<PAGE>
RELIABILITY INCORPORATED
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant X
---
Filed by a Party other than the Registrant
---
Check the appropriate box:
Preliminary Proxy Statement
- ---
Confidential, for Use of the Commission Only (as permitted by
- --- Rule 14a-6(e)(2))
X Definitive Proxy Statement
- ---
Definitive Additional Materials
- ---
Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
- ---
Reliability Incorporated
(Name of Registrant as Specified in Its Charter)
Reliability Incorporated
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
X No fee required
- ---
$500 per each party to the controversy pursuant to Exchange Act Rule
- --- 14a-6(i)(3).
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
- ---
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
Fee paid previously with preliminary materials
- ---
- --- Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid: -0-
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed: March 17, 1997
* Set forth the amount on which the filing fee is calculated and state how
it was determined.
ofs:fin:prox97.wp1 1
<PAGE>
RELIABILITY INCORPORATED
16400 Park Row
Houston, Texas 77084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 30, 1997
To the Shareholders of
Reliability Incorporated:
Notice is hereby given that the 1997 annual meeting of shareholders of
Reliability Incorporated (the "Company") will be held in the offices of the
Company at 16400 Park Row, Houston, Texas 77084, on April 30, 1997, at 10:00
a.m. Houston time, for the following purposes:
1. To elect a Board of Directors to serve until the next annual meeting
of shareholders and until their respective successors are elected.
2. To consider and act upon a proposal to approve the Reliability
Incorporated 1997 Stock Option Plan and to ratify the adoption
thereof by the Board of Directors.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 14, 1997,
as the record date for determination of shareholders entitled to notice of,
and to vote at, such meeting.
Regardless of whether you expect to attend the meeting in person, you are
requested to fill in, date and sign the enclosed proxy and return it in the
enclosed envelope at your earliest convenience. No postage need be affixed
if such envelope is mailed in the United States.
By order of the Board of Directors,
Max T. Langley
Secretary
Date: March 25, 1997
2
<PAGE>
RELIABILITY INCORPORATED
16400 Park Row
Houston, Texas 77084
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
Solicitation and revocation of proxies
The accompanying proxy is solicited by Reliability Incorporated, a Texas
corporation (the "Company"), for use in connection with the 1997 annual
meeting of shareholders of the Company. Although proxies will be solicited
primarily by mail, employees of the Company may personally aid in such
solicitation. The Company will make arrangements with brokerage houses and
banks for forwarding proxy materials to the beneficial owners of shares
registered in brokers' and banks' names. All solicitation costs will be
borne by the Company. All properly signed proxies will be voted, and, where
a choice has been specified by the shareholder as provided on the proxy, it
will be voted in accordance with the specification so made. If no
specification is made, the shares will be voted FOR all nominees for director
and FOR approval and ratification of the 1997 Stock Option Plan. Any
shareholder giving a proxy may revoke it at any time before it is used at the
meeting by giving written notice of revocation to the secretary of the
Company or by signing and delivering to the secretary of the Company a proxy
bearing a later date.
Proxy materials are expected to be mailed or delivered to shareholders
on or about March 25, 1997.
Voting at the meeting
Only holders of record of the Company's Common Stock (the "Common Stock")
at the close of business on March 14, 1997, will be entitled to vote at the
meeting. As of such date, 2,972,627 shares were issued and outstanding and
entitled to vote at the meeting. Each share of Common Stock is entitled to
one vote; shareholders do not have the right to cumulate their votes with
respect to the election of directors. Directors are elected by a majority
vote of those shares present and voting at the meeting. The 1997 Stock Option
Plan will be approved by the affirmative vote of a majority of the shares
present and voting at the meeting.
3
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
OWNERSHIP OF COMMON STOCK
Principal stockholders
As of February 14, 1997, each of the following persons beneficially owned
5% or more of the 4,242,848 (2,972,627 as of March 14, 1997 as explained
below) shares of Common Stock then outstanding:
Voting shares Dispositive shares
and percent of total and percent of total
Name and address outstanding (1) outstanding (2)
- ---------------- -------------------- --------------------
S. I. P., Inc. 1,270,221 (29.94%)(3) 1,270,221 (29.94%)(3)
P. O. Box 34311
Houston, TX
Dimensional Fund
Advisors Inc. 261,200 (6.16%)(4) 261,200 (6.16%)(4)
1299 Ocean Avenue,
11th Floor
Santa Monica, CA
Fidelity Low-Priced
Stock Fund 236,000 (5.56%)(5) 236,000 (5.56%)(5)
82 Devonshire Street
Boston, MA
- --------------------
(1) Shares as to which the shareholder has voting power.
(2) Shares as to which the shareholder has power to dispose.
(3) On March 12, 1997, S.I.P., Inc. sold its shares to the Company and
ceased to be a stockholder.
(4) Dimensional Fund Advisors Inc. ("Dimensional"), in a Schedule 13G,
reported sole power to vote 141,200 shares and that certain persons in
their capacity as officers of Dimensional vote an additional 120,000
shares, in addition to voting the 141,200 shares. As reported in a
Schedule 13G, dated February 5, 1997, after giving effect to S.I.P.,
Inc.'s March 1997 stock sale to the Company, Dimensional owns 8.79% of
the outstanding shares.
(5) As reported in a Schedule 13G, dated February 14, 1997; after giving
effect to S.I.P, Inc.'s March 1997 stock sale to the Company, Fidelity
owns 7.94% of the outstanding shares.
- --------------------
S.I.P., Inc. ("SIP"), a Houston-based construction company, is a
wholly-owned second tier subsidiary of Parsons Corporation, which may be
deemed to own beneficially the shares of Common Stock owned by SIP. On
March 12, 1997, SIP sold its shares to the Company. The shares purchased
from SIP are held by the Company as treasury shares and are not outstanding
and do not vote.
Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 261,200 shares of Common
Stock as of December 31, 1996, all of which shares are held in portfolios of
4
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
Edward C. Johnson, III, owns approximately 12% and Abigail P. Johnson
owns approximately 25% of the stock of FMR Corp., which controls Fidelity
Management & Research Company ("Fidelity"), the investment advisor to the
Fidelity Low-Priced Stock Fund ("Fund"). Members of the Edward C. Johnson,
III family and trusts for their benefit constitute a group controlling
Fidelity. The Fund's shares are voted by Fidelity under guidelines
established by the Board of Trustees of the Fund; the Johnson family, through
its control of Fidelity, has the sole power to dispose of the Fund's shares.
The Company's Employee Stock Savings Plan (the "Plan") owns a total of
324,156 shares (7.64% as of February 14, 1997 and 10.90% after giving effect
to SIP's stock sale to the Company on March 12, 1997) of Common Stock. Each
employee of the Company who participates in the Plan may direct the Trustee
of the Plan on how to vote the stock beneficially owned by such employee and,
under certain circumstances, the employee can direct the sale of some or all
of the shares held for his benefit. No employee owns 5% or more of the
Company's shares through the Plan.
On March 12, 1997, the Company purchased all shares owned by S.I.P., Inc.
The transaction reduced the total shares of outstanding Common Stock from
4,242,848 to 2,972,627. The shares which were purchased from S.I.P., Inc.
are held in the Company's treasury.
5
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
Security ownership of management
The following table sets forth, as of March 14, 1997, the amount of
Common Stock owned by the directors of the Company, the nominees for
director, each executive officer named in the compensation table and all
directors and officers as a group.
Amount and Nature of
Beneficial Ownership
--------------------
Voting
and Other
Name of Individual Investment Beneficial Percent
or Group Power (1) Ownership (2) of Class (3)
------------------ ---------- ------------- ------------
Larry Edwards 56,850 25,945 2.79%
W. L. Hampton -0- -0- -0-
John R. Howard 300 -0- *
Thomas L. Langford 2,000 -0- *
A. C. Lederer, Jr. 6,500 -0- *
James M. Harwell 600 9,864 *
Max T. Langley 10,100 12,429 *
Paul Nesrsta -0- 5,285 *
Robert W. Hildenbrand, Jr. -0- 9,398 *
All executive officers
and directors as a
group (nine persons) 76,350 62,921 4.69
- --------------------
* Less than 1%
(1) Each person has the sole power to vote and dispose of the shares shown
except that Mr. Edwards has shared power with his spouse to vote and
dispose of the 56,850 shares reported above.
