f<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 June 30, 1995 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 August 11, 1995
1
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RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
June 30, 1995
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets:
June 30, 1995 and December 31, 1994 3-4
Consolidated Statements of Operations
and Retained Earnings:
Six Months Ended June 30, 1995 and 1994 5
Three Months Ended June 30, 1995 and 1994 6
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures 19
Exhibit 20 - 22
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
June 30, December 31,
1995 1994
Current Assets:
Cash and Cash Equivalents $ 2,253 $ 6,019
Accounts Receivable 4,362 2,502
Inventories (Note 1) 4,187 2,099
Deferred Tax Assets 350 221
Other Current Assets 145 398
------- -------
Total Current Assets 11,297 11,239
Property, Plant and Equipment at Cost:
Machinery and Equipment 12,022 11,247
Building and Improvements 5,698 2,596
Land 230 -
------- -------
17,950 13,843
Less Accumulated Depreciation 12,661 11,918
------- -------
5,289 1,925
Other Assets 74 120
------- -------
$16,660 $13,284
======= =======
See accompanying notes
(unaudited)
3
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RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
June 30, December 31,
1995 1994
Current Liabilities:
Accounts Payable $ 1,076 $ 369
Accrued Liabilities 1,894 1,999
Current Maturities on Long-Term Debt (Note 2) 89 -
Income Taxes Payable 117 17
------- -------
Total Current Liabilities 3,176 2,385
Long-Term Debt (Note 2) 2,530 -
Deferred Tax Liabilities 140 140
Commitments and Contingencies (Note 4) - -
Stockholders' Equity:
Common Stock, Without Par Value;
20,000,000 Shares Authorized,
4,242,848 Shares Issued 5,926 5,926
Retained Earnings 4,888 4,833
------- -------
Total Stockholders' Equity 10,814 10,759
------- -------
$16,660 $13,284
======= =======
See accompanying notes
(unaudited)
4
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Six Months Ended June 30,
(In thousands, except per share data)
1995 1994
Revenues $9,860 $11,905
Costs and Expenses:
Cost of Revenues 5,271 6,053
Marketing, General and Administrative 3,390 3,803
Research and Development 1,090 372
------ -------
9,751 10,228
------ -------
Operating Income 109 1,677
Interest (Income) Expense, Net (Note 2) 2 (34)
------ -------
Income Before Income Taxes 107 1,711
------ -------
Provision (Benefit) for Income Taxes (Note 1):
Current 181 107
Deferred (129) (33)
------ -------
52 74
------ -------
Net Income 55 1,637
Retained Earnings Beginning of Period 4,833 2,188
------ -------
Retained Earnings End of Period $4,888 $ 3,825
====== =======
Net Income Per Share $ .01 $ .39
====== =======
See accompanying notes
(unaudited)
5
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended June 30,
(In thousands, except per share data)
1995 1994
Revenues $ 5,767 $ 6,680
Costs and Expenses:
Cost of Revenues 2,822 3,343
Marketing, General and Administrative 1,694 2,064
Research and Development 564 137
------- -------
5,080 5,544
------- -------
Operating Income 687 1,136
Interest (Income) Expense, Net (Note 2) 3 (19)
------- -------
Income Before Income Taxes 684 1,155
------- -------
Provision (Benefit) for Income Taxes (Note 1):
Current 276 79
Deferred (119) (20)
------- -------
157 59
------- -------
Net Income 527 1,096
Retained Earnings Beginning of Period 4,361 2,729
------- -------
Retained Earnings End of Period $ 4,888 $ 3,825
======= =======
Net Income Per Share $ .12 $ .26
======= =======
See accompanying notes
(unaudited)
6
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(In thousands)
1995 1994
Cash Flows from Operating Activities:
Net Income $ 55 $ 1,637
Adjustments to Reconcile Net Income to
Cash (Used) by Operating Activities:
Depreciation and Amortization 595 540
Deferred Income Taxes (129) (33)
Provision for Inventory Obsolescence 144 55
(Gain) on Disposal of Fixed Assets (15) (2)
Increase (Decrease) in Operating Cash Flows:
Accounts Receivable (1,860) (1,829)
Inventories (2,232) (1,164)
Other Assets 288 109
Accounts Payable 707 232
Accrued Liabilities (105) 14
Income Taxes Payable 100 47
Liability for Restructuring - (154)
------- -------
Total Adjustments (2,507) (2,185)
------- -------
Net Cash (Used) by
Operating Activities (2,452) (548)
------- -------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (3,979) (386)
Proceeds from Sale of Equipment 44 6
------- -------
Net Cash (Used) by Investing Activities (3,935) (380)
------- -------
Cash Flows from Financing Activities:
Issuance of Mortgage Payable 2,640 -
Payments on Long-Term Debt (21) (58)
------- -------
Net Cash Provided (Used) by
Financing Activities 2,619 (58)
------- -------
Effect of Exchange Rate Changes on Cash 2 4
------- -------
Net (Decrease) in Cash (3,766) (982)
Cash at Beginning of Period 6,019 2,882
------- -------
Cash at End of Period $ 2,253 $ 1,900
======= =======
See accompanying notes
(unaudited)
7
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
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, 1994.
