-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OhcaxPoC32yXp+YBuI8tJL0vR+uRImlP4mTAdYcYR8GUqXEPzM7bsogqMcOY0aHq AzUL1zeDQisE9BTL08Js4A== 0000034285-00-000007.txt : 20000515 0000034285-00-000007.hdr.sgml : 20000515 ACCESSION NUMBER: 0000034285-00-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RELIABILITY INC CENTRAL INDEX KEY: 0000034285 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 750868913 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07092 FILM NUMBER: 627210 BUSINESS ADDRESS: STREET 1: 16400 PARK ROW STREET 2: P O BOX 218370 CITY: HOUSTON STATE: TX ZIP: 77218 BUSINESS PHONE: 2814920550 FORMER COMPANY: FORMER CONFORMED NAME: FAIRLANE INDUSTRIES INC DATE OF NAME CHANGE: 19800519 10-Q 1 10-Q 1ST QUARTER 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2000 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. 6,668,265 -- Common Stock -- No Par Value as of May 12, 2000 10Q12K.doc 1 RELIABILITY INCORPORATED FORM 10-Q TABLE OF CONTENTS March 31, 2000 PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Consolidated Balance Sheets: March 31, 2000 and December 31, 1999 3-4 Consolidated Statements of Operations: Three Months Ended March 31, 2000 and 1999 5 Consolidated Statements of Cash Flows: Three Months Ended March 31, 2000 and 1999 6 Notes to Consolidated Financial Statements 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-18 Item 3. Quantitative and Qualitative Disclosure About Market Risk 18 PART II - OTHER INFORMATION Item 1. through Item 3. Not applicable. 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Not applicable. 19 Item 6. Exhibits and Reports on Form 8-K. 19 Signatures 20 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 PART I - FINANCIAL INFORMATION Item 1. Financial Statements RELIABILITY INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS March 31, December 31, 2000 1999 (unaudited) (Note 1) Current assets: Cash and cash equivalents $13,237 $13,573 Accounts receivable 3,156 1,267 Inventories 1,331 1,616 Refundable income taxes 551 551 Other current assets 827 580 Deferred tax assets 196 351 ------ ------ Total current assets 19,298 17,938 ------ ------ Property, plant and equipment, at cost: Machinery and equipment 14,006 13,981 Buildings and improvements 5,021 5,021 Land 530 530 ------ ------ 19,557 19,532 Less accumulated depreciation 12,494 11,937 ------ ------ 7,063 7,595 ------ ------ Assets held for sale 2,135 2,135 Investments 730 647 Goodwill, net of accumulated amortization of $75 and $61 in 2000 and 1999, respectively 320 334 ------ ------ $29,546 $28,649 ====== ====== See accompanying notes 3 RELIABILITY INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 2000 1999 (unaudited) (Note 1) Current liabilities: Accounts payable $ 443 $ 291 Accrued liabilities 1,250 1,029 Income taxes payable 238 145 Accrued shut-down and restructuring costs 38 72 ------ ------ Total current liabilities 1,969 1,537 ------ ------ Deferred tax liabilities 667 718 Stockholders' equity: Common stock, without par value; 20,000,000 shares authorized; 6,678,765 and 6,631,765 shares issued in 2000 and 1999, respectively 9,573 9,389 Retained earnings, net of $7,772 in treasury stock retired in 1999 17,099 17,053 Accumulated other comprehensive income (loss) 238 (48 ) ------ ------ Total stockholders' equity 26,910 26,394 ------ ------ $29,546 $28,649 ====== ====== See accompanying notes 4 RELIABILITY INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended March 31, 2000 1999 (unaudited) Revenues $4,602 $4,320 Costs and expenses: Cost of revenues 2,897 2,759 Marketing, general and administrative 1,385 1,503 Research and development 393 476 ----- ----- 4,675 4,738 ----- ----- Operating income (loss) (73 ) (418 ) Interest income, net 224 158 ----- ----- Income (loss) before income taxes 151 (260 ) ----- ----- Provision (benefit) for income taxes: Current 145 (118 ) Deferred (40 ) 120 ----- ----- 105 2 ----- ----- Net income (loss) $ 46 $ (262 ) ===== ===== Earnings (loss) per share: Basic $ .01 $ (.04 ) ===== ===== Diluted $ .01 $ (.04 ) ===== ===== Weighted average shares: Basic 6,646 6,616 ===== ===== Diluted 6,779 6,616 ===== ===== See accompanying notes 5 RELIABILITY INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31, 2000 1999 (unaudited) Cash flows from operating activities: Net income (loss) $ 46 $ (262 ) Adjustments to reconcile net income (loss) to cash (used) by operating activities: Depreciation and amortization 574 604 Provision for deferred income taxes (40 ) 120 Provision for inventory obsolescence 42 2 (Gain) loss on disposal of fixed assets (37 ) 19 Changes in operating asset and liabilities: Accounts receivable (1,889 ) 29 Inventories 243 28 Other current assets 87 (43 ) Accounts payable 152 92 Accrued liabilities 221 (1,585 ) Income taxes payable 93 (147 ) Cash payments charged to restructuring reserve (34 ) (29 ) ------ ------ Total adjustments (588 ) (910 ) ------ ------ Net cash (used) by operating activities (542 ) (1,172 ) ------ ------ Cash flows from investing activities: Expenditures for property and equipment (28 ) (390 ) Proceeds from sale of equipment 37 - (Decrease) in other long-term assets - (19 ) ------ ------ Net cash provided (used) by investing activities 9 (409 ) ------ ------ Cash flows from financing activities: Proceeds from issuance of common stock pursuant to stock option plan 238 128 Borrowings under revolving credit facility 446 - Payments under revolving credit facility (446 ) - Payments on long-term debt - (274 ) Other (54 ) (7 ) ------ ------ Net cash provided (used) by financing activities 184 (153 ) ------ ------ Effect of exchange rate changes on cash 13 (4 ) ------ ------ Net (decrease) in cash (336 ) (1,738 ) Cash and cash equivalents: Beginning of period 13,573 15,702 ------ ------ End of period $13,237 $13,964 ====== ====== Supplemental disclosures: Interest paid $ - $ 10 ====== ====== Income taxes paid $ 39 $ 35 ====== ====== See accompanying notes 6 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of business - ----------------------- Reliability Incorporated ("Reliability" or the "Company") 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 March 31, 2000, are provided principally to two customers in Singapore. The Company acquired, in December 1998, assets of a company that provided services to customers in Austin, Texas and Singapore. The Company closed the Austin facility in September 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, 1999 have been reclassified to conform to the 2000 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 March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The balance sheet at December 31, 1999 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, 1999. Accounting Estimates - -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. 