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 Period Ended March 31, 1999
Commission File Number 0-7092
RELIABILITY INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0868913
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16400 Park Row
Post Office Box 218370
Houston, Texas 77218-8370
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(281) 492-0550
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
YES X NO
----------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,631,765 -- Common Stock -- No Par Value
as of May 7, 1999
1
<PAGE>
RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
March 31, 1999
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets:
March 31, 1999 and December 31, 1998 3-4
Consolidated Statements of Operations:
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosure of Market Risk 17
PART II - OTHER INFORMATION
Item 1.
through
Item 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures 19
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
March 31, December 31,
1999 1998
(unaudited)
Current assets:
Cash and cash equivalents $13,964 $15,702
Accounts receivable 2,149 2,178
Inventories 1,271 1,301
Deferred tax assets 525 572
Other current assets 488 441
------ ------
Total current assets 18,397 20,194
------ ------
Property, plant and equipment at cost:
Machinery and equipment 14,517 14,390
Building and improvements 4,934 5,023
Land 530 530
------ ------
19,981 19,943
Less accumulated depreciation 10,764 10,407
------ ------
9,217 9,536
------ ------
Assets held for sale 2,135 2,193
Other assets, net of accumulated amortization 1,349 1,323
------ ------
$31,098 $33,246
====== ======
See accompanying notes
3
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1999 1998
(unaudited)
Current liabilities:
Note payable to shareholder $ 534 $ 534
Accounts payable 639 547
Accrued liabilities 1,460 3,045
Income taxes payable 188 335
Current maturities on long-term debt - 274
Accrued restructuring reserve 134 300
------ ------
Total current liabilities 2,955 5,035
------ ------
Deferred tax liabilities 707 634
Commitments and contingencies - -
Stockholders' equity:
Common stock, without par value;
20,000,000 shares authorized; 7,838,527
and 7,811,278 shares issued in 1999 and
1998, respectively 9,461 9,340
Retained earnings 25,819 26,081
------ ------
35,280 35,421
Less treasury stock, at cost, 1,206,762
shares in 1999 and 1998 7,844 7,844
------ ------
Total stockholders' equity 27,436 27,577
------ ------
$31,098 $33,246
====== ======
See accompanying notes
4
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended March 31,
(unaudited)
1999 1998
Revenues $4,320 $11,480
Costs and expenses:
Cost of revenues 2,759 5,863
Marketing, general and administrative 1,503 2,399
Research and development 476 614
Provision for restructuring - 100
----- ------
4,738 8,976
----- ------
Operating income (loss) (418 ) 2,504
Interest income, net 158 44
----- ------
Income (loss) before income taxes (260 ) 2,548
----- ------
Provision (benefit) for income taxes:
Current (118 ) 698
Deferred 120 63
----- ------
2 761
----- ------
Net income (loss) $ (262 ) $ 1,787
===== ======
Earnings (loss) per share:
Diluted $ (.04 ) $ .29
===== ======
Basic $ (.04 ) $ .29
===== ======
Weighted average shares:
Diluted 6,616 6,210
===== ======
Basic 6,616 6,061
===== ======
See accompanying notes
5
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
(unaudited)
1999 1998
Cash flows from operating activities:
Net income (loss) $ (262 ) $ 1,787
Adjustments to reconcile net income (loss) to
cash provided (used) by operating activities:
Depreciation and amortization 604 485
Change in deferred tax assets and liabilities 120 63
Provision for inventory obsolescence 2 3
Loss (gain) on disposal of fixed assets 19 -
Provision for restructuring, net of
cash payments - 100
Increase (decrease) in operating assets
and liabilities:
Accounts receivable 29 (821 )
Inventories 28 1,047
Other current assets (47 ) 78
Accounts payable 92 (854 )
Accrued liabilities (1,585 ) (2,053 )
Income taxes payable (147 ) 463
Cash payments charged to
restructuring reserve (29 ) -
------ ------
Total adjustments (914 ) (1,489 )
------ ------
Net cash (used) provided by
operating activities (1,176 ) 298
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (390 ) (417 )
Decrease in other long-term assets (19 ) -
------ ------
Net cash (used) in investing activities (409 ) (417 )
------ ------
Cash flows from financing activities:
Payments on long-term debt (274 ) (197 )
Proceeds from issuance of common and treasury
stock pursuant to stock option and employee
stock savings plans 128 169
Other (7 ) 19
------ ------
Net cash (used) by financing activities (153 ) (9 )
------ ------
