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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1997 Commission File Number 0-7092
RELIABILITY INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0868913
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16400 Park Row
Post Office Box 218370
Houston, Texas 77218-8370
- --------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(281) 492-0550
----------------------------------------------------
(Registrant's telephone number, including area 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 twelve 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 ninety days.
YES X NO
---------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
2,972,627 -- Common Stock -- No Par Value
as of May 8, 1997
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RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
March 31, 1997
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Consolidated Balance Sheets:
March 31, 1997 and December 31, 1996 3-4
Consolidated Statements of Income
and Retained Earnings:
Three Months Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II - OTHER INFORMATION
Item 1.
through
Item 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K. 16
Signatures 17
The information furnished in this report reflects all adjustments (none of which
were other than normal recurring accruals) which are, in the opinion of
management, necessary to a fair statement of the results of the interim periods
presented.
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
March 31, December 31,
1997 1996
(unaudited)
Current assets:
Cash and cash equivalents $ 1,131 $ 8,504
Accounts receivable (Note 2) 4,162 4,188
Inventories (Notes 1 and 2) 4,773 3,159
Prepaid income tax - 286
Deferred tax assets 750 760
Other current assets 402 449
------- -------
Total current assets 11,218 17,346
Property, plant and equipment at cost (Note 2):
Machinery and equipment 14,323 13,807
Building and improvements 7,612 8,706
Land 792 792
------- -------
22,727 23,305
Less accumulated depreciation 13,291 14,048
------- -------
9,436 9,257
------- -------
$20,654 $26,603
======= =======
See accompanying notes
3
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RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1997 1996
(unaudited)
Current liabilities:
Accounts payable $ 1,523 $ 700
Accrued liabilities 1,504 3,220
Current maturities on long-term debt (Note 2) 375 367
Income taxes payable 416 331
------- -------
Total current liabilities 3,818 4,618
Long-term debt (Note 2) 4,364 1,961
Deferred tax liabilities 321 356
Commitments and contingencies (Note 4) - -
Stockholders' equity:
Common stock, without par value;
20,000,000 shares authorized,
4,242,848 shares issued 5,926 5,926
Retained earnings 14,481 13,742
------- -------
20,407 19,668
Less treasury stock at cost,
1,270,221 shares in 1997 (Note 3) (8,256) -
------- -------
Total stockholders' equity 12,151 19,668
------- -------
$20,654 $26,603
======= =======
See accompanying notes
4
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands, except per share data)
Three Months Ended March 31,
1997 1996
(unaudited)
Revenues $ 6,691 $6,758
Costs and expenses:
Cost of revenues 3,710 3,039
Marketing, general and administrative 1,411 2,163
Research and development 405 512
------- ------
5,526 5,714
------- ------
Operating income 1,165 1,044
Interest (income) expense, net (Note 2) (3) 20
------- ------
Income before income taxes 1,168 1,024
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Provision (benefit) for income taxes (Note 1):
Current 454 342
Deferred (25) (9)
------- ------
429 333
------- ------
Net income 739 691
Retained earnings beginning of period 13,742 8,896
------- ------
Retained earnings end of period $14,481 $9,587
======= ======
Net income per share $ .18 $ .16
======= ======
Weighted average shares outstanding 4,031 4,243
======= ======
See accompanying notes
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
1997 1996
(unaudited)
Cash flows from operating activities:
Net income $ 739 $ 691
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Depreciation 360 334
Change in deferred tax assets and liabilities (25) (9)
Provision for inventory obsolescence 46 3
Increase (decrease) in operating cash flows:
Accounts receivable 26 3,246
Inventories (1,660) (2,124)
Other current assets 47 13
Prepaid income taxes 286 -
Accounts payable 823 (236)
Accrued liabilities (1,716) (1,102)
Income taxes payable 85 (262)
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Total adjustments (1,728) (137)
------- -------
Net cash (used) provided by operating activities (989) 554
------- -------
Cash flows from investing activities:
Expenditures for property, plant and equipment (539) (535)
------- -------
Cash flows from financing activities:
Borrowings under loan agreement 2,500 -
Purchase of common stock for treasury (8,256) -
Payments on long-term debt (89) (42)
------- -------
Net cash (used) provided by financing activities (5,845) (42)
------- -------
Net increase (decrease) in cash (7,373) (23)
Cash at beginning of period 8,504 1,552
------- -------
Cash at end of period $ 1,131 $ 1,529
======= =======
Supplemental disclosures:
Interest paid $ 52 $ 58
======= =======
Income taxes paid $ 81 $ 602
======= =======
See accompanying notes
6
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Reliability Incorporated is a United States based corporation with operations
in the United States, Singapore and Costa Rica. The Company and its subsidiaries
are principally engaged in the design, manufacture and sale of equipment used to
test and condition integrated circuits. The Company and its subsidiaries also
operate service facilities which condition and test integrated circuits as a
service to others and manufacture and sell power sources, primarily a line of DC
to DC power converters. The Company's testing products are sold to companies
that manufacture semiconductor products and are shipped to locations in the
U.S., Europe, Asia and Pacific Rim countries. Currently, services are provided
principally to only two customers, one in the U.S. (Durham, North Carolina) and
one in Singapore. Power sources are sold to U.S., European and Asian based
companies that design and sell electronic equipment.
