RELIABILITY INCORPORATED
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant X
---
Filed by a Party other than the Registrant
---
Check the appropriate box:
Preliminary Proxy Statement
- ---
Confidential, for Use of the Commission Only (as permitted by
- --- Rule 14a-6(e)(2))
X Definitive Proxy Statement
- ---
Definitive Additional Materials
- ---
Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
- ---
Reliability Incorporated
(Name of Registrant as Specified in Its Charter)
Reliability Incorporated
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
X No fee required
- ---
$125 per Exchange Act Rules O-11(c)I(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2).
- --- of Schedule 14A.
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
- ---
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
Fee paid previously with preliminary materials.
- ---
- --- Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid: -0-
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed: March 16, 1998
1
RELIABILITY INCORPORATED
16400 Park Row
Houston, Texas 77084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 1998
To the Shareholders of
Reliability Incorporated:
Notice is hereby given that the 1998 annual meeting of shareholders of
Reliability Incorporated (the "Company") will be held in the offices of the
Company at 16400 Park Row, Houston, Texas 77084, on April 29, 1998, at 10:00
a.m. Houston time, for the following purposes:
1. To elect a Board of Directors to serve until the next annual meeting
of shareholders and until their respective successors are elected.
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 6, 1998,
as the record date for determination of shareholders entitled to notice of,
and to vote at, such meeting.
Regardless of whether you expect to attend the meeting in person, you are
requested to fill in, date and sign the enclosed proxy and return it in the
enclosed envelope at your earliest convenience. No postage need be affixed
if such envelope is mailed in the United States.
By order of the Board of Directors,
Max T. Langley
Secretary
Date: March 19, 1998
2
RELIABILITY INCORPORATED
16400 Park Row
Houston, Texas 77084
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
Solicitation and revocation of proxies
The accompanying proxy is solicited by Reliability Incorporated, a Texas
corporation (the "Company"), for use in connection with the 1998 annual
meeting of shareholders of the Company. Although proxies will be solicited
primarily by mail, employees of the Company may personally aid in such
solicitation. The Company will make arrangements with brokerage houses and
banks for forwarding proxy materials to the beneficial owners of shares
registered in brokers' and banks' names. All solicitation costs will be
borne by the Company. All properly signed proxies will be voted, and, where
a choice has been specified by the shareholder as provided on the proxy, it
will be voted in accordance with the specification so made. If no
specification is made, the shares will be voted FOR all nominees for
director. Any shareholder giving a proxy may revoke it at any time before
it is used at the meeting by giving written notice of revocation to the
secretary of the Company or by signing and delivering to the secretary of the
Company a proxy bearing a later date.
Proxy materials are expected to be mailed or delivered to shareholders
on or about March 19, 1998.
Voting at the meeting
Only holders of record of the Company's Common Stock (the "Common Stock")
at the close of business on March 6, 1998, will be entitled to vote at the
meeting. As of such date, 6,063,578 shares were issued and outstanding and
entitled to vote at the meeting. Each share of Common Stock is entitled to
one vote; shareholders do not have the right to cumulate their votes with
respect to the election of directors. Directors are elected by a majority
vote of those shares present and voting at the meeting.
3
RELIABILITY INCORPORATED
PROXY STATEMENT
OWNERSHIP OF COMMON STOCK
Principal stockholders
As of February 13, 1998, each of the following persons beneficially owned
5% or more of the 6,059,156 shares of Common Stock then outstanding:
Voting shares Dispositive shares
and percent of total and percent of total
Name and address outstanding (1) outstanding (2)
- ---------------- -------------------- --------------------
Dimensional Fund
Advisors Inc. 428,600 (7.07%)(3) 428,600 (7.07%)
1299 Ocean Avenue,
11th Floor
Santa Monica, CA
Fidelity Low-Priced
Stock Fund 546,000 (9.01%) 546,000 (9.01%)
82 Devonshire Street
Boston, MA
- --------------------
(1) Shares as to which the shareholder has voting power.
(2) Shares as to which the shareholder has power to dispose.