(2) Represents shares allocated to the executive officer through his
participation in the Company's Employee Stock Savings Plan (the
"Plan"), according to the latest statement for said Plan which is as
of December 31, 1996. Employees have the power to vote all shares held
in the Plan and, under certain circumstances, the employee can direct
the sale of some or all of the shares held for his benefit.
(3) The percent stated in this column is based on the total beneficial
ownership of the individual or group as a percent of the 2,972,627
shares of Common Stock outstanding as of March 14, 1997.
- --------------------
The Company is not aware of any contractual arrangement the operation of
which may at any subsequent date result in a change in control of the
Company.
6
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
ELECTION OF DIRECTORS
At the meeting, five directors are to be elected. Each director will
hold office until the next annual meeting of shareholders and until his
successor is elected and qualifies. The persons named as proxy holders in
the accompanying form of proxy intend to vote each properly signed and
submitted proxy for the election as a director of each of the persons named
in the following table unless authority to vote for all or any of such
nominees is withheld on such proxy.
Number and percent Other positions and
of shares of offices presently
Common Stock of held with the Company
the Company benefi- (and other present
Director cially owned as of principal occupation
Name since Age March 14, 1997(1) if different)
---- -------- --- -------------------- ------------------
Larry Edwards 1995 55 82,795(2) 2.79% Chairman of the Board
of Directors,
President and Chief
Executive Officer
W.L. Hampton 1984 68 -0- -0- (retired)
John R. Howard(3) 1971 63 300 * (attorney-at-law)
Thomas L. Langford 1980 55 2,000 * (investor)
A.C. Lederer, Jr.(3)1972 83 6,500 * (investor)
- ---------------------------
* Less than 1%
(1) Except as otherwise noted, each director has the sole power to vote and
to dispose of the shares shown in this table as being beneficially
owned by him.
(2) Mr. Edwards has shared power with his wife to vote and dispose of
56,850 shares. The remaining 25,945 shares are held in the Employee
Stock Savings Plan ("Plan"); Mr. Edwards can vote Plan shares, but the
power to direct the sale of these shares is limited.
(3) The wife of A. C. Lederer, Jr. is a sister of John R. Howard. There
is no other family relationship among the persons named in this table.
- ---------------------------
Mr. Edwards has been President and Chief Executive Officer of the Company
since 1993 and has been a Director and Chairman of the Board of Directors
since October 1995. From April 1990 to March 1993, he served as President
and Chief Operating Officer of the Company. Mr. Edwards joined the Company
in 1977 as Manager of Engineering, Planning and Manufacturing Systems, and
subsequently held the positions of Vice President - Operations, Corporate
Vice President - Systems, and Executive Vice President - Systems.
Mr. Hampton has been a Director of the Company since 1984. Mr. Hampton
was President of S.I.P. Engineering, Inc. from 1984 until his retirement in
1993.
Mr. Howard has been a Director of the Company since 1971. He is and has
been for more than five years an attorney in private practice.
7
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
Mr. Langford has been a Director of the Company since 1980. Mr.
Langford's principal occupation has been that of an investor since May 1996.
He was President of Parsons Corporation from September 1991 until May 1996.
From May 1989 to September 1991, Mr. Langford was Executive Vice President
and Chief Financial Officer of Parsons Corporation.
Mr. Lederer has been a Director of the Company since 1972 and was
Chairman of the Board of Directors of the Company from March 1993 until
October 1995. Mr. Lederer's principal occupation has been that of an
investor for more than the last five years.
Management has no reason to believe that any person proposed to be
elected a director will be unwilling or unable to serve if elected. If such
a situation arises, proxies will be voted for a nominee selected by the Board
of Directors of the Company.
The Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires that the Company's directors, executive officers and 10%
stockholders report to the Securities and Exchange Commission certain
transactions involving Common Stock. Based solely upon a review of Forms 3,
4 and 5 furnished to the Company and representations received from persons
subject to such reporting requirements, all filings were timely during the
year ended December 31, 1996.
The Company's Board of Directors held four meetings during 1996. All
incumbent directors attended 75% or more of the meetings of the Board of
Directors.
The Company's audit committee, composed of Messrs. Howard and Langford,
met two times during 1996 and both members attended both meetings. The audit
committee reviews and approves all services to be performed by independent
auditors and the fees therefor, consults with independent auditors and
management with respect to internal controls and other financial matters and
reviews the results of the year-end audit and other reports of independent
auditors.
The compensation committee, composed of Messrs. Lederer and Hampton, met
two times during 1996 and both members attended both meetings. The functions
of the compensation committee are to review executive compensation and
benefit plans and recommend changes therein and to make recommendations to
the Board of Directors concerning executive salaries and incentive plans for
the Company.
8
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
Compensation Committee report
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
of Reliability Incorporated submits this report on executive compensation to
the Board of Directors and the Company's shareholders. This report covers
components of executive compensation and the bases of the Committee's
compensation decisions. The Committee's goal is to establish compensation
for executive officers that ensures a fair and competitive salary and
additional incentive compensation which is related directly to the financial
success of the Company and the performance of the officers.
Salary
Salaries for the chief executive officer ("CEO") and each other executive
officer are set annually. The Committee strives to set salaries that are
competitive with those paid by companies of similar size and revenue in the
industry. The Company utilizes the currently available American Electronics
Association Executive Compensation Survey ("AEA Compensation Survey") to
determine appropriate and competitive salaries.
In 1995, the salary of the CEO was increased 8% and the raises for the
other executive officers varied from 4% to 10%. In 1996, the salary of the
CEO was increased 6% and the raises for the other executives varied from 4%
to 6%. The raises in 1995 and 1996 for the CEO and executive officers varied
depending on the performance of the individual executive and the financial
success of the industry segment, division or subsidiary for which the
executive was responsible. In addition, the Committee reviewed the overall
financial performance of the Company, its gross, operating, and net profits,
the performance of the Company's officers and the business plan for 1996, as
well as the applicable AEA Compensation Survey to determine appropriate and
competitive salaries. The Committee considered salaries paid by other
companies of similar size and revenues to determine market rate salary using
the 25th percentile results of the AEA Compensation Survey.
Incentive compensation
In addition to base salary, the Company has an incentive bonus plan which
applies to the CEO, all other executive officers, the directors and salaried
employees of the Company. This bonus plan has three components: (1) a
quantitative measure based on the net income before income tax of the Company
(a) as a whole in the case of the CEO and certain other executive officers
or (b) the subsidiary, industry segment or division of the Company for which
the executive is responsible; (2) a qualitative measure which is an
evaluation of each individual's performance during the year, made by the
Committee for the CEO and by the CEO for all other executive officers; and
(3) a target bonus. The Committee's approach to incentive bonuses is to
establish incentives at a pay-for-performance level which allows the
executive to be compensated in total at a competitive rate. Each year the
Committee establishes the target bonus for the CEO and each executive officer
and approves the payment of bonuses, if any, based on achieving predetermined
goals. The CEO and executive officers are only eligible for bonuses when the
Company as a whole and/or the operating division for which such officer is
responsible is profitable. The actual bonus for the CEO was 56% of salary
9
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
in 1994. Bonuses ranging from 26% to 37% were paid to other executive
officers for 1994. Target bonuses, for 1995, ranged from 35% of salary for
the CEO (up from 30% in 1994) to 26.5% for executive officers (up from 22.5%
in 1994); the actual bonus paid, in 1995, to the CEO was 124% of his salary
and ranged from 11% to 103% of salary for the executive officers. Actual
bonus amounts for any or all officers can exceed target bonuses when the
Company's (or the subsidiary, division or industry segment for which the
officer is responsible) net income exceeds income goals set at the beginning
of the year and an individual officer's performance exceeds a rating of 1.0,
and will be less than target bonuses if the appropriate net income before
taxes does not reach the specified goals or an individual officer's
performance is judged to be between 0 and 1.0. Target bonuses, for 1996,
ranged from 40% of salary for the CEO to 30% for executive officers. The
actual bonus paid, in 1996, to the CEO was 169% of his salary and ranged from
51% to 126% of salary for the executive officers. In 1996, the Committee and
the CEO considered the improvements in revenues, net income and net income
before income tax as a percent of revenues from 12% in 1994 to 18% in 1995
and 21% in 1996. The high level of the Company's income in 1995 and 1996
resulted in income factors coupled with individual performance factors being
set at levels that resulted in the CEO and certain executive officers
receiving total compensation for 1996 at amounts somewhat above the 75th
percentile of the AEA Compensation Survey. All salaried employees of the
Company received bonuses in 1995 and 1996; such bonuses ranged from 10% of
base salary to 62% of base salary in 1995 and from 8% of base salary to 107%
of base salary in 1996, exclusive of bonuses paid to executive officers.
