SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
(Registrant's telephone number, including area code): (281) 492-0550
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(title of class)
---------------
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 report), and (2) has been subject to such
filing requirements for the past ninety days.
YES X NO
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
-----
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State the aggregate market value of the voting stock held by non-
affiliates of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specific date within 60 days prior to the
filing date.
$47,355,983, based on the last sales price as reported on The Nasdaq
Stock(r) Market on March 3, 2000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock, no par value 6,668,765
(title of class) (number of shares outstanding)
as of March 3, 2000
Documents Incorporated by Reference
Listed hereunder are the documents incorporated by reference and the Part
of the Form 10-K into which such documents are incorporated:
Part III Proxy Statement for the 2000 Annual
Meeting of Shareholders of the
Registrant (to be filed within 120
days of the close of the registrant's
fiscal year)
2
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RELIABILITY INCORPORATED
FORM 10-K
TABLE OF CONTENTS
December 31, 1999
PART I
Page
Item 1. Business.........................................................4
Item 2. Properties......................................................13
Item 3. Legal Proceedings...............................................13
Item 4. Submission of Matters to a Vote of Security Holders.............13
Item 4A. Executive Officers of the Registrant............................14
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 15
Item 6. Selected Financial Data.........................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......24
Item 8. Consolidated Financial Statements and Supplementary Data.......F-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................26
Part III
Item 10. Part III is omitted as the Company will file a
Item 11. Proxy Statement for the 2000 Annual Meeting of
Item 12. Shareholders as indicated in this report.....................26
Item 13.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..........................................26
Signatures......................................................27
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PART I
Item 1. Business
(a) GENERAL DEVELOPMENT OF BUSINESS. Reliability Incorporated
("Reliability") and its subsidiaries are principally engaged in the design,
manufacture and sale of equipment used to test and condition integrated
circuits. The Company and its subsidiaries also operate service facilities
which condition and test integrated circuits as a service to others, and
design, manufacture and sell power sources, primarily a line of DC to DC power
converters, which convert direct current voltage into a higher or lower
voltage.
The following table shows the subsidiaries of the Company as of the date
of this report:
Reliability Incorporated
(a Texas corporation)
------------------------
RICR de Costa Rica, S.A. Reliability Singapore Pte Ltd.
(a Costa Rica corporation) (a Singapore corporation)
As used in this report, the terms "Company" and "Registrant" refer to
Reliability, its present subsidiaries and their predecessors, unless a
different meaning is stated or indicated.
The Company was incorporated under the laws of Texas in 1953. All
subsidiaries are incorporated under a variant of the "Reliability" name.
The Company's business was started in 1971 when substantially all of the
assets of a testing laboratory owned by Texas Instruments Incorporated were
acquired by Reliability, Inc. In 1974, the Registrant acquired Reliability,
Inc. and began providing conditioning and testing services. Reliability
Singapore Pte Ltd. provides conditioning services, including limited
manufacturing of certain conditioning products for sale to its services
customers. RICR de Costa Rica, S.A. began operating in 1990 and manufactures
and sells power sources.
The Company operates in three industry segments as discussed blow.
TESTING AND CONDITIONING PRODUCTS ("Testing Products").
Under current semiconductor technology and manufacturing processes,
manufacturers are unable to consistently produce batches of integrated circuits
("ICs" or "semiconductors") that are completely free of defects which cause the
ICs to fail. An IC may be defective at the time it is produced or it may have a
latent defect which eventually will cause it to fail. An IC with such a defect
will almost always fail during the first 500 to 1,000 hours of normal use.
Accordingly, it has become customary to "condition" or "burn-in" ICs (i.e.,
subject them, during a relatively short period of time, to controlled stresses
which simulate the first several hundred hours of operation) to identify
defects prior to delivery. Such conditioning subjects the ICs to maximum rated
temperatures, voltages and electrical signals. Following burn-in, each IC is
tested to determine whether it functions as designed.
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The Company manufactures equipment that performs burn-in and testing, and
a limited amount of equipment that performs burn-in only. The Company was one
of the first to design, manufacture and market systems that utilize burn-in and
test technology within the same product. The Company's burn-in and testing
products contain sophisticated software, most of which is designed and
developed by the Company contemporaneously with the related hardware. The
Testing Products segment provided 26% of the Company's revenues in 1999.
The Company focuses its research and development on equipment and related
software that performs functional testing during burn-in of memory and
micrologic devices. This focus has led to the development of two major product
families - the INTERSECT(tm) line for the memory market (i.e., SRAM, DRAM &
SDRAM) and the CRITERIA(r) 18 line for the micrologic, or more specifically,
the microprocessor device market.
Set forth below is the device capacity, power dissipation and type of
semiconductor processed by each of the primary Testing Products that the
Company currently offers:
Burn-In and Test Device Power Primary
Product Type Capacity Dissipation(1) Application
---------------- -------- -------------- -----------
Criteria 18 1,152 7KW Micrologic
Criteria 18-HD 1,152 15KW Microprocessors
INTERSECT 2000 (2) 12,288 - Memory
---------
(1) Power/heat dissipation rate in kilowatts
(2) 256 Meg DRAMS
The Company manufactures and sells CRITERIA 18 and CRITERIA 18-HD (High
[heat] Dissipation) burn-in and test systems. The CRITERIA 18-HD system
provides a cost-effective means to perform functional testing during burn-in of
high frequency micrologic devices which dissipate large quantities of heat. The
system also offers the ability to dissipate 15KW of power in an economically
sized system without having to use chilled water as a cooling mechanism. This
feature allows users to reduce significantly the amount of floor space used
when performing burn-in and testing of high power micrologic devices.
Under the trade name INTERSECT, the Company manufactures systems which
functionally test memory devices during burn-in. Most functional testing is
performed serially after the device is conditioned. INTERSECT systems perform
parallel functional testing during the burn-in process. The testing currently
performed by INTERSECT systems during burn-in has historically been performed
by serial testers capable of testing 64 individual DRAMs at a time. Because
INTERSECT systems can test up to 12,288 individual DRAMs at a time, and are
less expensive than serial testers, testing costs per IC can be reduced 30% to
60%.
INTERSECT systems are computer controlled for high volume burn-in and
testing of memory devices. The Company's INTERSECT systems can vary in their
burn-in and testing capabilities. The current generation of INTERSECT products
is based on the INTERSECT 30 ("I-30") technology which was developed in 1992.
The I-30 was capable of functionally testing 8,640 64 Meg memory devices during
5
<PAGE>
the burn-in process in a single chamber. It was capable of testing MOS, CMOS,
Bipolar, ECL and BiCMOS DRAMs and SRAMs. A lower cost version of the I-30 burn-
in and test system called the INTERSECT 2000 ("I-2000") is the current
generation INTERSECT product. The I-2000 has the capacity to functionally test
12,288 256 Meg memory devices during the burn-in process in a single chamber
and has become the principal product in the INTERSECT product line.
The Company has developed a networked burn-in and test management
software system known as RELNET(tm), which enables users of CRITERIA and
INTERSECT systems to connect multiple systems to a single host computer. This
provides users with a flexible software tool and a convenient central location
to monitor system status, track burn-in boards and device lots, schedule
equipment maintenance, control and store test profiles, and generate and store
burn-in and testing results.
Burn-in and testing products are designed and manufactured at the
Company's Houston, Texas facility.
The Company continues to manufacture a limited number of burn-in only
systems marketed under the name CRITERIA. Demand for burn-in only systems has
declined significantly, and is being replaced by demand for products that
perform both burn-in and testing. The original CRITERIA systems were designed
for internal use in the Company's Services segment, but, since 1974, these
systems and their successors have been sold to outside customers.
CRITERIA and INTERSECT systems generally are used on new IC production
lines, but may also be added to existing production lines. These systems burn-
in and test relatively large numbers of similar ICs at one time and are usually
purchased by companies that manufacture large volumes of similar ICs, but they
also may be purchased by companies that independently burn-in and test ICs.
SERVICES ("Services").
The Company operates a Services facility in Singapore which offers pre-
test, burn-in, burn-in and test, final test and speed sort, automatic visual
inspection, and tape and reel for DRAMs and SRAMs. The facility also provides
burn-in of micrologic devices, particularly microprocessors. Texas Instruments,
the principal customer of the Singapore Services facility, prior to 1999, was
acquired by Micron Technology ("Micron") in October 1998. Micron advised the
Company, in the fourth quarter of 1998, that it would not outsource the
processing of DRAMs of its own design. Micron stopped using the Company's
services in the fourth quarter of 1999.
In December 1998, the Company acquired assets related to two services
facilities from Basic Engineering Services and Technology Labs, Inc. ("BEST").
The acquired facilities were located in Austin, Texas and Singapore. The BEST
Singapore facility that was acquired, replaced a substantial portion of the
decline in revenues that resulted from the loss of Micron's business. The
Austin, Texas facility that was acquired from BEST was closed in September
1999.
The Company's North Carolina facility provided services to one customer,
Mitsubishi Semiconductor America, Inc. The customer notified the Company in
January 1998 that it was reducing its output of DRAMs to be burned-in and
tested by the Company's Durham facility and ceased sending product to the
Company in April 1998, at which time the Company closed the Durham facility.
6
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In spite of the numerous difficulties that were encountered in this
segment in 1998 and 1999, Services revenues increased by 10% and accounted for
62% of the Company's 1999 revenues. (Reference is made to Notes 10 and 11 of
the Company's Consolidated Financial Statements for additional information.)
The Company uses CRITERIA systems and burn-in boards to provide burn-in
services. The Company utilizes serial testing equipment and burn-in equipment
acquired from others in certain testing procedures. Services are generally sold
on a periodically adjusted per-unit-processed basis.
