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Reliability Incorporated
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twenty-five years of reliability in electronics
Annual Report
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Reliability is celebrating its 25th year
of providing quality to the electronics industry.
We have made our reputation as a leading supplier
of testing services and testing products to the major
manufacturers and users of integrated circuits.
Our DC/DC converters are used worldwide in telecom,
distributed power and industrial control applications.
Please join us in a review of the Company's history.
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Table of Contents
Annual Report
To Our Shareholders I
Selected Financial Information I
The Company in Review IV
Corporate Information VIII
Form 10-K 1
Five Year Selected Financial Data 9
Management's Discussion 10
Consolidated Financial Statements F-1
Notes To Consolidated Financial Statements F-7
(inside front cover)
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Full page ghosted photo of man working on burn-in chamber
Front of fly sheet
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Back of fly sheet
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To Our Shareholders 1996 was a very successful, but challenging, year. Due
to the hard work and good execution by Reliability's seasoned professional
staff, we have a lot to celebrate. It is hard to describe 1996 as anything
but outstanding for the Company, since operating income was 25% higher than
1995 on a 5% increase in revenues. This was accomplished in a year when the
semiconductor market declined over 10%. 1996's operating income of $7.5
million and net income of $4.8 million are the highest in the history of the
Company.
We entered the year with a $14.1 million backlog, greater than any
year's beginning backlog since the Company was founded. However, beginning
in January of 1996, booking of new orders for semiconductors decreased below
shipments, and bookings did not rise above shipments until October of 1996.
Even though almost all semiconductor industry analysts were forecasting
continued growth of 15-25% for 1996, as the year unfolded, it became obvious
that it would not be a good year for semiconductor manufacturers. DRAM
manufacturers in particular were affected, and that in turn presented its
share of challenges for Reliability.
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SELECTED FINANCIAL INFORMATION
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(In Thousands, except per share data)
1994 1995 1996 % Change
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Revenues $23,427 $33,930 $35,760 + 5
Operating Income 2,580 6,004 7,493 +25
Net Income 2,645 4,063 4,846 +19
Net Income Per Share .62 .96 1.14 +19
Working Capital 8,974 8,504 12,728 +50
Stockholders' Equity 10,759 14,822 19,668 +33
Total Assets 13,284 23,727 26,603 +12
Average Shares Outstanding 4,243 4,243 4,243 --
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We were again reminded that the semiconductor equipment industry is
volatile and is still subject to the basic economic laws of supply and
demand. When the supply of semiconductors exceeds the demand, there is a
correction, and that is exactly what happened in 1996. Needless to say,
semiconductor manufacturers slowed their capital spending and delayed or
rescheduled a number of announced projects for increasing capacity.
Reliability weathered the slowdown in the market in the first quarter
better than the general market, and our bookings remained above our
shipments as our backlog increased. The slowdown did catch up with us,
however, in the second and third quarters, and backlog at September 30,
declined to $8 million. Orders for our functional memory testers and
micrologic systems decreased below shipments, and the rate of new orders for
our DC/DC converters declined below shipments. We responded by decreasing
our overhead and general and administrative expenses as well as reducing
planned capital expenditures for 1996.
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Demand for our Intersect(tm) functional memory testers returned in the
fourth quarter, and we finished the year with a consolidated backlog of $9.9
million.
On the positive side, the demand for our testing Services remained
strong throughout the year and our revenues in this segment increased by 21%
over our previous record year of 1995.
Reliability held its R&D investment constant in 1996; however, we
invested a total of $4.4 million in R&D in 1995/1996 in order to continue
development of new state-of-the-art test systems and DC/DC converters for
our customers.
Even though we saw some softening in our semiconductor equipment markets
during the year, we continued our proven strategy of investing in shared
customer-specific research and development and capital equipment
expenditures. We invested $1.8 million in capital equipment in 1996, for a
total of $10 million in the 1995/1996 time frame. The majority of the
investment was in equipment for testing Services to increase our capacity
for processing larger volumes of DRAMs for our key customers. This resulted
in considerable
The following graphs represent those shown in the printed annual report.
The graphs in the annual report are vertical bar graphs showing the dollars
along the left side and the years along the bottom. These three graphs are
horizontal in the middle of the second page of the letter to shareholders.
