<PAGE>
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, 1994 Commission File Number 1-7378
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)
(713) 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.
4,242,848 -- Common Stock -- No Par Value
as of May 11, 1994
1
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RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
March 31, 1994
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets:
March 31, 1994 and December 31, 1993 3-4
Consolidated Statements of Operations
and Retained Earnings:
Three Months Ended March 31, 1994 and 1993 5
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable. 16
Item 6. Exhibits and Reports on Form 8-K. 16
Signatures 17
The information furnished in this report reflects all adjustments which are,
in the opinion of management, necessary to a fair statement of the results
of the interim periods presented.
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1994 1993
(In thousands)
Current Assets:
Cash $ 3,253 $ 2,882
Accounts Receivable (Note 2) 2,634 3,074
Inventories (Notes 1 and 2) 2,867 2,356
Other Current Assets 277 314
------- -------
Total Current Assets 9,031 8,626
Property and Equipment at Cost (Note 2):
Machinery and Equipment 11,851 11,994
Leasehold Improvements 2,554 2,543
------- -------
14,405 14,537
Less Accumulated Depreciation 12,313 12,280
------- -------
2,092 2,257
Other Assets 125 135
------- -------
$11,248 $11,018
======= =======
See accompanying notes
(unaudited)
3
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RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1994 1993
(In thousands)
Current Liabilities:
Accounts Payable $ 639 $ 524
Accrued Liabilities (Note 1) 1,805 2,016
Current Maturities on Long-Term Debt (Note 2) - 58
Income Taxes Payable 8 18
Liability for Restructuring (Note 5) 30 164
------- -------
Total Current Liabilities 2,482 2,780
Deferred Income Taxes 111 124
Commitments and Contingencies (Note 4) - -
Stockholders' Equity (Note 2):
Common Stock, Without Par Value;
20,000,000 Shares Authorized,
4,242,848 Shares Issued 5,926 5,926
Retained Earnings 2,729 2,188
------- -------
Total Stockholders' Equity 8,655 8,114
------- -------
$11,248 $11,018
======= =======
See accompanying notes
(unaudited)
4
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended March 31,
1994 1993
(In thousands, except
per share data)
Revenues $ 5,225 $ 6,752
Costs and Expenses:
Cost of Revenues 2,710 4,167
Marketing, General and Administrative 1,739 2,543
Research and Development 235 242
Provision for Restructuring (Note 5) - 319
------- -------
4,684 7,271
------- -------
Operating Income (Loss) 541 (519)
Interest (Income) Expense, Net (Note 2) (15) 33
------- -------
Income (Loss) Before Income Taxes 556 (552)
Provision (Benefit) for Income Taxes (Note 1):
Current 28 (2)
Deferred (13) (5)
------- -------
15 (7)
------- -------
Net Income (Loss) 541 (545)
Retained Earnings (Deficit) Beginning of Period 2,188 (181)
------- -------
Retained Earnings (Deficit) End of Period $ 2,729 $ (726)
======= =======
Net Income (Loss) Per Share $ .13 $ (.13)
======= =======
See accompanying notes
(unaudited)
5
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
1994 1993
(In thousands)
Cash Flows from Operating Activities:
Net Income (Loss) $ 541 $ (545)
Adjustments to Reconcile Net Income (Loss) to
Cash Provided by Operating Activities:
Depreciation and Amortization 263 343
Provision for Restructuring - 319
Deferred Income Taxes (13) (5)
(Gain) Loss on Disposal of Fixed Assets (5) 2
Provision for Inventory Obsolescence 22 53
Exchange Loss - 172
Increase (Decrease) in Operating Cash Flows:
Accounts Receivable 440 1,024
Inventories (533) 1,097
Other Assets 35 172
Accounts Payable 115 (612)
Accrued Liabilities (211) (401)
Income Taxes Payable (10) (18)
Liability for Restructuring (134) (337)
------- -------
Total Adjustments (31) 1,809
------- -------
Net Cash Provided by
Operating Activities 510 1,264
------- -------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (89) (131)
Proceeds from Sale of Equipment 6 -
------- -------
Net Cash (Used) by
Investing Activities (83) (131)
------- -------
Cash Flows from Financing Activities:
Net (Payments) Borrowings Under
Loan Agreements - (1,548)
Conversion of Notes Payable to
Long-Term Debt - 363
Payments on Long-Term Debt (58) -
------- -------
Net Cash (Used) by
Financing Activities (58) (1,185)
------- -------
Effect of Exchange Rate Changes on Cash 2 8
------- -------
Net Increase (Decrease) in Cash 371 (44)
Cash at Beginning of Period 2,882 362
------- -------
Cash at End of Period $ 3,253 $ 318
======= =======
See accompanying notes
(unaudited)
6
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-
01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. 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, 1993.
