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 0-11(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:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
1
RELIABILITY INCORPORATED
16400 Park Row
Houston, Texas 77084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 28, 1999
To the Shareholders of
Reliability Incorporated:
Reliability Incorporated (the "Company") will hold its 1999 annual meeting
of shareholders on April 28, 1999, at 10:00 a.m. Houston time. The meeting will
be held at the Company's offices at 16400 Park Row, Houston, Texas 77084. The
purposes of the meeting are:
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 designated the close of business on March 5,
1999, as the record date for determining which shareholders are entitled to
notice of, and to vote at, the meeting.
Whether you expect to attend the meeting in person or not, 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 is needed if such
envelope is mailed in the United States.
By order of the Board of Directors,
Max T. Langley
Secretary
Date: March 15, 1999
2
RELIABILITY INCORPORATED
16400 Park Row
Houston, Texas 77084
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
Solicitation and revocation of proxies
The enclosed proxy is solicited by Reliability Incorporated, a Texas
corporation (the "Company"), for use in connection with the 1999 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 paid 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 18, 1999.
Voting at the meeting
Only holders of record of the Company's Common Stock (the "Common Stock")
at the close of business on March 5, 1999 will be entitled to vote at the
meeting. As of such date, 6,631,765 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.
The presence of the holders of a majority of the issued and outstanding
shares of Common Stock entitled to vote, either in person or represented by
proxy, is necessary to constitute a quorum for the transaction of business at
the annual meeting. Proxies that withhold authority to vote for a nominee or
abstain from voting are counted for the purpose of determining whether a quorum
is present. Broker non-votes, which may occur when a broker or nominee has not
received timely voting instructions on certain proposals, are not counted for
the purpose of determining whether a quorum is present. If there are not
sufficient shares represented at the meeting to constitute a quorum, the
meeting may be adjourned until a specified future date to allow the
solicitation of additional proxies.
Directors are elected by a plurality of the votes cast at the meeting. The
nominees that receive the greatest number of votes will be elected, even though
the number of votes received may be less than a majority of the shares
represented in person or by proxy at the meeting. Proxies that withhold
authority to vote for a nominee and broker non-votes will not prevent the
election of such nominee if other shareholders vote for such a nominee.
3
RELIABILITY INCORPORATED
PROXY STATEMENT
OWNERSHIP OF COMMON STOCK
Principal shareholders
As of February 12, 1999, each of the following persons beneficially owned
5% or more of the 6,604,516 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. 443,500 (6.72%) 443,500 (6.72%)
1299 Ocean Avenue,
11th Floor
Santa Monica, CA
Fidelity Low-Priced
Stock Fund 552,500 (8.37%) 552,500 (8.37%)
82 Devonshire Street
Boston, MA
The Qubain Family Trust
3600 Peterson Way 475,000 (7.19%) 475,000 (7.19%)
Santa Clara, CA
- -----------------------------------------
(1) Shares which the shareholder has the power to vote.
(2) Shares which the shareholder has the power to sell.
- -----------------------------------------
Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, has beneficial ownership of 443,500 shares of Common Stock.
Dimensional furnishes investment advice to four investment companies and serves
as an investment manager to certain other investment vehicles, including
commingled group trusts. In its role as investment advisor and investment
manager, Dimensional possesses both voting and investment power over the stock
of the Company. Dimensional disclaims beneficial ownership of all such shares.
Edward C. Johnson, III, owns approximately 12% and Abigail 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 control 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 sell the
Fund's shares.
The information provided above for Dimensional and Fidelity is based on
filings made with the Securities and Exchange Commission pursuant to Section 13
of the Securities Exchange Act of 1934, as amended.
The Company issued 475,000 shares to Basic Engineering Services and
Technology Labs, Inc. ("BEST") on December 3, 1998, in partial payment for
4
RELIABILITY INCORPORATED
PROXY STATEMENT
the purchase of certain assets. BEST filed a Schedule 13D with the Securities
and Exchange Commission and indicated that it was controlled by The Qubain
Family Trust. Subsequently, BEST transferred the shares to The Qubain
Family Trust.
The Company's Employee Stock Savings Plan (the "Plan") owns a total of
546,064 shares (8.27% of the 6,604,516 shares of Common Stock outstanding as of
February 12, 1999) of Common Stock. Each employee of the Company who
participates in the Plan may direct the Trustee of the Plan on how to vote the
stock beneficially owned by such employee and, under certain circumstances, the
employee can direct the sale of some or all of the shares held for his benefit.
No employee owns 5% or more of the Company's shares through the Plan.
