-----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, TSSpws62xVCGp2igj/MgmVUQbtGJkS27Z74kpz1drFv2beE+sxwqorzGrRWFCOa9 vKMefqPsA5mrkfs6sqOKoQ== 0001169232-06-004744.txt : 20061214 0001169232-06-004744.hdr.sgml : 20061214 20061213201107 ACCESSION NUMBER: 0001169232-06-004744 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20061031 FILED AS OF DATE: 20061214 DATE AS OF CHANGE: 20061213 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: 061275438 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 d70133_10-q.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------------------------- (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 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 principal executive offices) (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 December 11, 2006 was 8,746,689 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Index PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Condensed Consolidated Balance Sheets at October 31, 2006 (unaudited) and January 31, 2006 3 Unaudited Condensed Consolidated Statements of Income For the Nine Months Ended October 31, 2006 and 2005 4 Unaudited Condensed Consolidated Statements of Income For the Three Months Ended October 31, 2006 and 2005 5 Unaudited Condensed Consolidated Statements of Cash Flows For the Nine Months Ended October 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 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Item 4. Controls and Procedures 24 PART II. OTHER INFORMATION & SIGNATURE Item 1. Legal Proceedings 25 Item 1A. Risk Factors 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4 Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits 25 Signature 26 2 PART I - FINANCIAL ITEM 1. FINANCIAL STATEMENTS NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets
At At October 31, January 31, 2006 2006 ASSETS (unaudited) ------------------------------- CURRENT ASSETS: Cash $ 1,885,000 $ 4,196,000 Accounts receivable, less allowance for doubtful accounts of $838,000 at October 31, 2006 and $816,000 at January 31, 2006 23,174,000 20,425,000 Income taxes receivable -- 10,000 Inventories 2,798,000 2,184,000 Deferred income taxes 1,812,000 1,747,000 Prepaid expenses 1,048,000 769,000 ------------------------------- Total current assets 30,717,000 29,331,000 Property, plant and equipment, at cost 100,532,000 93,887,000 Less: accumulated depreciation (65,052,000) (60,787,000) ------------------------------- Net property, plant and equipment 35,480,000 33,100,000 Goodwill 4,125,000 2,740,000 Other assets 4,310,000 3,962,000 ------------------------------- TOTAL ASSETS $ 74,632,000 $ 69,133,000 =============================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,111,000 $ 4,715,000 Accrued expenses 4,014,000 5,400,000 Income taxes payable 285,000 594,000 Deferred income 1,113,000 817,000 Current installments of long-term debt 2,678,000 1,529,000 ------------------------------- Total current liabilities 13,201,000 13,055,000 Long-term debt, excluding current installments 22,007,000 15,579,000 Deferred income taxes 4,858,000 5,084,000 Deferred compensation 933,000 874,000 Minority interest 238,000 163,000 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, 8,701,000 as of October 31, 2006 and 9,176,000 as of January 31, 2006 12,694,000 14,624,000 Retained earnings 20,752,000 19,744,000 Accumulated other comprehensive income (loss) (51,000) 10,000 ------------------------------- Total shareholders' equity 33,395,000 34,378,000 ------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,632,000 $ 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 Nine Months Ended October 31, 2006 and 2005
2006 2005 --------------------------------- Net revenues $ 86,398,000 $ 82,707,000 Cost of sales 66,726,000 63,046,000 --------------------------------- Gross profit 19,672,000 19,661,000 Selling, general and administrative expense 16,791,000 16,022,000 Equity income from non-consolidated subsidiary (192,000) (180,000) --------------------------------- Operating income 3,073,000 3,819,000 Other income (expense): Interest expense, net (1,312,000) (985,000) Other 171,000 163,000 --------------------------------- Total other expense (1,141,000) (822,000) Income before income taxes and minority interest 1,932,000 2,997,000 Income taxes 849,000 1,117,000 --------------------------------- Income before minority interest 1,083,000 1,880,000 Minority interest (75,000) (88,000) --------------------------------- Net income $ 1,008,000 $ 1,792,000 ================================= Earnings per common share: Basic $ 0.12 $ 0.20 ================================= Diluted $ 0.11 $ 0.19 ================================= Weighted average common shares outstanding 8,704,000 9,108,000 Dilutive effect of stock options 822,000 542,000 Weighted average common shares outstanding, assuming dilution --------------------------------- 9,526,000 9,650,000 =================================
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 October 31, 2006 and 2005
2006 2005 --------------------------------- Net revenues $ 29,809,000 $ 28,508,000 Cost of sales 22,954,000 21,684,000 --------------------------------- Gross profit 6,855,000 6,824,000 Selling, general and administrative expense 5,634,000 5,687,000 Equity income from non-consolidated subsidiary (57,000) (68,000) --------------------------------- Operating income 1,278,000 1,205,000 Other income (expense): Interest expense, net (500,000) (338,000) Other income 42,000 147,000 --------------------------------- Total other expense (458,000) (191,000) Income before income taxes and minority interest 820,000 1,014,000 Income taxes 375,000 382,000 --------------------------------- Income before minority interest 445,000 632,000 Minority interest (36,000) (42,000) --------------------------------- Net income $ 409,000 $ 590,000 ================================= Earnings per common share Basic $ 0.05 $ 0.06 ================================= Diluted $ 0.04 $ 0.06 ================================= Weighted average common shares outstanding 8,676,000 9,166,000 Dilutive effect of stock options 819,000 589,000 Weighted average common shares outstanding, assuming dilution --------------------------------- 9,495,000 9,755,000 =================================
See accompanying notes to condensed consolidated financial statements. 5 NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2006 and 2005
2006 2005 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,008,000 $ 1,792,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,298,000 4,028,000 Recoveries on receivables 22,000 139,000 Gain on sale of assets -- (163,000) Undistributed earnings of affiliate 75,000 88,000 Deferred income taxes (net of acquisitions) (291,000) (441,000) Tax benefit from stock options exercised 276,000 -- Share based compensation 447,000 -- Changes in operating assets and liabilities (net of acquisitions): Accounts receivable (2,523,000) (2,749,000) Inventories (579,000) (648,000) Prepaid expenses (247,000) (224,000) Other assets and intangibles 29,000 (269,000) Accounts payable 164,000 407,000 Accrued expenses (1,428,000) 341,000 Income taxes payable (309,000) 274,000 Deferred income 243,000 508,000 Deferred compensation 59,000 63,000 Income taxes receivable 10,000 521,000 -------------------------------- Cash provided by operating activities 1,254,000 3,667,000 -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (4,545,000) (4,277,000) Sale of property, plant and equipment -- 543,000 Investment in life insurance (143,000) -- Acquisitions of businesses, net of cash (3,054,000) (483,000) -------------------------------- Cash used for investing activities (7,742,000) (4,217,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from current and long-term debt 14,436,000 1,076,000 Repayments of current and long-term debt (6,897,000) (4,063,000) Proceeds from stock options exercised 592,000 221,000 Common stock repurchase (3,893,000) -- -------------------------------- Net cash provided by (used for) financing activities 4,238,000 (2,766,000) -------------------------------- Effect of exchange rate changes on cash (61,000) 32,000 -------------------------------- Net decrease in cash (2,311,000) (3,284,000) Beginning cash balance 4,196,000 6,201,000 -------------------------------- ENDING CASH BALANCE $ 1,885,000 $ 2,917,000 ================================
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 nine months ended October 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 $375,000 and $849,000 for the three and nine months ended October 31, 2006, respectively, and $382,000 and $1,117,000 for the three and nine months ended October 31, 2005, respectively. 3. Comprehensive Income (Loss) Accumulated other comprehensive income (loss) on the Company's Condensed Consolidated Balance Sheets consists of cumulative equity adjustments from foreign currency translation. During the nine months ended October 31, 2006 the foreign currency translation adjustment resulted in a loss of $61,000 and total comprehensive income was $947,000. During the nine months ended October 31, 2005, the foreign currency translation adjustment was a gain of $32,000 and total comprehensive income was $1,824,000. 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 nine months ended October 31, 2006 was $1,342,000 and $1,149,000, respectively. Cash paid for interest and taxes for the nine months ended October 31, 2005 was $1,000,000 and $757,000, 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 October 31, 2006. As of October 31, 2006 and January 31, 2006, the Company had the following acquired intangible assets:
October 31, 2006 January 31, 2006 ---------------------------------------------- ----------------------------------------------- Gross Net Estimated Gross Net Estimated Carrying Accum. Carrying Useful Carrying Accum. Carrying Useful Amount Amort. Amount Life Amount Amort. Amount Life Intangible assets subject to amortization: Covenants not to compete $ 299,000 $125,000 $ 174,000 3-5 years $ 148,000 $110,000 $ 38,000 3-5 years Customer relationships 105,000 6,000 99,000 18 months -- -- -- ---------------------------------- ---------------------------------- Total $ 404,000 $131,000 $ 273,000 $ 148,000 $110,000 $ 38,000 ====================== ========== ================================== Intangible assets not subject to amortization: Goodwill $4,922,000 $797,000 $4,125,000 $3,537,000 $797,000 $2,740,000 ====================== ========== ==================================
Amortization expense for intangible assets subject to amortization was $21,000 and $30,000 for the nine months ended October 31, 2006 and 2005, respectively. Goodwill increased by $1,385,000 due to the acquisitions of American International Registrars Corporation, B & B Technologies, Inc. and Dynamic Labs. (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 non qualified 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 8 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 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:
Nine Months Ended Three Months Ended ----------------------------- ----------------------------- October 31, October 31, October 31, October 31, 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Cost of sales $ 110,000 $ -- $ 30,000 $ -- Selling, general and administrative expense 337,000 -- 99,000 -- ----------- ----------- ----------- ----------- Share-based compensation effect in income before taxes 447,000 -- 129,000 -- Income taxes (17,000) -- (4,000) -- ----------- ----------- ----------- ----------- Net share-based compensation effects in net income $ 430,000 $ -- $ 125,000 $ -- =========== =========== =========== =========== Share-based compensation effects on basic earnings per common share $ 0.05 $ -- $ 0.01 $ -- =========== =========== =========== =========== Share-based compensation effects on diluted earnings per common share $ 0.05 $ -- $ 0.01 $ -- =========== =========== =========== =========== Share-based compensation effects on cash flow from operations $ -- $ -- $ -- $ -- =========== =========== =========== =========== Share-based compensation effects on cash flow from financing activities $ -- $ -- $ -- $ -- =========== =========== =========== =========== Weighted average common shares outstanding 8,712,000 9,108,000 8,701,000 9,166,000 Dilutive effect of stock options 822,000 542,000 819,000 589,000 ----------- ----------- ----------- ----------- Weighted average common shares outstanding, assuming dilution 9,534,000 9,650,000 9,520,000 9,755,000 =========== =========== =========== =========== Stock-based compensation expense by type of award: Stock Options 439,000 -- 121,000 -- Restricted Stock 8,000 -- 8,000 -- ----------- ----------- ----------- ----------- 447,000 -- 129,000 -- =========== =========== =========== ===========
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 nine months ended October 31, 2006 was immaterial. Under the provisions of SFAS No. 123(R), $723,000 has been recorded as a credit to common stock. During the nine months ended October 31, 2006, the tax benefit realized for the tax deduction from option exercises totaled 9 $276,000. As of November 1, 2006, there was $453,000 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 39 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:
Nine Months Three Months Ended Ended October 31, October 31, 2005 2005 -------------- ------------ Net income, as reported $ 1,792,000 $ 590,000 Less: total share-based employee compensation determined under the fair value method for all awards, net of tax 292,000 75,000 -------------- ------------ Pro forma net income $ 1,500,000 $ 515,000 ============== ============ Reported basic earnings per common share $ 0.20 $ 0.06 ============== ============ Pro forma basic earnings per common share $ 0.16 $ 0.06 ============== ============ Reported diluted earnings per common share $ 0.19 $ 0.06 ============== ============ Pro forma diluted earnings per common share $ 0.16 $ 0.05 ============== ============
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 2006 equity incentive plan replaced the 2002 stock option plan, which was terminated early and no further options will be granted under it. Initially, a total of 300,000 new shares of common stock were reserved for issuance under the new 2006 equity incentive plan. As of October 31, 2006, 43,270 shares of the Company's common stock had been issued under the 2006 Equity Incentive Plan ("EIP") and 256,730 shares were reserved for future issuance under the plan. Shares are issued under the EIP as compensation to certain employee and non-employee directors of the Company. 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 October 31, 2006 is as follows:
Nine months ended October 31, 2006 ----------------------------- Weighted Avg. Shares Exercise Price ----------------------------- Beginning Balance 2,167,445 $3.78 Grants -- -- Exercises (264,378) 3.03 Canceled or expired (25,325) 3.77 ----------------------------- Ending balance 1,877,742 $3.89 ============================= Reserved for future grants at 10/31/2006 -- -- Exercisable 1,518,504 $3.72 =============================
10 The range of exercise prices for options outstanding at October 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. The following table summarizes information about options outstanding at October 31, 2006:
Outstanding at Weighted Avg. Range of exercise October 31, Remaining contract Weighted Avg. Number Weighted Avg. prices 2006 life in yrs. Exercise Price Exercisable Exercise Price ------------------------------------------------------------------------------------------------------------------- $1.00 to $2.00 123,250 5.1 $ 1.61 123,250 $ 1.61 $2.01 to $3.00 522,238 4.6 $ 2.58 505,988 $ 2.57 $3.01 to $4.00 199,706 3.3 $ 3.31 199,206 $ 3.31 $4.01 to $5.00 653,825 7.1 $ 4.61 343,587 $ 4.59 $5.01 to $6.00 344,306 2.8 $ 5.42 312,056 $ 5.45 $6.01 to $7.00 34,417 1.9 $ 6.36 34,417 $ 6.36 ----------- ---------- 1,877,742 5.0 $ 3.89 1,518,504 $ 3.72 =========== ==========
These options will expire if not exercised at specific dates ranging from June 2007 to December 2015. During the nine months ended October 31, 2006, 264,378 options were exercised at prices from $1.35 to $5.50 per share. The Company's non-vested shares have a vesting period of four years. Compensation expense, representing the fair market value of the shares at the date of grant, net of assumptions regarding estimated future forfeitures, is charged to earnings over the vesting period. Compensation expense included in general and administrative expenses in the Company's consolidated statement of income, relating to these grants was $8,000 for the nine months ended October 31, 2006. The following table summarizes the non-vested shares transactions for the nine months ended October 31, 2006:
