-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RBAhKJHgZgPw3TVJAJN9EnBYYwkSSVRnkmYSASoGxOzfHE3mRdgFfr0jVfk85EEw U7Dx/2cyiFswAeu2cA+K2A== 0001169232-06-003769.txt : 20060913 0001169232-06-003769.hdr.sgml : 20060913 20060913164709 ACCESSION NUMBER: 0001169232-06-003769 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060731 FILED AS OF DATE: 20060913 DATE AS OF CHANGE: 20060913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL TECHNICAL SYSTEMS INC /CA/ CENTRAL INDEX KEY: 0000110536 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 954134955 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16438 FILM NUMBER: 061088897 BUSINESS ADDRESS: STREET 1: 24007 VENTURA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8185910776 MAIL ADDRESS: STREET 1: 24007 VENTURA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL TECHNICAL SYSTEMS /DE/ DATE OF NAME CHANGE: 19880218 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL TECHNICAL SERVICES INC DATE OF NAME CHANGE: 19810712 FORMER COMPANY: FORMER CONFORMED NAME: LINCOLN FUND INC DATE OF NAME CHANGE: 19760315 10-Q 1 d69309-10q.txt QUARTERLY REPORT ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- (mark one) |x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended July 31, 2006 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from ________________ to _________________ 0-16438 (Commission File Number) NATIONAL TECHNICAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) California 95-4134955 (State of incorporation) (I.R.S. Employer Identification No.) 24007 Ventura Boulevard, Suite 200, Calabasas, California (Address of registrant's principal executive office) (818) 591-0776 91302 (Registrant's telephone number including area code) (Zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X| The number of shares of common stock, no par value, outstanding as of September 11, 2006 was 8,744,650 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Index PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of July 31, 2006 (unaudited) and January 31, 2006 3 Unaudited Condensed Consolidated Statements of Income For the Six Months Ended July 31, 2006 and 2005 4 Unaudited Condensed Consolidated Statements of Income For the Three Months Ended July 31, 2006 and 2005 5 Unaudited Condensed Consolidated Statements of Cash Flows For the Six Months Ended July 31, 2006 and 2005 6 Notes to the Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION & SIGNATURE Item 1. Legal Proceedings 23 Item 1A. Risk Factors 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4 Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits 24 2 PART I - FINANCIAL ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets At At July 31, January 31, 2006 2006 ASSETS (unaudited) ------ ---------------------------- CURRENT ASSETS: Cash $ 2,717,000 $ 4,196,000 Accounts receivable, less allowance for doubtful accounts of $926,000 at July 31, 2006 and $816,000 at January 31, 2006 22,678,000 20,425,000 Income taxes receivable 117,000 10,000 Inventories 2,115,000 2,184,000 Deferred income taxes 1,753,000 1,747,000 Prepaid expenses 1,144,000 769,000 ---------------------------- Total current assets 30,524,000 29,331,000 Property, plant and equipment, at cost 97,066,000 93,887,000 Less: accumulated depreciation (63,589,000) (60,787,000) ---------------------------- Net property, plant and equipment 33,477,000 33,100,000 Goodwill 3,999,000 2,740,000 Other assets 4,707,000 3,962,000 ---------------------------- TOTAL ASSETS $ 72,707,000 $ 69,133,000 ============================ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 5,468,000 $ 4,715,000 Accrued expenses 4,376,000 5,400,000 Income taxes payable -- 594,000 Deferred income 1,552,000 817,000 Current installments of long-term debt 2,696,000 1,529,000 ---------------------------- Total current liabilities 14,092,000 13,055,000 Long-term debt, excluding current installments 19,884,000 15,579,000 Deferred income taxes 4,936,000 5,084,000 Deferred compensation 903,000 874,000 Minority interest 202,000 163,000 Commitments and contingencies SHAREHOLDERS' EQUITY: Preferred stock, no par value, 2,000,000 shares authorized; none issued -- -- Common stock, no par value. Authorized, 20,000,000 shares; issued and outstanding, 8,615,000 as of July 31, 2006 and 9,176,000 as of January 31, 2006 12,356,000 14,624,000 Retained earnings 20,343,000 19,744,000 Accumulated other comprehensive income (9,000) 10,000 ---------------------------- Total shareholders' equity 32,690,000 34,378,000 ---------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 72,707,000 $ 69,133,000 ============================
See accompanying notes to condensed consolidated financial statements. 3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Income for Six Months Ended July 31, 2006 and 2005 2006 2005 ---------------------------- Net revenues $ 56,589,000 $ 54,199,000 Cost of sales 43,772,000 41,362,000 ---------------------------- Gross profit 12,817,000 12,837,000 Selling, general and administrative expense 11,157,000 10,335,000 Equity income from non-consolidated subsidiary (135,000) (112,000) ---------------------------- Operating income 1,795,000 2,614,000 Other income (expense): Interest expense, net (812,000) (647,000) Other 129,000 16,000 ---------------------------- Total other expense, net (683,000) (631,000) Income before income taxes and minority interest 1,112,000 1,983,000 Income taxes 474,000 735,000 ---------------------------- Income before minority interest 638,000 1,248,000 Minority interest (39,000) (46,000) ---------------------------- Net income $ 599,000 $ 1,202,000 ============================ Earnings per common share: Basic $ 0.07 $ 0.13 ============================ Diluted $ 0.06 $ 0.13 ============================ Weighted average common shares outstanding 8,718,000 9,079,000 Dilutive effect of stock options 799,000 516,000 Weighted average common shares outstanding, ---------------------------- assuming dilution 9,517,000 9,595,000 ============================
See accompanying notes to condensed consolidated financial statements. 4
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Income for Three Months Ended July 31, 2006 and 2005 2006 2005 ---------------------------- Net revenues $ 28,438,000 $ 26,755,000 Cost of sales 21,859,000 20,516,000 ---------------------------- Gross profit 6,579,000 6,239,000 Selling, general and administrative expense 5,747,000 5,120,000 Equity income from non-consolidated subsidiary (60,000) (35,000) ---------------------------- Operating income 892,000 1,154,000 Other income (expense): Interest expense, net (451,000) (329,000) Other income 123,000 16,000 ---------------------------- Total other expense, net (328,000) (313,000) Income before income taxes and minority interest 564,000 841,000 Income taxes 270,000 335,000 ---------------------------- Income before minority interest 294,000 506,000 Minority interest (47,000) (38,000) ---------------------------- Net income $ 247,000 $ 468,000 ============================ Earnings per common share Basic $ 0.03 $ 0.05 ============================ Diluted $ 0.03 $ 0.05 ============================ Weighted average common shares outstanding 8,544,000 9,106,000 Dilutive effect of stock options 899,000 541,000 Weighted average common shares outstanding, ---------------------------- assuming dilution 9,443,000 9,647,000 ============================
See accompanying notes to condensed consolidated financial statements. 5
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2006 and 2005 2006 2005 ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 599,000 $ 1,202,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,819,000 2,664,000 Recoveries on receivables 111,000 73,000 Undistributed earnings of affiliate 39,000 46,000 Deferred income taxes (net of acquisition) (154,000) (294,000) Tax benefit from stock options exercised 234,000 -- Share based compensation 319,000 -- Changes in operating assets and liabilities (net of acquisition): Accounts receivable (2,116,000) (1,476,000) Inventories 104,000 (224,000) Prepaid expenses (343,000) (299,000) Other assets and intangibles (554,000) (169,000) Accounts payable 521,000 (531,000) Accrued expenses (1,067,000) 99,000 Income taxes payable (594,000) -- Deferred income 682,000 986,000 Deferred compensation 29,000 33,000 Income taxes receivable (107,000) 505,000 ---------------------------- Net cash provided by operations 522,000 2,615,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (3,083,000) (2,615,000) Investment in life insurance (91,000) -- Acquisitions of businesses, net of cash (773,000) (483,000) ---------------------------- Cash used for investing activities (3,947,000) (3,098,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from current and long-term debt 10,292,000 1,075,000 Repayments of current and long-term debt (4,858,000) (2,906,000) Proceeds from stock options exercised 424,000 193,000 Common stock repurchase (3,893,000) -- ---------------------------- Net cash provided by (used for) financing activities 1,965,000 (1,638,000) ---------------------------- Effect of exchange rate changes on cash and cash equivalents (19,000) 4,000 ---------------------------- Net decrease in cash (1,479,000) (2,117,000) Beginning cash balance 4,196,000 6,201,000 ---------------------------- ENDING CASH BALANCE $ 2,717,000 $ 4,084,000 ============================