(3) Dimensional Fund Advisors Inc. in a Schedule 13G, reported sole power
to vote 260,900 shares and that certain persons in their capacity as
officers of Dimensional vote an additional 167,700 shares, in addition
to voting the 260,900 shares.
- --------------------
Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 428,600 shares of Common
Stock, all of which shares are held in portfolios of DFA Investment
Dimensions Group Inc., a registered open-end investment company, or in series
of the DFA Investment Trust Company, a Delaware business trust, or the DFA
Group Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, all of which Dimensional Fund Advisors Inc.
serves as investment manager. Dimensional disclaims beneficial ownership of
all such shares.
Edward C. Johnson, III, owns approximately 12% and Abigail P. Johnson
owns approximately 25% of the stock of FMR Corp., which controls Fidelity
Management & Research Company ("Fidelity"), the investment advisor to the
Fidelity Low-Priced Stock Fund ("Fund"). Members of the Edward C. Johnson,
III family and trusts for their benefit constitute a group controlling
Fidelity. The Fund's shares are voted by Fidelity under guidelines
established by the Board of Trustees of the Fund; the Johnson family, through
its control of Fidelity, has the sole power to dispose of the Fund's shares.
The Company's Employee Stock Savings Plan (the "Plan") owns a total of
635,578 shares (10.5% of the 6,063,156 shares of Common Stock outstanding as
of February 27, 1998) of Common Stock. Each employee of the Company who
participates in the Plan may direct the Trustee of the Plan on how to vote
the stock beneficially owned by such employee and, under certain
circumstances, the employee can direct the sale of some or all of the shares
4
RELIABILITY INCORPORATED
PROXY STATEMENT
held for his benefit. No employee owns 5% or more of the Company's shares
through the Plan.
Security ownership of management
The following table sets forth, as of March 6, 1998, the amount of Common
Stock owned by the directors of the Company, the nominees for director, each
executive officer named in the compensation table and all directors and
officers as a group.
Amount and nature of
beneficial ownership
--------------------
Voting
and Other
Name of individual investment beneficial Percent
or group power (1) ownership (2) of class (3)
------------------ ---------- ------------- ------------
Larry Edwards 124,600 36,915 2.66%
W. L. Hampton -0- -0- -0-
John R. Howard 2,100 -0- *
Thomas L. Langford 4,000 -0- *
A. C. Lederer, Jr. 5,000 -0- *
Philip Uhrhan -0- -0- -0-
James M. Harwell 10,000 21,783 *
Paul Nesrsta -0- 11,486 *
Max T. Langley 28,200 26,439 *
Robert W. Hildenbrand, Jr. 4,000 19,648 *
All executive officers
and directors as a
group (eleven persons) 178,500 116,418 4.86
- --------------------
* Less than 1%
(1) Each person has the sole power to vote and dispose of the shares shown
except that Messrs. Edwards, Langley and Hildenbrand have shared power
with their respective spouses to vote and dispose of the 124,600,
28,200 and 4,000 shares, respectively, reported above.
(2) Represents shares allocated to the executive officer through his
participation in the Company's Employee Stock Savings Plan (the
"Plan"), according to the latest statement for said Plan which is as
of December 31, 1997. Employees have the power to vote all shares held
in the Plan and, under certain circumstances, the employee can direct
the sale of some or all of the shares held for his benefit.
(3) The percent stated in this column is based on the total beneficial
ownership of the individual or group as a percent of the 6,063,578
shares of Common Stock outstanding as of March 6, 1998.
- --------------------
The Company is not aware of any contractual arrangement the operation of
which may at any subsequent date result in a change in control of the
Company.
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RELIABILITY INCORPORATED
PROXY STATEMENT
ELECTION OF DIRECTORS
At the meeting, six directors are to be elected. Each director will hold
office until the next annual meeting of shareholders and until his successor
is elected and qualifies. The persons named as proxy holders in the
accompanying form of proxy intend to vote each properly signed and submitted
proxy for the election as a director of each of the persons named in the
following table unless authority to vote for all or any of such nominees is
withheld on such proxy.