Stock Options
The Committee has recommended that the shareholders approve a stock
option plan for officers, directors and key employees. The Committee hopes
to encourage stock ownership among managers so that they have a vested
interest in the growth and profitability of the Company. In addition, stock
options will be used in the future as a component of the total compensation
package to reward performance, to equalize benefits with those offered by
comparable companies and to encourage key personnel to remain with the
Company.
Benefits
The CEO and other executive officers are not entitled to any additional
benefits which are not also provided to all full-time salaried employees.
Respectfully submitted,
W.L. Hampton
A.C. Lederer, Jr.
10
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
Remuneration of directors and executive officers
The following table provides information as to the compensation paid by the
Company and its subsidiaries, during fiscal year 1996, to the chief executive
officer and the four other highest paid executive officers and directors
whose remuneration exceeded $100,000 in 1996.
Annual Compensation
------------------------------------
(a) (b) (c) (d) (e) (i)
Name and Annual Other All Other
Principal Salary Bonus Compensation Compensation
Position Year ($) ($) ($) ($) (1)
---------- ---- ------ ----- ------------ ------------
Larry Edwards, 1996 146,309 247,099 -0- 4,376
President, Chairman 1995 137,514 170,415 -0- 4,045
of the Board, and 1994 127,506 72,219 -0- 3,825
Chief Executive Officer
James M. Harwell, 1996 92,333 116,715 -0- 2,767
Vice President 1995 86,587 89,413 -0- 2,547
1994 79,056 29,785 -0- 2,372
Max T. Langley, Senior 1996 100,601 95,995 -0- 3,016
Vice President, Chief 1995 96,753 73,828 -0- 2,846
Financial Officer, 1994 92,712 34,461 -0- 2,781
Secretary and Treasurer
Paul Nesrsta, 1996 91,592 101,982 -0- 2,745
Vice President 1995 87,003 84,222 -0- 2,559
1994 81,978 21,802 -0- 1,640
Robert W. Hildenbrand, 1996 91,514 46,759 -0- 2,743
Jr., Vice President 1995 87,932 9,445 -0- 2,587
1994 84,300 23,363 -0- 2,529
- --------------------
In 1994, 1995 and 1996, the Company did not provide any long-term
compensation plans for executive officers, thus columns (f), (g) and (h) are
omitted from the above table.
(1) Amounts shown in this column represent the Company's matching and
annual contributions to the Employee Stock Savings Plan for the benefit
of the named individual.
- --------------------
The Company sponsors an Employee Stock Savings Plan (the "Plan"). All
U.S. employees of the Company who have completed one year of service are
covered by the Plan. The Plan allows an employee to contribute up to 15% of
defined compensation to the Plan. Contributions to the Plan by executive
officers have been limited (8% in 1996 and 6% in 1995) by provisions of the
Internal Revenue Code. The Company contributes a matching amount to the Plan
11
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
equal to 50% of the employee's contribution, to a maximum of 2%, for
employees who contribute 2% or more. The Company also contributes, as a
voluntary contribution, an amount equal to 1% of the defined compensation of
all covered employees.
The Company has no long-term compensation plans, awards or
arrangements. Except for the 1997 Stock Option Plan submitted for approval
herein, the Company has no stock appreciation rights or option plans and
grants no options or stock rights. The Company has no long-term incentive
plan, defined benefit or actuarial plan, employment contracts or termination
of employment or change in control agreements with any executive officer.
Compensation to directors
Non-employee directors are paid a fee of $1,000 per month and,
effective January 1, 1996, participate in an incentive bonus program
essentially similar to the bonus program described in the Compensation
Committee Report. Awards to directors are based on the Company's performance
and profitability. In 1996, each director received a bonus of $13,500 in
addition to their monthly fee.
Performance graph
The following performance graph compares (1) the five year cumulative
total return to shareholders for the Company's Common Stock to (2) the Nasdaq
Non-Financial Stocks Index (which includes the Company) and to (3) the Nasdaq
Stock Market (US) CRSP Total Return Index. The graph assumes that the value
of the investment in the Company's Common Stock and each index was $100 at
December 31, 1991 and that all dividends (the Company did not pay any
dividends) were reinvested.
(Graph is displayed here)
Comparison of Five-Year Cumulative Total Return
For Years Ended December 31,
---------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Reliability Common Stock $100 $138 $338 $238 $713 $625
Nasdaq Non-Financial Stocks 100 109 126 121 169 206
Nasdaq Stock Market Total Return 100 116 134 131 185 227
Compensation Committee interlocks and insider participation
The compensation committee is composed of Messrs. Lederer and Hampton.
Neither person is an officer or employee of the Company or any of its
subsidiaries. No director or executive officer of the Company serves as a
director (or a member of the compensation committee or other group performing
equivalent functions) of another entity, of which any executive officer or
director serves as a director of the Company.
12
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
APPROVAL OF ADOPTION OF THE 1997 STOCK OPTION PLAN
Introduction
On February 26, 1997, the Board of Directors adopted the Reliability
Incorporated 1997 Stock Option Plan ("1997 Plan"), subject to stockholder
approval. A copy of the 1997 Plan is attached as Exhibit A. The following
general description of certain features of the 1997 Plan is qualified in its
entirety by reference to Exhibit A.
General Plan Information
The 1997 Plan was adopted for the benefit of the executive officers,
directors and other key employees of the Company and its subsidiaries and
authorizes for issuance upon the exercise of stock options an aggregate of
up to 500,000 shares of the Company's common stock, no par value ("Common
Stock").
The purpose of the 1997 Plan is to promote the interests of the Company
by providing incentives to the directors, officers and other key employees
of the Company to use their best efforts on behalf of the Company and its
stockholders by offering such persons an opportunity to become stockholders
of the Company, thereby rewarding outstanding performance, encouraging
continued employment and encouraging stock ownership.
Administration
The 1997 Plan may be administered by (i) the Board of Directors of the
Company, (ii) any duly constituted committee of the Board of Directors
consisting of at least two members of the Board of Directors, all of whom
shall be Non-Employee Directors, or (iii) any other duly constituted
committee of the Board of Directors. The administering party is referred to
herein as the "Plan Administrator". At the current time, the Board of
Directors is serving as the Plan Administrator. A Non-Employee Director is
defined as any director who (i) is not an officer of the Company or
subsidiary of the Company, or otherwise employed by the Company or subsidiary
of the Company; (ii) does not receive compensation, either directly or
indirectly, from the Company or subsidiary of the Company, for services
rendered as a consultant or any capacity other than as a director, except for
an amount not exceeding $60,000; (iii) does not possess an interest in any
transaction for which disclosure would be required under Item 404(a) of
Regulation S-K of the Securities Act of 1933, as amended ("Securities Act");
and (iv) is not engaged in a business relationship for which disclosure would
be required pursuant to Item 404(b) of Regulation S-K under the Securities
Act. The Plan Administrator selects the participants to whom options are to
be granted and, with respect to each option, determines the type of option,
the number of shares covered thereby, the price payable on its exercise, and
the period during which it may be exercised, all in a manner not inconsistent
with the 1997 Plan. The Plan Administrator also resolves all questions of
application or interpretation of the 1997 Plan.
