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 September 30, 1999
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.
6,631,765 -- Common Stock -- No Par Value
as of November 8, 1999
1
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RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
September 30, 1999
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets:
September 30, 1999 and December 31, 1998 3-4
Consolidated Statements of Operations:
Nine Months Ended September 30, 1999 and 1998 5
Three Months Ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-23
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
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
September 30, December 31,
1999 1998
(unaudited)
Current assets:
Cash and cash equivalents $13,549 $15,702
Accounts receivable 2,452 2,178
Inventories 1,502 1,301
Refundable income taxes 237 -
Deferred tax assets 419 572
Other current assets 842 441
------ ------
Total current assets 19,001 20,194
------ ------
Property, plant and equipment, at cost:
Machinery and equipment 14,145 14,390
Buildings and improvements 4,980 5,023
Land 530 530
------ ------
19,655 19,943
Less accumulated depreciation 11,506 10,407
------ ------
8,149 9,536
------ ------
Assets held for sale 2,135 2,193
Other assets and goodwill, net of
accumulated amortization 849 1,323
------ ------
$30,134 $33,246
====== ======
See accompanying notes
3
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RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1999 1998
(unaudited)
Current liabilities:
Accounts payable $ 396 $ 547
Accrued liabilities 1,628 3,045
Income taxes payable 172 335
Note payable to shareholder - 534
Current maturities on long-term debt - 274
Accrued restructuring and shut-down costs 131 300
------ ------
Total current liabilities 2,327 5,035
------ ------
Deferred tax liabilities 694 634
Stockholders' equity:
Common stock, without par value;
20,000,000 shares authorized; 7,838,527
and 7,811,278 shares issued in 1999 and
1998, respectively 9,461 9,340
Retained earnings 25,496 26,081
------ ------
34,957 35,421
Less treasury stock, at cost, 1,206,762
shares in 1999 and 1998 7,844 7,844
------ ------
Total stockholders' equity 27,113 27,577
------ ------
$30,134 $33,246
====== ======
See accompanying notes
4
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Nine months Ended September 30,
1999 1998
(unaudited)
Revenues $14,216 $29,826
Costs and expenses:
Cost of revenues 8,842 13,943
Marketing, general and administrative 4,448 6,871
Research and development 1,199 1,636
Provision for shut-down and restructuring 800 100
------ ------
15,289 22,550
------ ------
Operating income (loss) (1,073 ) 7,276
Interest income, net 470 295
------ ------
Income (loss) before income taxes (603 ) 7,571
------ ------
Provision (benefit) for income taxes:
Current (231 ) 2,474
Deferred 213 158
------ ------
(18 ) 2,632
------ ------
Net income (loss) $ (585 ) $ 4,939
====== ======
Earnings (loss) per share:
Diluted $ (.09 ) $ .80
====== ======
Basic $ (.09 ) $ .81
====== ======
Weighted average shares:
Diluted 6,627 6,208
====== ======
Basic 6,627 6,088
====== ======
See accompanying notes
5
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended September 30,
1999 1998
(unaudited)
Revenues $4,935 $9,203
Costs and expenses:
Cost of revenues 3,192 4,230
Marketing, general and administrative 1,406 2,493
Research and development 327 533
Provision for shut-down and restructuring 800 -
----- -----
5,725 7,256
----- -----
Operating income (loss) (790 ) 1,947
Interest income, net 146 150
----- -----
Income (loss) before income taxes (644 ) 2,097
----- -----
Provision (benefit) for income taxes:
Current (268 ) 771
Deferred 131 21
----- -----
(137 ) 792
----- -----
Net income (loss) $ (507 ) $1,305
===== =====
Earnings (loss) per share:
Diluted $ (.08 ) $ .21
===== =====
Basic $ (.08 ) $ .21
===== =====
Weighted average shares:
Diluted 6,632 6,189
===== =====
Basic 6,632 6,111
===== =====
See accompanying notes
6
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months Ended September 30,
1999 1998
(unaudited)
Cash flows from operating activities:
Net (loss) income $ (585 ) $ 4,939
Adjustments to reconcile net (loss) income to
cash (used) provided by operating activities:
Depreciation and amortization 1,974 1,403
Change in deferred tax assets and liabilities 213 158
Provision for inventory obsolescence 128 49
Provision for shut-down and restructuring 800 100
(Gain) on disposal of fixed assets (59 ) (14 )
Increase (decrease) in operating cash flows:
Accounts receivable (274 ) 1,607
Inventories (329 ) 2,054
Refundable income taxes (237 ) -
Other current assets (31 ) 5
Accounts payable (151 ) (1,470 )
Accrued liabilities (1,417 ) (707 )
Income taxes payable (163 ) 457
Cash payments charged to shut-down
and restructuring reserve (141 ) -
------ ------
Total adjustments 313 3,642
------ ------
Net cash (used) provided by operating activities (272 ) 8,581
------ ------
Cash flows from investing activities:
Expenditures for property and equipment (847 ) (755 )
Purchase of marketable equity and
debt securities (870 ) -
Proceeds from sale of equipment 516 471
Increase in other long-term assets 7 -
------ ------
Net cash (used) in investing activities (1,194 ) (284 )
------ ------
Cash flows from financing activities:
Payments on long-term debt (274 ) (1,112 )
Payment on note payable to shareholder (534 ) -
Borrowings under revolving credit facility - 105
Payments under revolving credit facility - (105 )
Proceeds from issuance of common and treasury
stock pursuant to stock option and employee
stock savings plans 128 490
Other (7 ) 49
------ ------
Net cash (used) by financing activities (687 ) (573 )
------ ------
Net (decrease) increase in cash (2,153 ) 7,724
Cash and cash equivalents:
Beginning of period 15,702 7,108
------ ------
End of period $13,549 $14,832
====== ======
See accompanying notes
7
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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. In addition, a
subsidiary of the Company operates a service facility which conditions and
tests integrated circuits as a service to others. 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.
Services, as of September 30, 1999, are provided principally to two customers
in Singapore. The Company closed, in April 1999, a services facility in North
Carolina and acquired, in December 1998, assets of a company that provided
services to customers in Austin, Texas and Singapore. The Company closed the
Austin facility on September 30, 1999. Another subsidiary manufactures and
sells power sources, primarily a line of DC to DC power converters. 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 its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the consolidated financial statements for the period ended
December 31, 1998 have been reclassified to conform to the 1999 presentation.
The accompanying unaudited consolidated 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
Article 10 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, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the interim
period ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. 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, 1998.
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
8
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
during the reporting period. Actual results may differ from those estimates.
Comprehensive Income
- --------------------
The Company includes unrealized gains and losses on available-for-sale
securities in other comprehensive income. During the three and nine month
periods ended September 30, 1999 and 1998, total comprehensive income was equal
to net income because such unrealized gains and losses were not material.
Income Taxes
- ------------
Deferred income taxes are provided under the liability method and reflect
the net tax effects of temporary differences between the tax basis of assets
and liabilities and their reported amounts in the consolidated financial
statements.
The differences between the effective rate reflected in the provision
(benefit) for income taxes and the amounts determined by applying the statutory
U.S. tax rate of 34% to income (loss) before income taxes are analyzed below
(in thousands) for the nine month periods ended:
September 30,
1999 1998
Provision (benefit) at statutory rate $(205 ) $2,574
Tax effects of:
Lower effective income tax rates related
to undistributed foreign earnings (56 ) (158 )
Foreign losses for which a tax benefit is
not available 230 185
State income taxes, net (7 ) 48
Other 20 (17 )
---- -----
Provision (benefit) for income taxes $ (18 ) $2,632
==== =====
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):
September 30, December 31,
1999 1998
Raw materials $ 699 $1,071
Work-in-progress 758 180
Finished goods 45 50
----- -----
$1,502 $1,301
===== =====
9
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Inventories are presented net of reserves for excess and obsolete
inventories of $617,000 and $775,000 at September 30, 1999 and December 31,
1998, respectively.
Investments in Marketable Equity and Debt Securities
- ----------------------------------------------------
The Company held marketable equity securities with an aggregate book value
of $370,000 and a convertible promissory note receivable with a book value of
$500,000 as of September 30, 1999. Marketable equity securities are included in
other current assets and the promissory note is included in other assets. All
marketable securities are classified as held to maturity or available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
equity and debt securities at the time of purchase and reevaluates such
determinations at each balance sheet date.
Equity securities are classified as available-for-sale and are carried at
their fair value on the balance sheet, with unrealized gains and losses (net of
applicable income taxes), if any, reported as a separate component of
shareholders' equity. Equity securities are stated at market value, as
determined by the most recently published trade price of the securities at the
balance sheet date. The cost and fair value of equity securities as of
September 30, 1999 were equal. The debt security is classified as held to
maturity because the Company has the positive intent and ability to hold the
security to maturity. The held to maturity security is stated at amortized
cost.