Cash Equivalents
- ----------------
For the purposes of the statements of cash flows, the Company considers
all highly liquid cash investments with maturities of three months or less
to be cash equivalents.
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:
March 31, December 31,
1994 1993
(In thousands)
Raw materials $1,596 $1,702
Work-in-progress 1,153 553
Finished goods 118 101
------ ------
$2,867 $2,356
====== ======
Advanced Payments
- -----------------
Advanced payments included in accrued liabilities total $276,000 at
March 31, 1994, and $341,000 at December 31, 1993. The advanced payments
may be refundable if the Company does not meet the terms of the order.
Revenues related to advanced payments are recognized when the products are
shipped.
7
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
Income Taxes
- ------------
Effective January 1, 1993, the Company changed its method of accounting
for income taxes by adopting Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes" which requires an asset and
liability approach to financial accounting and reporting for income taxes.
The significant components of the Company's net deferred income tax
liability as of January 1, 1994 were as noted below. The components of the
Company's net deferred income tax liability as of March 31, 1994 are not
significantly different than those presented below, except that $79,000 of
the net operating loss carryforward has been utilized and the valuation
allowance has been reduced by the same amount.
(In thousands)
Deferred tax liabilities:
Depreciation $ 103
Domestic International Sales Corp. dividend 21
-------
Total deferred tax liabilities 124
-------
Deferred tax assets:
Reserves not currently deductible (416)
Foreign tax credits (490)
Net operating loss carryforwards (255)
Business tax credits (253)
Other (21)
-------
Total deferred tax assets (1,435)
Valuation allowance 1,435
-------
Net deferred tax assets -
-------
Net deferred tax liability $ 124
=======
8
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
The provision for income taxes includes Federal, foreign, and state
income taxes. Deferred income taxes are provided for temporary differences
between financial statement and income tax reporting. The differences
between the effective rate reflected in the provision (benefit) for income
taxes on income (loss) before income taxes and the amounts determined by
applying the statutory U.S. tax rate of 34% are analyzed below:
March 31,
1994 1993
(In thousands)
Provision (benefit) at statutory rate $ 189 $(188)
Tax benefit of net operating loss
carryforward (79) -
Benefits not recorded due to net loss
carryforward position - 189
Tax effect of:
Foreign expenses for which a benefit
is available (37) -
Foreign income taxed at rates less than
U.S. rate (9) -
Foreign tax benefit of net operating
loss carryforward (54) (1)
Other 5 (7)
----- -----
Provision (benefit) for income taxes $ 15 $ (7)
===== =====
2. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Company maintains a working capital financing agreement with
NationsBank of Texas, N.A. Under the agreement, the Company may request
loan advances, evidenced by demand notes, up to $2,500,000. Credit
availability is limited to 80% of eligible accounts receivable, as defined,
of the U.S. Company. Interest is payable monthly at the bank's base rate
plus 2 1/2% (8 3/4% at March 31, 1994). There were no balances outstanding
at March 31, 1994. The loan is collaterized by the U.S. Company's accounts
receivable, inventories, fixed assets and certain other assets. The Company
had credit availability of $1,042,000 at March 31, 1994. The agreement
provides that if the tangible net worth, as defined, of the U.S. Company is
less than $3,000,000, the U.S. Company may not pay dividends or make certain
advances or loans without the written approval of the bank and becomes
subject to certain other defined restrictions. The agreement limits the
Company's annual capital expenditures. The financial requirements of the
financing agreement were met at March 31, 1994.
9
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
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. $319,000) at the bank's prime rate plus 1% (6 1/4%
at March 31, 1994). There were no balances outstanding at March 31, 1994,
and amounts utilized under credit commitments totalled $124,000, resulting
in credit availability of $195,000 at March 31, 1994. The loan is
collateralized by all assets of the subsidiary and requires maintenance of
a minimum net worth of the Singapore subsidiary. Payment of dividends
requires written consent from the bank and continuation of the credit
facility is at the discretion of the bank.
The Company's Japanese subsidiary maintained an agreement with a related
party of the subsidiary to provide a credit facility to the subsidiary.
The related party of the subsidiary obtained a line of credit from a
Japanese bank and made the amount available to the Company. In April 1993,
the loan was converted to a term loan payable in monthly installments of
$9,900, plus interest paid quarterly. The Company made certain advance
payments and the loan was paid in full in March 1994.
Interest (income) expense, for the periods ended March 31, is presented
net as follows:
1994 1993
(In thousands)
Interest expense $ 3 $ 35
Interest (income) (18) (2)
----- -----
Interest (income) expense, net $ (15) $ 33
===== =====
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the periods ended March 31
are as follows:
1994 1993
(In thousands)
Interest $ 1 $ 46
Income taxes $ 4 $ 14
10
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
4. COMMITMENTS
The Company leases manufacturing and office facilities under non-
cancellable operating lease agreements, expiring through 1998.