13
<PAGE>
RELIABILITY INCORPORATED
PROXY STATEMENT
Description of Common Stock
The Company has only one class of authorized capital stock, the Common
Stock. The 1997 Plan currently authorizes the issuance, upon the exercise
of stock options by eligible participants, of an aggregate of up to 500,000
shares of the Company's Common Stock. Holders of Common Stock are entitled
to receive dividends if, when and as declared by the Board of Directors of
the Company out of funds legally available therefor. All shares of Common
Stock have equal voting rights on the basis of one vote per share on all
matters to be voted upon by stockholders. Cumulative voting for the election
of directors is not permitted. Shares of Common Stock have no preemptive,
conversion, sinking fund or redemption provisions and are not liable for
further call or assessment. Each share of Common Stock is entitled to share
on a pro rata basis in any assets available for distribution to the holders
of the Company's equity securities upon liquidation of the Company.
The Company has not paid any dividends on its Common Stock for more than
ten years. Although the Company intends to invest any future earnings in its
business, it may determine at some future date that the payment of cash
dividends would be desirable. The payment of any such dividends would
depend, among other things, upon the earnings and financial condition of the
Company.
Eligibility
Participants in the 1997 Plan are selected by the Plan Administration
from the directors, executive officers and other key employees of the Company
or its subsidiaries who occupy responsible managerial or professional
positions and who have the capability of making a substantial contribution
to the success of the Company. In making this selection and in determining
the form and amount of awards, the Plan Administrator may consider any
factors deemed relevant, including the individual's functions,
responsibilities, value of services to the Company and past and potential
contributions to the Company's profitability and growth.
Types of Awards
Awards under the 1997 Plan may be in the form of either one or both of
the following: stock options and incentive stock options, as described
below. The 1997 Plan permits the granting of both incentive stock options
("ISOs"), intended to qualify as such under the provisions of Section 422 of
the Internal Revenue Code of 1986 (the "Code"), and non-qualified options.
To qualify as ISOs, options must meet additional Federal income tax
requirements. These requirements include a limitation that the aggregate
fair market value of ISOs that first become exercisable during any calendar
year may not exceed $100,000. The term of each option will be fixed by the
Plan Administrator but, for incentive stock options, may not exceed ten years
from date of grant. The Plan Administrator will determine at which time or
times each option may be exercised. Awards are evidenced by award
agreements, the terms and provisions of which may differ, in form and
substance satisfactory to the Plan Administrator and not inconsistent with
the 1997 Plan.
Exercise Price
A stock option entitles the grantee to purchase a set number of shares
of Common Stock at a set price ("Exercise Price"). The Exercise Price for
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RELIABILITY INCORPORATED
PROXY STATEMENT
each share covered by an option will be the fair market value of a share of
Common Stock on the date the option is granted. In most instances, fair
market value will be the closing price on the date of the grant of the
option. The Exercise Price must be paid in full with cash or by delivery of
Common Stock valued at its fair market value on the exercise date.
Restrictions
As soon as practicable after receipt of payment of the Exercise Price,
the Company will deliver to the optionee a certificate or certificates for
such shares of Common Stock represented by the option exercised. The
optionee will become a stockholder of the Company with respect to Common
Stock represented by the share certificates issued and as such will be fully
entitled to receive dividends, to vote and to exercise all other rights of
a stockholder, including the right to dispose of such shares. Prior to
exercise of an option, payment of the option price and receipt of
certificates for shares of Common Stock, an optionee will have no rights of
a stockholder.
Tax Information
The following is a brief summary of the general rules relating to the tax
consequences under present federal income tax laws with respect to grants
under the 1997 Plan:
Taxation of ISOs. No taxable income will be realized by an optionee upon
the grant or exercise of an ISO. If shares of Common Stock are issued to an
optionee pursuant to the exercise of an ISO and if no disposition of such
shares is made within two years after the date of grant or within one year
after the purchase of such shares to such optionee, then, upon the sale of
such shares, any amount realized in excess of the exercise price will be
taxed to such optionee as a long-term capital gain and any loss sustained
will be a long-term capital loss, and no deduction will be allowed to the
Company for Federal income tax purposes. If no disqualifying disposition is
made, the exercise of an ISO will give rise to an adjustment in computing
alternative minimum taxable income that may result in alternative minimum tax
liability for the optionee.
If shares of Common Stock acquired upon the exercise of an ISO are
disposed of prior to the expiration of either holding period described above,
the optionee in most instances will realize ordinary income in the year of
such disqualifying disposition in an amount equal to the excess (if any) of
the fair market value of the shares at exercise (or, if less, the amount
realized on the disposition of the shares) over the exercise price thereof
and the Company will be entitled to deduct such amount. Any additional gain
realized by the participant will be taxed as short-term or long-term capital
gain, depending on how long the shares have been held, and will not result
in any deduction by the employer. The holding period for long-term capital
gain treatment is more than one year.
If an ISO is exercised at a time when it no longer qualifies as an ISO,
the option will be treated as a non-qualified option. Subject to certain
exceptions for disability or death, an ISO generally will not be eligible for
the tax treatment described above if it is exercised more than three months
following the termination of employment.
Taxation of Non-Qualified Options. No income will be realized by an
optionee at the time a non-qualified option is granted. In most instances,
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RELIABILITY INCORPORATED
PROXY STATEMENT
ordinary income will be realized by the optionee upon exercise in an amount
equal to the difference between the fair market value of the shares on the
date of exercise and the exercise price (the amount paid for the shares), and
the Company will be entitled to a tax deduction in the same amount. At
disposition, appreciation (or depreciation) after the date of exercise will
be treated as either short-term or long-term capital gain (or loss) depending
on how long the shares have been held.
Taxation of Common Stock used to Exercise Options. Shares of Common
Stock delivered to pay for shares of Common Stock purchased on the exercise
of an ISO or a non-qualified stock option will be valued at the fair market
value at the date of exercise. Unless the delivery of shares constitutes a
disqualifying disposition of shares acquired upon exercise of an ISO, no
taxable gain or loss on the surrendered shares will be realized at the time
of delivery. For Federal income tax purposes, the optionee receives the same
tax basis and holding period in a number of the new shares equal to the
number of old shares exchanged. The optionee will also receive a tax basis
in the additional shares equal to zero in the case of an ISO or equal to
their fair market value at the date of exercise in the case of a non-
qualified stock option and a new holding period in either case.
Withholding. The Company has the right to require an optionee or grantee
to remit an amount necessary to satisfy any federal, state or local tax
withholding requirements prior to the delivery of certificates for shares.
An optionee or grantee may be required to deposit cash with the Company in
an amount necessary to satisfy the applicable federal and state law
requirements with respect to withholding of taxes on wages. Alternatively,
the Company may issue such shares, net of the number of shares sufficient to
satisfy the withholding requirements. For withholding purposes, Common Stock
will be valued on the date the withholding obligation is incurred.
Other Tax Information. The foregoing does not constitute a definitive
statement on the tax effects of awards under the 1997 Plan and is based on
the laws and regulations presently in effect. There can be no assurance that
the tax consequences as discussed above will continue or that other tax laws
will not be applicable. Accordingly, it is suggested that prior to
exercising an award granted under the 1997 Plan and prior to disposing of
shares acquired pursuant to an exercise thereof, a grantee should consult his
tax advisor.
The 1997 Plan is not qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended.
Assignment of Interest
No award granted under the 1997 Plan is assignable or transferable other
than by will or by the laws of the descent and distribution. During the
lifetime of the optionee, the award may be exercisable only by the optionee.
Termination of Employment
Upon the termination of an optionee's employment, all stock options shall
terminate thirty days after termination, unless (i) the termination was the
result of retirement or permanent disability (as each is determined by the
Plan Administrator), in which case the optionee may within the remaining term
of the option and six months (as to disability) or three months (as to
retirement) exercise any awards to the extent such awards are exercisable at
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RELIABILITY INCORPORATED
PROXY STATEMENT
the time of termination; (ii) the termination was caused by the optionee's
death, in which case any rights exercisable on the date of death may be
exercised by the optionee's estate, or by a person acquiring such right by
bequest or inheritance, provided that such exercise occurs within both the
remaining effective term of the awards and one year after the optionee's
death.
Amendment and Termination
The Plan Administrator is permitted to amend the 1997 Plan without
further approval by the stockholders. No amendment may adversely affect any
outstanding grants without the holder's consent.