7 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 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 three month periods ended: March 31, 2000 1999 Provision (benefit) at statutory rate $ 51 $ (88 ) Tax effects of: Foreign losses for which a tax benefit is not available 65 83 Lower effective income tax rates related to undistributed foreign earnings (16 ) (1 ) Other 5 8 ---- --- Provision for income taxes $ 105 $ 2 ==== === Inventories - ----------- Inventories are stated at the lower of standard cost (which approximates first-in, first-out) or market (replacement cost or net realizable value) and include (in thousands): March 31, December 31, 2000 1999 Raw materials $ 706 $ 966 Work-in-progress 513 149 Finished goods 112 501 ----- ----- $1,331 $1,616 ===== ===== Inventories are presented net of reserves for excess and obsolete inventories of $465,000 and $428,000 at March 31, 2000 and December 31, 1999, respectively. 8 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 Investments in Marketable Equity and Debt Securities - ---------------------------------------------------- Investments 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 re-evaluates 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 (benefit) of $120,000 and $(24,000) at March 31, 2000 and December 31, 1999), if any, reported as a separate component of stockholders' 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 preferred stock is classified as a held to maturity security. The preferred stock represents a convertible bond that was converted into 562,000 shares of preferred stock of the issuer in January 2000 and is stated at cost. It is not practicable to estimate the fair value of the preferred stock, as the issuer is in the early stages of product development. The following table summarizes the Company's investment in securities (in thousands) at the dates indicated. March 31, December 31, 2000 1999 Preferred stock, at cost $ 500 $500 Marketable equity securities, at cost 422 422 Unrealized net gains (losses) on marketable securities 358 (72) ----- --- 1,280 850 Amount classified as current 550 203 ----- --- $ 730 $647 ===== === 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. Interest is payable at the bank's prime rate minus 1/4% (8.75% at March 31, 2000). Any 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 March 31, 2000, and there were no balances outstanding under the agreement at March 31, 2000 or December 31, 1999. 9 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 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. $293,000) at the bank's prime rate plus 2% (7.5% at March 31, 2000). There were no balances outstanding at March 31, 2000, but amounts utilized under letter of credit commitments totaled $242,000, resulting in credit availability of $51,000 at March 31, 2000. The loan is collateralized by all assets of the subsidiary and requires maintenance of a minimum net worth of the Singapore subsidiary. Payment of dividends requires written consent from the bank, and continuation of the credit facility is at the discretion of the bank. Interest income (expense) for the three month periods ended March 31, is presented net as follows (in thousands): 2000 1999 Interest income $225 $168 Interest (expense) (1 ) (10 ) --- --- Interest income, net $224 $158 === === 3. SEGMENT INFORMATION The following table sets forth reportable segment information (in thousands) for the periods indicated: Three Months Ended March 31, 2000 1999 Revenues from external customers: Testing Products $2,105 $ 966 Services 2,002 2,832 Power Sources 495 522 Inter-segment revenues: Testing Products 22 55 Services - 6 Eliminations (22 ) (61 ) ----- ----- $4,602 $4,320 ===== ===== Operating income (loss): Testing Products (43 ) $ (677 ) Services 238 468 Power Sources (169 ) (116 ) General corporate expenses (99 ) (93 ) ----- ----- Operating income (loss) $ (73 ) $ (418 ) ===== ===== 10 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 Total assets by reportable segment as of the dates indicated are as follows (in thousands): March 31, December 31, 2000 1999 Testing Products $ 7,828 $ 6,687 Services 5,367 5,783 Power Sources 1,656 1,647 General corporate assets 14,695 14,532 ------ ------ $29,546 $28,649 ====== ====== 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): Three Months Ended March 31, 2000 1999 Net income (loss) $ 46 $ (262 ) ===== ===== Weighted average shares outstanding 6,646 6,616 Net effect of dilutive stock options based on the treasury stock method 133 - ----- ----- Weighted average shares and assumed conversions 6,779 6,616 ===== ===== Earnings (loss) per share: Basic $ .01 $ (.04 ) ===== ===== Diluted $ .01 $ (.04 ) ===== ===== Options to purchase 191,000 and 608,000 shares of common stock of the Company were excluded from the computation of diluted earnings (loss) per share during 2000 and 1999, respectively, as inclusion of these options in the calculations would have been anti-dilutive. 11 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 5. SHUT-DOWN AND RESTRUCTURING OF FACILITIES The following table reports activity in the accrued shut-down and restructuring accounts during the three month period ended March 31, 2000 and year ended December 31, 1999 (in thousands): 2000 1999 Accrued costs at beginning of period $ 72 $ 300 Provision for shut-down and restructuring: Employee severance - 30 Other expenses - 80 ---- ---- - 110 ---- ---- Cash payments charged to accounts: Employee severance - (72 ) Lease payments (20 ) (101 ) Other payments (14 ) (27 ) ---- ---- (34 ) (200 ) ---- ---- Disposal of Singapore assets - (138 ) ---- ---- Accrued costs at end of period $ 38 $ 72 ==== ==== The Company's Austin, Texas facility (which was part of the Services segment) provided services principally to one customer. 