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,
when purchased, 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:
June 30, December 31,
1995 1994
(In thousands)
Raw materials $2,087 $1,299
Work-in-progress 1,980 726
Finished goods 120 74
------ ------
$4,187 $2,099
====== ======
8
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
Income Taxes
- ------------
The provision for income taxes includes federal, foreign, and state
income taxes. The Company accounts for income taxes under the asset and
liability approach which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial reporting amounts and tax basis of assets
or liabilities. Deferred tax assets are recognized, net of any valuation
allowance, for deductible temporary differences and net operating loss and
tax credit carryforwards. Deferred tax expense represents the change in the
deferred tax asset or liability balances.
The differences between the effective rate reflected in the provision
for income taxes on income before income taxes and the amounts determined
by applying the statutory U.S. tax rate of 34% are analyzed below:
June 30,
1995 1994
(In thousands)
Provision at statutory rate $ 36 $ 582
Change in valuation allowance (66) (27)
Tax benefit of net operating loss
carryforward - (355)
Tax effect of:
Foreign expenses for which a benefit
is available - (37)
Foreign benefits not recorded due to
net operating loss carryforward position 47 -
Foreign tax benefit of export
processing exemption - (103)
Other 35 14
----- -----
Provision for income taxes $ 52 $ 74
===== =====
9
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
2. LONG-TERM DEBT AND SHORT TERM BORROWINGS
Long-term debt at June 30, consisted of the following:
1995
(In thousands)
Mortgage payable; due in monthly installments
of $26,777, including interest at 9%, beginning
May 1, 1995 $2,619
Less current maturities 89
------
Long-term debt due after one year $2,530
======
A lease on the Company's headquarters and manufacturing facility located
in Houston, Texas was scheduled to expire in May 1995. In March 1995, the
Company purchased the land and building for $3,300,000, of which $660,000
was paid in cash. The $2,640,000 balance is payable in 180 equal monthly
installments, including interest at 9%, under a promissory note which is
payable to the seller. The note is collateralized by the land and building.
The aggregate maturities of the note for the next five years are: 1995 -
$36,000; 1996 - $93,000; 1997 - $101,000; 1998 - $111,000; and 1999 -
$121,000.
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. $357,000) at the bank's prime rate plus 1% (7% at
June 30, 1995). There were no balances outstanding at June 30, 1995, but
amounts utilized under credit commitments totalled $141,000, resulting in
credit availability of $216,000 at June 30, 1995. 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 periods ended June 30, is presented
net as follows:
1995 1994
(In thousands)
Interest expense $ 128 $ 4
Interest (income) (126) (38)
----- -----
Interest (income) expense, net $ 2 $ (34)
===== =====
10
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the periods ended June 30
are as follows:
1995 1994
(In thousands)
Interest $128 $ 1
Income taxes $ 81 $24
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 June 30, 1995
are: 1995 - $280,000; 1996 - $566,000; 1997 - $318,000; 1998 - $18,000;
subsequent to 1998 - None.
The Company leased manufacturing and office space in its U.S. facility
to a third party under an agreement that expired in May 1995. In May 1995,
the Company entered into a letter agreement which converted the lease to a
month-to-month lease at a monthly rental of $11,000.