Changes in Capital Structure
The 1997 Plan provides for proportionate adjustments upwards or downwards
upon an increase or decrease, respectively, in the number of shares of Common
Stock outstanding or other subdivision or consolidation of shares. Upon the
merger or consolidation of the Company in which the Company is the survivor,
each holder of an option will be entitled to receive upon exercise the number
and class of securities to which the holder would have been entitled pursuant
to the merger or consolidation agreement if, immediately prior to such event,
such holder had been the record holder of a number of shares of Common Stock
as to which such option was exercisable.
In the event of a merger or consolidation in which the Company is not the
surviving corporation, or in the event of a sale or other disposition of all
of the Company's assets to another entity, the Plan Administrator may elect
any of the following: (i) in the event the successor entity assumes the
obligation to deliver securities, to entitle each holder to receive upon
exercise of an option such securities as the holder would have been entitled
to receive had such option been exercised immediately prior to the merger or
consolidation; (ii) to waive any limitations with respect to an option such
that such option becomes exercisable prior to the date of the merger,
consolidation or sale of assets; or (iii) to cancel all outstanding options
as of the effective date of such merger, consolidation or sale, provided
notice is given to each holder and each holder has the right to exercise
options for a period of not less than thirty days prior to the effective date
of the merger, consolidation or sale.
Other Information
The fair market value of the Common Stock shall be determined by the Plan
Administrator and, generally, shall be the closing price of the Common Stock
as reported on the consolidated trading tables of The Wall Street Journal on
the date the option is granted. If at any time the Common Stock shall not
have been traded on National Association of Securities Dealers, Inc.
Automatic Quotation System/National Market or other public securities market
for more than 10 days immediately preceding such date, the Plan Administrator
may provide other appropriate means of determining fair market value.
Optionees will not be given periodic reports on the status of their
options; however, grantees may obtain information as to the amount and status
of their options at any time upon written request to the Company. The Plan
Administrator may permit the Company to withhold Common Stock to satisfy all
or part of the optionee's withholding tax. The Common Stock will be valued
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RELIABILITY INCORPORATED
PROXY STATEMENT
at its fair market value. The payment of withholding taxes by surrendering
Common Stock is subject to any restrictions the Plan Administrator may
impose.
Neither the adoption of the 1997 Plan by the Board of Directors nor the
submission of the Plan to the stockholders of the Company for approval shall
be construed as creating any limitations of the power of the Board of
Directors to adopt such other incentive arrangements as it may deem desirable
including without limitation, the granting of stock options otherwise than
under the 1997 Plan, and such arrangements may be either generally applicable
or applicable only in specific cases.
The 1997 Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974.
Grants of Options under the 1997 Plan
On February 26, 1997, the Board granted, subject to stockholder approval
of the 1997 Plan, options to purchase 170,000 shares of the Common Stock
under the 1997 Plan at $7.00 per share, the fair market value of the Common
Stock on the date of grant. The options were granted to:
Incentive Non-qualified
Name Option Option
---- --------- -------------
Larry Edwards 35,000
James M. Harwell 15,000
Paul Nesrsta 15,000
Max T. Langley 15,000
Robert W. Hildenbrand, Jr. 10,000
W. L. Hampton 15,000
John R. Howard 15,000
Thomas L. Langford 15,000
A.C. Lederer, Jr. 15,000
Non-officer/director employees 10,000 10,000
Approval of Adoption of 1997 Plan
The Board of Directors believes it is in the best interests of the
Company to adopt the 1997 Plan to increase the Company's ability to attract
and retain the services of individuals of outstanding quality and ability to
serve in the offices, positions and directorships of the Company and to
increase the interest of officers, directors and key employees in the growth
and success of the Company through ownership.
Approval of the 1997 Plan requires the affirmative vote of a majority of
the shares of Common Stock present and voting at the Annual Meeting in person
or by proxy. For purposes of this proposal, abstentions and broker "non-
votes" are not counted in determining the total number of votes cast and,
thus, have no effect on the outcome of the vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE
RELIABILITY INCORPORATED 1997 STOCK OPTION PLAN, AS IDENTIFIED IN THE
ENCLOSED PROXY CARD. PROXIES RECEIVED BY THE COMPANY WILL BE SO VOTED UNLESS
A CONTRARY VOTE IS SPECIFIED.
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RELIABILITY INCORPORATED
PROXY STATEMENT
Independent auditors
The Board of Directors has appointed Ernst & Young LLP as independent
auditors of the Company for 1997. Ernst & Young LLP has served as the
Company's independent auditors since 1974. A representative of such firm is
expected to be present at the meeting, will be given the opportunity to make
a statement if he desires to do so and will respond to appropriate questions.
THE TRANSACTION OF OTHER BUSINESS
As of the date of this proxy statement, the Board of Directors has no
knowledge of business other than that described above which will be presented
for consideration at this meeting. With respect to any other business which
may properly come before the meeting or any adjournment, it is intended that
proxies will be voted in accordance with the judgement of the person or
persons voting them.
Proposals by shareholders for 1998 annual meeting of shareholders
Shareholders desiring to present proposals to the shareholders of the
Company at the 1998 annual meeting of shareholders, and to have such
proposals included in the Company's proxy statement and proxy, must submit
their proposals to the Company so as to be received no later than January 2,
1998.
By order of the Board of Directors,
Larry Edwards
Chairman
Date: March 25, 1997
THE COMPANY WILL FURNISH WITHOUT CHARGE TO ANY PERSON WHOSE PROXY IS
SOLICITED, ON WRITTEN REQUEST FROM SUCH PERSON DELIVERED TO INVESTOR
RELATIONS MANAGER, P.O. BOX 218370, HOUSTON, TEXAS 77218, A COPY OF THE
COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM
10-K FOR 1996.
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EXHIBIT A
RELIABILITY INCORPORATED
1997 STOCK OPTION PLAN
February 26, 1997
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TABLE OF CONTENTS
Page
----
ARTICLE I. GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 1.1. Purpose.. . . . . . . . . . . . . . . . . . . . . . . 22
Section 1.2. Administration. . . . . . . . . . . . . . . . . . . . 23
Section 1.3. Eligibility for Participation.. . . . . . . . . . . . 23
Section 1.4. Types of Awards Under Plan. . . . . . . . . . . . . . 23
Section 1.5. Aggregate Limitation on Awards. . . . . . . . . . . . 23
Section 1.6. Effective Date and Term of Plan.. . . . . . . . . . . 23
ARTICLE II. STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . 24
Section 2.1. Award of Stock Options. . . . . . . . . . . . . . . . 24
Section 2.2. Stock Option Agreements.. . . . . . . . . . . . . . . 24
Section 2.3. Stock Option Price. . . . . . . . . . . . . . . . . . 24
Section 2.4. Term and Exercise.. . . . . . . . . . . . . . . . . . 24
Section 2.5. Manner of Payment.. . . . . . . . . . . . . . . . . . 24
Section 2.6. Issuance of Certificates. . . . . . . . . . . . . . . 24
Section 2.7. Death, Retirement and Termination of Employment
of Optionee 24
ARTICLE III. INCENTIVE STOCK OPTIONS. . . . . . . . . . . . . . . . . 25
Section 3.1. Award of Incentive Stock Options. . . . . . . . . . . 25
Section 3.2. Incentive Stock Option Agreements.. . . . . . . . . . 25
Section 3.3. Incentive Stock Option Price. . . . . . . . . . . . . 25
Section 3.4. Term and Exercise.. . . . . . . . . . . . . . . . . . 25
Section 3.5. Maximum Amount of Incentive Stock Option Grant. . . . 26
Section 3.6. Death of Optionee.. . . . . . . . . . . . . . . . . . 26
Section 3.7. Retirement or Disability. . . . . . . . . . . . . . . 26
Section 3.8. Termination for Other Reasons.. . . . . . . . . . . . 26
Section 3.9. Applicability of Stock Option Sections. . . . . . . . 26
Section 3.10. Code Requirements.. . . . . . . . . . . . . . . . . . 26
ARTICLE IV. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.1. General Restriction.. . . . . . . . . . . . . . . . . 27
Section 4.2. Non-Assignability.. . . . . . . . . . . . . . . . . . 27
Section 4.3. Withholding Taxes.. . . . . . . . . . . . . . . . . . 27
Section 4.4. Right to Terminate Employment.. . . . . . . . . . . . 27
Section 4.5. Non-Uniform Determinations. . . . . . . . . . . . . . 27
Section 4.6. Rights as a Stockholder.. . . . . . . . . . . . . . . 27
Section 4.7. Definitions.. . . . . . . . . . . . . . . . . . . . . 27
Section 4.8. Leaves of Absence.. . . . . . . . . . . . . . . . . . 28
Section 4.9. Newly Eligible Employees. . . . . . . . . . . . . . . 28
Section 4.10. Adjustments.. . . . . . . . . . . . . . . . . . . . . 28
Section 4.11. Changes in the Company's Capital Structure. . . . . . 29
Section 4.12. Amendment of the Plan.. . . . . . . . . . . . . . . . 30
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RELIABILITY INCORPORATED
1997 STOCK OPTION PLAN
ARTICLE I. GENERAL
Section 1.1. Purpose. The purposes of this Stock Option Plan (the
"Plan") are to: (1) associate the interests of the officers, directors and
key employees of RELIABILITY INCORPORATED and its subsidiaries (collectively
referred to as the "Company") closely with the Company's stockholders to
generate an increased incentive to contribute to the Company's future success
and prosperity, thus enhancing the value of the Company for the benefit of
its stockholders; (2) provide management with a proprietary ownership
interest in the Company commensurate with Company performance, as reflected
in increased stockholder value; (3) maintain competitive compensation levels
thereby attracting and retaining highly competent and talented directors and
employees; and (4) provide an incentive to management for continuous
employment with the Company. Certain capitalized terms are defined in
Section 4.7.