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. The Company did not include 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. 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. Micron accounted for 8% of 1999 fiscal year consolidated revenues and completely discontinued utilizing the Company's services during the fourth quarter of 1999. 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. 12 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 6. COMPREHENSIVE INCOME The only difference between total comprehensive income (loss) and net income (loss) that is reported on the Consolidated Statements of Operations arises from unrealized gains and losses on available-for-sale securities. The Company's total comprehensive income for the three months ended March 31, 2000 was $391,000. There were no items of comprehensive income during the three month period ended March 31, 1999; thus, comprehensive income was equal to the $262,000 loss for the 1999 three month period. 13 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2000 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, 1999 and March 31, 1999 are generally attributable to changes in cash flows from operating activities, including the effect of operating at revenue levels below historical levels, the effects of changes in operations related to the acquisition of certain assets in the Services segment in December 1998 and accelerating payments on and payment in full of a mortgage during 1999. In addition, the shut-down of the Company's Austin, Texas Services facility in 1999 and changes in operations at the Company's Singapore subsidiary, throughout 1999, did and will in the future, affect the Company's financial condition. In addition, purchasing marketable equity securities and changes in the levels of capital expenditures affected the Company's financial condition. 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 three months ended March 31, and twelve months ended December 31, 1999: March 31, December 31, March 31, 2000 1999 1999 Working capital: Working capital (in thousands) $17,329 $16,401 $15,442 Current ratio 9.8 to 1 11.7 to 1 6.2 to 1 Equity ratios: Total liabilities to equity 0.1 0.1 0.1 Assets to equity 1.1 1.1 1.1 Profitability ratios: Gross profit 37% 35 % 36 % Return on revenues 1% (8)% (6)% Return on assets (annualized) 1% (4)% (3)% Return on equity (annualized) 1% (5)% (4)% 14 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2000 The Company's financial condition remained strong during 2000. Working capital increased to $17.3 million at March 31, 2000, from $16.4 million at December 31, 1999, and the ratio of current assets to current liabilities increased from 6.2 to 1 at March 31, 1999, to 9.8 to 1 at March 31, 2000. The increase in the current ratio resulted from a decline in the level of operations during 1999 and 2000 compared to 1998, 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 period of declining production and were converted to cash. Cash provided by certain components of cash flows from operations in 1999 were used to reduce and pay off a mortgage payable, acquire assets in the Services segment, purchase fixed assets, maintain the amount of short-term interest-bearing cash investments and, in 1999, reduce accrued liabilities, pay off a note and purchase certain equity securities. The Company continues to maintain stringent expense control measures, thus minimizing the negative impact on the Company's financial condition while the Company is operating at reduced revenue levels. The Company maintains a credit facility with a financial institution to provide credit availability to supplement cash provided by operations, if required. Credit availability provided by the facility was reduced by the Company from $4.0 million to $1.0 million in 1999. The Company's Singapore subsidiary maintains a small overdraft facility to support the subsidiary's credit commitments. Net cash used by operating activities for the three months ended March 31, 2000 was $0.5 million, compared with $1.2 million used by operations in the first three months of 1999. The principal item contributing to the cash used by operations in 2000 was a $1.9 million increase in accounts receivable. Cash used by operations in 2000 was reduced by $0.6 million of depreciation and amortization and a $0.3 million decrease in inventories. Accrued liabilities increased $0.2 million in 2000, resulting from a general increase in most items included in accrued liabilities due to accrual throughout the year of various items, such as property taxes, that are paid in the following year. The increase in accounts receivable resulted from the fact that the Company sold $2.0 million of Testing Products in January 2000 and the accounts receivable related to that sale will be collected in 23 monthly installments. Inventories decreased due to shipments in the first quarter of 2000 of Testing Products items that were included in inventory at December 31, 1999. The increase in other current assets and investments relates to an increase in the unrealized gains on marketable securities as of March 31, 2000. Increases in demand for the Company's products resulted in backlog increasing from $0.7 million at September 30, 1999, to $2.4 million at December 31, 1999 and to $3.2 million at March 31, 2000. The current forward-looking forecast indicates revenues for the second quarter of 2000 will be between $3.6 and $4.5 million, compared to revenues of $2.3 million for the fourth quarter of 1999 and $4.3 million for the first quarter of 1999, resulting in net income being a breakeven or a small loss. The Company is beginning to see some signs that new orders may increase in the near future. Some of these signs are increases in demand 15 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2000 for products sold by the semiconductor industry, increases in inquiries by certain customers and forecasts by certain customers needing new or retrofit capacity. In general, these signs provide some visibility that demand for the Company's products should increase, but actual timing of the increase is difficult to forecast. In addition, changes in product mix and increases in demand for ICs that are sold by customers of the Singapore Services facility have