Revenues (Thousands of Dollars)
1996 |XXXXXX|XXXXXX|XXXXXX|X $35,760
1995 |XXXXXX|XXXXXX|XXXXXX|XXX | $33,930
1994 |XXXXXX|XXXXXX|X $23,427
$0 $10,000 $20,000 $30,000 $40,000
Operating Income (Thousands of Dollars)
1996 |XXXXXX|XXXXXX|XXXXXX|XXX $ 7,493
1995 |XXXXXX|XXXXXX|XXXXXX| $ 6,004
1994 |XXXXXX|X $ 2,580
$0 $2,000 $4,000 $6,000 $8,000
Net Income (Thousands of Dollars)
1996 |XXXXXX|XXXXXX|XXXXXX|XXXXXX|XXXXX | $4,846
1995 |XXXXXX|XXXXXX|XXXXXX|XXXXXX|X $4,063
1994 |XXXXXX|XXXXXX|XXXX $2,645
$0 $1,000 $2,000 $3,000 $4,000 $5,000
growth in revenue for this segment during 1995 and 1996. The balance of the
capital expenditures was invested in equipment to reduce costs, increase
productivity, and reduce time to market.
While we continued to make significant investments in our future, our
financial position remains very strong. Cash increased from $1.6 million as
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of December 31, 1995, to $8.5 million at December 31, 1996. Net worth
increased to $19.7 million or $4.64 per share. Working capital increased to
$12.7 million, and net capital assets increased to $9.3 million, while
long-term debt decreased to less than $2 million. Our only long-term debt
is the fixed-rate mortgage on our Houston facility.
Our forward looking forecasts reflect increasing demand for our
products and services due to a predicted increase in demand for DRAMs,
SDRAMs, SRAMs, and microprocessors. Our shared investments in R&D and
capital equipment, which are targeted at serving key customers who are
leaders in supplying high performance memory and micrologic devices, should
position our testing Services and Testing Products for long-term growth
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that is faster than most other semiconductor equipment and service markets.
The focus in Power Sources on the fast growing computer and telecom market
should produce a good environment to steadily increase our revenue on DC/DC
converters. This, along with our strong financial position, should place
Reliability's products and services in a good position to respond as the
market recovers and begins to grow again.
I want to extend a special thank you to our customers, employees, and
stockholders who have supported Reliability during the past 25 years. Our
employees have done an excellent job designing, selling, manufacturing, and
supporting high quality products and services to a very loyal customer base.
Our stockholders have been very patient and supportive, which we certainly
appreciate.
We believe that we have developed winning strategies for all three of
our business segments that positions Reliability to continue to perform at
increasingly higher levels in the long term. However, we forecast that 1997
revenue and profits will start slowly and gain momentum through the year as
our backlog increases.
The following graphs represent those shown in the printed annual report.
The graphs in the annual report are vertical bar graphs showing the dollars
along the left side and the years along the bottom. These three graphs are
horizontal in the middle of the third page of the letter to shareholders.
Working Capital (Thousands of Dollars)
1996 |XXXXXXX|XXXXXXX|XXXX $12,728
1995 |XXXXXXX|XXXXX $ 8,504
1994 |XXXXXXX|XXXXXX $ 8,974
$0 $5,000 $10,000 $15,000
Stockholders' Equity (Thousands of Dollars)
1996 |XXXXXXXX|XXXXXXXX|XXXXXXXX|XXXXXXXX $19,668
1995 |XXXXXXXX|XXXXXXXX|XXXXXXX | $14,822
1994 |XXXXXXXX|XXXXXXXX|X $10,759
$0 $5,000 $10,000 $15,000 $20,000
Total Assets (Thousands of Dollars)
1996 |XXXXXXXX|XXXXXXXX|XXXXXXXX|XXXXXXXX|XXXXXXXX|XX $26,603
1995 |XXXXXXXX|XXXXXXXX|XXXXXXXX|XXXXXXXX|XXXXXX $23,727
1994 |XXXXXXXX|XXXXXXXX|XXXX $13,284
$0 $5,000 $10,000 $15,000 $20,000 $25,000
/s/ Larry Edwards
Larry Edwards
President and Chief Executive Officer
February 19, 1997
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1971-1977 Reliability was founded in 1971 when it acquired the assets of
the Testing Services Division of Texas Instruments. The objective was
simple, but far reaching - to provide reliability testing services of
integrated circuits (ICs) to major electronics manufacturers or their end
customers. By artificially aging or conditioning ICs (a process commonly
called "burn-in"), then testing the devices, Reliability was able to improve
the probability that the ICs would continue to operate in their final
environment over time. The Company developed the Criteria(r) Burn-in
System for its internal use since there was no commercially available
equipment to meet its stringent quality requirements.
In a virtually untapped market, the first year saw sales quadruple.
A "small" R & D budget of $1,800 was allocated to develop products for a new
market - DC/DC converters.