Security ownership of management
As of March 5, 1999, 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 is shown below.
Amount and nature of
beneficial ownership
--------------------
Voting Stock
and Other options
Name of individual investment beneficial exercis- Percent
or group power(1) ownership(2) able(3) of class(4)
------------------ --------- ------------ -------- -----------
Larry Edwards 124,600 33,046 56,900 3.13 %
W. L. Hampton 4,000 -0- 9,000 *
John R. Howard 7,100 -0- 8,000 *
Thomas L. Langford 4,000 -0- 30,000 *
A. C. Lederer, Jr. 5,000 -0- 7,000 *
Philip Uhrhan 2,000 -0- 15,000 *
James M. Harwell 16,249 25,056 18,751 *
J.E. (Jim) Johnson 5,600 980 19,700 *
Paul Nesrsta 10,000 13,370 25,000 *
Max T. Langley 28,200 28,498 25,000 1.19
All executive officers
and directors as a
group (ten persons) 206,749 100,950 214,351 7.63
- --------------------
* Less than 1%
(1) Each person has the sole power to vote and sell the shares shown in this
column except that Messrs. Edwards and Langley have shared power with
their respective spouses to vote and sell 124,600 and 28,200 of the
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, 1998. Employees have the right to direct the vote of 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.
5
RELIABILITY INCORPORATED
PROXY STATEMENT
(3) Shares listed in the stock options exercisable column represent shares
that are exercisable by the named individual as of March 5, 1999 and
within 60 days thereafter under the Company's stock option plan.
(4) The percent stated in this column is based on the total beneficial
ownership of the individual or group as a percent of the 6,631,765 shares
of Common Stock outstanding as of March 5, 1999, plus shares acquirable
under stock options on, or within 60 days of, March 5, 1999.
- --------------------
The Company is not aware of any contract or agreement which may at any
subsequent date result in a change in control of the Company.
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.
Other positions and
offices presently
held with the Company
(and other present
Director principal occupation
Name since Age if different)
---- -------- --- ------------------
Larry Edwards 1995 57 Chairman of the Board
of Directors,
President and Chief
Executive Officer
W.L. Hampton 1984 70 (retired)
John R. Howard(1) 1971 65 (attorney-at-law)
Thomas L. Langford 1980 57 (executive vice
president, Stone
and Webster, Inc.)
A.C. Lederer, Jr.(1) 1972 85 (investor)
Philip Uhrhan 1997 49 (vice president
finance, Solvay
America, Inc.)
- ---------------------------
* Less than 1%
(1) 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.
- ---------------------------
6
RELIABILITY INCORPORATED
PROXY STATEMENT
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.
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 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 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 believes that each person proposed to be elected a director is
willing and able to serve if elected. If a situation arises in which any
nominee is unable or unwilling to serve, 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 1998. All
incumbent directors attended 75% or more of the meetings of the Board of
Directors.
The Company's audit committee, composed of Messrs. Langford and Uhrhan, met
two times during 1998, and both members attended the meetings. The audit
committee reviews and approves all services to be performed by independent
auditors and the fees therefor, consults with independent auditors and
management with respect to internal controls and other financial matters and
reviews the results of the year-end audit and other reports of independent
auditors.
7
RELIABILITY INCORPORATED
PROXY STATEMENT
The compensation committee, composed of Messrs. Lederer, Hampton, and
Howard, met two times during 1998. Messrs. Lederer and Howard attended both
meetings; Mr. Hampton attended one meeting. The compensation committee reviews
executive compensation and benefit plans, recommends changes therein, and makes
recommendations to the Board of Directors concerning executive salaries and
incentive plans for the Company.
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. 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. 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 1997, the salary of the CEO was increased 6% and the raises for the
other executive officers ranged from 4% to 7%. In 1998, the salary of the CEO
was increased 14% and the raises for the other executives ranged from 4% to 7%.
The raises in 1997 and 1998 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 1998, 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 plan which applies
to the CEO, all other executive officers, the directors and all salaried
employees of the Company. The incentive plan has three components:
8
RELIABILITY INCORPORATED
PROXY STATEMENT
1. a quantitative measure based on the net income before income tax
of:
(a) the Company as a whole in the case of the CEO and certain
other executive officers, or
(b) the subsidiary, industry segment or division of the Company
for which the executive is responsible;
2. a qualitative measure, which is an evaluation of each individual's
performance during the year, made by the Committee for the CEO and by
the CEO for all other executive officers; and
3. a target bonus.