The consolidated financial statements include the accounts of the Company and
is subsidiaries, all of which are wholly owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the interim period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1996.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Cash Equivalents
For the purposes of the statements of cash flows, the Company considers all
highly liquid cash investments with maturities of three months or less, when
purchased, to be cash equivalents.
7
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
Net Income Per Share
Net income per share amounts have been computed based on the weighted average
number of common shares outstanding.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred tax liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. The provision for income taxes includes
federal, foreign, and state income taxes. Deferred tax assets are recognized,
net of any valuation allowance, for deductible temporary differences and net
operating loss and tax credit carryforwards. Deferred tax expense represents the
change in the deferred tax asset or liability balances.
The differences between the effective rate reflected in the provision for
income taxes on income before income taxes and the amounts determined by
applying the statutory U.S. tax rate of 34% are analyzed below (in thousands)
for the three month periods ended:
March 31,
1997 1996
Provision at statutory rate $397 $348
State income taxes 11 10
Tax effects of:
Foreign losses for which a tax benefit is
not available 79 -
Foreign tax benefit of export processing
exemption - (19)
U.S. tax on undistributed foreign earnings (77) -
Other 19 (6)
---- ----
Provision for income taxes $429 $333
==== ====
Effective January 1, 1997, the Company changed its policy with respect to
providing U.S. income taxes on undistributed earnings of a foreign subsidiary.
Increasing demand for services provided by the subsidiary necessitates
permanently reinvesting future earnings of the subsidiary, thus deferred U.S.
income taxes will not be provided after January 1, 1997.
8
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
Inventories
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market (replacement cost or net realizable value) and
include (in thousands):
March 31, December 31,
1997 1996
Raw materials $1,770 $1,874
Work-in-progress 1,985 872
Finished goods 1,018 413
------ ------
$4,773 $3,159
====== ======
Inventories are presented net of reserves for excess and obsolete inventories
of $1,482,000 and $1,509,000 at March 31, 1997 and December 31, 1996,
respectively.
2. LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consisted of the following (in thousands):
March 31, December 31,
1997 1996
Revolving declining term loan with interest
at prime minus 1/4% $2,500 $ -
Mortgage payable; due in monthly install-
ments of $26,777 ($46,777 as explained
below), including interest at 9% 2,239 2,328
------ ------
4,739 2,328
Less current maturities 375 367
------ ------
Long-term debt due after one year $4,364 $1,961
====== ======
The mortgage was payable in 180 equal monthly installments, including
interest at 9%. The Company began paying an additional principal payment of
$10,000 each month effective March 1, 1996 and increased the additional payment
to $20,000 each month effective October 1, 1996. Current maturities as of March
31, 1997 assume the Company will continue making the additional $20,000
principal payment, resulting in the note being paid in full in 84 payments. The
mortgage is collateralized by land and a building.
In March 1997, the Company amended its Loan Agreement with Wells Fargo Bank
Texas, N.A. to increase its credit availability from $2.0 million to $7.5
million and to extend the term of the Loan Agreement to March 31, 2003. Interest
is payable at the bank's prime rate minus 1/4% (8-1/4% at March 31, 1997). The
amendment provided for a declining revolving line of credit, secured by
substantially all assets of the Company which are located in the U.S., except
for land and buildings. The agreement provides initial credit availability of
$7,500,000. The amount available reduces by $500,000 semi-annually, beginning
on October 1, 1997 until October 1, 2002. At October 1,
9
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
2002, the available amount will be $2,000,000, until expiration of the agreement
on March 31, 2003. Principal payments are due as credit availability declines,
if the outstanding principal amount exceeds the commitment amount. The amendment
prohibits the payment of dividends by the Company unless otherwise agreed to by
the bank. The credit facility requires compliance with certain financial loan
covenants related to tangible net worth, current ratio, liabilities to tangible
net worth and debt service coverage. The Company was in compliance with the
financial requirements of the agreement at March 31, 1997.
