion while the Registrant estimates the total market to
be in excess of $200 billion. The Registrant competes in this segment primarily
on the basis of its niche position and of price and high quality service. In
addition, the Registrant has established a strategic alliance with another
Technical Staffing company in order to more effectively compete in the
marketplace.
The Registrant's Technical Staffing segment is dependent upon two
customers for a material portion of its segment revenue. None of the
Registrant's other business segments are dependent upon a single customer or a
few customers, the loss of which would have a materially adverse effect on the
segment.
At this time, the Registrant believes the competitive conditions
surrounding the Registration Services segment are immaterial to the overall
operations of the Company.
(v) BACKLOG. The Registrant's backlog at January 31, 1997 and
1996 is as follows:
1997 1996
---- ----
Technical Services $19,195,000 $20,124,000
Technical Staffing 4,003,000 2,008,000
Registration Services 1,840,000 1,710,000
--------- ----------
Total Backlog $25,038,000 $23,842,000
=========== ===========
Registrant estimates that approximately 85% of the backlog at January 31, 1997
will be completed by January 31, 1998.
(vi) GENERAL.
(a) SERVICE MARK. The Registrant has registered its
service mark "NTS" with the U.S. Patent and Trademark Office.
(b) ENVIRONMENTAL EFFECT. Compliance with applicable
federal, state and local provisions regulating the discharge of materials into
the environment has not had and is not expected to have any material effect
upon the capital expenditures, earnings or competitive position of the
Registrant.
Page 7 of 102
(c) SEASONAL EFFECT. Registrant's business does not have
material seasonal characteristics.
(d) EMPLOYEES. The Registrant employed 449 individuals at
January 31, 1997 and 420 in 1996 as follows:
At January 31,
--------------
1997 1996
---- ----
Technical Services 281 272
Technical Staffing 134 124
Registration Services 23 12
Corporate Administration 11 12
---- ----
449 420
==== ====
Approximately 100 of the Registrant's Technical Services employees occupy
management and professional positions, and approximately 75 of the Technical
Staffing employees have degrees in engineering and other fields. None of the
employees of the Registrant is represented by a union. The Registrant considers
its relationship with its employees to be good.
ITEM 2. PROPERTIES.
A. OPERATIONS. The Registrant owns/leases and operates the
following properties:
OWNED PROPERTIES BUILDINGS LAND
STATE CITY (SQ.FT.) (ACRES)
- -----------------------------------------------------------------------------
California Fullerton 36,000 3
Saugus 60,000 160
Massachusetts Acton 30,000 5
Boxborough 25,000 4
Virginia Hartwood 66,000 87
------ ---
TOTAL OWNED PROPERTIES 217,000 259
======= ===
LEASED PROPERTIES BUILDINGS LAND
STATE CITY (SQ.FT.) (ACRES)
- -----------------------------------------------------------------------------
Arkansas Camden 22,400 216
California Calabasas 4,500 n/a
Fullerton 20,200 n/a
Los Angeles 16,000 2
Valencia 142,000 50
Louisiana Zachary 1,500 n/a
Michigan Detroit 45,400 n/a
Texas San Antonio 2,200 n/a
Arizona Tempe 17,100 n/a
------ -----
TOTAL LEASED PROPERTIES 271,300 268
======= =====
Page 8 of 102
B. The Registrant believes that the space occupied by all of its
operations is adequate for its current and near-term requirements. Should
additional space be required, the Registrant does not anticipate problems in
securing such additional space.
C. INVESTMENT PROPERTIES.
The Registrant owns four acres of unimproved real property in
Escondido, California which is currently for sale. In addition, the Registrant
owns, for investment purposes, a condominium located in Palm Desert, California.
The facility is rented to the public and, on occasion, used by employees of the
Registrant.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is, from time to time, the subject of claims and
suits arising out of matters occurring during the operation of the Registrant's
business. In the opinion of management, no pending claims or suits would
materially affect the financial position or the results of the operations of the
Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
Page 9 of 102
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
A. PRINCIPAL MARKET
The Registrant's common stock is traded in the over-the-counter
market and quoted on the NASDAQ National Market under the symbol "NTSC". The
range of high and low quotations as reported by the NASDAQ Intra Dealer
Quotation System for each of the quarters of the fiscal years ended January 31,
1997 and 1996 is presented below:
1997 1996
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter 3-1/4 1-5/8 2-5/8 1-5/8
Second Quarter 4 2-3/8 2-1/8 1-5/16
Third Quarter 3-9/16 2-7/16 2-3/8 1-5/8
Fourth Quarter 2-15/16 2-1/16 2-7/8 1-7/8
B. HOLDERS OF COMMON STOCK.
As of the close of business on April 17, 1997, there were 723
holders of record of Registrant's common stock. The number of holders of record
is based on the actual number of holders registered on the books of the
Registrant's transfer agent and does not reflect holders of shares in "street
name" or persons, partnerships, associations, corporations or other entities
identified in security position listings maintained by depository trust
companies.
C. DIVIDENDS.
On June 30, 1996, the Registrant declared a five cents per share
special dividend payable on August 5, 1996 to shareholders of record on
July 20, 1996.
The Registrant is permitted to pay cash dividends under the terms of
its loan agreements up to 40% of the net income without the prior written
consent of its banks.
Page 10 of 102
ITEM 6. SELECTED FINANCIAL DATA. (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended January 31, 1997 1996 1995 1994 1993
INCOME STATEMENT DATA: ---- ---- ---- ---- ----
Net revenues $ 47,069 $ 41,457 $ 37,380 $ 43,020 $ 41,220
Gross profit 12,144 9,650 9,019 8,995 8,296
Interest expense 1,021 1,157 1,032 956 1,070
Income from continuing
operations before income
taxes and minority interest 3,590 2,192 1,276 1,159 671
Income taxes 1,561 972 574 523 301
-------- -------- -------- ------- --------
Income from continuing
operations before
minority interest 2,029 1,220 702 636 370
Minority interest 10 (55) - - -
Income (loss) from
discontinued operations,
net of income taxes (684) (246) (137) 98 -
--------- --------- --------- ------- -------
Net income $ 1,355 $ 919 $ 565 $ 734 370
========= ========= ========= ======== =======
Primary income (loss) per
common share:*
From continuing operations $ 0.30 $ 0.17 $ 0.11 $ 0.10 $ 0.06
From discontinued operations (0.10) (0.04) (0.02) 0.02 -
--------- --------- --------- ------- ------
Total $ 0.20 $ 0.14* $ 0.09 $ 0.12 $ 0.06
========= ========= ========= ======== =======
Weighted average number of
common shares and common
stock equivalents outstanding $ 6,702 $ 6,660 $ 6,622 $ 6,295 $ 6,113
========= ========= ========= ========= =======
Cash dividends paid per
common share $ 0.05 $ 0.02 $ 0.02 $ 0.03 $ -
======= ========= ========= ========= =======
BALANCE SHEET DATA:
Working capital(1) $ 9,700 $ 8,752 $ 7,932 $ 5,346 $ 3,349
Total assets 35,296 33,503 33,088 31,573 28,561
Long-term debt, excluding
current installments 9,183 9,090 10,045 7,616 6,488
Stockholders' equity 16,735 15,651 14,831 14,353 13,103
(1) Working capital for the year ended January 31, 1995 increased from
January 31, 1994 due to the reclassification of the line of credit
from short term to long term borrowings.
* Per share date may not always add up to total for the year because each
figure is independently calculated.
Page 11 of 102
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. All information is based
upon National Technical System, Inc.'s fiscal year ending January 31.
RESULTS OF OPERATIONS
NET REVENUES
(Dollars in thousands)
1997 % CHG 1996 % CHG 1995
---- ----- ---- ----- ----
TECHNICAL SERVICES $ 37,597 10.5% $ 34,029 8.9% $ 31,259
TECHNICAL STAFFING 7,135 34.4% 5,310 13.7% 4,670
REGISTRATION SERVICES 2,337 10.3% 2,118 46.0% 1,451
-------- ----- -------- ----- --------
TOTAL $ 47,069 13.5% $ 41,457 10.9% $ 37,380
For the year ended January 31, 1997, consolidated net revenues
increased $5,612,000 or 13.5% when compared with fiscal 1996. Revenues in the
Technical Services segment increased $3,568,000 due to increases in its
traditional aerospace and defense testing business resulting from increased
research and development budgets of government defense and aerospace contractors
as well as an increase in outsourcing of testing and engineering services.
Revenues in the Technical Staffing segment increased $1,825,000 due
to increases in its expanding staff augmentation business and the continuing
success of its strategic alliances with a major technical staffing company. The
Registrant considers this to be a continuing growth industry.
Revenues in the Registrant's Registration Services segment increased
$219,000 as a result of continuing marketing efforts in this segment and an
increase in demand by U.S. companies for ISO 9000 certification.
It is anticipated by the Registrant that revenues in the Technical
Services and Technical Staffing segments will continue to increase through
fiscal 1998. The Registrant also anticipates that revenues in the Registration
Services segment will continue to grow moderately through 1998.
For the year ended January 31, 1996, consolidated net revenues
increased $4,077,000 or 10.9% when compared with fiscal 1995. Revenues in the
Technical Services segment increased $2,770,000 due to increases in its
traditional aerospace and defense testing business offset partially by a decline
in the nuclear power testing and dedication business. Revenues in the Technical
Staffing segment increased $640,000 due to increases in its expanding staff
augmentation business and the success of its strategic alliances with a major
technical staffing company. Revenues in the Registrant's Registration Services
segment increased $667,000 as a result of continuing marketing efforts in this
segment, and an increase in demand by U.S. companies for ISO 9000 certification.
Page 12 of 102
GROSS PROFIT
(Dollars in thousands)
1997 % CHG 1996 % CHG 1995
---- ----- ---- ----- ----
TECHNICAL SERVICES $ 9,502 21.2% $ 7,840 7.0% $ 7,326
% TO SEGMENT REVENUE 25.3% 23.0% 23.4%
TECHNICAL STAFFING $ 1,798 67.6% $ 1,073 (1.5%) $ 1,089
% TO SEGMENT REVENUE 25.2% 20.2% 23.3%
REGISTRATION SERVICES $ 844 14.5% $ 737 22.0% $ 604
% TO SEGMENT REVENUE 36.1% 34.8% 41.6%
-------- ----- -------- ----- --------
TOTAL $12,144 25.8% $ 9,650 7.0% $ 9,019
% TO NET REVENUE 25.8% 23.3% 24.1%
Total gross profits increased by $2,494,000 as a result of increased
revenues in 1997 compared to 1996. Gross profit as a percentage of net revenues
in fiscal 1997 also increased when compared to fiscal 1996. This increase was
due primarily to the success of the Registrant in obtaining more profitable
fixed price contracts in its Technical Services segment and Technical Staffing
segment and the success of its continued cost containment programs in these
segments.
Total gross profits increased by $631,000 as a result of increased
revenues in 1996 compared to 1995. Gross profit as a percentage of net revenues
in fiscal 1996 decreased when compared to fiscal 1995. This decline was due
primarily to lower margins in all segments due to increased costs and reduced
efficiencies due to rapid volume increases.
SELLING, GENERAL AND ADMINISTRATIVE
(Dollars in thousands)
1997 % CHG 1996 % CHG 1995
----- ----- ----- ----- ----
TECHNICAL SERVICES $ 5,468 21.1% $ 4,516 (11.1%) $ 5,078
% TO SEGMENT REVENUE 14.5% 13.3% 16.2%
TECHNICAL STAFFING $ 1,260 12.3% $ 1,122 1.6% $ 1,104
% TO SEGMENT REVENUE 17.7% 21.1% 23.6%
REGISTRATION SERVICES $ 717 23.6% $ 580 48.7% $ 390
% TO SEGMENT REVENUES 30.7% 27.4% 26.9%
CORPORATE $ 131 15.9% $ 113 14.1% $ 99
-------- ----- -------- ----- --------
TOTAL $ 7,576 19.7% $ 6,331 (0.5%) $ 6,671
% TO NET REVENUE 16.1% 15.3% 17.8%
Page 13 of 102
Selling, general and administrative expenses for the year ended
January 31, 1997 increased as a percentage of net revenues when compared to
1996. This increase was due primarily to the Registrant's increased incentive
compensation to its sales representatives and managers as well as increased
marketing costs in its Technical Services segment and increased costs of
administering the on-going activities in the Registration Services segment.
The Registrant continues to look for new ways to reduce costs yet remain
effective in all segments of its business.
Selling, general and administrative expenses for the year ended
January 31, 1996 decreased as a percentage of net revenues when compared to
1995. This decrease was due primarily to the Registrant's on-going cost
containment program in its established Technical Services segment and due to
the increase in net revenues. These decreases were partially offset by
increases in the newer Registration Services segment due mainly to the cost of
pursuing business in this competitive market.
INTEREST EXPENSE
Interest expense decreased $136,000 in fiscal 1997 when compared to
1996. This decrease was principally due to lower weighted average debt balances
along with slightly lower interest rates.
Interest expense increased $125,000 in fiscal 1996 compared to
fiscal 1995 due primarily to higher interest rates.
INCOME TAXES
The income tax rate for 1997, 1996 and 1995 reflects a rate in
excess of the U.S. Federal statutory rate primarily due to the inclusion of
state income taxes. The Registrant's fiscal 1997 income tax provision was
$589,000 more than fiscal 1996 because of an increase in income from continuing
operations before income taxes.
The fiscal 1996 income tax provision was $398,000 more than fiscal
1995 because of the increase in income from continuing operations before income
taxes. See Note 4 to the Consolidated Financial Statements for a reconciliation
of the provision for income taxes from continuing operations at the statutory
rate to the provision for income taxes from continuing operations.
Management has determined that it is more likely than not that the
Registrant's deferred tax asset will be realized on the basis of offsetting it
against deferred tax liabilities and future income. It is the Registrant's
intention to evaluate the realizability of the Registrant's deferred tax asset
quarterly by assessing the need for a valuation allowance based upon future net
income of the Registrant.
Page 14 of 102
DISCONTINUED OPERATIONS
The loss from discontinued operations represents the operating
results of the Registrant's Environmental Services segment prior to its
discontinuance and estimated future shutdown expenses.
NET INCOME
The increase in net income for the year ended January 31, 1997
compared to fiscal 1996 was due primarily to increased revenues and higher
gross profit margins partially offset by slightly higher selling, general and
administrative expenses.
The increase in net income for the year ended January 31, 1996
compared to fiscal 1995 was due to increased revenues partially offset by
slightly lower gross profit margins.