See accompanying notes to condensed consolidated financial statements. 6 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Notes to the Unaudited Condensed Consolidated Financial Statements 1. Basis of Presentation In accordance with instructions to Form 10-Q, the accompanying consolidated financial statements and footnotes of National Technical Systems, Inc. ("NTS" or the "Company") have been condensed and, therefore, do not contain all disclosures required by U.S. generally accepted accounting principles. These statements should not be construed as representing pro rata results of the Company's fiscal year ending January 31, 2007 and should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended January 31, 2006. The statements presented as of and for the three and six months ended July 31, 2006 and 2005 are unaudited. In management's opinion, all adjustments have been made to present fairly the results of such unaudited interim periods. All such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of the Company and its wholly owned and financially controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 2. Income Taxes Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year, as adjusted for any discrete taxable events that occur during the period. The Company recorded income tax expense of $270,000 and $474,000 for the three and six months ended July 31, 2006, respectively, and $335,000 and $735,000 for the three and six months ended July 31, 2005, respectively. 3. Comprehensive Income Accumulated other comprehensive income on the Company's Condensed Consolidated Balance Sheets consists of cumulative equity adjustments from foreign currency translation. During the six months ended July 31, 2006 the foreign currency translation adjustment resulted in a loss of $19,000 and total comprehensive income was $580,000. During the six months ended July 31, 2005, the foreign currency translation adjustment was a gain of $4,000 and total comprehensive income was $1,206,000. 4. Inventories Inventories consist of accumulated costs applicable to uncompleted contracts and are stated at actual cost which is not in excess of estimated net realizable value. 5. Interest and Taxes Cash paid for interest and taxes for the six months ended July 31, 2006 was $822,000 and $1,053,000, respectively. Cash paid for interest and taxes for the six months ended July 31, 2005 was $741,000 and $530,000, respectively. 6. Minority Interest Minority interest in the Company's NQA, Inc. subsidiary is a result of 50% of the stock of NQA, Inc. being issued to National Quality Assurance, Ltd. Effective with fiscal 2002, profits and losses are allocated 50.1% to NTS, and 49.9% to National Quality Assurance, Ltd. 7. Earnings per share Basic and diluted net income per common share is presented in conformity with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" for all periods presented. In accordance with SFAS No. 128, basic earnings per share have been computed using the weighted average number of shares of common stock outstanding during the year. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. 7 8. Intangible Assets The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." There have been no indications of any impairment through July 31, 2006. As of July 31, 2006 and January 31, 2006, the Company had the following acquired intangible assets:
July 31, 2006 ---------------------------------------------------------- Gross Net Estimated Carrying Accum. Carrying Useful Amount Amort. Amount Life Intangible assets subject to amortization: Covenant not to compete $ 148,000 $ 115,000 $ 33,000 3-5 years Customer relationships 105,000 -- 105,000 18 months ---------------------------------------------- Total $ 253,000 $ 115,000 $ 138,000 ============================================== Intangible assets not subject to amortization: Goodwill $ 4,796,000 $ 797,000 $ 3,999,000 ============================================== January 31, 2006 ----------------------------------------------------------- Gross Net Estimated Carrying Accum. Carrying Useful Amount Amort. Amount Life Intangible assets subject to amortization: Covenant not to compete $ 148,000 $ 110,000 $ 38,000 3-5 years Customer relationships -- -- -- ----------------------------------------------- Total $ 148,000 $ 110,000 $ 38,000 =============================================== Intangible assets not subject to amortization: Goodwill $ 3,537,000 $ 797,000 $ 2,740,000 ===============================================
Goodwill increased by $1,259,000 due to the acquisitions of American International Registrars Corporation and B & B Technologies, Inc. (see note 11). 9. Employee Equity Incentive Plans Effective February 1, 2006, the Company adopted the provisions of SFAS No. 123(R). SFAS No. 123(R) requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at grant date, based on the fair value of the award. The Company previously accounted for awards granted under its equity incentive plans under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and provided the required pro forma disclosures prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," as amended. The exercise price of options is equal to the market price of National Technical Systems, Inc. common stock (defined as the closing price reported by the NASDAQ stock market) on the date of grant. Accordingly, no share-based compensation, other than acquisition-related compensation, was recognized in the financial statements prior to January 31, 2006. The Company used the modified prospective method of adoption for SFAS No. 123(R), under which the compensation cost recognized by the Company beginning in fiscal 2007 includes (a) compensation cost for all equity incentive awards granted prior to, but not yet vested as of February 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all equity incentive awards granted subsequent to February 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company uses the straight-line attribution method to recognize share-based compensation costs over the service period of the award. Upon exercise, cancellation, or expiration of stock options, deferred tax assets for options with multiple vesting dates are eliminated for each vesting period on a first-in, first-out basis as if each vesting period was a separate award. To calculate the excess tax benefits available for use in offsetting future tax shortfalls as of the date of implementation, the Company followed the alternative transition method discussed in FASB Staff Position No. 123(R)-3. No options have been granted by the Company during the current fiscal year. Options to be granted to existing and newly hired employees or directors will generally vest over a four-year period from the date of grant. The Company may also assume the equity incentive plans and the outstanding equity awards of certain acquired companies. Once assumed, the Company does not grant additional stock under these plans. The Company may use other types of equity incentive awards, such as restricted stock. The Company's equity incentive plan also 8 allows for performance-based vesting for equity incentive awards. Share-based compensation recognized in fiscal year 2007 as a result of the adoption of SFAS No. 123(R) as well as pro forma disclosures according to the original provisions of SFAS No. 123 for periods prior to the adoption of SFAS No. 123(R) is based on the Black-Scholes-Merton option pricing model for estimating fair value of options granted under the Company's equity incentive plans and rights to acquire stock granted under the Company's stock participation plan. The following table summarizes the effects of share-based compensation resulting from the application of SFAS No. 123(R) to options granted under the Company's equity incentive plans and rights to acquire stock granted under the Company's stock participation plan:
Six Months Ended Three Months Ended ------------------------ ----------------------- July 31, July 31, July 31, July 31, 2006 2005 2006 2005 ----------- --------- ---------- ---------- Cost of sales $ 80,000 $ -- $ 38,000 $ -- Selling, general and administrative expense 238,000 -- 112,000 -- ----------- --------- ---------- ---------- Share-based compensation effect in income before taxes 318,000 -- 150,000 -- Income taxes (13,000) -- 44,000 -- ----------- --------- ---------- ---------- Net share-based compensation effects in net income $ 305,000 $ -- $ 194,000 $ -- =========== ========= ========== ========== Share-based compensation effects on basic earnings per common share $ 0.03 $ -- $ 0.02 $ -- =========== ========= ========== ========== Share-based compensation effects on diluted earnings per common share $ 0.03 $ -- $ 0.02 $ -- =========== ========= ========== ========== Share-based compensation effects on cash flow from operations $ -- $ -- $ -- $ -- =========== ========= ========== ========== Share-based compensation effects on cash flow from financing activities $ -- $ -- $ -- $ -- =========== ========= ========== ========== Weighted average common shares outstanding 8,718,000 9,079,000 8,544,000 9,106,000 Dilutive effect of stock options 799,000 516,000 899,000 541,000 ----------- --------- ---------- ---------- Weighted average common shares outstanding, assuming dilution 9,517,000 9,595,000 9,443,000 9,647,000 =========== ========= ========== ==========
In accordance with SFAS No. 123(R), the Company adjusts share-based compensation on a quarterly basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after February 1, 2006 will be recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments in the six months ended July 31, 2006 was immaterial. Under the provisions of SFAS No. 123(R), $552,000 has been recorded as a credit to common stock. During the six months ended July 31, 2006, the tax benefit realized for the tax deduction from option exercises totaled $234,000. As of August 1, 2006, there was $575,000 of total unrecognized compensation costs related to stock options granted under the Company's equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 42 months. Pro forma information required under SFAS No. 123 for periods prior to fiscal 2007 as if the Company had applied the fair value recognition provisions of SFAS No. 123, to options granted under the Company's equity incentive plans was as follows: 9
Six Months Ended Three Months Ended July 31, 2005 July 31, 2005 ------------------------------------- Net income, as reported $ 1,202,000 $ 468,000 Less: total share-based employee compensation determined under the fair value method for all awards, net of tax 217,000 99,000 ------------------------------------- Pro forma net income $ 985,000 $ 369,000 ===================================== Reported basic earnings per common share $ 0.13 $ 0.05 ===================================== Pro forma basic earnings per common share $ 0.11 $ 0.04 ===================================== Reported diluted earnings per common share $ 0.13 $ 0.05 ===================================== Pro forma diluted earnings per common share $ 0.10 $ 0.04 =====================================