Weighted-Average Grant Date Fair Number of Shares Value ----------------------------------------- Non-vested shares: Outstanding at February 1, 2006 -- -- Granted 43,270 $ 7.08 Vested -- -- Forfeited -- -- ----------------------------------------- Non-vested at October 31, 2006 43,270 $ 7.08 =========================================
As of October 31, 2006, there was $298,000 of total unrecognized compensation cost related to the non-vested share-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted-average period of four years. 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. 11 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. Amendment to Revolving Credit Agreement On September 21, 2006, the Company amended its agreement with its banks, to include an additional $2,000,000, four year term loan to fund the purchase of Dynamic Labs with interest at the bank's prime rate less 25 basis points or at the Libor rate plus 225 basis points, at the election of the Company. The amendment also includes a $2,000,000 equipment line at the bank's prime rate less 25 basis points or at the Comerica Cost of Funds rate plus 225 basis points, at the election of the Company. This will have a one year, interest only period with the balance on the equipment line to be paid over 48 monthly payments commencing on October 31, 2007. See Exhibit 10.11 attached. 12. 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 $1,065,000, payable in cash and 83,243 shares of 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 October 31, 2006. The preliminary allocation of the purchase price of BBT is 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 1,004,000 Accounts payable (232,000) Other assumed liabilities (134,000) ----------- Purchase price $ 1,065,000 =========== Cash flow: Purchase price $ 1,065,000 Common stock issued (648,000) Cash acquired (3,000) Cash paid (414,000) 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 for a total purchase price of $2,254,000, paid in cash. The Phoenix laboratory provided EMI, environmental and dynamics testing for the aerospace and defense industries. The Austin facility also provided aerospace, environmental, and dynamic testing. The majority of the machinery and equipment at the Phoenix facility was relocated to the NTS Tempe, Arizona laboratory with the rest of the equipment distributed to other NTS facilities. All of the machinery and equipment at the Austin facility were relocated to other NTS facilities. The preliminary allocation of the purchase price of Dynamic Labs is as follows: 12 Purchase price: Property, plant and equipment 2,004,000 Goodwill 100,000 Covenant not to compete 150,000 ---------- Purchase price $2,254,000 ========== The purchase price allocations for AIR, BBT and Dynamic Labs have not yet been finalized. 13. 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. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on February 1, 2008. The Company will be evaluating the impact of adopting SFAS 157 on its financial position, cash flows, and results of operations. In September 2006, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the SEC's views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 will be effective for the Company for the fiscal year ended January 31, 2007. The Company is currently evaluating the impact of applying SAB 108 but does not believe that the application of SAB 108 will have a material effect on its financial position, cash flows, and results of operations. 13 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. These forward-looking statements are not guarantees of future performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This discussion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the year ended January 31, 2006 and the condensed consolidated financial statements included elsewhere in this report. 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 and specialty solutions services to its customers specifically in the areas of information technology, information systems, software engineering and construction. 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. For a discussion of the Company's critical accounting policies, refer to the Company's Form 10-K for the year ended January 31, 2006. 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 nine month periods ended October 31. 14 RESULTS OF OPERATIONS REVENUES Nine months ended October 31, 2006 % Change 2005 (Dollars in thousands) ---------------------------------------- Engineering & Evaluation $ 59,060 12.3% $ 52,610 Technical Solutions 27,338 (9.2)% 30,097 ----------- ----------- Total revenues $ 86,398 4.5% $ 82,707 =========== =========== For the nine months ended October 31, 2006, consolidated revenues increased by $3,691,000 or 4.5% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the nine months ended October 31, 2006, Engineering & Evaluation segment revenues increased by $6,450,000 or 12.3% when compared to the same period in fiscal 2006, primarily due to additional revenues of $1,812,000 from the acquisition on June 9, 2006 of B&B Technologies, an engineering systems integration company located in Albuquerque, New Mexico, $2.5 million in increased aerospace revenues from the Santa Clarita, California laboratory as a result of the enhanced capability and capacity at that facility and increases in revenues from telecommunications, electronics, power products and registration markets. These increases were partially offset by decreases in the automotive testing business at the Detroit, Michigan facility and defense testing business at the Camden, Arkansas facility. Technical Solutions: For the nine months ended October 31, 2006, Technical Solutions segment revenues decreased by $2,759,000 or 9.2% when compared to the same period in fiscal 2006, primarily due to increased price compression in this market as a result of customers insisting on fixed mark-up pricing and competition from off-shore companies. GROSS PROFIT Nine months ended October 31, 2006 % Change 2005 (Dollars in thousands) ---------------------------------------- Engineering & Evaluation $ 15,018 3.4% $ 14,530 % to segment revenue 25.4% 27.6% Technical Solutions 4,654 (9.3)% 5,131 % to segment revenue 17.0% 17.0% ----------- ----------- Total $ 19,672 0.1% $ 19,661 =========== =========== % to total revenue 22.8% 23.8% Total gross profit for the nine months ended October 31, 2006 increased by $11,000 or 0.1% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the nine months ended October 31, 2006, gross profit for the Engineering & Evaluation segment increased by $488,000 or 3.4% and gross profit as a percentage of revenues decreased by 2.2% 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 lower gross margins at the Company's Tinton Falls, 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 yet. 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 15 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 was reinstated after the Company took the necessary corrective actions. Additionally, share-based compensation expense included in cost of sales for the nine months ended October 31, 2006 was $110,000, compared with no share-based compensation expense in fiscal 2006. Technical Solutions: For the nine months ended October 31, 2006, gross profit decreased by $477,000 or 9.3% in the Technical Solutions segment when compared to the same period in fiscal 2006. This decrease was due to the lower revenues discussed above. For the nine months ended October 31, 2006, gross profit as a percentage of revenues remained the same at 17.0% when compared to the same period in the prior year. SELLING, GENERAL & ADMINISTRATIVE Nine months ended October 31, 2006 % Change 2005 (Dollars in thousands) ----------------------------------------- Engineering & Evaluation $ 12,353 9.6% $ 11,276 % to segment revenue 20.9% 21.4% Technical Solutions 4,438 (6.5)% 4,746 % to segment revenue 16.2% 15.8% ----------- ----------- Total $ 16,791 4.8% $ 16,022 =========== =========== % to total revenue 19.4% 19.4% Total selling, general and administrative expenses increased $769,000 or 4.8% for the nine months ended October 31, 2006 when compared to the same period in fiscal 2006. Engineering & Evaluation: For the nine months ended October 31, 2006, selling, general and administrative expenses increased by $1,077,000 or 9.6% when compared to the same period in fiscal 2006, primarily due to the effects of share-based compensation expense of $337,000 resulting from the application of SFAS No. 123(R), as described in Note 9 of the financial statements, 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 nine months ended October 31, 2006, selling, general and administrative expenses decreased by $308,000 or 6.5% 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 nine months ended October 31, 2006, equity income from XXCAL Japan was $192,000, compared to $180,000 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. 16 OPERATING INCOME Nine months ended October 31, 2006 % Change 2005 (Dollars in thousands) ----------------------------------------- Engineering & Evaluation $ 2,857 (16.8)% $ 3,434 % to segment revenue 4.8% 6.5% Technical Solutions 216 (43.9)% 385 % to segment revenue 0.8% 1.3% ----------- ----------- Total $ 3,073 (19.5)% $ 3,819 =========== =========== % to total revenue 3.6% 4.6% Operating income for the nine months ended October 31, 2006 decreased by $746,000 or 19.5% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the nine months ended October 31, 2006, operating income in the Engineering & Evaluation segment decreased by $577,000 or 16.8% 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 nine months ended October 31, 2006, operating income in the Technical Solutions segment decreased by $169,000 or 43.9% when compared to the same period in fiscal 2006, as a result of the decrease in gross profit, partially offset by the decrease in selling, general and administrative expenses, discussed above. INTEREST EXPENSE Net interest expense increased by $327,000 to $1,312,000 in the nine months ended October 31, 2006 when compared to the same period in fiscal 2006. This increase was principally due to higher interest rate levels for the nine months ended October 31, 2006 and higher average debt balances for the nine months ended October 31, 2006 when compared with the same period last year. OTHER INCOME Other income was $171,000 in the nine months ended October 31, 2006 compared to $163,000 for the same period in fiscal 2006. INCOME TAXES The income tax provision rate of 43.9% for the nine months ended October 31, 2006 is higher than the 37.3% income tax rate in the prior year, primarily due to non-deductible share-based compensation expense recorded for the nine months ended October 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 nine months ended October 31, 2006 was $1,008,000, a decrease of $784,000 compared to the same period in fiscal 2006. This decrease was primarily due to the lower operating income, higher interest expense and higher income tax rate. 17 The following information is based upon results for National Technical Systems, Inc. for the three months ended October 31. RESULTS OF OPERATIONS REVENUES Three months ended October 31, 2006 % Change 2005 (Dollars in thousands) ------------------------------------------ Engineering & Evaluation $ 20,706 14.3% $ 18,108 Technical Solutions 9,103 (12.5)% 10,400 ---------- ---------- Total revenues $ 29,809 4.6% $ 28,508 ========== ========== For the three months ended October 31, 2006, consolidated revenues increased by $1,301,000 or 4.6% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the three months ended October 31, 2006, Engineering & Evaluation revenues increased by $2,598,000 or 14.3% when compared to the same period in fiscal 2006, primarily due to additional revenues of $1,094,000 from the acquisition on June 9, 2006 of B&B Technologies, an engineering systems integration company located in Albuquerque, New Mexico, $1 million in increased aerospace revenues from the Santa Clarita, California laboratory as a result of the enhanced capability and capacity at that facility and increases in revenues from telecommunications, software testing, power products and registration markets. These increases were partially offset by decreases in electronics testing business at the Fullerton, California facility and defense testing business at the Camden, Arkansas facility due to customer program delays. Technical Solutions: For the three months ended October 31, 2006, Technical Solutions revenues decreased by $1,297,000 or 12.5% when compared to the same period in fiscal 2006, primarily as a result of increased price compression in the general IT service business and competition from off-shore companies. GROSS PROFIT Three months ended October 31, 2006 % Change 2005 (Dollars in thousands) ----------------------------------------- Engineering & Evaluation $ 5,256 9.4% $ 4,804 % to segment revenue 25.4% 26.5% Technical Solutions 1,599 (20.8)% 2,020 % to segment revenue 17.6% 19.4% ---------- ---------- Total $ 6,855 0.5% $ 6,824 ========== ========== % to total revenue 23.0% 23.9% Total gross profit for the three months ended October 31, 2006 increased by $31,000 or 0.5% when compared to the same period in fiscal 2006. Engineering & Evaluation: For the three months ended October 31, 2006, gross profit for the Engineering & Evaluation segment increased by $452,000 or 9.4% when compared to the same period in fiscal 2006, primarily as a result of the increase in revenues 18 discussed above. Gross profit as a percentage of revenues decreased by 1.1% for the three months ended October 31, 2006, compared with the same period last year. This decrease was primarily due to program delays at the Camden, Arkansas facility and reduced margins at the Santa Rosa and Fullerton, California facilities. Gross profit was also impacted by higher energy costs. Additionally, share-based compensation expense included in cost of sales for the three months ended October 31, 2006 was $30,000, compared to no share-based compensation expense in fiscal 2006. Technical Solutions: For the three months ended October 31, 2006, gross profit decreased by $421,000 or 20.8% in the Technical Solutions segment when compared with the same period in fiscal 2006. This decrease was primarily due to workers compensation insurance credit received in the prior year and the decrease in revenues. Gross profit as a percentage of revenues decreased for the three months ended October 31, 2006 to 17.6% from 19.4% for the same period in the prior year. SELLING, GENERAL & ADMINISTRATIVE Three months ended October 31, 2006 % Change 2005 (Dollars in thousands) -------------------------------------------- Engineering & Evaluation $ 4,171 4.4% $ 3,995 % to segment revenue 20.1% 22.1% Technical Solutions 1,463 (13.5)% 1,692 % to segment revenue 16.1% 16.3% ---------- ---------- Total $ 5,634 (0.9)% $ 5,687 ========== ========== % to total revenue 18.9% 19.9% Total selling, general and administrative expenses decreased $53,000 or 0.9% for the three months ended October 31, 2006 when compared with the same period in fiscal 2006. Engineering & Evaluation: For the three months ended October 31, 2006, selling, general and administrative expenses increased by $176,000 or 4.4% when compared with the same period in fiscal 2006, primarily due to the share-based compensation expense of $99,000 resulting from the application of SFAS No. 123(R), as described in Note 9 of the financial statements, and increased use of outside services related to the improvement of the Company's internal IT infrastructure and data automation. Technical Solutions: For the three months ended October 31, 2006, selling, general and administrative expenses decreased by $229,000 or 13.5% 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 October 31, 2006, equity income from XXCAL Japan was $57,000, compared to $68,000 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. 