BUSINESS ENVIRONMENT
During the course of fiscal 1997, the business climate in the
aerospace and defense industry, which in the past had shown signs of
uncertainty, seems to have stabilized and, in some areas show signs of
strengthening. Various major prime government contractors have won significant
development contracts which increases the market for the Registrant's Technical
Services segment. During the period of uncertainty the Registrant developed a
strategy of growth through diversification and taking advantage of opportunities
created by the aerospace and defense industry's merger activities and ultimate
downsizing. In addition, increased activity in commercial satellite and launch
vehicles has increased demand for component and systems testing. The Registrant
continues to pursue ISO registration business through its Registration Services
segment as demand for these services continues to increase as more companies
must compete for business in the global market place. Also, as the demand for
nuclear staff augmentation has decreased, the Registrant has aggressively
pursued additional staff augmentation business in the growing "hi-tech"
industries (computer and software) through its Technical Staffing segment.
Because of the foregoing, as well as other factors affecting the Registrant's
operating results, past financial performance should not be considered to be a
reliable indicator of future performance.
LIQUIDITY AND CAPITAL RESOURCES
In the year ended January 31, 1997, cash provided by operations
decreased by $1,190,000 when compared to 1996. A primary factor contributing to
this was an increase in accounts receivable, as well as increases in prepaid
expenses and decreases in accrued expenses. The increase in accounts receivable
was due primarily to increases in the Technical Staffing segment accounts
receivable of approximately $677,000, as well as an increase of $1,201,000 in
the accounts receivable of Technical Services segment offset by decreases in
other segments of the Registrant's business. In the Technical Staffing segment,
the Registrant provides payroll funding for some of its customers for which a
fee is earned. The fee revenue is accrued upon payroll funding, however, the
Page 15 of 102
payroll funds advanced at the end of the year are also recorded as accounts
receivable until paid by the customer. At January 31, 1997, accounts receivable
for this segment included $1,054,000 in such funding advances. The increase in
use of cash was partially offset by noncash expenses (depreciation and
amortization). Due to the expanding growth in sales and requirements for
non-long term financed capital expenditures, the Registrant is currently
negotiating with its banks to reclassify approximately $2,500,000 of its
revolving line of credit to a five year term loan. The Registrant believes that
the banks will agree to this change in the Registrant's loan agreements. In
April 1997 the Registrant replaced a $1,500,000 equipment line of credit, which
expired in August 1996, with a $2,000,000 equipment line of credit. In fiscal
1996, cash provided by operations increased by $288,000 over 1995, reflecting
an increase net revenues as well as non-cash expenses (depreciation and accrued
expenses) partially offset by an increase in accounts receivable due to
increases in payroll funding receivables in the Technical Staffing segment and
other mitigating factors.
Net cash used in investing activities in the year ended January 31,
1997 increased $1,147,000 as compared to 1996 due to increased capital
requirements to continue the Company's business expansion and the acquisition
of a new subsidiary in the Registrant's Registration Services segment. Net
cash used in investing activities in the year ended January 31, 1996 decreased
$1,268,000 as compared to 1995 due to reduced capital requirements.
Net cash provided by financing activities in the year ended January
31, 1997 consisted principally of proceeds from bank loans and stock options
exercised, partially offset by cash dividends paid and repayments of current
and long-term debt. Long-term debt increased $224,000 in fiscal 1997 from 1996.
This increase was principally due to new borrowings in excess of regularly
scheduled payments on long-term debt. Maturities of long-term debt consist of
regularly scheduled payments on the Registrant's term loans to its banks and
notes payable. Of the $6,735,000 shown in the maturities of long term debt (see
footnote 3(c) of the Consolidated Financial Statements) due in fiscal 1999,
$5,400,000 is the outstanding balance of the Registrant's revolving lines of
credit which were extended to August 1998 during October 1996. All other
maturities of long-term debt will be paid with cash generated from operations.
The Registrant also has a term loan agreement with Bank of America NT&SA and
Sanwa Bank California for an aggregate amount of $5,000,000 payable in monthly
installments of $83,333 through August 31, 1998, and an additional $1,000,000
loan with Sanwa Bank entered into in January 1995, with monthly payments of
$16,667 through January 31, 2000.
In 1996, long-term debt decreased $1,268,000 from 1995. This
decrease was principally due to regularly scheduled payments on long-term debt
in excess of new borrowings. Net cash provided by financing activities consisted
of proceeds from bank loans and stock options exercised, partially reduced by
cash dividends and repayments of current and long-term debt.
Management is not aware of any significant demands for capital funds
that may materially affect short or long-term liquidity in the form of large
fixed asset acquisitions, unusual working capital commitments or contingent
Page 16 of 102
liabilities. In addition, the Registrant has made no material commitments for
capital expenditures. The Registrant's future working capital will be provided
from operations, plus the reclassification of approximately $2,500,000 of its
revolving line of credit to a five year term loan and the new equipment line of
credit as described above. The Registrant's current bank revolving lines of
credit, which aggregate $6,000,000 for short-term liquidity needs, had $600,000
available at January 31, 1997.
ENVIRONMENTAL MATTERS
An internal environmental compliance group formed in 1991 continues
to review environmental matters for the Registrant. It is the opinion of
Management that compliance with applicable environmental regulations will not
have a material effect upon capital expenditures or future earnings of the
Registrant.
IMPACT OF INFLATION
Registrant has not been adversely affected by inflation during the
past three fiscal years. Registrant continues to incur increased costs in the
areas of wages, operating supplies and utilities. To date, these increases have
been substantially offset by reductions in other operating areas, and reductions
in interest expense. The Registrant can give no assurances, however, that in the
future it can offset such increased costs.
FORWARD-LOOKING INFORMATION
Certain statements or assumptions in Management's Discussion and
Analysis contain or are based on "forward-looking" information (as defined in
the Private Securities Litigation and Reform Act of 1995) that involve risk and
uncertainties inherent in the Registrant's business. Actual outcomes are
dependent upon the Registrant's successful performance of internal plans,
customer changes in short range and long range plans, competition in the
Registrant's services areas and pricing, continued acceptance of new services,
performance issues with key customers, and general economic risks and
uncertainties.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
The Registrant's consolidated financial statements together with the
reports thereon by independent auditors, are attached hereto as Exhibits A (i)
and A (ii).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
Page 17 of 102
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections entitled "Nomination and Election of Directors" and
"Remuneration of Directors and Officers" in Registrant's definitive Proxy
Statement to be furnished to shareholders in connection with the Annual Meeting
of Shareholders to be held on June 27, 1997 are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section entitled "Remuneration of Directors and Officers" in
Registrant's definitive Proxy Statement to be furnished to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 27, 1997
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The sections entitled "Voting Securities and Principal Holders
Thereof" and "Nomination and Election of Directors" in Registrant's definitive
Proxy Statement to be furnished to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 27, 1997 are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Transaction with Management and Other" in
Registrant's definitive Proxy Statement to be furnished to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 27, 1997
are incorporated herein by reference.
Page 18 of 102
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES.
(i) Consolidated Financial Statements and notes thereto as
of January 31, 1997 and 1996 and for each of the years
in the three year period ended January 31, 1997.
(ii) Consolidated Financial Statement Schedule.
II Valuation and Qualifying Accounts and Reserves
B. REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed for the fourth quarter
ended January 31, 1997.
C. EXHIBITS.
2 Agreement and plan of merger of National Technical
Systems, Inc., a Delaware corporation into National
Technical Systems, Inc., a California corporation
(formerly NTS Merger corporation).
3(i) Articles of incorporation of National Technical
Systems, Inc., a California corporation (formerly NTS
Merger corporation).
3(ii) Bylaws of National Technical Systems, Inc., a
California corporation (formerly NTS Merger
corporation).
10(a)1 Amendment No. Five dated October 29, 1996 to National
Technical Systems Credit Agreement between Bank of
America NT&SA and Sanwa Bank California dated
September 1, 1993.
10(b)1 Amendment No. Four dated April 26, 1996 to National
Technical Systems Credit Agreement between Bank of
America NT&SA and Sanwa Bank California dated
September 1, 1993. Filed as exhibit 10(a)1 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1996 and is incorporated herein
by reference.
Page 19 of 102
10(c)1 Amendment No. One dated July 6, 1994 to National
Technical Systems Credit Agreement between Bank of
American NT&SA and Sanwa Bank California dated
September 1, 1993 (filed as exhibit 10(b)1 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1995, and is incorporated
herein by reference thereto).
10(d)1 National Technical Systems Credit Agreement between
Bank of America NT&SA and Sanwa Bank California dated
September 1, 1993 (filed as exhibit 10.1 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1994, and is incorporated
herein by reference thereto).
10(a)2 First Amendment dated May 27, 1994 to National
Technical Systems Equipment Financing Agreement
between Bank of America NT&SA dated November 19, 1993
(filed as exhibit 10(a)2 to the Company's annual
report on form 10-K for the fiscal year ended January
31, 1995, and is incorporated herein by reference
thereto).
10(b)2 National Technical Systems Equipment Financing
Agreement between Bank of America NT&SA dated
November 19, 1993 (filed as exhibit 10.2 to the
Company's annual report on form 10-K for the fiscal
year ended January 31. 1994, and is incorporated
herein by reference thereto).
10.3 National Technical Systems Loan Agreement between
Merchants and Planters Bank, n.a., Camden, Arkansas
dated January 26, 1994 (filed as exhibit 10.3 to the
Company's annual report on form 10-K for the fiscal
year ended January 31, 1994, and is incorporated
herein by reference thereto).
10(a)4 Form of the Company's 1994 Stock Option Plan (filed
as Appendix B to the Company's Proxy Statement for
Annual Meeting of June 30, 1994, and is incorporated
herein by reference thereto).
10(b)4 Form of the Company's 1988 Stock Option Plan (filed
as Exhibit A to the Company's Proxy Statement for
Annual Meeting of June 18, 1988, and is incorporated
herein by reference thereto).
10.5 National Technical Systems Loan Agreement between
Sanwa Bank California dated January 31, 1995 (filed
as exhibit 10.5 to the Company's annual report on
form 10-K for the fiscal year ended January 31, 1995,
and is incorporated herein by reference thereto).
Page 20 of 102
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Undertakings incorporated by reference into Form S-8
Registration Statement No. 33-48211.
99.2 Undertakings incorporated by reference into Form S-8
Registration Statement No. 2-83778.
99.3 Undertakings incorporated by reference into Form S-8
Registration Statement No. 333-04905.
Page 21 of 102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
April 30, 1997 NATIONAL TECHNICAL SYSTEMS, INC.
By /s/ Jack Lin
-------------------------------------
Jack Lin, President
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated
on April 30, 1997.
/s/ Jack Lin /s/ Aloysius Casey
- --------------------------------------- -----------------------------------
Jack Lin, President Aloysius Casey, Chairman
(Principal Executive Officer of the Board
& Director)
/s/ Arthur Edelstein /s/ Ralph Clements
- --------------------------------------- -----------------------------------
Arthur Edelstein, Director Ralph F. Clements, Director
and Executive Vice President
/s/ Lloyd Blonder /s/ Harry Derbyshire
- --------------------------------------- -----------------------------------
Lloyd Blonder, Senior Vice President Harry Derbysire, Director
and Treasurer (Principal Financial
and Accounting Officer)
/s/ William Traw /s/ Robert Lin
- --------------------------------------- -----------------------------------
William Traw, Senior Vice President Robert Lin, Director
and Director
/s/ Richard Short /s/ William McGinnis
- --------------------------------------- -----------------------------------
Richard Short, Senior Vice President William McGinnis, Vice President
and Director and Director
Page 22 of 102
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Auditors
Financial Statements:
Consolidated Balance Sheets - January 31, 1997 and 1996
Consolidated Statements of Income - Years ended January 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity - Years ended
January 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended January 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Schedule Supporting Financial Statements: Schedule
--------
Valuation and Qualifying Accounts and Reserves II
All other schedules are omitted as inapplicable or because the required
information is contained in the financial statements or the notes thereto.
Page 23 of 102
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Technical Systems, Inc.
We have audited the accompanying consolidated balance sheets of National
Technical Systems, Inc. and Subsidiaries as of January 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Technical Systems, Inc. and Subsidiaries at January 31, 1997 and 1996
and the consolidated results of its operation and its cash flows for each of the
three years in the period ended January 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
------------------------------------
Woodland Hills, California
April 14, 1997
Page 24 of 102
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1997 AND 1996
ASSETS 1997 1996
------ ---- ----
CURRENT ASSETS:
Cash $ 1,204,000 $ 1,949,000
Accounts receivable, less allowance
for doubtful accounts of $703,000
in 1997 and $595,000 in 1996 12,292,000 10,453,000
Income taxes receivable - 33,000
Inventories 2,271,000 2,220,000
Deferred tax assets 440,000 435,000
Prepaid expenses 813,000 687,000
----------- ----------
Total current assets 17,020,000 15,777,000
Property, plant and equipment
Land 1,306,000 1,267,000
Buildings 7,780,000 7,491,000
Machinery and equipment 31,722,000 29,781,000
Leasehold improvements 3,601,000 3,416,000
----------- -----------
44,409,000 41,955,000
Less: accumulated depreciation 27,309,000 25,398,000
---------- ----------
Net property, plant and equipment 17,100,000 16,557,000
Property held for sale
544,000 544,000
Intangible assets, net 438,000 286,000
Other assets 194,000 339,000
----------- -----------
TOTAL ASSETS $35,296,000 $33,503,000
=========== ===========
Page 25 of 102
NTS TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 1997 and 1996
(CONTINUED)
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,395,000 $ 3,197,000
Accrued expenses 2,007,000 2,081,000
Income taxes payable 40,000 -
Current installments of long-term debt 1,878,000 1,747,000
--------- ---------
Total current liabilities 7,320,000 7,025,000
Long-term debt, excluding current
installments 9,183,000 9,090,000
Deferred tax liabilities 2,057,000 1,662,000
Minority interest 1,000 75,000
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock $.01 par value.
Authorized, 20,000,000 shares; issued
and outstanding 6,736,000 in 1997 and
6,674,000 in 1996 67,000 67,000
Additional paid-in capital 10,577,000 10,513,000
Retained earnings 6,091,000 5,071,000
---------- ----------
Total stockholders' equity 16,735,000 15,651,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,296,000 $33,503,000
========== ==========
See accompanying notes.