Net (decrease) in cash (1,738 ) (128 )
Cash and cash equivalents:
Beginning of period 15,702 7,108
------ ------
End of period $13,964 $ 6,980
====== ======
Supplemental disclosures:
Interest paid $ 10 $ 43
====== ======
Income taxes paid $ 35 $ 201
====== ======
See accompanying notes
6
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
- -----------------------
Reliability Incorporated is a United States based corporation with
operations in the United States, Singapore and Costa Rica. The Company and its
subsidiaries are principally engaged in the design, manufacture and sale of
equipment used to test and condition integrated circuits. In addition, the
Company and a subsidiary operate service facilities which condition and test
integrated circuits as a service to others. The Company's testing products are
sold to companies that manufacture semiconductor products and are shipped to
locations in the U.S., Europe, Asia and Pacific Rim countries. Services, as of
March 31, 1999, are provided principally to two customers; one in the U.S. and
one in Singapore. The Company closed a U.S. services facility in April 1998 and
acquired, in December 1998, assets of a company that provides services to
customers in Austin, Texas and Singapore. Another subsidiary manufactures and
sells power sources, primarily a line of DC to DC power converters. Power
sources are sold to U.S., European and Asian based companies that design and
sell electronic equipment.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the consolidated financial statements for the period ended
December 31, 1998 have been reclassified to conform to the 1999 presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the interim
period ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1998.
7
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Comprehensive Income
During the first quarter of 1999 and 1998, total comprehensive income
(loss) amounts were $(262,000) and $1,787,000, respectively, which are the same
as net income (loss).
Income Taxes
- ------------
Deferred income taxes are provided under the liability method and reflect
the net tax effects of temporary differences between the tax basis of assets
and liabilities and their reported amounts in the consolidated financial
statements.
The differences between the effective rate reflected in the provision
(benefit) for income taxes on income (loss) before income taxes and the amounts
determined by applying the statutory U.S. tax rate of 34% are analyzed below
(in thousands) for the three month periods ended:
March 31,
1999 1998
Provision at statutory rate $ (88 ) $ 866
Tax effects of:
Lower effective income tax rates related
to undistributed foreign earnings (1 ) (107 )
Foreign losses for which a tax benefit is
not available 83 -
Foreign tax benefit of export processing
exemption - (22 )
State income taxes - 13
Other 8 11
---- ----
Provision for income taxes $ 2 $ 761
==== ====
8
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Inventories
- -----------
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market (replacement cost or net realizable value) and
include (in thousands):
March 31, December 31,
1999 1998
Raw materials $ 956 $1,071
Work-in-progress 274 180
Finished goods 41 50
------ -----
$1,271 $1,301
====== =====
Inventories are presented net of reserves for excess and obsolete
inventories of $777,000 and $775,000 at March 31, 1999 and December 31, 1998,
respectively.
2. NOTE PAYABLE TO SHAREHOLDER AND CREDIT AGREEMENTS
The note payable to shareholder at March 31, 1999 represents the balance
due to Basic Engineering Services and Technology Labs, Inc. ("BEST") related to
the acquisition of assets that was completed in December 1998. The note is due
June 3, 1999 and bears interest at 6%.
Reliability maintains a line of credit with Wells Fargo Bank Texas. N.A.
which permits the Company to borrow up to $4 million until December 31, 1999.
Interest is payable at the bank's prime rate minus 1/4% (7.5% at March 31,
1999). The unpaid principal of the note is due December 31, 1999. The loan
agreement provides for a revolving line of credit, secured by substantially all
assets of the Company which are located in the U.S., except for land and
buildings. The credit facility requires compliance with certain financial
covenants related to the Company's current ratio, debt service coverage and
funded debt to net income before income taxes plus non-cash items and interest
expense. The agreement prohibits the payment of cash dividends by the Company
unless otherwise agreed to by the bank. The Company was in compliance with the
financial requirements of the agreement at March 31, 1999, and there were no
balances outstanding under the agreement at March 31, 1999 or December 31,
1998.