POWER SOURCES ("Power Sources")
The operating components of electronic equipment frequently have varying
electrical requirements. Rather than provide electricity to each component
separately, specialized devices called DC-DC converters or power sources are
used to convert direct current voltage into a higher or lower voltage. By using
small DC-DC converters, electronic equipment can operate from a single output
power supply, yet provide different voltages to different operating components.
These DC-DC converters allow designers of electronic equipment to localize
power requirements, increase modularity in the product design, and expand
equipment features without having to redefine power needs. The Company
specializes in the 1 watt to 30 watt DC-DC converter market and designs,
manufactures and markets a wide range of power sources classified into the
various product series. The Power Sources segment accounted for 12% of the
Company's revenues in 1999.
Products in the Power Sources segment are generally based on the V-PAC(r)
which was introduced in 1972. The V-PAC is a DC-DC converter compatible with
electronic equipment assembly operations, and today is a minor product. The
principal products the Company currently manufactures are the (1) the LAN-
PAC(tm), a power source designed to operate with Local Area Network computer
applications; (2) the S-PAC(tm), a smaller 1 watt unit which is similar to the
V-PAC; (3) the Q-PAC(tm), which is a replacement for the V-PAC and is
compatible with electronic assembly operations; (4) the Z-PAC(r), which is a
high efficiency DC-DC power source; and (5) the TELECOM-PAC(r), which is a
power source designed for the telecommunications industry.
The Company is continually developing and introducing additional models
of DC-DC converters, which increases the number of higher wattage units in the
product line. In addition, the Company continues to convert to surface mount
technology for manufacturing power source products. Surface mount technology
removes the human element from certain manufacturing processes, thereby
enhancing the reliability of the power sources. The technology also allows
product assembly in smaller packages and therefore provides higher power output
from smaller units.
Power sources are designed at the Company's Houston, Texas facility and
are manufactured in the Company's Costa Rica facility.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company's
business is divided into three industry segments - (i) manufacture of testing
and conditioning products (Testing Products), (ii), services which condition
and test integrated circuits as a service to others (Services), and (iii)
manufacture of power sources (Power Sources). The information included in Note
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5 of the Company's Consolidated Financial Statements provides additional
information regarding the Company's industry segments.
(c) NARRATIVE DESCRIPTION OF BUSINESS. The business of the Company is
generally described in part (a) of this Item 1. The following paragraphs
provide additional information concerning various aspects of the Company's
business. Unless otherwise indicated, the information provided is applicable to
all industry segments in which the Company operates.
(i) PRINCIPAL PRODUCTS. Information as to the principal products and
services of the Company is given in part (a) of this Item 1. The Testing
Products segment of the Company's business has historically been the dominant
segment. The Services segment was the dominant segment in 1999. The following
table sets forth the percentage of the Company's total revenues by business
segment:
Years Ended December 31,
-----------------------
Business Segment 1999 1998 1997
---------------- ---- ---- ----
Testing Products 26% 64% 50%
Services 62 28 43
Power Sources 12 8 7
--- --- ---
Total revenues 100% 100% 100%
=== === ===
Reference is made to Note 5 of the Company's Consolidated Financial
Statements for additional information.
(ii) NEW PRODUCTS. During 1999, Reliability's Testing Products segment
began development of the key building blocks required for its next generation
of testing products systems. The systems are being designed to meet the
technical challenges created by the continuously shrinking geometries of the
new generations of memory and microprocessor devices. This trend toward smaller
feature sizes has enabled the semiconductor industry to package higher
functionality at increasing operating frequencies into smaller and smaller
packages. For Reliability and other equipment suppliers to the semiconductor
industry, the challenge will be to provide systems that operate at high
frequencies and lower voltages, while supplying up to ten times more current
per device. With this goal in mind, the Testing Products segment has embarked
on a number of development projects that specifically target high speed test
and interface electronics, the delivery and control of large amounts of current
at very low voltages, thermal management techniques to tightly control the
ambient temperature gradient while handling large variations in dissipation
from device to device, and methods of dissipating higher power in the chamber
at lower operating temperatures. Some of the features that are developed will
be introduced as retrofits to existing testing systems over the next two to
three years. Many of the features will only be economical, however, when
offered on new systems.
The power source market is demanding devices that function more
efficiently, driven by a requirement for higher wattage devices in smaller
packages. During 2000, the Company will expand the 1 to 2 watt miniature DC-DC
family to include regulated units in both SIP (through-hole) and DIP (surface-
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mountable) packages. In addition, the Company will incorporate synchronous
rectification into selected models, thus providing the efficiency levels
required by higher wattage, lower voltage, smaller footprint converters. The
Company introduced, over the past three years, additional models in a new
series of wide input range (up to 65 watts) DC-DC converters, which increased
the number of higher wattage units in the product line. The Company continues
to convert to surface mount technology for manufacturing power source products.
During 1999, over 80% of the units shipped incorporated surface mount
technology, compared to 70% in 1998 and 40% in 1997. The Company began
shipping, in 1999, 1 and 2 watt, surface mountable, Q-PAC converters to
customers. Also during 1999, the Power Sources segment designed and shipped
samples of four custom converters and nine special designs to meet specific
applications for target customers. This represents the highest number of custom
and special power sources designed and shipped in one year since the beginning
of the segment. Two of the custom converters will provide the basis for a new
family of high-density low-cost 1 to 2 watt miniature DC-DC converters. The
Company has also started to design its first triple output converter.
(iii) RAW MATERIALS AND INVENTORY. The Company's products are designed by
its engineers and are manufactured, assembled, and tested at its facilities in
Houston, Texas; San Jose, Costa Rica; and, to a limited degree, in Singapore.
The Company's products contain certain parts which it manufactures and
components purchased from others. Some metal fabrications and subassembly
functions are performed by others for the Company.
The Company maintains an inventory of components and parts for its
manufacturing activities. There are many sources for most of the raw materials
needed for the Company's manufacturing activities, although a few components
come from sole sources. The Company has not experienced any significant
inability to obtain components or parts, but does experience occasional delays
in receiving certain items.
(iv) PATENTS, TRADEMARKS. Because of rapidly changing technology in the
electronics industry, the Company believes its future success is dependent more
on the quality of its products and services, the technical skills of its
personnel, and its ability to adapt to the changing technological environment
than on protection of proprietary developments and inventions. The Company has
patents and pending patent applications in the United States and certain other
countries on components of its testing and conditioning products and ancillary
equipment, including the EX-SERT(tm) backplane, a thermally conductive
mechanical device (heat-sink), a method of IC extraction during unloading of
burn-in boards and a floating-head mechanism used in loading and unloading
burn-in boards. The Company considers certain of its patents or patent
applications to be significant, but not material, to the Company's business.
The Company has certain trademarks which are registered with the U.S.
Patent and Trademark Office for use in connection with its products and
services, including "ri (and design)," "RELIABILITY," "CRITERIA," "V-PAC,"
"Z-PAC," "INNOVATION," and "TELCOM-PAC." In addition, the Company uses certain
other tradenames which are not presently registered, including "INTERSECT,"
"RELNET," "EX-SERT," "UNLOADER," "S-PAC," "Q-PAC," "ISDN-PAC," "RK-94," "SERIES
1000," "CRITERIA 18-HD," "I-2000" and others not listed here which are used
less frequently. The Company relies on copyrights and trade secrets to protect
its computer software.
9
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The Company has in the past and will in the future take appropriate
action to protect all of its patents, copyrights, trade secrets and trademarks,
as well as its other proprietary rights.
(v) SEASONALITY. The Company's business is not seasonal, but is
cyclical, depending on the electronics manufacturing and semiconductor
industries.
(vi) WORKING CAPITAL. The Company finances its inventory and other
working capital needs out of internally generated funds and has in the past
used periodic borrowings to finance its needs. The Company has short-term
credit facilities on which it could draw additional funds. Reference is made to
Note 3 of the Company's Consolidated Financial Statements for additional
information as to the credit agreements under which working capital is or could
be available if required.
(vii) MAJOR CUSTOMERS. The products and services offered by the Company's
Testing Products and Services segments are used by manufacturers or users of
very large quantities of semiconductor devices or ICs. Accordingly, the
potential customer base is limited, due to the fact that there are only a small
number of companies that have a need to test and condition large batches of
devices or ICs. Loss of a customer in a limited market environment can
adversely affect the Company.
In 1999, Advanced Micro Devices, Inc. ("AMD") and Motorola Semiconductor
Products Sector ("Motorola") accounted for 39% of consolidated revenues; these
same customers accounted for only 2% and 0% of consolidated revenues in 1998
and 1997, respectively. In 1999, 1998 and 1997, Intel Corporation ("Intel"),
International Business Machines Corporation ("IBM"), Mitsubishi Semiconductor
America, Inc ("Mistubishi") and Texas Instruments Incorporation ("TI")
accounted for 25%, 88% and 90% of consolidated revenues. AMD and Motorola are
customers of the Services segment only, and Intel and IBM are customers of the
Testing Products segment only.
The Company has operated Service facilities in Durham, North Carolina and
Austin, Texas. When the sole customer at each of such facilities (Mitsubishi in
Durham in 1998 and Motorola in Austin in 1999) informed the Company that it
would significantly decrease the amount of product sent for testing or would
cease using the Company's services altogether, the Company closed the
facilities. In 1998, upon the sale by TI of its DRAM operations to Micron
Technology ("Micron"), the Company was informed that Micron would decrease the
amount of products sent for testing and ultimately stopped sending product in
1999. In 1999, the Company restructured its Singapore Services facility
capabilities in response to changes in demand for services at the facility.
The Company believes that its relationships with its customers are good.
In the Power Sources segment, decreased business from one customer may be
replaced by new or increased business from other customers, but there is no
assurance that this will occur. The loss of other major customers or a
significant reduction in orders from a major customer in any business segment
and the failure of the Company to obtain other sources of revenue has had and
could, in the future, have a material adverse impact on the Company. The
Company has no long-term contracts with its major customers.