Section 1.2. Administration.
(a) The Plan shall be administered by (i) the Board of Directors of the
Company, (ii) any duly constituted committee of the Board of Directors
consisting of at least two members of the Board of Directors, all of whom
shall be Non-Employee Directors, or (iii) any other duly constituted
committee of the Board of Directors. Such administrating party shall be
referred to herein as the "Plan Administrator".
(b) The Plan Administrator shall have the authority, in its sole
discretion and from time to time to:
(i) designate the directors, officers and key employees of the
Company eligible to participate in the Plan;
(ii) grant Awards provided in the Plan in such form and amount as the
Plan Administrator shall determine;
(iii) impose such limitations, restrictions and conditions, not
inconsistent with this Plan, upon any such Award as the Plan
Administrator shall deem appropriate; and
(iv) interpret the Plan and any agreement, instrument or other
document executed in connection with the Plan, adopt, amend and rescind
rules and regulations relating to the Plan, and make all other
determinations and take all other action necessary or advisable for the
implementation and administration of the Plan.
(c) Decisions and determinations of the Plan Administrator on all
matters relating to the Plan shall be in its sole discretion and shall be
final, conclusive and binding upon all persons, including the Company, any
participant, any stockholder of the Company, any director and any employee.
No member of any committee acting as Plan Administrator shall be liable for
any action taken or decision made relating to the Plan or any Award
thereunder.
1
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Section 1.3. Eligibility for Participation. Participants in the Plan
shall be selected by the Plan Administrator from the directors, executive
officers and other key employees of the Company. In making this selection
and in determining the form and amount of awards, the Plan Administrator
shall consider any factors deemed relevant, including the individual's
functions, responsibilities, value of services to the Company and past and
potential contributions to the Company's profitability and growth.
Section 1.4. Types of Awards Under Plan. Awards under the Plan may be
in the form of either or both of the following:
(i) Stock Options, as described in Article II; and/or
(ii) Incentive Stock Options, as described in Article III.
Awards under the Plan shall be evidenced by an Award Agreement between
the Company and the recipient of the Award, in form and substance
satisfactory to the Plan Administrator, and not inconsistent with this Plan.
Award Agreements may provide such vesting schedules for Stock Options and
Incentive Stock Options, and such other terms, conditions and provisions as
are not inconsistent with the terms of this Plan. Subject to the express
provisions of the Plan, and within the limitations of the Plan, the Plan
Administrator may modify, extend or renew outstanding Award Agreements, or
accept the surrender of outstanding Awards and authorize the granting of new
Awards in substitution therefor. However, except as provided in this Plan,
no modification of an Award shall impair the rights of the holder thereof
without his consent.
Section 1.5. Aggregate Limitation on Awards.
(a) Shares of stock which may be issued under the Plan shall be
authorized and unissued or treasury shares of Common Stock of the Company
("Common Stock"). The maximum number of shares of Common Stock which may be
issued pursuant to Awards issued under the Plan shall be 500,000.
(b) For purposes of calculating the maximum number of shares of Common
Stock which may be issued under the Plan at any time, all the shares issued
(including the shares, if any, withheld for tax withholding requirements)
under the Plan as well as all shares subject to Option shall be counted.
(c) Shares tendered by a participant as payment for shares issued upon
exercise of a Stock Option or Incentive Stock Option shall be available for
issuance under the Plan. Any shares of Common Stock subject to a Stock
Option or Incentive Stock Option which for any reason is terminated
unexercised or expires shall again be available for issuance under the Plan.
Section 1.6. Effective Date and Term of Plan.
(a) The Plan shall become effective on the date adopted by the Board
of Directors, subject to approval by the holders of a majority of the shares
of Common Stock present in person or by proxy at a meeting at which a quorum
is present.
(b) The Plan and all Awards made under the Plan shall remain in effect
until such Awards have been satisfied or terminated in accordance with the
Plan and the terms of such Awards.
2
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<PAGE>
ARTICLE II. STOCK OPTIONS
Section 2.1. Award of Stock Options. The Plan Administrator may from
time to time, and subject to the provisions of the Plan and such other terms
and conditions as the Plan Administrator may prescribe, grant to any
participant in the Plan one or more options to purchase for cash or shares
the number of shares of Common Stock ("Stock Options") allotted by the Plan
Administrator. The date a Stock Option is granted shall mean the date
selected by the Plan Administrator as of which the Plan Administrator allots
a specific number of shares to a participant pursuant to the Plan.
Section 2.2. Stock Option Agreements. The grant of a Stock Option shall
be evidenced by a written Award Agreement, executed by the Company and the
holder of a Stock Option (the "Optionee"), stating the number of shares of
Common Stock subject to the Stock Option evidenced thereby, and in such form
as the Plan Administrator may from time to time determine.
Section 2.3. Stock Option Price. The Option Price per share of Common
Stock deliverable upon the exercise of a Stock Option shall be 100% of the
Fair Market Value of a share of Common Stock on the date the Stock Option is
granted.
Section 2.4. Term and Exercise. A Stock Option shall not be exercisable
prior to six months from the date of its grant, unless a shorter period is
provided by the Plan Administrator or by another Section of this Plan, and
may be subject to such vesting scheduling and term ("Option Term") as the
Plan Administrator may provide in an Award Agreement. No Stock Option shall
be exercisable after the expiration of its Option Term.
Section 2.5. Manner of Payment. Each Award Agreement providing for
Stock Options shall set forth the procedure governing the exercise of the
Stock Option granted thereunder, and shall provide that, upon such exercise
in respect of any shares of Common Stock subject thereto, the Optionee shall
pay to the Company, in full, the Option Price for such shares with cash or,
if duly authorized by the Plan Administrator, Common Stock.
Section 2.6. Issuance of Certificates. As soon as practicable after
receipt of payment, the Company shall deliver to the Optionee a certificate
or certificates for such shares of Common Stock. Upon issuance of a
certificate, the Optionee shall become a stockholder of the Company with
respect to Common Stock represented by such share certificates and as such
shall be fully entitled to receive dividends, to vote and to exercise all
other rights of a stockholder.
Section 2.7. Death, Retirement and Termination of Employment of
Optionee. Unless otherwise provided in an Award Agreement or otherwise
agreed to by the Plan Administrator:
(a) Upon the death of the Optionee, any rights to the extent
exercisable on the date of death may be exercised by the Optionee's estate,
or by a person who acquires the right to exercise such Stock Option by
bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within the sooner of (i) the remaining Option Term
of the Stock Option, and (ii) the expiration of one year from the date of
death. The provisions of this Section shall apply notwithstanding the fact
that the Optionee's employment may have terminated prior to death, but only
to the extent of any rights exercisable on the date of death.