The Committee's approach to incentive bonuses is to establish incentives
at a pay-for-performance level which allows the executive to be compensated in
total at a competitive rate. Each year the Committee establishes the target
bonus for the CEO and each executive officer and approves the payment of
bonuses, if any, based on achieving predetermined goals. The CEO and executive
officers are only eligible for bonuses when the Company as a whole and/or the
operating division for which such officer is responsible reports income before
income taxes as a percent of revenues equal to or greater than 5%.
1. 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 base salary and ranged from 11% to 179% 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.
2. Target bonuses, for 1998, ranged from 40% of salary for the CEO to
30% for executive officers. The actual bonus paid, in 1998, to the CEO
was 128% of his salary and ranged from 90% to 117% of salary for the
other executive officers. In establishing actual bonuses for 1998, the
Committee and the CEO considered the decrease in revenues, net income
and net income before income tax as a percent of revenues from 26% in
1997 and 20% in 1998.
The level of the Company's income in 1997 and 1998 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 1998 at amounts somewhat below the 75th percentile of the AEA Compensation
Survey and somewhat above the 75th percentile in 1997.
All salaried employees of the Company received bonuses in 1997 and 1998;
such bonuses ranged from 5% to 118% of base salary in 1997 and from 3% to 73%
of base salary in 1998, exclusive of bonuses paid to executive officers.
9
RELIABILITY INCORPORATED
PROXY STATEMENT
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 by 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 1998 fiscal year. Each option was granted at the fair market value
of the Company's Common Stock on the date of grant. In 1998, stock options were
granted to 18 key employees and directors, including the CEO and named
executive officers, for the purchase of 169,000 shares of Common Stock at a
price per share of $13.38, which was the fair market value of the Company's
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 1998, 1997 and 1996 to the
chief executive officer and the four other highest paid executive officers and
directors whose remuneration exceeded $100,000 in 1998.
Annual Long-term
compensation compensation
------------ ------------
(a) (b) (c) (d) (g) (i)
Securities All other
Name and underlying compen-
principal Annual options sation
position Year Salary bonus (#) (1) (2)
---------- ---- ------ ------ ------ -------- -------
Larry Edwards, 1998 $174,760 $230,037 35,000 $12,800
President, Chairman 1997 155,248 362,230 70,000 11,930
of the Board, and 1996 146,309 247,099 -0- 4,376
Chief Executive
Officer
James M. Harwell, 1998 105,560 125,904 15,000 11,282
Vice President 1997 98,600 176,892 30,000 10,951
1996 92,333 116,715 -0- 2,767
J. E. (Jim) Johnson (3) 1998 105,586 108,508 15,000 10,523
Vice President 1997 30,465 35,229 14,700 2,005
1996 6,908 -0- -0- 2,024
Paul Nesrsta, 1998 100,728 111,839 15,000 11,133
Vice President 1997 95,550 150,324 30,000 10,862
1996 91,592 101,982 -0- 2,745
Max T. Langley, Senior 1998 108,864 93,388 15,000 11,387
Vice President, 1997 104,322 133,806 30,000 11,126
Chief Financial 1996 100,601 95,995 -0- 3,016
Officer, Secretary
and Treasurer
- --------------------
In 1996, 1997 and 1998, 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 reflects an 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.
(3) Mr. Johnson terminated employment with the Company in August 1996 and was
re-employed in September 1997; thus his compensation for 1997 and 1996 is
for periods of less than 12 months.
- --------------------
11
RELIABILITY INCORPORATED
PROXY STATEMENT
The Company sponsors an Employee Stock Savings Plan (the "Plan"). All U.S.
employees of the Company who have been employed for six months 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 (9% in 1998 and 8% in 1997 and 1996) by provisions of the Internal
Revenue Code. The Company matches employee contributions in an amount equal to
50% of the employee's contributions. The Company's matching contribution is
limited to 2% of the employee's defined compensation. The Company also makes a
voluntary contribution in an amount equal to 1% of the defined compensation of
all participants. Since January 1, 1997, the Company has made an additional
voluntary profit sharing contribution based on the consolidated profits of the
Company. The maximum profit sharing contribution is 5% of compensation. The
Company's profit sharing contributions were 5% in 1998 and 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. 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 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 1998, each director received a bonus of $12,780 in addition
to the monthly fee.