The Company has two employee incentive stock option plans: the "2002 stock option plan" and the "1994 stock option plan." The Company presented a new equity incentive plan for shareholder vote at its June 29, 2006 annual shareholders' meeting and it was approved by the shareholders. This new equity incentive plan replaced the 2002 stock option plan, which was terminated early and no further options will be granted under it. A total of 300,000 new shares of common stock were reserved for issuance under the new equity incentive plan. Outstanding options under the 2002 and the 1994 stock option plans are exercisable at 100% or more of fair market (as determined by the compensation committee of 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. Additional information with respect to the option plans as of July 31, 2006 is as follows: Six months ended July 31, 2006 ----------------------------- Weighted Avg. Shares Exercise Price ----------------------------- Beginning Balance 2,167,445 $3.78 Grants -- -- Exercises (152,720) 3.03 Canceled or expired (24,075) 3.74 ----------------------------- Ending balance 1,990,650 $3.84 ============================= Reserve for future grants at 7/31/2006 -- -- Exercisable 1,621,412 $3.67 ============================= The range of exercise prices for options outstanding at July 31, 2006 was $1.35 to $7.00. The range of exercise prices for options is wide due primarily to the fluctuating price of the Company's stock over the period of the grants. 10 The following table summarizes information about options outstanding at July 31, 2006:
Weighted Avg. Range of exercise Outstanding at Remaining contract Weighted Avg. Number Weighted Avg. prices July 31, 2006 life in yrs. Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------------- $1.00 to $2.00 123,250 5.3 $ 1.61 123,250 $ 1.61 $2.01 to $3.00 613,319 4.2 $ 2.62 597,069 $ 2.61 $3.01 to $4.00 213,283 3.3 $ 3.30 212,783 $ 3.30 $4.01 to $5.00 661,075 7.3 $ 4.61 340,837 $ 4.60 $5.01 to $6.00 345,306 3.1 $ 5.42 313,056 $ 5.45 $6.01 to $7.00 34,417 2.1 $ 6.36 34,417 $ 6.36 ----------------- -------------- 1,990,650 1,621,412 ================= ==============
These options will expire if not exercised at specific dates ranging from September 2006 to December 2015. During the six months ended July 31, 2006, 152,720 options were exercised at prices from $1.35 to $5.50 per share. 10. Repurchase of Common Stock On March 28, 2006, the Company exercised an option to repurchase 792,266 shares of its common stock from an executive officer and director of the Company. The total cash purchase price of $3,893,000, or $4.914 per share, represented the average closing price of the Company's common stock for the five trading days prior to the option exercise date minus 10%, in accordance with an agreement between the Company and the executive officer and director entered into in September 2001. The shares repurchased in this private transaction represented approximately 8.6% of the Company's outstanding common stock on the date of exercise. On March 29, 2006, the Company entered into an agreement with its banks, Comerica Bank and First Bank (together, the "Banks"), to expand the existing credit facility by $3.9 million effective March 29, 2006. Interest is at the bank's prime rate less 25 basis points or at the Libor rate, at the election of the Company. Principal and interest payments are due monthly until the loan matures on March 29, 2010. The Company entered into the credit facility to fund the repurchase of the 792,266 shares discussed above. 11. Acquisitions of Businesses On April 12, 2006, NQA, USA, a 50% owned consolidated subsidiary of NTS, acquired the existing business of American International Registrars Corporation ("AIR"), located in Ventura, California, for a total purchase price of $386,000, payable in cash. All existing AIR clients and associated certifications and backlog were transferred to NQA, USA. The purchase was recorded $105,000 to customer relationships and $281,000 to goodwill. On June 9, 2006, NTS Technical Systems, a wholly owned subsidiary of NTS, acquired the assets and the existing business of B & B Technologies, Inc. (BBT), a systems integration firm headquartered in Albuquerque, New Mexico for a total purchase price of $1,038,000, payable in cash and 83,243 shares in NTS common stock, valued using the closing price of the Company's stock. BBT designs and integrates test, measurement, automation, data acquisition and control systems utilizing diverse hardware platforms, operating systems, and instrumentation standards. The results of operations of the acquired business are included in the accompanying consolidated statement of operations from June 9, 2006 to July 31, 2006. 11 The preliminary allocation of the purchase price of BBT was as follows: Purchase price: --------------- Cash $ 3,000 Accounts receivable 248,000 Inventory 35,000 Property, plant and equipment 108,000 Prepaid expenses 33,000 Goodwill 977,000 Accounts payable (232,000) Other assumed liabilities (134,000) ------------ Purchase price $ 1,038,000 ============ Cash flow: ---------- Purchase price $ 1,038,000 Common stock issued (648,000) Cash acquired (3,000) The purchase price allocations for AIR and BBT have not yet been finalized. 12. Recent Accounting Pronouncements In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and is effective for fiscal years beginning after December 15, 2005, i.e. fiscal year ending January 31, 2007. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company does not expect the adoption of SFAS No. 154 to have a material impact on its condensed consolidated financial statements. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an interpretation of FAS109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 effective February 1, 2007, as required. The cumulative effect of adopting FIN 48, if any, will be recorded in retained earnings and other accounts as applicable. The Company does not expect that the adoption of FIN 48 will have a significant impact on the Company's financial position, cash flows, or results of operations. 13. Subsequent events On August 1, 2006, the Company acquired the assets and the existing business of Dynamic Labs, an EMI and environmental testing laboratory with locations in Phoenix, Arizona and Austin, Texas. The Phoenix laboratory offers EMI, environmental and dynamics testing for the aerospace and defense industries, The Austin facility also offers aerospace, environmental, and dynamic testing. The Phoenix facility will be relocated to the NTS Tempe, Arizona laboratory and the Austin facility will be relocated to NTS Plano, Texas laboratory and other NTS laboratories. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters addressed in this Item 2 contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking words such as "may", "will", "expect", "anticipate", "intend", "estimate", "continue", "behave" and similar words. Financial information contained herein, to the extent it is predictive of financial condition and results of operations that would have occurred on the basis of certain stated assumptions, may also be characterized as forward-looking statements. Although forward-looking statements are based on assumptions made, and information believed by management to be reasonable, no assurance can be given that such statements will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. GENERAL The Company is a diversified business to business services organization that supplies technical services and solutions to a variety of industries including aerospace, defense, automotive, power products, electronics, computers and telecommunications. Through its wide range of testing facilities, solutions and certification services, the Company provides its customers the ability to sell their products globally and enhance their overall competitiveness. NTS is accredited by numerous national and international technical organizations which allow the Company to have its test data accepted in most countries. The Company operates in two segments: "Engineering & Evaluation" and "Technical Solutions". The business of the Company is conducted by a number of operating units, each with its own organization. Each segment is under the direction of its own executive and operational management team. In making financial and operational decisions, NTS relies on an internal management reporting process that provides revenues and operating cost information for each of its operating units. Revenues and booking activities are also tracked by market type. The Engineering & Evaluation segment is one of the largest independent conformity assessment and management system registration organizations in the U.S., with facilities throughout the United States and in Japan, Canada and Germany, serving a large variety of high technology industries, including aerospace, defense, automotive, power products, electronics, computers and telecommunications. This segment provides highly trained technical personnel for product certification, product safety testing and product evaluation to allow customers to sell their products in world markets. In addition, it performs management registration and certification services to ISO related standards. The Technical Solutions segment provides professional and specialty staffing services including contract services, temporary and full time placements, offering specialty solutions services to its customers specifically in the area of information technology, information systems, software engineering and construction needs. Technical Solutions supplies professionals in support of customers who need help-desk analysts and managers, relational database administrators and developers, application and systems programmers, configuration and project managers, engineering personnel and multiple levels of system operations personnel. The following discussion should be read in conjunction with the consolidated quarterly financial statements and notes thereto. All information is based upon operating results of the Company for the three and six month periods ended July 31. 13
