<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, 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 May 11, 1995
1
<PAGE>
RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
March 31, 1995
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets:
March 31, 1995 and December 31, 1994 3-4
Consolidated Statements of Operations
and Retained Earnings:
Three Months Ended March 31, 1995 and 1994 5
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable. 15
Item 6. Exhibits and Reports on Form 8-K. 15
Signatures 16
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
ASSETS
March 31, December 31,
1995 1994
(In thousands)
Current Assets:
Cash and Cash Equivalents $ 4,821 $ 6,019
Accounts Receivable 2,184 2,502
Inventories (Note 1) 2,206 2,099
Refundable Income Taxes 132 -
Deferred Tax Assets 231 221
Other Current Assets 300 398
------- -------
Total Current Assets 9,874 11,239
Property, Plant and Equipment at Cost:
Machinery and Equipment 11,524 11,247
Building and Improvements 5,688 2,596
Land 230 -
------- -------
17,442 13,843
Less Accumulated Depreciation 12,233 11,918
------- -------
5,209 1,925
Other Assets 74 120
------- -------
$15,157 $13,284
======= =======
See accompanying notes
(unaudited)
3
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1995 1994
(In thousands)
Current Liabilities:
Accounts Payable $ 630 $ 369
Accrued Liabilities 1,444 1,999
Current Maturities on Long-Term Debt (Note 2) 87 -
Income Taxes Payable 16 17
------- -------
Total Current Liabilities 2,177 2,385
Long-Term Debt (Note 2) 2,553 -
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 4,361 4,833
------- -------
Total Stockholders' Equity 10,287 10,759
------- -------
$15,157 $13,284
======= =======
See accompanying notes
(unaudited)
4
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended March 31,
1995 1994
(In thousands, except
per share data)
Revenues $ 4,093 $ 5,225
Costs and Expenses:
Cost of Revenues 2,449 2,710
Marketing, General and Administrative 1,696 1,739
Research and Development 526 235
------- -------
4,671 4,684
------- -------
Operating Income (Loss) (578) 541
Interest (Income) Expense, Net (Note 2) (1) (15)
------- -------
Income (Loss) Before Income Taxes (577) 556
Provision (Benefit) for Income Taxes (Note 1):
Current (95) 28
Deferred (10) (13)
------- -------
(105) 15
------- -------
Net Income (Loss) (472) 541
Retained Earnings Beginning of Period 4,833 2,188
------- -------
Retained Earnings End of Period $ 4,361 $ 2,729
======= =======
Net Income (Loss) Per Share $ (.11) $ .13
======= =======
See accompanying notes
(unaudited)
5
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
1995 1994
(In thousands)
Cash Flows from Operating Activities:
Net Income (Loss) $ (472) $ 541
Adjustments to Reconcile Net Income (Loss) to
Cash Provided by Operating Activities:
Depreciation and Amortization 326 263
Deferred Income Taxes (10) (13)
(Gain) Loss on Disposal of Fixed Assets - (5)
Provision for Inventory Obsolescence 17 22
Increase (Decrease) in Operating Cash Flows:
Accounts Receivable 318 440
Inventories (124) (533)
Refundable Income Taxes (132) -
Other Assets 132 35
Accounts Payable 261 115
Accrued Liabilities (555) (211)
Income Taxes Payable (1) (10)
Liability for Restructuring - (134)
------- -------
Total Adjustments 232 (31)
------- -------
Net Cash (Used) Provided by
Operating Activities (240) 510
------- -------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (3,612) (89)
Proceeds from Sale of Equipment 10 6
------- -------
Net Cash (Used) by Investing Activities (3,602) (83)
------- -------
Cash Flows from Financing Activities:
Issuance of Mortgage Payable 2,640 -
Payments on Long-Term Debt - (58)
------- -------
Net Cash Provided (Used) by
Financing Activities 2,640 (58)
------- -------
Effect of Exchange Rate Changes on Cash 4 2
------- -------
Net Increase (Decrease) in Cash (1,198) 371
Cash at Beginning of Period 6,019 2,882
------- -------
Cash at End of Period $ 4,821 $ 3,253
======= =======
See accompanying notes
(unaudited)
6
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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:
March 31, December 31,
1995 1994
(In thousands)
Raw materials $1,556 $1,299
Work-in-progress 580 726
Finished goods 70 74
------ ------
$2,206 $2,099
====== ======
7
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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
(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,
1995 1994
(In thousands)
Provision (benefit) at statutory rate $(196) $ 189
Tax benefit of net operating loss
carryforward - (79)
Tax effect of:
Foreign expenses for which a benefit
is available - (37)
Foreign benefits not recorded due to net
loss carryforward position 77 -
Foreign tax benefit of export
processing exemption - (54)
Other 14 (4)
----- -----
Provision (benefit) for income taxes $(105) $ 15
===== =====
8
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
2. LONG-TERM DEBT AND SHORT TERM BORROWINGS
Long-term debt at March 31, consisted of the following:
1995
(In thousands)
Mortgage payable; due in monthly installments
of $26,777, including interest at 9%, beginning
May 1, 1995 $2,640
Less current maturities 87
------
Long-term debt due after one year $2,553
======
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 -
$57,000; 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. $355,000) at the bank's prime rate plus 1% (7-1/4%
at March 31, 1995). There were no balances outstanding at March 31, 1995,
but amounts utilized under credit commitments totalled $135,000, resulting
in credit availability of $220,000 at March 31, 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 March 31, is presented
net as follows:
1995 1994
(In thousands)
Interest expense $ 69 $ 3
Interest (income) (70) (18)
----- -----
Interest (income) expense, net $ (1) $ (15)
===== =====
9
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the periods ended March 31
are as follows:
1995 1994
(In thousands)
Interest $ 69 $ 1
Income taxes $ 38 $ 4
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, 1995
are: 1995 - $417,000; 1996 - $560,000; 1997 - $312,000; 1998 - $18,000;
subsequent to 1998 - None.