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(viii) BACKLOG. The following table sets forth the Company's backlog at
the dates indicated:
December 31,
------------
Business Segment 1999 1998
---------------- ---- ----
(In thousands)
Testing Products $2,133 $1,360
Services 58 182
Power Sources 190 245
------ -----
Total $2,381 $1,787
====== =====
Backlog for sales of Testing Products and Power Sources represents orders
for delivery within 12 months from the date on which backlog is reported.
Backlog for Services represents orders for services where the ICs to be
conditioned have been delivered to the Company and orders for testing products
(for delivery within 12 months from the date on which backlog is reported) that
are directly related to providing services to customers. Approximately $2.0
million of the Testing Products backlog at December 31, 1999 is for products
that are scheduled for delivery in the first four months of 2000. Revenue
therefrom will be recorded at the time the products are delivered, but the
customer will pay for the total order, under a written contract, in 23 monthly
installments, beginning in January 2000. The Company's backlog as of December
31, 1999 is believed to be firm, although portions of the backlog are not
subject to legally binding agreements.
(ix) GOVERNMENTAL BUSINESS. The Company does not carry on a material
amount of business with any governmental agency.
(x) COMPETITION. The markets for the Company's products and services
are subject to intense competition. The Company's primary competitors in the
Testing Products segment are other independent manufacturers of such systems
and manufacturers of ICs who design their own equipment. The primary methods of
competition in this segment are quality, product features, service, delivery,
and price. The Company believes that its service after the sale, including its
ability to provide installation, maintenance service, and spare parts, enhances
its competitiveness.
The primary areas of competition for the Company's Services are price,
service level and geographic location. The Singapore Services facility provides
services to a small number of major IC manufacturers in Singapore and, to a
limited degree, to companies in Southeast Asia that manufacture and use ICs.
The world market for power sources is divided into the merchant and the
captive markets. There are less than 1,000 competitors in the merchant market
of the power sources manufacturing business, most of which target a particular
application for their business. The Company believes there are approximately 20
significant competitors whose products compete directly with those of the
Company in its U.S. and foreign markets. Competition in the Power Sources
segment is based primarily on the specific features of the power sources, price
and quality.
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(xi) RESEARCH. The demands of the semiconductor industry for
increasingly complex and sophisticated equipment requires the Company to
continuously develop new products and to review and modify its existing
products and services to adapt to technology changes in the industry. The
Company also focuses on the development of options for its INTERSECT and
CRITERIA product lines. In 1999, 1998 and 1997, the Company spent $1.7 million,
$2.0 million and $1.6 million, respectively, on research and development
activities. Development projects, which are related to the Testing Products
segment, account for a significant portion of research and development
expenditures.
(xii) ENVIRONMENTAL MATTERS. The business of the Company is not expected
to be affected by zoning, environmental protection, or other similar laws or
ordinances.
(xiii) EMPLOYEES. On December 31, 1999, the Company had 345 employees, of
which 17 were contract or temporary employees. The Company's continued growth
depends on its ability to attract and retain its technical staff and skilled
employees. During recent years, the Company has experienced a low turnover rate
among its U.S. employees. Due to the low unemployment rate in Singapore,
turnover at the Singapore subsidiary has been high. Turnover at the Company's
Austin and Singapore facilities increased in 1999. The increase was primarily
related to changes in production levels and closure of the Austin facility,
resulting in the facilities needing fewer employees.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES. See Note 5 to the Company's Consolidated Financial Statements for
a table showing information about foreign and domestic operations of the
Company for the last three years.
Item 2. Properties
The Company's headquarters, including its manufacturing and research and
development facility for testing and conditioning products, is located in a
131,000 square foot facility on a seven acre tract of land in Park 10, an
office and industrial park on Interstate Highway 10, located on the west side
of Houston. The Company leased this facility until March 1995, at which time
the Company purchased the facility. The Company financed the purchase of its
headquarters; during the first quarter of 1999, all indebtedness related to the
facility was paid. The Company occupies 96,000 square feet in the building and
leases the remaining 35,000 square feet to an unrelated party.
A subsidiary of the Registrant leases two facilities totaling 46,000
square feet in Singapore. The Singapore facilities are devoted to Services
operations. The Austin, Texas Services facility occupied 16,000 square feet of
leased space. The facility has been sub-leased for the remaining term of the
lease. A subsidiary of the Registrant owns a 29,500 square foot building in a
free trade zone in San Jose, Costa Rica. The subsidiary utilizes 22,600 square
feet in the building for the manufacture of power sources. The San Jose
facility is not subject to any encumbrance. See Notes 3 and 8 to the Company's
Consolidated Financial Statements for information concerning encumbrances and
leases.
The Company considers its properties suitable and sufficient for its
needs and has no plans to expand or relocate.
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The Company owns land and a 43,500 square foot building in Durham, North
Carolina. The Durham facility is not occupied and is listed for sale.
Item 3. Legal Proceedings.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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Item 4A. Executive Officers of the Registrant.
The following table sets out certain information regarding each executive
officer of the Company:
Officer of
Reliability Position Currently Held
Incorporated Held with Reliability
Name Age Since Incorporated
---- --- ----------- -----------------------
Larry Edwards 58 1981 Chairman of the Board
of Directors,
President and Chief
Executive Officer
Max T. Langley 53 1978 Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
James M. Harwell 45 1993 Vice President
Paul Nesrsta 43 1993 Vice President
J.E. (Jim) Johnson 54 1994 Vice President
Mr. Edwards has been President and Chief Executive Officer of the Company
since 1993 and became a Director and Chairman of the Board of Directors in
1995. Mr. Edwards has been employed by the Company in various capacities since
1977.
Mr. Langley has held his present position for more than five years.
Mr. Harwell has been Vice President, Manufacturing Operations since 1996.
He was Vice President, Site Services from 1993 until 1996 and was the division
manager of the automation equipment division of the Company from 1991 to 1993.
Mr. Nesrsta has been Vice President, Sales and Marketing since 1996. He
was Vice President, Testing Products Marketing from 1993 until 1996 and was
manager of the test systems division of the Company for more than five years
prior to becoming a vice president in 1993.
Mr. Johnson has been Vice President, Engineering since September 1997. He
was Vice President of Engineering for Fusion Semiconductor from August 1996
until September 1997. He was Vice President, Systems Division of Reliability
Incorporated for more than five years prior to August 1996.
14
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The common stock of Reliability trades on The Nasdaq Stock Market(r)
under the stock symbol REAL. The high and low sale prices for 1999 and 1998, as
reported by The Nasdaq Stock Market, are set forth below.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1999
----
High $ 6.13 $ 5.81 $ 6.44 $ 3.75
Low 3.50 3.56 3.44 2.25
1998
----
High $16.75 $16.00 $12.13 $ 6.50
Low 9.56 8.00 3.75 3.38
The Company paid no cash dividends in 1999 or 1998. The Company intends
to retain earnings for use in its business and therefore does not anticipate
paying dividends in the foreseeable future.
The Company has only one class of stock, which is common stock with full
voting rights. In 1999 and 1998, the Company sold and issued shares of common
stock to its Employee Stock Savings Plan and to key employees, officers and
directors who exercised stock options. All common stock shares that were sold
to the stock savings plan and under the stock option plan in 1999 and 1998 were
registered under Registration Statements on Form S-8.
Reliability had approximately 739 shareholders of record as of
February 11, 2000. Management estimates there are approximately 4,000
beneficial owners of Reliability common stock.
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Item 6. Selected Financial Data.
The following table sets forth certain selected financial data for the
years indicated:
Years Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In thousands, except per share data)
Revenues $16,551 $33,543 $47,220 $35,760 $33,930
Cost of revenues 10,750 16,330 23,653 18,027 16,837
------- ------ ------ ------ ------
Gross profit 5,801 17,213 23,567 17,733 17,093
Expenses:
Marketing, general and
administrative 5,540 8,383 9,679 8,043 8,862
Research and development 1,654 2,009 1,578 2,197 2,227
Provision for shut-down and
restructuring 800 607 - - -
Interest (income) expense, net (649 ) (491 ) 66 53 60
------ ------ ------ ------ ------
Total expenses 7,345 10,508 11,323 10,293 11,149
------ ------ ------ ------ ------
Income (loss) before income taxes (1,544 ) 6,705 12,244 7,440 5,944
Provision (benefit) for
income taxes (288 ) 2,468 4,112 2,594 1,881
------ ------ ------ ------ ------
Net income (loss) $(1,256 ) $ 4,237 $ 8,132 $ 4,846 $ 4,063
====== ====== ====== ====== ======
Earnings (loss) per share (1):
Basic $ (.19 ) $ .69 $ 1.25 $ .57 $ .48
Diluted (.19 ) .68 1.23 .57 .48
Weighted average shares (1):
Basic 6,628 6,111 6,500 8,486 8,486
Diluted 6,628 6,201 6,604 8,486 8,486
Total assets $28,649 $33,246 $29,801 $26,603 $23,727
Working capital 16,401 15,159 11,906 12,728 8,504
Property and equipment, net 7,595 9,536 10,682 9,257 8,979
Long-term debt - - 1,560 1,961 2,482
Total stockholders' equity 26,394 27,577 20,642 19,668 14,822
(1) The weighted average number of shares used in the earnings per share
calculations and earnings per share have been adjusted to give effect to
a 1997 two-for-one stock split in the form of a dividend and the
reduction in shares resulting from the purchase of 1,270,221 shares of
the Company's common stock in March 1997. (See Note 4 of the Notes to
Consolidated Financial Statements.)
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Item 7. 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 report 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
report.