resulted in increased demand for services provided by the facility. The Company is currently negotiating with a customer to provide upgraded and additional capacity at the facility. These changes could result in an increase in revenues in the Services segment. During January 2000, the Company's common stock traded between $3.00 and $4.00 per share. The Company announced, on February 1, 2000, a plan to repurchase for cash up to 1.5 million shares of its common stock. Shares that are repurchased would be used to issue stock when stock options are exercised, make contributions to the Company's 401(k) plan, or for acquisitions. The stock has traded above the January 2000 price range during most of the time since the announcement was made. The stock traded in the $4.00 range during April 2000 and the Company has repurchased a total of 14,500 shares as of May 12, 2000. Capital expenditures during the first three months of 2000 and 1999 were $28,000 and $390,000, 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 capital expenditures for 2000 may be between $3.0 and $4.0 million. A significant portion of the expenditures would be for equipment required by the Singapore subsidiary to support changes and increases in services provided to its customers, as noted earlier in this discussion. 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 2000. RESULTS OF OPERATIONS Three months ended March 31, 2000 compared to three months ended March 31, 1999. Revenues. Revenues for the 2000 three month period were $4.6 million compared to $4.3 million for the 1999 period. Revenues in the Testing Products segment increased $1.1 million, Power Sources revenues decreased slightly and Services revenues decreased $0.8 million. Revenues in the Testing Products segment were $2.1 million for the first quarter of 2000, which is an increase of 118% from the first quarter of 1999. Revenues from the sale of CRITERIA products increased $0.2 million or 40% and revenues from the sale of INTERSECT products increased $0.9 million or 175%. An increase in demand for IC products sold by customers of the Company's Testing Products segment resulted in an increase in the number of Criteria systems upgraded during the 2000 quarter and the sale of upgraded Intersect systems to a customer. 16 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2000 Revenues in the Services segment for the 2000 period were $2.0 million, a decrease of 29% compared to the corresponding 1999 period. The decrease resulted from the closing of the Company's Austin, Texas Services facility at the end of the third quarter of 1999. Revenues at the Singapore Services facility increased 5% in the 2000 period compared to the 1999 period and increased 33% in the 2000 period compared to the fourth quarter of 1999. The increase at the Singapore facility resulted from product mix changes and increased demand for products sold by a customer of the subsidiary, resulting from the customer introducing a new generation of microprocessors. Revenues in the Power Sources segment were $0.5 million for the first quarter of 2000, reflecting a 5% decrease from the 1999 period. Revenues were affected by general reductions in demand, price competition, an aging product line and a decline in market penetration. Costs and Expenses. Total costs and expenses for the first quarter of 2000 decreased $0.1 million or 1% compared to the 7% revenue increase of $0.3 million. Cost of revenues increased $0.1 million; marketing, general and administrative expenses decreased $0.1 million and research and development expenses decreased $0.1 million. The increase in gross profit from 36% in the 1999 period to 37% in the 2000 period is attributable to an increase in the gross profit in the Testing Products segment resulting from volume increases reduced by decreases in the gross profit in the Services and Power Sources segments. The decrease in the Power Sources segment relates to price decreases related to price competition and the decrease in the Services segment relates to an increase in depreciation expense resulting from a faster write-off of certain IC testers, due to an anticipated shorter product life of the ICs that are processed on the testers. Marketing, general and administrative expenses for the 2000 period decreased $0.1 million. The decrease is related to a decrease in expenses due to closing of the Austin Services facility and the effect of stringent expense controls, reduced somewhat by increases in volume related expenses, such as commissions, warranty and similar expenses resulting from the increase in revenues in the Testing Products segment Research and development expenses for the 2000 period decreased $0.1 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 increase in interest income during the 2000 period relates primarily to interest earned on an accounts receivable amount that is being collected over a two-year period and a general increase in interest rates paid on investments, reduced by a 6% decrease in cash investments. The Company's effective tax rate was 70% for the three-month period ended March 31, 2000, compared to a $2,000 provision related to the $260,000 loss for the 1999 period. The principal items affecting the Company's tax rate in both years were tax benefits not available to a foreign subsidiary due to limitations on net operating loss deductions and a lower effective tax rate related to earnings of the Singapore subsidiary. 17 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2000 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, 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, 1999. 18 RELIABILITY INCORPORATED OTHER INFORMATION PART II. OTHER INFORMATION Items 1 through 3. Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders. (a) Reliability Incorporated held its annual meeting of shareholders on April 26, 2000 (b) At the meeting, shareholders elected the following persons as directors; no other director continued in office except those elected at the meeting: Larry Edwards W. L. Hampton John R. Howard Thomas L. Langford Philip Uhrhan (c) The shareholders of Reliability Incorporated also approved an amendment to the Reliability Incorporated 1997 Stock Option Plan. The amendment increased the maximum number of shares of Common Stock reserved for issuance from 1,000,000 to 1,500,000. A copy of the amended Plan is attached to this report as Exhibit 10.1. The results of the votes of shareholders are as follows: Director Nominee: For Abstain Larry Edwards 5,440,274 594,783 W. L. Hampton 4,952,234 1,082,823 John R. Howard 5,440,346 594,711 Thomas L. Langford 4,968,046 1,067,011 Philip Uhrhan 4,966,096 1,068,961 Stock Option Plan: For Against Abstain 2,003,424 (1) 1,460,771 493,856 (1) A total of 2,077,006 shares did not cast votes on the proposal. In accordance with the Company's by-laws, 3,958,051 shares were represented and entitled to vote on the proposal. Item 5. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. Description 10.1 Reliability Incorporated Amended and Restated 1997 Stock Option Plan 27. Financial Data Schedule (b) Reports on Form 8-K. On February 15, 2000, the Company filed a Current Report on Form 8-K, with respect to its announcement on February 1, 2000 of a plan to repurchase up to 1,500,000 shares of its common stock. 19 RELIABILITY INCORPORATED SIGNATURES March 31, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RELIABILITY INCORPORATED (Registrant) May 12, 2000 /s/Larry Edwards President and Chief Executive Officer May 12, 2000 /s/Max T. Langley Sr. Vice President - Finance and Chief Financial Officer 20 EX-10.1 2 AMENDED 1997 STOCK OPTION PLAN RELIABILITY INCORPORATED 1997 STOCK OPTION PLAN February 26, 1997 Amended and Restated February 23, 2000 10QX102K.doc 1 TABLE OF CONTENTS PAGE ARTICLE I. GENERAL 3 Section 1.1. Purpose. 3 Section 1.2. Administration. 3 Section 1.3. Eligibility for Participation. 4 Section 1.4. Types of Awards Under Plan. 4 Section 1.5. Aggregate Limitation on Awards. 4 Section 1.6. Effective Date and Term of Plan. 4 ARTICLE II. STOCK OPTIONS 5 Section 2.1. Award of Stock Options. 5 Section 2.2. Stock Option Agreements. 5 Section 2.3. Stock Option Price. 5 Section 2.4. Term and Exercise. 5 Section 2.5. Manner of Payment. 5 Section 2.6. Issuance of Certificates. 5 Section 2.7. Death, Retirement and Termination of Employment of Optionee 5 ARTICLE III. INCENTIVE STOCK OPTIONS 6 Section 3.1. Award of Incentive Stock Options. 6 Section 3.2. Incentive Stock Option Agreements. 6 Section 3.3. Incentive Stock Option Price. 7 Section 3.4. Term and Exercise. 7 Section 3.5. Maximum Amount of Incentive Stock Option Grant. 7 Section 3.6. Death of Optionee. 7 Section 3.7. Retirement or Disability. 7 Section 3.8. Termination for Other Reasons. 7 Section 3.9. Applicability of Stock Option Sections. 8 Section 3.10. Code Requirements. 8 ARTICLE IV. MISCELLANEOUS 8 Section 4.1. General Restriction. 8 Section 4.2. Non-Assignability. 8 Section 4.3. Withholding Taxes. 8 Section 4.4. Right to Terminate Employment. 8 Section 4.5. Non-Uniform Determinations. 9 Section 4.6. Rights as a Stockholder. 9 Section 4.7. Definitions. 9 Section 4.8. Leaves of Absence. 9 Section 4.9. Newly Eligible Employees. 10 Section 4.10. Adjustments. 10 Section 4.11. Changes in the Company's Capital Structure. 10 Section 4.12. Amendment of the Plan. 11 2 RELIABILITY INCORPORATED 1997 STOCK OPTION PLAN Amended and Restated February 23, 2000 ARTICLE I. GENERAL Section 1.1. Purpose. The purposes of this Stock Option Plan (the "Plan") are to: (1) associate the interests of the officers, directors and key employees of RELIABILITY INCORPORATED and its subsidiaries (collectively referred to as the "Company") closely with the Company's stockholders to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders; (2) provide management with a proprietary ownership interest in the Company commensurate with Company performance, as reflected in increased stockholder value; (3) maintain competitive compensation levels thereby attracting and retaining highly competent and talented directors and employees; and (4) provide an incentive to management for continuous employment with the Company. Certain capitalized terms are defined in Section 4.7. Section 1.2. Administration. (a) The Plan shall be administered by (i) the Board of Directors of the Company, (ii) any duly constituted committee of the Board of Directors consisting of at least two members of the Board of Directors, all of whom shall be Non-Employee Directors, or (iii) any other duly constituted committee of the Board of Directors. Such administrating party shall be referred to herein as the "Plan Administrator". (b) The Plan Administrator shall have the authority, in its sole discretion and from time to time to: (i) designate the directors, officers and key employees of the Company eligible to participate in the Plan; (ii) grant Awards provided in the Plan in such form and amount as the Plan Administrator shall determine; (iii) impose such limitations, restrictions and conditions, not inconsistent with this Plan, upon any such Award as the Plan Administrator shall deem appropriate; and (iv) interpret the Plan and any agreement, instrument or other document executed in connection with the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Plan Administrator on all matters relating to the Plan shall be in its sole discretion and shall be final, conclusive and binding upon all persons, including the Company, any participant, any stockholder of the Company, any director and any employee. No member of any committee acting as Plan Administrator shall be liable for any action taken or decision made relating to the Plan or any Award thereunder. 