Number and percent Other positions and
of shares of offices presently
Common Stock of held with the Company
the Company benefi- (and other present
Director cially owned as of principal occupation
Name since Age March 6, 1998(1) if different)
---- -------- --- -------------------- ------------------
Larry Edwards 1995 56 161,515 (2) 2.66% Chairman of the Board
of Directors,
President and Chief
Executive Officer
W.L. Hampton 1984 69 -0- -0- (retired)
John R. Howard(3) 1971 64 2,100 * (attorney-at-law)
Thomas L. Langford 1980 56 4,000 * (Executive Vice
President, Stone
and Webster, Inc.)
A.C. Lederer, Jr.(3) 1972 84 5,000 * (investor)
Philip Uhrhan 1997 48 -0- -0- (Vice President
Finance, Solvay
America, Inc.)
- ---------------------------
* Less than 1%
(1) Except as otherwise noted, each director has the sole power to vote and
to dispose of the shares shown in this table as being beneficially
owned by him.
(2) Mr. Edwards has shared power with his wife to vote and dispose of
124,600 shares. The remaining 36,915 shares are held in the Employee
Stock Savings Plan; Mr. Edwards can vote Plan shares, but the power to
direct the sale of these shares is limited.
(3) The wife of A. C. Lederer, Jr. is a sister of John R. Howard. There
is no other family relationship among the persons named in this table.
- ---------------------------
Mr. Edwards has been President and Chief Executive Officer of the Company
since 1993 and has been a Director and Chairman of the Board of Directors
since 1995. From 1990 to 1993, he served as President and Chief Operating
Officer of the Company. Mr. Edwards joined the Company in 1977 as Manager
of Engineering, Planning and Manufacturing Systems, and subsequently held the
positions of Vice President - Operations, Corporate Vice President - Systems,
and Executive Vice President - Systems.
Mr. Hampton has been a Director of the Company since 1984. Mr. Hampton
was President of S.I.P. Engineering, Inc., an engineering and construction
company, from 1984 until his retirement in 1993.
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RELIABILITY INCORPORATED
PROXY STATEMENT
Mr. Howard has been a Director of the Company since 1971. He is and has
been for more than five years an attorney in private practice.
Mr. Langford has been a Director of the Company since 1980. Mr.
Langford's principal occupation has been that of Executive Vice President and
Chief Financial Officer of Stone and Webster, Inc., a professional
engineering, construction and consulting company, since 1997. He was
President of Parsons Corporation, an engineering and construction company,
from 1991 until 1996.
Mr. Lederer has been a Director of the Company since 1972 and was
Chairman of the Board of Directors of the Company from 1993 until 1995. Mr.
Lederer's principal occupation has been that of an investor for more than the
last five years.
Mr. Uhrhan has been a Director of the Company since September 1997. Mr.
Uhrhan's principal occupation has been that of Vice President Finance of
Solvay America, Inc., a chemical and pharmaceuticals company, since 1996.
Mr. Uhrhan was a Partner with Ernst and Young LLP for more than five years
prior to his employment by Solvay America, Inc.
Management has no reason to believe that any person proposed to be
elected a director will be unwilling or unable to serve if elected. If such
a situation arises, proxies will be voted for a nominee selected by the Board
of Directors of the Company.
Board of Directors' meetings and committees
The Company's Board of Directors held four meetings during 1997. All
incumbent directors attended 75% or more of the meetings of the Board of
Directors.
The Company's audit committee, composed of Messrs. Howard (until December
1997), Langford, and Uhrhan, met two times during 1997, and all incumbent
members attended the meetings. Mr. Howard, in December 1997, resigned as a
member of the audit committee and was elected as a member of the compensation
committee. The audit committee reviews and approves all services to be
performed by independent auditors and the fees therefor, consults with
independent auditors and management with respect to internal controls and
other financial matters and reviews the results of the year-end audit and
other reports of independent auditors.
The compensation committee, composed of Messrs. Lederer, Hampton, and
Howard, met two times during 1997, and all incumbent members attended all
meetings. The functions of the compensation committee are to review
executive compensation and benefit plans and recommend changes therein and
to make recommendations to the Board of Directors concerning executive
salaries and incentive plans for the Company.