RESULTS OF OPERATIONS - --------------------- REVENUES Six months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 38,354 11.2% $ 34,502 $ 3,852 Technical Solutions 18,235 (7.4)% 19,697 (1,462) -------- ----------------------- Total revenues $ 56,589 4.4% $ 54,199 $ 2,390 ======== =======================
For the six months ended July 31, 2006, consolidated revenues increased by $2,390,000 or 4.4% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the six months ended July 31, 2006, Engineering and Evaluation revenues increased by $3,852,000 or 11.2% when compared to the same period in fiscal 2006, primarily due to additional revenues of $718,000 from the acquisition on June 9, 2006 of B&B Technologies, an engineering systems integration company located in Albuquerque, New Mexico, $1.5 million in increased aerospace revenues from the Santa Clarita laboratory as a result of the enhanced capability and capacity at that facility and increases in overall revenues from telecommunications, electronics and registration markets. These increases were partially offset by a decrease in the transportation testing business. Technical Solutions: For the six months ended July 31, 2006, Technical Solutions revenues decreased by $1,462,000 or 7.4% when compared to the same period in fiscal 2006, as a result of the lower demand in outplacement services and permanent placements in the general IT service business, primarily due to increased price compression in this market and competition from off-shore companies.
GROSS PROFIT Six months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 9,762 0.4% $ 9,726 $ 36 % to segment revenue 25.5% 28.2% -2.7% Technical Solutions 3,055 (1.8)% 3,111 (56) % to segment revenue 16.8% 15.8% 1.0% -------- ---------------------- Total $ 12,817 (0.2)% $ 12,837 $ (20) ======== ====================== % to total revenue 22.6% 23.7% -1.0%
Total gross profit for the six months ended July 31, 2006 decreased by $20,000 or 0.2% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the six months ended July 31, 2006, gross profit for the Engineering & Evaluation Group increased by $36,000 or 0.4% and gross profit as a percentage of revenues decreased by 2.7% when compared to the same period in fiscal 2006, primarily due to the continued weakness in the automotive industry, program delays at the Camden, Arkansas facility and the continued reduction in gross margin at the Company's New Jersey and Santa Rosa, California facilities as a result of the investments made for expansion at these facilities and not achieving the desired revenues. However the Company expects the performance at these facilities to improve due to the increased capacity and capability. Gross profit was also impacted by high energy costs, particularly at the Santa Clarita, California facility and losses from one program at Santa Clarita due to contractual issues. The performance at the Company's Fullerton, California facility was negatively impacted during the second quarter as a result of a quality system deficiency in the Company's "NEBS" (Network Equipment Building Specification) testing under the "ITL" (Independent Test Laboratory) program and suspended testing under this program. The testing has recently been reinstated after the Company took the necessary corrective 14 actions. Additionally, share-based compensation expense included in cost of sales for the six months ended July 31, 2006 was $80,000, compared with no share-based compensation expense in fiscal 2006. Technical Solutions: For the six months ended July 31, 2006, gross profit decreased by $56,000 or 1.8% in the Technical Solutions Group when compared to the same period in fiscal 2006. This decrease was due to the lower revenues discussed above. Gross profit as a percentage of revenues increased to 16.8% from 15.8% when compared to the same period in the prior year.
SELLING, GENERAL & ADMINISTRATIVE Six months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 8,182 12.4% $ 7,281 $ 901 % to segment revenue 21.3% 21.1% 0.2% Technical Solutions 2,975 (2.6)% 3,054 (79) % to segment revenue 16.3% 15.5% 0.8% -------- ---------------------- Total $ 11,157 8.0% $ 10,335 $ 822 ======== ====================== % to total revenue 19.7% 19.1% 0.6%
Total selling, general and administrative expenses increased $822,000 or 8.0% for the six months ended July 31, 2006 when compared to the same period in fiscal 2006. Engineering & Evaluation: For the six months ended July 31, 2006, selling, general and administrative expenses increased by $901,000 or 12.4% when compared to the same period in fiscal 2006, primarily due to the effects of share-based compensation expense resulting from the application of SFAS No. 123(R) and increased use of outside services related to the improvement of the Company's internal IT infrastructure and data automation and increased travel and conference expenses. Technical Solutions: For the six months ended July 31, 2006, selling, general and administrative expenses decreased by $79,000 or 2.6% when compared to the same period in fiscal 2006, primarily due to the reduction in selling costs associated with the lower revenues discussed above. Equity Income from Non-Consolidated Subsidiary: Engineering & Evaluation: For the six months ended July 31, 2006, equity income from XXCAL Japan was $135,000, compared to $112,000 for the same period in fiscal 2006. XXCAL Japan is 50% owned by NTS and is accounted for under the equity method since NTS does not have management or board control. 15
OPERATING INCOME Six months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 1,715 (32.9)% $ 2,557 $ (842) % to segment revenue 4.5% 7.4% (2.9)% Technical Solutions 80 40.4% 57 23 % to segment revenue 0.4% 0.3% 0.1% -------- ---------------------- Total $ 1,795 (31.3)% $ 2,614 $ (819) ======== ====================== % to total revenue 3.2% 4.8% -1.7%
Operating income for the six months ended July 31, 2006 decreased by $819,000 or 31.3% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the six months ended July 31, 2006, operating income in the Engineering & Evaluation Group decreased by $842,000 or 32.9% when compared to the same period in fiscal 2006, primarily as a result of the decrease in gross profit and the increase in selling, general and administrative expenses, partially offset by the increase in equity income from non-consolidated subsidiary. Technical Solutions: For the six months ended July 31, 2006, operating income in the Technical Solutions Group increased by $23,000 or 40.4% when compared to the same period in fiscal 2006, as a result of the decrease in selling, general and administrative expenses, partially offset by the decrease in gross profit discussed above. INTEREST EXPENSE Net interest expense increased by $165,000 to $812,000 in the six months ended July 31, 2006 when compared to the same period in fiscal 2006. This increase was principally due to higher interest rate levels for the six months ended July 31, 2006 and higher average debt balances for the six months ended July 31, 2006 when compared to the same period last year. OTHER INCOME Other income increased by $113,000 to $129,000 in the six months ended July 31, 2006 when compared to the same period in fiscal 2006, primarily due to the reduction in deferred compensation expense. INCOME TAXES The income tax provision rate of 42.6% for the six months ended July 31, 2006 is higher than the 37.1% income tax rate in the prior year, primarily due to non-deductible share-based compensation expense recorded for the six months ended July 31, 2006 as compared to none for the same period in the prior year. This rate is based on the estimated provision accrual for fiscal year ending January 31, 2007. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities. It is the Company's intention to assess the need for a valuation account by evaluating the realizability of the deferred tax asset quarterly based upon projected future taxable income of the Company. NET INCOME Net income for the six months ended July 31, 2006 was $599,000, a decrease of $603,000 compared to the same period in fiscal 2006. This decrease was primarily due to the lower operating income, higher interest expense, higher income tax rate, partially offset by higher other income and lower minority interest expense. 16 The following information is based upon results for National Technical Systems, Inc. for the three months ended July 31. RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - --------------------- REVENUES Three months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 19,230 11.6% $ 17,231 $ 1,999 Technical Solutions 9,208 (3.3)% 9,524 (316) -------- ----------------------- Total revenues $ 28,438 6.3% $ 26,755 $ 1,683 ======== =======================
For the three months ended July 31, 2006, consolidated revenues increased by $1,683,000 or 6.3% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the three months ended July 31, 2006, Engineering and Evaluation revenues increased by $1,999,000 or 11.6% when compared to the same period in fiscal 2006, primarily due to additional revenues of $718,000 from the acquisition on June 9, 2006 of B&B Technologies, an engineering systems integration company located in Albuquerque, New Mexico, $610,000 in increased aerospace revenues from the Santa Clarita laboratory as a result of the enhanced capability and capacity at that facility and increases in overall revenues from telecommunications, electronics and registration markets. These increases were partially offset by a decrease in the transportation testing business. Technical Solutions: For the three months ended July 31, 2006, Technical Solutions revenues decreased by $316,000 or 3.3% when compared to the same period in fiscal 2006, as a result of the lower demand in outplacement services and permanent placements in the general IT service business, primarily due to increased price compression in this market and competition from off-shore companies.