3 Section 1.3. Eligibility for Participation. Participants in the Plan shall be selected by the Plan Administrator from the directors, executive officers and other key employees of the Company. In making this selection and in determining the form and amount of awards, the Plan Administrator shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company and past and potential contributions to the Company's profitability and growth. Section 1.4. Types of Awards Under Plan. Awards under the Plan may be in the form of either or both of the following: (i) Stock Options, as described in Article II; and/or (ii) Incentive Stock Options, as described in Article III. Awards under the Plan shall be evidenced by an Award Agreement between the Company and the recipient of the Award, in form and substance satisfactory to the Plan Administrator, and not inconsistent with this Plan. Award Agreements may provide such vesting schedules for Stock Options and Incentive Stock Options, and such other terms, conditions and provisions as are not inconsistent with the terms of this Plan. Subject to the express provisions of the Plan, and within the limitations of the Plan, the Plan Administrator may modify, extend or renew outstanding Award Agreements, or accept the surrender of outstanding Awards and authorize the granting of new Awards in substitution therefor. However, except as provided in this Plan, no modification of an Award shall impair the rights of the holder thereof without his consent. Section 1.5. Aggregate Limitation on Awards. (a) Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of the Company ("Common Stock"). The maximum number of shares of Common Stock which may be issued pursuant to Awards issued under the Plan shall be 1,500,000. (b) For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan at any time, all the shares issued (including the shares, if any, withheld for tax withholding requirements) under the Plan as well as all shares subject to Option shall be counted. (c) Shares tendered by a participant as payment for shares issued upon exercise of a Stock Option or Incentive Stock Option shall be available for issuance under the Plan. Any shares of Common Stock subject to a Stock Option or Incentive Stock Option which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan. Section 1.6. Effective Date and Term of Plan. (a) The Plan shall become effective on the date adopted by the Board of Directors, subject to approval by the holders of a majority of the shares of Common Stock present in person or by proxy at a meeting at which a quorum is present. (b) The Plan and all Awards made under the Plan shall remain in effect until such Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards. 4 ARTICLE II. STOCK OPTIONS Section 2.1. Award of Stock Options. The Plan Administrator may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Plan Administrator may prescribe, grant to any participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock ("Stock Options") allotted by the Plan Administrator. The date a Stock Option is granted shall mean the date selected by the Plan Administrator as of which the Plan Administrator allots a specific number of shares to a participant pursuant to the Plan. Section 2.2. Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the holder of a Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Plan Administrator may from time to time determine. Section 2.3. Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of a Stock Option shall be 100% of the Fair Market Value of a share of Common Stock on the date the Stock Option is granted. Section 2.4. Term and Exercise. A Stock Option shall not be exercisable prior to six months from the date of its grant, unless a shorter period is provided by the Plan Administrator or by another Section of this Plan, and may be subject to such vesting scheduling and term ("Option Term") as the Plan Administrator may provide in an Award Agreement. No Stock Option shall be exercisable after the expiration of its Option Term. Section 2.5. Manner of Payment. Each Award Agreement providing for Stock Options shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the Option Price for such shares with cash or, if duly authorized by the Plan Administrator, Common Stock. Section 2.6. Issuance of Certificates. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. Upon issuance of a certificate, the Optionee shall become a stockholder of the Company with respect to Common Stock represented by such share certificates and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a stockholder. Section 2.7. Death, Retirement and Termination of Employment of Optionee. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Plan Administrator: (a) Upon the death of the Optionee, any rights to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within the sooner of (i) the remaining Option Term of the Stock Option, and 5 (ii) the expiration of one year from the date of death. The provisions of this Section shall apply notwithstanding the fact that the Optionee's employment may have terminated prior to death, but only to the extent of any rights exercisable on the date of death. (b) Upon termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Plan Administrator), the Optionee may exercise any Stock Options exercisable on the date of termination of employment, provided such option exercise occurs within the sooner of (i) the remaining Option Term of the Stock Option, and (ii) the expiration of six months (in the case of permanent disability) or three months (in the case of retirement) of the date of termination. (c) Upon termination of the Optionee's employment for any reason other than death, disability or retirement, the Optionee may exercise any Stock Options exercisable on the date of termination of employment, provided such option exercise occurs within the sooner of (i) the remaining Option Term of the Stock Option, and (ii) the expiration of thirty days of the date of termination. ARTICLE III. INCENTIVE STOCK OPTIONS Section 3.1. Award of Incentive Stock Options. The Plan Administrator may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Plan Administrator may prescribe, grant to any officer or key employee who is a participant in the Plan one or more "incentive stock options" (intended to qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986 ("Code"), as amended ("Incentive Stock Options")) to purchase for cash or shares the number of shares of Common Stock allotted by the Plan Administrator. No Incentive Stock Options shall be granted under the Plan after the tenth anniversary of the effective date of the Plan. The date an Incentive Stock Option is granted shall mean the date selected by the Plan Administrator as of which the Plan Administrator allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any officer or employee who owns 10% or more of the Company's voting stock (directly or beneficially) unless the requirements of the code are met. Section 3.2. Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the holder of an Incentive Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby, and in such form as the Plan Administrator may from time to time determine. Section 3.3. Incentive Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted, except as otherwise required by Section 422 of the Code, as amended. 