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 and improvements in
liquidity during the three year period ended December 31, 1999 are generally
attributable to changes in cash flows from operating activities, including the
effect of significant declines in revenues and expenses in 1998 and 1999,
acquiring certain assets from BEST during 1998, accelerating payments on a
mortgage during 1998 and 1999, purchasing marketable equity and debt securities
and changes in the levels of capital expenditures. In addition, the shut-down
of the Company's Austin Services facility in 1999 and North Carolina Services
facility in 1998 and changes in operations at the Company's Singapore facility
did, during late 1998 and 1999, and will in 2000, affect the Company's
financial condition.
Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
table:
1999 1998 1997
------ ------ ------
Working capital:
Working capital (thousands) $16,401 $15,159 $11,906
Current ratio 11.7 to 1 4.0 to 1 2.7 to 1
Profitability ratios:
Gross profit 35% 51% 50%
Return on revenues (8)% 13% 17%
Return on assets (4)% 13% 27%
Return on equity (5)% 15% 39%
Equity ratios:
Total liabilities to equity 0.1 0.2 0.4
Assets to equity 1.1 1.2 1.4
The Company's financial ratios improved significantly throughout the
three year period ending in 1999. Working capital totaled $16.4 million at
December 31, 1999, compared to $15.2 million and $11.9 million at December 31,
1998 and 1997, respectively. The ratio of current assets to current liabilities
was 11.7 to 1 at December 31, 1999, an increase from 4.0 to 1 and 2.7 to 1 at
December 31, 1998 and 1997, respectively. The Company's current ratio was
unusually high at December 31, 1999 due to significant decreases in liabilities
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related to the decline in production levels and cash accumulations. Management
closely monitored and managed its assets, liabilities and operations during
1999, resulting in current liabilities decreasing $3.5 million while current
assets decreased only $2.3 million. Since current liabilities decreased at a
rate faster than current assets, the current ratio increased 193% to 11.7 to 1
at December 31, 1999. Assets, such as accounts receivable and inventories,
decrease during periods of declining production and are converted to cash. Cash
and cash equivalents that were available at December 31, 1998 and during 1999
and cash provided by certain elements of operations were used to substantially
reduce all current liability items, purchase marketable and debt securities and
purchase capital assets. Cash provided by operations in 1998 was used to
substantially reduce a mortgage payable, acquire assets from BEST, purchase
fixed assets and increase the amount of short-term interest-bearing cash
investments.
Significant changes and decreases in demand for the Company's products
and services during 1999 and 1998 resulted in backlog decreasing from the
higher levels reported in 1997 and the first half of 1998 to $2.4 million at
December 31, 1999. The operating effects related to the decreases in backlog
and revenues in 1999 and 1998 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 year ended December 31,
1999 was $0.4 million compared to $11.0 million and $9.2 million provided in
1998 and 1997, respectively. Significant items contributing to cash used by
operations in 1999 were depreciation and amortization of $2.5 million, reduced
by the net loss of $1.3 million and $0.6 million of refundable income taxes
associated with the loss. Accrued liabilities decreased $2.0 million. The
decrease in accrued liabilities was primarily related to a decrease in payroll
accruals, principally bonus accruals, and other decreases resulting from the
decline in production levels. Inventories increased $0.5 million due to the
purchase of inventory related to shipments scheduled during the first quarter
of 2000. A decrease in accounts receivable of $0.9 million, resulting from a
decrease in revenues, provided cash for operations. The Company invested $0.9
million in marketable and debt securities in 1999, and expenditures for
property and equipment totaled $0.8 million. Payment of the balance of long-
term debt totaled $0.3 million and payment of a note to a shareholder totaled
$0.5 million. In addition, a $0.8 million provision for the shut-down of a
facility, $0.6 million of proceeds from the sale of assets of the facility and
cash disbursements related to the shut-down and restructuring reserve affected
various elements of cash flows. The principal items contributing to the cash
provided by operations in 1998 were net income plus depreciation and
amortization, which totaled $6.2 million, and decreases in accounts receivable
and inventories of $4.6 million and $2.8 million, respectively. Cash provided
by operations in 1998 was reduced by decreases in accounts payable, accrued
liabilities and income taxes payable totaling $3.1 million. The decrease in
accounts receivable, inventories and the liability accounts, in 1998, resulted
from a reduction in the level of revenues and backlog during the last half of
1998.
Capital expenditures during 1999, 1998 and 1997 were $0.9, $0.9, and $3.0
million, respectively. Expenditures during 1999 and 1998 were primarily related
to equipment used by the Singapore Services facility to provide services to its
customers. In addition, expenditures in 1998 included equipment for the Testing
Products segment. A significant portion of the expenditures during 1997 were
for equipment required by the Singapore Services facility to support increased
demand for services.
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<PAGE>
During the 1997 to 1999 period, the Company maintained a credit facility
with a financial institution to provide credit availability to supplement cash
provided by operations, if required. Credit availability provided by the
facility was reduced by the Company from $4.0 million to $1.0 million in 1999.
The Company's Singapore subsidiary maintains a small overdraft facility to
support the subsidiary's credit commitments.
Reliability's revenue is dependent on conditions within the semiconductor
industry, and profitability is dependent on revenues and the Company's ability
to control expenses. The Company continues to enforce stringent expense
controls and will maintain these controls until revenues increase to higher
levels. Semiconductor manufacturers experienced good volume growth during 1998
and 1999. The Company's Testing Products segment is dependent on capital
expenditures by semiconductor manufacturers. The semiconductor industry is
highly cyclical and experiences periods of oversupply and excess production
capacity. Beginning in late 1997, oversupply and excess production capacity
began to affect demand for test equipment and also continued to reduce and hold
down DRAM sales prices. DRAM prices increased in 1998 and declined in 1999.
These factors resulted in a significant decrease in the amount of new orders
for testing products and changes in demand for services sold by the Company in
1998 and in 1999. Demand for testing products sold by the Company remains
relatively weak during the early months of 2000, but indications are that the
demand may increase during 2000. The acquisition of certain services activities
from BEST in December 1998 resulted in revenues in the Services segment
increasing in 1999.
Based on the Company's current backlog level and the uncertainty
concerning demand for the Company's products during 2000, Reliability is not
currently providing a revenue forecast for the year ending December 31, 2000.
The current forward-looking forecast indicates revenues for the first quarter
of 2000 to be approximately $3.5 million to $4.5 million, compared to fourth
quarter 1999 revenues of $2.3 million and $4.3 million for the first quarter of
1999. The Company is beginning to see some signs that new orders may increase
in the near future. Some of these signs are increases in demand for products
sold by the semiconductor industry, increases in inquiries by certain customers
and certain customers forecasting a need for new and retrofit capacity. In
general, these signs provide some visibility indicating that demand for the
Company's products should increase, but the actual timing of when an increase
will occur is difficult to forecast.
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
during 2000.
RESULTS OF OPERATIONS.
OVERVIEW. Changes in revenues from the sale of testing products sold by
the Company during the three year period ended in 1999 reflected changes in
demand by the semiconductor industry resulting in product mix changes in 1998
and volume decreases in 1999 and 1998. The acquisition of services activities
from BEST in December 1998 and a general increase in demand, beginning in late
1998, for services provided by the BEST operations at the Company's Singapore
subsidiary contributed to a 10% increase in Services revenues during 1999. The
Company's Austin, Texas Services facility provided services principally to
one
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<PAGE>
customer and accounted for 14% of consolidated revenues for 1999. The facility
was closed in September 1999 because the customer stopped sending product to
the facility. Services revenues decreased in 1998 due to the closing of the
Company's North Carolina facility and acquisition of the Singapore facility's
dominant customer (Texas Instruments) by Micron Technology. These events were
caused by significant decreases in DRAM prices in 1997 and weak prices in 1998.
The North Carolina facility accounted for approximately 4% and 10% of
consolidated revenues in 1998 and 1997, respectively. Services revenues in 1999
and 1998 were impacted by the Company's acquisition of two services operations
from BEST in December 1998. The results of operations related to the
acquisition have been included in the Company's operations since December 1998.
Product mix changes and price competition in the Power Sources segment resulted
in a decrease in unit volumes and a decline in total revenues in 1999 and 1998.
REVENUES. Consolidated revenues for 1999 decreased 51% to $16.6 million,
reflecting decreases of $17.2 and $0.7 million in the Testing Products and
Power Sources segments, respectively, and an increase of $0.9 million in the
Services segment. Revenues for 1998 decreased 29% to $33.5 million, reflecting
decreases of $11.1, $1.9 and $0.7 million in the Services, Testing Products and
Power Sources segments.
Revenues in the Testing Products segment were $4.4 million for 1999,
which was an 80% decrease over 1998. The decrease resulted from the fact that
the Company's two major customers for products of this segment implemented
programs to more effectively utilize their existing capacity and to upgrade
systems rather than purchase new systems. In addition, one of the customers
implemented a program to outsource production of certain devices. Revenues from
the sale of INTERSECT products decreased $9.4 million and revenues from the
sale of CRITERIA products decreased $7.8. Revenues in the Testing Products
segment were $21.6 million for 1998, which was a decrease of 8% from the same
period in 1997. The decrease was related to changes in demand resulting in
volume changes and product mix changes. Revenues from the sale of INTERSECT
products decreased $2.2 million, while net revenues from the sale of CRITERIA
and loader and unloader products increased $0.3 million. CRITERIA revenues
increased due to an increase in the number of CRITERIA systems delivered to a
customer. The increase reflected increased demand for semiconductors sold by
the customer.
Revenues in the Services segment increased 10% in 1999 to $10.2 million.
The increase was related to revenues from customers acquired in December 1998
from BEST. Approximately 80% of revenues in the Services segment in 1999 were
related to the BEST acquisition. The Austin facility, which was closed in
September 1999, accounted for 24% of revenues in this segment in 1999. Revenues
in the Services segment decreased 54% in 1998 to $9.2 million. Services
revenues, in 1998, decreased at two of the Company's Services facilities. The
North Carolina facility was closed in April 1998. In addition, revenues at the
Singapore Services facility decreased $7.6 million due to volume and unit price
decreases related to reduced demand and price competition and the acquisition
by Micron of Texas Instrument's Singapore DRAM operations. Revenues included in
the Services segment from the sale of conditioning products to Services
customers also decreased significantly during 1998 due to the same factors.