GROSS PROFIT Three months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 4,928 5.0% $ 4,695 $ 233 % to segment revenue 25.6% 27.2% -1.6% Technical Solutions 1,651 6.9% 1,544 107 % to segment revenue 17.9% 16.2% 1.7% -------- ---------------------- Total $ 6,579 5.4% $ 6,239 $ 340 ======== ====================== % to total revenue 23.1% 23.3% -0.2%
Total gross profit for the three months ended July 31, 2006 increased by $340,000 or 5.4% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the three months ended July 31, 2006, gross profit for the Engineering & Evaluation Group increased by $233,000 or 5.0% when compared to the same period in fiscal 2006, primarily as a result of the increase in revenues discussed above. Gross profit as a percentage of revenues decreased by 1.6% for the three months ended July 31, 2006, compared with the same period last year. This decrease was primarily due to the continued weakness in the automotive industry, program delays at the Camden, Arkansas facility and the continued reduction in gross margin at the Company's New Jersey and Santa Rosa, California facilities as a result of the investments made for expansion at these facilities and not achieving the desired revenues. However the Company expects the performance at these facilities to improve due to the increased 17 capacity and capability. Gross profit was also impacted by high energy costs, particularly at the Santa Clarita, California facility and losses from one program at Santa Clarita due to contractual issues. The performance at the Company's Fullerton, California facility was negatively impacted during the second quarter as a result of a quality system deficiency in the Company's "NEBS" (Network Equipment Building Specification) testing under the "ITL" (Independent Test Laboratory) program and suspended testing under this program. The testing has recently been reinstated after the Company took the necessary corrective actions. Additionally, share-based compensation expense included in cost of sales for the three months ended July 31, 2006 was $38,000, compared with no share-based compensation expense in fiscal 2006. Technical Solutions: For the three months ended July 31, 2006, gross profit increased by $107,000 or 6.9% in the Technical Solutions Group when compared to the same period in fiscal 2006. This increase was due to the increased focus in specialized compliance and engineering support services which generally produce higher margins. Gross profit as a percentage of revenues increased for the three months ended July 31, 2006 to 17.9% from 16.2% for the same period in the prior year.
SELLING, GENERAL & ADMINISTRATIVE Three months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 4,214 17.6% $ 3,582 $ 632 % to segment revenue 21.9% 20.8% 1.1% Technical Solutions 1,533 (0.3)% 1,538 (5) % to segment revenue 16.6% 16.1% 0.5% -------- ---------------------- Total $ 5,747 12.2% $ 5,120 $ 627 ======== ====================== % to total revenue 20.2% 19.1% 1.1%
Total selling, general and administrative expenses increased $627,000 or 12.2% for the three months ended July 31, 2006 when compared to the same period in fiscal 2006. Engineering & Evaluation: For the three months ended July 31, 2006, selling, general and administrative expenses increased by $632,000 or 17.6% when compared to the same period in fiscal 2006, primarily due to the effects of share-based compensation resulting from the application of SFAS No. 123(R) and increased use of outside services related to the improvement of the Company's internal IT infrastructure and data automation and increased travel and conference expenses. Technical Solutions: For the three months ended July 31, 2006, selling, general and administrative expenses decreased by $5,000 or 0.3% when compared to the same period in fiscal 2006, primarily due to the reduction in selling costs associated with the lower revenues discussed above. Equity Income from Non-Consolidated Subsidiary: Engineering & Evaluation: For the three months ended July 31, 2006, equity income from XXCAL Japan was $60,000, compared $35,000 for the same period in fiscal 2006. XXCAL Japan is 50% owned by NTS and is accounted for under the equity method since NTS does not have management or board control. 18
OPERATING INCOME Three months ended July 31, 2006 % Change 2005 Diff ----------------------------------------------- (Dollars in thousands) Engineering & Evaluation $ 774 (32.6)% $ 1,148 $ (374) % to segment revenue 4.0% 6.7% (2.6)% Technical Solutions 118 1866.7% 6 112 % to segment revenue 1.3% 0.1% 1.2% ------- ---------------------- Total $ 892 (22.7)% $ 1,154 $ (262) ======= ====================== % to total revenue 3.1% 4.3% -1.2%
Operating income for the three months ended July 31, 2006 decreased by $262,000 or 22.7% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the three months ended July 31, 2006, operating income in the Engineering & Evaluation Group decreased by $374,000 or 32.6% when compared to the same period in fiscal 2006, primarily as a result of the increase in selling, general and administrative expenses, partially offset by the increase in gross profit and increase in equity income from non-consolidated subsidiary. Technical Solutions: For the three months ended July 31, 2006, operating income in the Technical Solutions Group increased by $112,000 when compared to the same period in fiscal 2006, as a result of the increase in gross profit and the decrease in selling, general and administrative expenses discussed above. INTEREST EXPENSE Net interest expense increased by $122,000 to $451,000 in the three months ended July 31, 2006 when compared to the same period in fiscal 2006. This increase was principally due to higher interest rate levels for the three months ended July 31, 2006 and the higher average debt balances for the three months ended July 31, 2006 when compared to the same period last year. OTHER INCOME Other income increased by $107,000 to $123,000 in the three months ended July 31, 2006 when compared to the same period in fiscal 2006, primarily due to the reduction in deferred compensation expense. INCOME TAXES The income tax provision rate of 47.9% for the three months ended July 31, 2006 is higher than the 39.8% income tax rate in the prior year, primarily due to non-deductible share-based compensation expense and certain other non-deductible expenses recorded for the three months ended July 31, 2006 as compared to none for the same period in the prior year. This rate is based on the estimated provision accrual for fiscal year ending January 31, 2006. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities. It is the Company's intention to assess the need for a valuation account by evaluating the realizability of the deferred tax asset quarterly based upon projected future taxable income of the Company. NET INCOME Net income for the three months ended July 31, 2006 was $247,000, a decrease of $221,000, compared to the same period in fiscal 2006. This decrease was primarily due to the lower operating income, higher interest expense, higher income tax rate and higher minority interest expense, partially offset by higher other income. 19 BUSINESS ENVIRONMENT In the Engineering & Evaluation segment, the Company tests and certifies high tech products for seven distinct markets: defense, aerospace, telecommunications, transportation, power, computer and electronics. The Company also provides ISO 9000 Quality Management System Registration. The defense and aerospace markets generate approximately 60% of the overall Engineering and Evaluation revenues. In recent years, domestic and worldwide political and economic developments have impacted positively the market demands for defense and advanced technology systems. Government R&D funding specifically for defense has increased this year. Also, the increase in government outsourcing activity has created additional opportunities for NTS. The Company has ten fully equipped defense and aerospace environmental simulation laboratories located throughout the United States and is well equipped to handle this increase in demand. The Company has seen an increase in demand for the evaluation of military equipment and weapons systems, which has positively affected business at its laboratories. In addition, NASA Space exploration R&D budgeting is up 6.2% this year. This increase in R&D should have a positive impact on the aerospace test and evaluation business for the foreseeable future. Currently the Company is experiencing a slight increase in its aerospace business this year. The trend in the telecommunications market appears to be stable in the short term and growing in the future. Carriers are deploying voice, video and data using fiber networks. This should increase the demand for certification of suppliers' premises equipment, fiber component certification and certification of additional central office equipment. The Company has been approved as an Independent Test laboratory (ITL) by the regional bell operating companies (RBOCs) to test and certify central office equipment developed by manufactures to the Network Equipment Building Specifications (NEBS). The Company is currently providing this service at Laboratories in California, Massachusetts, Texas, Alberta, Canada and Germany. The Company has been approved as an (ITL) to offer a complete suite of passive fiber components certifications and Digital Subscriber Line (DSL) certification. This service currently is being provided at laboratories in California. The Company expects an increase in business demand as RBOCs upgrade networks packet-based Voice Over Internet Protocol (VOIP) devices. As service providers gradually convert to VOIP architectures, interoperability becomes critical to ensure a seamless transition to next generation networks. The Company also expects an increase in demand as carriers begin to deploy "triple play" (voice, video, and broadband) offerings over FTTP (fiber to the premises) passive fiber networks (PON). The Company recently acquired a network architecture and interoperability laboratory in Northern California. This laboratory was acquired to extend the Company's service offering to handle the anticipated demand for interoperability testing and the FTTP deployment. The transportation market and power markets have been stable with the Company continuing to experience a slight decrease in the transportation business, while the Company continues to experience a slight increase in the power business. The computer and electronics markets have been stable. The Company anticipates growth in these markets as it captures additional market share due to the planned international expansion. NTS has signed cooperative agreements in Taiwan and Korea with SGS and STC in Hong Kong and mainland China. The cooperative agreements will focus on providing USB, USB on the go, Connector and Zigbee certification to device manufacturers and industrial products manufactured in Asia. The Company believes that the demand for these certification activities will increase in Asia. In the Technical Solutions segment, the Company provides a variety of staffing and workforce management services and solutions, including