Page 26 of 102
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
Net revenues $ 47,069,000 $ 41,457,000 $ 37,380,000
Cost of sales 34,925,000 31,807,000 28,361,000
------------- ------------- -------------
Gross profit 12,144,000 9,650,000 9,019,000
Selling, general and
administrative expense 7,576,000 6,331,000 6,671,000
-------------- ------------- -------------
Operating income 4,568,000 3,319,000 2,348,000
Other income (expense):
Interest expense (1,021,000) (1,157,000) (1,032,000)
Other 43,000 30,000 ( 40,000)
------------- ------------- -------------
(978,000) (1,127,000) (1,072,000)
Income from continuing
operations before income
taxes and minority interest 3,590,000 2,192,000 1,276,000
Income taxes 1,561,000 972,000 574,000
------------- ----------- -------------
Income from continuing
operations before
minority interest 2,029,000 1,220,000 702,000
Minority interest 10,000 (55,000) -
------------- ------------ ------------
Income from continuing
operations 2,039,000 1,165,000 702,000
Loss from discontinued
operations, net of
income tax (684,000) (246,000) (137,000)
------------- ------------ ------------
Net income $ 1,355,000 $ 919,000 $ 565,000
============= ============ ============
Primary and fully diluted net
income (loss) per share:
Continuing operations $ 0.30 $ 0.17 $ 0.11
Discontinued operations (0.10) (0.04) (0.02)
------------- ------------ ------------
Total $ 0.20 $ 0.14 $ 0.09
============= ============ ============
Weighted average number of
common shares and common
stock equivalents outstanding 6,702,000 6,660,000 6,622,000
============ ========== ===========
See accompanying notes.
Page 27 of 102
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended January 31, 1997, 1996 and 1995
COMMON STOCK
------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ---------- -------- --------------
Balance at January 31, 1994 6,587,000 $ 66,000 $ 10,435,000 $ 3,852,000 $ 14,353,000
Net income - - - 565,000 565,000
Common stock exchanges for stock
options exercised (14,000) (1,000) (41,000) - (42,000)
Stock options exercised 76,000 1,000 86,000 - 87,000
Cash dividends - - - (132,000) (132,000)
--------- --------- ------------- ------------ -------------
Balance at January 31, 1995 6,649,000 66,000 10,480,000 4,285,000 14,831,000
Net income - - - 919,000 919,000
Stock issued in lieu of wages 12,000 1,000 18,000 - 19,000
Stock options exercised 13,000 - 15,000 - 15,000
Cash dividends - - - (133,000) (133,000)
--------- --------- ------------- ------------ -------------
Balance at January 31, 1996 6,674,000 67,000 10,513,000 5,071,000 15,651,000
Net income - - - 1,355,000 1,355,000
Stock options exercised 62,000 - 64,000 - 64,000
Cash dividends - - - (335,000) (335,000)
--------- --------- ------------- ------------ -------------
Balance at January 31, 1997 6,736,000 $ 67,000 $ 10,577,000 $ 6,091,000 $ 16,735,000
========= ======== ============= ============ ============
See accompanying notes.
Page 28 of 102
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended January 31, 1997, 1996 and 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVTIES: ---- ---- ----
Net income from continuing
operations $ 2,039,000 $ 1,165,000 $ 702,000
Adjustments to reconcile net
income to net cash provided
by operating activities: 2,328,000 2,401,000
Depreciation and amortization 2,204,000
Stock issued in lieu of compensation - 19,000 -
Provisions for losses on receivables 108,000 18,000 156,000
(Gain) loss on disposal of fixed
assets 2,000 (20,000) 7,000
Deferred income taxes 390,000 206,000 128,000
Changes in assets and liabilities:
Accounts receivable (1,947,000) (771,000) (309,000)
Inventories (51,000) (138,000) (258,000)
Prepaid expenses (126,000) 70,000 (185,000)
Other assets 145,000 94,000 (1,000)
Deferred revenues (45,000) - -
Accounts payable 198,000 331,000 23,000
Income taxes 73,000 (217,000) 213,000
Distributed earnings of affiliate (51,000) - -
Undistributed earnings of affiliate (23,000) 55,000 -
Accrued expenses (74,000) 454,000 320,000
------------ ------------ -----------
Net cash provided by continuing
operations 2,842,000 3,594,000 3,197,000
Loss from discontinued operations (684,000) (246,000) (137,000)
------------- ------------ -----------
Net cash provided by operating
activities 2,158,000 3,348,000 3,060,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (2,650,000) (1,735,000) (2,979,000)
Investment in new business (208,000) - -
Proceeds from sales of fixed assets 2,000 26,000 2,000
------------ ------------ -----------
Net cash used for investing
activities (2,856,000) (1,709,000) (2,977,000)
Page 29 of 102
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended January 31, 1997, 1996 and 1995
(CONTINUED)
1997 1996 1995
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and
long-term debt $ 2,673,000 $ 1,235,000 $ 2,327,000
Minority interest in
consolidated subsidiary - - 20,000
Proceeds from stock options
exercised 64,000 15,000 45,000
Cash dividends paid (335,000) (133,000) (132,000)
Repayments of current and
long-term debt (2,449,000) (2,503,000) (2,066,000)
------------ ----------- -----------
Net cash provided by (used for)
financing activities (47,000) (1,386,000) 194,000
------------- ----------- -----------
Net increase (decrease) in cash (745,000) 253,000 277,000
BEGINNING CASH BALANCE 1,949,000 1,696,000 1,419,000
------------ ------------ ------------
ENDING CASH BALANCE $ 1,204,000 $ 1,949,000 $ 1,696,000
============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash payments during the year for:
Interest $ 1,053,000 $ 1,196,000 $ 1,067,000
Income taxes 646,000 605,000 116,000
Cash received during the year for:
Income taxes 43,000 - -
Non-cash items:
Deferred revenue in connection
with acquisition of business $ 45,000 $ - $ -
Page 30 of 102
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of National
Technical Systems, Inc. (the "Company") and its subsidiaries. In
addition, the Company has consolidated NQA-USA, a 50% owned subsidiary
for which the distribution of profits and losses is 65% to the
Company, and 35% to the other shareholder. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
1996 and 1995 amounts have been reclassified to conform with 1997
presentation.
Risks and Uncertainties
-----------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Estimates made by the Company relate primarily to
the recognition of revenue under long-term contracts, valuation of
contract claims, the valuation of certain real estate held for sale and
estimates for future shutdown expenses related to discontinued operations.
Actual results could differ from those estimates.
Revenue Recognition
-------------------
Revenues are derived from development, qualification and production
testing and engineering services for commercial products, space systems
and military equipment of all types. The Company also provides a variety
of services to the nuclear power industry where the Company supplies
Nuclear Regulatory Commission (NRC) approved spare parts. In addition, the
Company provides technical staffing, qualification of safety related
systems and components, and ISO 9000 certification services.
Revenue from testing contracts, the Company's primary source of revenue,
is recorded upon completion of the contracts, which are generally
short-term, or identifiable contractual tasks. Revenue from contracts
which are cost-based are recorded as effort is expended. The Company
measures progress on long-term contracts on the basis of efforts-expended
(hours charged). Billings in excess of amounts earned are deferred. The
Company has entered into fixed-price contracts. Accounting for these
contracts involves considerable cost and revenue estimation. Such
estimates are reviewed periodically over the life of the contracts and any
changes in projected cost and revenue are appropriately reflected in
income. Any anticipated losses on contracts are charged to income when
identified. All selling, general and administrative costs are treated as
period costs and expensed as incurred.
Page 31 of 102
Inventories
-----------
Inventories consist of accumulated costs including direct labor, material
and overhead applicable to uncompleted contracts and are stated at actual
cost which is not in excess of estimated net realizable value.
Property Held for Sale
----------------------
The Company owns a parcel of land in San Diego County, California, which
was offered for sale in the fourth quarter of fiscal 1988. The property
was acquired for approximately $544,000. The Company anticipates that
sales proceeds will exceed the net book value of the property.
Property, Plant and Equipment
-----------------------------
Property, plant, and equipment is stated at actual cost and is depreciated
and amortized using the straight-line method over the following estimated
useful lives:
Buildings 30 to 35 years
Machinery and equipment 3 to 20 years
Leasehold improvements Terms of lease
The Company capitalizes certain machinery and equipment repair costs
which are irregular in occurrence. These costs are charged to expense
over a one-year period.
Intangible Assets
-----------------
Intangible assets consist primarily of the excess of cost over net assets
acquired and a covenant not to compete and are amortized over 5 to 20
years using the straight-line method. Accumulated amortization was
$2,364,000 as of January 31, 1997 and $2,251,000 as of January 31, 1996.
In accordance with Statement of Financial Accounting Standards No. 121
"Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
("SFAS No. 121"), which the Company adopted in the fourth quarter of
fiscal 1996, long-lived and certain identifiable intangible assets held
and used by the Company will be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The recoverability test will be performed on
undiscounted net cash flows of the entities acquired over the remaining
amortization period. Based on the Company's analysis under SFAS No. 121,
the Company believes that no impairment of the carrying value of its
long-lived assets, inclusive of goodwill and covenants, existed at
January 31, 1997.
Earnings Per Share
------------------
Primary income per common share is computed based on the weighted average
number of shares of common stock and common stock equivalents (stock
options) outstanding. The effect of stock options on the fully diluted
Page 32 of 102
calculations was either immaterial or antidilutive. In February 1997, the
Financial Accounting Standards Board issued Statement No. 128, "Earnings
per share", which is required to be adopted on December 31, 1997. At that
time, the Company will be required to change the method currently used to
compute earning per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. The impact of Statement 128 on
the calculation of earnings per share is not expected to be material.
(2) BUSINESS DISPOSITION
In January 1997, the Company, after considering the highly competitive and
unreliable nature of the business and the inability to operate at
profitable levels, elected to discontinue and abandon its Environmental
Services segment. As of January 31, 1997 the Environmental Services
segment had contract claims totaling $449,000, of which the Company had
recorded $200,000 included in inventory. The Company also has net accounts
receivable of $1,124,000 relative to completed contracts. Management of
the Company, on the advice of legal counsel, believes the amounts recorded
will be fully realized.
Results of operations related to the discontinued operations are as
follows:
1997 1996 1995
Net Revenues $ 1,683,000 $ 2,981,000 $ 537,000
------------ ------------- ---------
Loss from discontinued operations:
Environmental Services (1,093,000) (448,000) (249,000)
operating losses and other expenses (116,000) - -
Estimated future shutdown expenses 525,000 202,000 112,000
-------- -------- --------
Tax benefit from discontinued $ (684,000) $ (246,000) $ (137,000)
operations ========= ======== =========
(3) DEBT
Long-term debt consists of the following:
1997 1996
---------------------------
Term loans payable to banks (b) $ 2,183,000 $ 3,383,000
Notes payable (interest rates of 8.5% to 11.0%),
collateralized
by land and buildings, with a net book 2,006,000 1,947,000
value of $2,306, payable in
monthly installments of $25,000
through 2014
Secured notes payable (c) 1,472,000 1,507,000
Revolving lines of credit (a) 5,400,000 4,000,000
----------- -----------
Subtotal 11,061,000 10,837,000
Less current installments 1,878,000 1,747,000
----------- -----------
Total $ 9,183,000 $ 9,090,000
=========== ===========
Page 33 of 102
(a) The Company has lines of credit with Bank of America NT&SA and Sanwa Bank
California which provides an aggregate availability of $6,000,000. In
October 1996, the Registrant renegotiated its revolving lines of credit
extending them to August 1, 1998. The outstanding balance at January 31,
1997 and 1996 is $5,400,000 and $4,000,000, respectively, and is
reflected in the accompanying consolidated balance sheets as long-term.
The interest rate is at the banks' prime rate (8.25% at January 31, 1997)
plus 0.5%. The Company is required to maintain an average net collected
compensating balance equal to 5% of the average daily outstanding
principal borrowed on these lines. A commitment fee of approximately
0.5% is charged on the daily average balance of the unused portion of
these credit lines ($600,000 at January 31, 1997). Any balance
deficiencies and the commitment fees are payable on a quarterly basis.
In April 1997 the Company replaced a $1,500,000 equipment line of credit
with CIT Group Equipment Financing, which expired August 1996, with a
$2,000,000 equipment purchase line of credit with Sanwa Bank California,
which expires January 1998.
(b) Term loans payable to Bank of America NT&SA and Sanwa Bank California
have monthly principal payments of an aggregate of $83,333, and are due
through 1999. The interest rate is fixed at 7.37%. The Company paid a
one time facility fee of 1% of the $5,000,000 commitment upon closing in
December 1993. The Company has an additional $1,000,000 loan with Sanwa
Bank California with monthly principal payments of $16,667 that are due
through January 2000 at an interest rate of 0.75% over the bank's Prime
Rate. The Company paid a one-time facility fee of 0.75% of the
$1,000,000 commitment upon closing in January 1995.
The term loan and line of credit noted above require the maintenance of
certain working capital, debt-to-equity, earnings-to-expense and cash
flow ratios. Under these agreements, the Company may declare and pay cash
dividends up to 40% of net income. The Company may not make any
distribution other than dividends to its stockholders or repurchase any
of the Company's stock without the banks' prior approval. Except for the
$1,000,000 term loan, Bank of America NTSA and Sanwa Bank California
share 50% participation in these loan agreements. These loan agreements
are collateralized by substantially all of the Company's accounts
receivable and machinery and equipment other than those which serve as
collateral for the notes in (c) below.
(c) Notes payable (interest rates of 8.75% to 10.25%) to Bank of America
NT&SA and Merchants & Planters Bank are collateralized by equipment with
a net book value of $1,706,000 at January 31, 1997, payable in monthly
and quarterly installments which vary through 1999.
The weighted average interest rate on the Company's long-term debt is
approximately 8.85%.
Page 34 of 102
Maturities of long-term debt for five years subsequent to January 31, 1997
are as follows:
1998 $ 1,878,000
1999 6,735,000
2000 516,000
2001 195,000
2002 824,000
Thereafter 913,000
-----------
$11,061,000
In accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosure about Fair Value of Financial
Instruments", a reasonable estimate of fair value for the Company's fixed
rate debt was based on a discounted cash flow analysis. The carrying
amount of other debt, including borrowings under the Company's revolving
lines of credit, approximate its fair value.