Revenues in the Power Sources segment decreased 27% in 1999 to $2.0
million, after decreasing 22% to $2.7 million in 1998. Revenues were affected
in 1999 and 1998 by changes in demand, an aging product line, price competition
and a decline in market penetration resulting in volume decreases.
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<PAGE>
COSTS AND EXPENSES. Changes in costs and expenses during the three year
period were primarily related to changes in revenues, closing and restructuring
Services facilities, acquiring Services facilities from BEST and the effect of
stringent expense control programs during the period, and in 1999, a
significant decrease in incentive bonuses.
Total costs and expenses, excluding interest, decreased $8.6 million or
31% in 1999, compared to the 51% revenue decrease of $17.0 million. Cost of
revenues decreased $5.6 million; marketing, general and administrative expenses
decreased $2.8 million; and research and development expenses decreased $0.4
million. Total costs and expenses in 1999 included a $0.8 million provision for
shut-down of the Austin Services facility. Expenses for 1998 included a $0.6
million provision for restructuring and impairment of operations and assets.
Total costs and expenses, excluding interest and a $0.6 million provision for
restructuring and impairment, for the 1998 period decreased $7.0 million or 20%
compared to the 29% revenue decrease of $13.7 million. Cost of revenues
decreased $7.3 million; marketing, general and administrative expenses
decreased $1.3 million and research and development expenses increased $0.4
million.
The Company's gross profit, as a percent of revenues, was 35% in 1999,
51% in 1998 and 50% in 1997.
The decrease in gross profit from 51% in 1998 to 35% in 1999 is
attributable, in general, to the fact that fixed costs could not be fully
absorbed due to the significant revenues decreases in the Testing Products and
Power Sources segments. In addition, the Services segment accounted for a
significantly higher percentage of total consolidated revenues in the 1999
period than in the 1998 period. This resulted in a decrease in the consolidated
gross profit in 1999, compared to 1998, because the gross profit in the
Services segment is fundamentally lower than in the other two segments. In
addition, the gross profit in the Services segment decreased in 1999, compared
to 1998, due to price competition and a change in product mix resulting from
the change in customers. The customers changed due to the closing of the North
Carolina facility in early 1998, the loss of the Texas Instruments/Micron
revenues throughout 1999 and adding new customers related to the BEST
acquisition. The increase in gross profit to 51% in the 1998 period was
attributable to the Testing Products segment. The gross profit in the Testing
Products segment is higher than the gross profit in the other two segments.
Revenues in the Testing Products segment accounted for a significantly higher
percent of total consolidated revenues in the 1998 period, resulting in the
overall increase in gross profit in 1998, compared to 1997. Gross profit in all
three business segments decreased slightly in 1998 due to revenue decreases
related to overall volume decreases. The gross profit in the Power Sources
segment, in 1998, decreased due to the significant decrease in revenues
resulting from volume decreases. The gross profit in the Services segment, in
1998, decreased due to a significant decrease in revenues.
Marketing, general and administrative expense for 1999 decreased $2.8
million or 34% over the 1998 period, compared to a 51% decrease in revenues.
The decrease in expenses is primarily related to a decrease in Testing Products
revenues which resulted in decreases 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
21
<PAGE>
to the decrease in profitability. The Company maintains a stringent expense
control program to monitor and decrease expenses where possible. The shut-down
of the Company's North Carolina facility in 1998 and a modest reduction in
volume-related expenses in the Power Products segment also contributed to the
decrease. The overall decrease was affected, in 1999, by expenses associated
with the operations acquired from BEST in December 1998 and closing of the
Austin Services facility in September 1999. Marketing, general and
administrative expenses for 1998 decreased $1.3 million, or 13%, over the 1997
period, compared to a 29% decrease in revenues. This decrease was primarily
related to the Services segment and, to a lesser extent, to the Power Sources
segment. Expenses in the Services segment decreased due to the shut-down of the
North Carolina Services facility in April 1998 and a decrease in variable
expenses at the Singapore facility due a reduction in the volume of ICs
processed for customers. In addition, expenses in all three segments, in 1998,
were reduced because incentive compensation accruals declined due to the
decrease in profitability in all segments and for the Company as a whole.
Expenses in the Power Sources segment decreased due to expense controls and a
decrease in personnel levels due to a reduction in revenues. The Company has
maintained various measures to reduce expenses. Personnel levels were basically
unchanged in 1999, except for termination of employees at the Austin Services
facility and a 13% increase in employees at the Singapore Services facility.
The increase in Singapore resulted from an increase in revenues related to the
BEST acquisition. During 1998, worldwide personnel levels decreased 50%,
excluding the BEST acquisition, through attrition and workforce reductions. The
Company will ensure that its research and development projects and its ability
to respond to customer requirements are not affected by cost control measures.
Research and development expenses decreased to $1.7 million in 1999,
compared to $2.0 million in the 1998 period. Research and development expenses
increased $0.4 million in 1998. A significant portion of the expenditures in
each of the years related to development of testing and conditioning products
and, in 1998, development of new features for existing product lines. The
Company completed development of new models of INTERSECT and CRITERIA products
during 1995, and the new products and upgrades to the products accounted for a
substantial portion of the revenues in the three year period ending in 1999.
Reliability is committed to continuing a significant research and development
program, and development costs may increase in 2000.
PROVISION FOR SHUT-DOWN AND RESTRUCTURING The Company recorded, in 1999,
a $0.8 million provision for shut-down of its Austin facility. The facility was
closed because the operation had only one customer and that customer advised
the Company that the volume of product supplied to the Company for processing
would be decreased. The Company's projections indicated that the facility could
not be operated profitably at the lower volumes. The Company recorded a
$507,000 provision for restructuring of its Singapore operations in 1998, due
to a significant reduction in the volume of ICs processed for Micron Technology
by the Company in Singapore. The volume decrease relates to Micron's
acquisition of the Texas Instruments DRAM manufacturing facility in Singapore.
Micron discontinued using services of the Singapore subsidiary in the fourth
quarter of 1999. In addition, during 1998, the Company shut down its Services
facility in North Carolina. The Company recorded a $100,000 impairment reserve
related to the land and building located at the North Carolina facility. The
carrying value of the land and building totals $2.1 million and the assets are
classified as assets held for sale in the December 31, 1999 consolidated
balance sheet. The assets are being actively marketed, although no assurances
22
<PAGE>
can be given that they will be sold during 2000.
INTEREST INCOME AND EXPENSE. The changes in net interest during the
three year period reflect an increase in interest income and a decrease in
interest expense. Interest income increased due to a significant increase in
investable cash in 1998, reduced by a 14% decrease in cash in 1999 and
increases in interest rates in 1999. Interest expense decreased due to the fact
the Company accelerated payments on, and paid in full, the mortgage related to
the Houston facility.
PROVISION FOR INCOME TAXES. The Company's tax benefit rate was 19% in
1999 and the effective tax rates were 37% and 34% 1998 and 1997, respectively.
The principal items affecting the Company's tax rate in 1999, 1998 and 1997
were foreign losses for which a tax benefit is not available, lower effective
income tax rates related to undistributed foreign earnings and in 1998 and 1997
state income taxes. The 1997 rate was affected by a change in the valuation
allowance resulting from utilization of foreign tax credits.
NET INCOME. The loss before income taxes was $1.5 million in 1999
compared to income before income taxes of $6.7 million for 1998 and $12.2
million for 1997. The net loss was $1.3 million in 1999 and net income was $4.2
million and $8.1 million for 1998 and 1997, respectively.
EARNINGS PER SHARE.The diluted loss per share was $.19 in 1999. An
increase in the weighted average shares, in 1999, reduced the loss per share by
$.01. The principal item affecting the increase in shares, in 1999, is the
475,000 shares issued in December 1998, related to the BEST acquisition.
Diluted earnings per share were $.68, and $1.23 for the years ended December
31, 1998 and 1997, respectively; $.04 of the 1998 earnings per share was due to
a decrease in the weighted average number of shares outstanding. The decrease,
in 1998, in average shares outstanding was affected by the Company purchasing
1.3 million shares of its common stock from a stockholder in March 1997. The
Company declared a two-for-one stock split as a 100% stock dividend on
September 5, 1997. Weighted average share and per share data reflect the stock
split.
IMPACT OF YEAR 2000. In prior years, the Company discussed the nature
and progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in internal business operations, information technology and non-information
technology systems, and believes those systems successfully responded to the
Year 2000 date change. The Company expensed approximately $200,000 during 1998
and 1999 in connection with remediating its systems. The Company is not aware
of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors through the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
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FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements,
including those that are contained in this report, relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the operations,
performance, development and results of the Company's business include, but are
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 the
Company's products and services and its customers' products and services.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
MARKET RISK. The following discussion about the Company's market risk
includes "forward-looking" statements that involve risk and uncertainties.
Actual results could differ materially from those projected in the forward-
looking statements.
The Company is exposed to market risks, including interest rate risk,
price risk and foreign currency risk. In addition, trade receivables subject
the Company to concentrations of credit risk. The adverse effects of potential
changes in these market risks are discussed below. The sensitivity analyses
presented do not consider the effects that such adverse changes may have on
overall economic activity, nor do they consider additional actions management
may take to mitigate the Company's exposure to such changes. See the Notes to
the Consolidated Financial Statements for a description of the Company's
accounting policies and other information related to these financial
instruments. The Company does not engage in speculative transactions and does
not use derivative instruments or engage in hedging activities.