Future minimum rental payments under leases in effect at March 31, 1994
are: 1994 - $872,000; 1995 - $665,000; 1996 - $430,000; 1997 - $305,000;
1998 -$18,000; subsequent to 1998 - None.
The Company sub-leases manufacturing and office space in its U.S.
facility. Future income under the sub-lease will be: 1994 - $81,000 and
1995 - $38,000.
5. PROVISION FOR RESTRUCTURING
The Company recorded, in the quarter ended March 31, 1993, a provision
for restructuring of its U.S. operations totalling $319,000 related to
retirement and severance pay for employees who were terminated in March
1993. The Company recorded restructuring charges of $1,392,000 in 1992.
The 1992 amount represents a $1,000,000 provision for closing the Company's
Japanese subsidiary and a charge of $392,000 related to downsizing of the
Company's UK and Irish operations and downsizing of production capacity for
power sources in Singapore and shifting of production to Costa Rica. The
charge was related principally to the remaining lease obligations and
associated costs at the UK and Singapore facilities, severance liabilities
and write-off of fixed assets. The provision for closing the Japanese
subsidiary related to estimated losses on disposal of certain assets,
severance pay, estimated expenses to be incurred in curtailing operations
and settling lease obligations related to the subsidiary's facility.
11
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1994
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
Management considers cash provided by operations and retained earnings
to be primary sources of capital. The Company maintains lines of credit to
supplement these primary sources of capital and has leased its major
facilities, reducing the need to expend capital on such items. Changes in
the Company's financial condition, liquidity, and capital requirements since
March 31, 1993 are attributable to significant operating losses through the
first quarter of 1993 and a return to profitability in the periods
subsequent to the March 1993 quarter. The return to profitability resulted
in a significant improvement in the Company's financial condition.
Reduction in expenses related to the restructuring of operations, which
was completed in the first quarter of 1993, contributed to the Company
returning to profitability. Factors discussed in the management's
discussion included in the Company's 1993 Form 10-K are also applicable to
operations for the first quarter of 1994 and should be read in conjunction
with this discussion.
Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
chart:
March 31, December 31, March 31,
1994 1993 1993
Working Capital:
Working Capital (in thousands) $6,549 $5,846 $2,485
Current Ratio 3.6 to 1 3.1 to 1 1.4 to 1
Equity Ratios:
Total Liabilities to Equity 0.3 0.4 1.3
Assets to Equity 1.3 1.4 2.3
Profitability Ratios:
Gross Profit 48 % 43 % 38 %
Return on Sales 10 % 9 % (8)%
Return on Assets (Annualized) 19 % 22 % (18)%
Return on Equity (Annualized) 25 % 29 % (42)%
The Company's financial condition improved significantly during 1993 and
the first quarter of 1994. Working capital increased to $6.5 million at
March 31, 1994 from $2.5 million at March 31, 1993, and the ratio of current
assets to current liabilities increased to 3.6 at March 31, 1994, compared
to 1.4 at March 31, 1993. The improvement is attributable to a return to
profitability resulting from expense reductions which included reductions
in personnel levels and restructuring of operations, reduction in excess
leased space and a general reduction in most expense items.
12
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1994
Net cash provided by operating activities for the quarter ended March
31, 1994 was $510,000, compared with $1.3 million provided by operations in
the first quarter of 1993. The principal item contributing to the cash
provided by operations in 1994 was net income of $541,000. The principal
items contributing to the cash provided by operations in 1993 were decreases
in accounts receivable and inventories of $1.0 million and $1.1 million,
respectively. Cash provided by operations in 1993 was used to reduce debt
by $1.2 million and to reduce accounts payable and accrued liabilities by
a total of $1.0 million. The decrease in inventories resulted from shipment
of conditioning products in the first quarter of 1993 that were partially
completed at December 31, 1992.
The Company maintains bank lines of credit to provide funds to support
changes in liquidity. The Company's total bank debt was $880,000 at March
31, 1993. Cash flow from operations was used to pay off bank debt in 1993.
In addition, in 1993 the Company negotiated conversion of a short-term
borrowing to a term loan repayable over approximately 3 years. The amount
due under the term loan was $381,000 at March 31, 1993 and was paid in full
during the quarter ended March 31, 1994. The U.S. Company's working capital
line of credit is evidenced by demand notes, and credit availability is
limited to 80% of eligible accounts receivable. The Company's Singapore
subsidiary has an overdraft facility; continuation of the facility is at the
discretion of the bank. The Company could borrow $1.2 million under its
lines of credit at March 31, 1994.