7
RELIABILITY INCORPORATED
PROXY STATEMENT
Compensation Committee report on executive compensation
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
of Reliability Incorporated submits this report on executive compensation to
the Board of Directors and the Company's shareholders. This report covers
components of executive compensation and the bases for the Committee's
compensation decisions. The Committee's goals are to establish compensation
for executive officers that ensures a fair and competitive salary and
additional incentive compensation which is related directly to the financial
success of the Company and the performance of the officers and to motivate
executive personnel to achieve corporate objectives that will contribute to
the overall goal of maximizing shareholder value. A fundamental principle
of the compensation program is to align the amount of an executive's total
compensation with his contribution to the success of the Company in creating
shareholder value. The program has the following components:
Base salary
Salaries for the chief executive officer ("CEO") and each other executive
officer are set annually. The Committee strives to set salaries that are
competitive with those paid by companies of similar size and revenue in the
industry. The Company utilizes the currently available American Electronics
Association Executive Compensation Survey ("AEA Compensation Survey") to
determine appropriate and competitive salaries.
In 1996, the salary of the CEO was increased 6% and the raises for the
other executive officers ranged from 4% to 6%. In 1997, the salary of the
CEO was increased 6% and the raises for the other executives ranged from 3%
to 7%. The raises in 1996 and 1997 for the CEO and executive officers varied
depending on the performance of the individual executive and the financial
success of the industry segment, division or subsidiary for which the
executive was responsible. In addition, the Committee reviewed the overall
financial performance of the Company, its gross, operating, and net profits,
the performance of the Company's officers and the business plan for 1997, as
well as the applicable AEA Compensation Survey, to determine appropriate and
competitive salaries. The Committee considered salaries paid by other
companies of similar size and revenues to determine market rate salary using
the 25th percentile results of the AEA Compensation Survey.
Short-term incentive compensation
In addition to base salary, the Company has an incentive bonus plan which
applies to the CEO, all other executive officers, the directors and salaried
employees of the Company. This bonus plan has three components: (1) a
quantitative measure based on the net income before income tax of the Company
(a) as a whole in the case of the CEO and certain other executive officers
or (b) the subsidiary, industry segment or division of the Company for which
the executive is responsible; (2) a qualitative measure, which is an
evaluation of each individual's performance during the year, made by the
Committee for the CEO and by the CEO for all other executive officers; and
(3) a target bonus. The Committee's approach to incentive bonuses is to
establish incentives at a pay-for-performance level which allows the
executive to be compensated in total at a competitive rate. Each year the
Committee establishes the target bonus for the CEO and each executive officer
and approves the payment of bonuses, if any, based on achieving predetermined
8
RELIABILITY INCORPORATED
PROXY STATEMENT
goals. The CEO and executive officers are only eligible for bonuses when the
Company as a whole and/or the operating division for which such officer is
responsible reports income before income taxes as a percent of revenues equal
to or greater than 5%. The actual bonus for the CEO was 124% of base salary
in 1995. Bonuses ranging from 11% to 103% of base salary were paid to other
executive officers for 1995. Target bonuses, for 1996, ranged from 40% of
salary for the CEO (up from 35% in 1995) to 30% for executive officers (up
from 26.5% in 1995); the actual bonus paid, in 1996, to the CEO was 169% of
his base salary and ranged from 51% to 126% of salary for the other executive
officers. Actual bonus amounts for any or all officers can exceed target
bonuses when the Company's (or the subsidiary, division or industry segment
for which the officer is responsible) net income exceeds income goals set at
the beginning of the year and an individual officer's performance exceeds a
rating of 1.0, and will be less than target bonuses if the appropriate net
income before taxes does not reach the specified goals or an individual
officer's performance is judged to be between 0 and 1.0. Target bonuses, for
1997, ranged from 40% of salary for the CEO to 30% for executive officers.