5. SUBSEQUENT EVENT
On July 1, 1995, the Company entered into a revolving credit agreement
with First Interstate Bank of Texas, N.A. The facility allows borrowings
through July 1, 1997 of up to $2,000,000 at the bank's base rate (9% at July
1, 1995). Credit availability is limited to 80% of eligible accounts
receivable, as defined, of the U.S. Company and its Costa Rica subsidiary,
plus 30% of U.S. inventories, limited to $750,000. The credit facility
requires compliance with certain financial loan covenants related to
tangible net worth, current ratio, debt to tangible net worth and fiscal
year-end losses. The loan is unsecured except that if the Company violates
certain financial covenants accounts receivable, inventories and certain
other assets of the U.S. Company will become collateral for the loan. The
Company is in compliance with the financial requirements of the agreement.
11
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1995
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 the primary sources of capital. The Company has maintained lines of
credit to supplement these primary sources of capital and leased most of its
facilities, reducing the need to expend capital on such items. Changes in
the Company's financial condition and liquidity since June 30, 1994 are
generally attributable to changes in cash flows from operating activities
and the purchase of the Company's headquarters facility in March 1995.
Reduction in expenses related to the restructuring of operations, which was
completed in the first quarter of 1993, contributed to profitability and a
significant improvement in the Company's financial condition during 1994 and
1995. Factors discussed in the management's discussion included in the
Company's 1994 Form 10-K are also applicable to operations for the six
months of 1995 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:
June 30, December 31, June 30,
1995 1994 1994
Working Capital:
Working Capital (in thousands) $8,121 $8,854 $7,600
Current Ratio 3.6 to 1 4.7 to 1 3.7 to 1
Equity Ratios:
Total Liabilities to Equity 0.5 0.2 0.3
Assets to Equity 1.5 1.2 1.3
Profitability Ratios:
Gross Profit 47 % 46 % 49 %
Return on Revenues 1 % 11 % 14 %
Return on Assets (Annualized) 1 % 20 % 26 %
Return on Equity (Annualized) 1 % 25 % 34 %
The Company's financial condition improved significantly during 1994 and
has remained very strong during 1995. Working capital increased to $8.1
million at June 30, 1995, from $7.6 million at June 30, 1994, and the ratio
of current assets to current liabilities was 3.6 at June 30, 1995, compared
to 3.7 at June 30, 1994. The improvement was attributable to cash provided
by operating activities during the year ended December 31, 1994 of $3.9
million. Increases in demand for the Company's products and services during
the first half of 1995 resulted in a significant increase in the Company's
backlog at June 30, 1995. The operating effects of this increase have
12
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1995
affected various elements of cash provided by operations. The Company has
maintained a strong working capital position. The potential negative impact
of the low revenues levels during the first half of 1995 have been minimized
by expense controls. These expense controls resulted in expense reductions,
reduction in excess leased space and a general reduction in most expense
items which contributed to the Company reporting net income in 1994 and a
small profit in 1995.
Net cash used in operating activities for the six months ended June 30,
1995 was $2.5 million, compared with $548,000 used in the first six months
of 1994. The principal items contributing to the cash used in operations
in 1995 were increases in accounts receivable and inventories of $1.9 and
$2.2 million, respectively, and a decrease in accrued liabilities of
$707,000. The changes are attributable to the Company operating at an
increased level of operations during 1995. The increase in activity is
supporting the production activities related to the increase in backlog and
a corresponding increase in revenues which is forecast to occur in the
second half of 1995.
The Company used cash flow from operations to pay off all bank debt in
the latter part of 1993. The Company did not need to utilize its principal
line of credit during 1994 and allowed the U.S. line of credit to expire in
November 1994. The Company's Singapore subsidiary maintains a small
overdraft facility to support the subsidiary's credit commitments. The
subsidiary could borrow $216,000 under the facility at June 30, 1995.
Current projections indicate that the Company's cash and cash equivalent
balances and future cash generated by operations will be sufficient to meet
the cash requirements of the Company during 1995. The Company, in July
1995, established a credit facility with a financial institution to provide
credit availability of $2.0 million to supplement cash provided by
operations, if required.
Capital expenditures during the first half of 1995 and 1994 were $4.0
million and $386,000, respectively. Expenditures for 1995 include the
purchase of the Company's headquarters facility for $3.3 million. The
purchase has significantly reduced the Company's occupancy expenses.
Management currently projects that 1995 expenditures, excluding the purchase
of the U.S. facility, may exceed $2.5 million.
RESULTS OF OPERATIONS
Six months ended June 30, 1995 compared to six months ended June 30,
1994.