Other Assets
- ------------
Other assets consisted of the following (in thousands):
September 30, December 31,
1999 1998
Goodwill, net $349 $1,323
Convertible promissory note receivable 500 -
--- -----
$849 $1,323
=== =====
The $500,000 convertible promissory note, dated July 20, 1999, is
receivable from a start-up company and is due on July 1, 2000, provided the
note is not converted into stock of the issuer prior to the due date. The note
is automatically convertible to stock of the issuer if the issuer completes an
equity financing, as defined, prior to the due date of the note. Upon
conversion, stock would be issued to the Company based on certain defined
criteria and conversion factors included in the note. It is not practicable to
estimate a fair value of the note due to the fact the issuer is in the very
early stages of product development. The maturity date of the note of July 1,
2000 represents an initial milestone
10
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
related to product development. It may be possible to estimate a fair value as
the milestone date is reached. The note has been classified as a long-term
asset based on the assumption the note will be converted to stock.
Supplemental Cash Flow Information
- ----------------------------------
Interest and income taxes paid during the nine month periods ended
September 30, are presented below (in thousands):
1999 1998
Interest paid $ 18 $ 109
===== =====
Income taxes paid $ 135 $1,923
===== =====
2. CREDIT AGREEMENTS AND NOTE PAYABLE TO SHAREHOLDER
Reliability maintains a line of credit with Wells Fargo Bank Texas, N.A.
which permits the Company to borrow up to $1 million until April 1, 2001. (The
Company reduced the amount available under the line of credit from $4.0 million
to $1.0 million during the second quarter of 1999.) Interest is payable at the
bank's prime rate minus 1/4% (8% at September 30, 1999). The unpaid principal
of the note is due April 1, 2001. The loan agreement provides for a 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 credit facility
requires compliance with certain financial covenants related to the Company's
current ratio, debt service coverage and funded debt to net income (as defined)
and total liabilities to total net worth. The agreement prohibits the payment
of cash dividends by the Company unless otherwise agreed to by the bank. The
Company was in compliance with the financial requirements of the agreement at
September 30, 1999, and there were no balances outstanding under the agreement
at September 30, 1999 or December 31, 1998.
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. $294,000) at the bank's prime rate plus 2% (7.5% at September 30,
1999). There were no balances outstanding at September 30, 1999, but amounts
utilized under letter of credit commitments totaled $268,000, resulting in
credit availability of $26,000 at September 30, 1999. 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.
The note payable to shareholder at December 31, 1998 represented the
balance due to Basic Engineering Services and Technology Labs, Inc. ("BEST")
related to the acquisition of assets that was completed in December 1998 (see
Note 6). The note was paid in full in June 1999 and bore interest at 6%.
11
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Interest income (expense) for the nine month periods ended September 30, is
presented net as follows (in thousands):
1999 1998
Interest income $486 $404
Interest (expense) (16 ) (109 )
--- ---
Interest income, net $470 $295
=== ===
3. SEGMENT INFORMATION
The following table sets forth reportable segment information (in
thousands) for the periods indicated:
Nine Months Three Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Revenues from external
customers:
Testing Products $ 3,973 $19,578 $1,628 $7,275
Services 8,689 7,991 2,819 1,376
Power Sources 1,554 2,257 488 552
Intersegment revenues:
Testing Products 125 203 45 67
Services 11 267 5 13
Eliminations (136 ) (470 ) (50 ) (80 )
------ ------ ----- -----
$14,216 $29,826 $4,935 $9,203
====== ====== ===== =====
Operating income (loss):
Testing Products $(1,074 ) $ 5,918 $ (295 ) $2,232
Services 1,490 1,924 581 27
Power Sources (418 ) (340 ) (211 ) (220 )
Provision for shut-down
of Services operation (800 ) - (800 ) -
General corporate expenses (271 ) (226 ) (65 ) (92 )
------ ------ ----- -----
Operating income (loss) $(1,073 ) $7,276 $ (790 ) $1,947
====== ====== ===== =====
Total assets by reportable segment as of the dates indicated are as follows
(in thousands):
September 30, December 31,
1999 1998
Testing Products $ 6,653 $ 6,702
Services 7,018 9,584
Power Sources 1,640 1,651
General corporate assets 14,823 15,309
------ ------
$30,134 $33,246
====== ======
12
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
For the periods indicated above, there were no material changes in the
accounting policies and procedures used to determine segment income or loss.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
Net income (loss) $ (585 ) $4,939 $ (507 ) $1,305
===== ===== ===== =====
Weighted average shares
outstanding 6,627 6,088 6,632 6,111
Net effect of dilutive stock
options based on the
treasury stock method - 120 - 78
----- ----- ----- -----
Weighted average shares and
assumed conversions 6,627 6,208 6,632 6,189
====== ===== ===== =====
Earnings (loss) per share:
Diluted $ (.09 ) $ .80 $ (.08 ) $ .21
====== ===== ===== =====
Basic $ (.09 ) $ .81 $ (.08 ) $ .21
====== ===== ===== =====
There were 253,000 and 243,000 options to purchase shares of common stock
that were outstanding during the first two quarters and third quarter of 1998,
respectively, and 608,000 options during the first quarter of 1999 and 587,000
options during the second and third quarter of 1999, respectively, that were
not included in the computation of diluted earnings per share because including
the options in the calculations would have been anti-dilutive.
The Company, in December 1998, issued 475,000 shares of common stock
related to the acquisition of assets from BEST (see Note 6).
13
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
5. SHUT-DOWN AND RESTRUCTURING OF FACILITIES AND ASSETS HELD FOR SALE
The following table reports activity in the accrued shut-down and
restructuring accounts during the nine month period ended September 30, 1999
(in thousands):
Accrued costs at January 1, 1999 $ 300
Provision for Austin shut-down:
Employee severance 30
Other expenses 80
----
110
----
Cash payments charged to accounts:
Employee severance (60 )
Lease payment (73 )
Other payments (8 )
----
(141 )
----
Disposal of Singapore assets (138 )
----
Accrued costs at September 30, 1999 $ 131
====
The Company's Austin, Texas facility (which was part of the Services
segment) provided services principally to one customer and accounted for 17% of
the Company's consolidated revenues for the nine months ended September 30,
1999. The facility was closed on September 30, 1999 because the customer
notified the Company that it would cease sending product to the facility. The
Company recorded an $800,000 provision for shut-down in September 1999 related
to the closing of this facility on September 30, 1999. The provision included a
$875,000 write-off of impaired goodwill and a $257,000 write-down to adjust
certain fixed assets at the facility to their estimated fair value as
determined by management's estimate based on their knowledge of market
conditions. Proceeds related to the sale of certain fixed assets totaled
$442,000 and are included as a reduction of the provision for shut-down. The
provision also included employee severance costs related to 32 employees of
$30,000 and $80,000 of other expenses to complete the shut-down. The remaining
fixed assets related to the Austin facility are expected to be disposed of by
December 31, 1999. The Company has not included an accrual for future rent
obligations related to the leased facility in Austin because it has entered
into a sublease agreement with a third party equal to the Company's remaining
obligation under the lease agreement.
The Company's North Carolina Services facility accounted for approximately
4% and 10% of consolidated revenues in 1998 and 1997, respectively, and
provided services to one customer. The customer notified the Company in January
1998 that it was necessary to reduce the output of DRAMs burned-in and
tested by the Company's Durham facility.
14
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
The customer ceased sending product, and the Company shut-down the facility in
April 1998. The Company recorded a $100,000 impairment reserve related to the
land and building located at the Durham facility in 1998 in order to state
these assets at the lower of carrying amount or fair value, less cost to sell.
The land and a building located in Durham are presented as assets held for sale
in the accompanying consolidated balance sheet. The assets held for sale are
being actively marketed, although no assurances can be given that they will be
sold during 1999.
Services provided to Texas Instruments Incorporated accounted for
substantially all of the revenues of the Company's Singapore Services facility.
On October 1, 1998, Micron Technology acquired the Texas Instruments facility
in Singapore and informed the Company that it would continue to utilize the
Company's burn-in services, but at a significantly reduced level. Texas
Instruments revenues at the Singapore facility accounted for 21% and 32% of
consolidated revenues for the years ended December 31, 1998 and 1997,
respectively. In connection with the decrease in volumes at the Singapore
facility, a $507,000 provision for restructuring was recorded in the fourth
quarter of 1998. The restructuring provision included $207,000 for severance
costs paid to employees who were terminated during 1998, $100,000 related to
disposal of excess equipment and 200,000 related to costs associated with
excess leased facilities.