The Company's Singapore subsidiary maintains an agreement with a Singapore
bank to provide an overdraft facility to the subsidiary of 500,000 Singapore
dollars (U.S. $345,000) at the bank's prime rate plus 1% (7% at March 31, 1997).
There were no balances outstanding at March 31, 1997, but amounts utilized under
letter of credit commitments totalled $135,000, resulting in credit availability
of $210,000 at March 31, 1997. The loan is collateralized by all assets of the
subsidiary and requires maintenance of a minimum net worth of the Singapore
subsidiary. Payment of dividends requires written consent from the bank, and
continuation of the credit facility is at the discretion of the bank.
Interest expense (income), for the periods ended March 31, is presented net
as follows (in thousands):
1997 1996
Interest expense $ 88 $ 59
Interest (income) (91) (39)
---- ----
Interest (income) expense, net $ (3) $ 20
==== ====
3. TREASURY STOCK PURCHASE
In March 1997, the Company purchased 1,270,221 shares of its common stock
from a stockholder for $6.50 per share. If shareholders approve the 1997 Stock
Option Plan (see Note 5), the stock may be used to issue shares under the option
plan. The stock may also be used to fund the Company's contributions to its
401(k) employee benefit plan.
4. COMMITMENTS
A subsidiary of the Company leases a conditioning services and office
facility under a non-cancelable operating lease agreement, expiring in 2000.
Future minimum rental payments under the lease at March 31, 1997 are: 1997 -
$225,000; 1998 - $309,000; 1999 - $327,000; and 2000 - $140,000.
The Company leases manufacturing and office space in its U.S. facility to a
third party under an agreement expiring in January 2001. Future income under the
lease will be: 1997 - $134,000; 1998 - $179,000; 1999 - $179,000; 2000 -
$179,000; subsequent to 2000 - $15,000.
The Company's Durham services operation moved to a larger facility in 1996.
The Company leases space which was vacated by the Durham operation under a
non-cancelable operating agreement which expires in January 1998. The Company
has sub-leased the facility for the remaining term of the lease.
10
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
5. STOCK OPTIONS
In February 1997, the Company's Board of Directors adopted, subject to
shareholder approval at the Company's annual meeting on April 30, 1997, the 1997
Stock Option Plan under which 500,000 shares of Common Stock will be available
for future grants. The proposed Plan permits the granting of both incentive
stock options, as defined under the Internal Revenue Code, and non-qualified
options to directors, executive officers and other key employees of the Company
and its subsidiaries. The term of each option will be fixed by the Plan
Administrator and may not exceed 10 years for incentive stock options. The
exercise price is the fair market value of the Company's Common Stock on the
date the option is granted. The Board of Directors, in February 1997, granted
options, subject to shareholder approval of the Plan, for 170,000 shares of
Common Sock at $7.00 per share.
The financial statements for the quarter ended March 31, 1997 do not reflect
any transactions related to the stock options because the Plan is subject to
approval on April 30, 1997.
11
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
The primary sources of Reliability's liquidity are cash provided by
operations and retained earnings. The Company maintains lines of credit to
supplement the primary sources of capital and, until 1995, had leased most of
its facilities, reducing the need to expend capital on such items. Changes in
the Company's financial condition and liquidity since March 31, 1996 are
generally attributable to changes in cash flows from operating activities,
changes in the levels of capital expenditures, and the purchase of 1.3 million
shares of the Company's Common Stock in March 1997.
Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
chart. The periods presented related to the profitability ratios are for the
three months ended March 31, and twelve months ended December 31,:
March 31, December 31, March 31,
1997 1996 1996
Working capital:
Working capital (in thousands) $7,400 $12,728 $8,812
Current ratio 2.9 to 1 3.8 to 1 2.8 to 1
Equity ratios:
Total liabilities to equity 0.7 0.4 0.5
Assets to equity 1.7 1.4 1.5
Profitability ratios:
Gross profit 45 % 50 % 55 %
Return on revenues 11 % 14 % 10 %
Return on assets (annualized) 14 % 18 % 12 %
Return on equity (annualized) 24 % 25 % 18 %
The Company's financial condition improved significantly throughout 1996 and
has remained very strong during 1997. Working capital decreased to $7.4 million
at March 31, 1997, from $12.8 million at December 31 ,1996, and the ratio of
current assets to current liabilities decreased from 3.8 to 1 at December 31,
1996, to a very healthy 2.9 to 1 at March 31, 1997. The Company's current ratio
and working capital were unusually high at December 31, 1996 due to an unusually
high cash balance. The cash balance of $8.5 million at December 31, 1996 was
generated by operations during a period of declining production. Management's
evaluations indicated that the Company's Common Stock was undervalued compared
to industry peers. In March 1997, the Company purchased 1.3 million shares from
a shareholder for $8.3 million. The Company used $5.8 million of its cash
balance and drew $2.5 million under its revolving term loan to purchase the
stock. The Company obtained an increase in its line of credit from $2.0 million
to $7.5 million in March 1997. The increase is related to the purchase of
Company stock and possible need to finance increases in inventory and accounts
receivable during the second and third quarters of 1997. Increases in demand for
the Company's products in late 1996 and the first quarter of 1997 resulted in a
significant increase in the Company's backlog in December 1996 and during the
first quarter of 1997. Backlog was $15.9 million at March 31, 1997,
12
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1997
compared to $9.9 million at December 31, 1996. The effects of operating at
changing levels of demand for products and services have affected various
elements of cash provided by operations.
Net cash used by operating activities for the three months ended March 31,
1997 was $1.0 million, contrasted with $0.6 million provided in the first three
months of 1996. The principal items contributing to the cash used by operations
in 1997 were net income plus depreciation which totaled $1.1 million and a $0.8
million increase in accounts payable. Cash provided by operations, accounts
payable and depreciation was reduced by a $1.7 million increase in inventories
and a $1.7 million decrease in accrued liabilities. The increase in inventories
and accounts payable resulted from increases in production of testing products
which are included in the Company's backlog. A substantial portion of these
products are scheduled for shipment in the second and third quarters of 1997.
Accrued liabilities decreased $1.7 million due to payment of performance bonuses
related to 1996 profitability and a general reduction in most items included in
accrued liabilities due to payment of year-end accruals in the first quarter of
1997. In addition, a reduction in the level of revenues in the Testing Products
and Power Sources segments during the 1997 quarter compared to the fourth
quarter of 1996 contributed to the decrease in accrued liabilities which are
directly related to revenues, such as warranty, commission and similar accruals.
Based on currently available information, principally an increase in demand
for semiconductors, the Company's forward-looking projections indicate that
revenues and net income for 1997 should exceed 1996 net income and revenues. Net
income per share in 1997 will increase due to a decrease in the weighted average
shares outstanding resulting from the purchase of 1.3 million shares of Common
Stock in March 1997.
In July 1995, the Company established a credit facility with a financial
institution to provide credit availability of $2.0 million to supplement cash
provided by operations, if required. This credit facility was not utilized until
March 1997. The Company obtained an increase in the line of credit to $7.5
million and converted the loan to a revolving term loan with a maturity in March
2003. The changes were obtained to provide funding to purchase Company stock as
explained in the Financial Condition discussion above, and to provide credit
availability to support working capital, if required. The Company's Singapore
subsidiary maintains a small overdraft facility to support the subsidiary's
credit commitments. The subsidiary could borrow $210,000 under the facility at
March 31, 1997.
Capital expenditures during the first three months of 1997 and 1996 were $0.5
million and $0.5 million, respectively. Expenditures for 1997 include equipment
required by the Singapore services facility to support increased demand for
services provided by the subsidiary.
The Company believes its cash and cash equivalent balances, future cash
generated from operations and available lines of credit will be sufficient to
meet the cash requirements of the Company for the remainder of 1997 and the
first quarter of 1998.
13
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1997
RESULTS OF OPERATIONS
Three months ended March 31, 1997 compared to three months ended
March 31, 1996.
Revenues. Revenues for the 1997 three-month period were $6.7 million compared
to $6.8 million for the 1996 period. Revenues in the Services segment
increased $1.7 million, while Testing Products and Power Sources revenues
decreased $1.2 million and $0.6 million, respectively. Historically revenues
in the Services segment accounted for 32% to 36% of consolidated revenues.
Services revenues were 65% and Testing Products revenues were only 23% of
revenues in the 1997 quarter.
Revenues in the Testing Products segment were $1.5 million for the first
three months of 1997, which is a decline of 44% over the same period in 1996.