contract, contract-to-hire and full time placements to meet its customers' needs with a focus on IT and engineering. As the IT general services business went off-shore and became treated as commodity by the larger organizations the Company deployed a transformation strategy in 2003 which focused on meeting the anticipated increase in demand for specialized IT, compliance, engineering support services at Company locations as well as taking advantage of offshore opportunities. As part of this transformation, the Company developed a proprietary database and put in place a customer service team which maintains relationships and manages the availability of the technical experts which support these specialized services. The Company has also set up a test and compliance laboratory in Vietnam to support the needs of a major US Fortune 500 computer company and to take advantage of the low cost highly skilled labor in Vietnam. The Company is now expanding this offshore offering to additional clients. TS continues to differentiate itself from its competitors by using NTS' testing, engineering and compliance capabilities to maximize its customers' return on human assets. Notwithstanding the foregoing, and because of factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance. 20 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities of $522,000 in the six months ended July 31, 2006 primarily consisted of net income of $599,000 adjusted for non-cash items of $2,819,000 in depreciation and amortization, share based compensation of $319,000, other non cash items of $230,000, partially offset by changes in working capital of $3,445,000. Net cash provided by operating activities in the six months ended July 31, 2005 was $2,615,000. Net cash provided by operating activities decreased from the six months ended July 31, 2005 to the six months ended July 31, 2006 by $2,093,000, primarily as a result of the increase in accounts receivable and the decrease in net income, accrued expenses and income taxes payable. Cash used for investing activities in the six months ended July 31, 2006 of $3,947,000 was attributable to capital spending of $3,083,000, cash used to acquire American International Registrars Corporation ("AIR") of $386,000, cash used to acquire B&B Technologies of $387,000 and investment in life insurance of $91,000. Capital spending is generally comprised of purchases of machinery and equipment, building, leasehold improvements, computer hardware, software and furniture and fixtures. Cash used for investing activities in the six months ended July 31, 2005 was $3,098,000. Net cash provided by financing activities in the six months ended July 31, 2006 of $1,965,000 consisted of proceeds from borrowings of $10,292,000, proceeds from stock options exercised of $424,000, partially offset by repayment of debt of $4,858,000, and common stock repurchase of $3,893,000 from an executive officer and director of the Company. Net cash used for financing activities for the six months ended July 31, 2005 was $1,638,000. On November 25, 2002, the Company increased the revolving line of credit under its credit agreement with Comerica Bank California and First Bank to $20,000,000. Comerica Bank California, as the agent, retained 60% of the line with First Bank, as the participant, holding 40% of the line. The revolving line of credit was reduced by $1,750,000 on August 1, 2003 and was reduced again on August 1, 2004 by $1,750,000, bringing the maximum line of credit available down to $16,500,000. The interest rate is at the agent's prime rate, with an option for the Company to convert to loans at the Libor rate plus 250 basis points for 30, 60, 90, 180 or 365 days, with minimum advances of $1,000,000. The Company paid a 0.5% commitment fee of the total line amount and is paying an additional 0.25% of the commitment amount annually and a 0.25% fee for any unused line of credit. On July 1, 2005, the agreement was amended to include a $2,500,000 term loan to be repaid in 60 equal monthly payments. The proceeds were used to pay down the line of credit. In addition, the requirement of the $1,750,000 reduction of the line was removed from the agreement. On March 29, 2006, the Company increased the term loan by an additional $3,900,000 to fund the repurchase of 792,266 shares of common stock from an executive officer and director, as discussed above. The outstanding balance on the term loan at July 31, 2006 was $5,533,000. The outstanding balance on the revolving line of credit at July 31, 2006 was $10,993,000. This balance is reflected in the accompanying condensed consolidated balance sheets as long-term. The amount available on the line of credit was $5,507,000 as of July 31, 2006. The amendment also includes an additional equipment line of credit for $2,000,000. The outstanding balance on the equipment line of credit at July 31, 2006 was $2,000,000. This agreement is subject to certain covenants, which require the maintenance of certain working capital, debt-to-equity, earnings-to-expense and cash flow ratios. The Company was in full compliance with all of the covenants with its banks at July 31, 2006. The Company is in the process of renewing its existing lines of credit with its banks. The Company has additional equipment line of credit agreements (at interest rates of 5.56% to 9.82%) to finance various test equipment with terms of 60 months for each equipment schedule. The outstanding balance at July 31, 2006 was $1,504,000. The balance of other notes payable collateralized by land and building was $2,512,000 and the balance of unsecured notes was $38,000 at July 31, 2006. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's quantitative and qualitative market risk since the disclosure in the Company's Annual Report on Form 10-K for the year ended January 31, 2006, filed with the Securities and Exchange Commission on April 28, 2006. ITEM 4. CONTROLS AND PROCEDURES Evaluation Of Disclosure Controls And Procedures The Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation with the participation of the Company's management, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective. Changes in Internal Controls Over Financial Reporting As required by Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer, with the participation of the Company's management, also conducted an evaluation of the Company's internal controls over financial reporting to determine whether any changes occurred during the six months ended July 31, 2006 that have materially affected, or are reasonably likely to affect, the Company's internal controls over financial reporting. Based on that evaluation, there has been no such change during the six months ended July 31, 2006. Limitations of the Effectiveness A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Notwithstanding these limitations, the Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are, in fact, effective at the "reasonable assurance" level. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings From time to time the Company may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. Management does not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company's business, financial condition, cash flows or results of operation. Item 1A. Risk Factors There have been no material changes in the Company's risk factors since the disclosure in the Company's Annual Report on Form 10-K for the year ended January 31, 2006 filed with the Securities and Exchange Commission on April 28, 2006. Item 2. Unregistered Sales of Equity Securities The Company issued .83,243 shares in NTS common stock in conjunction with the acquisition of B&B Technologies, Inc. (see note 11). These shares were issued pursuant to to the exemption provided in "Section 4(2)" of the securities act of 1933. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of shareholders held on June 29, 2006, two nominees of the Board of Directors were elected directors for three year terms as Class I Directors expiring on the date of the annual meeting in 2009. The votes were as follows: --------------------------------------------------------- For Withheld --------------------------------------------------------- William McGinnis 7,131,256 827,681 --------------------------------------------------------- John Gibbons 7,239,081 719,856 --------------------------------------------------------- The shareholders of the Company voted to approve the adoption of the 2006 Equity Incentive Plan. The results of the vote of the shareholders were as follows: ------------------------------------------------------------------- For Against Abstain ------------------------------------------------------------------- Approve the 2006 Equity Incentive Plan 3,542,645 1,322,649 5,140 ------------------------------------------------------------------- The shareholders of the Company voted to ratify Ernst & Young LLP as auditors for the year ending January 31, 2007. The results of the vote of the shareholders were as follows: ------------------------------------------------------------------- For Against Abstain ------------------------------------------------------------------- Ratify Ernst & Young LLP as auditors for the year ending January 31, 2007 7,330,581 622,526 5,830 ------------------------------------------------------------------- Item 5. Other Information None. 23 Item 6. Exhibits 3.3 - Bylaws of National Technical Systems, Inc., a California corporation, as adopted on December 14, 2004. 31.1 - Certification of the Principal Executive Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification of the Principal Financial Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 - Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL TECHNICAL SYSTEMS, INC. Date: September 13, 2006 By: /s/ Lloyd Blonder ------------------- Lloyd Blonder Senior Vice President Chief Financial Officer (Signing on behalf of the registrant and as principal financial officer) 25 EX-3.3 2 d69309ex3-3.txt BYLAWS OF NATIONAL TECHNICAL SYSTEMS, INC. EXHIBIT 3.3 BYLAWS OF NATIONAL TECHNICAL SYSTEMS, INC. 8. OFFICES 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. 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. 9. MEETINGS OF SHAREHOLDERS PLACE OF MEETINGS. Meetings of shareholders 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. At the discretion of the board of directors, and subject to such guidelines and procedures as the board of directors may adopt and as are required by applicable law, the corporation may permit any shareholder not physically present in person or by proxy at a meeting of shareholders to participate in a meeting of the shareholders by electronic transmission by and to the corporation or by electronic video screen communication, and the shareholder shall be deemed by such participation to be present in person or by proxy, and to vote at a meeting of shareholders. Notwithstanding subsection 2.1(a) above, the corporation may conduct any shareholder meeting, in whole or in part, by electronic transmission by and to the corporation or by electronic video screen communication provided (1) the corporation has obtained from the shareholders the requisite consent under de of California, (2) the corporation implements reasonable measures to provide shareholders (in person or by proxy) a reasonable opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including an opportunity to read or hear the proceedings of the meeting concurrently with those proceedings, and (3) if any shareholder votes or takes other action at the meeting by means of electronic transmission to the corporation or electronic video screen communication, a record of that vote or action is maintained by the corporation. 