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. $289,000) at the bank's prime rate plus 2% (7.5% at March 31,
1999). There were no balances outstanding at March 31, 1999, but amounts
utilized under letter of credit commitments totaled $264,000, resulting in
credit availability of $25,000 at March 31, 1999. 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.
9
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Interest income (expense), for the three month periods ended March 31, is
presented net as follows (in thousands):
1999 1998
Interest income $168 $87
Interest (expense) (10 ) (43 )
--- --
Interest income, net $158 $44
=== ==
3. SEGMENT INFORMATION
The following table sets forth reportable segment information (in
thousands) for the periods indicated:
Three Months Ended
March 31,
1999 1998
---- ----
Revenues from external customers:
Testing Products $ 966 $ 5,650
Services 2,832 4,775
Power Sources 522 1,055
Intersegment revenues:
Testing Products 55 47
Services 6 135
Eliminations (61 ) (182 )
------ ------
$ 4,320 $11,480
====== ======
Operating income (loss):
Testing Products $ (838 ) $ 1,159
Services 657 1,322
Power Sources (144 ) 120
General corporate expenses (93 ) (97 )
------ ------
Operating income (loss) $ (418 ) $ 2,504
====== ======
10
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Total assets by reportable segment as of the dates indicated are as follows
(in thousands):
March 31, December 31,
1999 1998
Testing Products $ 5,880 $ 6,702
Services 8,722 9,584
Power Sources 1,754 1,651
General corporate assets 14,742 15,309
------ ------
$31,098 $33,246
====== ======
For the periods indicated above, there were no material changes in the
accounting policies and procedures used to determine segment income or loss.
4. SHUT-DOWN AND RESTRUCTURING OF FACILITIES AND ASSETS HELD FOR SALE
The Company's North Carolina Services facility accounted for approximately
4% and 10% of consolidated revenues in 1998 and 1997, respectively, and
provided services to one customer. The customer notified the Company in January
1998 that it was necessary to reduce the output of DRAMs burned-in and tested
by the Company's Durham facility. The customer ceased sending product, and the
Company shut down the facility in April 1998. The Company recorded a $100,000
impairment reserve related to the land and building located at the Durham
facility in 1998 in order to state these assets at the lower of carrying amount
or fair value, less cost to sell. The land and a building located in Durham are
presented as assets held for sale in the accompanying consolidated balance
sheet. The assets held for sale are being actively marketed, although no
assurances can be given that they will be sold during 1999.
Services provided to Texas Instruments Incorporated accounted for
substantially all of the revenues of the Company's Singapore Services facility.
On October 1, 1998, Micron Technology acquired the Texas Instruments facility
in Singapore and informed the Company that it would continue to utilize the
Company's burn-in services, but at a significantly reduced level. Texas
Instruments revenues at the Singapore facility accounted for 21% and 32% of
consolidated revenues for the years ended December 31, 1998 and 1997,
respectively. In connection with the decrease in volumes at the Singapore
facility, a $507,000 provision for restructuring was recorded in the fourth
quarter of 1998. The restructuring provision includes $207,000 for severance
costs paid to employees who were terminated during 1998; $100,000 related to
disposal of excess equipment and $200,000 related to costs associated with
excess leased facilities. Fixed asset disposals totaling $137,000 were charged
to the accrued restructuring reserve in the first quarter of 1999.