19 OPERATING INCOME Three months ended October 31, 2006 % Change 2005 (Dollars in thousands) -------------------------------------------- Engineering & Evaluation $ 1,142 30.2% $ 877 % to segment revenue 5.5% 4.8% Technical Solutions 136 (58.5)% 328 % to segment revenue 1.5% 3.2% ---------- ---------- Total $ 1,278 6.1% $ 1,205 ========== ========== % to total revenue 4.3% 4.2% Operating income for the three months ended October 31, 2006 increased by $73,000 or 6.1% when compared with the same period in fiscal 2006. Engineering & Evaluation: For the three months ended October 31, 2006, operating income in the Engineering & Evaluation segment increased by $265,000 or 30.2% when compared with the same period in fiscal 2006, primarily as a result of the increase in gross profit, partially offset by the increase in selling, general and administrative expenses and the decrease in equity income from non-consolidated subsidiary. Technical Solutions: For the three months ended October 31, 2006, operating income in the Technical Solutions segment decreased by $192,000 when compared to the same period in fiscal 2006, as a result of the decrease in gross profit, partially offset by the decrease in selling, general and administrative expenses discussed above. INTEREST EXPENSE Net interest expense increased by $162,000 to $500,000 in the three months ended October 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 October 31, 2006 and the higher average debt balances for the three months ended October 31, 2006 when compared with the same period last year. OTHER INCOME Other income decreased by $105,000 to $42,000 in the three months ended October 31, 2006 when compared with the same period in fiscal 2006, primarily due to the inclusion of gain on the sale of real estate in the prior year. INCOME TAXES The income tax provision rate of 45.7% for the three months ended October 31, 2006 is higher than the 37.7% income tax rate in the prior year, primarily due to non-deductible share-based compensation expense recorded for the three months ended October 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 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 three months ended October 31, 2006 was $409,000, a decrease of $181,000, compared to the same period in fiscal 2006. This decrease was primarily due to the higher interest expense, lower other income and higher income tax rate, partially offset by higher operating income. 20 OFF BALANCE SHEET ARRANGEMENTS None. 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 research and development funding specifically for defense has increased this year. In addition, both the commercial and military aerospace markets are increasing and it is predicted that this growth will continue for the next several years. 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 experienced an increase in demand for the evaluation of military equipment and weapons systems, which has positively affected business at its laboratories. Currently the Company is experiencing a moderate 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 may 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 is currently evaluating the overall compliance requirements for the deployment of wireless products and how best to position NTS to service the anticipated growth for this technology. The Company may continue to experience a moderate increase in the Telecom business. 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 has recently experienced a moderate 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. Over the past few years, the IT general services business transferred to off-shore facilities and became a commodity service for some of the Company's largest competitors. In 2003, the Company deployed a transformation strategy 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 21 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. 22 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities of $1,254,000 in the nine months ended October 31, 2006 primarily consisted of net income of $1,008,000 adjusted for non-cash items of $4,298,000 in depreciation and amortization, share based compensation of $447,000, other non cash items of $82,000, partially offset by changes in working capital of $4,581,000. Net cash provided by operating activities in the nine months ended October 31, 2005 was $3,667,000. Net cash provided by operating activities decreased from the nine months ended October 31, 2005 to the nine months ended October 31, 2006 by $2,413,000, primarily as a result of the decrease in net income, accrued expenses and income taxes payable. Cash used for investing activities in the nine months ended October 31, 2006 of $7,742,000 was primarily attributable to capital spending of $4,545,000, cash used to acquire American International Registrars Corporation ("AIR") of $386,000, cash used to acquire B&B Technologies of $414,000 and cash used to acquire Dynamic Labs of $2,254,000. 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 nine months ended October 31, 2005 was $4,217,000. Net cash used by investing activities increased from the nine months ended October 31, 2005 to the nine months ended October 31, 2006 by $3,525,000, primarily as a result of additional cash paid for acquisitions and capital spending in fiscal 2007 and cash proceeds in fiscal 2006 from the sale of property. Net cash provided by financing activities in the nine months ended October 31, 2006 of $4,238,000 consisted of proceeds from borrowings of $14,436,000, proceeds from stock options exercised of $592,000, partially offset by repayment of debt of $6,897,000, 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 nine months ended October 31, 2005 was $2,766,000. 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. The amendment also included an additional equipment line of credit for $2,000,000. 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. On September 21, 2006, the agreement was amended again to include an additional equipment line of credit of $2,000,000 and an additional $2,000,000 in term loan, to be repaid in 48 equal monthly payments, to fund the purchase of Dynamic Labs. The outstanding balance on the revolving line of credit at October 31, 2006 was $11,093,000. This balance is reflected in the accompanying condensed consolidated balance sheets as long-term. The amount available on the line of credit was $5,407,000 as of October 31, 2006. The aggregate outstanding balance on the term loans at October 31, 2006 was $7,165,000. The aggregate outstanding balance 23 on the equipment line of credit at October 31, 2006 was $2,594,000. 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 October 31, 2006. 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 October 31, 2006 was $1,362,000. The balance of other notes payable collateralized by land and building was $2,462,000 and the balance of unsecured notes was $9,000 at October 31, 2006. 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 quarter ended October 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 quarter ended October 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. 24 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 None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits 10.11 - Amendment number seven to revolving credit agreement between the Company and Comerica Bank effective September 21, 2006. 10.12 - National Technical Systems, Inc. 2006 Long-Term Incentive Plan. 10.13 - National Technical Systems, Inc. 2006 Supplemental Executive Retirement Plan. 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. 25 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: December 12, 2006 By: /s/ Lloyd Blonder --------------------- ------------------------------- Lloyd Blonder Senior Vice President Chief Financial Officer (Signing on behalf of the registrant and as principal financial officer) 26 EX-10.11 2 d70133_ex10-11.txt AMENDMENT #7 TO REVOLVING CREDIT AGREEMENT EXHIBIT 10.11 AMENDMENT NUMBER SEVEN TO REVOLVING CREDIT AGREEMENT This AMENDMENT NUMBER SEVEN TO REVOLVING CREDIT AGREEMENT (this "Amendment"), dated as of September 21, 2006, is entered into among NATIONAL TECHNICAL SYSTEMS, INC., a California corporation ("Parent"), NTS TECHNICAL SYSTEMS, a California corporation, dba National Technical Systems ("NTS"), XXCAL, INC., a California corporation ("XXCAL"), APPROVED ENGINEERING TEST LABORATORIES, INC., a California corporation ("AETL"), ETCR, INC., a California corporation ("ETCR"), ACTON ENVIRONMENTAL TESTING CORPORATION, a Massachusetts corporation ("Acton"), and PHASE SEVEN LABORATORIES, INC., a California corporation ("Phase Seven") and one or more Subsidiaries of Parent, whether now existing or hereafter acquired or formed, which become party to the Agreement (as defined below) by executing an Addendum in the form of Exhibit 1 of the Agreement (NTS, XXCAL, AETL, ETCR, Acton, Phase Seven and such other Subsidiaries are sometimes individually referred to herein as a "Subsidiary Borrower" and collectively referred to herein as "Subsidiary Borrowers", and Subsidiary Borrowers and Parent are sometimes individually referred to herein as a "Borrower" and collectively referred to herein as "Borrowers"), the financial institutions from time to time parties hereto as Lenders, whether by execution hereof or an Assignment and Acceptance in accordance with Section 11.5(c) of the Agreement, and Comerica Bank, in its capacity as contractual representative for itself and the other Lenders ("Agent"), with reference to the following facts: A. Borrowers, Agent and Lenders are parties to that certain Revolving Credit Agreement, dated as of November 21, 2001, as amended by that certain Amendment Number One to Revolving Credit Agreement, dated as of July 17, 2002, that certain Amendment Number Two to Revolving Credit Agreement, dated as of November 25, 2002, that certain Amendment Number Three to Revolving Credit Agreement, dated as of July 21, 2003, that certain Amendment Number Four to Revolving Credit Agreement, dated as of July 30, 2004, that certain Amendment Number Five to Revolving Credit Agreement, dated as of July 1, 2005, and that certain Amendment Number Six to Revolving Credit Agreement, dated as of March 29, 2006 (as so amended, the "Agreement"); B. Borrowers and Agent, in its capacity as Agent for the Lenders, entered into that certain Security Agreement, dated as of November 21, 2001 (the "Security Agreement"); C. Borrowers, Agent and Lenders desire to further amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as follows: 1. Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement. 2. Amendments to the Agreement. 2.1 Definitions. (a) The following definitions set forth in Section 1.1 of the Agreement are hereby amended in their entirety as follows, and the amended definition of "Debt Service Coverage Ratio" shall be deemed effective as of the reporting period ending July 31, 2006: "Commitment" means a Lender's Revolving Credit Commitment, Term Loan Commitment, Equipment Loan Commitment, Term Loan B Commitment, Equipment Facility B Loan Commitment and/or Term Loan C Commitment, as the context requires. "Debt Service Coverage Ratio" means, for the rolling four fiscal quarter period ending on the date of determination, the ratio of (i) the sum, without duplication, of: (1) Consolidated Adjusted Net Income for such period, plus (2) each Borrower's and the Subsidiaries' consolidated depreciation and amortization expense for such period (including any non-cash compensation paid to Borrowers' and the Subsidiaries' officers, directors, employees, and agents), minus (3) any Distributions paid or Capital Stock of each Borrower acquired or any other action taken under Section 7.10 during such period, plus or minus (4) any change in Borrowers' deferred federal or state taxes during such period, minus (5) unfunded cash Capital Expenditures during such period (other than any fixed assets acquired pursuant to a Permitted Acquisition), plus (6) for the test period ending July 31, 2006, $2,000,000, and for the test period ending October 31, 2006, $1,300,000; to (ii) the sum of: (1) the current portion of Borrowers' long term Debt that will be due during the next four fiscal quarter period, plus (2) the current portion of Borrowers' Capital Lease Obligations that will be due during the next four fiscal quarter period. "Interest Payment Date" means: (i) with respect to each Prime Lending Rate Portion, the last day of each and every month commencing the last such day after the making of such Loan, and the Equipment Loans Maturity Date (in the case of the Equipment Loans), the Equipment Facility B Loans Maturity Date (in the case of the Equipment Facility B Loans), the Revolving Loans Maturity Date (in the case of the Revolving Loans), the Term Loans Maturity Date (in the case of the Term Loans), the Term Loans B Maturity Date (in the case of the Term Loans B); and the Term Loans C Maturity Date (in the case of the Term Loans C) (ii) with respect to each LIBOR Lending Rate Portion, the earlier of: (1) the last day of the Interest Period with respect thereto, or (2) if the Interest Period has a duration of more than three months, every LIBOR Business Day that occurs during such Interest Period every three months from the first day of such Interest Period; and (iii) with respect to the COF Lending Rate Loans, the last day of each and every month, and the Equipment Loans Maturity Date and the Equipment Facility B Loans Maturity Date, as applicable." "Loans" means the Revolving Loans, the Term Loans, the Equipment Loans, the Term Loans B, the Term Loans C and the Equipment Facility B Loans (each, a "Loan"). "Notes" means, collectively, the Revolving Notes, the Term Notes, the Equipment Loans Notes, the Term B Notes, the Term C Notes and the Equipment Facility B Notes (each, a "Note"). "Permitted Debt" means (i) Debt owing to Agent and Lenders in accordance with the terms of this Agreement and the Loan Documents, (ii) Debt listed on Schedule 5.6, (iii) Debt of Borrowers up to a maximum aggregate amount of Two Million Dollars ($2,000,000) incurred during each fiscal year (but without carry-forward of any amounts not incurred during any fiscal year), incurred in the ordinary course of business and secured by the Liens described in clause (iv) of the definition of Permitted Liens hereinbelow, (iv) trade payables incurred in the ordinary course of business described in clause (iv) of the definition of "Debt" hereinabove, and (v) unsecured Debt in an aggregate amount not to exceed One Million Dollars ($1,000,000) outstanding at any time among all Borrowers owing to officers and employees of any Borrower. "Revolving Loans Maturity Date" means August 1, 2008. "Total Commitment Percentage" means, with respect to any Lender, the percentage equal to sum of such Lender's Revolving Loan Commitment, Term Loan Commitment, Equipment Loan Commitment, Term Loan B Commitment, Term Loan C Commitment and Equipment Facility B Commitment, divided by the Total Credit." "Total Credit" means $28,900,000. (b) The definition of "Interest Period" in Section 1.1 of the Agreement is hereby amended to amend clause (iii) to read as follows: (iii) no Interest Period respecting a Revolving Loan may extend beyond the Revolving Loans Maturity Date, no Interest Period respecting the Term Loans may extend beyond the Term Loans Maturity Date, no Interest Period respecting the Term Loans B may extend beyond the Term Loans B Maturity Date, and no Interest Period respecting the Term Loans C may extend beyond the Term Loans C Maturity Date. (c) The following definitions are hereby added to Section 1.1 of the Agreement in alphabetical order: "Dynamic Assets" means the assets of Dynamic Labs LLC and its subsidiaries. "Equipment Facility B Loan Commitment" means, with respect to any Equipment Facility B Loan Lender, the amount indicated under such Lender's name on Schedule 1.1C under the heading Equipment Facility B Loan Commitment or, in the case of any Lender that is an assignee Lender pursuant to Section 11.5(c), the amount of the assigning Lender's Equipment Facility B Loan Commitment assigned to such assignee Lender (collectively, the "Equipment Facility B Loan Commitments"). "Equipment Facility B Loan Commitment Percentage" means, with respect to any Equipment Facility B Loan Lender, the percentage indicated on Schedule 1.1C under the heading Equipment Facility B Loan Commitment Percentage or, in the case of any Lender that is an assignee Lender pursuant to Section 11.5(c), the percentage of the assigning Lender's Equipment Facility B Loan Commitment assigned to such assignee Lender. "Equipment Facility B Loan Lender" means each of the Lenders indicated on Schedule 1.1C under the heading Equipment Facility B Loan Lenders, and also means any assignee of such Lender pursuant to Section 11.5(c). "Equipment Facility B Loans" has the meaning given to such term in Section 2.3(d). "Equipment Facility B Loans Conversion Date" means September 21, 2007. "Equipment Facility B Loans Maturity Date" means September 21, 2011. "Equipment Facility B Loans Notes" means, collectively, the promissory notes executed by each Borrower to the order of each Lender pursuant to Section 2.11(a) to evidence such Lender's Equipment Facility B Loans. "Term Loan C Commitment" means, with respect