6. ACQUISITION
On December 3, 1998, the Company acquired certain assets and assumed
certain liabilities from BEST. The assets acquired included equipment,
furniture and fixtures, contracts, work-in-progress, backlog, proprietary
rights, books and records, customer lists and goodwill. The liabilities assumed
consisted of employee-related obligations. The operations acquired are located
in Austin, Texas and Singapore and are used to operate burn-in and test
services laboratories, providing such services to integrated circuit
manufacturers. The results of operations related to this acquisition have been
included in the Company's consolidated financial statements since December 3,
1998.
15
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this document contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth elsewhere in this
document.
FINANCIAL CONDITION
The primary sources of Reliability's liquidity are cash provided by
operations and working capital. The parent Company and its Singapore subsidiary
have substantial cash available to support anticipated liquidity requirements.
The Company maintains lines of credit to supplement the primary sources of
capital. Changes in the Company's financial condition since December 31, 1998
and September 30, 1998 are generally attributable to changes in cash flows from
operating activities, acquiring certain assets from BEST during 1998 and
accelerating payments on a mortgage during 1998 and 1999. In addition, the
shut-down, in 1998, of the Company's North Carolina Services facility, the
shut-down, on September 30, 1999, of the Company's Austin, Texas Services
facility and changes in operations at the Company's Singapore subsidiary,
during late 1998, did and will in the future, affect the Company's financial
condition. In addition, the Company purchased certain securities with a total
cost of $870,000 during the third quarter of 1999.
Certain ratios and amounts monitored by management in evaluating the
Company's financial performance and resources are presented in the following
chart. The periods presented related to the profitability ratios are for the
nine months ended September 30, and twelve months ended December 31:
September 30, December 31, September 30,
1999 1998 1998
Working capital:
Working capital (in thousands) $16,674 $15,159 $17,155
Current ratio 8.2 to 1 4.0 to 1 3.9 to 1
Equity ratios:
Total liabilities to equity 0.1 0.2 0.3
Assets to equity 1.1 1.2 1.3
Profitability ratios:
Gross profit 38 % 51 % 53 %
Return on revenues (4)% 13 % 17 %
Return on assets (annualized) (3)% 13 % 20 %
Return on equity (annualized) (3)% 15 % 25 %
16
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
The Company's financial condition improved throughout 1998 and has remained
strong during 1999. Working capital increased to $16.7 million at September 30,
1999, from $15.1 million at December 31, 1998, and the ratio of current assets
to current liabilities increased from 4.0 to 1 at December 31, 1998, to 8.2 to
1 at September 30, 1999. The significant increase in the current ratio resulted
from a significant decline in the level of operations, resulting in current
liabilities declining at a faster rate than the decline in current assets.
Beginning in the fourth quarter of 1998, the Company's revenues and level of
operations, compared to the corresponding prior year periods, declined. Assets
such as accounts receivable and inventories decreased during the 1998 period of
declining production and were converted to cash. Cash provided by certain
components of cash flows from operations in 1998 and in 1999 were used to
reduce and pay off a mortgage payable, acquire assets from BEST, purchase fixed
assets, increase the amount of short-term interest-bearing cash investments
and, in 1999, reduce accrued liabilities, pay off the note related to the BEST
transaction and purchase certain equity securities. The decline in revenues and
net loss for the nine month period ended September 30, 1999 resulted in all
elements of operating cash flows using cash during the 1999 period.
The Company maintains a credit facility with a financial institution to
provide credit availability to supplement cash provided by operations, if
required. Projections indicated that the Company would not need to use the
credit facility in the foreseeable future; thus the line of credit was reduced
from $4.0 million to $1.0 million during the second quarter of 1999. In
addition, the agreement has been renewed and the expiration date extended to
April 1, 2001. Credit availability provided by the facility was $1.0 million at
September 30, 1999. The Company's Singapore subsidiary maintains a small
overdraft facility to support the subsidiary's credit commitments.
Decreased demand for the Company's products, starting in the latter half of
1998 and continuing into 1999, resulted in a decline in backlog from $3.0
million at September 30, 1998 to $1.8 million at December 31, 1998. Backlog
decreased further to $0.7 million at September 30, 1999 and current projections
indicate that, due to changes in and decreased demand by the Company's major
customers, there may not be significant increases in backlog in the foreseeable
future. The operating effects resulting from the changes in backlog and the
corresponding changes in operations, during 1998 and 1999, affected various
elements of cash provided by operations, as reflected in the Consolidated
Statements of Cash Flows.
Net cash used by operating activities for the nine months ended September
30, 1999 was $0.3 million, contrasted with $8.6 million provided by operations
in the first nine months of 1998. The principal items contributing to the cash
used by operations in 1999 were the net loss of $0.6 million, a $1.4 million
decrease in accrued liabilities and a $1.3 million decrease in operating cash
flows related to all other operating cash flow items. Cash used by operations
in 1999 was reduced by $2.0 million of depreciation and amortization. Accrued
liabilities decreased $1.4 million due to payment, in the first quarter of
1999, of performance bonuses related to 1998 profits and a general reduction in
most items included in accrued liabilities due to a decrease in the level of
operations. The increase in accounts receivable resulted from the fact
17
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
that certain accounts receivable were not due as of September 30, 1999 for
products that were shipped late in the third quarter of 1999 and an increase in
revenues in the Services segment. Inventories increased due to purchase of
Testing Products items in anticipation of receiving orders for these products
and recording of refundable income taxes resulting from tax benefits related to
carry-back of the 1999 loss. A $0.8 million provision for shut-down of the
Austin Services facility was recorded in the third quarter of 1999.
Demand for Testing Products sold by the Company has remained very weak during
1999 and indications are that the weak demand may continue for several more
quarters. The acquisition of services activities from BEST in December 1998 and
a general increase in demand, beginning in late 1998, for Services provided by
the BEST operations at the Company's Singapore subsidiary resulted in an
increase in Services revenues during the first nine months of 1999. Current
projections indicate that revenues at the Singapore Services operation may
decline due to production mix changes, price competition and decreases in
demand. The Company's Austin, Texas Services division provided services
principally to one customer and accounted for 17% of consolidated revenues for
the nine months ended September 30, 1999. The facility was closed on
September 30, 1999 because the customer stopped sending product to the
facility. Based on the Company's current low backlog level and the uncertainty
concerning demand for the Company's products and services during 1999 and 2000,
Reliability is not currently providing a revenue forecast beyond the fourth
quarter of 1999. The current forward-looking forecast indicates revenues for
the fourth quarter of 1999 will be between $2.0 and $3.0 million, compared to
fourth quarter 1998 revenues of $3.7 million, resulting in a loss between $.10
and $.15 per diluted share for the fourth quarter of 1999.
Capital expenditures during the first nine months of 1999 and 1998 were
$0.85 million and $0.76 million, respectively. A significant portion of
expenditures in both years included equipment required by the Singapore
subsidiary to support services provided by the subsidiary.
Current projections indicate that the Company's cash and cash equivalent
balances and available lines of credit will be sufficient to meet the projected
cash requirements of the Company for the remainder of 1999 and 2000.
RESULTS OF OPERATIONS
Nine months ended September 30, 1999 compared to nine months ended
September 30, 1998.
Revenues. Revenues for the 1999 nine-month period were $14.2 million compared
to $29.8 million for the 1998 period. Revenues in the Testing Products and
Power Sources segments decreased $15.6 and $0.7, million, respectively.
Services revenues increased $0.7 million.
Revenues in the Testing Products segment were $4.0 million for the first
nine months of 1999, which is a decrease of 80% from the same period in 1998.
The revenue decrease reflects the fact that the Company's customers reduced
burn-in times, upgraded rather than purchasing new products, and in general,
increased utilization of the testing products they own. In addition, the
semiconductor industry is highly cyclical and
18
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
experiences periods of excess production capacity. Beginning in mid 1998,
increases in utilization of existing testing products and the excess production
capacity began to affect demand for Testing Products sold by the Company,
resulting in a significant decrease in new orders for Testing Products. In
addition, price competition and the need to develop new products that will be
purchased by the semiconductor industry have begun to affect new orders for
Testing Products. Volume decreases resulted in revenues from the sale of
CRITERIA products decreasing $6.2 million and revenues from the sale of
INTERSECT products decreasing $9.4 million.
Revenues in the Services segment for the 1999 period were $8.7 million, an
increase of 9% compared to the corresponding 1998 period. The increase in
revenues in this segment is related to revenues at the Austin, Texas Services
division, resulting from the acquisition, in December 1998, of certain services
activities of BEST, reduced by a decrease resulting from the shut-down of the
Company's North Carolina Services facility in April 1998 and a decrease in
revenues at the Company's Singapore facility, beginning in October 1998,
resulting from the Micron Technology purchase of the Singapore facility's
principal customer, Texas Instruments.