A lease on the Company's U.S. facility, located in Houston, Texas was
scheduled to expire in May 1995. In March 1995, the Company purchased the
facility as explained in Note 2 to the Consolidated Financial Statements.
The Company leases manufacturing and office space in its U.S. facility
to a third party under an agreement expiring in May 1995. In April 1995,
the Company entered into a letter agreement to extend the lease for a period
of three years. Future income under the lease will be as follows: 1995 -
$79,000; 1996 - $111,000; 1997 - $122,000; and 1998 - $53,000.
10
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 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 maintained a line of
credit, through the fourth quarter of 1994, to supplement these primary
sources of capital and has historically leased its major facilities,
reducing the need to expend capital on such items. Changes in the Company's
financial condition and liquidity since March 31, 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. Factors
discussed in the management's discussion included in the Company's 1994 Form
10-K are also applicable to operations for the first quarter 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:
March 31, December 31, March 31,
1995 1994 1994
Working Capital:
Working Capital (in thousands) $7,697 $8,854 $6,549
Current Ratio 4.5 to 1 4.7 to 1 3.6 to 1
Equity Ratios:
Total Liabilities to Equity 0.4 0.2 0.3
Assets to Equity 1.5 1.2 1.3
Profitability Ratios:
Gross Profit 40 % 46 % 48 %
Return on Sales (12)% 11 % 10 %
Return on Assets (Annualized) (12)% 20 % 19 %
Return on Equity (Annualized) (18)% 25 % 25 %
The Company's financial condition improved significantly during 1994 and
declined slightly during 1995. Working capital increased to $7.7 million
at March 31, 1995, from $6.5 million at March 31, 1994, and the ratio of
current assets to current liabilities increased to 4.5 at March 31, 1995,
compared to 3.6 at March 31, 1994. The improvement is attributable to cash
provided by operating activities during 1994. A significant element of cash
provided by operations, in 1994, was net income of $2.6 million. 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 contributed to the Company reporting income in 1994. The
11
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1995
Company operated below its breakeven point in the first quarter of 1995,
resulting in a loss for the quarter ended March 31, 1995. The loss resulted
in a modest decline in the Company's financial condition in 1995.
Net cash used in operating activities for the quarter ended March 31,
1995 was $240,000, contrasted with $510,000 provided by operations in the
first quarter of 1994. The principal items contributing to the cash used
in operations in 1995 were the net loss of $472,000, and a decrease in
accrued liabilities of $555,000. The net loss was attributable to a
decrease in revenues and the decrease in accrued liabilities resulted from
payment of incentive bonuses and other accruals, which were related to 1994,
in the first quarter 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 $220,000 under the facility at March 31, 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 may, however,
during 1995, establish a credit facility with a financial institution to
provide credit availability to supplement cash provided by operations, if
required.
Capital expenditures during the first three months of 1995 and 1994 were
$3,612,000 and $89,000, respectively. Expenditures for 1995 include the
purchase of the Company's headquarters facility for $3.3 million. The
purchase will significantly reduce the Company's occupancy expenses.
Management currently projects that 1995 expenditures, excluding the purchase
of the U.S. facility, may exceed $1.4 million.
RESULTS OF OPERATIONS
Three months ended March 31, 1995 compared to three months ended March
31, 1994.
REVENUES
Revenues for the 1995 three month period were $4.1 million compared
to $5.2 million for the 1994 quarter. Conditioning Products and Power
Sources revenues decreased $756,000, and $479,000, respectively, while
Conditioning Services revenues increased $103,000.