to any Term Loan C Lender, the amount indicated opposite such Lender's name on Schedule 1.1C under the heading Term Loan C Commitment or, in the case of any Lender that is an assignee Lender pursuant to Section 11.5(c), the amount of the assigning Lender's Term Loan C Commitment assigned to such assignee Lender (collectively, the "Term Loan C Commitments"). "Term Loan C Commitment Percentage" means, with respect to any Term Loan C Lender, the percentage indicated on Schedule 1.1C under the heading Term Loan C Commitment Percentage or, in the case of any Lender that is an assignee Lender pursuant to Section 11.5(c), the percentage the assigning Lender's Term Loan C Commitment assigned to such assignee Lender. "Term Loan C Lender" means each of the Lenders indicated on Schedule 1.1C under the heading Term Loan C Lenders, and also means any assignee of such Lender pursuant to Section 11.5(c). "Term Loans C Maturity Date" means September 21, 2010. "Term C Notes" means, collectively, the promissory notes executed by each Borrower to the order of each Lender pursuant to Section 2.11(a) to evidence such Lender's Term Loan C. 2.2 Term Loans B and C. Section 2.2 of the Agreement is hereby amended by changing the numbering of the third clause incorrectly numbered as the second clause to "(b)" to clause "(c)" and by adding clauses (e) and (f) as follows: (e) Several Term Loans C. Subject to the terms and conditions hereof, each Term Loan C Lender severally agrees to make a term loan (each a "Term Loan C" and collectively the "Term Loans C") to Borrowers on September 21, 2006, or as soon as practicable thereafter, in an amount equal to each such Term Loan C Lender's Term Loan C Commitment, the proceeds of which shall be used to repay Revolving Loans used to pay the purchase price paid by Parent to acquire the Dynamic Assets. Each Term Loan B Lender shall make the amount of such Lender's Term Loan B available to Agent in same day funds, not later than 9:00 a.m. (Pacific time), on September 21, 2006, or as soon as practicable thereafter. After Agent's receipt of the proceeds of the Term Loans C, Agent shall disburse the Term Loans C as directed pursuant to written disbursement instructions provided by Borrowers. (f) Amortization. Borrowers shall pay forty-eight monthly principal reduction payments on the Term Loans C, each in the aggregate amount of $41,670. Each such payment shall be due and payable on the last day of each month commencing September 30, 2006 and continuing on the last day of each succeeding month. On the Term Loans C Maturity Date, the outstanding principal balance, and all accrued and unpaid interest under the Term Loans C shall be due and payable in full. Borrowers may prepay the Term Loans C at any time, in whole or in part, without penalty or premium except as otherwise required by Section 2.7(a) with respect to repayments of LIBOR Lending Rate Portions. All principal amounts so repaid or prepaid may not be reborrowed. Borrowers shall give Agent at least two (2) LIBOR Business Days' prior written notice of any prepayment of a LIBOR Lending Rate Portion, upon receipt of which, Agent shall promptly give notice to each Term Loan C Lender. Upon receipt of any such notice of a prepayment, Agent shall promptly notify each Term Loan C Lender thereof. Agent shall, promptly following its receipt of any payment or prepayment of the Term Loans C, distribute to each Term Loan C Lender its pro rata share (based upon the principal amounts outstanding) of all amounts received by Agent pursuant to this Section 2.2 for each such Term Loan C Lender's respective account. All prepayments shall be applied toward scheduled principal reductions payments owing under this Section 2.2 in inverse order of maturity. 2.3 Equipment Facility B Loans. Section 2.3 of the Agreement is hereby amended subsections (d), (e) and (f) as follows: (d) Several Equipment Facility B Loans. Subject to the terms and conditions hereof, from September 21, 2006 up to but not including the Equipment Facility B Loans Conversion Date, each Equipment Facility B Loan Lender severally agrees to make a series of term loans (each, an "Equipment Facility B Loan" and collectively the "Equipment Facility B Loans") to or for the benefit of Borrowers, in an amount equal to such Equipment Facility B Loan Lender's Equipment Facility B Loan Percentage of each Borrowing of Equipment Facility B Loans, up to an aggregate amount not to exceed such Equipment Facility B Loan Lender's Equipment Facility B Loan Commitment. Each Borrowing consisting of Equipment Facility B Loans shall be advanced directly to the applicable vendor or Borrower, as Borrowers may request. The foregoing to the contrary notwithstanding, (i) each Borrowing consisting of Equipment Facility B Loans shall be in an amount, as determined by the Equipment Facility B Loan Lenders, not to exceed 100% of Borrowers' invoice cost (net of shipping, freight, installation, and other so-called "soft costs") of new Equipment that is to be purchased by Borrowers with the proceeds of such Borrowing, or new Equipment that has been purchased and accepted by Borrowers within 90 days prior to the date of such Borrowing, provided that as to the initial Equipment Facility B Loan only such 90-day restriction shall not be applicable but all Equipment to be financed by such initial Equipment Facility B Loan shall have been acquired by Borrower during its fiscal year ending January 31, 2007, (ii) the Equipment that is to be acquired or that has been purchased by Borrowers must be acceptable to the Equipment Facility B Loan Lenders in all respects, and, except for any Equipment that is or will be installed on any Real Property Collateral upon delivery to Borrowers, not be a fixture, and not be intended to be affixed to real property or to become installed in or affixed to other goods unless waivers or fixture filings acceptable to the Equipment Facility B Loan Lenders and Agent have been obtained, and (iii) the Equipment Facility B Loan Lenders shall have no obligation to fund any Equipment Facility B Loans hereunder to the extent that the making thereof would cause the then outstanding amount of all Equipment Facility B Loans to exceed the aggregate Equipment Facility B Loan Commitments. On the Equipment Facility B Loans Conversion Date, each Equipment Facility B Loan Lender's obligations to make Equipment Facility B Loans to Borrowers shall cease. Each Borrowing of Equipment Facility B Loans shall be in a minimum amount of $100,000. (e) Payments. From the Amendment Date until the Equipment Facility B Loans Conversion Date, no principal payments shall be due on the outstanding Equipment Facility B Loans; provided that Borrowers shall make interest payments thereon during such period in accordance with Section 2.4. The aggregate amount of all Equipment Facility B Loans outstanding on the Equipment Facility B Loans Conversion Date shall be repayable in equal monthly installments of principal, each such installment in an amount equal to 1/48th of the aggregate principal amount of Equipment Facility B Loans outstanding on the Equipment Facility B Loans Conversion Date, and such installments to be due and payable on the last day of each month commencing October 31, 2007 and continuing on the last day of each succeeding month until the Equipment Facility B Loans Maturity Date, whereupon the entire remaining unpaid principal balance of the Equipment Facility B Loans together with all accrued but unpaid interest thereon shall be due and payable. (f) Prepayment. Borrowers may prepay the Equipment Facility B Loans at any time, in whole or in part, without penalty or premium except as otherwise required by Section 2.16 with respect to prepayments of COF Lending Rate Loans. All principal amounts so repaid or prepaid may not be reborrowed. Agent shall, promptly following its receipt of any payment or prepayment of the Equipment Facility B Loans, distribute to each Equipment Facility B Loan Lender, its pro rata share (based upon the principal amounts outstanding) of all amounts received by Agent pursuant to this Section 2.3 for each such Lender's respective account. All prepayments shall be applied toward scheduled principal reductions payments owing under Section 2.3(b) in inverse order of maturity. 2.4 Interest Rates. Section 2.4(a) of the Agreement is hereby amended to add subsections (iv) and (v) as follows: (iv) Term Loans C. Subject to the terms and conditions hereof, the Term Loans C, or portions thereof, may be outstanding as either Prime Lending Rate Portions or LIBOR Lending Rate Portions, by designating, in accordance with Sections 2.5(b) and 2.6(b), either the Prime Lending Rate, or the LIBOR Lending Rate to apply to all or any portion of the unpaid principal balance of the Term Loans C; provided, however, there shall be no more than three (3) LIBOR Lending Rate Portions of Term Loans C outstanding at any time. LIBOR Lending Rate Portions of Term Loans C shall be in minimum amounts each of One Million Dollars ($1,000,000). (v) Equipment Facility B Loans. Subject to the terms and conditions hereof, all Equipment Facility B Loans shall be outstanding as Prime Lending Rate Portions; provided, however, at any time from and after the Equipment Facility B Loans Conversion Date, Borrowers shall have the option to convert the entire outstanding balance of Equipment Facility B Loans to COF Lending Rate Loans upon three (3) Business Days' prior written notice to Agent.. If Borrowers fail to exercise such option, the Equipment Facility B Loans shall continue to be outstanding as Prime Lending Rate Portions from and after the Equipment Facility B Loans Conversion Date. Once the Equipment Facility B Loans have been converted to COF Lending Rate Loans pursuant to this clause (v), such COF Lending Rate Loans may not be converted back to Prime Lending Rate Portions. 2.5 Conversion or Continuation Requirements. Section 2.6(a) of the Agreement is hereby amended to add the following sentence at the end thereof as follows: If Borrowers elect to convert the entire balance of the Equipment Facility B Loans to COF Lending Rate Loans after the Equipment Facility B Loans Conversion Date pursuant to Section 2.4(a)(v), such COF Lending Rate Loans may not be converted back into Prime Lending Rate Portions. 2.6 Notes. Sections 2.11(a) and (b) of the Agreement are hereby amended as follows: (a) Borrowers agree that, upon the request to Agent by any Lender if and to the extent that such Lender has a Commitment as of date of request, or in connection with any assignment pursuant to Section 11.5(c), to evidence such Lender's Loans, Borrowers will execute and deliver to such Lender a Revolving Note, Term Note, Equipment Loans Note, Term B Notes and/or Equipment Facility B Loans Note, as applicable, substantially in the forms of Exhibit 2.11(a), with appropriate insertions as to payee, date and principal amount (each, as amended, supplemented, replaced or otherwise modified from time to time, a "Note" and, collectively, the 'Notes"), payable to the order of such Lender and in a principal amount equal to such Lender's Revolving Credit Commitment, Term Loan Commitment, Equipment Loan Commitment, Equipment Facility B Loan Commitment, Term Loan B Commitment and/or Term Loans C Commitment, as applicable. Each Note shall (x) be dated the date the applicable Commitment became effective, (y) be payable as provided herein and (z) provide for the payment of interest in accordance with Section 2.4. (b) The Revolving Loans and Borrowers' obligation to repay the same shall be evidenced by the Revolving Notes, this Agreement and the books and records of Agent and the Revolving Loan Lenders. The Term Loans and Borrowers' obligation to repay the same shall be evidenced by the Term Notes, this Agreement and the books and records of Agent and the Term Loan Lenders. The Equipment Loans and Borrowers' obligation to repay the same shall be evidenced by the Equipment Loans Notes, this Agreement and the books and records of Agent and the Equipment Loan Lenders. The Term Loans B and Borrowers' obligation to repay the same shall be evidenced by the Term B Notes, this Agreement and the books and records of Agent and the Term Loan B Lenders. The Equipment Facility B Loans and Borrowers' obligation to repay the same shall be evidenced by the Equipment Facility B Loans Notes, this Agreement and the books and records of Agent and the Equipment Loan Lenders. The Term Loans C and Borrowers' obligation to repay the same shall be evidenced by the Term C Notes, this Agreement and the books and records of Agent and the Term Loan C Lenders. Agent shall maintain the Register pursuant to Section 10.13, and a sub-account therein for each Lender, in which shall be recorded (i) the amount of each Loan made hereunder, whether each such Loan is a LIBOR Lending Rate Portion, a Prime Lending Rate Portion or COF Lending Rate Loans, and each Interest Period, if any, applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from Borrowers to each Lender hereunder and (iii) both the amount of any sum received by Agent hereunder from Borrowers and each Lender's share thereof; provided, however, any failure by Agent to maintain the Register or any such sub-account with respect to any Loan or continuation, conversion or payment thereof shall not limit or otherwise affect Borrowers' obligations hereunder or under the Notes. 2.7 Financial Statements. Subsections (c) and (e) of Section 6.3 of the Agreement are hereby each amended, effective as of the reporting period ending July 31, 2006, to substitute therein a covenant by Borrowers to deliver to Agent, upon its request, internally prepared consolidating trial balance statements for the covenant that Borrowers deliver annual and quarterly consolidating financial statements. 2.8 Use of Funds. Subsections (e) and (f) to Section 7.1 of the Agreement are hereby added as follows: (e) Use any proceeds of the Term Loans C for any purpose other than to repay Revolving Loans used to fund the purchase price paid by Parent for the Dynamic Assets; or (f) Use any proceeds of the Equipment Facility B Loans for any purpose other than as provided in Section 2.3. 2.9 Financial Condition. Subsections (b) and (e) of Section 7.15 of the Agreement are hereby amended to read follows: (b) the Consolidated Total Liabilities to Consolidated Effective Tangible Net Worth Ratio, measured as of the end of each fiscal quarter commencing with the fiscal quarter ending July 31, 2006, at any time to exceed 1.75:1.00. (e) the Debt Service Coverage Ratio, measured as of the end of each fiscal quarter commencing with the fiscal quarter ending July 31, 2006, at any time to be less than 1.25:1.0. 