Interest Rate Risk. The Company places its short-term investments, which
generally have a term of less than 90 days, with high quality financial
institutions, limits the amount of credit exposure to any one institution, and
has investment guidelines relative to diversification and maturities designed
to maintain safety and liquidity. As of December 31, 1999, the Company had
short-term investments totaling $12 million. Due to the short-term nature of
these instruments, the carrying value approximates market value. If 2000
average short-term interest rates decreased by 1.0% over 1999 average rates,
the Company's projected interest income from short-term investments would
decrease by approximately $120,000. The Company had short-term investments
totaling $14 million at December 31, 1998. If 1999 average short-term interest
rates decreased by 1.0% over 1998 average rates, the Company's interest income
from short-term investments would have decreased by approximately $140,000.
The Company had no debt outstanding at December 31, 1999 and projects that
it may not utilize its $1.0 million line of credit during 2000. The Company
does have various letters of guarantee outstanding under a line of credit. The
24
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fees for these guarantee documents are at current competitive rates. Market
risk, estimated as potential increase in fair value resulting from a
hypothetical 1.0% decrease in interest rates under the assumption that the
Company would fully utilize its $1.0 million ($4.0 million at December 31,
1998) line of credit, is (was) estimated to be not material to the Company as
of December 31, 1999 and 1998. The Company has historically maintained lines of
credit at interest rates that fluctuate with the U.S. prime rate, thus the
Company's historical borrowing rates have been near or slightly below prime
rates. As of December 31, 1998, the fair value of the Company's total debt
outstanding (all of which bore interest at fixed rates) of $0.8 million
approximated its fair value. The debt was paid in full during the first half of
1999.
Price Risk. As of December 31, 1999 and 1998, the Company held
marketable equity securities with fair values of $350,000 and $52,000,
respectively. Had market prices of such securities declined 10% as of December
31, 1999 and 1998, the fair values of these instruments would have decreased
$35,000 and $5,000, respectively. As of December 31, 1999, the Company held a
$500,000 bond which was converted into 562,000 shares of preferred stock of the
issuer in January 2000. Since it is not practicable to estimate the fair value
of the convertible bond, as the issuer is in the very early stages of product
development and a readily determinable market value does not exist for either
the bond or the preferred stock, the Company is unable to quantify the amount
of price risk sensitivity inherent in this investment.
Foreign Currency Risk. The Company has subsidiaries located in Costa Rica
and Singapore. The functional currency of the two subsidiaries is the U.S.
dollar. Revenues of the Costa Rica subsidiary are denominated in U.S. dollars
and operating expenses are denominated in the local currency of Costa Rica.
Historically, the Costa Rica currency has been devalued frequently, relative to
the U.S. dollar, resulting in minimal exchange effects on the equivalent U.S.
dollar expenses of the subsidiary.
The Company estimates that approximately 70% and 50% of its Singapore
subsidiary's 2000 revenues and expenses, respectively, will be denominated in
Singapore dollars. The balance will be denominated in U.S. dollars. A
significant portion of the subsidiary's assets, including cash investments, are
denominated in U.S. dollars. Historically, fluctuations in the Singapore
dollar/U.S. dollar exchange rates have not had a material effect on the
Company. Future changes in the exchange rate of the U.S. dollar to the
Singapore dollar may positively or negatively impact the Company's revenues,
operating expenses and earnings.
Concentrations of Credit Risk. The Company provides products and services
to companies in the electronics and semiconductor industries, many of which are
industry leaders. There are a limited number of companies which purchase
testing products and services sold by the Company. During 1999 and 1998, the
Company's four largest customers accounted for approximately 64% and 88%,
respectively, of consolidated revenues. The Company's trade receivables are
primarily denominated in U.S. dollars and are generally due within 30 days. In
general, trade receivables are collected in a timely manner and historically
bad debts have been very low. Timely collection of trade receivables minimizes
the currency risk associated with trade receivables that are denominated in
foreign currencies.
25
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
Report of independent auditors F-2
Consolidated balance sheets at December 31, 1999 and 1998 F-3
For each of the three years in the period ended December 31, 1999:
Consolidated statements of operations F-5
Consolidated statements of cash flows F-6
Consolidated statements of stockholders' equity F-8
Notes to consolidated financial statements F-10
Schedule for each of the three years in the period
ended December 31, 1999:
II - Valuation and qualifying accounts and reserves S-1
All other schedules are omitted since the required information is not
present, or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Reliability Incorporated
We have audited the accompanying consolidated balance sheets of
Reliability Incorporated as of December 31, 1999 and 1998, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index on page F-1.
These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Reliability Incorporated at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
BY/s/ERNST & YOUNG LLP
Houston, Texas
January 28, 2000
F-2
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31,
--------------
1999 1998
Current assets: ---- ----
Cash and cash equivalents $13,573 $15,702
Accounts receivable 1,267 2,178
Inventories 1,616 1,301
Refundable income taxes 551 -
Deferred tax assets 351 572
Other current assets 580 441
------ ------
Total current assets 17,938 20,194
Property, plant and equipment, at cost:
Machinery and equipment 13,981 14,390
Building and improvements 5,021 5,023
Land 530 530
------ ------
19,532 19,943
Less accumulated depreciation 11,937 10,407
------ ------
7,595 9,536
Assets held for sale 2,135 2,193
Investments 647 -
Goodwill, net of accumulated amortization
of $61 and $16 in 1999 and 1998,
respectively 334 1,323
------ ------
$28,649 $33,246
====== ======
See accompanying notes.
F-3
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
--------------
1999 1998
---- ----
Current liabilities:
Accounts payable $ 291 $ 547
Accrued liabilities 1,029 3,045
Income taxes payable 145 335
Accrued shut-down and restructuring costs 72 300
Note payable to shareholder - 534
Current maturities on long-term debt - 274
------ ------
Total current liabilities 1,537 5,035
Deferred tax liabilities 718 634
Commitments and contingencies - -
Stockholders' equity:
Common stock, without par value; 20,000,000 shares
authorized; 6,631,765 and 7,811,278 shares
issued in 1999 and 1998, respectively 9,389 9,340
Retained earnings, net of $7,772 in treasury
stock retired during 1999 17,053 26,081
Accumulated other comprehensive (loss) (48 ) -
Less treasury stock, at cost, 1,206,762 shares
in 1998 - (7,844 )
------ ------
Total stockholders' equity 26,394 27,577
------ ------
$28,649 $33,246
====== ======
See accompanying notes.
F-4
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Revenues:
Product sales $10,193 $24,294 $26,908
Services 6,358 9,249 20,312
------ ------ ------
16,551 33,543 47,220
Costs and expenses:
Cost of product sales 7,092 10,491 11,108
Cost of services 3,658 5,839 12,545
Marketing, general and administrative 5,540 8,383 9,679
Research and development 1,654 2,009 1,578
Provision for shut-down and restructuring 800 607 -
------ ------ ------
18,744 27,329 34,910
------ ------ ------
Operating income (loss) (2,193 ) 6,214 12,310
Interest income (expense), net 649 491 (66 )
------ ------ ------
Income (loss) before income taxes (1,544 ) 6,705 12,244
Provision (benefit) for income taxes (288 ) 2,468 4,112
------ ------ ------
Net income (loss) $(1,256 ) $ 4,237 $ 8,132
====== ====== ======
Earnings (loss) per share:
Basic $ (.19 ) $ .69 $ 1.25
Diluted $ (.19 ) $ .68 $ 1.23
Weighted average shares:
Basic 6,628 6,111 6,500
Diluted 6,628 6,201 6,604
See accompanying notes.
F-5
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (1,256 ) $4,237 $ 8,132
Adjustments to reconcile net income (loss) to
cash (used) provided by operating activities:
Depreciation and amortization 2,538 1,916 1,613
Provision for deferred income taxes 329 277 189
Provision for inventory obsolescence 150 40 233
Provision for shut-down and restructuring 800 607 -
(Gain) loss on disposal of fixed assets (172 ) (14 ) 6
Changes in operating assets and liabilities,
net of effects from acquisition:
Accounts receivable 911 4,575 (2,565 )
Inventories (465 ) 2,815 (1,230 )
Refundable income taxes (551 ) - 286
Other current assets 28 (72 ) (52 )
Accounts payable (256 ) (1,112 ) 959
Accrued liabilities (2,016 ) (1,637 ) 1,206
Income taxes payable (190 ) (392 ) 396
Cash payments charged to shut-down and
restructuring reserve (200 ) (207 ) -
------ ------ ------
Total adjustments 906 6,796 1,041
------ ------ ------
Net cash (used) provided by operating activities (350 ) 11,033 9,173
------ ------ ------
Cash flows from investing activities:
Expenditures for property and equipment (847 ) (853 ) (3,046 )
Purchase of marketable equity and
debt securities (870 ) - -
Proceeds from sale of equipment 634 498 2
Cash paid for acquired business - (1,000 ) -
Increase in other long-term assets 7 - -
------ ------ ------
Net cash (used) in investing activities (1,076 ) (1,355 ) (3,044 )
------ ------ ------
See accompanying notes.
F-6
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
Payments on long-term debt (274 ) (1,687 ) (367 )
Payment on note payable to shareholder (534 ) - -
Proceeds from issuance of common and treasury
stock pursuant to stock option and employee
stock savings plans 128 517 957
Purchase of treasury stock - - (8,256 )
Borrowings under revolving credit facility 30 457 6,969
Payments under revolving credit facility (30 ) (457 ) (6,969 )
Other (7 ) 86 141
------ ------ ------
Net cash (used) by financing activities (687 ) (1,084 ) (7,525 )
------ ------ ------
Effect of exchange rate changes on cash (16 ) - -
------ ------ ------
Net (decrease) increase in cash and
cash equivalents (2,129 ) 8,594 (1,396 )
Cash and cash equivalents:
Beginning of year 15,702 7,108 8,504
------ ------ ------
End of year $13,573 $15,702 $ 7,108
====== ====== ======
See accompanying notes.