Revenues in the Power Sources segment were $1.5 million for the first nine
months of 1999, reflecting a 31% decrease from the 1998 period. Revenues were
affected, in 1999, by changes in demand, an aging product line, price
competition and a decline in market penetration resulting in volume decreases.
Costs and Expenses. Total costs and expenses for the 1999 period decreased
$7.3 million or 32% compared to the 52% revenue decrease. Cost of revenues
decreased $5.1 million, marketing, general and administrative expenses
decreased $2.4 million and research and development expenses decreased $0.4
million. A provision for asset impairment of $0.1 million, related to the
closing of the North Carolina Services facility, was included in 1998
operations and a $0.8 million provision for shut-down of the Austin Services
facility was recorded in 1999.
The decrease in the gross profit from 53% in the 1998 period to 38% in 1999
is attributable, in general, to the fact that fixed cost could not be fully
absorbed due to the significant revenue decreases in the Testing Products and
Power Sources segments. In addition, the Services segment accounted for a
significantly higher percentage of total consolidated revenues in the 1999
period than in the 1998 period resulting in a decrease in gross profit in 1999,
compared to 1998, because the gross profit in the Services segment is
fundamentally lower than the gross profit in the other two segments.
Marketing, general and administrative expenses for the 1999 period
decreased $2.4 million. The decrease in expenses is primarily related to a
decrease in Testing Products revenues which resulted in decreases in volume
related expenses, such as commissions, warranty and similar expenses and, in
all business segments, a decrease in incentive compensation expense accruals
which are directly related to the decrease in profitability. The Company
maintains a stringent expense control program to monitor and decrease expenses
where possible. The shut-down of the Company's North Carolina facility and a
modest reduction in volume related expenses in the Power Products segment
also contributed to the
19
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
decrease. The overall decrease was reduced, in 1999, by expenses associated
with the operations acquired from BEST in December 1998.
Research and development costs decreased to $1.2 million in 1999, compared
to $1.6 million in the 1998 period. Reliability is committed to a significant
research and development program and development costs are projected to remain
at current levels or increase during the remainder of the year.
The change in net interest during the 1999 period reflects an increase in
interest income and a decrease in interest expense. Interest income increased
due to significant increases in investable cash, and interest expense decreased
due to the fact the Company accelerated payments on, and paid off, in 1999, the
mortgage related to the Houston facility.
The Company's effective tax rate was 35% for the nine months ended
September 30, 1998, compared to a 3% benefit rate related to the loss before
income taxes for the 1999 period. The principal reason the Company's benefit
rate was only 3% in 1999 is that tax benefits related to the loss of a foreign
subsidiary were not available due to limitations on net operating loss
deductions. In general, items affecting the tax rate in the 1999 nine-month
period are the same as those noted in the three month discussion below.
Three months ended September 30, 1999 compared to three months ended
September 30, 1998.
Revenues. Revenues for the 1999 three-month period were $4.9 million compared
to $9.2 million for the 1998 period. Revenues in the Testing Products segment
decreased $5.7 million, Power Sources revenues decreased $0.1 million and
Services revenues increased $1.5 million.
Revenues in the Testing Products segment were $1.6 million for the third
quarter of 1999, which is a decrease of 78% from the third quarter of 1998. The
decrease is related to decreased demand resulting in volume decreases and other
factors described in the nine-month discussion above. Revenues from the sale of
CRITERIA products increased $0.1 million and revenues from the sale of
INTERSECT products decreased $5.6 million.
Revenues in the Services segment for the 1999 period were $2.8 million, an
increase of 105% compared to the corresponding 1998 period. The increase is
related, in general, to the items discussed in the above nine-months discussion
and specifically to revenues resulting from the December 1998 BEST transaction.
Revenues in the Power Sources segment were $0.5 million for the third
quarter of 1999, reflecting a 12% decrease from the 1998 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 third quarter of 1999
decreased $1.5 million or 21% compared to the 46% revenue decrease of $4.3
million. Cost of revenues decreased $1.0 million; marketing, general and
administrative expenses decreased $1.1 million and research and development
expenses decreased $0.2 million. A $0.8 million provision for shut-down of the
Austin Services facility was recorded in 1999.
20
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
The decrease in gross profit from 54% in the 1998 period to 35% in the 1999
period is attributable to the fact that fixed cost could not be fully absorbed
due to the significant decrease in revenues in the Testing Products segment. In
addition, the gross profit in the Services segment increased, but the typical
gross profit in the Services segment is lower than the gross profit in the
other two segments. Revenues in the Services segment accounted for a
significantly higher percent of total consolidated revenues in the 1999 three-
month period contributing to a decrease in the overall gross profit in 1999
compared to 1998.
Marketing, general and administrative expenses for the 1999 period
decreased $1.1 million. The decrease in expenses is related to a decrease in
Testing Products revenues which resulted in a decrease in volume related
expenses, such as commissions, warranty and similar expenses and a decrease in
incentive compensation expense accruals in all segments, which are directly
related to the decrease in profitability. Expenses in the Services segment
increased $52,000. The increase relates to increases resulting from the BEST
transaction.
Research and development expenses for the 1999 period decreased $0.2
million. Reliability is committed to a significant research and development
program and development costs are projected to remain at current levels or
increase somewhat during the remainder of the year.
The decrease in net interest reflects a decrease in both interest income
and interest expense. The decrease in interest expense is explained in the
above nine-month discussion. Interest income decreased due to a decrease in
investable cash balances.
The Company's effective tax benefit rate was 21% for the three-month period
ended September 30, 1999, compared to an effective tax rate of 38% for the
three month period ended September 30, 1998. The principal items affecting the
Company's tax rate in 1999 and 1998 were tax benefits not available to a
foreign subsidiary due to limitations on net operating loss deductions, state
income tax expense in 1998 and a lower effective tax rate related to earnings
of the Singapore subsidiary.
IMPACT OF YEAR 2000
The Company disclosed information related to the impact of year 2000 in
Form 10-K for the year ended December 31, 1998. There have been no significant
changes in matters related to the impact of the year 2000 on the Company, and
readers are referred to the Form 10-K for further information.
The Company classified its Year 2000 ("Y2K") program into four projects:
1. assessment of products that are currently manufactured and
supported by the Company;
2. assessment of the Company's internal business and operating
systems;
3. assessment of the impact on the Company of non-compliance by third
party companies that supply material and services to the Company
and obtaining confirmation that the third parties will correct
known non-compliance in a timely manner; and
21
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
4. conversion of BEST internal business and operating systems to the
Company's compliant systems.
The following is the current status of the four projects:
1. Evaluation of the Y2K impact on products that are currently sold
and supported by the Company is complete. The Company has provided
Y2K solutions to customers of currently supported products. It is
estimated that the Company and its customers have completed the
planned testing of Y2K solutions related to Company supported
products. The Company does not provide Y2K solutions for products
that are no longer in production. The Company will quote to
customers the cost to provide Y2K solutions for products that are
no longer in production. It is projected that there will be a
limited number, if any, of future requests for Y2K solutions
related to items that are not current products. The Company
believes that products that are being shipped currently and that
will be shipped in the future are Y2K compliant. The Company's Y2K
solutions are subject to typical uncertainties, such as future
identification of currently unknown problems and that products will
only be used for a reasonable number of years related to the
technology that the product is designed to process.
2. Internal business and operating systems located at the Company's
three facilities have been evaluated and the hardware and software
changes have been identified.
(a) The hardware and software changes identified by the Houston Y2K
compliance program are 100% complete. Additional testing will
continue throughout the balance of the year.
(b) The hardware and software changes identified by the Costa Rica
Y2K compliance program are 100% complete. Additional testing will
continue throughout the balance of the year.
(c) The hardware and software changes identified by the Singapore
compliance program are approximately 99% complete and the remaining
changes will be completed by November 30, 1999. Additional testing
will continue throughout the balance of the year.
3. The Company has communicated with key third party suppliers and has
received responses from approximately 98% of the suppliers.
(a) This project is estimated to be 95% complete because certain
suppliers have indicated that compliance will not be completed
until the fourth quarter of 1999.
(b) The Company has and will continue to follow up with suppliers
that have not responded or that are not Y2K compliant.
22
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
(c) The status of this project will continue to be monitored during
the remainder of 1999 and specific action steps will be taken where
necessary. The Company and the public in general will be subject to
uncertainties related to continuation of public utility services,
availability of major freight carriers and availability of services
from similar suppliers. The Company will attempt to obtain written
assurance from as many key suppliers as possible and will,
throughout 1999, identify problem areas and develop and implement
contingency plans, if necessary.