The actual bonus paid, in 1997, to the CEO was 233% of his salary and ranged
from 11% to 179% of salary for the other executive officers. In 1997, the
Committee and the CEO considered the improvements in revenues, net income
and net income before income tax as a percent of revenues from 18% in 1995
to 21% in 1996 and 26% in 1997. The high level of the Company's income in
1996 and 1997 resulted in income factors coupled with individual performance
factors being set at levels that resulted in the CEO and certain executive
officers receiving total compensation for 1996 and 1997 at amounts somewhat
above the 75th percentile of the AEA Compensation Survey. All salaried
employees of the Company received bonuses in 1995, 1996 and 1997; such
bonuses ranged from 10% of base salary to 62% of base salary in 1995, from
8% of base salary to 107% of base salary in 1996 and from 5% of base salary
to 118% of base salary in 1997, exclusive of bonuses paid to executive
officers.
Stock based compensation
The Company's long-term compensation program consists of options granted
under the Company's 1997 Stock Option Plan. The Committee encourages stock
ownership among managers so that they have a vested interest in the growth
and profitability of the Company. Stock options are used as a component of
the total compensation package to reward performance, to equalize benefits
with those offered by comparable companies and to encourage key personnel to
remain with the Company. In addition, stock options emphasize the objective
of increasing shareholder value and encouraging share ownership by management
in accordance with established guidelines. In general, options granted to
the CEO and executives vest in three installments over a period of
approximately two to three years. The option agreements encourage the CEO
and executives to own shares with a market value, at date of grant,
equivalent to one times base annual compensation. If the executive does not
own the required number of shares on the date the third installment would
vest, the option period on all unexercised shares is shortened from ten years
to two to three years.
The Board of Directors functions as the administrative committee for the
Option Plan and grants options based on its subjective determination of the
relative current and future contribution that each optionee has or may make
to the long-term goals of the Company. The OPTION GRANTS IN LAST FISCAL YEAR
table shows the options granted to the CEO and each of the named executive
officers during the 1997 fiscal year. Each option was granted at the fair
market value of the Company's common stock on the date of grant. In 1997,
stock options were granted to 24 key employees and directors, including the
9
RELIABILITY INCORPORATED
PROXY STATEMENT
CEO and named executive officers, for the purchase of 423,700 common shares
at prices per share ranging from $3.50 to $20.25, which were the fair market
values of the Company's Common Stock on the date the options were granted.
Benefits
The CEO and other executive officers are not entitled to any additional
benefits which are not also provided to all full-time salaried employees.
Respectfully submitted,
W.L. Hampton
John R. Howard
A.C. Lederer, Jr.
10
RELIABILITY INCORPORATED
PROXY STATEMENT
COMPENSATION OF EXECUTIVES
Summary compensation table
The following table provides information as to the compensation paid by
the Company and its subsidiaries, during fiscal years 1997, 1996 and 1995 to
the chief executive officer and the four other highest paid executive
officers and directors whose remuneration exceeded $100,000 in 1997.
Annual Long-term
compensation compensation
------------ ------------
(a) (b) (c) (d) (g) (i)
Securities All other
Name and Annual underly- compen-
principal Salary bonus ing options sation
position Year ($) ($) (#) (1) ($) (2)
---------- ---- ------ ------ -------- -------
Larry Edwards, 1997 155,248 362,230 70,000 11,930
President, Chairman 1996 146,309 247,099 -0- 4,376
of the Board, and 1995 137,514 170,415 -0- 4,045
Chief Executive
Officer
James M. Harwell, 1997 98,600 176,892 30,000 10,951
Vice President 1996 92,333 116,715 -0- 2,767
1995 86,587 89,413 -0- 2,547
Paul Nesrsta, 1997 95,550 150,324 30,000 10,862
Vice President 1996 91,592 101,982 -0- 2,745
1995 87,003 84,222 -0- 2,559
Max T. Langley, Senior 1997 104,322 133,806 30,000 11,126
Vice President, 1996 100,601 95,995 -0- 3,016
Chief Financial 1995 96,753 73,828 -0- 2,846
Officer, Secretary
and Treasurer
Robert W. Hildenbrand, 1997 94,524 10,813 20,000 9,892
Jr., Vice President 1996 91,514 46,759 -0- 2,743
1995 87,932 9,445 -0- 2,587
- --------------------
In 1995, 1996 and 1997, the Company did not provide any other compensation
or long-term compensation plans for executive officers, thus columns (e), (f)
and (h) are omitted from the above table.