F-7
<PAGE>
<TABLE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<CAPTION>
Treasury Stock Accumulated Total
Common Stock (at cost) Other Com- Comprehensive
------------ Retained -------------- prehensive Total Income
Shares Amount Earnings Shares Amount Income Amount (loss)
------ ------ ------- ------ ------ ----------- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,243 $5,926 $13,742 - $ - $ - $19,668
Net income 8,132 8,132 $8,132
Purchase of treasury stock (1,270 ) (8,256 ) (8,256 ) =====
Treasury shares issued for
exercise of stock options 154 23 149 303
Stock dividend 2,999 30 (30 ) -
Shares issued for exer-
cise of stock options 28 130 130
Treasury shares issued
pursuant to employee
stock savings plan 309 33 215 524
Other 141 141
----- ----- ------ ----- ------ ----- ------
Balance at December 31, 1997 7,270 6,690 21,844 (1,214 ) (7,892 ) - 20,642
Net income 4,237 4,237 $4,237
Shares issued for acquisition 475 2,095 2,095 =====
Shares issued for exer-
cise of stock options 59 395 395
Shares issued pursuant to
employee stock
savings plan 7 40 40
Treasury shares issued pur-
suant to employee stock
savings plan 34 7 48 82
Other 86 86
----- ----- ------ ----- ------ ----- ------
Balance at December 31,1998 7,811 9,340 26,081 (1,207 ) (7,844 ) - 27,577
</TABLE>
See accompanying notes.
F-8
<PAGE>
<TABLE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<CAPTION>
Treasury Stock Accumulated Total
Common Stock (at cost) Other Com- Comprehensive
------------ Retained -------------- prehensive Total Income
Shares Amount Earnings Shares Amount Income Amount (Loss)
------ ------ -------- ------ ------ ------------ ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 7,811 9,340 26,081 (1,207 ) (7,844 ) - 27,577
Comprehensive income (loss):
Net income (loss) (1,256 ) (1,256 ) $(1,256 )
Unrealized net (losses) on
marketable equity
securities (48 ) (48 ) (48 )
-----
Total comprehensive (loss) $(1,304 )
Treasury stock retirement (1,207 ) (72 ) (7,772 ) 1,207 7,844 - =====
Shares issued for exer-
cise of stock options 27 128 128
Other 1 (7 ) (7 )
----- ----- ------ ----- ------ ----- ------
Balance at December 31, 1999 6,632 $9,389 $17,053 - $ - $ (48 ) $26,394
===== ===== ====== ===== ====== ===== ======
</TABLE>
See accompanying notes.
F-9
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Reliability Incorporated ("Reliability" or the "Company") 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, a subsidiary of the Company operates a service facility
which conditions and tests 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 December 31, 1999, are provided principally to two
customers in Singapore. The Company, in April 1998, closed a services facility
in North Carolina and acquired, in December 1998, assets of a company that
provided services to customers in Austin, Texas and Singapore. The Company
closed the Austin facility in September 1999. 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.
PRINCIPLES OF CONSOLIDATION
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 prior periods
have been reclassified to conform to the 1999 presentation.
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, at December 31, are stated at the lower of standard cost
(which approximates first-in, first-out) or market (replacement cost or net
realizable value) and include:
1999 1998
---- ----
(In thousands)
Raw materials $ 966 $1,071
Work-in-progress 149 180
Finished goods 501 50
----- -----
$1,616 $1,301
===== =====
F-10
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
Inventories are presented net of reserves for excess and obsolete
inventories of $428,000 and $775,000 as of December 31, 1999 and 1998,
respectively.
INVESTMENTS
All investments are classified as held to maturity or available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
equity and debt securities at the time of purchase and reevaluates such
determinations at each balance sheet date.
Equity securities are classified as available-for-sale and are carried at
their fair value on the balance sheet, with unrealized gains and losses (net of
applicable income taxes of $24,000 at December 31, 1999), if any, reported as a
separate component of stockholders' equity. Equity securities are stated at
market value, as determined by the most recently published trade price of the
securities at the balance sheet date. The debt security is classified as held
to maturity because the Company has the positive intent and ability to hold the
security to maturity. The security was converted into 562,000 shares of
preferred stock of the issuer in January 2000. The held to maturity security is
stated at amortized cost. It is not practicable to estimate the fair value of
the convertible note, as the issuer is in the very early stages of product
development. The following table summarizes the Company's investment in equity
securities at December 31:
1999 1998
---- ----
(In thousands)
Convertible bond, at amortized cost $500 $ -
Marketable equity securities, at cost 422 52
Unrealized net (losses) on marketable
equity securities (72 ) -
--- ---
850 52
Amount classified as current 203 52
--- ---
$647 $ -
=== ===
PROPERTY, PLANT AND EQUIPMENT
For financial statement purposes, depreciation is computed principally on
the straight-line method using lives of six years for leasehold improvements
and 30 years for buildings, and the straight-line and double-declining balance
methods using lives from two to eight years for machinery and equipment.
F-11
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
GOODWILL
Goodwill arising from the December 1998 acquisition of Basic Engineering
Services and Technology Labs, Inc. ("BEST") is amortized over its estimated
useful life of seven years.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of". SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. The Company
assesses the impairment of long-lived assets, including goodwill, when events
or changes in circumstances indicate that the carrying value of an asset may
not be recoverable. If such assets are considered impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", in accounting for its stock
options. Since the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of grant, generally no
compensation expense is recognized. Pro forma information regarding net income
and earnings per share, as calculated under the provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation", is disclosed in Note 4.
REVENUE RECOGNITION
Generally, revenues for the sales of products and services are recognized
when products are shipped and services are provided, unless the Company has
obligations remaining under the purchase orders, in which case, revenue is
deferred until all obligations are satisfied. Sales returns have historically
been immaterial.
WARRANTY
The Company warrants products sold to customers for up to three years
from shipment. A provision for estimated future warranty costs, which
historically have been low, is recorded upon shipment.
F-12
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries are translated into U.S.
dollar equivalents in accordance with Statement of Financial Accounting
Standards No. 52. The Company's primary functional currency is the U.S. dollar.
Accordingly, translation adjustments and transaction gains or losses for
foreign subsidiaries that use the U.S. dollar as their functional currency are
recognized in consolidated income (loss) in the year of occurrence.
CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable and cash
equivalents.
The Company invests in money market instruments and commercial paper with
maturities of three months or less. The investments are made through high
quality financial institutions, and investments are made only in those
securities which have an investment rating in the two most credit-worthy
categories.
The Company sells its products and services to a limited number of
customers (See Note 5).
The Company's revenues are primarily denominated in U.S. dollars, thus
the risks of foreign exchange fluctuations are generally not material.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, refundable income
taxes, accounts payable, and accrued liabilities, as presented in the financial
statements, approximate fair value because of the short-term maturity of these
instruments. The recorded amount of long-term debt, when present, has
approximated fair value, as the actual interest rate approximated current
competitive rates. See the disclosures above for fair value information related
to investments in marketable equity and debt securities.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Basic earnings per share ("EPS") excludes dilution and is calculated by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
F-13
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
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 financial statements.
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 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.
2. INCOME TAXES
The provision for income taxes is based on income (loss) before income
taxes, as follows:
Geographic area 1999 1998 1997
--------------- ---- ---- ----
(In thousands)
United States $(1,506 ) $6,018 $ 9,695
Foreign (243 ) 446 2,839
Eliminations and corporate items 205 241 (290 )
----- ----- ------
$(1,544 ) $6,705 $12,244
====== ===== ======
F-14
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
The components of the provision (benefit) for income taxes are as
follows:
Current Deferred Total
------- -------- -----
1999 (In thousands)
----
Federal $ (704 ) $ 269 $ (435 )
Foreign 97 60 157
State (10 ) - (10 )
----- ----- -----
$ (617 ) $ 329 $ (288 )
1998 ===== ===== =====
----
Federal $1,946 $ 154 $2,100
Foreign 173 123 296
State 72 - 72
----- --- -----
$2,191 $ 277 $2,468
1997 ===== === =====
----
Federal $3,059 $ 36 $3,095
Foreign 586 153 739
State 278 - 278
----- ---- -----
$3,923 $ 189 $4,112
===== ==== =====
The differences between the effective tax 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:
1999 1998 1997
---- ---- ----
(In thousands)
Provision (benefit) at statutory rate $ (525 ) $2,280 $4,163
Tax effects of:
Foreign losses for which a tax
benefit is not available 305 281 201
Lower effective income tax rates related
to undistributed foreign earnings (49 ) (138 ) (429 )
State income taxes (7 ) 48 183
Change in valuation allowance - - (168 )
Other (12 ) (3 ) 162
----- ----- -----
$ (288 ) $2,468 $4,112
===== ===== =====
F-15
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
The change in the valuation allowance in 1997 resulted from the pending
expiration of related foreign tax credits. The foreign taxes were deducted as
expenses prior to their expiration, resulting in a partial realization of a
deferred tax asset equal to $168,000.
The Company's Singapore subsidiary had available, through December 31,
1998, an investment allowance grant which provided a reduction in Singapore
income taxes based on the subsidiary's investment in certain fixed assets
during the period from 1995 through 1998. The total tax benefit related to this
grant that was recorded during the four-year period ended December 31, 1998 was
approximately $290,000.