3
24
<PAGE>
(b) Upon termination of the Optionee's employment by reason of
retirement or permanent disability (as each is determined by the Plan
Administrator), the Optionee may exercise any Stock Options exercisable on
the date of termination of employment, provided such option exercise occurs
within the sooner of (i) the remaining Option Term of the Stock Option, and
(ii) the expiration of six months (in the case of permanent disability) or
three months (in the case of retirement) of the date of termination.
(c) Upon termination of the Optionee's employment for any reason other
than death, disability or retirement, the Optionee may exercise any Stock
Options exercisable on the date of termination of employment, provided such
option exercise occurs within the sooner of (i) the remaining Option Term of
the Stock Option, and (ii) the expiration of thirty days of the date of
termination.
ARTICLE III. INCENTIVE STOCK OPTIONS
Section 3.1. Award of Incentive Stock Options. The Plan Administrator
may, from time to time and subject to the provisions of the Plan and such
other terms and conditions as the Plan Administrator may prescribe, grant to
any officer or key employee who is a participant in the Plan one or more
"incentive stock options" (intended to qualify as such under the provisions
of Section 422 of the Internal Revenue Code of 1986 ("Code"), as amended
("Incentive Stock Options")) to purchase for cash or shares the number of
shares of Common Stock allotted by the Plan Administrator. No Incentive
Stock Options shall be granted under the Plan after the tenth anniversary of
the effective date of the Plan. The date an Incentive Stock Option is
granted shall mean the date selected by the Plan Administrator as of which
the Plan Administrator allots a specific number of shares to a participant
pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options
shall not be granted to any officer or employee who owns 10% or more of the
Company's voting stock (directly or beneficially) unless the requirements of
the code are met.
Section 3.2. Incentive Stock Option Agreements. The grant of an
Incentive Stock Option shall be evidenced by a written Award Agreement,
executed by the Company and the holder of an Incentive Stock Option (the
"Optionee"), stating the number of shares of Common Stock subject to the
Incentive Stock Option evidenced thereby, and in such form as the Plan
Administrator may from time to time determine.
Section 3.3. Incentive Stock Option Price. The Option Price per share
of Common Stock deliverable upon the exercise of an Incentive Stock Option
shall be 100% of the Fair Market Value of a share of Common Stock on the date
the Incentive Stock Option is granted, except as otherwise required by
Section 422 of the Code, as amended.
Section 3.4. Term and Exercise. Each Incentive Stock Option shall not
be exercisable prior to six months from the date of its grant, unless a
shorter period is provided by the Plan Administrator or another Section of
this Plan, may be exercised during a period, established by the Plan
Administrator, of up to ten years from the date of grant thereof (the "Option
Term") and may be subject to such vesting scheduling as the Plan
Administrator may provide in an Award Agreement. No Incentive Stock Option
shall be exercisable after the expiration of its Option Term.
4
25
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Section 3.5. Maximum Amount of Incentive Stock Option Grant. The
aggregate Fair Market Value (determined on the date the Incentive Stock
Option is granted) of Common Stock with respect to which Incentive Stock
Options first become exercisable by an Optionee during any calendar year
(under all plans of the Optionee's employer corporations and their parent and
subsidiary corporations) shall not exceed $100,000.
Section 3.6. Death of Optionee.
(a) Upon the death of the Optionee, any Incentive Stock Option
exercisable on the date of death may be exercised by the Optionee's estate
or by a person who acquires the right to exercise such Incentive Stock Option
by bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within the sooner of the remaining Option Term of
the Incentive Stock Option and one year after the Optionee's death.
(b) The provisions of this Section shall apply notwithstanding the fact
that the Optionee's employment may have terminated prior to death, but only
to the extent of any Incentive Stock Options exercisable on the date of
death.
Section 3.7. Retirement or Disability. Unless otherwise provided in an
Award Agreement or otherwise agreed to by the Plan Administrator, upon the
termination of the Optionee's employment by reason of permanent disability
or retirement (as each is determined by the Plan Administrator), the Optionee
may exercise any Incentive Stock Options exercisable on the date of
termination, provided such option exercise occurs within the sooner of (i)
the remaining Option Term of the Incentive Stock Option, and (ii) six months
(in the case of permanent disability) or three months (in the case of
retirement) of termination. Notwithstanding the terms of an Award Agreement,
the tax treatment available pursuant to Section 422 of the Code, as amended,
upon the exercise of an Incentive Stock Option shall not be available to an
Optionee who exercises any Incentive Stock Options more than (i) one year
after the date of termination of employment due to permanent disability or
(ii) three months after the date of termination of employment due to
retirement.
Section 3.8. Termination for Other Reasons. Upon termination of the
Optionee's employment for any reason other than death, disability or
retirement, the Optionee may exercise any Incentive Stock Options exercisable
on the date of termination of employment, provided such option exercise
occurs within the sooner of (i) the remaining Option Term of the Incentive
Stock Option, and (ii) the expiration of thirty days of the date of
termination.
Section 3.9. Applicability of Stock Option Sections. Sections 2.5,
Manner of Payment, and 2.6, Issuance of Certificates, applicable to Stock
Options, shall apply equally to Incentive Stock Options. Said Sections are
incorporated by reference in this Article III as though fully set forth
herein
Section 3.10. Code Requirements. The terms of any Incentive Stock
Option granted under the Plan shall comply in all respects with the
provisions of Code Section 422. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to Incentive Stock Options
shall be interpreted, amended or altered, nor shall any discretion or
authority granted under the Plan be exercised, so as to disqualify either the
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Plan or any Incentive Stock Option under Code Section 422, unless the
participant has first requested the change that will result in such
disqualification.
ARTICLE IV. MISCELLANEOUS
Section 4.1. General Restriction. Each Award under the Plan shall be
subject to the requirement that, if at any time the Plan Administrator shall
determine that (i) the listing, registration or qualification of the shares
of Common Stock subject or related thereto upon any securities exchange or
under any state or Federal law, or (ii) the consent or approval of any
government regulatory body, or (iii) an agreement by the grantee of an Award
with respect to the disposition of shares of Common Stock, is necessary or
desirable as a condition of, or in connection with, the granting of such
Award or the issue or purchase of shares of Common Stock thereunder, such
Award may not be consummated in whole or in part unless such listing,
registration, qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the Plan
Administrator.
Section 4.2. Non-Assignability. No Award under the Plan shall be
assignable or transferable by the recipient thereof, except by will or by the
laws of descent and distribution. During the life of the recipient, such
Award shall be exercisable only by such person or by such person's guardian
or legal representative.
Section 4.3. Withholding Taxes. Whenever the Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the
Company shall have the right to require the grantee to remit to the Company
an amount sufficient to satisfy any Federal, state and/or local withholding
tax requirements prior to the delivery of any certificate or certificates for
such shares. Alternatively, the Company may issue, transfer or vest only
such number of shares of the Company net of the number of shares sufficient
to satisfy the withholding tax requirements. For withholding tax purposes,
the shares of Common Stock shall be valued on the date the withholding
obligation is incurred.
Section 4.4. Right to Terminate Employment. Nothing in the Plan or in
any agreement entered into pursuant to the Plan shall confer upon any
participant the right to continue in the employment of the Company or affect
any right which the Company may have to terminate the employment of such
participant.
Section 4.5. Non-Uniform Determinations. The Plan Administrator's
determinations under the Plan (including without limitation determinations
of the persons to receive Awards, the form, amount and timing of such Awards,
the terms and provisions of such Awards and the agreements evidencing same)
need not be uniform and may be made by it selectively among persons who
receive, or are eligible to receive, Awards under the Plan, whether or not
such persons are similarly situated.
Section 4.6. Rights as a Stockholder. The recipient of any Award under
the Plan shall have no rights as a stockholder with respect thereto unless
and until certificates for shares of Common Stock are issued to him.
Section 4.7. Definitions. In this Plan the following definitions shall
apply:
(a) "Award" shall mean a grant of Stock Options or Incentive Stock
Options under the Plan.