(1) Number of securities subject to options reflect the adjustment made as
a result of the stock split in the form of a dividend paid by the
Company to shareholders of record on September 22, 1997.
(2) Amounts shown in this column represent the Company's matching and
annual profit sharing contributions to the Employee Stock Savings Plan
for the benefit of the named individual.
- --------------------
11
RELIABILITY INCORPORATED
PROXY STATEMENT
The Company sponsors an Employee Stock Savings Plan (the "Plan"). All
U.S. employees of the Company who have completed six months of service are
covered by the Plan. The Plan allows an employee to contribute up to 15% of
defined compensation to the Plan. Contributions to the Plan by executive
officers have been limited (8% in 1997 and 1996) by provisions of the
Internal Revenue Code. The Company contributes a matching amount to the Plan
equal to 50% of the employee's contribution, to a maximum of 2%, for
employees who contribute 2% or more. The Company also contributes, as a
voluntary contribution, an amount equal to 1% of the defined compensation of
all participants and, effective January 1, 1997, contributes a profit sharing
amount based on the consolidated profits of the Company. The maximum profit
sharing contribution is 5% of compensation. The Company's profit sharing
contribution was 5% in 1997.
The Company has no long-term compensation plans, awards or arrangements.
Except for the 1997 Stock Option Plan, the Company has no stock appreciation
rights or option plans and grants no options or stock rights. The Company
has no long-term incentive plan, defined benefit or actuarial plan,
employment contracts or termination of employment or change in control
agreements with any executive officer.
Compensation to directors
Non-employee directors are paid a fee of $1,000 per month, participate
in an incentive bonus program essentially similar to the bonus program
described in the Compensation Committee Report and participate in the 1997
Stock Option Plan. Incentive bonuses paid to directors are based on the
Company's performance and profitability. In 1997, each director received a
bonus of $18,180 in addition to their monthly fee, except that Mr. Uhrhan,
who was elected to the Board of Directors in September 1997, received a bonus
payment of $5,302.
Stock Option Plan
In 1997, the Board of Directors adopted, and the shareholders approved,
the 1997 Stock Option Plan ("Option Plan") for officers, directors and key
employees. The objectives of the Option Plan are to promote the interests
of the Company by providing incentives to officers, directors and key
employees to use their best efforts on behalf of the Company and its
stockholders, to reward outstanding performance, and to encourage continued
employment.
Under the Option Plan, the Board of Directors, which acts as Plan
Administrator, determines the officers, directors and key employees to whom
options are granted, the type of options, the number of shares covered by
such options and the option vesting schedule. The Option Plan provides for
the grant of stock options to purchase an aggregate of up to 1,000,000 shares
of the Company's Common Stock. All options are issued at market value on the
date of the grant.
The Board of Directors granted options to purchase 423,700 shares
(including 135,000 shares granted to directors) of Common Stock during 1997.
At December 31, 1997, options outstanding covered a total of 350,000 shares
of Common Stock. Options covering 135,000 shares were exercisable, and
options covering 215,000 shares were not yet exercisable. The purchase
prices for the shares covered by unexercised options ranged from $3.50 to
$20.25, which was market value on the date of grant.
12
RELIABILITY INCORPORATED
PROXY STATEMENT
Option grants in last fiscal year
The following table provides certain information with respect to stock
options granted during the fiscal year ended December 31, 1997, under the
Option Plan, to the executive officers named in the table above.