4. All of the BEST systems were converted or integrated into the
Company's compliant systems by June 30, 1999.
The Company has developed contingency plans and has evaluated the
possible worst case scenarios. In general, it appears that the worst case
scenario may be that some suppliers who have indicated they are compliant may
not be able to supply critical products or services. The Company will address
these issues in the remote case this happens and will seek new vendors where
necessary.
The Company's Y2K compliance project is being implemented based on
information that is generally available concerning identified Y2K problems.
Additional information is continually emerging concerning Y2K problems and
solutions, and the Company believes it has used reasonable efforts to assess
and correct Y2K problems and will, as necessary, update the assessment.
The dates by which the Company believes it will complete its Y2K projects
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
materially differ from those anticipated.
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, Y2K compliance, future results related to acquisitions and
supply and demand changes for Company products and services and its customers'
products and services. Actual results may materially differ from projections.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
There have been no material changes in the market risk disclosures
reported in the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1998.
23
<PAGE>
RELIABILITY INCORPORATED
OTHER INFORMATION
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. Description
3.2 Amended and Restated Bylaws of the
Company as of July 28, 1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company during the quarter ended September 30, 1999
24
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
September 30, 1999
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)
November 9, 1999 /s/Larry Edwards
President and
Chief Executive Officer
November 9, 1999 /s/Max T. Langley
Sr. Vice President - Finance
and Chief Financial Officer
25
AMENDED AND RESTATED
BYLAWS OF
RELIABILITY INCORPORATED
(the "Company")
ARTICLE I
Offices
Section 1.1. Offices. The principal business office of the
Company shall be 16400 Park Row, Houston, Texas. The Company may have such
other business offices within or without the State of Texas as the board of
directors may from time to time establish.
ARTICLE II
Capital Stock
Section 2.1. Certificate Representing Shares. Shares of the
capital stock of the Company shall be represented by certificates in such
form or forms as the board of directors may approve, provided that such
form or forms shall comply with all applicable requirements of law or of
the articles of incorporation. Such certificates shall be signed by the
chairman of the board or the president, and by the secretary or an
assistant secretary, of the Company and may be sealed with the seal of the
Company or imprinted or otherwise marked with a facsimile of such seal. The
signature of any or all of the foregoing officers of the Company may be
represented by a printed facsimile thereof. If any officer whose signature,
or a facsimile thereof, shall have been set upon any certificate shall
cease, prior to the issuance of such certificate, to occupy the position in
right of which his signature, or facsimile thereof, was so set upon such
certificate, the Company may nevertheless adopt and issue such certificate
with the same effect as if such officer occupied such position as of such
date of issuance; and issuance and delivery of such certificate by the
Company shall constitute adoption thereof by the Company. The certificates
shall be consecutively numbered, and as they are issued, a record of such
issuance shall be entered in the books of the Company.
Section 2.2. Stock Certificate Records and Shareholders of
Record. The secretary of the Company shall maintain, or cause to be
maintained, among other records, stock certificate records which shall set
forth the names and addresses of the holders of all issued shares of the
Company, the number of shares held by each, the number of certificates
representing such shares, the date of issue of such certificates, and
whether or not such shares originate from original issue or from transfer.
The names and addresses of shareholders as they appear on the stock
certificate records shall be the official list of shareholders of record of
the Company for all purposes. The Company shall be entitled to treat the
holder of record of any shares as the owner thereof for all purposes, and
shall not
1
<PAGE>
be bound to recognize any equitable or other claim to, or interest in, such
shares or any rights deriving from such shares on the part of any other
person, including, but without limitation, a purchaser, assignee, or
transferee, unless and until such other person becomes the holder of record
of such shares, whether or not the Company shall have either actual or
constructive notice of the interest of such other person.
Section 2.3. Shareholder's Change of Name or Address. Each
shareholder shall promptly notify the secretary of the Company, at its
principal business office, by written notice sent by certified mail, return
receipt requested, of any change in name or address of the shareholder from
that as it appears upon the official list of shareholders of record of the
Company. The secretary of the Company shall then enter such changes into
all affected Company records, including, but not limited to, the official
list of shareholders of record.
Section 2.4. Transfer of Stock. The shares represented by any
certificate of the Company are transferable only on the books of the
Company by the holder of record thereof or by his duly authorized attorney
or legal representative upon surrender of the certificate for such shares,
properly endorsed or assigned. The board of directors may make such rules
and regulations concerning the issue, transfer, registration and
replacement of certificates as they deem desirable or necessary.
Section 2.5. Transfer Agent and Registrar. The board of
directors may appoint one or more transfer agents or registrars of the
shares, or both, and may require all share certificates to bear the
signature of a transfer agent or registrar, or both.
Section 2.6. Lost, Stolen or Destroyed Certificates. The
Company may issue a new certificate for shares of stock in the place of any
certificate theretofore issued and alleged to have been lost, stolen or
destroyed, but the board of directors may require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to furnish an
affidavit as to such loss, theft, or destruction and to give a bond in such
form and substance, and with such surety or sureties, with fixed or open
penalty, as the board may direct, in order to indemnify the Company and its
transfer agents and registrars, if any, against any claim that may be made
on account of the alleged loss, theft or destruction of such certificate.
Section 2.7. Fractional Shares. Only whole shares of the stock
of the Company shall be issued. In case of any transaction by reason of
which a fractional share might otherwise be issued, the directors, or the
officers in the exercise of powers delegated by the directors, shall take
such measures consistent with the law, the articles of incorporation and
these bylaws, including (for example, and not by way of limitation) the
payment in cash of an amount equal to the fair value of any fractional
share, as they may deem proper to avoid the issuance of any fractional
share.
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ARTICLE III
The Shareholders
Section 3.1. Annual Meeting. Commencing in the calendar year
1984, the annual meeting of the shareholders, for the election of directors
and for the transaction of such other business as may properly come before
the meeting, shall be held at the principal office of the Company, at 10:00
a.m. local time, during the fourth week in April of each year, or at such
other place and time as may be designated by the board of directors.
Failure to hold any annual meeting or meetings shall not work a forfeiture
or dissolution of the Company.
Section 3.2. Special Meetings. Except as otherwise provided by
law or by the articles of incorporation, special meetings of the
shareholders may be called by the chairman of the board of directors, the
president, any one of the directors, or the holders of at least ten percent
of all the shares having voting power at such meeting, and shall be held at
the principal office of the Company or at such other place, and at such
time, as may be stated in the notice calling such meeting. The record date
for determining shareholders entitled to call a special meeting is the date
on which the first shareholder signs the notice of that meeting. Business
transacted at any special meeting of shareholders shall be limited to the
purpose stated in the notice of such meeting given in accordance with the
terms of Section 3.3.
Section 3.3. Notice of Meetings - Waiver. Written or printed
notice of each meeting of shareholders, stating the place, day and hour of
any meeting and, in case of a special shareholders' meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than
ten nor more than sixty days before the date of such meeting, either
personally or by mail, by or at the direction of the president, the
secretary, or the persons calling the meeting, to each shareholder of
record entitled to vote at such meeting. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail addressed
to the shareholder at his address as it appears on the stock certificate
records of the Company, with postage thereon prepaid. Such further or
earlier notice shall be given as may be required by law. The signing by a
shareholder of a written waiver of notice of any shareholders' meeting,
whether before or after the time stated in such waiver, shall be equivalent
to the receiving by him of all notice required to be given with respect to
such meeting. Attendance by a shareholder, whether in person or by proxy,
at a shareholders' meeting shall constitute a waiver of notice of such
meeting. No notice of any adjournment of any meeting shall be required.
Section 3.4. Discharge of Notice Requirement. The notice
provided for in Section 3.3. of these bylaws is not required to be given to
any shareholder if either notice of two consecutive annual meetings and all
notices of meetings held during the period between such annual meetings or
all payments, provided that there were at least two such payments and all
payments were sent by first class mail, of distributions or interest on
securities during a twelve-month period have been mailed to such
shareholder, addressed to the address as shown on the records of the
Company and have been returned undeliverable. Any action or meeting taken
or held without notice to such a shareholder
3
<PAGE>
shall have the same force and effect as if the notice had been duly given
and any articles or document filed with the Secretary of State pursuant to
action taken may state that notice was duly given to all persons to whom
notice was required to be given. The requirement that notice be given to
such a shareholder shall be reinstated if such shareholder delivers to
the Company a written notice setting forth his then current address.
Section 3.5. Closing of Transfer Books and Fixing Record Date.