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(b) "Fair Market Value" as of any date and in respect of any share of
Common Stock means the closing price on such date or on the previous business
day, if such date is not a business day, of a share of Common Stock reflected
in the consolidated trading tables of The Wall Street Journal or any other
publication selected by the Plan Administrator provided that, if shares of
Common Stock shall not have been traded on the National Association of
Securities Dealers, Inc. Automated Quotation System/National Market System
or other public securities market for more than 10 days immediately preceding
such date or if deemed appropriate by the Plan Administrator for any other
reason, the fair market value of shares of Common Stock shall be as
determined by the Plan Administrator in such other manner as it may deem
appropriate. In no event shall the Fair Market Value of any share of Common
Stock be less than its par value.
(c) "Non-Employee Director" shall mean a director who (i) is not an
officer of the Company or a parent or subsidiary of the Company, or otherwise
employed by the Company or parent or subsidiary of the Company; (ii) does not
receive compensation, either directly or indirectly, from the Company or a
parent or subsidiary of the Company, for services rendered as a consultant
or in any capacity other than as a director, except for an amount not
exceeding $60,000; (iii) does not possess an interest in any transaction for
which disclosure would be required under Item 404(a) of Regulation S-K of the
Securities Act of 1933, as amended ("Securities Act"); and (iv) is not
engaged in a business relationship for which disclosure would be required
pursuant to Item 404(b) of Regulation S-K of the Securities Act.
(d) "Option" means a Stock Option or Incentive Stock Option.
(e) "Option Price" means the purchase price per share of Common Stock
deliverable upon the exercise of a Stock Option or Incentive Stock Option.
Section 4.8. Leaves of Absence. The Plan Administrator shall be
entitled to make such rules, regulations and determinations as it deems
appropriate under the Plan in respect of any leave of absence taken by the
recipient of any Award. Without limiting the generality of the foregoing,
the Plan Administrator shall be entitled to determine (i) whether or not any
such leave of absence shall constitute a termination of employment within the
meaning of the Plan, and (ii) the impact, if any, of any such leave of
absence on Awards under the Plan theretofore made to any recipient who takes
such leave of absence.
Section 4.9. Newly Eligible Employees. The Plan Administrator shall be
entitled to make such rules, regulations, determinations and Awards as it
deems appropriate in respect of any director, officer or employee who becomes
eligible to participate in the Plan or any portion thereof after the
commencement of an Award or incentive period.
Section 4.10. Adjustments. In the event of any change in the
outstanding Common Stock by reason of a stock dividend or distribution,
recapitalization, merger, consolidation, split-up, combination, exchange of
shares or the like, the Plan Administrator may appropriately adjust the
number of shares of Common Stock which may be issued under the Plan, the
number of shares of Common Stock subject to Options or Performance Shares
theretofore granted under the Plan, and any and all other matters deemed
appropriate by the Plan Administrator.
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Section 4.11. Changes in the Company's Capital Structure.
(a) The existence of outstanding Options or Performance Shares shall
not affect in any way the right or power of the Company or its stockholders
to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of
bonds, debentures, preferred or prior preference stock ahead of or affecting
the Common Stock or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
(b) If, while there are outstanding Options, the Company shall effect
a subdivision or consolidation of shares or other increase or reduction in
the number of shares of the Common Stock outstanding without receiving
compensation therefor in money, services or property, then, subject to the
provisions, if any, in the Award Agreement (a) in the event of an increase
in the number of such shares outstanding, the number of shares of Common
Stock then subject to Options hereunder shall be proportionately increased;
and (b) in the event of a decrease in the number of such shares outstanding,
the number of shares of Common Stock then subject to Option hereunder shall
be proportionately decreased.
(c) After a merger of one or more corporations into the Company, or
after a consolidation of the Company and one or more corporations in which
the Company shall be the surviving corporation, (i) each holder of an
outstanding Option shall, at no additional cost, be entitled upon exercise
of such Option to receive (subject to any required action by stockholders)
in lieu of the number of shares as to which such Option shall then be so
exercisable, the number and class of shares of stock, other securities or
consideration to which such holder would have been entitled to receive
pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, such holder had been the
holder of record of a number of shares of the Company equal to the number of
shares as to which such Option had been exercisable, and (ii) unless
otherwise provided by the Plan Administrator, the number of shares of Common
Stock, other securities or consideration to be received with respect to
unvested Performance Shares shall continue to be subject to the Award
Agreement, including any vesting provisions thereof.
(d) If the Company is about to be merged into or consolidated with
another corporation or other entity under circumstances where the Company is
not the surviving corporation, or if the Company is about to sell or
otherwise dispose of substantially all of its assets to another corporation
or other entity while unvested Performance Shares or unexercised Options
remain outstanding, then the Plan Administrator may direct that any of the
following shall occur:
(i) If the successor entity is willing to assume the obligation to
deliver shares of stock or other securities after the effective date of
the merger, consolidation or sale of assets, as the case may be, each
holder of an outstanding Option shall be entitled to receive, upon the
exercise of such Option and payment of the Option Price, in lieu of
shares of Common Stock, such shares of stock or other securities as the
holder of such Option would have been entitled to receive had such Option
been exercised immediately prior to the consummation of such merger,
consolidation or sale, and the terms of such Option shall apply
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<PAGE>
as nearly as practicable to the shares of stock or other securities
purchasable upon exercise of the Option following such merger,
consolidation or sale of assets;
(ii) The Plan Administrator may waive any limitations set forth in or
imposed pursuant to this Plan or any Award Agreement with respect to such
Option or Performance Share such that (A) such Option shall become
exercisable prior to the record or effective date of such merger,
consolidation or sale of assets or (B) the vesting of such Performance
Share shall occur upon such merger, consolidation or sale of assets;
and/or
(iii) The Plan Administrator may cancel all outstanding Options as of
the effective date of any such merger, consolidation or sale of assets,
provided that prior notice of such cancellation shall be given to each
holder of an Option at least 30 days prior to the effective date of such
merger, consolidation or sale of assets, and each holder of an Option
shall have the right to exercise such Option in full during a period of
not less than 30 days prior to the effective date of such merger,
consolidation or sale of assets.
(e) Except as herein provided, the issuance by the Company of Common
Stock or any other shares of capital stock or securities convertible into
shares of capital stock, for cash, property, labor done or other
consideration, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to outstanding Options.
Section 4.12. Amendment of the Plan. The Board of Directors may,
without further approval by the stockholders and without receiving further
consideration from the participants, amend this Plan or condition or modify
Awards under this Plan.
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RELIABILITY INCORPORATED
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 30, 1997.
The undersigned hereby appoints Larry Edwards and Max T. Langley,
or either of them, with full power of substitution, attorneys and
P proxies of the undersigned to vote all shares of Common Stock of
Reliability Incorporated (the "Company") which the undersigned is
entitled to vote at the annual meeting of shareholders of the Company
to be held on April 30, 1997, at the offices of the Company, at 10:00
a.m., Houston time, and any adjournment thereof:
R
1. Election of Directors, Nominees:
Larry Edwards, W. L. Hampton,
O
John R. Howard, Thomas L. Langford,
A.C. Lederer, Jr.
X
2. Approval and Ratification of the 1997 Stock Option Plan.
3. In their discretion, upon such other matters as may come before
the meeting or any adjournment thereof.
Y
All as described in the Notice of Annual Meeting of Shareholders and
Proxy Statement, receipt of which is hereby acknowledged.
You are encouraged to specify your choices by marking the appropriate
boxes, SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE
FOR THE BOARD OF DIRECTORS' NOMINEES and FOR APPROVAL OF THE 1997 STOCK
OPTION PLAN. The Proxies cannot vote your shares unless you sign and return
this Card.
-------------
/ SEE REVERSE /
/ SIDE /
-------------
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<PAGE>
---- Please mark SHARES IN YOUR NAME
/ X / your votes as
- ----- in this example
FOR WITHHELD
ALL FROM
NOMINEES ALL
NOMINEES
1. Election of ---- ----
Directors / / / /
(see reverse) ----- -----
For, except vote withheld from the following nominee(s):
-------------------------------------------------------
FOR AGAINST ABSTAIN
---- ------- -------
2. Approval of 1997 / / / / / /
Stock Option Plan ---- ------ ------
SIGNATURE(S) DATE
----------------------------------------- ----------
SIGNATURE(S) DATE
----------------------------------------- ----------
Note: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
32