2.10 Replacement of Affected Lenders. The first paragraph of Section 10.16 of the Agreement is amended as follows: 10.16 Replacement of Affected Lenders. If any Lender (other than Agent) (x) is owed a material amount of increased costs under Section 2.7 or ceases to be obligated to make LIBOR Lending Rate Loans as a result of the operation of Sections 2.8 or 2.9, (y) refuses to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved pursuant to Section 11.4 by the Majority Lenders, the Revolving Loan Lenders the Revolving Credit Commitment Percentage of which aggregate more than 66.67%, the Term Loan Lenders the Term Loans Commitment Percentage of which aggregate more than 66.67%, the Equipment Loan Lenders the Equipment Loans Commitment Percentage of which aggregate more than 66.67%, the Term Loan B Lenders the Term Loans B Commitment Percentage of which aggregate more than 66.67%; the Equipment Facility B Loan Lenders the Equipment Facility B Loans Commitment Percentage of which aggregate more than 66.67%, or the Term Loan C Lenders the Term Loans C Commitment Percentage of which aggregate more than 66.67%; or (z) is in default of its obligations hereunder, then Agent shall have the right, but not the obligation, to replace such Lender (the "Replaced Lender") with one or more Eligible Assignees (collectively, the "Replacement Lender") provided, that: 2.11 Amendments and Waivers. Sections 11.4 (iv) and (v) of the agreement are hereby amended as follows: (iv) amend, modify or waive any provision of this Agreement regarding the allocation of prepayment amounts to the Term Loans or the application of such prepayment amounts to the respective installments of principal under the respective Term Loans without the written consent of the Term Loan Lenders the Term Loan Commitment Percentages of which aggregate more than 66.67%; or amend, modify or waive any provision of this Agreement regarding the allocation of prepayment amounts to the Revolving Loans or the application of such prepayment amounts to the respective installments of principal under the respective Revolving Loans without the written consent of the Revolving Loan Lenders the Revolving Loan Commitment Percentages of which aggregate more than 66.67%; or amend, modify or waive any provision of this Agreement regarding the allocation of prepayment amounts to the Equipment Loans or the application of such prepayment amounts to the respective installments of principal under the respective Equipment Loans without the written consent of the Equipment Loan Lenders the Equipment Loan Commitment Percentages of which aggregate more than 66.67%; or amend, modify or waive any provision of this Agreement regarding the allocation of prepayment amounts to the Term Loans B or the application of such prepayment amounts to the respective installments of principal under the respective Term Loans B without the written consent of the Term Loan B Lenders the Term Loan B Commitment Percentages of which aggregate more than 66.67%; or amend, modify or waive any provision of this Agreement regarding the allocation of prepayment amounts to the Equipment Facility B Loans or the application of such prepayment amounts to the respective installments of principal under the respective Equipment Facility B Loans without the written consent of the Equipment Facility B Loan Lenders the Equipment Facility B Loan Commitment Percentages of which aggregate more than 66.67%; or amend, modify or waive any provision of this Agreement regarding the allocation of prepayment amounts to the Term Loans C or the application of such prepayment amounts to the respective installments of principal under the respective Term Loans C without the written consent of the Term Loan C Lenders the Term Loan C Commitment Percentages of which aggregate more than 66.67%; or (v) subject to clause (i) of this Section 11.4 as it relates to reducing the amount or extending the scheduled date of maturity of any Loan or any installment thereof, amend, modify or waive any provision of (x) Section 2.1 or Section 2.11 (to the extent it relates to Revolving Loans) without the written consent of Revolving Loan Lenders the Revolving Loan Commitment Percentages of which aggregate more than 66.67%; or (y) Section 2.2 or Section 2.11 (to the extent it relates to Term Loans) without the written consent of Term Loan Lenders the Term Loan Commitment Percentages of which aggregate more than 66.67%; (z) Section 2.3 or Section 2.11 (to the extent it relates to Equipment Loans) without the written consent of Equipment Loan Lenders the Equipment Loan Commitment Percentages of which aggregate more than 66.67%; or (aa) Section 2.2 or Section 2.11 (to the extent it relates to Term Loans B) without the written consent of Term Loan B Lenders the Term Loan B Commitment Percentages of which aggregate more than 66.67%; (bb) Section 2.3 or Section 2.11 (to the extent it relates to Equipment Facility B Loans) without the written consent of Equipment Facility B Loan Lenders the Equipment Facility B Loan Commitment Percentages of which aggregate more than 66.67%; or (cc) Section 2.2 or Section 2.11 (to the extent it relates to Term Loans C) without the written consent of Term Loan C Lenders the Term Loan C Commitment Percentages of which aggregate more than 66.67%; or 2.12 Amendment to Schedule 1.1C. Schedule 1.1C of the Agreement is hereby replaced with the Schedule 1.1C attached hereto. 2.13 Amendment to Exhibit 2.11(a). Exhibit 2.11(a) to the Agreement is hereby appended with the form of Term C Note and Equipment Facility B Loans Note set forth on the Exhibit 2.11(a) attached hereto. 2.14 Amendment to Schedule 5.9. Schedule 5.9 (Subsidiaries) of the Agreement is hereby replaced with the Schedule 5.9 attached hereto. 3. Conditions Precedent to Effectiveness of Amendment. The effectiveness of this Amendment is subject to and contingent upon the fulfillment of each and every one of the following conditions: (a) Agent shall have received this Amendment, duly executed by Borrowers and all Lenders; (b) Agent shall have received the Term C Notes payable to each Lender in the amount of such Lender's respective Term Loan C Commitment, duly executed by Borrowers; (c) Agent shall have received the Equipment Facility B Loans Notes payable to each Lender in the amount of such Lender's respective Equipment Facility B Loan Commitment, duly executed by Borrowers; (d) Agent shall have received, for the pro rata account of Lenders, a Term Loan C fee of $5,000, which shall be fully earned and nonrefundable; (e) Agent shall have received, for the pro rata account of Lenders, an Equipment Facility B Loan fee of $5,000, which shall be fully earned and nonrefundable; (f) No Material Adverse Effect shall have occurred, as determined by Agent in its reasonable discretion; (g) No Event of Default, Unmatured Event of Default or Material Adverse Effect shall have occurred; and (h) All of the representations and warranties set forth herein, in the Loan Documents and in the Agreement shall be true, complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of the Closing Date). 4. Representations and Warranties. In order to induce Agent and Lenders to enter into this Amendment, each Borrower hereby represents and warrants to Agent and Lenders that: (a) No Event of Default or Unmatured Event of Default is continuing; (b) All of the representations and warranties set forth in the Agreement and the Loan Documents are true, complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the Closing Date); and (c) This Amendment has been duly executed and delivered by Borrowers, and after giving effect to this Amendment, the Agreement and the Loan Documents continue to constitute the legal, valid and binding agreements and obligations of Borrowers, enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws and equitable principles affecting the enforcement of creditors' rights generally. 5. Counterparts; Telefacsimile Execution. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. 6. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof and thereof. 7. Reaffirmation of the Agreement. The Agreement as amended hereby and the other Loan Documents remain in full force and effect. [remainder of page intentionally left blank] IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written. NATIONAL TECHNICAL SYSTEMS, INC. By: /s/ Lloyd Blonder Lloyd Blonder, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary NATIONAL TECHNICAL SYSTEMS dba NATIONAL TECHNICAL SYSTEMS By: /s/ Lloyd Blonder Lloyd Blonder, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary XXCAL, INC. By: /s/ Lloyd Blonder Lloyd Blonder, Vice President, Treasurer And Assistant Secretary APPROVED ENGINEERING TEST LABORATORIES, INC. By: /s/ Lloyd Blonder Lloyd Blonder, Vice President, Treasurer And Assistant Secretary ETCR, INC. By: /s/ Lloyd Blonder Lloyd Blonder, Vice President, Treasurer And Assistant Secretary ACTON ENVIRONMENTAL TESTING CORPORATION By: /s/ Lloyd Blonder Lloyd Blonder, Vice President, Treasurer And Assistant Secretary PHASE SEVEN LABORATORIES, INC. By: /s/ Lloyd Blonder Lloyd Blonder, Vice President, Treasurer And Assistant Secretary COMERICA BANK, in its capabilities as Agent, Issuing Lender and a Lenter By: /s/ Vahe S. Medzoyan Vahe S. Medzoyan, Vice President FIRST BANK & TRUST, in its capacity as a Lender By: /s/ Lisa Stavro Lisa Stavro, Senior Vice President Schedule 1.1C Schedule of Commitments - -------------------------------------------------------------------------------------------------------------- Revolving Credit Revolving Credit --------------------------------- Revolving Loan Lender -------------------------------------- Commitment Percentage - --------------------------------------- Commitment - -------------------------------------------------------------------------------------------------------------- Comerica $9,900,000 60% First Bank & Trust $6,600,000 40% - -------------------------------------------------------------------------------------------------------------- Term Loan Commitment Term Loan Commitment --------------------------------- Term Loan Lender -------------------------------------- Percenta'e - --------------------------------------- - -------------------------------------------------------------------------------------------------------------- Comerica $1,500,000 60% First Bank & Trust $1,000,000 40% - -------------------------------------------------------------------------------------------------------------- Equipment Loan Equipment Loan --------------------------------- Equipment Loan Lender -------------------------------------- Commitment Percentage - --------------------------------------- Commitment --------------------------------- -------------------------------------- - -------------------------------------------------------------------------------------------------------------- Comerica $1,200,000 60% First Bank & Trust $800,000 40% - -------------------------------------------------------------------------------------------------------------- Term Loan B Commitment Term Loan B Lender Term Loan B Commitment --------------------------------- - ----------------------------------------------------------------------------- Percentage - -------------------------------------------------------------------------------------------------------------- Comerica $2,340,000 60% First Bank & Trust $1,560,000 40% - -------------------------------------------------------------------------------------------------------------- Equipment Facility B Loan Equipment Facility Loan Equipment Facility B Loan ----------------------------------------------------------------------- - --------------------------------------- Commitment Commitment Percentage Lender ----------------------------------------------------------------------- - --------------------------------------- - -------------------------------------------------------------------------------------------------------------- Comerica $1,200,000 60% First Bank & Trust $800,000 40% - -------------------------------------------------------------------------------------------------------------- Term Loan C Commitment Term Loan C Commitment Term Loan C Lender ----------------------------------------------------------------------- - --------------------------------------- Percentage - -------------------------------------------------------------------------------------------------------------- Comerica $1,200,000 60% First Bank & Trust $800,000 40% - --------------------------------------------------------------------------------------------------------------
EX-10.12 3 d70133_ex10-12.txt 2006 LONG-TERM INCENTIVE PLAN EXHIBIT 10.12 NATIONAL TECHNICAL SYSTEMS, INC. 2006 LONG-TERM INCENTIVE PLAN 8. ARTICLE 1 - PURPOSE The purpose of National Technical Systems, Inc. 2006 Long-Term Incentive Plan is to retain the services of select employees of National Technical Systems, Inc. and any successor thereof (the "Corporation") and to motivate them to contribute to the growth and profits of the Corporation. This Plan is intended to comply with the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be interpreted in a manner consistent with that intention. 9. ARTICLE 2 - DEFINITIONS For purposes hereof, unless otherwise clearly apparent from the context, where the following terms appear as proper nouns, they shall have the meanings indicated below. 2.1 Beneficiary: Any person or persons (including, without limitation, the trustees of any testamentary or inter vivos trust), as designated from time to time in writing pursuant to Article 5, to whom any benefits may be payable upon the death of a Participant. 2.2 Cause: Behavior of a Participant which constitutes any of the following: a. Willfully engaging in gross misconduct with regard to the Corporation which is materially injurious to the Corporation, b. Gross negligence in the performance of the Participant's duties and responsibilities which is materially injurious to the Corporation, c. Refusal to follow proper and achievable written direction of the Board of Directors, provided that this shall not be Cause if the Participant in good faith believed the direction to be illegal, unethical or immoral and provides written notification of such belief to the Board of Directors, d. Being convicted of (or pleading nolo contendere to) a felony involving financial impropriety (or any other crime which would materially interfere with his service), e. Willfully breaching any material obligations under any agreement with the Corporation without proper justification, f. Material fraud or dishonesty with regard to the Corporation (other than good faith expense account disputes), g. Refusal to attempt to perform the Participant's responsibilities and duties after written notice, and h. Entering into competition with the Corporation in any line of business in which the Corporation was involved during the Participant's employment. 2.3 Change of Control: A change in the ownership of the Corporation, a change in the effective control of the Corporation or a change in the ownership of a substantial portion of the assets of the Corporation as provided under Section 409A of the Code, as amended from time to time, and any Internal Revenue Service guidance, including Notice 2005-1, and regulations issued in connection with Section 409A of the Code. 2.4 Committee: The Compensation Committee of the Board of Directors of the Corporation, or such other persons as may be selected by the Compensation Committee or the Board of Directors to administer the Plan. The Committee may assign some of the routine administrative functions to any department of the Corporation or another organization as approved by the board.. 2.5 Corporation: National Technical Systems, Inc., a California corporation, and any successor thereof, including any affiliated company that adopts this Plan with the consent of the Board of Directors of the Corporation. 2.6 Disabled or Disability: The circumstance where, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, the Participant is (i) unable to engage in any substantial gainful activity, or (ii) receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Corporation. For purposes of the Plan, the determination of a Participant's disability shall be made by the Committee with the Participant's participation or the participation of his legal representative. The Committee shall make the final and conclusive determination of disability based upon all the evidence presented to it and after due consideration of the information presented by the Participant or his legal representative. 2.7 Grant Date: The effective date on which the Committee grants Phantom Stock Full-Value or Phantom Stock Appreciation-Only Shares to a Participant. 2.8 Grant Price: The Value of a share of Phantom Stock on the Grant Date. 2.9 Maturity Date: The date on which a Participant's vested Phantom Stock Full-Value or Phantom Appreciation-Only Shares are deemed to mature under Section 4.1(a) below. 2.10 Maturity Price: The Value of a share of Phantom Stock on the Maturity Date. 2.11 Participant: An employee and/or officer of the Corporation designated by the Committee to be eligible for participation in the Plan, who executes and returns to the Committee all forms necessary for participation in the Plan, including a related Participation Agreement if applicable. 2.12 Participation Agreement: A written award agreement executed by the Corporation and Participant. The Board shall determine the terms and conditions set forth in those award agreements in its sole discretion. The Phantom Stock award agreements shall indicate the extent to which the Phantom Stock rights are Phantom Appreciation-Only Shares or Phantom Stock Full-Value Shares, the Grant Price of those Phantom Stock rights, the Grant Date, and the applicable vesting schedules. The Board shall be under no obligation to grant Phantom Stock rights on a uniform basis among Participants. 2.13 Phantom Stock Appreciation-Only Shares: A form of Phantom Stock wherein the Participant receives a contractual right to receive the appreciation in the Value of a share of Phantom Stock pursuant to the Plan. 2.14 Phantom Stock: Phantom Stock represents a mere contractual right to payment of certain compensation in the future; not actual capital stock of, or ownership equity, in the Corporation or its assets. 2.15 Phantom Stock Full-Value Shares: A form of Phantom Stock wherein the Participant receives a contractual right to receive the full Value of a share of Phantom Stock pursuant to the Plan. 2.16 Plan: The National Technical Systems, Inc. 2006 Long-Term Incentive Plan effective September 7, 2006, including any Participation Agreement, and as from time to time amended and in effect. 