11
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
5. ACQUISITION
On December 3, 1998, the Company acquired certain assets and assumed
certain liabilities from BEST. The assets acquired included equipment,
furniture and fixtures, contracts, work-in-progress, backlog, proprietary
rights, books and records, customer lists and goodwill. The liabilities assumed
consisted of employee-related obligations. The operations acquired are located
in Austin, Texas and Singapore and are used to operate burn-in and test
services laboratories, providing such services to integrated circuit
manufacturers. The results of operations related to this acquisition have been
included in the Company's consolidated financial statements since December 3,
1998.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended
March 31,
1999 1998
Net income (loss) $ (262 ) $1,787
===== =====
Weighted average shares outstanding 6,616 6,061
Net effect of dilutive stock options
based on the treasury stock method - 149
----- -----
Weighted average shares and
assumed conversions 6,616 6,210
===== =====
Earnings per share:
Diluted $ (.04 ) $ .29
===== =====
Basic $ (.04 ) $ .29
===== =====
Stock options related to the purchase of 608,000 and 253,000 shares of
common stock were not included in the computation of diluted earnings per share
for the first quarters of 1999 and 1998, respectively, because including the
options in the calculations would have been antidilutive.
The Company, in December 1998, issued 475,000 shares of Common Stock
related to the acquisition of assets from BEST.
12
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this document contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth elsewhere in this
document.
FINANCIAL CONDITION
The primary sources of Reliability's liquidity are cash provided by
operations and working capital. The parent Company and its Singapore subsidiary
have substantial cash available to support anticipated liquidity requirements.
The Company maintains lines of credit to supplement the primary sources of
capital. Changes in the Company's financial condition since December 31, 1998
and March 31, 1998 are generally attributable to changes in cash flows from
operating activities, acquiring certain assets from BEST during 1998 and
accelerating payments on a mortgage during 1998 and 1999. In addition, the
shut-down, in 1998, of the Company's North Carolina Services facility and
changes in operations at the Company's Singapore facility did, during late
1998, and will in 1999, affect the Company's future financial condition.
Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
chart. The periods presented related to the profitability ratios are for the
three months ended March 31, and twelve months ended December 31:
March 31, December 31, March 31,
1999 1998 1998
Working capital:
Working capital (thousands) $15,442 $15,159 $13,257
Current ratio 6.2 to 1 4.0 to 1 3.5 to 1
Equity ratios:
Total liabilities to equity 0.1 0.2 0.3
Assets to equity 1.1 1.2 1.3
Profitability ratios:
Gross profit 36 % 51 % 49 %
Return on revenues (6)% 13 % 16 %
Return on assets (annualized) (3)% 13 % 25 %
Return on equity (annualized) (4)% 15 % 32 %
13
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
The Company's financial condition improved throughout 1998 and has remained
strong during 1999. Working capital increased to $15.4 million at March 31,
1999, from $13.3 million at March 31, 1998, and the ratio of current assets to
current liabilities increased from 3.5 to 1 at March 31, 1998, to 6.2 to 1 at
March 31, 1999. Beginning in the fourth quarter of 1998, the Company's revenues
and level of operations declined. Assets such as accounts receivable and
inventories decrease during periods of declining production and are converted
to cash. Cash provided by certain components of cash flows from operations in
1998 and in 1999 were used to reduce and pay off a mortgage payable, acquire
assets from BEST, purchase fixed assets, increase the amount of short-term
interest-bearing cash investments and, in 1999, reduce accrued liabilities.
The Company maintains a credit facility with a financial institution to
provide credit availability to supplement cash provided by operations, if
required. Credit availability provided by the credit facility was $4.0 million
at March 31, 1999. The Company's Singapore subsidiary maintains a small
overdraft facility to support the subsidiary's credit commitments.
Decreased demand for the Company's products and services, during the latter
half of 1998, resulted in a decline in backlog from $16.7 million at March 31,
1998 to $1.8 million at December 31, 1998. Backlog increased during 1999 to
$2.5 million at March 31, 1999. The increase resulted from a modest change in
demand for products sold by the Company. The operating effects resulting from
the changes in backlog and the corresponding changes in operations, during 1998
and 1999, affected various elements of cash provided by operations, as
reflected in the Consolidated Statements of Cash Flows.
Net cash used by operating activities for the three months ended March 31,
1999 was $1.2 million, contrasted with $0.3 million provided by operations in
the first three months of 1998. The principal items contributing to the cash
used by operations in 1999 were the net loss of $0.3 million and a $1.6 million
decrease in accrued liabilities. Cash used by operations in 1999 was reduced by
$0.6 million of depreciation and amortization. Accrued liabilities decreased
$1.6 million due to payment of performance bonuses related to 1998 profits and
a general reduction in most items included in accrued liabilities due to
payment of year-end accruals in the first quarter of 1999.