For the purpose of determining shareholders entitled to notice of, or to
vote at, any meeting of shareholders or any adjournment thereof, or
shareholders entitled to receive a distribution by the Company (other than
a distribution involving a purchase or redemption by the Company of any of
its own shares) or a share dividend, or in order to make a determination of
shareholders for any other proper purpose, the board of directors of the
Company may provide that the stock transfer books shall be closed for a
stated period in no case to exceed sixty days. If the stock transfer books
shall be closed for the purpose of determining shareholders entitled to
notice of or to vote at a meeting of shareholders, such books shall be
closed for at least the ten days immediately preceding such meeting. In
lieu of closing the stock transfer books, the board of directors may fix in
advance a date as the record date for any such determination of
shareholders, such date in no case to be more than sixty days nor, in the
case of a meeting of shareholders, less than ten days prior to the date on
which the particular action requiring such determination of shareholders is
to be taken. If the stock transfer books are not closed and no record date
is fixed for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders, or shareholders entitled to receive a
distribution (other than a distribution involving a purchase or redemption
by the corporation of any of its own shares) or a share dividend, the date
on which notice of the meeting is mailed or the date on which the
resolution of the board of directors declaring such distribution or share
dividend is adopted, as the case may be, shall be the record date of such
determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made, as provided
in this section, such determination shall apply to any adjournment thereof
except where the determination has been made through the closing of stock
transfer books and the stated period of closing has expired.
Section 3.6. Distributions and Share Ownership as of Record Date.
Distributions of cash, tangible property or intangible property made or
payable by the Company, whether in liquidation or from earnings, profits,
assets or capital, including all distributions that were payable but not
paid to the registered owner of the shares, his heirs, successors or
assigns but that are now being held in suspense by the Company or that were
paid or delivered by it into an escrow account or to a trustee or
custodian, shall be payable by the Company, escrow agent, trustee or
custodian to the person registered as owner of the shares in the Company's
stock certificate records as of the record date determined for that
distribution, as provided in Section 3.5 of these bylaws, his heirs,
successors or assigns. The person in whose name the shares are or were
registered in the stock certificate records of the Company as of the record
date shall be deemed to be the owner of the shares registered in his name
at that time.
4
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Section 3.7. Voting List. The officer or agent having charge of
the stock certificate records for shares of the Company shall make, at
least ten days before each meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of
shares held by each, which list, for a period of ten days prior to such
meeting, shall be kept on file at the registered office of the Company and
shall be subject to lawful inspection by any shareholder at any time during
the usual business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of
any shareholder during the whole time of the meeting. Failure to comply
with this section shall not affect the validity of any action taken at such
meeting.
Section 3.8. Quorum and Officers. Except as otherwise provided
by law, by the articles of incorporation or by these bylaws, the holders of
a majority of the shares entitled to vote and represented in person or by
proxy shall constitute a quorum at a meeting of shareholders, but the
shareholders present at any meeting, although representing less than a
quorum, may from time to time adjourn the meeting to some other day and
hour, without notice other than announcement at the meeting. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum. The vote of the holders of a
majority of the shares entitled to vote and thus represented at a meeting
at which a quorum is present shall be the act of the shareholders' meeting,
unless the vote of a greater number is required by law. The chairman of the
board or the president shall preside at, and the secretary shall keep the
records of, each meeting of shareholders, and in the absence of either such
officer, his duties shall be performed by any other officer authorized by
these bylaws or any person appointed by resolution duly adopted at the
meeting.
Section 3.9. Voting at Meetings. Each outstanding share shall be
entitled to one vote on each matter submitted to a vote at a meeting of
shareholders except to the extent that the articles of incorporation or the
laws of the State of Texas provide otherwise.
Section 3.10. Proxies. A shareholder may vote either in person
or by proxy executed in writing by the shareholder, or by his duly
authorized attorney-in-fact. No proxy shall be valid after eleven (11)
months from the date of its execution unless otherwise provided in the
proxy. A proxy shall be revocable unless the proxy form conspicuously
states that the proxy is irrevocable and the proxy is coupled with an
interest.
Section 3.11. Balloting. Upon the demand of any shareholder, the
vote upon any question before the meeting shall be by ballot. At each
meeting inspectors of election may be appointed by the presiding officer of
the meeting, and at any meeting for the election of directors, inspectors
shall be so appointed on the demand of any shareholder present or
represented by proxy and entitled to vote in such election of directors. No
director or candidate for the office of director shall be appointed as such
inspector. The number of votes cast by shares in the election of directors
shall be recorded in the minutes.
5
<PAGE>
Section 3.12. Voting Rights, Prohibition of Cumulative Voting for
Directors. Each outstanding share of common stock shall be entitled to one
(1) vote upon each matter submitted to a vote at a meeting of shareholders.
No shareholder shall have the right to cumulate his votes for the election
of directors but each share shall be entitled to one vote in the election
of each director. In the case of any contested election for any
directorship, the candidate for such position receiving a plurality of the
votes cast in such election shall be elected to such position.
Section 3.13. Record of Shareholders. The Company shall keep at
its principal business office, or the office of its transfer agents or
registrars, a record of its shareholders, giving the names and addresses of
all shareholders and the number and class of the shares held by each. This
list, compiled from the stock certificate records, shall be the official
list of shareholders of the Company for all purposes and shall be the same
list required by Section 2.2 hereof.
Section 3.14. Action Without Meeting. Any action required by
statute to be taken at a meeting of the shareholders of the Company, or any
action which may be taken at a meeting of the shareholders, may be taken
without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the shareholders entitled to vote with
respect to the subject matter thereof and such consent shall have the same
force and effect as a unanimous vote of the shareholders. Any such signed
consent, or a signed copy thereof, shall be placed in the minute book of
the Company.
ARTICLE IV
The Board of Directors
Section 4.1. Number, Qualifications and Term. The business and
affairs of the Company shall be managed and controlled by the board of
directors; and, subject to any restrictions imposed by law, by the articles
of incorporation, or by these bylaws, the board of directors may exercise
all the powers of the Company. The board of directors shall consist of five
members. Such number may be increased or decreased by amendment of these
bylaws, provided that no decrease shall effect a shortening of the term of
any incumbent director. Directors need not be residents of Texas or
shareholders of the Company absent provision to the contrary in the
articles of incorporation or laws of the State of Texas. Except as
otherwise provided in Section 4.3. of these bylaws, each position on the
board of directors shall be filled by election at the annual meeting of
shareholders. Any such election shall be conducted in accordance with
Section 3.8. of these bylaws. Each person elected a director shall hold
office, unless removed in accordance with Section 4.2 of these bylaws,
until the next annual meeting of the shareholders and until his successor
shall have been duly elected and qualified.
6
<PAGE>
Section 4.2. Removal. Any director or the entire board of
directors may be removed from office, with or without cause, at any special
meeting of shareholders by the affirmative vote of a majority of the shares
of the shareholders present in person or by proxy and entitled to vote at
such meeting, if notice of the intention to act upon such matter shall have
been given in the notice calling such meeting. If the notice calling such
meeting shall have so provided, the vacancy caused by such removal may be
filled at such meeting by the affirmative vote of a majority in number of
the shares of the shareholders present in person or by proxy and entitled
to vote.
Section 4.3. Vacancies. Any vacancy occurring in the board of
directors may be filled by the vote of a majority of the remaining
directors, even if such remaining directors comprise less than a quorum of
the board of directors. A director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office. Any position
on the board of directors to be filled by reason of an increase in the
number of directors shall be filled by the vote of a majority of the
directors, election at an annual meeting of the shareholders, or at a
special meeting of shareholders duly called for such purpose, provided that
the board of directors may fill no more than two such directorships during
the period between any two successive annual meetings of shareholders.
Section 4.4. Regular Meetings. Regular meetings of the board of
directors shall be held immediately following each annual meeting of
shareholders, at the place of such meeting, and at such other times and
places as the board of directors shall determine. No notice of any kind of
such regular meetings needs to be given to either old or new members of the
board of directors.
Section 4.5. Special Meetings. Special meetings of the board of
directors shall be held at any time by call of the chairman of the board,
the president, the secretary or any one director. The secretary shall give
notice of each special meeting to each director at his usual business or
residence address by mail at least three days before the meeting or in
person, by telegraph, telefax or telephone at least one day before such
meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail with postage thereon prepaid. Except as
otherwise provided by law, by the articles of incorporation, or by these
bylaws, such notice need not specify the business to be transacted at, or
the purpose of, such meeting. No notice shall be necessary for any
adjournment of any meeting. The signing of a written waiver of notice of
any special meeting by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be equivalent to the
receiving of such notice. Attendance of a director at a meeting shall also
constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express and announced purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 4.6. Quorum. A majority of the number of directors fixed
by these bylaws shall constitute a quorum for the transaction of business
and the act of not less than a majority of such quorum of the directors
shall be required in order to constitute the act of the board of directors,
unless the act of a greater number shall be required by law, by the
articles of incorporation or by these bylaws.