6 Section 3.4. Term and Exercise. Each Incentive Stock Option shall not be exercisable prior to six months from the date of its grant, unless a shorter period is provided by the Plan Administrator or another Section of this Plan, may be exercised during a period, established by the Plan Administrator, of up to ten years from the date of grant thereof (the "Option Term") and may be subject to such vesting scheduling as the Plan Administrator may provide in an Award Agreement. No Incentive Stock Option shall be exercisable after the expiration of its Option Term. Section 3.5. Maximum Amount of Incentive Stock Option Grant. The aggregate Fair Market Value (determined on the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options first become exercisable by an Optionee during any calendar year (under all plans of the Optionee's employer corporations and their parent and subsidiary corporations) shall not exceed $100,000. Section 3.6. Death of Optionee. (a) Upon the death of the Optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within the sooner of the remaining Option Term of the Incentive Stock Option and one year after the Optionee's death. (b) The provisions of this Section shall apply notwithstanding the fact that the Optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. Section 3.7. Retirement or Disability. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Plan Administrator, upon the termination of the Optionee's employment by reason of permanent disability or retirement (as each is determined by the Plan Administrator), the Optionee may exercise any Incentive Stock Options exercisable on the date of termination, provided such option exercise occurs within the sooner of (i) the remaining Option Term of the Incentive Stock Option, and (ii) six months (in the case of permanent disability) or three months (in the case of retirement) of termination. Notwithstanding the terms of an Award Agreement, the tax treatment available pursuant to Section 422 of the Code, as amended, upon the exercise of an Incentive Stock Option shall not be available to an Optionee who exercises any Incentive Stock Options more than (i) one year after the date of termination of employment due to permanent disability or (ii) three months after the date of termination of employment due to retirement. Section 3.8. Termination for Other Reasons. Upon termination of the Optionee's employment for any reason other than death, disability or retirement, the Optionee may exercise any Incentive Stock Options exercisable on the date of termination of employment, provided such option exercise occurs within the sooner of (i) the remaining Option Term of the Incentive Stock Option, and (ii) the expiration of thirty days of the date of termination. 7 Section 3.9. Applicability of Stock Option Sections. Sections 2.5, Manner of Payment, and 2.6, Issuance of Certificates, applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated by reference in this Article III as though fully set forth herein Section 3.10. Code Requirements. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Code Section 422. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any Incentive Stock Option under Code Section 422, unless the participant has first requested the change that will result in such disqualification. ARTICLE IV. MISCELLANEOUS Section 4.1. General Restriction. Each Award under the Plan shall be subject to the requirement that, if at any time the Plan Administrator shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an Award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such Award or the issue or purchase of shares of Common Stock thereunder, such Award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Plan Administrator. Section 4.2. Non-Assignability. No Award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such Award shall be exercisable only by such person or by such person's guardian or legal representative. Section 4.3. Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may issue, transfer or vest only such number of shares of the Company net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. Section 4.4. Right to Terminate Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. 8 Section 4.5. Non-Uniform Determinations. The Plan Administrator's determinations under the Plan (including without limitation determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. Section 4.6. Rights as a Stockholder. The recipient of any Award under the Plan shall have no rights as a stockholder with respect thereto unless and until certificates for shares of Common Stock are issued to him. Section 4.7. Definitions. In this Plan the following definitions shall apply: (a) "Award" shall mean a grant of Stock Options or Incentive Stock Options under the Plan. (b) "Fair Market Value" as of any date and in respect of any share of Common Stock means the closing price on such date or on the previous business day, if such date is not a business day, of a share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal or any other publication selected by the Plan Administrator provided that, if shares of Common Stock shall not have been traded on the National Association of Securities Dealers, Inc. Automated Quotation System/National Market System or other public securities market for more than 10 days immediately preceding such date or if deemed appropriate by the Plan Administrator for any other reason, the fair market value of shares of Common Stock shall be as determined by the Plan Administrator in such other manner as it may deem appropriate. In no event shall the Fair Market Value of any share of Common Stock be less than its par value. (c) "Non-Employee Director" shall mean a director who (i) is not an officer of the Company or a parent or subsidiary of the Company, or otherwise employed by the Company or parent or subsidiary of the Company; (ii) does not receive compensation, either directly or indirectly, from the Company or a parent or subsidiary of the Company, for services rendered as a consultant or in any capacity other than as a director, except for an