REVENUES
Revenues for the 1995 six month period were $9.9 million compared to
$11.9 million for the 1994 period. Conditioning Products and Power Sources
revenues decreased $1,632,000 and $808,000, respectively, while Conditioning
Services revenues increased $395,000.
13
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1995
Demand for Conditioning Products decreased during 1994, resulting in a
significant decrease in backlog in this segment in 1994. Due to the lag
time between order entry and shipment, the decrease in backlog resulted in
a significant decline in revenues from the sale of Intersect(tm) products
and a small decrease in revenues from the sale of burn-in products during
the first half of 1995, compared to the first half of 1994. The decrease
in revenues was reduced somewhat by modest increases in revenues from the
sale of LOADER and UNLOADER products. Demand for Conditioning Products
increased significantly during the first half of 1995, resulting in an
increase in backlog in this segment from $2.6 million at December 31, 1994
to $12.4 million at June 30, 1995. Continued strong demand for products
provided by the semiconductor industry resulted in the increase in demand
for Conditioning Products sold by the Company.
Revenues in the Power Sources segment were $2.2 million for the first
half of 1995, reflecting a 27% decrease from the first half of 1994. The
decrease resulted from volume and unit price decreases due to decreased
demand and product mix changes.
Revenues in the Services segment, for the first half of 1995, were $4.1
million, an increase of 11% compared to the 1994 period. Revenues related
to conditioning services increased at both of the Company's Services
facilities, but increased at a slower rate at the Singapore Service facility
that at the North Carolina facility. These changes were due to increases
in demand by semiconductor manufacturers.
COSTS AND EXPENSES
Total costs and expenses for the 1995 six month period, compared to the
1994 period, decreased $477,000 to $9.8 million, compared to the revenue
decrease of $2.0 million. Cost of revenues decreased $782,000; marketing,
general and administrative expenses decreased $413,000 and research and
development expenses increased $718,000.
The decrease in the gross profit from 49% in 1994 to 47% in 1995 is
attributable to the Power Sources and Conditioning Services business
segments and resulted from revenue decreases in the Power Sources segments
and costs increasing at a rate greater than the revenue increase in the
Services segment. The increase in the gross profit in the Conditioning
Products segment results primarily from changes in product mix and expense
controls. The decrease in the gross profit in the Power Sources segment is
also attributable to volume decreases and unit price decreases, without a
corresponding decrease in manufacturing overhead costs.
14
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1995
Marketing, general and administrative expenses, for the first half of
1995 decreased $413,000 in comparison to a $2.0 million decrease in
revenues. The decrease is due primarily to stringent expense controls and
decreases in some volume-related expenses, such as commissions. Revenues
for the first half of 1995 were low and are forecasted to increase based on
the Company's backlog as of June 30, 1995. Marketing, general and
administrative expenses for 1995 were maintained at levels necessary to
sustain operations throughout 1995.
Research and development costs increased to $1,090,000 in 1995, compared
to $372,000 in the 1994 period. The increase relates primarily to
development cost associated with orders for INTERSECT(tm) products and new
models of CRITERIA products, which are included in the Company's backlog at
June 30, 1995. Delivery of some of the new products began in the first
half of 1995 and other new products are scheduled for delivery beginning in
the third quarter of 1995.
INTEREST (INCOME) EXPENSE
The change in net interest reflects significant increases in interest
expense and interest income. Interest expense increased due to the payment
of interest on debt associated with the purchase of the Company's U.S.
facility. The purchase was finalized in March 1995, but interest on the
debt was effective December 15, 1994. Interest income increased due to an
increase in cash available for investment and an increase in interest rates.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 49% in 1995, compared to a tax rate
of 4% in 1994. The principal reason the Company's effective tax rate varied
from the U.S. statutory rate in 1995 was that tax benefits were not
available for losses of a foreign subsidiary and the U.S. Company utilized
deferred tax asset carryforwards to reduce income tax expense in 1995. The
Company's effective tax rate differed from the U.S. tax rate of 34% in 1994
due to utilization of tax benefits of net operating loss carryforwards, tax
benefits related to expenses incurred in shutting down a foreign subsidiary,
and a tax benefit from an export processing exemption.
Three months ended June 30, 1995, compared to three months ended June
30, 1994.
REVENUES
Revenues for the 1995 three-month period decreased $913,000 to $5.8
million. Revenues in the Services segment increased $293,000. Conditioning
Products and Power Sources revenues decreased $876,000 and $330,000,
respectively.