From 1972-1975, the Company grew in both size and scope of its
operations. It began manufacturing its V-PAC(tm) and T-PAC DC/DC converters
overseas, expanding the Company's presence in Europe. Demand for testing
Photos with the following captions are printed across the middle of the page
at this point:
Testing ICs after burn-in (1971); board assembly
Criteria burn-in chambers at service facility; V-PAC DC/DC converter
An early facility; Criteria chamber manufacturing
text continues at this point:
services capabilities had increased to the point that the Company started
manufacturing Criteria Burn-in Systems for sale to external customers.
Reliability had become one of the largest independent test laboratories,
and the Criteria equipment an industry standard.
As demand for Reliability's innovative products escalated, a new
Houston facility was opened in 1977 to significantly increase manufacturing
and support capacity. The customer base for Criteria systems and DC/DC
converters expanded to include Europe and Asia. Two new models of the
Criteria line were introduced, thereby widening the equipment market for the
Company. Plans were also announced to expand the Company's manufacturing and
testing services operations in the U.S. and overseas.
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1978-1983 With the opening of additional testing laboratories, the Company
was able to serve the large concentration of semiconductor manufacturers in
Southeast Asia and the heart of Silicon Valley. 1978 revenues soared 31%.
Part of this success was due to the expansion of the Power Sources business
as it entered the ten-watt market. The Criteria line of burn-in systems
increased again with the introduction of the Criteria VII. Targeted for the
16K and 64K Random Access Memory (RAM) market, it provided two-and-one-half
times the capacity of competing product offerings. In addition, Reliability
introduced its first peripheral products for more efficient use of burn-in
equipment including automatic loaders and unloaders for inserting and
removing ICs on and off burn-in boards.
Investments in R & D paid off by the end of 1980 with the introduction
of the Intercept (later changed to Intersect) Burn-in and Test System
(BITS), a unit that provided the first system for simultaneously
conditioning and testing 16K and 64K memories. By 1982, Intersect II was
introduced, giving RI another industry first -
Photos with the following captions are printed across the middle of the page
at this point:
Networked systems; Loader channels; the first Intercept (Intersect)
Auto Loader/Unloader; transformer winding for power sources; finished
power sources
Text continues at this point:
a service capability for performing parallel test during burn-in on 18,000
64K RAMs. This technology came at a time when Japanese competition in the
semiconductor market was increasing pressure on US manufacturers to improve
their quality levels.
Automation and reduced human intervention were perceived as keys to
increasing quality. The Company responded with its InterNet (later
RelNet(tm)) local area network system which was introduced in 1983 to supply
microprocessor controlled burn-in and test equipment.
1983 also produced software enhancements for the Intersect systems,
boosting their capabilities to handle 256K RAMs. In the Power Sources
segment, new five-watt switch mode regulated DC/DC converters were
introduced. RI also initiated its first software for tracking ICs through
the entire burn-in and test service process.
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1984-1990 1984 was an outstanding year for Reliability. Burgeoning demand
for microprocessors enabled the Company to operate at or near capacity
levels for the entire year. Revenues were up almost 100% and net income
increased more than 350%, compared to 1983. All three business segments
contributed to this phenomenal success, but the Testing Products segment
accounted for the greatest portion of the growth. During 1984 construction
also began on an 87,000 square foot, three-story addition to the
headquarters building in Houston.
As with all highs, a low followed and lasted for the next couple of
years. The semiconductor industry experienced its worst recession in its
thirty-year history during 1985. RI began a repositioning process to prepare
for an era of rapidly changing technologies. Out of the new challenges and
technologies came new opportunities and the Company took advantage of these
through the balance of the decade. The mid and late '80s ushered in a host
of new products to address the complex burn-in process required for high pin
count ICs including Application Specific Integrated Circuits (ASICs) such
as gate arrays, standard cells, and custom and programmable logic
Photos with the following captions are printed across the middle of the page
at this point:
The current building at 16400 Park Row; board manufacturing
Intersect 30; Costa Rica facility for power source manufacturing
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devices. The most notable new products were the Criteria XII and Intersect
10, the first commercially available products for ASICs and Very Large Scale
Integration (VLSI) devices. In 1986, RI released its Interactive System
Controller which provides total programming, control and monitoring of the
Criteria family of burn-in systems.
The testing Services segment had become more customer specific over
the years and, in response, the Company established a "captive" testing
services lab in Durham, North Carolina. This facility continues to be
dedicated to providing services to one major manufacturer of DRAMs.