2.17 Specified Employee: A person who is a specified employee as defined in the regulations issued under Section 409A of the Code. otherwise) of a Participant's service as an employee of the Corporation; provided that no Termination of Service will be deemed to have occurred unless it constitutes a "separation from service" within the meaning of Code Section 409A and the regulations thereunder. 2.19 Value: The Value of a share of Phantom Stock for any given date shall be the diluted earnings per share of the Corporation weighted over the prior three fiscal years, as recommended by the Committee and approved by the board, from the books and records of the Corporation maintained in accordance with the Corporation's customary accounting practices as of the close of the Corporation's fiscal year that immediately precedes the applicable Maturity Date of that Phantom Stock. The diluted earnings per share for each year will be weighted 50% for the most recent year, 35% for the preceding year and 15% for the second most recent year. This weighted average is multiplied by twenty to determine the Phantom Stock Value for the purposes of the Plan. The Board's determination of diluted earnings per share and Value shall be conclusive unless proven to be arbitrary and capricious. No Participant has the right to review the Corporation's books and records beyond the Corporation's statement of income for the relevant three years. 10. ARTICLE 3 - ELIGIBILITY, GRANT AND VESTING 3.1 Eligibility/Grant. Eligibility to commence participation in this Plan shall be restricted to those employees and officers recommended by management and approved by the board. s As a condition of participation, eligible individuals shall timely complete all forms necessary for participation in the Plan under this Section, as determined by the Committee. A Participant shall be entitled to benefits, if any, in accordance with this Plan. 3.2 Grant of Phantom Stock Rights. The Board, in its sole discretion, may at any time grant to one or more Participants Phantom Stock rights on such terms and conditions, not inconsistent with the terms of this Plan document, as recommended by the Committee. All grants of Phantom Stock rights shall be evidenced by a Participation Agreement. The Board shall be under no obligation to grant Phantom Stock rights on a uniform basis among Participants. 3.3 Vesting. The Participation Agreement shall vest as set forth in the Participation Agreement. Except as otherwise provided for above or in the Participation Agreement, the Participant shall cease vesting in his or her Phantom Stock Full-Value Shares and Phantom Appreciation-Only Shares in the event of a Termination of Service for any reason as well as upon a Participant's Disability, the Change of Control of the Company, or the termination of the Plan. The Participant's unvested Phantom Stock Full-Value Shares and Phantom Appreciation-Only Shares shall terminate on such date. No Phantom Stock rights will be reinstated upon re-employment unless granted anew by the Board in its sole discretion. 11. ARTICLE 4 - BENEFITS 4.1 Phantom Stock Full Value and Phantom Appreciation-Only Shares. a) Entitlement to Benefits (Maturity). A Participant's vested Phantom Stock Full-Value and Phantom Appreciation-Only Shares shall mature and the Participant shall be entitled to receive the amount provided for in Section 4.1(b) below for such vested Phantom Stock Full-Value and Phantom Appreciation-Only Shares commencing upon the earlier of the following dates ("Maturity Dates"): (i) the date on which the Participant becomes Disabled; (ii) the date on which the Participant dies; (iii) the date on which Participant has a Termination of Service for any reason other than Cause; (iv) the specified effective date of a Change of Control of the Corporation, and (v) the fourth anniversary of the grant year of the Shares. In the case of a Maturity Date described in clauses (i) through (v) above, any unvested Phantom Stock Full-Value and Phantom Appreciation-Only Shares and all rights to payment with respect thereto shall terminate on such Maturity Date. b) Payment Amount and Timing. (i) Phantom Appreciation-Only Shares. For each vested Phantom Appreciation-Only Share, the Participant shall be entitled to receive an amount in cash that is equal to the Maturity Price as of the Maturity Date less the Grant Price of the Phantom Appreciation-Only Share. (ii) Phantom Stock Full-Value Shares. For each vested Phantom Stock Full-Value Share, the Participant shall be entitled to receive an amount in cash that is equal to the Maturity Price of the Phantom Stock Full-Value Share as of the Maturity Date. (iii) Form and Timing of Payment. Distributions of Phantom Stock Full-Value Shares or Phantom Appreciation-Only Shares will be paid in a lump sum on the 90th day following the applicable Maturity Date or the first business day thereafter if the 90th day is not a business day. Notwithstanding this Section 4.1(b) to the contrary, distributions of Phantom Stock Full-Value Shares or Phantom Appreciation-Only Shares shall be delayed in the event the Corporation reasonably anticipates that the payment would constitute a violation of applicable law. Additionally, the Corporation shall have the authority to delay distributions to the extent it deems necessary or appropriate to comply with Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (relating to payments to certain "key employees" of certain publicly-traded companies); in such event, any distribution to which the Participant would otherwise be entitled during the six (6) month period following the date of the Participant's Termination of Service will be distributed on the first business day following the expiration of such six (6) month period. (iv) Termination of Service with Cause. Any provision in this Plan to the contrary notwithstanding, if the Participant has a Termination of Service for Cause, then all vested and unvested Phantom Stock Full-Value and Phantom Appreciation-Only Shares shall terminate as of the date of Termination of Service and the Participant shall not be entitled to receive any amount for such Phantom Stock Full-Value or Phantom Appreciation-Only Shares. 4.2 Tax Liability. The Participant is ultimately liable and responsible for all taxes owed by the Participant in connection with any distribution under the Plan, regardless of any action taken by the Corporation with respect to any tax withholding obligations that arise in connection with a Participant's participation in the Plan. 12. ARTICLE 5 - BENEFICIARY 5.1 Designation. At the time participation in the Plan commences, or at any later date, each Participant shall designate a Beneficiary on the Designation Beneficiary Form (attached hereto as Exhibit A) to receive any benefits that may become payable hereunder in the event of his or her death (Beneficiary Designation). A Participant may change any such Beneficiary at any time prior to his or her death upon written notice to the Corporation. 5.2 Subsequent Beneficiary Designations. If the Participant shall have made more than one Beneficiary Designation, the Beneficiary Designation most recently filed with the Corporation prior to the time of the Participant's death shall govern. 5.3 No Beneficiary Designation. If any amounts under the Plan become payable following a Participant's death at a time when no Beneficiary Designation is applicable or when no Beneficiary is in existence, such payments shall be made in a lump sum to such Participant's surviving spouse, or if none, such amounts shall be paid to such Participant's estate. 13. ARTICLE 6 - MISCELLANEOUS 6.1 Amendment and Termination. The Corporation, acting through the Committee, reserves the right to amend, in whole or in part, in writing, or to terminate this Plan at any time and in its sole discretion, with or without notice; provided, however, that no such action shall reduce the amount of a Participant's vested Termination Benefit prior to the date of any such amendment or termination. Any provision herein to the contrary notwithstanding, amendment or termination of the Plan shall not accelerate, directly or indirectly, the date on which distribution of any then vested benefit is to be paid unless such acceleration complies with the requirements of Code Section 409A and the regulations thereunder. In addition, notwithstanding any provision herein to the contrary, if the Corporation determines, after a review of the final regulations issued under Section 409A of the Code and all applicable Internal Revenue Service guidance, that this Plan should be amended to avoid triggering the tax and interest penalties imposed by Section 409A of the Code, the Corporation may amend this Plan to the extent necessary to avoid triggering the tax and interest penalties imposed by Section 409A of the Code. 6.2 Insurance: The Corporation may purchase one or more insurance policies on the life of a Participant, as a means of providing, in whole or in part, for the payment of benefits hereunder. However, in such event neither such Participant, his designated Beneficiary, nor any other beneficiary shall have any rights whatsoever therein or in the proceeds therefrom. The Corporation shall be the sole owner and beneficiary of any such insurance policy and shall possess and may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for a Participant or any other person or as collateral security for any obligation of the Corporation hereunder. This Plan shall under no circumstances be deemed to constitute a contract of insurance. 6.3 No Contract of Employment: The Plan shall under no circumstance be deemed to have any effect upon the terms or conditions of employment of any employee of the Corporation whether or not he or she is a Participant hereunder. Neither the offering of the Plan, the payment of any expenses, costs or benefit amounts associated with the Plan, nor any documents published in connection with the Plan shall be construed as having created a contract of employment between the Participant and the Corporation. Nor shall it affect any right that the Corporation may have to terminate the service of such person at will. 6.4 Benefits not Transferable: Benefits under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by any Participant or Beneficiary and any attempt to do so shall be null and void. Benefits under this Plan shall not be subject to or liable for the debts, contracts, liabilities, engagements or torts of any Participant or any Beneficiary, nor may the same be subject to attachment or seizure by any creditor of any Participant or any Beneficiary under any circumstances. 6.5 Capital Structure Adjustments. In the event of a change in the form of entity, recapitalization, reorganization, merger, consolidation, separation, financing, or like change in the organizational or capital structure of the Corporation, the Committee shall make such changes to the Plan as the Committee deems appropriate. These changes shall include, but are not limited to, changes to the definition of "Value" and "Corporation". The Board's determination shall be final, binding, and conclusive. The Committee shall interpret this section in a manner it believes (in its discretion) to be consistent with the intent to place Participants in substantially the same economic position as they would have had in the absence of such an organizational or capital structure change. The Plan shall not affect, in any way, the right or power of the Corporation to make adjustments, re-classifications, reorganizations, or changes of its capital or business structures, to make distributions to its shareholders, or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. 6.6 No Trust: No action by the Corporation or its Board of Directors under this Plan shall be construed as creating a trust, escrow or other secured or segregated fund or other fiduciary relationship of any kind in favor of any Participant or Beneficiary or any other persons otherwise entitled to benefits under the Plan. The status of the Participant and any Beneficiary with respect to any liabilities assumed by the Corporation hereunder shall be solely that of unsecured creditors of the Corporation. The Plan constitutes a mere promise by the Corporation to make benefit payments in the future. Any insurance policy or any other asset acquired or held by the Corporation in connection with liabilities assumed by it hereunder, shall not be deemed to be held under any trust, escrow or other secured or segregated fund or other fiduciary relationship of any kind for the benefit of a Participant or Beneficiary or to be security for the performance of the obligations of the Corporation, but shall be and remain a general, unpledged, unrestricted asset of the Corporation at all times subject to the claims of general creditors of the Corporation. Notwithstanding the foregoing, the Corporation may transfer assets. 6.7 Plan Administration: The Plan shall be administered by the Committee. The Board and Committee shall have the exclusive authority, sole discretion and responsibility for all matters in connection with the operation and administration of the Plan. The Committee's powers and duties shall include, but not be limited to, the following: (a) responsibility for the compilation and maintenance of all records necessary in connection with the Plan; (b) authorizing the payment of all benefits under and expenses of the Plan; (c) authority to engage such legal, accounting and other professional services as it may deem proper. The board shall have (a) authority to interpret the Plan; and (b) authority to determine eligibility for benefits under the Plan and to resolve all issues of fact and law in connection with such determination. Decisions by the Board and Committee shall be final and binding upon all parties. The Committee, from time to time, may allocate to other persons or organizations any of its rights, powers, and duties with respect to the operation and administration of the Plan. Any such allocation shall be reviewed from time to time by the Committee; shall, unless the Committee specifies otherwise, carry such discretionary authority as the Committee possesses regarding the matter; and shall be terminable upon such notice as the Committee in its sole discretion, deems reasonable and prudent under the circumstances. 6.8 Satisfaction of Claims: Any payment to a Participant or Beneficiary or the legal representative of either, in accordance with the terms of this Plan shall to the extent thereof be in full satisfaction of all claims such person may have against the Corporation. The Corporation may require such payee, as a condition to such payment, to execute a receipt and release therefore in such form as shall be determined by the Corporation. 6.9 Governing Law: The Plan shall be construed, administered, and governed in all respects in accordance with the laws of the State of California without regard to applicable conflicts of law or choice of law principles. By electing to participate in the Plan, each Participant on behalf of himself and his beneficiaries irrevocably and unconditionally (a) submits to the exclusive personal jurisdiction of the United States Federal courts and the State of California state courts located in Los Angeles County, California ("California Courts") with respect to any lawsuit, claim or cause of action arising under or with respect to this Plan; (b) agrees that the California Courts shall have exclusive subject matter jurisdiction over any such lawsuit, claim or cause of action; (c) agrees that venue with respect to any such lawsuit, claim or cause of action is proper and most convenient in such California Courts; and (d) agrees not to assert or raise any objection to jurisdiction or venue in the California Courts. BY ELECTING TO PARTICIPATE IN THE PLAN, EACH PARTICIPANT, ON BEHALF OF HIMSELF AND HIS BENEFICIARIES, IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY AND ALL ACTIONS OR PROCEEDINGS BROUGHT WITH RESPECT TO ANY PROVISION OF THIS PLAN AND/OR WITH RESPECT TO ANY CLAIMS ARISING OUT OF, OR RELATED TO, THIS PLAN. 6.10 Gender and Number: Words used herein in the masculine, feminine or neuter gender shall be construed as though they were also used in another gender in all cases where they would so apply. Words used herein in the singular or plural form shall be construed as though they were also used in the other form in all cases where they would so apply. 