Capital expenditures during the first three months of 1994 and 1993 were
$89,000 and $131,000, respectively. Management currently projects that 1994
expenditures may exceed $1.0 million. The lease on the Company's corporate
headquarters expires in 1995. The Company will decide during 1994 whether
to continue to lease or purchase the existing facility or to relocate to
a different facility.
RESULTS OF OPERATIONS
Three months ended March 31, 1994 compared to three months ended March
31, 1993.
REVENUES
REVENUES for the 1994 three month period were $5.2 million compared to
$6.7 million for the 1993 quarter. Conditioning Products, Conditioning
Services and Power Sources revenues decreased $1,292,000, $157,000 and
$78,000, respectively.
13
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1994
Demand for Conditioning Products increased during the 1994 quarter,
resulting in an increase in revenues from the sale of burn-in products
during the quarter and an increase in backlog in this segment at March 31,
1994, but overall revenues in the Conditioning Products segment declined due
to a decrease in the volume of INTERSECT(tm) 30 burn-in and test systems
shipped.
Revenues in the Power Sources segment were $1.5 million for the first
quarter of 1994, reflecting a five percent decrease from the first quarter
of 1993. The decrease resulted from unit price decreases due to product mix
changes.
Revenues in the Services segment, for the 1994 quarter, were $1.8
million, a decrease of eight percent compared to the 1993 quarter. Revenues
related to conditioning services increased at both of the Company's Services
facilities due to increased demand resulting in volume increases, but
overall the decrease in revenues in this segment is attributable to the
Company's Singapore service facility where revenues from the sale of
conditioning products to Services customers declined in 1994, due to a
decrease in demand.
COSTS AND EXPENSES
Total costs and expenses for the 1994 quarter, compared to the 1993
quarter and excluding the 1993 provision for restructuring, decreased $2.3
to $4.7 million, compared to the revenue decrease of $1.5 million. Cost of
revenues decreased $1.5 million, marketing, general and administrative
expenses decreased $804,000 and research and development expenses decreased
$7,000.
The increase in the gross profit from 38% in 1993 to 48% in 1994 is
attributable to all business segments and resulted from changes in product
mix and cost reductions associated with the restructuring of operations
which was completed in the first quarter of 1993.
The increase in the gross profit in the Conditioning Products segment
relates to cost reduction measures implemented throughout 1993, resulting
in a decrease in both fixed and variable manufacturing costs.
The increase in the gross profit in the Services segment is due to
volume increases and a significant decrease in revenues from the sale of
conditioning products to Services customers. The gross profit on these
products is traditionally low due to price competition.
The increase in the gross profit in the Power Sources segment is
attributable to a reduction in manufacturing costs and production
efficiencies resulting from shifting production capacity for this segment
to Costa Rica and an increase in unit prices for certain products resulting
from product mix changes.
14
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1994
Marketing, general and administrative expenses, for the 1994 quarter,
decreased $804,000 in comparison to a $1.5 million decrease in revenues.
A significant portion of the decrease relates to reductions in personnel
levels at the Houston facility, for which a restructuring provision was
recorded in the first quarter of 1993. Most elements of expenses were
reduced throughout 1993 due to stringent expense controls which contributed
to the 1994 decrease. Approximately 30% of the decrease results from a
decrease in revenue related expenses such as commissions, royalties and
installation costs associated with the decrease in INTERSECT(tm) 30 burn-
in and test product revenues.
As noted above, the Company reduced personnel levels at its Houston
facility during the first quarter of 1993 and recorded a $319,000 provision
for restructuring of operations to cover the termination costs.
RESEARCH AND DEVELOPMENT costs decreased three percent in 1994 to
$235,000.
INTEREST (INCOME) EXPENSE
The change in net interest reflects a decrease in interest expense and
a significant increase in interest income. Interest expense decreased due
to payment of all debt balances. Interest income increased due to an
increase in investable cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company's effective tax rate was 3% in 1994, and an income tax
benefit of $7,000 was recorded in 1993 related to the first quarter loss.
The Company's effective tax rate differed from the U.S. tax rate of 34% in
1994 due to tax benefits of net operating loss carryforwards, and tax
benefits related to expenses incurred in shutting down a foreign subsidiary.
The principal reason the Company's effective tax rate varied from the U.S.
statutory rate in 1993 was that tax benefits were not available to the U.S.
Company due to net operating loss limitations.
15
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RELIABILITY INCORPORATED
OTHER INFORMATION
March 31, 1994
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Not applicable.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company during the quarter ended March 31, 1994.
16
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RELIABILITY INCORPORATED
SIGNATURES
March 31, 1994
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)
BY /s/ Larry Edwards
Larry Edwards DATE: May 11, 1994
President and
Chief Executive Officer
BY /s/ Max T. Langley
Max T. Langley DATE: May 11, 1994
Sr. Vice President - Finance
and Chief Financial Officer
17