The carrying amounts and estimated fair values of the Company's financial
instruments are:
1997 1997 1996 1996
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------- ----------- ----------- -----------
Term loans payable to banks $ 2,183,000 $ 2,370,000 $ 3,383,000 $ 3,572,000
Notes payable 2,006,000 1,722,000 1,947,000 1,740,000
Secured notes payable 1,472,000 1,207,000 1,507,000 1,519,000
Revolving lines of credit 5,400,000 5,400,000 4,000,000 4,000,000
Page 35 of 102
(4) INCOME TAXES
The provision for income tax expense from continuing operations consists
of:
Current: 1997 1996 1995
--------- --------- ---------
Federal $ 625,000 $ 388,000 $ 289,000
State 282,000 323,000 126,000
------- ------- -------
907,000 711,000 415,000
Deferred:
Federal 638,000 341,000 171,000
State 16,000 (80,000) (12,000)
-------- --------- ---------
654,000 261,000 159,000
------- ------- -------
Income tax expense $1,561,000 $ 972,000 $574,000
========= ======== =======
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the
federal statutory tax rate on income from continuing operations before
income taxes:
1997 1996 1995
--------- --------- ---------
Income from continuing operations
before income taxes $3,590,000 $2,192,000 $1,276,000
========= ========= =========
Federal income tax computed at $1,221,000 $746,000 $433,000
statutory rate
Amortization of goodwill 15,000 15,000 15,000
State income taxes, net of federal 197,000 152,000 84,000
benefits
Other 128,000 59,000 42,000
--------- ---------- ----------
Income tax expense $ 1,561,000 $ 972,000 $ 574,000
=========== ========== ==========
Page 36 of 102
Deferred income taxes on the consolidated balance sheets reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The primary components of the Company's
deferred tax assets and liabilities at January 31 were as follows:
1997 1997 1996 1996
-------- ----------- --------- -----------
DEFERRED TAX ASSET: CURRENT NON-CURRENT CURRENT NON-CURRENT
-------- ----------- --------- -----------
Bad debt reserve $ 190,000 $ - $ 234,000 $ -
Vacation accrual 138,000 - 130,000 -
AMT credit - 120,000 - 523,000
State taxes 60,000 33,000 34,000 -
Other 52,000 - 37,000 -
-------- ----------- --------- -----------
Total deferred tax asset 440,000 153,000 435,000 523,000
Valuation allowance - - - -
DEFERRED TAX LIABILITY:
Tax over book depreciation - (2,210,000) - (2,185,000)
-------- ----------- --------- -----------
NET DEFERRED TAX ASSET
(LIABILITY) $ 440,000 $(2,057,000) $ 435,000 $(1,662,000)
======== =========== ========= ===========
Page 37 of 102
(5) STOCK OPTIONS AND PENSION PLANS
The Company has a 1981 employee incentive stock option plan and a 1988
and 1994 stock option plans. The 1981 and 1988 plans have expired and no
new options may be granted thereunder. Under the 1994 plan officers, key
employees and non-employee directors and consultants may be granted
options to purchase shares of the Company's authorized but unissued
common stock.
Outstanding options under all plans are exercisable at 100% or more of
fair market (as determined by the Board of Directors) at the date of
grant. The options are contingent upon continued employment and are
exercisable, unless otherwise specified, on a cumulative basis of
one-fourth of the total shares each year, commencing one year from the
date of grant. Options currently expire five to ten years from the date
of grant. Proceeds received by the Company from the exercises are
credited to Common Stock and capital in excess of par value. Additional
information with respect to the option plans as of January 31, are as
follows:
1997 1996
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- ---------- -------- ---------
Beginning Balance 490,838 $ 1.95 532,866 $ 1.89
Grants 239,000 2.91 29,500 2.00
Exercises (61,511) 1.22 (12,489) 1.20
Canceled or expired (24,782) 1.83 (59,039) 1.61
------- ---- -------- ----
Ending balance 643,545 $ 2.38 490,838 $1.95
======= ==== ======= ====
Reserve for future
grants at year end 195,777 424,687
Exercisable 307,762 $ 2.09 285,916 $1.76
======= ===== ======== ====
The range of exercise prices for options outstanding at January 31, 1997
was $1.00 to $2.87. The range of exercise prices for options is wide due
primarily to the increasing price of the Company's stock over the period
of the grants.
Page 38 of 102
The following tables summarize information about options outstanding at
January 31, 1997:
Weighted Avg. Weighted Weighted
Range of Outstanding Remaining Avg. Avg.
exercise at January contract Exercise Number Exercise
prices 31, 1997 life in yrs. Price Exercisable Price
- -------------- ----------- ------------ -------- ----------- ---------
$1.00 to $2.00 141,232 1.2 $1.31 123,606 $1.28
$2.01 to $3.00 470,693 8.2 $2.65 123,969 $2.51
$3.01 to $4.00 31,620 4.7 $3.16 - -
These options will expire if not exercised at specific dates ranging from
March 1997 to September 2006. Prices for options exercised during the
two-year period ended January 1997 ranged from $1.00 to $2.50.
Page 39 of 102
The Company has elected to continue to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees", in accounting for its
employee stock options because, as discussed below, the alternative fair
value accounting provided under SFAS No. 123, "Accounting for Stock Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25 no
compensation expense is recognized in the Company's financial statements,
since the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined
as if the Company had accounted for its employee stock options granted
subsequent to January 31, 1995 under the fair value method of that
statement. The fair value of options granted in fiscal 1997 and 1996
reported below has been estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
---- ----
Expected life (in years) 5 5
Risk-free interest rate 6.14% 5.23%
Expected volatility 78% 78%
Expected dividend yield 86% 64%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of the traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair value of
its options. The weighted average estimated fair value of employee stock
options granted during 1997 and 1996 was $2.07 and $1.24 per share,
respectively. Had compensation cost for the Company's stock option plan
been determined consistent with the fair value method outlined in SFAS
No. 123, the impact on the Company's net income and earnings per share
would not have been material.
Page 40 of 102
The Company has an employee stock ownership plan covering all employees.
Contributions by the Company are at the discretion of the Board of
Directors. The Company did not make contributions in 1997, 1996 or 1995.
The Company offers a 401(k) profit sharing plan. The purpose of the plan
is to provide retirement benefits to all employees of the Company. The
Company's employees can contribute up to 10% of their salary into the
401(k) plan and the Company's Board of Directors, at its discretion, will
determine each year the amount of matching contribution the Company will
make. All employer contributions are allocated in the ratio that a
participant's compensation bears to total plan compensation. In 1997, the
Board of Directors of the Company approved a contribution to the 401(k)
profit sharing plan of $100,000 as compared to $50,000 approved in 1996.
The Company did not make a contribution in 1995.
(6) COMMITMENTS
The Company leases certain of its operating facilities and equipment under
operating leases which principally expire at various dates to fiscal year
2003. The leases are generally on a net-rent basis, whereby the Company
pays taxes, maintenance, insurance and other operating expenses.
Management expects that, in the normal course of business, leases that
expire will be renewed or replaced by other leases. Gross rental expense
was $786,000 in 1997, $602,000 in 1996, and $498,000 in 1995. Rental
income was $41,000 in 1996, $82,000 in 1995, and there was no rental
income in 1997.
At January 31, 1997, minimum rental payment obligations under operating
leases were as follows:
1998 $ 598,000
1999 432,000
2000 258,000
2001 197,000
2002 115,000
Thereafter 109,000
---------
$1,709,000
In May 1992, the Company entered into a five year lease agreement for
operating facilities located in Valencia, California. The lease payments
are based upon an escalating percentage of revenue at that facility
Page 41 of 102
for the five year period. The future lease payments are dependent upon
sales volume during the lease and as such are contingent rentals. Thus,
these future payments are excluded from the minimum rental payment
obligations disclosed above.
(7) ACCRUED EXPENSES
A summary of accrued expenses at January 31 is as follows:
1997 1996
----------- -----------
Compensation and employee benefits $ 1,177,000 $ 1,807,000
Other 830,000 274,000
--------- ---------
$ 2,007,000 $ 2,081,000
========= =========
8) CONTINGENCIES
The Company is, from time to time, the subject of claims and suits arising
out of matters occurring during the operation of the Company's business.
In the opinion of management, no claims or suits would materially affect
the financial position or the results of the operations or cash flows of
the Company.
(9) SEGMENT OF BUSINESS INFORMATION
Technical Services involve technical support and technical support
personnel to assist clients in a broad range of industries in the solving
of technical problems via analysis and testing of materials, components,
subsystems and systems.
Technical Staffing locates, recruits, and hires a wide variety of
technical personnel, engineers, drafters, designers, computer programmer
technicians and others and assigns them temporarily to clients either
individually for staff augmentation, or as members of a project team. The
Company assumes the normal responsibilities of an employer.
Registration Services is a third party registrar whose business is to
evaluate a supplier's quality systems for conformity to ISO 9000, the
international quality standard. The evaluations include an examination of
the companies quality policy, quality system documentation and quality
records. Part of the evaluation is a thorough on-site assessment to
determine whether each required quality system element is defined,
documented, deployed and consistently implemented and the required
documentation and records are current and available.
Page 42 of 102
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets consist of cash,
accounts receivable, investments in securities, real estate, oil drilling
programs, fixed assets not allocated to segments and net assets of
discontinued operations. Corporate general and administrative expenses
were allocated on the basis of sales, fixed assets and payroll expenses of
the respective segments. Interest expense is allocated to the segments
based on average borrowing rates and segment advances.
Direct and indirect revenues of Technical Services from federal agencies
were approximately $23,024,000 in 1997, $17,883,000 in 1996 and
$16,317,000 in 1995, consist principally of sales under subcontracts to
customers with government contracts. Two major customers represented
$1,758,000 and $1,060,000 of the 1997 Technical Staffing net revenues. One
major customer represented $2,021,000 of the 1996 net revenues, and two
major customers represented $1,922,000 and $1,930,000 of the 1995
Technical Staffing net revenues.
NTS performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral.
JANUARY 31, 1997
----------------
TECHNICAL TECHNICAL REGISTRATION DISCONTINUED
SERVICES STAFFING SERVICES OPERATIONS CORPORATE TOTAL
------------ ----------- ------------ ------------ ---------- -----------
Net revenues $37,597,000 $7,135,000 $ 2,337,000 $ - $ - $ 47,069,000
=========== ========== =========== ============ ========== ===========
Gross profit 9,502,000 1,798,000 844,000 - - 12,144,000
Selling, general and
administration expense 5,468,000 1,260,000 717,000 - 131,000 7,576,000
------------ --------- ----------- ------------ ----------- -----------
Operating income (loss) 4,034,000 538,000 127,000 - (131,000) 4,568,000
Other income (expense):
Interest expense, net (955,000) - 28,000 - (94,000) (1,021,000)
Other 41,000 1,000 - - 1,000 43,000
------------ --------- ----------- ------------ ----------- ------------
(914,000) 1,000 28,000 - (93,000) (978,000)
------------ --------- ----------- ------------ ----------- -------------
Income (loss) from
continuing operations
before income taxes $ 3,120,000 $ 539,000 $ 155,000 $ - $ (224,000) $ 3,590,000
=========== ========= =========== ============ =========== ============
Identifiable assets $25,653,000 $3,542,000 $ 879,000 $ 1,336,000 $3,886,000 $ 35,296,000
=========== ========= =========== ============ =========== ============
Capital expenditures $ 2,262,000 $ 58,000 $ 74,000 $ 1,000 $ 255,000 $ 2,650,000
=========== ========= =========== ============ =========== ============
Depreciation and
amortization $ 1,971,000 $ 150,000 $ 19,000 $ 5,000 $ 59,000 $ 2,204,000
=========== ========= =========== ============ =========== ============
Page 43 of 102
JANUARY 31, 1996
----------------
TECHNICAL TECHNICAL REGISTRATION DISCONTINUED
SERVICES STAFFING SERVICES OPERATIONS CORPORATE TOTAL
--------------------------------------------------------------------------------------
Net revenues $ 34,029,000 $ 5,310,000 $ 2,118,000 $ - $ - $ 41,457,000
============ ============ ============ ============ ============ ============
Gross profit 7,840,000 1,073,000 737,000 - - 9,650,000
Selling, general and
administrative expense 4,516,000 1,122,000 580,000 - 113,000 6,331,000
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) 3,324,000 (49,000) 157,000 - (113,000) 3,319,000
Other income (expense):
Interest expense, net (900,000) (161,000) - - (96,000) (1,157,000)
Other 84,000 (49,000) (6,000) - 1,000 30,000
------------ ------------ ------------- ------------ ------------- ------------
(816,000) (210,000) (6,000) - (95,000) (1,127,000)
------------ ------------ ------------- ------------ ------------- ------------
Income (loss) from
continuing operations
before income taxes $ 2,508,000 $ (259,000) $ 151,000 $ - $ (208,000) $ 2,192,000
============ ============= ============ ============= ============ ============
Identifiable assets $ 25,786,000 $ 2,627,000 $ 1,066,000 $ 1,641,000 $ 2,383,000 $ 33,503,000
============ ============= ============ ============= ============ ============
Capital expenditures $ 1,566,000 $ - $ 37,000 $ 10,000 $ 122,000 $ 1,735,000
============ ============= ============ ============= ============ ============
Depreciation and
amortization $ 1,975,000 $ 286,000 $ 7,000 $ 4,000 $ 56,000 $ 2,328,000
============ ============= ============ ============= ============ ============
Page 44 of 102
JANUARY 31, 1995
----------------
TECHNICAL TECHNICAL REGISTRATION DISCONTINUED
SERVICES STAFFING SERVICES OPERATIONS CORPORATE TOTAL
--------------------------------------------------------------------------------------
Net revenues $ 31,259,000 $ 4,670,000 $ 1,451,000 $ - $ - $ 37,380,000
============ ============ ============ ============ ============ ============
Gross profit 7,326,000 1,089,000 604,000 - - 9,019,000
Selling, general and
administrative expense 5,078,000 1,104,000 390,000 - 99,000 6,671,000
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) 2,248,000 (15,000) 214,000 - (99,000) 2,348,000
Other income (expense):
Interest expense, net (817,000) (74,000) - - (141,000) (1,032,000)
Other 21,000 (61,000) - - - (40,000)
------------ ------------ ------------- ------------ ------------- ------------
(796,000) (135,000) - - (141,000) (1,072,000)
------------ ------------ ------------- ------------ ------------- ------------
Income (loss) from
continuing operations
before income taxes $ 1,452,000 $ (150,000) $ 214,000 $ - $ (240,000) $ 1,276,000
============ ============= ============ ============= ============ ============
Identifiable assets $ 27,952,000 $ 2,208,000 $ 546,000 $ 551,000 $ 1,831,000 $ 33,088,000
============ ============= ============ ============= ============ ============
Capital expenditures $ 2,743,000 $ 6,000 $ 8,000 $ 9,000 $ 213,000 $ 2,979,000
============ ============= ============ ============= ============ ============
Depreciation and
amortization $ 2,029,000 $ 301,000 $ 3,000 $ 1,000 $ 67,000 $ 2,401,000
============ ============= ============ ============= ============ ============
Page 45 of 102
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
THREE MONTHS ENDED
------------------
1997 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- ----------------------------------------------------------------------------------------------------------------
Net revenues $ 11,149,000 $ 11,400,000 $ 12,308,000 12,212,000
Gross profit 2,720,000 2,801,000 3,046,000 3,577,000
Income from continuing operations 353,000 395,000 500,000 791,000
Loss from discontinued operations (15,000) (49,000) (145,000) (475,000)
Net income 338,000 346,000 355,000 316,000
Earnings per share from continuing
operations
0.05 0.06 0.07 0.12
Earnings per share from discontinued
operations 0.00 (0.01) (0.02) (0.07)
Net income per share* $ 0.05 $ 0.05 $ 0.05 0.05
Weighted average number of common
shares outstanding 6,676,000 6,704,000 6,710,000 6,719,000
=========== =========== =========== ==========
Page 46 of 102
THREE MONTHS ENDED
------------------
1996 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
- ----------------------------------------------------------------------------------------------------------------
Net revenues $ 9,247,000 10,261,000 11,528,000 10,421,000
Gross profit 1,987,000 2,404,000 2,781,000 2,478,000
Income (loss) from continuing operations
(5,000) 280,000 441,000 449,000
Income (loss) from discontinued
operations 19,000 8,000 (98,000) (175,000)
Net income 14,000 288,000 343,000 274,000
Earnings per share from continuing
operations
0.00 0.04 0.07 0.07
Earnings per share from discontinued
operations 0.00 0.00 (0.01) (0.03)
Net income per share* $ 0.00 $ 0.04 0.05 0.04
Weighted average number of common
shares outstanding 6,651,000 6,652,000 6,661,000 6,674,000
=========== =========== =========== ==========
* Per share data may not always add to the total for the year because each figure is independently calculated.