6.11 Severability: In the event that a court of competent jurisdiction determines that any provision of the Plan is in violation of any statute or public policy, only those provisions of the Plan that violate such statute or public policy shall be stricken. All provisions of the Plan that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any provision of the Plan shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the Corporation in establishing the Plan. 6.12 Indemnification: The Corporation agrees to and shall indemnify and hold harmless each Indemnified Person (as hereinafter defined), to the full extent permitted by law and the Corporation's Articles of Incorporation and Bylaws, from and against all claims, losses, damages, causes of action, suits, and liability of every kind, including all expenses of litigation, court costs and reasonable attorney's fees and expenses, incurred in connection with the Plan. "Indemnified Person" shall mean each director, officer, Committee member, Claims Administrator or employee of the Corporation acting as a fiduciary of the Plan. 6.13 Expenses: The expenses of administering the Plan shall be borne by the Corporation. 6.14 Successors and Assigns: This Plan shall be binding on and inure to the benefit of the Corporation and the Participants and their Beneficiaries, and their respective heirs and assigns. 6.15 Captions. The captions of this Plan are descriptive only and do not affect the intent or interpretation of the Plan. 6.16 Notices. Any notice required or permitted to be given hereunder shall be in writing sent by either personal delivery, overnight delivery, or United Sates, registered or certified mail, return receipt requested, all of which shall be properly addressed with postage or delivery charges prepaid, to the Committee or Participant at their respective addresses described below, or at such other addresses as either the Corporation or Participant may hereafter designate to the other in writing: To the Committee: National Technical Systems, Inc. 2006 Supplemental Executive Retirement Plan 24007 Ventura Blvd. Suite 200 Calabasas, California 91302 To any Participant: To the Participant's last known address as shown in the Corporation's Human Resource Department records Notices sent by personal delivery shall be deemed given upon actual receipt. Notices sent by overnight delivery shall be deemed given on the next business day. Notices sent via United States registered or certified mail shall be deemed given two business days from mailing. ACKNOWLEDGED: National Technical Systems, Inc. - ------------------------------------------------ ------------ By Date EX-10.13 4 d70133_ex10-13.txt 2006 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.13 National Technical Systems, Inc. 2006 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PURPOSE The purpose of the National Technical Systems, Inc. 2006 Supplemental Executive Retirement Plan is to retain the services of a select group of officers and highly compensated employees of National Technical Systems, Inc. (the "Corporation"), its subsidiaries and any successors thereto, and to motivate them to contribute to the growth and profits of the Corporation This Plan is intended to comply with the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be interpreted in a manner consistent with that intention. ARTICLE 2-- DEFINITIONS For purposes hereof, unless otherwise clearly apparent from the context, where the following terms appear as proper nouns, they shall have the meanings indicated below. 2.1. Additions: Interest on Annual Credits, compounded monthly at an annualized rate of 5.5%. Additions shall be attributed to each Participant's Employer Credit Account from the date upon which the Employer Credit Account first has a positive balance until the date upon which the Corporation determines the final payment of benefits to a Participant or his Beneficiary pursuant to Article 5. The Committee may elect to utilize a different interest rate in future years in its discretion. 2.2. Annual Credit: The amount the Corporation will credit on behalf of a Participant for each year of his participation in the Plan. The Annual Credit shall be based upon a Participant's salary and years to Retirement from the Corporation based upon the Participant's date of entry in the Plan. The amount of the Base Credit and the date upon which it will be attributed to the Employer Credit Account are specified in Schedule A. This amount may vary from Participant to Participant and from year to year as determined by the Committee. Furthermore, since the value of the Base Credit is predicated upon the value of the Participant's annual salary when he joined the Plan and adjusted by an assumed rate of inflation of 3.5 percent per year, the Committee may deem it appropriate to re-calculate the benefit for one or more Participants if it deems, in its discretion, that the Participant's salary has been substantially modified. 2.3. Beneficiary: Any person or persons (including, without limitation, the trustees of any testamentary or inter vivos trust), as designated from time to time in writing pursuant to Article 5, to whom any benefits may be payable upon the death of a Participant. 2.4. Cause: Behavior of a Participant which constitutes any of the following: a. Willfully engaging in gross misconduct with regard to the Corporation which is materially injurious to the Corporation, b. Gross negligence in the performance of the Participant's duties and responsibilities which is materially injurious to the Corporation, c. Refusal to follow proper and achievable written direction of the Board of Directors, provided that this shall not be Cause if the Participant in good faith believed the direction to be illegal, unethical or immoral and provides written notification of such belief to the Board of Directors, d. Being convicted of (or pleading nolo contendere to) a felony involving financial impropriety (or any other crime which would materially interfere with his service), e. Willfully breaching any material obligations under any agreement with the Corporation without proper justification, f. Material fraud or dishonesty with regard to the Corporation (other than good faith expense account disputes), g. Refusal to attempt to perform the Participant's responsibilities and duties after written notice, and h. Entering into competition with the Corporation in any line of business in which the Corporation was involved during the Participant's employment. 2.5. Change of Control: A change in the ownership of the Corporation, a change in the effective control of the Corporation or a change in the ownership of a substantial portion of the assets of the Corporation as provided under Section 409A of the Code, as amended from time to time, and any Internal Revenue Service guidance, including Notice 2005-1, and regulations issued in connection with Section 409A of the Code. 2.6. Committee: The Compensation Committee of the Board of Directors of the Corporation, or such other persons as may be selected by the Compensation Committee or the Board of Directors to administer the Plan. The Committee may assign some of the routine administrative functions to any department of the Corporation or another organization as approved by the board. 2.7. Corporation: National Technical Systems, Inc., a California corporation, and any successor thereof, including any affiliated company that adopts this Plan with the consent of the Board of Directors of the Corporation. 2.8. Effective Date of the Plan: September 7, 2006 2.9. Employer Credit Account: The sum of Annual Credits which are described in Schedule A, attached hereto and incorporated herein by reference, and attributable to a Participant plus Additions and less withdrawals and distributions on such amounts. The Corporation shall maintain a bookkeeping account to reflect and track each Participant's Employer Credit Account, as adjusted from time to time. 2.10. Participant: Any officer or highly compensated employee of the Corporation designated by the Committee to be eligible for participation in the Plan, who has executed an application for participation pursuant to Section 3.1, and who is participating in this Plan from time to time. 2.11. Plan: The National Technical Systems, Inc. 2006 Supplemental Executive Retirement Plan effective September 7, 2006 and as from time to time amended and in effect. 2.12. Plan Year: January 1 through December 31, provided that the first Plan Year shall be from the Effective Date of the Plan through December 31, 2006. 2.13. Retirement: The Termination of Service of a Participant on or after his attainment of age sixty-five. 2.14. Specified Employee: A person who is a specified employee as defined in the regulations issued under Section 409A of the Code. 2.15. Termination of Service: The termination (by death, Retirement, or otherwise) of a Participant's service as an employee of the Corporation; provided that no Termination of Service will be deemed to have occurred unless it constitutes a "separation from service" within the meaning of Code Section 409A and the regulations thereunder. ARTICLE 3 -- DEFERRED COMPENSATION 3.1. Eligibility and Participation: Eligibility to commence participation in this Plan shall be restricted to those officers or highly compensated employees selected by the Committee in its sole discretion who qualify as "select management or highly compensated employees" as defined in Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974 and amendments thereto ("ERISA"), provided, however, that any such person shall timely complete all forms necessary for participation in the Plan under this Section. Any individual so selected shall first become a Participant in the Plan by filing with the Corporation a written application for participation in a form satisfactory to the Corporation, within thirty days of the date that he or she is first eligible to participate in the Plan (after taking into account the aggregation of "plan" principles set forth in Section 409A of the Code). If such application is not filed within such thirty-day period, such individual shall not thereafter be permitted to participate in the Plan until the next calendar year following the date upon which he first became eligible to participate. Upon selecting an individual to become a Participant in the Plan, the Committee shall notify the individual in writing of the date of eligibility and shall provide the individual with a written application for participation. 3.2. Termination Event: A Participant shall continue to be eligible to participate in the Plan until the earliest date on which any of the following events ("a Termination Event") occurs: (a) There occurs a Change of Control as defined in Section 2.5. (b) There occurs a Termination of Service as defined in Section 2.15. (c) The Participant becomes disabled to the extent that, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, the Participant is (i) unable to engage in any substantial gainful activity, or (ii) receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Corporation. For purposes of the Plan, the determination of a Participant's disability shall be made by the Committee with the Participant's participation or the participation of his legal representative. The Committee shall make the final and conclusive determination of disability based upon all the evidence presented to it and after due consideration of the information presented by the Participant or his legal representative. OR (d) The Plan is terminated in a manner that fully complies with the accelerated payment provisions of Section 409A of the Code and the regulations promulgated thereunder, including the requirements that all similar arrangements be terminated and that all payments be made within 24 months of the termination date. For purposes of this Plan, a Participant will not be deemed to have "terminated" his or her Service unless he or she has "separated from service" within the meaning of Section 409A(a)(2)(A)(i) of the Code and the regulations thereunder. ARTICLE 4 -- BENEFITS 4.1. Benefit: Should a Participant have a Termination Event, other than for Cause, he shall be entitled to receive the vested value of his Employer Credit Account (a "Termination Benefit"), adjusted as necessary for a Termination of Service prior to Retirement, Death or Disability. 4.2. Payment Amount and Timing. Distributions of the Termination Benefit will be paid as follows: a) Retirement. Pursuant to the Retirement of the Participant, the Termination Benefit shall be paid in fifteen substantially equal annual installments beginning on the 90th day following the Retirement or the first business day thereafter if the 90th day is not a business day; provided, however, that if the installments are to be paid to a Specified Employee due to a Retirement, the first installment shall be delayed six months from Participant's Retirement. On the day following the end of such six-month period, the Corporation shall make a catch-up payment to the Participant equal to the total amount of such payments that would have been made during the six-month period but for this Section 4.2(a). Thereafter, each subsequent installment shall be paid on the annual anniversary of the initial payment or the first business day thereafter if the anniversary is not a business day. b) Death or Disability. Pursuant to the Death or Disability of the Participant, the Termination Benefit shall be paid in a lump sum on the 90th day following the Death or Disability or the first business day thereafter if the 90th day is not a business day; provided, however that if the lump sum payment is to be paid to a Specified Employee due to a death or Disability, the payment shall be delayed until the first day of the month immediately following the lapse of six months after the date of the death or Disability. c) Other Termination Event. Pursuant to a Termination Event other than the Retirement, Death or Disability of the Participant, the Termination Benefit shall be paid in five substantially equal annual installments beginning on the 90th day following the Termination Event or the first business day thereafter if the 90th day is not a business day; provided, however, that if the installments are to be paid to a Specified Employee due to a Termination Event other than the Retirement, death or Disability of a Participant, the first installment shall be delayed six months from Participant's Termination Event. On the day following the end of such six-month period, the Corporation shall make a catch-up payment to the Participant equal to the total amount of such payments that would have been made during the six-month period but for this Section 4.2(a). Thereafter, each subsequent installment shall be paid on the annual anniversary of the initial payment or the first business day thereafter if the anniversary is not a business day. 4.3. Cause: Should a Participant have a Termination Event for Cause, he shall forfeit any Termination Benefit. 4.4. Vesting: Each Year's Annual Credit and Additions will be subject to its own vesting schedule and shall vest at a rate of 20% for each full year following the contribution date of the Annual Credit. For example, Annual Credits attributed to a Participant's Employer Credit Account on August 1, 2006 will be 20 percent vested on July 31, 2007, 40 percent vested on July 31, 2008, 60 percent vested on July 31, 2009, 80 percent vested on July 31, 2010 and 100 percent vested on July 31, 2011. If a Termination Event occurs, Participants will forfeit any unvested benefits accrued as of the date of the applicable Termination Event, except that all unvested benefits shall become fully vested if the Termination Event is due to Retirement, death, or Disability of a Participant. Additionally, all unvested benefits shall become fully vested for Participants with ten or more years of service with the Company upon a Change of Control. In the event the Plan is terminated due to Section 6.1 hereof, no further vesting shall occur after the date of termination of the Plan. ARTICLE 5 -- BENEFICIARY 5.1 Designation: At the time participation in the Plan commences, or at any later date, each Participant shall designate a Beneficiary on the Designation Beneficiary Form (attached hereto as Exhibit B) to receive any benefits which may become payable hereunder in the event of his death (Beneficiary Designation). A Participant can change any such Beneficiary Designation at any time prior to his death upon written notice to the Corporation. 5.2 Subsequent Beneficiary Designations: If the Participant shall have made more than one Beneficiary Designation, the Beneficiary Designation most recently filed with the Corporation prior to the time of the Participant's death shall govern. 