% of Potential
total realizable value
options at assumed
Number of granted annual rates of
securities to em- Exercise Expira- stock price
underlying ployees price tion appreciation for
options in $/share date option term
Name granted (1) 1997 (2) (3) 5% ($) 10% ($)
(a) (#) (b) (c) (d) (e) (f)(4) (g)(4)
- ----------- ------------ -------- -------- -------- ------- ------
Larry Edwards 70,000 24.3% 3.50 2/25/07 296,800 623,000
James M. Harwell 30,000 10.4 3.50 2/25/07 127,200 267,000
Paul Nesrsta 30,000 10.4 3.50 2/25/07 127,200 267,000
Max T. Langley 30,000 10.4 3.50 2/25/07 127,200 267,000
Robert W.
Hildenbrand, Jr. 20,000 6.9 3.50 2/25/07 84,800 178,000
- --------------------
(1) Number of securities reflect the adjustment made as a result of the
stock split in the form of a dividend paid by the Company to
shareholders of record on September 22, 1997.
(2) Exercise price was the market price on the date of grant which was
adjusted for the subsequent stock split.
(3) Approximately one-third of the options will terminate on each of
3/1/99, 3/1/01, and 3/1/02 if optionee does not own a specified number
of shares on March 1, 1999.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted
to their expiration date. Actual gains, if any, on stock appreciation
exercises will depend on the future performance of the Common Stock and
the date on which the options are exercised.
13
RELIABILITY INCORPORATED
PROXY STATEMENT
Aggregate option exercises in 1997 and outstanding stock option values
as of December 31, 1997
The following table discloses for the executive officers named in the
above tables information regarding options to purchase the Company's Common
Stock which were exercised during 1997 and options to purchase the Company's
Common Stock held at the end of 1997.
Number of secur- Value of
ties underlying unexercised
unexercised in-the-money
options options at
Shares Value at 12/31/97 12/31/97
acquired realized (#) (2) ($) (3)
on upon --------------- ----------------
exercise exercise Exercis- Unexer- Exercis- Unexer-
Name (#) (1) ($) able cisable able cisable
(a) (b) (c) (d) (e)
---- --------- --------- -------- ------ ------- --------
Larry Edwards 23,400 394,992 -0- 46,600 -0- 477,650
James M. Harwell 10,000 130,000 -0- 20,000 -0- 205,000
Paul Nesrsta -0- - 10,000 20,000 102,500 205,000
Max T. Langley 9,000 144,000 1,000 20,000 10,250 205,000
Robert W.
Hildenbrand, Jr. 4,000 73,240 2,800 13,200 28,700 135,300
- --------------------
(1) Options which were exercised before the stock split in the form of a
dividend, which was paid to shareholders of record on September 22,
1997, have been adjusted to show the effect of the split, thus making
all of the share values comparable.
(2) Number of securities reflect the adjustment made as a result of a stock
split in the form of a dividend which was paid by the Company to
shareholders of record on September 22, 1997.
(3) The amounts in these columns are calculated using the difference
between the exercise price and the closing price ($13.75) for the
Common Stock on the Nasdaq National Market on December 31, 1997 of in-
the-money stock options.
- --------------------
14
RELIABILITY INCORPORATED
PROXY STATEMENT
Performance graph
The following performance graph compares (1) the five year cumulative
total return to shareholders for the Company's Common Stock to (2) the Nasdaq
Non-Financial Stocks Index (which includes the Company) and to (3) the Nasdaq
Stock Market (US) CRSP Total Return Index. The graph assumes that the value
of the investment in the Company's Common Stock and each index was $100 at
December 31, 1992 and that all dividends (the Company did not pay any
dividends) were reinvested.
(Graph is displayed here)
Comparison of Five-Year Cumulative Total Return
For Years Ended December 31,
----------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Reliability Common Stock $100 $245 $173 $518 $454 $1,999
Nasdaq Non-Financial Stocks 100 115 111 155 188 221
Nasdaq Stock Market Total Return 100 115 112 159 195 240
Section 16(a) beneficial ownership reporting compliance
The Securities Exchange Act of 1934, as amended, requires that the
Company's directors, executive officers and 10% stockholders (if any) report
to the Securities and Exchange Commission certain transactions involving
Common Stock. Based solely upon a review of Forms 3, 4 and 5 furnished to
the Company and representations received from persons subject to such
reporting requirements, all filings were timely during the year ended
December 31, 1997, except that it was determined that Mr. A.C. Lederer, Jr.,
a director of the Company, failed to file one Form 4 on a timely basis, but
Mr. Lederer filed a Form 5 on February 4, 1998 to report the October 1997
transaction.