Demand for Conditioning Products decreased during 1994, resulting in a
significant decrease in backlog in this segment in 1994. The decrease
resulted in a decline in revenues from the sale of burn-in products during
the first quarter of 1995, compared to the first quarter of 1994. The
decrease was reduced somewhat by modest increases in revenues from the sale
12
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1995
of INTERSECT(tm) and Loader and Unloader products. Demand for Conditioning
Products increased significantly during the first quarter of 1995, resulting
in an increase in backlog in this segment from $3.0 million at December 31,
1994 to $8.1 million at March 31, 1995.
Revenues in the Power Sources segment were $976,000 for the first
quarter of 1995, reflecting a 33% decease from the first quarter of 1994.
The decrease resulted from volume and unit price decreases due to decreased
demand and product mix changes. Revenues in this segment in 1995 declined
only 7% compared to the fourth quarter of 1994.
Revenues in the Services segment, for the 1995 quarter, were $1.9
million, an increase of 6% compared to the 1994 quarter. Revenues related
to conditioning services increased at the Company's North Carolina Services
facility, but decreased at the Singapore Service facility. These changes
were primarily due to changes in demand.
COSTS AND EXPENSES
Total costs and expenses for the 1995 quarter, compared to the 1994
quarter, decreased only $13,000 to $4.7 million, compared to the revenue
decrease of $1.1 million. Cost of revenues decreased $261,000; marketing,
general and administrative expenses decreased $43,000 and research and
development expenses increased $291,000.
The decrease in the gross profit from 48% in 1994 to 40% in 1995 is
attributable to all business segments and resulted from revenue decreases
in the Conditioning Products and Power Sources segments and an increase in
expenses in the Services segment. The decrease in the gross profit in the
Conditioning Products segment results primarily from the decline in
revenues. Expenses remained low, but volumes for most product lines were
below levels necessary to fully absorb manufacturing overhead costs. The
gross profit in the Services segment, in the first quarter of 1995,
approximates the historical rate in this segment, but is less than the rate
in the first quarter of 1994. The 1994 gross profit rate was high due to
unusually high productivity.
The decrease in the gross profit in the Power Sources segment is
attributable to significant volume decreases and unit price decreases,
without a corresponding decrease in manufacturing overhead costs.
Marketing, general and administrative expenses, for the 1995 quarter,
decreased $43,000 in comparison to a $1.1 million decrease in revenues.
Revenues for the first quarter of 1995 were unusually low and are forecasted
to increase based on the Company's backlog as of March 31, 1995. Marketing,
General and Administrative expenses for 1995 were maintained at levels
necessary to maintain operations throughout 1995.
13
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1995
RESEARCH AND DEVELOPMENT
Research and development costs increased to $526,000 in 1995, compared
to $235,000 in the 1994 quarter. The increase relates primarily to
development cost associated with orders for INTERSECT(tm) products which are
included in the Company's backlog at March 31, 1995. These products are
scheduled for delivery beginning in the second 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 investable cash balances and an increase in interest rates.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company's effective tax benefit rate was 18% in 1995, compared to
a tax rate of 3% 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 to a foreign subsidiary due to net operating loss limitations.
The Company recorded a tax benefit associated with a U.S. loss during the
first quarter of 1995, due to management's forecast that realization of the
benefit in 1995 is more likely than not. 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, tax benefits related to expenses incurred in
shutting down a foreign subsidiary, and a tax benefit of an export
processing exemption.
14
<PAGE>
RELIABILITY INCORPORATED
OTHER INFORMATION
March 31, 1995
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, 1995.
15
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
March 31, 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: May 11, 1995
President and
Chief Executive Officer
BY /s/ Max T. Langley
Max T. Langley DATE: May 11, 1995
Sr. Vice President - Finance
and Chief Financial Officer
16
<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
<NAME> RELIABILITY INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 4,821
<SECURITIES> 0
<RECEIVABLES> 2,184
<ALLOWANCES> 0
<INVENTORY> 2,206
<CURRENT-ASSETS> 9,874
<PP&E> 17,442
<DEPRECIATION> 12,233
<TOTAL-ASSETS> 15,157
<CURRENT-LIABILITIES> 2,177
<BONDS> 0
<COMMON> 5,926
0
0
<OTHER-SE> 4,361
<TOTAL-LIABILITY-AND-EQUITY> 15,157
<SALES> 4,093
<TOTAL-REVENUES> 4,093
<CGS> 2,449
<TOTAL-COSTS> 2,449
<OTHER-EXPENSES> 2,222
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1)
<INCOME-PRETAX> (577)
<INCOME-TAX> (105)
<INCOME-CONTINUING> (472)
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<NET-INCOME> (472)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