15
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1995
Revenues in the Conditioning Products segment were $2.3 million for the
second quarter of 1995 which is a decrease of $876,000 over the second
quarter of 1994 and is related to product mix changes. Revenues from the
sale of loader and unloader products and burn-in products increased 74%,
while revenues from the sale of INTERSECT products decreased significantly
due to volume decreases.
Revenues in the Power Sources segment were $1.3 million for the second
quarter of 1995, reflecting a 21% decrease from the 1994 quarter. Revenues
were affected by a decrease in unit volume and unit price decreases due to
product mix changes and a decrease in demand.
Revenues in the Services segment for the 1995 quarter were $2.2 million,
an increase of 16% compared to the corresponding 1994 quarter. The increase
is related to both of the Company's services facilities, as noted in the
above discussion related to the six month period ended June 30, 1995. The
increase was partially offset, during the 1995 quarter, by a decrease in
revenues from the sale of burn-in products to Services customers at the
Singapore facility.
COSTS AND EXPENSES
Total costs and expenses decreased $464,000 to $5.1 million in
comparison to the revenue decrease of $913,000. Cost of revenues decreased
$521,000, marketing, general and administrative expenses decreased $370,000
and research and development expenses increased $427,000.
The increase in the gross profit from 50% in the 1994 quarter to 51% in
1995 is attributable primarily to the Conditioning Products segment and, to
a lesser extent, the Conditioning Services business segment. The gross
profit in the Conditioning Products segment increased due to changes in
product mix and cost reductions due to production volume increases. A
decrease in the gross profit in the Power Sources segment is attributable
to revenue decreases, as discussed in the above six months discussion. The
principal reason for the increase in the gross profit in the Services
segment is production efficiencies related to volume increases.
Marketing, general and administrative expenses for the 1995 quarter
decreased $370,000. The decrease in expenses is primarily related to
expense controls and a decrease in volume related expenses in the
Conditioning Products and Power Sources segments due to the decrease in
revenues.
Research and development costs increased from $137,000 in 1994 to
$564,000 in 1995. The reasons for the increase are explained in the above
discussion of the six month period.
16
<PAGE>
RELIABILITY INCORPORATED
MANGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1995
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 23% for the quarter ended June 30,
1995, compared to a tax rate of 5% for the 1994 quarter. The factors
affecting income taxes for the quarters ended June 30, 1995 and 1994 are the
same as those discussed in the above narrative related to income taxes for
the six months ended June 30, 1995.
17
<PAGE>
RELIABILITY INCORPORATED
OTHER INFORMATION
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description Page No.
3 Restated Articles of
Incorporation (with
amendments) 20 - 22
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company during the quarter ended June 30, 1995.
18
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
June 30, 1995
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: August 11, 1995
President and
Chief Executive Officer
BY /s/ Max T. Langley
Max T. Langley DATE: August 11, 1995
Sr. Vice President - Finance
and Chief Financial Officer
19
<PAGE>
EXHIBIT 3
RESTATED ARTICLES OF INCORPORATION
(with amendment)
OF
RELIABILITY INCORPORATED
1. Reliability Incorporated (the "Corporation"), pursuant to the
provisions of Article 4.07 of the Texas Business Corporation Act (the "Act"),
hereby adopts Restated Articles of Incorporation which accurately copy the
Articles of Incorporation and all amendments thereto that are in effect to date
and as further amended by such Restated Articles of Incorporation as hereinafter
set forth and which contains no other changes.
2. The Articles of Incorporation of the Corporation are amended by the
Restated Articles of Incorporation as follows:
Articles Two and Seven of the Articles of Incorporation of the
Corporation are amended in their entirety to read as set forth in
the Restated Articles of Incorporation printed below under paragraph
5 and Article Eight is deleted in its entirety.
3. Each amendment made by these Restated Articles of Incorporation has
been effected in conformity with the provisions of the Texas Business
Corporation Act and each such amendment made by the Restated Articles of
Incorporation were duly adopted by the shareholders of the Corporation on April
26, 1995.
4. The number of shares outstanding was 4,242,848; the number of shares
entitled to vote on the Restated Articles of Incorporation as so amended was
4,242,848; the number of shares voted for such Restated Articles of
Incorporation as so amended was 3,800,980; and the number of shares voted
against such Restated Articles as so amended was 101,334; and the number of
shares abstaining was 13,355.