Page 47 of 102
SCHEDULE II
NATIONAL TECHNICAL SYSTEMS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended January 31, 1997, 1996 and 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Description Balance at beginning Additions - charged Deductions - describe Balance at end
of period to costs and expenses (a) of period
- ---------------------------------------------------------------------------------------------------------------
Allowance for doubtful
accounts receivable:
1997 $ 595,000 $ 349,000 $ (241,000) $ 703,000
========= ========= ============ =========
1996 $ 577,000 $ 319,000 $ (301,000) $ 595,000
========= ========= ============ =========
1995 $ 417,000 $ 156,000 $ 4,000 $ 577,000
========= ========= ============ =========
(a) Write-off of uncollectible accounts receivable, net of recoveries.
Page 48 of 102
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description Page
- -------------------------------------------------------------------------------
Exhibit 2 Agreement and plan of merger of National 50
Technical Systems, Inc., a California
corporation (formerly NTS Merger corporation)
Exhibit 3(i) Articles of incorporation of National
Technical Systems, Inc., a California
corporation (formerly NTS Merger corporation) 56
Exhibit 3(ii) Bylaws Of National Technical Systems, Inc., 58
a California corporation (formerly NTS Merger
Corporation
Exhibit 10(a)1 Amendment No. Five dated October 29, 1996 to 88
National Technical Systems Credit Agreement
between Bank of America NT&SA and Sanwa Bank
California dated September 1, 1993
Exhibit 21 Subsidiaries of the Registrant 91
Exhibit 23.1 Consent of Ernst & Young LLP,
Independent Auditors 92
Exhibit 99.1 Undertakings incorporated by reference into 93
Form S-8 Registration Statement No. 33-48211
Exhibit 99.2 Undertakings incorporated by reference into 96
Form 2-83778
Exhibit 99.3 Undertakings incorporated by reference into 99
Form S-8 Registration Statement No. 333-04905
Exhibit 27 Financial Data Schedule 102
Page 49 of 102
EXHIBIT 2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement"), is
entered into as of January 28, 1996, between NATIONAL TECHNICAL SYSTEMS, INC., a
Delaware corporation ("NTS Delaware"), and NTS MERGER CORPORATION, a California
corporation ("NTS California"). NTS Delaware and NTS California are sometimes
referred to herein as the "Constituent Corporations."
The authorized capital stock of NTS Delaware consists of 7,500,000
shares of Common Stock, par value, $.01 per share. The authorized capital stock
of NTS California consists of 7,500,000 shares of Common Stock, without par
value.
The directors of the Constituent Corporations deem it advisable and
to the advantage of these corporations that NTS Delaware merge with and into NTS
California upon the terms and conditions contained herein.
It is intended that the merger described in this Merger Agreement
shall constitute a tax free reorganization within the meaning of section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, the parties hereby adopt the plan of merger
encompassed by this Merger Agreement and hereby agree that NTS Delaware shall
merge into NTS California as herein provided.
SECTION 1.
TERMS AND CONDITIONS
1.1 Merger. Subject to compliance with all applicable laws and to
the terms and conditions of this Merger Agreement, NTS Delaware shall be merged
with and into NTS California, and NTS California shall be the surviving
corporation (the "Surviving Corporation"), effective as of the date when this
Merger Agreement is filed with the Secretary of State of the State of
California (the "Effective Date").
1.2 Succession. On the Effective Date, NTS California shall succeed
to all of the rights, privileges, powers and property, including, without
limitation, all rights, privileges, franchises, patents, trademarks, licenses,
registrations and other assets of every kind and description, of NTS Delaware.
All corporate acts, plans, policies, agreements, arrangements, approvals and
authorizations of NTS Delaware, its stockholders, Board of Directors, officers
and agents which were valid and effective immediately prior to the
ENDORSED FILED
in the office of the Secretary of State
of the State of California
JAN 31 1997
BILL JONES, Secretary of State
Page 50 of 102
Effective Date shall be taken for all purposes as the acts, plans, policies,
agreements, arrangements, approvals and authorizations of NTS California and
shall be as effective and binding thereon as the same were with respect to NTS
Delaware.
1.3 Stock of NTS Delaware and NTS California. Upon the Effective
Date, by virtue of the merger and without any further action on the part of the
Constituent Corporations or their shareholders, each share of Common Stock of
NTS Delaware issued and outstanding immediately prior to the Effective Date
shall be changed and converted into and become one fully paid and nonassessable
share of the Common Stock of NTS California. There will be no shares of capital
stock of NTS California issued and outstanding immediately prior to the
Effective Date.
1.4 Stock Certificates. On and after the Effective Date, all of the
outstanding certificates that prior to that time represented shares of the
Common Stock of NTS Delaware shall be deemed for all purposes to evidence
ownership of and to represent the shares of NTS California into which the shares
of NTS Delaware represented by such certificates have been converted as herein
provided and shall be so registered on the books and records of NTS California
or its transfer agents. The registered owner of any such outstanding stock
certificate shall, until such certificate shall have been surrendered for
transfer or conversion or otherwise accounted for to NTS California or its
transfer agent, have and be entitled to exercise any voting and other rights
with respect to and to receive any dividend and other distributions upon the
shares of NTS California evidenced by such outstanding certificate as provided
above.
SECTION 2.
CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 Certificate of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of NTS California as in effect immediately prior to the
Effective Date shall remain the Articles of Incorporation and Bylaws of the
Surviving Corporation after the Effective Date, except that Article I shall be
amended to read as follows:
"The name of this corporation is National Technical
Systems, Inc."
2.2 Directors and Officers. The directors and officers of NTS
California immediately prior to the Effective Date shall remain the directors
and officers of the Surviving Corporation after the Effective Date until such
time as successors are duly elected in accordance with the Bylaws of
the Surviving Corporation and any applicable laws.
Page 51 of 102
SECTION 3.
MISCELLANEOUS
3.1 Further Assurances. From time to time, as and when required by
NTS California or by its successors and assigns, there shall be executed and
delivered on behalf of NTS Delaware such deeds and other instruments, and there
shall be taken or caused to be taken by it all such further and other action, as
shall be appropriate and necessary in order to vest, perfect or confirm, of
record or otherwise, in NTS California the title to and possession of all the
property, interests, assets, rights, privileges, immunities, powers, franchises
and authority of NTS Delaware and otherwise to carry out the purposes of this
Merger Agreement, and the officers and directors of NTS California are fully
authorized in the name and on behalf of NTS Delaware or otherwise to take any
and all such action and to execute and deliver any and all such deeds and other
instruments.
3.2 Amendment. At any time before the Effective Date, this Merger
Agreement may be amended in any manner as may be determined in the judgment of
the respective Boards of Directors of NTS California and NTS Delaware to be
necessary, desirable or expedient in order to clarify the intention of the
parties hereto or to effect or facilitate the purpose and intent of this Merger
Agreement, except that any material changes shall be approved by the
shareholders.
3.3 Abandonment. At any time before the Effective Date, this Merger
Agreement may be terminated and the merger may be abandoned by the Board of
Directors of either NTS Delaware or NTS California, notwithstanding the approval
of this Merger Agreement by the stockholders of NTS Delaware, or the
consummation of the merger may be deferred for a reasonable period if, in either
case, in the opinion of the Board of Directors of either NTS Delaware or NTS
California, such action would be in the best interests of such corporation,
including, without limitation, the failure by the Constituent Corporations to
obtain (i) any and all consents or approvals from any governmental agency having
jurisdiction and other third parties that are required for the lawful
consummation of the merger and (ii) the approval by the requisite vote of the
stockholders of NTS Delaware in accordance with Delaware law.
3.4 Governing Law. This Merger Agreement shall be
governed by and construed in accordance with the internal laws
of the State of California.
Page 52 of 102
IN WITNESS WHEREOF, this Merger Agreement, having first been duly
approved by the Boards of Directors of NTS Delaware and NTS California, is
hereby executed on behalf of each said corporation and attested by their
respective officers thereunto duly authorized.
NATIONAL TECHNICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Jack Lin
---------------------------------
Jack Lin
President
By /s/ Harold Lipchik
---------------------------------
Harold Lipchik
Secretary
NTS MERGER CORPORATION,
a California corporation
By /s/ Jack Lin
---------------------------------
Jack Lin
President
By /s/ Harold Lipchik
---------------------------------
Harold Lipchik
Secretary
Page 53 of 102
OFFICERS' CERTIFICATE
OF
NTS MERGER CORPORATION
Jack Lin and Harold Lipchik certify that:
1. They are the President and Secretary, respectively, of
NTS Merger Corporation, a California corporation.
2. The Agreement and Plan of Merger in the form attached was
duly approved by the board of directors of the corporation.
3. There are no outstanding shares of the corporation.
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.
/s/ Jack Lin
---------------------------------
Jack Lin, President
/s/ Harold Lipchik
---------------------------------
Harold Lipchik, Secretary
Page 54 of 102
OFFICERS' CERTIFICATE
OF
NATIONAL TECHNICAL SYSTEMS, INC.
Jack Lin and Harold Lipchik certify that:
1. They are the President and Secretary of National Technical
Systems, Inc., a Delaware corporation.
2. That the Agreement and Plan of Merger in the form attached
hereto was approved by the board of directors and shareholders of the
corporation.
3. The total number of outstanding shares of each class of the
corporation entitled to vote on the merger is as follows:
Class Total Number of Shares Entitled
to Vote
Common Shares 6,702,990
4. The total number of votes approving the merger was 4,385,401
shares voting for the merger representing 65.4% of the shares entitled to vote,
said vote exceeded the required vote which was a majority of the outstanding
shares.
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.
/s/ Jack Lin
---------------------------------
Jack Lin, President
/s/ Harold Lipchik
---------------------------------
Harold Lipchik, Secretary
Page 55 of 102
EXHIBIT 3(i)
ENDORSED
FILED
In the office of the Secretary of State
of the State of California
May 29 1996
/s/ BILL JONES
BILL JONES, Secretary of State
ARTICLES OF INCORPORATION
OF
NTS MERGER CORPORATION
I.
The name of this corporation is:
NTS MERGER CORPORATION
II.
The purpose of this corporation is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
The name and address in the State of California of this corporation's initial
agent for service of process is:
Mr. Lloyd Blonder
24007 Ventura Blvd.
Calabasas, California 91503
IV.
This corporation is authorized to issue only one class of shares; and the total
number of shares which this corporation is authorized to issue is twenty million
(20,000,000).
Page 56 of 102
V.
The liability of the directors of this corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law.
VI.
This corporation is authorized to provide indemnification of agents (as defined
in Section 317 of the Corporations Code) to the fullest extent permissible under
California law.
VII.
Any repeal or modification of the provisions of Articles V or VI or this Article
VII by the shareholders of the corporation shall not adversely affect any right
or protection of a director or agent of this corporation existing at the time of
such repeal or modification.
Dated: May 29, 1996.
/s/ James J. Slaby
---------------------------------
James J. Slaby, Incorporator
Page 57 of 102
EXHIBIT 3(ii)
BYLAWS
OF
NTS MERGER CORPORATION
ARTICLE I
OFFICES
Section 1.1 PRINCIPAL OFFICES. The board of directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is
located outside this state, and the corporation has one or more business offices
in this state, the board of directors shall likewise fix and designate a
principal business office in the State of California.
Section 1.2 OTHER OFFICES. The board of directors may at any time
establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1 PLACE OF MEETINGS. Meetings of share holders shall be
held at any place within or outside the State of California designated by the
board of directors. In the absence of any such designation, shareholders'
meetings shall be held at the principal executive office of the corporation.
Section 2.2 ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of
shareholders shall be held each year at a time designated by the board of
directors. At each annual meeting, directors shall be elected and any other
proper business may be transacted.
Section 2.3 SPECIAL MEETINGS. A special meeting of shareholders may
be called at any time by the board of directors, or by the chairman of the
board, or by the president, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than 10% of the votes at any such meeting.
If a special meeting is called by any person or persons other than
the board of directors, the request shall be in writing, specifying the time of
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such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, any
vice president or the secretary of the corporation. The officer receiving such
request forthwith shall cause notice to be given to the shareholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing or affecting the time when a meeting
of shareholders called by action of the board of directors may be held.
Section 2.4 NOTICE OF SHAREHOLDERS' MEETINGS. All notices of
meetings of shareholders shall be sent or otherwise given in accordance with
Section 2.5 of this Article II not less than ten (10) nor more than sixty (60)
days before the date of the meeting being noticed. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the general nature of the business to be transacted, or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the shareholders. The notice
of any meeting at which directors are to be elected shall include the name of
any nominee or nominees which, at the time of the notice, the board of directors
intends to present for election.
If action is proposed to be taken at any meeting for approval of (i)
a contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the articles of incorporation, pursuant to Section 902 of such
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
such Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of such Code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of
such Code, the notice shall also state the general nature of such proposal.
Section 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of
any meeting of shareholders shall be given either personally or by first-class
mail or telegraphic or other written communication, charges prepaid, addressed
to the shareholder at the address of such shareholder appearing on the
books of the corporation or given by the shareholder to the corporation for the
purpose of notice. If no such address appears on the corporation's books or is
given, notice shall be deemed to have been given if sent by mail or telegram to
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the corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where this office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at such address, all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available to the shareholder
upon written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of such notice.
An affidavit of the mailing or other means of giving any notice of
any shareholders' meeting shall be executed by the secretary, assistant
secretary or any transfer agent of the corporation giving such notice, and shall
be filed and maintained in the minute book of the corporation.