The change is related to reduced shipments due to the fact that a significant
portion of the segment's backlog was not scheduled for shipment, based on
customer requirements, until the second and third quarters of 1997.
Revenues in the Services segment for the 1997 period were $4.4 million, an
increase of 63% compared to the corresponding 1996 period. The change is
related primarily to the Company's Singapore services facility and was caused by
volume increases resulting from greater demand for burn-in services and a
significant increase in the sale of burn-in boards, which is related to demand
and product mix changes.
Revenues in the Power Sources segment were $0.8 million for the first three
months of 1997, reflecting a 41% decrease from the 1996 period. Revenues were
affected by general reductions in demand, an aging product line and a decline in
market penetration resulting in volume decreases.
Costs and Expenses. Total costs and expenses for the 1997 period decreased $0.2
million or 3% compared to the 1% revenue decrease. Cost of revenues increased
$0.7 million, marketing, general and administrative expenses decreased $0.8
million and research and development expenses decreased $0.1 million.
The decrease in the gross profit from 55% in the 1996 quarter to 45% in 1997
is attributable to the significant increase in revenues in the Services segment.
As noted above, Services revenues increased significantly to 65% of consolidated
revenues in the 1997 quarter. The gross profit on Services revenues historically
averages 40%, thus the average consolidated gross profit in the 1997 quarter
totaled 45%. Consolidated gross profit should return to the historical average
of 50% in the second quarter of 1997 as Testing Products revenues return to
their historical 50% to 55% of consolidated revenues. Gross profit as a percent
of revenues in the Testing Products segment for the 1997 quarter was basically
the same as it was in the 1996 quarter. Gross profit in the Services segment
decreased slightly due to a significant increase in revenues related to sale of
burn-in boards to Services customers. Gross profit on burn-in boards is
traditionally lower because of price competition. Gross profit in the Power
Sources segment declined to 30% due to the significant decrease in revenues.
14
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1997
RESULTS OF OPERATIONS - continued
Marketing, general and administrative expenses for the 1997 period decreased
$0.8 million. The decrease in expenses is directly related to a decline in
Testing Products revenues which resulted in a decrease in volume related
expenses, such as commissions, warranty and similar expenses.
The Company's effective tax rate was 37% for the three months ended
March 31, 1997, compared to an effective tax rate of 33% for the 1996 period.
The principal reasons the Company's effective tax rate was greater than the U.S.
statutory rate in 1997 were that tax benefits were not available to a foreign
subsidiary due to net operating loss limitation and state income tax expense
which were reduced by U.S. tax which was not provided on earnings of a foreign
subsidiary. Effective January 1, 1997, the Company changed its policy with
respect to providing U.S. income taxes on undistributed earnings of its
Singapore subsidiary. Increasing demand for services provided by the subsidiary
necessitates permanently reinvesting future earnings of the subsidiary; thus
deferred U.S. income taxes will not be provided after January 1, 1997. The
effective tax rate in 1996 was reduced by a tax benefit from an export
processing exemption in Costa Rica and state income tax expense.
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Statements in this Form 10-Q regarding Reliability's business which are
not historical facts are "forward looking statements" that involve risk and
uncertainties, including, but not limited to, market acceptance of Company
products and services, the effects of general economic conditions, the impact of
competition, product development schedules, problems with technology, delivery
schedules, and supply and demand changes for Company products and services and
its customers' products and services. Actual results may materially differ from
projections.
15
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RELIABILITY INCORPORATED
OTHER INFORMATION
PART II. OTHER INFORMATION
Items 1 through 3.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Reliability Incorporated held its annual meeting of shareholders
on April 30, 1997.
(b) At the meeting, shareholders elected the following persons as
directors; no other director continued in office except those elected
at the meeting:
Larry Edwards
W.L. Hampton
John R. Howard
Thomas L. Langford
A.C. Lederer, Jr.
(c) The shareholders of Reliability Incorporated also approved the
Reliability Incorporated 1997 Stock Option Plan. A copy of the Plan is
attached to this report as Exhibit 10.
The results of the votes of shareholders are as follows:
Director Nominee For Withheld
Larry Edwards 2,361,838 274,001
W.L. Hampton 2,355,601 280,238
John R. Howard 2,358,251 277,588
Thomas L. Langford 2,358,251 277,588
A.C. Lederer, Jr. 2,355,251 280,588
Stock Option plan For Against Withheld/Broker
Non-Vote
1,322,986 367,899 944,954
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10 Reliability Incorporated 1997 Stock Option Plan.