26 ANNUAL MEETINGS OF SHAREHOLDERS. The corporation shall hold its annual meeting of shareholders 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. Nominations of persons for election to the board of directors of the corporation and the proposal of business to be transacted by the shareholders may be made at an annual meeting of shareholders (i) pursuant to the corporation's notice with respect to such meeting, (ii) by or at the direction of the board of directors or (iii) by any shareholder of record of the corporation who was a shareholder of record at the time of the giving of the notice provided for in this Section 2.2, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 2.2. For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (iii) of paragraph (b) of this Section 2.2, (i) the shareholder must have given timely notice of the nominations or proposed business in writing to the Secretary of the corporation, (ii) the business so proposed must be a proper matter for shareholder action under the General Corporation Law of the State of California, (iii) if the shareholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the corporation with a Solicitation Notice, as that term is defined in subclause (iv)(3) of paragraph (d) of this Section 2.2, the shareholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the corporation's voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the corporation's voting shares reasonably believed by such shareholder or beneficial holder to be sufficient to elect the nominee or nominees proposed to be nominated by such shareholder, and must, in either case, have included in such materials the Solicitation Notice and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this Section 2.2, the shareholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under paragraph (d) of this Section 2.2. To be timely, a shareholder's notice must be delivered to the Secretary at the principal executive offices of the corporation not less than 45 days nor more than 75 days prior to the first anniversary (the "Anniversary") of the date on which the corporation first mailed its proxy materials for the preceding year's annual meeting of shareholders; provided, however, that if the date of the annual meeting is advanced by more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the shareholder to be timely must be delivered not later than the close of business on the later of the 90th day prior to such annual meeting and the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. The shareholder's notice to be delivered pursuant to clause (i) of paragraph (c) of this Section 2.2 shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director, all information relating to such person as would be required to be disclosed in solicitations of proxies for election of such nominees as directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such person's written consent to being named in the proxy 27 statement as a nominee and to serve as a director if elected; (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iv) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner, (2) the class and number of shares of the capital stock of the corporation that are owned beneficially and of record by such shareholder and such beneficial owner, and (3) whether either such shareholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice"); Notwithstanding anything in the second sentence of paragraph (c) of this Section 2.2 to the contrary, in the event that the number of directors to be elected to the board of directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased board of directors made by the corporation at least 55 days prior to the Anniversary, a shareholder's notice required by this Section 2.2 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive office of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. Only persons nominated in accordance with the procedures set forth in these bylaws shall be eligible to serve as directors, and only such business shall be conducted at an annual meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in these bylaws. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting has been made in accordance with the procedures set forth in these bylaws and, if any proposed nomination or business is not in compliance with these bylaws, to declare that such defective proposed nomination or business shall not be presented for shareholder action at the meeting and shall be disregarded. For purposes of these bylaws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing provisions of this Section 2.2, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.2. Nothing in this Section 2.2 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 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 28 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 such meeting and the general nature of the business proposed to be transacted, and no other business shall be transacted. The notice 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. Whenever the corporation gives notice that the election of a director is to take place at a special meeting of shareholders, nominations may be made either (i) by or at the direction of the board of directors, or (ii) by any shareholder of record of the corporation who is a shareholder of record at the time of giving of notice provided for in this paragraph, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this bylaw. Nominations by shareholders of persons for election to the board of directors may be made at such a special meeting of shareholders if the shareholder's notice required by Section 2.2(d) of these bylaws shall be delivered to the Secretary at the principal executive office of the corporation not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. 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. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any 29 meeting of shareholders shall be given not less than ten (10) (or, if sent by third-class mail, thirty (30)) nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. That notice shall state the place, date and hour of the meeting, the means of electronic transmission by and to the corporation or electronic video screen communication, if any, by which shareholders may participate in that meeting, and (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters that the board, at the time of the mailing of 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 names of nominees intended at the time of the notice to be presented by the board for election. Notice of a shareholders' meeting or any report shall be given personally, by electronic transmission by the corporation, or by first-class mail, or, if the corporation's outstanding shares are held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Corporations Code of California) on the record date for the shareholders' meeting, notice may also be sent third-class mail, or other means of written communication, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located, provided that notice shall be delivered to a shareholder by electronic transmission only to the extent permitted by the Corporations Code of California. The notice or report shall be deemed to have been given at the time when delivered personally, sent by electronic transmission by the corporation, deposited in the mail, or sent by other means of written communication. An affidavit of mailing or electronic transmission by the corporation of any notice or report made in accordance with the provisions of these bylaws, executed by the secretary, assistant secretary or any transfer agent of the corporation giving such notice, shall be filed and maintained in the minute book of the corporation. 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. 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 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 30 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. 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 (i) the right to cumulate votes is required by Corporations Code of California or the Articles of Incorporation, and (ii) 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 of directors to be elected, shall be elected. Votes against a director and votes withheld shall have no legal effect. 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 31 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. 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 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. 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: 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 32 business day next preceding the day on which the meeting is held. 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. 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. 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, 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: 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; Receive votes, ballots or consents; Hear and determine all challenges and questions in any way arising in connection with the right to vote; Count and tabulate all votes or consents; 33 Determine when the polls shall close; Determine the result; and Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. 10. DIRECTORS POWERS. Subject to the provisions of the Corporations Code of California 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: 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. Change the principal executive office or the principal business office in the State of California 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. 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. 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. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be not less than NINE (9) nor more than SEVENTEEN (17). The exact number of authorized directors shall be set from time to time by the board of directors. An amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote which reduces the number of directors to a number less than five (5) cannot be 34 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. 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 an equal or close to equal number of 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 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 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. 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. 