7
<PAGE>
Section 4.7. Procedure at Meetings. The board of directors at
each regular meeting held immediately following the annual meeting of
shareholders shall appoint one of their number as chairman of the board of
directors. The chairman of the board shall preside at meetings of the
board. In his absence at any meeting, any officer authorized by these
bylaws or any member of the board selected by the members present shall
preside. The secretary of the Company shall act as secretary at all
meetings of the board. In his absence, the presiding officer of the meeting
may designate any person to act as secretary. At meetings of the board of
directors, the business shall be transacted in such order as the board may
from time to time determine.
Section 4.8. Presumption of Assent. Any director of the Company
who is present at a meeting of the board of directors at which action on
any corporate matter is taken shall be presumed to have assented to the
action taken unless his dissent shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered mail to the secretary
of the Company immediately after the adjournment of the meeting. Such right
to dissent shall not apply to a director who voted in favor of such action.
Section 4.9. Action Without a Meeting. Any action required by
statute to be taken at a meeting of the directors of the Company, or which
may be taken at such meeting, may be taken without a meeting if a consent
in writing, setting forth the action so taken, shall be signed by each
director entitled to vote at such meeting, and such consent shall have the
same force and effect as a unanimous vote of the directors. Such signed
consent, or a signed copy thereof, shall be placed in the minute book of
the Company.
Section 4.10. Compensation. Directors shall receive such
compensation for their services as is set by resolution of the board of
directors, and reimbursement for reasonable expenses of attendance, if any,
may be allowed for attendance at each regular or special meeting of the
board of directors or at any meeting of the executive committee of
directors, if any, to which such director may be elected in accordance with
the following Section 4.11; but nothing herein shall preclude any director
from serving the Company in any other capacity or receiving compensation
therefor.
Section 4.11. Executive Committee. The board of directors, by
resolution adopted by a majority of the full board of directors, may
designate an executive committee, which committee shall consist of two or
more of the directors of the Company. Such executive committee may exercise
such authority of the board of directors in the business and affairs of the
Company as the board of directors may, by resolution duly adopted, delegate
to it except as prohibited by law. The designation of such committee and
the delegation thereto of authority shall not operate to relieve the board
of directors, or any member thereof, of any responsibility imposed upon it
or him by law. Any member of the executive committee may be removed by the
board of directors. The executive committee shall keep regular minutes of
its proceedings and report the same to the board of directors when
required. The minutes of the proceedings of the executive committee shall
be placed in the minute book of the Company. Members of the executive
committee shall receive such compensation as may be approved by the board
of directors and will be reimbursed for reasonable expenses actually
incurred by reason of membership on the executive committee.
8
<PAGE>
Section 4.12. Other Committees. The board of directors, by
resolution adopted by a majority of the full board of directors, may
appoint one or more committees of two or more directors each. Such
committees may exercise such authority of the board of directors in the
business and affairs of the Company as the board of directors may, by
resolution duly adopted, delegate, except as prohibited by law. The
designation of any committee and the delegation thereto of authority shall
not operate to relieve the board of directors, or any member thereof, of
any responsibility imposed on it or him by law. Any member of a committee
may be removed at any time by the board of directors. Members of any such
committees shall receive such compensation as may be approved by the board
of directors and will be reimbursed for reasonable expenses actually
incurred by reason of membership on a committee.
ARTICLE V
Officers
Section 5.1. Officers. The officers of the Company shall consist
of a president, one or more vice presidents, a secretary and a treasurer;
and, in addition, such other officers and assistant officers and agents as
may be deemed appropriate or desirable. Officers shall be elected or
appointed by the board of directors. Any two or more offices may be held by
the same person. In its discretion, the board of directors may leave
unfilled any office except those of president, treasurer and secretary.
Section 5.2. Election; Term; Qualification. Officers shall be
chosen by the board of directors annually at the meeting of the board of
directors following the annual shareholders' meeting. Each officer shall
hold office until his successor has been chosen and qualified, or until his
death, resignation, or removal.
Section 5.3. Removal. Any officer or agent elected or appointed
by the board of directors may be removed by the board of directors whenever
in its judgment the best interests of the Company will be served thereby,
but such removal shall be without prejudice to the contract rights, if any,
of the person so removed. Election or appointment of an officer or agent
shall not of itself create any contract rights.
Section 5.4. Vacancies. Any vacancy in any office for any cause
may be filled by the board of directors at any meeting.
Section 5.5. Duties. The officers of the Company shall have such
powers and duties, except as modified by the board of directors, as
generally pertain to their offices, respectively, as well as such powers
and duties as from time to time shall be conferred by the board of
directors and by these bylaws.
Section 5.6. President. The president shall be the chief
executive officer of the Company and shall have general direction of the
affairs of the Company and general supervision over the several officers,
subject however to the control of the board of directors. The president
shall, at each annual meeting and from time to time, report to the
shareholders and the board of directors on all matters within his knowledge
concerning the Company, which, in his opinion, should be brought to the
notice of such persons. In the
9
<PAGE>
absence of the chairman of the board, or at his direction, the president
shall preside at all meetings of shareholders of the Company. The president
shall sign and execute in the name of the Company (i) all contracts or
other instruments authorized by the board of directors, and (ii) all
contracts or instruments in the usual and regular course of business,
pursuant to Section 6.2 hereof, excepting those contracts where the signing
thereof has been expressly delegated by the board or these bylaws to some
other officer or agent of the Company; and in general, shall perform all
duties incident to the office of the president and a chief executive
officer and such other duties as may from time to time be assigned to him
by the board of directors or as are prescribed by these bylaws.
Section 5.7. The Vice Presidents. At the request of the
president, or in the event of the absence or disability of the president,
the vice presidents, in the order of their election, shall perform the
duties of the president, and, when so acting, shall have all the powers of,
and be subject to all restrictions upon, the president. Any action taken by
the vice president in the performance of the duties of the president shall
be conclusive evidence of the absence or inability to act as the president
at the time such action is taken. The vice president shall perform such
other duties as may, from time to time, be assigned to them by the board of
directors or the president.
Section 5.8. Secretary. The secretary shall keep the minutes of
all meetings of the shareholders, of the board of directors, and of the
executive committee, if any, of the board of directors, in one or more
books provided for such purpose and shall see that all notices are duly
given in accordance with the provisions of these bylaws or as required by
law. He shall be custodian of the corporate records and of the seal (if
any) of the Company and see, if the Company has a seal, that the seal of
the Company is affixed to all documents the execution of which on behalf of
the Company under its seal is duly authorized; shall have general charge of
the stock certificate books, transfer books and stock ledgers, and such
other books and papers of the Company as the board of directors may direct,
all of which shall, at all reasonable times, be open to the examination of
any director, upon application at the office of the Company during business
hours; and in general shall perform all duties and exercise all powers
incident to the office of the secretary and such other duties and powers as
the board of directors or the president from time to time may assign to or
confer on him.
Section 5.9. Treasurer. The treasurer shall keep complete and
accurate records of account, showing at all times the financial condition
of the Company. He shall be the legal custodian of all money, notes,
securities and other valuables which may from time to time come into the
possession of the Company. He shall furnish at meetings of the board of
directors, or whenever requested, a statement of the financial condition of
the Company, and shall perform such other duties as these bylaws may
require or the board of directors may prescribe.
Section 5.10. Assistant Officers. Any assistant secretary or
assistant treasurer appointed by the board of directors shall have power to
perform, and shall perform, all duties incumbent upon the secretary or
treasurer of the Company, respectively, subject to the general direction of
such respective officers, and shall perform such other duties as these
bylaws may require or the board of directors may prescribe.
10
<PAGE>
Section 5.11. Salaries. The salaries or other compensation of
the officers shall be fixed from time to time by the board of directors. No
officer shall be prevented from receiving such salary or other compensation
by reason of the fact that he is also a director of the Company.
Section 5.12. Bonds of Officers. The board of directors may
secure the fidelity of any officer of the Company by bond or otherwise, on
such terms and with such surety or securities, conditions, penalties or
securities as shall be deemed proper by the board of directors.
Section 5.13. Delegation. The board of directors may delegate
temporarily the powers and duties of any officer of the Company, in case of
his absence or for any other reason, to any other officer, and may
authorize the delegation by any officer of the Company of any of his powers
and duties to any agent or employee, subject to the general supervision of
such officer.