Although the Power Sources segment of the Company had grown steadily
through the years, it was during the late 1980s that Reliability achieved
record sales and gained recognition as a major supplier of quality DC/DC
converters for local area networks. The Company decided to open a facility
in Costa Rica in 1990 dedicated to manufacturing this product line.
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1991-1996 The personal computer exploded onto the scene, and Reliability
was ready to take advantage of the semiconductor industry's continuing
growth. Although 1991/92 were sluggish years for the Company, testing
Services operations met or exceeded expectations. Our two captive test labs,
one in North Carolina, and another in Singapore, continued to expand as each
new generation of devices increased in complexity.
The Intersect 30 Burn-in and Test System was introduced after three
years of research and development. This product was the first to feature
surface mount, high speed multi-technology drivers for ECL, CMOS, BiCMOS,
or BiPolar memory devices. A personal computer served as the central
control, operator interface, and test engineer's interface. With the
Intersect 30, the Company claimed technology leadership for burn-in test
systems for the next generation of memory devices.
Another new product, Burn-in Board Management (BIB management)
software, was brought to market that enabled customers to track usage,
history, and defect rate of burn-in boards.
Photos with the following captions are printed across the middle of the page
at this point:
Loader manufacturing, Criteria 18, DC/DC converter inspection;
Intersect 2000, North Carolina testing facility
Text continues at this point:
Several other new products were introduced in response to market
demand: two new lower cost memory burn-in and test systems - the Intersect
2000 and the RK-94(tm); three phases of the RelNet software; and the
Criteria 18-HD(tm) with the capability to dissipate 15,000 watts; and new
10 and 25 watt wide input range converters.
The 1990s has been a period of investment and planning for the growth
of the Company. Research and development expenditures from 1991 through
1996 totaled $12 million, and another $13 million was invested in capital
equipment and plant. In 1995, we purchased our facilities in Costa Rica,
North Carolina and Houston. After repositioning the Company to meet the
challenges of a rapidly changing industry, we showed a profit in 1993 and
have shown increasing profitability in each subsequent year. We continue
to explore the avenues leading to another "25 years of Reliability in
electronics".
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Corporate Information
Directors Officers
Larry Edwards Larry Edwards
Chairman President and
Chief Executive Officer
W. L. Hampton Max T. Langley
Retired Senior Vice President Finance,
Chief Financial Officer,
John R. Howard Secretary and Treasurer
Attorney
Thomas L. Langford James M. Harwell
Investments Vice President
A.C. Lederer, Jr. Robert W. Hildenbrand, Jr.
Investments Vice President
Paul Nesrsta
Vice President
Margaret Bauer
Assistant Vice President
Lane Petterson
Assistant Vice President
Margaret A. Chapman
Assistant Secretary
Criteria(r) and V-PAC(r) are registered trademarks of Reliability
Incorporated
(tm) Intersect, RelNet, RK-94, and Criteria 18-HD are trademarks of
Reliability Incorporated
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Front of back fly sheet
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Shareholder Information
Legal Counsel Inquiries Concerning Inquiries Concerning the
the Company Company's Stock
Butler & Binion, L.L.P.
Houston, Texas If you have any ques- If you have any
tions concerning the questions concerning
Auditors Company's operations, stock certificates,
recent results, his- change of address,
Ernst & Young, LLP torical performance or consolidation of
Houston, Texas wish to receive pre- accounts, transfer
vious annual reports, of ownership or
press releases or other other stock account
Company information matters, please
Annual Meeting please contact: contact the Company's
stock transfer agent
The annual meeting at the following
of shareholders of Investor Relations address:
Reliability Incor- Manager
porated, will be Reliability Incorporated
held at the Company's P.O. Box 218370 Harris Trust and Savings
executive offices - Houston, Texas 77218-8370 Bank
16400 Park Row, Tel: (281) 492-0550 c/o Harris Trust Company
Houston, Texas Fax: (281) 492-0615 of New York
on April 30, 1997 77 Water Street, 4th Floor
at 10:00 a.m. New York, NY 10005
Tel: (800) 926-1269
Inside Back cover
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Reliability Incorporated
P.O. Box 218370
Houston, Texas 77218-8370
(281) 492-0550
Reliability Incorporated
North Carolina Operations
3427 Industrial Drive
Durham, North Carolina 27704
(919) 471-1884
RICR de Costa Rica, S.A.
P.O. Box 1-3006
Zona Franca Metropolitana
Barreal, Heredia
Costa Rica, A.C.
506-293-4384
Reliability Singapore Pte Ltd.
5004 Ang Mo Kio Ave. 5
#04-01 Techplace II
Singapore 569872
65-481-9266
(back cover)
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