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 35 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, electronic video screen communication, or electronic transmission by and to the corporation. Participation in a meeting through use of conference telephone or electronic video screen communication shall constitute presence in person at that meeting as long as all members participating in the meeting are able to hear one another. Participation in a meeting through electronic transmission by and to the corporation (other than conference telephone and electronic video screen communication) constitutes presence in person at that meeting as long as (i) each member participating in the meeting can communicate with all of the other members concurrently, and (ii) Each member is provided the means of participating in all matters before the board, including, without limitation, the capacity to propose, or to interpose an objection to, a specific action to be taken by the corporation. 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. 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. 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, telegram or by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, electronic mail, or other electronic means, 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 telegram, telephone, facsimile, electronic mail or other electronic means, it shall be delivered 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. 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 36 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. 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. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 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. 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. 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 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. 11. COMMITTEES 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: the approval of any action which, under the Corporations Code of California, also requires share holders' approval or approval of the outstanding shares; 37 the filling of vacancies on the board of directors or in any committee; the fixing of compensation of the directors for serving on the board or on any committee; the amendment or repeal of bylaws or the adoption of new bylaws; the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; 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 the appointment of any other committees of the board of directors or the members thereof. 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. 12. OFFICERS 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. 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. 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 the bylaws or as the board of directors may from time to time determine. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of 38 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. 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. 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. 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. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in 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. 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 39 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. 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, 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. 13. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 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, 40 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. 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. 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. 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 consolidation 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. 41 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. 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. 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 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. 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 42 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. 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. 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. EXCEPTIONS. Notwithstanding any other provision herein to the contrary, the corporation shall not be obligated pursuant to this Article VI: 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 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 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 Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or 43 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 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. 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. 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, 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. 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. 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. 44 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. 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 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. 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. 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. 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, (ii) if sent by electronic transmission by the corporation, at the time sent, or (iii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. 45 14. RECORDS AND REPORTS 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. 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. 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. 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 46 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. 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. 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 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. 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. 47 15. GENERAL CORPORATE MATTERS 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. 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. 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. 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 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. 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 48 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. 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. 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 singular, and the term "person" includes both a corporation and a natural person. TIME NOTICE GIVEN OR SENT. Any reference in these bylaws to the time a notice is given or sent means, unless otherwise expressly provided herein or by law, the time a written notice (a) is deposited in the United States mail, is personally delivered to the recipient, or is delivered to a common carrier for transmission; (b) is actually transmitted to the recipient by the person giving the notice by electronic transmission; or (c) is communicated, in person or by telephone, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient ELECTRONIC TRANSMISSION BY OR TO THE CORPORATION. (a) When used in these bylaws, the term "electronic transmission by the corporation" means a communication (a) delivered by (1) facsimile telecommunication or electronic mail when directed to the facsimile number or electronic mail address, respectively, for that recipient on record with the corporation, (2) posting on an electronic message board or network which the corporation has designated for those communications, together with a separate notice to the recipient of the posting, which transmission shall be validly delivered upon the later of the posting or delivery of the separate notice thereof, or (3) other means of electronic communication, (b) to a recipient who has provided an unrevoked consent to the use of those means of transmission for communications under or pursuant to the Corporations Code of California, (c) that creates a record that is capable of retention, retrieval, and review, and that may thereafter be rendered into clearly legible tangible form, and (d) that satisfies the requirements applicable to consumer consent to electronic records as set forth in the Electronic Signatures in Global and National Commerce Act (15 U.S.C. Sec. 7001(c)(1)), or any similar law that replaces such act. (b) When used in these bylaws, "electronic transmission to the corporation" means a communication (a) delivered by (1) facsimile telecommunication or electronic mail when directed to the facsimile number or electronic mail address, respectively, which the corporation has provided from time to time to shareholders or members and directors for sending communications to the 49 corporation, (2) posting on an electronic message board or network which the corporation has designated for those communications, and which transmission shall be validly delivered upon the posting, or (3) other means of electronic communication, (b) as to which the corporation has placed in effect reasonable measures to verify that the sender is the shareholder or member (in person or by proxy) or director purporting to send the transmission, and (c) that creates a record that is capable of retention, retrieval, and review, and that may thereafter be rendered into clearly legible tangible form. 16. AMENDMENTS 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. 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. 50 EX-31.1 3 d69309ex31-1.txt CERTIFICATION (SECTION 302) OF CEO & DIRECTOR EXHIBIT 31.1 CERTIFICATION I, William McGinnis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Technical Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ William McGinnis -------------------------------- William McGinnis, Chief Executive Officer and Director (Principal Executive Officer) September 13, 2006 51 EX-31.2 4 d69309ex31-2.txt CERTIFICATION (SECTION 302) OF SVP & CFO EXHIBIT 31.2 CERTIFICATION I, Lloyd Blonder, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Technical Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Lloyd Blonder -------------------------------------- Lloyd Blonder, Senior Vice President and Chief Financial Officer (Principal Financial Officer) September 13, 2006 52 EX-32.1 5 d69309ex32-1.txt CERTIFICATION (SECTION 906) OF CEO & DIRECTOR EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of NATIONAL TECHNICAL SYSTEMS, INC. (the "Company") on Form 10-Q for the period ended July 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William McGinnis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. /s/ William McGinnis ------------------------------------ William McGinnis, Chief Executive Officer and Director (Principal Executive Officer) September 13, 2006 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 53 EX-32.2 6 d69309ex32-2.txt CERTIFICATION (SECTION 906) OF SVP & CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of NATIONAL TECHNICAL SYSTEMS, INC (the "Company") on Form 10-Q for the period ended July 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lloyd Blonder, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. /s/ Lloyd Blonder -------------------------------------- Lloyd Blonder, Senior Vice President and Chief Financial Officer (Principal Financial Officer) September 13, 2006 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 54 -----END PRIVACY-ENHANCED MESSAGE-----