ARTICLE VI
Miscellaneous
Section 6.1. Distributions. Distributions, subject to the
provisions of the articles of incorporation and to limitations set forth by
law, if any, may be declared by the board of directors at any regular or
special meeting. Distributions may be in the form of a dividend, including
a share dividend, a purchase or redemption by the Company, directly or
indirectly, of any of its own shares or a payment by the Company
in liquidation of all or a portion of its assets. A distribution may not be
made if it would render the Company insolvent or if it exceeds the surplus
of the Company, except as otherwise allowed by law.
Subject to limitations upon the authority of the board of
directors imposed by law or by the articles of incorporation, the
declaration of and provision for payment of dividends shall be at the
discretion of the board of directors.
Section 6.2. Contracts. The president shall have the power and
authority to execute, on behalf of the Company, contracts or instruments in
the usual and regular course of business, and in addition the board of
directors may authorize any officer or officers, agent or agents, of the
Company to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Company, and such authority may be general
or confined to specific instances. Unless so authorized by the board of
directors or by these bylaws, no officer, agent or employee shall have any
power or authority to bind the Company by any contract or engagement, or to
pledge its credit or to render it pecuniarily liable for any purpose or in
any amount.
Section 6.3. Checks, Drafts, etc. All checks, drafts, or other
orders for the payment of money, notes, or other evidences of indebtedness
issued in the name of the Company shall be signed by such officers or
employees of the Company as shall from time to time be authorized pursuant
to these bylaws or by resolution of the board of directors.
11
<PAGE>
Section 6.4. Depositories. All funds of the Company shall be
deposited from time to time to the credit of the Company in such banks or
other depositories as the board of directors may from time to time
designate, and upon such terms and conditions as shall be fixed by the
board of directors. The board of directors may from time to time authorize
the opening and maintaining within any such depository as it may designate,
of general and special accounts, and may make such special rules and
regulations with respect thereto as it may deem expedient.
Section 6.5. Endorsement of Stock Certificates. Subject to the
specific directions of the board of directors, any share or shares of stock
issued by any corporation and owned by the Company, including reacquired
shares of the Company's own stock, may, for sale or transfer, be endorsed
in the name of the Company by the president or any vice president; and such
endorsement may be attested or witnessed by the secretary or any assistant
secretary either with or without the affixing thereto of the corporate
seal.
Section 6.6. Corporate Seal. The corporate seal, if any, shall
be in such form as the board of directors shall approve, and such seal, or
a facsimile thereof, may be impressed on, affixed to, or in any manner
reproduced upon, instruments of any nature required to be executed by
officers of the Company.
Section 6.7. Fiscal Year. The fiscal year of the Company shall
begin and end on such dates as the board of directors at any time shall
determine.
Section 6.8. Books and Records. The Company shall keep correct
and complete books and records of account and shall keep minutes of the
proceedings of its shareholders and board of directors, and shall keep at
its registered office or principal place of business, or at the office of
its transfer agent or registrar, a record of its shareholders, giving the
names and addresses of all shareholders and the number and class of the
shares held by each.
Section 6.9. Resignations. Any director or officer may resign at
any time. Such resignations shall be made in writing and shall take effect
at the time specified therein, or, if no time is specified, at the time of
its receipt by the president or secretary. The acceptance of a resignation
shall not be necessary to make it effective, unless expressly so provided
in the resignation.
Section 6.10. Indemnification of Officers and Directors. The
Company shall indemnify to the full extent allowed by law any person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, arbitrative, or investigative, any appeal in such an
action, suit, or proceeding, and any inquiry or investigation that could
lead to such an action, suit or proceeding by reason of the fact that he is
or was a director, officer, employee, or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee,
partner, venturer, proprietor, trustee, agent, or similar functionary of
another corporation, partnership, joint venture, trust, other enterprise,
or employee benefit plan. This indemnification shall, to the extent
permitted
12
<PAGE>
by law, be against judgments, penalties, fines, settlements and reasonable
expenses actually incurred in connection with such investigation, action,
suit or proceeding but if the person is found liable to the Company or is
found liable on the basis that personal benefit was improperly received by
the person, indemnification shall be limited to reasonable expenses
actually incurred by the person in connection with the proceeding and shall
not be made in respect of any proceedings in which the person shall have
been found liable for willful or intentional misconduct in the performance
of his duty to the Company. A person acting in his official capacity as a
director of the Company must have conducted himself in good faith and
reasonably believed his actions to have been in the Company's best
interests. A person acting in any other capacity must have conducted
himself in good faith and reasonably have believed his actions were not
opposed to the Company's best interests. In the case of any criminal
proceeding, indemnification requires that the person indemnified have had
no reasonable cause to believe his conduct was unlawful.
Any indemnification under this section shall be made by the
Company only as authorized in the specific case upon a determination that
indemnification is proper because the director, officer, employee or agent
has met the applicable standard of conduct as set forth in the laws of the
State of Texas, and the amount of indemnification (before or after
termination of the proceedings) shall be made only as set forth in the laws
of the State of Texas. Such determinations shall be made as set forth in
the laws of the State of Texas.
Any indemnification of or advance of expenses to any officer,
director, employee, or agent of the Company shall be reported in writing to
the shareholders with or before the notice or waiver of notice of the next
shareholder's meeting or with or before the next submission to shareholders
of a consent to action without a meeting pursuant to Section 3.14 hereof
and, in any case, within the twelve-month period immediately following the
date of the indemnification or advance.
Any right of indemnification granted by this Section 6.10. shall
be in addition to and not in lieu of any other such right to which any
director or officer of the Company may at any time be entitled under the
law of the State of Texas; and if any indemnification which would otherwise
be granted by this Section 6.10. shall be disallowed by any competent court
or administrative body as illegal or against public policy, then any
director or officer with respect to whom such adjudication was made, and
any other officer or director, shall be indemnified to the fullest extent
permitted by law and public policy, it being the express intent of the
Company to indemnify its officers, directors, employees and agents to the
fullest extent possible in conformity with these bylaws, all applicable
laws, and public policy.
13
<PAGE>
Section 6.11. Indemnity Insurance. The Company may purchase and
maintain insurance or another arrangement on behalf of a person who is or
was a director, officer, employee or agent of the Company or who is or was
serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such a person, whether or not the Company
would have the power to indemnify him against that liability under these
bylaws or the laws of the State of Texas. If the insurance or other
arrangement is with a person or entity that is not regularly engaged in the
business of providing insurance coverage, the insurance or arrangement may
provide for payment of a liability with respect to which the Company would
not have the power to indemnify the person only if the shareholders of the
Company approve the inclusion of coverage for the additional liability.
Section 6.12. Meetings by Telephone. Subject to the provisions
required or permitted by these bylaws or the laws of the State of Texas for
notice of meetings, shareholders, members of the board of directors, or
members of any committee designated by the board of directors may
participate in and hold any meeting required or permitted under these
bylaws by telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation
in a meeting pursuant to this Section shall constitute presence in person
at such a meeting, except where a person participates in the meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE VII
Amendments
Section 7.1. Amendments. These bylaws may be altered, amended, or
repealed, or new bylaws may be adopted, by a majority of the board of
directors at any duly held meeting of directors, provided that notice of
such proposed action shall have been contained in the notice of any such
meeting, unless the articles of incorporation or the laws of the State of
Texas reserve the power exclusively to the shareholders in whole or in
part, or the shareholders in amending, repealing or adopting a particular
bylaw expressly provide that the board of directors may not amend or repeal
that bylaw. Unless the articles of incorporation or a bylaw adopted by the
shareholders provides otherwise as to all or some portion of the Company's
bylaws, the holders of a majority of the shares represented at any duly
held meeting of the shareholders, provided that notice of such proposed
action shall have been contained in the notice of any such meeting, may
amend, repeal or adopt the Company's bylaws.
14
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
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</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,549
<SECURITIES> 0
<RECEIVABLES> 2,452
<ALLOWANCES> 0
<INVENTORY> 1,502
<CURRENT-ASSETS> 19,001
<PP&E> 19,655
<DEPRECIATION> 11,506
<TOTAL-ASSETS> 30,134
<CURRENT-LIABILITIES> 2,327
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0
0
<COMMON> 9,461
<OTHER-SE> 17,652
<TOTAL-LIABILITY-AND-EQUITY> 30,134
<SALES> 14,216
<TOTAL-REVENUES> 14,216
<CGS> 8,842
<TOTAL-COSTS> 8,842
<OTHER-EXPENSES> 5,647
<LOSS-PROVISION> 800
<INTEREST-EXPENSE> (470)
<INCOME-PRETAX> (603)
<INCOME-TAX> (18)
<INCOME-CONTINUING> (585)
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