27 Financial Data Schedule.
(b) Reports on Form 8-K. The Registrant filed a Form 8-K dated
March 11, 1997 reporting on the Company's revised Loan Agreement, which
restricts dividends. No financial statements were included in the report.
16
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RELIABILITY INCORPORATED
SIGNATURES
March 31, 1997
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.
RELIABILITY INCORPORATED
(Registrant)
May 8, 1997 BY /s/ Larry Edwards
Larry Edwards
President and
Chief Executive Officer
May 8, 1997 BY /s/ Max T. Langley
Max T. Langley
Sr. Vice President - Finance
and Chief Financial Officer
17
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RELIABILITY INCORPORATED
INDEX TO EXHIBITS
Exhibit Page
Number Description of Exhibits Number
- ------- ----------------------- ------
10. The Reliability Incorporated 1997 Stock Option Plan 19
27. Financial Data Schedule 30
18
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Exhibit 10
RELIABILITY INCORPORATED
1997 STOCK OPTION PLAN
FEBRUARY 26, 1997
19
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I. GENERAL................................................. 1
Section 1.1. Purpose.......................................... 1
Section 1.2. Administration................................... 1
Section 1.3. Eligibility for Participation.................... 2
Section 1.4. Types of Awards Under Plan....................... 2
Section 1.5. Aggregate Limitation on Awards................... 2
Section 1.6. Effective Date and Term of Plan.................. 2
ARTICLE II. STOCK OPTIONS.......................................... 3
Section 2.1. Award of Stock Options........................... 3
Section 2.2. Stock Option Agreements.......................... 3
Section 2.3. Stock Option Price............................... 3
Section 2.4. Term and Exercise................................ 3
Section 2.5. Manner of Payment................................ 3
Section 2.6. Issuance of Certificates......................... 3
Section 2.7. Death, Retirement and Termination of Employment
of Optionee..................................... 3
ARTICLE III. INCENTIVE STOCK OPTIONS............................... 4
Section 3.1. Award of Incentive Stock Options................. 4
Section 3.2. Incentive Stock Option Agreements................ 4
Section 3.3. Incentive Stock Option Price..................... 4
Section 3.4. Term and Exercise................................ 4
Section 3.5. Maximum Amount of Incentive Stock Option Grant... 5
Section 3.6. Death of Optionee................................ 5
Section 3.7. Retirement or Disability......................... 5
Section 3.8. Termination for Other Reasons.................... 5
Section 3.9. Applicability of Stock Option Sections........... 5
Section 3.10. Code Requirements................................ 5
ARTICLE IV. MISCELLANEOUS.......................................... 6
Section 4.1. General Restriction.............................. 6
Section 4.2. Non-Assignability................................ 6
Section 4.3. Withholding Taxes................................ 6
Section 4.4. Right to Terminate Employment.................... 6
Section 4.5. Non-Uniform Determinations....................... 6
Section 4.6. Rights as a Stockholder.......................... 6
Section 4.7. Definitions...................................... 6
Section 4.8. Leaves of Absence................................ 7
Section 4.9. Newly Eligible Employees......................... 7
Section 4.10. Adjustments...................................... 7
Section 4.11. Changes in the Company's Capital Structure....... 8
Section 4.12. Amendment of the Plan............................ 9
</TABLE>
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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.
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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.
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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.
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(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.
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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 Plan or any Incentive Stock Option
under Code Section 422, unless the participant has first requested the change
that will result in such disqualification.
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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"); or (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 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;
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(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.
9
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the First
Quarter 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,131
<SECURITIES> 0
<RECEIVABLES> 4,162
<ALLOWANCES> 0
<INVENTORY> 4,773
<CURRENT-ASSETS> 11,218
<PP&E> 22,727
<DEPRECIATION> 13,291
<TOTAL-ASSETS> 20,654
<CURRENT-LIABILITIES> 3,818
<BONDS> 0
0
0
<COMMON> 5,926
<OTHER-SE> 6,225
<TOTAL-LIABILITY-AND-EQUITY> 20,654
<SALES> 6,691
<TOTAL-REVENUES> 6,691
<CGS> 3,710
<TOTAL-COSTS> 3,710
<OTHER-EXPENSES> 1,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3)
<INCOME-PRETAX> 1,168
<INCOME-TAX> 429
<INCOME-CONTINUING> 739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 739
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