Section 2.6 QUORUM. The presence in person or by proxy of the
holders of a majority of the shares entitled to vote at a meeting of
shareholders shall constitute a quorum for the transaction of business. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
Section 2.7 ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of the majority of the shares represented at such
meeting, either in person or by proxy, but in the absence of a quorum, no other
business may be transacted at such meeting, except as provided in Section 2.6 of
this Article II.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days
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from the date set for the original meeting, in which case the board of directors
shall set a new record date. Notice of any such adjourned meeting shall be given
to each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 2.4 and 2.5 of this Article II. At
any adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
Section 2.8 VOTING. The shareholders entitled to vote at any meeting
of shareholders shall be determined in accordance with the provisions of Section
2.11 of this Article II, subject to the provisions of Sections 702 to 704,
inclusive, of the Corporations Code of California (relating to voting shares
held by a fiduciary, in the name of a corporation or in joint ownership). Such
vote may be by voice vote or by ballot; provided, however, that all elections
for directors must be by ballot upon demand by a shareholder at any election and
before the voting begins. Any shareholder entitled to vote on any matter (other
than elections of directors) may vote part of the shares in favor of the
proposal and refrain from voting the remaining shares or vote them against the
proposal, but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares such shareholder is
entitled to vote. Except as provided in Section 2.6 of this Article II, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or voting by classes is
required by the Corporations Code of California or the articles of
incorporation.
At a shareholders' meeting involving the election of directors, no
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) unless such candidate or candidates' names have been placed
in nomination prior to the voting and a shareholder has given notice at the
meeting prior to the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such notice, then every shareholder entitled to vote
may cumulate such shareholder's votes for candidates in nomination and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such shareholder's shares are
normally entitled, or distribute the shareholder's votes on the same principle
among any or all of the candidates, as the shareholder thinks fit. The
candidates receiving the highest number of affirmative votes up to the number
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of directors to be elected, shall be elected. Votes against a director and votes
withheld shall have no legal effect.
Section 2.9 WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions at any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to a holding of the meeting, or an approval of the minutes
thereof. The waiver of notice, consent to the holding of the meeting or approval
of the minutes thereof need not specify either the business to be transacted or
the purpose of any annual or special meeting of shareholders, except that if
action is taken or proposed to be taken for approval of any of those matters
specified in the second paragraph of Section 2.4 of this Article II, the waiver
of notice, consent to the holding of the meeting or approval of the minutes
thereof shall state the general nature of such proposal. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver
of notice of and presence at such meeting, except when the person objects, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened, and except that attendance at a
meeting is not a waiver of any right to object to the consideration of matters
required by the Corporations Code of California to be included in the notice but
which were not included in the notice, if such objection is expressly made at
the meeting.
Section 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING. Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. In the case of election
of directors, such consent shall be effective only if signed by the holders of
all outstanding shares entitled to vote for the election of directors; provided,
however, that a director may be elected at any time to fill a vacancy not filled
by the directors by the written consent of the holders of a majority of the
outstanding shares entitled to vote for the election of directors. All such
consents shall be filed with the secretary of the corporation and shall be
Page 62 of 102
maintained in the corporate records. Any shareholder giving a written consent,
or the shareholder's proxy holders, or a transferee of the shares or a personal
representative of the shareholder or their respective proxy holders, may revoke
the consent by a writing received by the secretary of the corporation prior to
the time that written consents of the number of shares required to authorize the
proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
Such notice shall be given in the manner specified in Section 2.5 of this
Article II. In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest, pursuant to Section 310 of
the Corporations Code of California, (ii) indemnification of agents of the
corporation, pursuant to Section 317 of such Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of such Code, and (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of such Code, such notice shall be given at
least ten (10) days before the consummation of any such action authorized by any
such approval.
Section 2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days prior to the date
of any such meeting nor more than sixty (60) days prior to such action without a
meeting, and in such case only shareholders at the close of business on the
record date so fixed are entitled to notice and to vote or to give consents, as
the case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date fixed as aforesaid, except as otherwise
provided in the Corporations Code of California.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the
business day next preceding the day on which the meeting is held.
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(b) The record date for determining shareholders entitled to
give consent to corporate action in writing without a meeting, (i) when no
prior action by the board has been taken, shall be the day on which the
first written consent is given, or (ii) when prior action of the board has
been taken, shall be at the close of business on the day on which the
board adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.
Section 2.12 PROXIES. Every person entitled to vote for directors or
on any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, prior to the vote pursuant thereto, by a
writing delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by the person executing the prior proxy and presented
to the meeting, or as to any meeting by attendance at such meeting and voting in
person by the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of such proxy is received by the corporation before the
vote pursuant thereto is counted; provided, however, that no such proxy shall be
valid after the expiration of eleven (11) months from the date of such proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Section 705(e) and (f) of the Corporations Code of California.
Section 2.13 INSPECTORS OF ELECTION. Before any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office to act as inspectors of election at the meeting or its adjournment.
If no inspectors of election are so appointed, the chairman of the meeting may,
and on the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may,
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and upon the request of any shareholder or a shareholder's proxy shall, appoint
a person to fill such vacancy.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions
in any way arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
Section 3.1 POWERS. Subject to the provisions of the Corporations
Code of California Law and any limitations in the articles of incorporation and
these bylaws relating to action required to be approved by the shareholders or
by the outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction of
the board of directors.
Without prejudice to such general powers, but subject to the same
limitations, it is hereby expressly declared that the directors shall have the
power and authority to:
(a) Select and remove all officers, agents, and employees of
the corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the articles of incorporation or these bylaws,
fix their compensation, and require from them security for faithful
service.
(b) Change the principal executive office or the
principal business office in the State of California
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from one location to another; cause the corporation to be qualified to do
business in any other state, territory, dependency, or foreign country and
conduct business within or outside the State of California; designate any
place within or without the State of California for the holding of any
shareholders' meeting, or meetings, including annual meetings; adopt, make
and use a corporate seal, and prescribe the forms of certificates of
stock, and alter the form of such seal and of such certificates from time
to time as in their judgment they may deem best, provided that such forms
shall at all times comply with the provisions of law.
(c) Authorize the issuance of shares of stock of the
corporation from time to time, upon such terms as may be lawful, in
consideration of money paid, labor done or services actually rendered,
debts or securities cancelled or tangible or intangible property actually
received.
(d) Borrow money and incur indebtedness for the purposes of
the corporation, and cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations, or other evidences of debt and
securities therefor.
Section 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The authorized
number of directors shall be NINE (9) until changed by a duly adopted amendment
to the articles of incorporation or by an amendment to this bylaw adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
of directors to a number less than five (5) cannot be adopted if the votes cast
against its adoption at a meeting, or the shares not consenting in the case of
action by written consent, are equal to more than 16-2/3% of the outstanding
shares entitled to vote.
Section 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS.
The directors shall be divided into three classes, designated Class
I, Class II and Class III. Each class shall consist of three directors. The term
of the initial Class I directors shall terminate on the date of the 1997 annual
meeting of shareholders; the term of the initial Class II directors shall
terminate on the date of the 1998 annual meeting of shareholders; and the term
of the initial Class III directors shall terminate on the date of the 1999
annual meeting of shareholders. At each annual meeting of shareholders beginning
in 1997, successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term. If the number of directors is
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changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional directors of any class elected to fill a vacancy resulting
from an increase in such a class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
Section 3.4 VACANCIES. Any vacancy on the Board of Directors,
howsoever resulting, may be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director. Any
director elected to fill a vacancy shall hold office for a term that shall
coincide with the term of the class to which such director shall have been
elected.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the case of the death, resignation or removal of any director, or if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors be increased, or if the
shareholders fail at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
The shareholders may elect a director or directors at any time to
fill any vacancy or vacancies not filled by the directors, but any such election
by written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation of a director is effective at a future time,
the board of directors may elect a successor to take office when the
resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
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Section 3.5 PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular
meetings of the board of directors may be held at any place within or without
the State of California that has been designated from time to time by resolution
of the board. In the absence of such designation, regular meetings shall be held
at the principal executive office of the corporation. Special meetings of the
board shall be held at any place within or without the State of California that
has been designated in the notice of the meeting or, if not stated in the notice
or there is no notice, at the principal executive office of the corporation. Any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in such meeting
can hear one another, and all such directors shall be deemed to be present in
person at such meeting.
Section 3.6 ANNUAL MEETING. Immediately following each annual
meeting of shareholders, the board of directors shall hold a regular meeting for
the purpose of organization, any desired election of officers and the
transaction of other business. Notice of this meeting shall not be required.
Section 3.7 OTHER REGULAR MEETINGS. Other regular meetings of the
board of directors shall be held without call at such time as shall from time to
time be fixed by the board of directors. Such regular meetings may be held
without notice.
Section 3.8 SPECIAL MEETINGS. Special meetings of the board of
directors for any purpose or purposes may be called at any time by the chairman
of the board or the president or any vice president or the secretary or any two
directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges pre-paid, addressed to each director at his or her address as
it is shown upon the records of the corporation. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours prior to
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated to either the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
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Section 3.9 QUORUM. A majority of the authorized number of directors
shall constitute a quorum for the transaction of business, except to adjourn as
hereinafter provided. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Corporations Code of California (approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 311 of that Code (appointment of committees), and Section
317(e) of that Code (indemnification of directors). A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
Section 3.10 WAIVER OF NOTICE. Notice of a meeting need not be given
to any director who signs a waiver of notice or a consent to holding the meeting
or an approval of the minutes thereof, whether before or after the meeting, or
who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 3.11 ADJOURNMENT. A majority of the directors present,
whether or not constituting a quorum, may adjourn any meeting to another time
and place.
Section 3.12 NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four hours, in which case notice of such time and place
shall be given prior to the time of the adjourned meeting, in the manner
specified in Section 3.8 of this Article III, to the directors who were not
present at the time of the adjournment.
Section 3.13 ACTION WITHOUT MEETING. Any action required or
permitted to be taken by the board of directors may be taken without a meeting,
if all members of the board shall individually or collectively consent in
writing to such action. Such action by written consent shall have the same force
and effect as a unanimous vote of the board of directors. Such written consent
or consents shall be filed with the minutes of the proceedings of the board.
Section 3.14 FEES AND COMPENSATION OF DIRECTORS. Directors and
members of committees may receive such compensation, if any, for their
services, and such reimbursement of expenses, as may be fixed or determined by
resolution of the board of directors. Nothing contained herein shall be
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construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee, or otherwise, and receiving
compensation for such services.
ARTICLE IV
COMMITTEES
Section 4.1 COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board. The board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any such committee, to the extent provided in the resolution of
the board, shall have all the authority of the board, except with respect to:
(a) the approval of any action which, under the Corporations
Code of California, also requires share holders' approval or approval of
the outstanding shares;
(b) the filling of vacancies on the board of
directors or in any committee;
(c) the fixing of compensation of the directors
for serving on the board or on any committee;
(d) the amendment or repeal of bylaws or the
adoption of new bylaws;
(e) the amendment or repeal of any resolution
of the board of directors which by its express terms is
not so amendable or repealable;
(f) a distribution to the shareholders of the
corporation, except at a rate or in a periodic amount or
within a price range determined by the board of directors;
or
(g) the appointment of any other committees of
the board of directors or the members thereof.
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Section 4.2 MEETINGS AND ACTION OF COMMITTEES. Meetings and action
of committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Sections 3.5 (place of meetings), 3.7
(regular meetings), 3.8 (special meetings and notice), 3.9 (quorum), 3.10
(waiver of notice), 3.11 (adjournment), 3.12 (notice of adjournment) and 3.13
(action without meeting), with such changes in the context of those bylaws as
are necessary to substitute the committee and its members for the board of
directors and its members, except that the time of regular meetings of
committees may be determined by resolution of the board of directors as well as
by resolution of the committee; special meetings of committees may also be
called by resolution of the board of directors; and notice of special meetings
of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
ARTICLE V
OFFICERS
Section 5.1 OFFICERS. The officers of the corporation shall be a
president, a secretary and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice-presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 5.3 of this Article V. Any number of offices may
be held by the same person.
Section 5.2 ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 5.3 or Section 5.5 of this Article V, shall be chosen by the board of
directors, and each shall serve at the pleasure of the board, subject to the
rights, if any, of an officer under any contract of employment.
Section 5.3 SUBORDINATE OFFICERS, ETC. The board of directors may
appoint, and may empower the president to appoint, such other officers as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as are provided in
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the bylaws or as the board of directors may from time to time
determine.
Section 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the
rights, if any, of an officer under any contract of employment, any officer may
be removed, either with or without cause, by the board of directors, at any
regular or special meeting thereof, or, except in case of an officer chosen by
the board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is with out prejudice to the rights, if
any, of the corporation under any contract to which the officer is a party.
Section 5.5 VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to such
office.
Section 5.6 CHAIRMAN OF THE BOARD. The chairman of the board, if
such an officer be elected, shall, if present, preside at all meetings of the
board of directors and exercise and perform such other powers and duties as may
be from time to time assigned to him by the board of directors or prescribed by
the bylaws. If there is no president, the chairman of the board shall in
addition be the chief executive officer of the corporation and shall have the
powers and duties prescribed in Section 5.7 of this Article V.
Section 5.7 PRESIDENT. Subject to such supervisory powers, if any,
as may be given by the board of directors to the chairman of the board, if there
be such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and the officers of
the corporation. He shall preside at all meetings of the shareholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or the bylaws.
Section 5.8 VICE PRESIDENTS. In the absence or disability of
the president, the vice presidents, if any, in
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order of their rank as fixed by the board of directors or, if not ranked, a vice
president designated by the board of directors, shall perform all the duties of
the president, and when so acting shall have all the powers of, and be subject
to all restrictions upon, the president. The vice presidents shall have such
other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors or the bylaws, the
president or the chairman of the board.
Section 5.9 SECRETARY. The secretary shall keep or cause to be kept,
at the principal executive office or such other place as the board of directors
may order, a book of minutes of all meetings and actions of directors,
committees of directors and shareholders, with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice thereof
given, the names of those present at directors' and committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the shareholders and of the board of directors required by the
bylaws or by law to be given, and he shall keep the seal of the corporation, if
one be adopted, in safe custody, and shall have such other powers and perform
such other duties as may be prescribed by the board of directors or by the
bylaws.
Section 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer
shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of accounts of the properties and business
transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings and shares.