5. The Articles of Incorporation and all amendments and supplements
thereto are hereby superseded by the following Restated Articles of
Incorporation which accurately copy the entire text thereof:
20
<PAGE>
RESTATED ARTICLES OF INCORPORATION
RELIABILITY INCORPORATED
ARTICLE ONE
The name of the Corporation is Reliability Incorporated.
ARTICLE TWO
The purpose for which the Corporation is organized is to engage in the
transaction of any lawful business for which a corporation may be incorporated
under the Act.
ARTICLE THREE
The name of its registered agent is Larry Edwards and the address of its
registered office is 16400 Park Row, Houston, Texas 77084.
ARTICLE FOUR
The period of its duration is perpetual.
ARTICLE FIVE
The number of Directors shall be fixed by the By-Laws of the Corporation
at not less than three, and until changed by such By-Laws shall be three, and
the names and addresses of those who are the current directors are as follows:
Name Address
W. L. Hampton 16400 Park Row
Houston, Texas 77084
Everett G. Hanlon 16400 Park Row
Houston, Texas 77084
John R. Howard 16400 Park Row
Houston, Texas 77084
Thomas L. Langford 16400 Park Row
Houston, Texas 77084
A. C. Lederer, Jr. 16400 Park Row
Houston, Texas 77084
ARTICLE SIX
The aggregate number of shares which the Corporation shall have authority
to issue is Twenty Million shares of common stock (the "Common Stock"), without
par value.
21
<PAGE>
ARTICLE SEVEN
Provisions for the regulation of the internal affairs of the Corporation
will include the following, but such enumeration is not in limitation of the
power of the shareholders or the Board of Directors to formulate in the By-Laws,
by resolution, or any other proper manner any other lawful provision not
inconsistent with law or these articles:
Section 1. Voting. Each outstanding share, regardless of class, will be
entitled to one vote on each matter submitted to a vote of shareholders. At
each election of directors every shareholder entitled to vote at such election
will be entitled to vote, in person or by proxy, the number of shares owned by
him for each director for whose election he has a right to vote. The right of
shareholders to cumulate votes in the election of directors is expressly denied.
Section 2. By-Laws. The Board of Directors from time to time may alter,
amend or repeal the By-Laws of the Corporation or adopt new By-Laws; but the
shareholders from time to time may alter, amend or repeal any By-Laws adopted
by the Board of Directors or may adopt new By-Laws.
Section 3. Denial of Preemptive Rights. The shareholders of the
Corporation will not have the preemptive right to acquire additional, unissued
or treasury shares of the Corporation, or securities of the Corporation
convertible into or carrying a right to subscribe to or acquire shares.
Section 4. Limitation of Liability of Directors. No director of the
Corporation shall be liable to the Corporation or its shareholders for monetary
damages for an act or omission in such director's capacity as a director except
for (i) a breach of the director's duty of loyalty to the Corporation or its
shareholders, (ii) an act or omission not in good faith that constitutes a
breach of duty to the Corporation or an act or omission that involves inten-
tional misconduct or a knowing violation of the law, (iii) a transaction from
which the director received an improper benefit (whether or not the benefit
resulted from an action taken within the scope of the director's office), or
(iv) an act or omission for which the liability of the director is expressly
provided by applicable statute.
Dated this 26th day of April, 1995.
RELIABILITY INCORPORATED
By: /s/ Larry Edwards
Larry Edwards, President
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the applicable SEC Form and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000034285
<MULTIPLIER> 1,000
<NAME> RELIABILITY INCORPORATED
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 2,253
<SECURITIES> 0
<RECEIVABLES> 4,362
<ALLOWANCES> 0
<INVENTORY> 4,187
<CURRENT-ASSETS> 11,297
<PP&E> 17,950
<DEPRECIATION> 12,661
<TOTAL-ASSETS> 16,660
<CURRENT-LIABILITIES> 3,176
<BONDS> 0
<COMMON> 5,926
0
0
<OTHER-SE> 4,888
<TOTAL-LIABILITY-AND-EQUITY> 16,660
<SALES> 9,860
<TOTAL-REVENUES> 9,860
<CGS> 5,271
<TOTAL-COSTS> 5,271
<OTHER-EXPENSES> 4,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 107
<INCOME-TAX> 52
<INCOME-CONTINUING> 55
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