Demand for Testing Products sold by the Company remains very weak during
the early months of 1999 and indications are that the weak demand may continue
for several more quarters. The acquisition of certain services activities from
BEST in December 1998 and a general increase in demand, beginning in late 1998,
for Services provided by the Company indicates, at this time, that revenues in
the Services segment could improve throughout 1999. Based on the Company's
current low backlog level and the uncertainty concerning demand for the
Company's products during 1999, Reliability is not currently providing a
revenue forecast for the year ending December 31, 1999. The current forward-
looking forecast indicates revenues for the second quarter of 1999 will be
approximately $4.7 to $5.1 million, compared to first quarter 1999 revenues of
$4.3 million.
14
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
Capital expenditures during the first three months of 1999 and 1998 were
$0.4 million and $0.4 million, respectively. Expenditures in both years include
equipment required by the Singapore Services facility to support services
provided by the subsidiary.
Current projections indicate that the Company's cash and cash equivalent
balances, future cash generated from operations and available lines of credit
will be sufficient to meet the projected cash requirements of the Company for
the remainder of 1999.
RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to three months ended March 31,
1998.
Revenues. Revenues for the 1999 three-month period were $4.3 million compared
to $11.5 million for the 1998 period. Revenues in the Testing Products,
Services and Power Sources segments decreased $4.7, $2.0 and $0.5 million,
respectively.
Revenues in the Testing Products segment were $1.0 million for the first
three months of 1999, which is a decrease of 83% over the same period in 1998.
The revenue decrease relates to the fact that the semiconductor industry is
highly cyclical and experiences periods of oversupply and excess production
capacity. Beginning in mid 1998, the oversupply and excess production capacity
began to affect demand for Testing Products sold by the Company, resulting in a
significant decrease in new orders for Testing Products sold by the Company.
Volume decreases resulted in revenues from the sale of CRITERIA products
decreasing $3.8 million and revenues from the sale of INTERSECT products
decreasing $0.9 million.
Revenues in the Services segment for the 1999 period were $2.8 million, a
decrease of 41% compared to the corresponding 1998 period. The decrease in
revenues in this segment is related to the shut-down of the Company's North
Carolina Services facility in April 1998 and a decrease in revenues at the
Company's Singapore facility, beginning in October 1998, resulting from the
Micron Technology purchase of the Singapore facility's principal customer,
Texas Instruments. The overall decrease was reduced by an increase in revenues,
in Austin, Texas and Singapore, resulting from the acquisition, in December
1998, of certain services activities of BEST.
Revenues in the Power Sources segment were $0.5 million for the first three
months of 1999, reflecting a 51% decrease from the 1998 period. Revenues were
affected, in 1999, by changes in demand, an aging product line, price
competition and a decline in market penetration resulting in volume decreases.
15
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
Costs and Expenses. Total costs and expenses for the 1999 period decreased
$4.2 million or 47% compared to the 62% revenue decrease. Cost of revenues
decreased $3.1 million, marketing, general and administrative expenses
decreased $0.9 million and research and development expenses decreased $0.1
million.
The decrease in the gross profit from 49% in the 1998 quarter to 36% in
1999 is attributable to significant revenue decreases in all business segments.
Marketing, general and administrative expenses for the 1999 period
decreased $0.9 million. The decrease in expenses is primarily related to the
Company's stringent expense control programs and a decrease in Testing Products
revenues which resulted in a decrease in volume related expenses, such as
commissions, warranty and similar expenses and, in all business segments, a
decrease in incentive compensation expense accruals which are directly related
to the decrease in profitability. The shut-down of the Company's North Carolina
facility and a modest reduction in expenses in the Power Products segment also
contributed to the decrease.
Research and development costs decreased to $476,000 in 1999, compared to
$614,000 in the 1998 quarter. The decrease relates primarily to the fact that
first quarter 1998 costs were somewhat higher than normal. Reliability is
committed to a significant research and development program and development
costs are projected to remain at current levels or increase somewhat during the
remainder of the year.