The books of account shall at all reasonable times be open to inspection by any
director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors. He shall disburse
the funds of the corporation as may be ordered by the board of directors,
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shall render to the president and directors, whenever they request it, an
account of all of his transactions as chief financial officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the board of directors or the
bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
Section 6.1 INDEMNIFICATION - THIRD PARTY PROCEEDINGS. The
corporation shall indemnify any person (the "Indemnitee") who is or was a party
or is threatened to be made a party to any proceeding (other than an action by
or in the right of the corporation to procure a judgment in its favor) by reason
of the fact that Indemnitee is or was a director or officer of the corporation,
or any subsidiary of the corporation, and the corporation may indemnify a person
who is or was a party or is threatened to be made a party to any proceeding
(other than an action by or in the right of the corporation to procure a
judgment in its favor) by reason of the fact that such person is or was an
employee or other agent of the corporation (the "Indemnitee Agent") by reason of
any action or inaction on the part of Indemnitee or Indemnitee Agent while an
officer, director or agent or by reason of the fact that Indemnitee or
Indemnitee Agent is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including subject to
Section 6.19, attorneys' fees and any expenses of establishing a right to
indemnification pursuant to this Article VI or under California law), judgments,
fines, settlements (if such settlement is approved in advance by the
corporation, which approval shall not be unreasonably withheld) and other
amounts actually and reasonably incurred by Indemnitee or Indemnitee Agent in
connection with such proceeding if Indemnitee or Indemnitee Agent acted in good
faith and in a manner Indemnitee or Indemnitee Agent reasonably believed to be
in or not opposed to the best interests of the corporation and, in the case of a
criminal proceeding, if Indemnitee or Indemnitee Agent had no reasonable cause
to believe Indemnitee's or Indemnitee Agent's conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that Indemnitee or Indemnitee Agent did not act in good faith and in
a manner which Indemnitee or Indemnitee Agent reasonably believed to be
in or not opposed to the best interests of the corporation, or with respect to
any criminal proceedings, would not create a presumption that Indemnitee or
Indemnitee Agent had reasonable cause to believe that Indemnitee's or Indemnitee
Agent's conduct was unlawful.
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Section 6.2 INDEMNIFICATION - PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION. The corporation shall indemnify Indemnitee and may indemnify
Indemnitee Agent if Indemnitee, or Indemnitee Agent, as the case may be, was or
is a party or is threatened to be made a party to any threatened, pending or
completed action by or in the right of the corporation or any subsidiary of the
corporation to procure a judgment in its favor by reason of the fact that
Indemnitee or Indemnitee Agent is or was a director, officer, employee or other
agent of the corporation, or any subsidiary of the corporation, by reason of any
action or inaction on the part of Indemnitee or Indemnitee Agent while an
officer, director or agent or by reason of the fact that Indemnitee or
Indemnitee Agent is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including subject to
Section 6.19, attorneys' fees and any expenses of establishing a right to
indemnification pursuant to this Article VI or under California law) and, to the
fullest extent permitted by law, amounts paid in settlement, in each case to the
extent actually and reasonably incurred by Indemnitee or Indemnitee Agent in
connection with the defense or settlement of the proceeding if Indemnitee or
Indemnitee Agent acted in good faith and in a manner Indemnitee or Indemnitee
Agent believed to be in or not opposed to the best interests of the corporation
and its shareholders, except that no indemnification shall be made with respect
to any claim, issue or matter to which Indemnitee (or Indemnitee Agent) shall
have been adjudged to have been liable to the corporation in the performance of
Indemnitee's or Indemnitee Agent's duty to the corporation and its shareholders,
unless and only to the extent that the court in which such proceeding is or was
pending shall determine upon application that, in view of all the circumstances
of the case, Indemnitee (or Indemnitee Agent) is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
Section 6.3 SUCCESSFUL DEFENSE ON MERITS. To the extent that
Indemnitee (or Indemnitee Agent) without limitation has been successful on the
merits in defense of any proceeding referred to in Sections 6.1 or 6.2 above, or
in defense of any claim, issue or matter therein, the corporation shall
indemnify Indemnitee (or Indemnitee Agent) against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee (or Indemnitee
Agent) in connection therewith.
Section 6.4 CERTAIN TERMS DEFINED. For purposes of this Article VI,
references to "other enterprises" shall include employee benefit plans,
references to "fines" shall include any excise taxes assessed on Indemnitee or
Indemnitee Agent with respect to an employee benefit plan, and references to
"proceeding" shall include any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative. References
to "corporation" include all constituent corporations absorbed in a consolida-
tion or merger as well as the resulting or surviving corporation, so that any
person who is or was a director, officer, employee, or other agent of such a
constituent corporation or who, being or having been such a director, officer,
employee or other agent of another corporation, partnership, joint venture,
trust or other enterprise shall stand in the same position under the provisions
of this Article VI with respect to the resulting or surviving corporation as
such person would if he or she had served the resulting or surviving corporation
in the same capacity.
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Section 6.5 ADVANCEMENT OF EXPENSES. The corporation shall advance
all expenses incurred by Indemnitee and may advance all or any expenses incurred
by Indemnitee Agent in connection with the investigation, defense, settlement
(excluding amounts actually paid in settlement of any action, suit or
proceeding) or appeal of any civil or criminal action, suit or proceeding
referenced in Sections 6.1 or 6.2 hereof. Indemnitee or Indemnitee Agent hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that Indemnitee or Indemnitee Agent is not
entitled to be indemnified by the corporation as authorized hereby. The advances
to be made hereunder shall be paid by the corporation (i) to Indemnitee within
twenty (20) days following delivery of a written request therefor by Indemnitee
to the corporation; and (ii) to Indemnitee Agent within twenty (20) days
following the later of a written request therefor by Indemnitee Agent to the
corporation and determination by the corporation to advance expenses to
Indemnitee Agent pursuant to the corporation's discretionary authority
hereunder.
Section 6.6 NOTICE OF CLAIM. Indemnitee shall, as a condition
precedent to his or her right to be indemnified under this Article VI, and
Indemnitee Agent shall, as a condition precedent to his or her ability to be
indemnified under this Article VI, give the corporation notice in writing as
soon as practicable of any claim made against Indemnitee or Indemnitee Agent, as
the case may be, for which indemnification will or could be sought under this
Article VI. Notice to the corporation shall be directed to the secretary of the
corporation at the principal business office of the corporation (or such other
address as the corporation shall designate in writing to Indemnitee). In
addition, Indemnitee or Indemnitee Agent shall give the corporation such
information and cooperation as it may reasonably require and as shall be
within Indemnitee's or Indemnitee Agent's power.
Section 6.7 ENFORCEMENT RIGHTS. Any indemnification provided for in
Sections 6.1 or 6.2 or 6.3 shall be made no later than sixty (60) days after
receipt of the written request of Indemnitee. If a claim or request under this
Article VI, under any statute, or under any provision of the corporation's
Articles of Incorporation providing for indemnification is not paid by the
corporation, or on its behalf, within sixty (60) days after written request for
payment thereof has been received by the corporation, Indemnitee may, but need
not, at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim or request, and subject to Section 6.19, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
action, suit or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under applicable
law for the corporation to indemnify Indemnitee for the amount claimed, but the
burden of proving such defense shall be on the corporation, and Indemnitee shall
be entitled to receive interim payments of expenses pursuant to Section 6.5
unless and until such defense may be finally adjudicated by court order or
judgment for which no further right of appeal exists. The parties hereto intend
that if the corporation contests Indemnitee's right to indemnification, the
question of Indemnitee's right to indemnification shall be a decision for the
court, and no presumption regarding whether the applicable standard has been met
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will arise based on any determination or lack of determination of such by the
corporation (including its Board or any subgroup thereof, independent legal
counsel or its shareholders). The board of directors may, in its discretion,
provide by resolution for similar or identical enforcement rights for any
Indemnitee Agent.
Section 6.8 ASSUMPTION OF DEFENSE. In the event the corporation shall
be obligated to pay the expenses of any proceeding against the Indemnitee (or
Indemnitee Agent), the corporation, if appropriate, shall be entitled to assume
the defense of such proceeding with counsel approved by Indemnitee (or
Indemnitee Agent), which approval shall not be unreasonably withheld, upon the
delivery to Indemnitee (or Indemnitee Agent) of written notice of its election
so to do. After delivery of such notice, approval of such counsel by Indemnitee
(or Indemnitee Agent) and the retention of such counsel by the corporation, the
corporation will not be liable to Indemnitee (or Indemnitee Agent) under this
Article VI for any fees of counsel subsequently incurred by Indemnitee (or
Indemnitee Agent) with respect to the same proceeding, unless (i) the employment
of counsel by Indemnitee (or Indemnitee Agent) is authorized by the corporation,
(ii) Indemnitee (or Indemnitee Agent) shall have reasonably concluded that there
may be a conflict of interest of such counsel retained by the corporation
between the corporation and Indemnitee (or Indemnitee Agent) in the conduct of
such defense, or (iii) the corporation ceases or terminates the employment of
such counsel with respect to the defense of such proceeding, in any of which
events then the fees and expenses of Indemnitee's (or Indemnitee Agent's)
counsel shall be at the expense of the corporation. At all times, Indemnitee (or
Indemnitee Agent) shall have the right to employ other counsel in any such
proceeding at Indemnitee's (or Indemnitee Agent's) expense.
Section 6.9 APPROVAL OF EXPENSES. No expenses for which indemnity
shall be sought under this Article VI, other than those in respect of judgments
and verdicts actually rendered, shall be incurred without the prior consent of
the corporation, which consent shall not be unreasonably withheld.
Section 6.10 SUBROGATION. In the event of payment under this Article
VI, the corporation shall be subrogated to the extent of such payment to all of
the rights of recovery of the Indemnitee (or Indemnitee Agent), who shall do all
things that may be necessary to secure such rights, including the execution of
such documents necessary to enable the corporation effectively to bring suit to
enforce such rights.
Section 6.11 EXCEPTIONS. Notwithstanding any other provision herein
to the contrary, the corporation shall not be obligated pursuant to this Article
VI:
(a) Excluded Acts. To indemnify Indemnitee
(i) as to circumstances in which indemnity is expressly
prohibited pursuant to California law, or (ii) for any
acts or omissions or transactions from which a director
may not be relieved of liability pursuant to California
law; or
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(b) Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Article VI or any other statute or law or as
otherwise required under the Corporations Code of California, but such
indemnification or advancement of expenses may be provided by the
corporation in specific cases if the board of directors has approved the
initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding
instituted by Indemnitee to enforce or interpret this Article VI, if a
court of competent jurisdiction determines that such proceeding was not
made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) which have been paid directly to Indemnitee by an insurance
carrier under a policy of officers' and directors' liability insurance
maintained by the corporation; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
Section 6.12 PARTIAL INDEMNIFICATION. If Indemnitee is entitled
under any provision of this Article VI to indemnification by the corporation for
some or a portion of the expenses, judgments, fines or penalties actually or
reasonably incurred by the Indemnitee in the investigation, defense, appeal or
settlement of any civil or criminal action, suit or proceeding, but not,
however, for the total amount thereof, the corporation shall nevertheless
indemnify Indemnitee for the portion of such expenses, judgments, fines or
penalties to which Indemnitee is entitled.
Section 6.13 COVERAGE. This Article VI shall, to the extent
permitted by law, apply to acts or omissions of (i) Indemnitee which occurred
prior to the adoption of this Article VI if Indemnitee was a director or officer
of the corporation or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, at the time such act or omission occurred; and (ii) Indemnitee
Agent which occurred prior to the adoption of this Article VI if Indemnitee
Agent was an employee or other agent of the corporation or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise at the time such act or
omission occurred. All rights to indemnification under this Article VI shall be
deemed to be provided by a contract between the corporation and the Indemnitee
in which the corporation hereby agrees to indemnify Indemnitee to the fullest
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by the corporation's Articles of Incorporation,
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these Bylaws or by statute. Any repeal or modification of these Bylaws, the
Corporations Code of California or any other applicable law shall not affect any
rights or obligations then existing under this Article VI. The provisions of
this Article VI shall continue as to Indemnitee and Indemnitee Agent for any
action taken or not taken while serving in an indemnified capacity even though
the Indemnitee or Indemnitee Agent may have ceased to serve in such capacity at
the time of any action, suit or other covered proceeding. This Article VI shall
be binding upon the corporation and its successors and assigns and shall inure
to the benefit of Indemnitee and Indemnitee Agent and Indemnitee's and
Indemnitee Agent's estate, heirs, legal representatives and assigns.
Section 6.14 NON-EXCLUSIVITY. Nothing herein shall be deemed to
diminish or otherwise restrict any rights to which Indemnitee or Indemnitee
Agent may be entitled under the corporation's Articles of Incorporation, these
Bylaws, any agreement, any vote of shareholders or disinterested directors, or
under the laws of the State of California.
Section 6.15 SEVERABILITY. Nothing in this Article VI is intended to
require or shall be construed as requiring the corporation to do or fail to do
any act in violation of applicable law. If this Article VI or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify Indemnitee or Indemnitee Agent to
the fullest extent permitted by any applicable portion of this Article VI that
shall not have been invalidated.
Section 6.16 MUTUAL ACKNOWLEDGMENT. Both the corporation and
Indemnitee acknowledge that in certain instances, Federal law or applicable
public policy may prohibit the corporation from indemnifying its directors and
officers under this Article VI or otherwise. Indemnitee understands and
acknowledges that the corporation has undertaken or may be required in the
future to undertake with the Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the corporation's right under public policy to indemnify
Indemnitee.
Section 6.17 OFFICER AND DIRECTOR LIABILITY INSURANCE. The
corporation shall, from time to time, make the good faith determination whether
or not it is practicable for the corporation to obtain and maintain a policy or
policies of insurance with reputable insurance companies providing the officers
and directors of the corporation with coverage for losses from wrongful acts, or
to ensure the corporation's performance of its indemnification obligations under
this Article VI. Among other considerations, the corporation will
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weigh the costs of obtaining such insurance coverage against the protection
afforded by such coverage. Notwithstanding the foregoing, the corporation shall
have no obligation to obtain or maintain such insurance if the corporation
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the corporation.
Section 6.18 NOTICE TO INSURERS. If, at the time of the receipt of a
notice of a claim pursuant to Section 6.6 hereof, the corporation has director
and officer liability insurance in effect, the corporation shall give prompt
notice of the commencement of such proceeding to the insurers in accordance with
the procedures set forth in the respective policies. The corporation shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
Section 6.19 ATTORNEYS' FEES. In the event that any action is
instituted by Indemnitee under this Article VI to enforce or interpret any of
the terms hereof, Indemnitee shall be entitled to be paid all court costs and
expenses, including reasonable attorneys' fees, incurred by Indemnitee with
respect to such action, unless as a part of such action, the court of competent
jurisdiction determines that the action was not instituted in good faith or was
frivolous. In the event of an action instituted by or in the name of the
corporation under this Article VI, or to enforce or interpret any of the terms
of this Article VI, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of such
action (including with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action the court determines that
Indemnitee's defenses to such action were not made in good faith or were
frivolous. The board of directors may, in its discretion, provide by resolution
for payment of such attorneys' fees to any Indemnitee Agent.
Section 6.20 NOTICE. All notices, requests, demands and other
communications under this Article VI shall be in writing and shall be deemed
duly given (i) if delivered by hand and receipted for by the addressee, on the
date of such receipt, or (ii) if mailed by domestic certified or registered mail
with postage prepaid, on the third business day after the date postmarked.
Page 80 of 102
ARTICLE VII
RECORDS AND REPORTS
Section 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER. The
corporation shall keep at its principal executive office, or at the office of
its transfer agent or registrar, if either be appointed and as determined by
resolution of the board of directors, a record of its share holders, giving the
names and addresses of all shareholders and the number and class of shares held
by each shareholder.