Compensation Committee interlocks and insider participation
The compensation committee is composed of Messrs. Lederer, Hampton and
Howard. None of such persons is an officer or employee of the Company or any
of its subsidiaries. No director or executive officer of the Company serves
as a director (or a member of the compensation committee or other group
performing equivalent functions) of another entity, of which any executive
officer or director serves as a director of the Company.
Independent auditors
The Board of Directors has appointed Ernst & Young LLP as independent
auditors of the Company for 1998. Ernst & Young LLP has served as the
Company's independent auditors since 1974. A representative of such firm is
expected to be present at the meeting, will be given the opportunity to make
a statement if he desires to do so and will respond to appropriate questions.
15
RELIABILITY INCORPORATED
PROXY STATEMENT
THE TRANSACTION OF OTHER BUSINESS
As of the date of this proxy statement, the Board of Directors has no
knowledge of business other than that described above which will be presented
for consideration at this meeting. With respect to any other business which
may properly come before the meeting or any adjournment, it is intended that
proxies will be voted in accordance with the judgement of the person or
persons voting them.
Proposals by shareholders for 1999 annual meeting of shareholders
Shareholders desiring to present proposals to the shareholders of the
Company at the 1999 annual meeting of shareholders, and to have such
proposals included in the Company's proxy statement and proxy, must submit
their proposals to the Company so as to be received no later than January 4,
1999.
By order of the Board of Directors,
Larry Edwards
Chairman
Date: March 19, 1998
THE COMPANY WILL FURNISH WITHOUT CHARGE TO ANY PERSON WHOSE PROXY IS
SOLICITED, ON WRITTEN REQUEST FROM SUCH PERSON DELIVERED TO INVESTOR
RELATIONS MANAGER, P.O. BOX 218370, HOUSTON, TEXAS 77218, A COPY OF THE
COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM
10-K FOR 1997.
16
RELIABILITY INCORPORATED PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 29, 1998.
The undersigned hereby appoints Larry Edwards and Max T. Langley,
or either of them, with full power of substitution, attorneys and proxies
of the undersigned to vote all shares of Common Stock of Reliability
Incorporated (the "Company") which the undersigned is entitled to vote at the
annual meeting of shareholders of the Company to be held on April 29, 1998,
at the offices of the Company, at 10:00 a.m., Houston time, and any
adjournment thereof:
1. Election of Directors, Nominees: Larry Edwards, W. L. Hampton, John R.
Howard, Thomas L. Langford, A.C. Lederer, Jr., Philip Uhrhan
---- FOR ---- WITHHELD
/ / all nominees / / from all nominees
---- ----
FOR, except vote withheld from the following nominee(s):
----
/ /
---- --------------------------------------------------
Instruction: to withhold authority to vote for an
individual nominee, write that nominee's name on the line
provided above.
2. In their discretion, upon such other matters as may come before the
meeting or any adjournment thereof.
You are encouraged to specify your choices by marking the appropriate
boxes, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE FOR THE BOARD OF
DIRECTORS' NOMINEES. The Proxies cannot vote your shares unless you sign and
return this Card.
PLEASE DATE AND SIGN ON REVERSE SIDE AND MAIL YOUR PROXY PROMPTLY.
17
RELIABILITY INCORPORATED
PROXY
All as described in the Notice of Annual Meeting of Shareholders and
Proxy Statement, receipt of which is hereby acknowledged.
This proxy will be voted in accordance with the specifications made
hereon. If no contrary specification is made, it will be voted "FOR" each
of the proposals set forth.
-----------------------------------
Signature Date
-----------------------------------
Signature Date
NOTE: Please sign exactly as your name appears
on your stock certificate. When signing
as an executor, administrator, trustee
or other representative, please sign
your full title. All joint owners
should sign.
18