The change in net interest during the 1999 period reflects an increase in
interest income and a decrease in interest expense. Interest income increased
due to significant increases in investable cash and interest expense decreased
due to the fact the Company accelerated payments on, and paid off, in 1999, the
mortgage related to the Houston facility.
The Company's effective tax rate was 30% for the three months ended March
31, 1998, compared to a $2,000 provision related to the $262,000 loss for the
1999 period. The principal reason the Company's effective benefit tax rate was
less than the U.S. statutory rate in 1999 was that tax benefits were not
available to a foreign subsidiary due to net operating loss limitations. The
effective rate for 1998 was less than the statutory rate due to a lower
effective tax rate related to earnings of the Singapore subsidiary and a tax
benefit from an export processing exemption in Costa Rica.
IMPACT OF YEAR 2000
The Company disclosed information related to the impact of Year 2000 in
Form 10-K for the year ended December 31, 1998. There have been no significant
changes in matters related to the impact of Year 2000 on the Company, and
readers are referred to Form 10-K for further information.
16
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Statements in this Form 10-Q regarding Reliability's business which
are not historical facts are "forward looking statements" that involve risk and
uncertainties, including, but not limited to, market acceptance of Company
products and services, the effects of general economic conditions, the impact
of competition, product development schedules, problems with technology,
delivery schedules, Year 2000 compliance, future results related to
acquisitions, and supply and demand changes for Company products and services
and its customers' products and services. Actual results may materially differ
from projections.
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
There have been no material changes in the market risk disclosures
reported in the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1998.
17
<PAGE>
RELIABILITY INCORPORATED
OTHER INFORMATION
PART II. OTHER INFORMATION
Items 1 through 3.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Reliability Incorporated held its annual meeting of shareholders on
April 28, 1999.
(b) At the meeting, shareholders elected the following persons as
directors; no director continued in office except those elected at the
meeting:
Larry Edwards
W.L. Hampton
John R. Howard
Thomas L. Langford
A.C. Lederer, Jr.
Philip Uhrhan
(c) The only matter voted on at the meeting was the election of
directors. The results of the votes of shareholders are as follows:
Director Nominee For Withheld
Larry Edwards 5,209,969 75,242
W.L. Hampton 5,193,375 91,836
John R. Howard 5,182,615 102,596
Thomas L. Langford 5,210,575 74,636
A.C. Lederer, Jr. 5,156,615 128,596
Philip Uhrhan 5,209,575 75,636
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is filed as part of this report:
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On December 17, 1998, the Company filed its report on Form 8-K, dated
December 3, 1998, with respect to its acquisition of assets from Basic
Engineering Services and Technology Labs, Inc. (Item 2 of the report).
On February 11, 1999, the Company filed an amendment to such Form 8-K,
filing the required financial statements.
18
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
March 31, 1999
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
May 11, 1999 Larry Edwards
President and
Chief Executive Officer
BY /s/ Max T. Langley
May 11, 1999 Max T. Langley
Sr. Vice President - Finance
and Chief Financial Officer
19
<PAGE>
RELIABILITY INCORPORATED
INDEX TO EXHIBITS
Exhibit Page
Number Description of Exhibits Number
- ------- ----------------------- ------
27. Financial Data Schedule 21
20
<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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,964
<SECURITIES> 0
<RECEIVABLES> 2,149
<ALLOWANCES> 0
<INVENTORY> 1,271
<CURRENT-ASSETS> 18,397
<PP&E> 19,981
<DEPRECIATION> 10,764
<TOTAL-ASSETS> 31,098
<CURRENT-LIABILITIES> 2,955
<BONDS> 0
0
0
<COMMON> 9,461
<OTHER-SE> 17,975
<TOTAL-LIABILITY-AND-EQUITY> 31,098
<SALES> 4,320
<TOTAL-REVENUES> 4,320
<CGS> 2,759
<TOTAL-COSTS> 2,759
<OTHER-EXPENSES> 1,979
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (158)
<INCOME-PRETAX> (260)
<INCOME-TAX> 2
<INCOME-CONTINUING> (262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (262)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