amount not exceeding $60,000; (iii) does not possess an interest in any transaction for which disclosure would be required under Item 404(a) of Regulation S-K of the Securities Act of 1933, as amended ("Securities Act"); and (iv) is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K of the Securities Act. (d) "Option" means a Stock Option or Incentive Stock Option. (e) "Option Price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. Section 4.8. Leaves of Absence. The Plan Administrator shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Award. Without limiting the generality of the foregoing, the Plan Administrator 9 shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan, and (ii) the impact, if any, of any such leave of absence on Awards under the Plan theretofore made to any recipient who takes such leave of absence. Section 4.9. Newly Eligible Employees. The Plan Administrator shall be entitled to make such rules, regulations, determinations and Awards as it deems appropriate in respect of any director, officer or employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an Award or incentive period. Section 4.10. Adjustments. In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Plan Administrator may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options or Performance Shares theretofore granted under the Plan, and any and all other matters deemed appropriate by the Plan Administrator. Section 4.11. Changes in the Company's Capital Structure. (a) The existence of outstanding Options or Performance Shares shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) If, while there are outstanding Options, the Company shall effect a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefor in money, services or property, then, subject to the provisions, if any, in the Award Agreement (a) in the event of an increase in the number of such shares outstanding, the number of shares of Common Stock then subject to Options hereunder shall be proportionately increased; and (b) in the event of a decrease in the number of such shares outstanding, the number of shares of Common Stock then subject to Option hereunder shall be proportionately decreased. (c) After a merger of one or more corporations into the Company, or after a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, (i) each holder of an outstanding Option shall, at no additional cost, be entitled upon exercise of such Option to receive (subject to any required action by stockholders) in lieu of the number of shares as to which such Option shall then be so exercisable, the number and class of shares of stock, other securities or consideration to which such holder would have been entitled to receive pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of the Company equal to the number of shares as to which such Option had been 10 exercisable, and (ii) unless otherwise provided by the Plan Administrator, the number of shares of Common Stock, other securities or consideration to be received with respect to unvested Performance Shares shall continue to be subject to the Award Agreement, including any vesting provisions thereof. (d) If the Company is about to be merged into or consolidated with another corporation or other entity under circumstances where the Company is not the surviving corporation, or if the Company is about to sell or otherwise dispose of substantially all of its assets to another corporation or other entity while unvested Performance Shares or unexercised Options remain outstanding, then the Plan Administrator may direct that any of the following shall occur: (i) If the successor entity is willing to assume the obligation to deliver shares of stock or other securities after the effective date of the merger, consolidation or sale of assets, as the case may be, each holder of an outstanding Option shall be entitled to receive, upon the exercise of such Option and payment of the Option Price, in lieu of shares of Common Stock, such shares of stock or other securities as the holder of such Option would have been entitled to receive had such Option been exercised immediately prior to the consummation of such merger, consolidation or sale, and the terms of such Option shall apply as nearly as practicable to the shares of stock or other securities purchasable upon exercise of the Option following such merger, consolidation or sale of assets; (ii) The Plan Administrator may waive any limitations set forth in or imposed pursuant to this Plan or any Award Agreement with respect to such Option or Performance Share such that (A) such Option shall become exercisable prior to the record or effective date of such merger, consolidation or sale of assets or (B) the vesting of such Performance Share shall occur upon such merger, consolidation or sale of assets; and/or (iii) The Plan Administrator may cancel all outstanding Options as of the effective date of any such merger, consolidation or sale of assets, provided that prior notice of such cancellation shall be given to each holder of an Option at least 30 days prior to the effective date of such merger, consolidation or sale of assets, and each holder of an Option shall have the right to exercise such Option in full during a period of not less than 30 days prior to the effective date of such merger, consolidation or sale of assets. (e) Except as herein provided, the issuance by the Company of Common Stock or any other shares of capital stock or securities convertible into shares of capital stock, for cash, property, labor done or other consideration, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. Section 4.12. Amendment of the Plan. The Board of Directors may, without further approval by the stockholders and without receiving further consideration from the participants, amend this Plan or condition or modify Awards under this Plan. 11 EX-27 3 ARTICLE 5 FDS FOR 1ST QTR 10-Q
5 This schedule contains summary financial information extracted from the applicable SEC Form and is qualified in its entirety by reference to such financial statements. 1000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 13237 0 3156 0 1331 19298 19557 12494 29546 1969 0 0 0 9573 17337 29546 4602 4602 2897 2897 1778 0 (224) 151 105 46 0 0 0 46 .01 .01
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