5.3 No Beneficiary Designation: If any amounts under the Plan become payable following a Participant's death at a time when no Beneficiary Designation is applicable or when no Beneficiary is in existence, such payments shall be made in a lump sum to such Participant's surviving spouse, or if none, such amounts shall be paid to such Participant's estate. ARTICLE 6 -- MISCELLANEOUS 6.1 Amendment and Termination: The Corporation, acting through the Committee, reserves the right to amend, in whole or in part, in writing, or to terminate this Plan at any time and in its sole discretion, with or without notice; provided, however, that no such action shall reduce the amount of a Participant's vested Termination Benefit prior to the date of any such amendment or termination. Any provision herein to the contrary notwithstanding, amendment or termination of the Plan shall not accelerate, directly or indirectly, the date on which distribution of any then vested benefit is to be paid unless such acceleration complies with the requirements of Code Section 409A and the regulations thereunder. In addition, notwithstanding any provision herein to the contrary, if the Corporation determines, after a review of the final regulations issued under Section 409A of the Code and all applicable Internal Revenue Service guidance, that this Plan should be amended to avoid triggering the tax and interest penalties imposed by Section 409A of the Code, the Corporation may amend this Plan to the extent necessary to avoid triggering the tax and interest penalties imposed by Section 409A of the Code. 6.2 Insurance: The Corporation may purchase one or more insurance policies on the life of a Participant, as a means of providing, in whole or in part, for the payment of benefits hereunder. However, in such event neither such Participant, his designated Beneficiary, nor any other beneficiary shall have any rights whatsoever therein or in the proceeds therefrom. The Corporation (or any "Rabbi Trust" (as described in Section 6.6) formed in connection with the Plan) shall be the sole owner and beneficiary of any such insurance policy and shall possess and may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for a Participant or any other person or as collateral security for any obligation of the Corporation hereunder. This Plan shall under no circumstances be deemed to constitute a contract of insurance. 6.3 No Contract of Employment: The Plan shall under no circumstance be deemed to have any effect upon the terms or conditions of employment of any employee of the Corporation whether or not he or she is a Participant hereunder. Neither the offering of the Plan, the payment of any expenses, costs or benefit amounts associated with the Plan, nor any documents published in connection with the Plan shall be construed as having created a contract of employment between the Participant and the Corporation. Nor shall it affect any right that the Corporation may have to terminate the service of such person at will. 6.4 Benefits not Transferable: Benefits under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by any Participant or Beneficiary and any attempt to do so shall be null and void. Benefits under this Plan shall not be subject to or liable for the debts, contracts, liabilities, engagements or torts of any Participant or any Beneficiary, nor may the same be subject to attachment or seizure by any creditor of any Participant or any Beneficiary under any circumstances. 6.5 Determination of Benefits: (a) General. The Committee may require any person claiming benefits under the Plan ("Claimant") to submit an application therefor in writing to the Claims Administrator or to any officer of the Corporation, together with such other documents and information as the Committee may require. (b) Claims. Claims for benefits, benefit determinations, appeals and reviews of any adverse benefit determination and all associated notifications shall, at a minimum, comply with Section 503 of ERISA and the applicable provisions of 29 C.F.R. ss. 2560.503-1 ("ERISA Regulations"). (c) Claims Administrator. The Claims Administrator shall be designated by the Committee. The Committee reserves the right to change the Claims Administrator from time to time and to designate a special Claims Administrator when deemed necessary to avoid a conflict of interest. (d) Notification of Benefit Determination. The Claims Administrator will notify the Claimant of a benefit determination in writing within a reasonable time. Notification that a claim is wholly or partially denied will normally be given no later than 90 days after receipt of the claim. The notice shall (1) specify the reasons for the adverse decision, (2) refer to the specific provisions of the Plan on which the decision is based, (3) describe any additional material necessary to complete the claim and the reasons that such material is necessary, (4) describe the appeal and review procedures and the applicable time limits, and (5) inform the claimant of the right to bring a civil action following review. Should special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the expiration of the initial ninety-day period. The notice shall indicate the special circumstances requiring an extension of time and the date by which a final decision is expected to be rendered. In no event shall the period of the extension exceed ninety days from the end of the initial ninety-day period. Claims not acted upon within the time prescribed herein shall be deemed denied for purposes of proceeding to the review stage. (e) Review. A claimant is entitled to have an adverse benefit determination reviewed by the Committee (the "Named Fiduciary"). The request for review must be in writing and filed with the Claims Administrator no later than 60 days following the claimant's receipt of the adverse determination. The claimant may submit written comments and other information and documents relating to the claim, and have reasonable access to and receive copies of all documents and information relevant to the claim. The claimant may request a hearing. The Claims Administrator will promptly forward the request for review and the claim file to the Named Fiduciary. The decision of the Named Fiduciary shall be made promptly, and not later than sixty days after the Named Fiduciary's receipt of a request for review, unless special circumstances require an extension of time for processing. In such a case, a decision shall be rendered as soon as possible, but not later than one hundred twenty days after receipt of the request for review. (f) Named Fiduciary. The Named Fiduciary shall not be the Claims Administrator nor subordinate to the Claims Administrator. The Board of Directors reserves the right to change the Named Fiduciary from time to time, and to designate a special Named Fiduciary for appeals when deemed necessary. (g) Review Procedure. The Named Fiduciary has the discretion to decide all questions regarding relevance and reasonable access. In addition, the Named Fiduciary has the discretion as to whether a hearing shall be held. The Named Fiduciary will afford no deference to the Claims Administrator's decision, and will ensure a full and fair review de novo. (h) Notification of Benefit Determination on Review. The Named Fiduciary's decision will be in writing and sent to the Claims Administrator. The Claims Administrator will then notify the claimant either by hand delivery or by first class mail within a reasonable time, and normally not later than 60 days after receipt of the claim for review. If the Named Fiduciary issues an adverse benefit decision to the Participant or his Beneficiary, the decision shall (1) specify the reasons for the decision, (2) refer to specific plan provisions on which the decision was based, (3) inform the claimant of the right to review all information reviewed by the Named Fiduciary, even information not relied on in making the decision, and (4) inform the claimant of the right to bring a civil action. (i) Exhaustion of Remedies. No legal action for benefits under the Plan may be brought unless and until the Claimant has exhausted his remedies under this Section 6.5. 6.6 No Trust: For tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), this Plan is intended to qualify as an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, and shall be interpreted accordingly. No action by the Corporation or its Board of Directors under this Plan shall be construed as creating a trust, escrow or other secured or segregated fund or other fiduciary relationship of any kind in favor of any Participant or Beneficiary or any other persons otherwise entitled to benefits under the Plan. The status of the Participant and any Beneficiary with respect to any liabilities assumed by the Corporation hereunder shall be solely that of unsecured creditors of the Corporation. The Plan constitutes a mere promise by the Corporation to make benefit payments in the future. Any insurance policy or any other asset acquired or held by the Corporation in connection with liabilities assumed by it hereunder, shall not be deemed to be held under any trust, escrow or other secured or segregated fund or other fiduciary relationship of any kind for the benefit of a Participant or Beneficiary or to be security for the performance of the obligations of the Corporation, but shall be and remain a general, unpledged, unrestricted asset of the Corporation at all times subject to the claims of general creditors of the Corporation. Notwithstanding the foregoing, the Corporation may transfer assets, including any insurance policies to a grantor trust of the type known as a "Rabbi Trust" with the Corporation as grantor and owner of such trust, provided that the terms of such trust comply with Section 409A of the Code. 6.7 Plan Administration: The Plan shall be administered by the Committee. The Committee shall have the exclusive authority, sole discretion and responsibility for all matters in connection with the operation and administration of the Plan. The Committee's powers and duties shall include, but not be limited to, the following: (a) responsibility for the compilation and maintenance of all records necessary in connection with the Plan; (b) authorizing the payment of all benefits under and expenses of the Plan; (c) authority to engage such legal, accounting and other professional services as it may deem proper; (d) discretionary authority to interpret the Plan; and (e) discretionary authority to determine eligibility for benefits under the Plan and to resolve all issues of fact and law in connection with such determination. Decisions by the Committee shall be final and binding upon all parties. The Committee, from time to time, may allocate to other persons or organizations any of its rights, powers, and duties with respect to the operation and administration of the Plan. Any such allocation shall be reviewed from time to time by the Committee; shall, unless the Committee specifies otherwise, carry such discretionary authority as the Committee possesses regarding the matter; and shall be terminable upon such notice as the Committee in its sole discretion, deems reasonable and prudent under the circumstances. 6.8 Satisfaction of Claims: Any payment to a Participant or Beneficiary or the legal representative of either, in accordance with the terms of this Plan shall to the extent thereof be in full satisfaction of all claims such person may have against the Corporation. The Corporation may require such payee, as a condition to such payment, to execute a receipt and release therefore in such form as shall be determined by the Corporation. 6.9 Governing Law: The Plan shall be construed, administered, and governed in all respects in accordance with ERISA and, to the extent not preempted by ERISA, the laws of the State of California without regard to applicable conflicts of law or choice of law 2principles. By electing to participate in the Plan, each Participant on behalf of himself and his beneficiaries irrevocably and unconditionally (a) submits to the exclusive personal jurisdiction of the United States Federal courts and the State of California state courts located in Los Angeles County, California ("California Courts") with respect to any lawsuit, claim or cause of action arising under or with respect to this Plan; (b) agrees that the California Courts shall have exclusive subject matter jurisdiction over any such lawsuit, claim or cause of action; (c) agrees that venue with respect to any such lawsuit, claim or cause of action is proper and most convenient in such California Courts; and (d) agrees not to assert or raise any objection to jurisdiction or venue in the California Courts. BY ELECTING TO PARTICIPATE IN THE PLAN, EACH PARTICIPANT, ON BEHALF OF HIMSELF AND HIS BENEFICIARIES, IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY AND ALL ACTIONS OR PROCEEDINGS BROUGHT WITH RESPECT TO ANY PROVISION OF THIS PLAN AND/OR WITH RESPECT TO ANY CLAIMS ARISING OUT OF, OR RELATED TO, THIS PLAN, to the extent not preempted by ERISA. 6.10 Gender and Number: Words used herein in the masculine, feminine or neuter gender shall be construed as though they were also used in another gender in all cases where they would so apply. Words used herein in the singular or plural form shall be construed as though they were also used in the other form in all cases where they would so apply. 6.11 Severability: In the event that a court of competent jurisdiction determines that any provision of the Plan is in violation of any statute or public policy, only those provisions of the Plan that violate such statute or public policy shall be stricken. All provisions of the Plan that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any provision of the Plan shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the Corporation in establishing the Plan. 6.12 Indemnification: The Corporation agrees to and shall indemnify and hold harmless each Indemnified Person (as hereinafter defined), to the full extent permitted by law and the Corporation's Articles of Incorporation and Bylaws, from and against all claims, losses, damages, causes of action, suits, and liability of every kind, including all expenses of litigation, court costs and reasonable attorney's fees and expenses, incurred in connection with the Plan. "Indemnified Person" shall mean each director, officer, Committee member, Claims Administrator or employee of the Corporation acting as a fiduciary of the Plan. 6.13 Expenses: The expenses of administering the Plan and any grantor trust described in Section 6.6 shall be borne by the Corporation. 6.14 Successors and Assigns: This Plan shall be binding on and inure to the benefit of the Corporation and the Participants and their Beneficiaries, and their respective heirs and assigns. 6.15 Captions. The captions of this Plan are descriptive only and do not affect the intent or interpretation of the Plan. 6.16 Notices. Any notice required or permitted to be given hereunder shall be in writing sent by either personal delivery, overnight delivery, or United Sates, registered or certified mail, return receipt requested, all of which shall be properly addressed with postage or delivery charges prepaid, to the Committee or Participant at their respective addresses described below, or at such other addresses as either the Corporation or Participant may hereafter designate to the other in writing: To the Committee: National Technical Systems, Inc. 2006 Supplemental Executive Retirement Plan 24007 Ventura Blvd. Suite 200 Calabasas, California 91302 To any Participant: To the Participant's last known address as shown in the Corporation's Human Resource Department records Notices sent by personal delivery shall be deemed given upon actual receipt. Notices sent by overnight delivery shall be deemed given on the next business day. Notices sent via United States registered or certified mail shall be deemed given two business days from mailing. ACKNOWLEDGED: National Technical Systems, Inc. ------------------------------------------------ ------------ By Date EX-31.1 5 d70133_ex31-1.txt SECTION 302 CERTIFICATION OF CEO 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) December 12, 2006 EX-31.2 6 d70133_ex31-2.txt SECTION 302 CERTIFICATION OF 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) December 12, 2006 EX-32.1 7 d70133_ex32-1.txt SECTION 906 CERTIFICATION OF CEO 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 October 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) December 12, 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. EX-32.2 8 d70133_ex32-2.txt SECTION 906 CERTIFICATION OF 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 October 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) December 12, 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. -----END PRIVACY-ENHANCED MESSAGE-----