A shareholder or shareholders of the corporation holding at least
five percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours upon five days prior
written demand upon the corporation, and/or (ii) obtain from the transfer agent
of the corporation, upon written demand and upon the tender of such transfer
agent's usual charges for such list, a list of the shareholders' names and
addresses, who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which such list has been
compiled or as of a date specified by the shareholder subsequent to the date of
demand. Such list shall be made available by the transfer agent on or before the
later of five (5) days after the demand is received or the date specified
therein as the date as of which the list is to be compiled. The record of
shareholders shall also be open to inspection upon the written demand of any
shareholder or holder of a voting trust certificate, at any time during usual
business hours, for a purpose reasonably related to such holder's interests as a
shareholder or as the holder of a voting trust certificate. Any inspection and
copying under this Section may be made in person or by an agent or attorney of
the shareholder or holder of a voting trust certificate making such demand.
Section 7.2 MAINTENANCE AND INSPECTION OF BYLAWS. The corporation
shall keep at its principal executive office, or if its principal executive
office is not in the State of California at its principal business office in
this state, the original or a copy of the bylaws as amended to date, which shall
be open to inspection by the shareholders at all reason able times during office
hours. If the principal executive office of the corporation is outside this
State and the corporation has no principal business office in this state, the
Secretary shall, upon the written request of any shareholder, furnish to such
shareholder a copy of the bylaws as amended to date.
Page 81 of 102
Section 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
The accounting books and records and minutes of proceedings of the shareholders
and the board of directors and any committee or committees of the board of
directors shall be kept at such place or places designated by the board of
directors, or, in the absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form. Such minutes and
accounting books and records shall be open to inspection upon the written demand
of any shareholder or holder of a voting trust certificate, at any reasonable
time during usual business hours, for a purpose reasonably related to such
holder's interests as a shareholder or as the holder of a voting trust
certificate. Such inspection may be made in person or by an agent or attorney,
and shall include the right to copy and make extracts. The foregoing rights of
inspection shall extend to the records of each subsidiary of the corporation.
Section 7.4 INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records, and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts of documents.
Section 7.5 ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the Corporations Code of California
is expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the board of directors from issuing annual or other periodic reports
to the shareholders of the corporation as they deem appropriate.
Section 7.6 FINANCIAL STATEMENTS. A copy of any annual financial
statement and any income statement of the corporation for each quarterly period
of each fiscal year, and any accompanying balance sheet of the corporation as of
the end of each such period, that has been prepared by the corporation shall be
kept on file in the principal executive office of the corporation for twelve
(12) months and each such statement shall be exhibited at all reasonable times
to any shareholder demanding an examination of any such statement or a copy
shall be mailed to any such shareholder.
If no annual report for the last fiscal year has been sent to
shareholders, the corporation shall, upon the written request of any shareholder
made more than 120 days after the
Page 82 of 102
close of such fiscal year, deliver or mail to such shareholder, within thirty
(30) days after such request a balance sheet as of the end of such fiscal year
and an income statement and statement of changes in financial position for such
fiscal year.
If a shareholder or shareholders holding at least five percent (5%)
of the outstanding shares of any class of stock of the corporation make a
written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the then current fiscal
year ended more than thirty (30) days prior to the date of the request and a
balance sheet of the corporation as of the end of such period and, in addition,
if no annual report for the last fiscal year has been sent to shareholders, a
balance sheet as of the end of such fiscal year and an income statement and
statement of changes in financial position for such fiscal year, then, the chief
financial officer shall cause such statements to be prepared, if not already
prepared, and shall deliver personally or mail such statement or statements to
the person making the request within thirty (30) days after the receipt of such
request.
The income statements and balance sheets referred to in this section
shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that such financial statements were prepared without
audit from the books and records of the corporation.
Section 7.7 ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation
shall file annually with the Secretary of State of the State of California, on
the prescribed form, a statement setting forth the names and complete business
or residence addresses of all incumbent directors, the number of vacancies on
the board of directors, if any, the names and complete business or residence
addresses of the chief executive officer, secretary and chief financial officer,
the street address of its principal executive office or principal business
office in this state and the general type of business constituting the principal
business activity of the corporation, together with a designation of the agent
of the corporation for the purpose of service of process, all in compliance with
Section 1502 of the Corporations Code of California.
Page 83 of 102
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.
For purposes of determining the share holders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
shareholders by written consent without a meeting), the board of directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
prior to any such action, and in such case only shareholders of record on the
date so fixed are entitled to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date
fixed as aforesaid, except as otherwise provided in the Corporations Code of
California.
If the board of directors does not so fix a record date, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the resolution relating thereto,
or the sixtieth (60th) day prior to the date of such action, whichever is later.
Section 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts or other orders for payment of money, notes or other evidences of
indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the Board of Directors.
Section 8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
board of directors, except as otherwise provided in these bylaws, may authorize
any officer or officers, agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors or within the agency power of
an officer, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.
Section 8.4 CERTIFICATES FOR SHARES. A certificate
or certificates for shares of the capital stock of the corporation
shall be issued to each shareholder when any such shares
Page 84 of 102
are fully paid, and the board of directors may authorize the issuance of
certificates for shares as partly paid provided that such certificates shall
state the amount of the consideration to be paid therefor and the amount paid
thereon. All certificates shall be signed in the name of the corporation by the
chairman of the board or vice chairman of the board or the president or a vice
president and by the chief financial officer or an assistant treasurer or the
secretary or any assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the signatures
on the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if such person were an officer, transfer agent or registrar at
the date of issue.
Section 8.5 LOST CERTIFICATES. Except as herein after in this
Section provided, no new certificates for shares shall be issued in lieu of an
old certificate unless the latter is surrendered to the corporation and
cancelled at the same time. The board of directors may in case any share
certificate or certificate for any other security is lost, stolen or destroyed,
authorize the issuance of a new certificate in lieu thereof, upon such terms and
conditions as the board may require including provision for indemnification of
the corporation secured by a bond or other adequate security sufficient to
protect the corporation against any claim that may be made against it, including
any expense or liability, on account of the alleged loss, theft or destruction
of such certificate or the issuance of such new certificate.
Section 8.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
chairman of the board, the president, or any vice president, or any other person
authorized by resolution of the board of directors by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority herein granted to said
officers to vote or represent on behalf of the corporation any and all shares
held by the corporation in any other corporation or corporations may be
exercised by any such officer in person or by any person authorized to do so by
proxy duly executed by said officer.
Section 8.7 CONSTRUCTION AND DEFINITIONS. Unless the context
requires otherwise, the general provisions, rules of construction, and
definitions in the Corporations Code of California shall govern the construction
of these bylaws. Without limiting the generality of the foregoing, the singular
number includes the plural, the plural number includes the
Page 85 of 102
singular, and the term "person" includes both a corporation and
a natural person.
ARTICLE IX
AMENDMENTS
Section 9.1 AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that if the articles of incorporation of the corporation set forth the
number of authorized directors of the corporation, the authorized number of
directors may be changed only by an amendment of the articles of incorporation.
Section 9.2 AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section 9.1 of this Article IX, bylaws, other than a
bylaw or an amendment thereof changing the authorized number of directors, may
be adopted, amended or repealed by the board of directors.
Page 86 of 102
CERTIFICATE OF INCORPORATOR
OF
NTS MERGER CORPORATION
I, the undersigned, do hereby certify:
(1) That I am the Incorporator of NTS Merger
Corporation, a California corporation; and
(2) That the foregoing Bylaws consisting of 32 pages constitute the
Bylaws of said corporation as duly adopted by the Incorporator as of May 29,
1996.
IN WITNESS WHEREOF, I have executed this Certificate as of this 29th
day of May, 1996.
/s/ James J. Slaby
-------------------------------
James J. Slaby
Incorporator
Page 87 of 102
Exhibit 10(a)1
AMENDMENT NO. FIVE TO BUSINESS LOAN AGREEMENT
This Amendment No. Five (the "Amendment") dated as of October 29, 1996, is
between Bank of America National Trust and Savings Association ("BofA") and
Sanwa Bank and National Technical Systems (the "Borrower").
RECITALS
A. The Banks and the Borrower entered into a certain Business Loan
Agreement dated as of September 1, 1993, as modified by amendments dated July 6,
1994, March 6, 1995, December 31, 1995, and April 26, 1996 (as amended, the
"Agreement").
B. The banks and the Borrower desire to further amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 In Paragraph 2.2, the date "August 1, 1998" is substituted for
the date "August 1, 1997."
2.2 In Paragraph 8.3, the ratio ".95:1.0" is substituted for the
ration "1.05:1.0."
2.3 Paragraph 8.6 is amended and restated to read in its entirety
as follows:
"8.6 Debt Coverage Ratio. To maintain on a consolidated
basis a Debt Coverage Ratio of at least 1.20:1.0.
'Debt Coverage Ratio' means the ratio of (a) net profit
after tax, plus depreciation, interest expense, increase in
deferred income taxes, and non-cash expenses, minus any
decrease in deferred income taxes, and minus any decrease in
deferred income taxes, and minus Non-Financed Capital
Page 88 of 102
Expenditures incurred in the quarter ending October 31, 996
and in any fiscal period thereafter, to (b) the sum of current
portion of long-term debt, interest expense, and dividends.
'Non-Financed Capital Expenditures' means all capital
expenditures minus the amount of all new term financing
(excluding any financing obtained under this Agreement),
including capital leases.
This ratio will be calculated at the end of each fiscal
quarter, using the results of that quarter and each of the
three immediately preceding quarters, except that the current
portion of long term debt will be measured as of the last day
of the most recent fiscal quarter."
2.4 In Paragraph 8.9, the amount "Two Million Five Hundred
Thousand Dollars ($2,500,000)" is substituted for the amount
"One Million Six Hundred Thousand Dollars ($1,600,000)."
3. Representations and Warranties. When the Borrower signs this Amendment,
the Borrower represents and warrants to the Banks that: (a) there is no event
which is, or with notice or lapse of time or both would be, a default under the
Agreement, (b) the representations and warranties in the Agreement are true as
of the date of this Amendment as if made on the date of this Amendment, (c) this
Amendment is within the Borrower's powers, has been duly authorized, and does
not conflict with any of the Borrower's organizational papers, and (d) this
Amendment does not conflict with any law, agreement, or obligation by which the
Borrower is bound.
4. Conditions. This Amendment will be effective when the Banks
receive the following items:
4.1 This Amendment, duly executed by the Borrower and the Banks.
4.2 A fee for the extension of the Banks' commitment to extend the
maturity date of the facility No. 2 lines of credit, in the
amount of Nine Thousand Three Hundred Seventy-Five Dollars
($9,375) for each Bank.
5. Effect of Amendment. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and effect.
Page 89 of 102
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NATIONAL TRUST SANWA BANK CALIFORNIA
AND SAVINGS ASSOCIATION
By_______________________________ By:_____________________________
Brian C. Roche Michael W. Platt
Vice President Vice President
NATIONAL TECHNICAL SYSTEMS
By:_______________________________
Lloyd Blonder
Senior Vice President
Chief Financial Officer
Page 90 of 102
EXHIBIT 21
NATIONAL TECHNICAL SYSTEMS, INC.
LIST OF SUBSIDIARIES
NTS, Technical Systems, a California Corp.
(Formerly National Technical Systems, a California Corp.)
Acton Environmental Testing Corporation, a Massachusetts Corp.
Approved Engineering Test Laboratories, Inc., a California Corp.
ETCR Inc., a California Corp.
NTS Products, a California Corp.
NTS Technical Services, Inc., a Florida Corp.
(Formerly S&W Technical Services, Inc., a Florida Corp.)
Wise and Associates, Inc., a Texas Corp.
PECS (QA) North America, Inc. (formerly NTS Registration Services, Inc.,
a Massachusetts Corp.)
(Operations combined with National Technical Systems - Certification Services)
National Quality Assurance - USA, Inc., a Massachusetts Corp.
(50% OWNED)
National Technical Systems-Certification Services, a Delaware Corporation
Page 91 of 102
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 2-83778, Form S-8 No. 33-48211, and 333-04905) pertaining to the
National Technical Systems, Inc. Employee Stock Ownership Plan, the National
Technical Systems, Inc. 1988 Stock Option Plan and the National Technical
Systems, Inc. 1994 Stock Option Plan in the related Prospectus of our report
dated April 14, 1997, with respect to the consolidated financial statements of
National Technical Systems, Inc. and Subsidiaries included in the Annual Report
(Form 10-K) for the year ended January 31, 1997.
/s/ Ernst & Young LLP
Woodland Hills, California
April 30, 1997
Page 92 of 102
EXHIBIT 99.1
TO BE INCORPORATED BY REFERENCE INTO
FORM S-8 REGISTRATION STATEMENT NO. 33-48211
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-ffective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in
Page 93 of 102
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(f) EMPLOYEE PLANS ON FORM S-8.
(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to
be transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders, copies of all reports, proxy statements
and other communications distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
promptly, without charge, to any participant in the plan who makes a written
request; a copy of the then latest annual report of the plan filed pursuant to
section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report
is filed separately on Form 11-K, such form shall be delivered upon written
request. If such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered upon written request. If such report is filed
as a part of the registrant's annual report to stockholders delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered pursuant to paragraph 91) or (2) of this
undertaking, additional delivery shall be required.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit
Page 94 of 102
or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
Page 95 of 102
EXHIBIT 99.2
TO BE INCORPORATED BY REFERENCE INTO
FORM S-8 REGISTRATION STATEMENT NO. 2-83778
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in
Page 96 of 102
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(f) Employee plans on Form S-8.
(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to
be transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders, copies of all reports, proxy statements
and other communications distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
promptly, without charge, to any participant in the plan who makes a written
request; a copy of the then latest annual report of the plan filed pursuant to
section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report
is filed separately on Form 11-K, such form shall be delivered upon written
request. If such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered upon written request. If such report is filed
as a part of the registrant's annual report to stockholders delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered pursuant to paragraph 91) or (2) of this
undertaking, additional delivery shall be required.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit
Page 97 of 102
or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
Page 98 of 102
EXHIBIT 99.3
TO BE INCORPORATED BY REFERENCE INTO
FORM S-8 REGISTRATION STATEMENT NO. 333-04905
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to
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the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) Employee plans on Form S-8.
(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to
be transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders, copies of all reports, proxy statements
and other communications distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
promptly, without charge, to any participant in the plan who makes a written
request; a copy of the then latest annual report of the plan filed pursuant to
section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report
is filed separately on Form 11-K, such form shall be delivered upon written
request. If such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered upon written request. If such report is filed
as a part of the registrant's annual report to stockholders delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered pursuant to paragraph 91) or (2) of this
undertaking, additional delivery shall be required.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in
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connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
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