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 an ownership incentive to officers, directors and key
employees, 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 employees to purchase 169,000
shares (no shares were granted to directors in 1998) of Common Stock during
1998. At December 31, 1998, options outstanding covered a total of 432,000
shares of Common Stock. Options covering 178,000 shares, including shares
exercisable by directors, were exercisable, and options covering 254,000 shares
were not yet exercisable. The purchase prices for the shares covered by
existing 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, 1998, under the
Option Plan, to the executive officers named in the compensation 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 $/share date option term
Name granted 1998 (1) (2) 5% 10% (3)
- ----------- ------------ -------- -------- ---------- ------- --------
(a) (b)(#) (c) (d)$ (e) (f)$ (g)$
- ----------- ------------ -------- -------- ---------- ------- --------
Larry Edwards 35,000 20.7% 13.38 2/24/08 294,500 746,400
James M. Harwell 15,000 8.9 13.38 2/24/08 126,200 319,900
J.E. (Jim) Johnson 15,000 8.9 13.38 2/24/08 126,200 319,900
Paul Nesrsta 15,000 8.9 13.38 2/24/08 126,200 319,900
Max T. Langley 15,000 8.9 13.38 2/24/08 126,200 319,900
- --------------------
(1) The exercise price is the market price on the date of grant.
(2) Approximately one-third of the options will terminate early on March 1,
2000, 2001, and 2002 if optionee does not own a specified number of
shares on March 1, 2000.
(3) 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 1998 and outstanding stock option values
as of December 31, 1998
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 1998 and options to purchase the Company's Common
Stock held at the end of 1998.
Number of secur- Value of
ties underlying unexercised
unexercised in-the-money
options options at
Shares Value at 12/31/98 (1) 12/31/98 (2)
acquired realized --------------- ----------------
on upon Exercis- Unexer- Exercis- Unexer-
Name exercise exercise able cisable able cisable
---- --------- --------- -------- ------ ------- --------
(a) (b)(#) (c)($) (d)(#) (e)(#) (f)($) (g)($)
---- --------- --------- -------- ------ ------- --------
Larry Edwards -0- -0- 23,400 58,200 17,600 17,400
James M. Harwell -0- -0- 10,000 25,000 7,500 7,500
J.E. (Jim) Johnson -0- -0- 4,900 24,800 -0- -0-
Paul Nesrsta -0- -0- 20,000 25,000 15,000 7,500
Max T. Langley 1,000 7,250 10,000 25,000 7,500 7,500
- --------------------
(1) Number of securities reflects 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.
(2) The amounts in these columns are calculated using the difference between
the exercise price and the closing price ($4.25) for the Common Stock on
The Nasdaq Stock Market on December 31, 1998 of in-the-money stock
options.
- --------------------
14
RELIABILITY INCORPORATED
PROXY STATEMENT
Performance graph
The following performance graph compares the five year cumulative total
return to shareholders for the Company's Common Stock to (1) the Nasdaq Non-
Financial Stocks Index (which includes the Company) and to (2) 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, 1993 and that all dividends (the Company did not pay any cash
dividends) were reinvested.
(Graph is displayed here)
Comparison of Five-Year Cumulative Total Return
For Years Ended December 31,
---------------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Reliability Common Stock $100 $70 $211 $185 $815 $252
Nasdaq Non-Financial Stocks 100 96 134 163 191 279
Nasdaq Stock Market Total Return 100 98 138 170 209 293
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, 1998.
Compensation Committee interlocks and insider participation
The compensation committee is composed of Messrs. Lederer, Hampton and
Howard. None of such persons is or has been 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, any of whose
executive officers or directors 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 1999. 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
so desired and will respond to appropriate questions.
Certain transactions
On December 3, 1998, the Company purchased certain assets associated with
two integrated circuit testing and conditioning service labs from Basic
Engineering Services and Technology Labs, Inc. ("BEST"). The service labs are
15
RELIABILITY INCORPORATED
PROXY STATEMENT
located in Austin, Texas and Singapore. As partial consideration for the
purchase, the Company issued 475,000 shares of Common Stock to BEST, and BEST
became a 7% shareholder of the Company. The Company also entered into a two
year consulting agreement with BEST to provide business transition advice and
marketing and customer support services. The Company pays annual fees of
$150,000 to BEST under the consulting agreement. BEST subsequently transferred
the 475,000 shares of Common Stock to The Qubain Family Trust, which controls
BEST (see principal shareholders).
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. If any other business properly comes before
the meeting or any adjournment, it is intended that proxies will be voted in
accordance with the judgment of the person or persons voting the proxy.
Proposals by shareholders for 2000 annual meeting of shareholders
Shareholders desiring to present proposals to the shareholders of the
Company at the 2000 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 3, 2000.
By order of the Board of Directors,
Larry Edwards
Chairman
Date: March 15, 1999
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 1998.
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 28, 1999.
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 28, 1999, 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, the proxies are authorized to vote 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