The significant components of the Company's net deferred tax liabilities
and assets at December 31, are as follows:
1999 1998
---- ----
(In thousands)
Deferred tax liabilities:
Depreciation $ 412 $ 373
Tax on unremitted foreign earnings 258 258
Other 48 3
---- ----
Total deferred tax liabilities 718 634
---- ----
Deferred tax assets:
Inventory reserves (110 ) (248 )
Accrued expenses not currently deductible (182 ) (236 )
Foreign net operating loss carryover (348 ) -
Market value reserve - investments (24 ) -
Restructuring and shut-down reserves (23 ) (73 )
Other (12 ) (15 )
---- ----
Total deferred tax assets (699 ) (572 )
Valuation allowance 348 -
---- ----
Total net deferred tax assets (351 ) (572 )
---- ----
Net deferred tax liabilities $ 367 $ 62
==== ====
The Company has established a valuation allowance related to the tax
benefits associated with the foreign net operating loss carryover. Management
believes that, based on a number of factors, the available evidence creates
sufficient uncertainty regarding the realization of this foreign net operating
loss carryover. The subsidiary operates in Costa Rica under an export
processing tax exemption. The subsidiary is exempt from Costa Rica
F-16
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
income tax through 1999 and is 50% exempted for 2000 through 2003. At December
31, 1999, the Costa Rica subsidiary had a net operating loss carryforward of
approximately $2,300,000, expiring in 2000 through 2002. The subsidiary
operated at a loss in 1999, 1998 and 1997.
The Company has provided deferred U.S. income taxes on $3,200,000 of
undistributed earnings of a subsidiary that were accumulated prior to
January 1, 1997. The Company has not provided deferred U.S. income taxes on
$4,200,000 of earnings that were accumulated after January 1, 1997 that are
considered permanently reinvested.
Net cash payments for income taxes during 1999, 1998 and 1997 were
$132,000, $2,491,000 and $3,357,000, respectively.
3. CREDIT AGREEMENTS, LONG-TERM DEBT AND NOTE PAYABLE TO SHAREHOLDER
Reliability maintains a line of credit with Wells Fargo Bank Texas, N.A.
which permits the Company to borrow up to $1 million until April 1, 2001. (The
Company reduced the amount available under the line of credit from $4.0 million
to $1.0 million during the second quarter of 1999.) Interest is payable at the
bank's prime rate minus 1/4% (8.25% at December 31, 1999). Any unpaid principal
of the note is due April 1, 2001. 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 (as defined)
and total liabilities to total net worth. 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
December 31, 1999, and there were no balances outstanding under the agreement
at December 31, 1999 or 1998.
The Company's Singapore subsidiary maintains an agreement with a
Singapore bank that provides for an overdraft facility of 500,000 Singapore
Dollars (U.S. $299,000 at December 31, 1999) at the bank's prime rate plus 2%
(7.5% at December 31, 1999). There were no balances outstanding at December 31,
1999, but amounts utilized under letter of credit commitments totaled $247,000,
resulting in credit availability of $52,000 at December 31, 1999. The loan is
collateralized by substantially 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.
Current maturities on long-term debt at December 31, 1998 totaled
$274,000 and represented a mortgage payable, due in monthly installments,
including interest at 9%. The mortgage was paid in full in March 1999. The
mortgage was collateralized by land and a building.
F-17
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
The note payable to shareholder at December 31, 1998 represented the
balance due to BEST related to the acquisition of assets that was completed in
December 1998, net of certain accrued liabilities that the Company agreed to
pay on behalf of BEST (See Note 10). The note was paid in full in June 1999 and
bore interest at 6%.
Interest paid on debt during 1999, 1998, and 1997 was $18,000, $125,000,
and $288,000, respectively.
Interest income (expense) is presented net as follows:
1999 1998 1997
---- ---- ----
(In thousands)
Interest income $665 $ 619 $ 222
Interest (expense) (16 ) (128 ) (288 )
--- ---- ----
Interest income (expense), net $649 $ 491 $ (66 )
=== ==== ====
4. STOCKHOLDERS' EQUITY
STOCK OPTION PLAN
Under the 1997 Stock Option Plan ("Option Plan"), 1,000,000 shares of
common stock were made available for future grants. The Option Plan permits the
granting of both incentive stock options and non-qualified options to
directors, executive officers and other key employees of the Company and its
subsidiaries. The term and vesting of each option is determined by the Board of
Directors. The term of each option may not exceed 10 years for incentive stock
options. The exercise price is the fair market value of the Company's common
stock on the date the option is granted. Incentive stock options generally vest
in three installments beginning six months after the option award. The second
and third installments are generally on March 1, one and two years after the
initial vesting date. Non-qualified options generally vest on the date granted,
but may vest in one or more installments. All option awards encourage the
recipients to own shares of common stock by requiring optionees to own shares
of Company stock in order to avoid the forfeiture of certain of their
unexercised options. The stock ownership inducements begin approximately two
years after the option grant date and, in certain instances, increase in three
to five annual increments. Unexercised options terminate in installments if the
required number of shares of common stock is not owned on the specified date.
The number of shares available for future grant was 94,000 at December 31,
1999.
F-18
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
A summary of the Option Plan activity is as follows:
Options Weighted Average
Activity Exercise Price
------- ---------------
Balance at December 31, 1996 - $ -
Options granted 424,000 5.92
Options exercised (74,000 ) 3.50
-------
Balance at December 31, 1997 350,000 $ 6.43
Options granted 169,000 13.38
Options exercised (59,000 ) 3.50
Options expired or cancelled (28,000 ) 11.09
-------
Balance at December 31, 1998 432,000 $ 9.24
Options granted 366,000 3.79
Options exercised (27,000 ) 3.50
Options expired or cancelled (25,000 ) 8.94
-------
Balance at December 31, 1999 746,000 $ 6.79
=======
The weighted average fair values of options granted in 1999, 1998 and
1997 were $2.42, $8.52 and $4.49, respectively.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1999:
Weighted Outstanding Exercisable
Average Re- Weighted Weighted
Number of maining Con- Average Number of Average
Exercise Options tractual Life Exercise Options Exercise
Price Outstanding in Years Price Exercisable Price
-------- ----------- ------------- ---------- ----------- ----------
$ 2.57 172,000 9.9 $ 2.57 - $ 2.57
4.88 181,000 9.2 4.88 103,000 4.88
3.50 174,000 7.2 3.50 174,000 3.50
13.31 42,000 7.2 13.31 28,000 13.31
13.38 147,000 8.2 13.38 49,000 13.38
20.25 30,000 7.2 20.25 25,000 20.25
------- -------
746,000 $ 6.79 379,000 $ 6.98
======= ===== ======= =====
As of December 31, 1998 and 1997, 178,000 and 135,000, respectively, of
the outstanding options were exercisable at a weighted average exercise price
of $6.26 and $5.35 per share, respectively.
F-19
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS No. 123
SFAS 123 defines a fair value based method of accounting for employee stock
options or similar equity instruments. However, SFAS 123 allows the continued
measurement of compensation cost in the financial statements for such plans
using the intrinsic value based method prescribed by APB 25, provided that
certain pro forma disclosures are made of the net income or loss, assuming the
fair value based method of SFAS 123 had been applied. For purposes of the pro
forma disclosures presented below, the Company has computed the fair value of
all options granted during 1999, 1998 and 1997 using the Black-Scholes pricing
model and the following weighted average assumptions:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.41 % 5.60 % 6.48 %
Expected lives (years) 5.0 5.0 5.3
Expected volatility 73 % 72 % 64 %
Expected dividend yield 0 % 0 % 0 %
To estimate expected lives of options for this valuation, it was assumed
options would be exercised at varying schedules after becoming fully vested.
All options are initially assumed to vest. Cumulative compensation cost
recognized in pro forma net income with respect to options that are forfeited
prior to vesting will be adjusted as a reduction of pro forma compensation
expense in the period of forfeiture.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. If the
Company had accounted for its stock-based compensation plan in 1999, 1998 and
1997 in accordance with SFAS 123, the Company's net income (loss) and earnings
(loss) per share would have been reported as follows:
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
Net income (loss):
As reported $(1,256 ) $4,237 $8,132
===== ===== =====
Pro forma $(2,196 ) $3,667 $7,232
===== ===== =====
Earnings (loss) per share:
As reported - basic $ (.19 ) $ .69 $ 1.25
===== ===== =====
Pro forma - basic $ (.33 ) $ .60 $ 1.11
===== ===== =====
As reported - diluted $ (.19 ) $ .68 $ 1.23
===== ===== =====
Pro forma - diluted $ (.33 ) $ .59 $ 1.09
===== ===== =====
F-20
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
The pro forma disclosures above are not necessarily indicative of the
effects of applying SFAS 123 in future years.
STOCK DIVIDEND
In 1997, the Company's Board of Directors declared a two-for-one stock
split effected as a 100% stock dividend. The stock split was distributed in
1997. The stock split was recorded by a transfer of $30,000 from retained
earnings to common stock, representing $.01 value for each additional share
issued.
TREASURY STOCK
In March 1997, the Company purchased 1,270,221 shares of its common stock
from a stockholder for $6.50 per share. The treasury stock was retired in
December 1999.
5. SEGMENT INFORMATION
The Company's operations consist of three segments: (1) the Testing
Products segment designs, manufactures and markets equipment used in the
testing and conditioning of integrated circuits by semiconductor manufacturers;
(2) the Services segment operates services facilities which condition and test
integrated circuits as a service to others; and (3) the Power Sources segment
designs, manufactures and markets power sources, primarily a line of DC-to-DC
power converters, which convert direct current voltage into a higher or lower
voltage.
The Company evaluates performance and allocates resources based on
operating income, which is defined as income before interest income, interest
expense and income taxes.
F-21
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
Financial information by industry segment is as follows:
1999 1998 1997
---- ---- ----
(In thousands)
Revenues from external customers:
Testing Products $ 4,386 $21,596 $23,464
Services 10,193 9,249 20,312
Power Sources 1,972 2,698 3,444
Inter-segment revenues:
Testing Products 148 222 1,823
Services 11 307 317
Eliminations (159 ) (529 ) (2,140 )
------ ------ ------
$16,551 $33,543 $47,220
====== ====== ======
Operating income (loss):
Testing Products $(1,995 ) $ 5,589 $ 8,012
Services 1,572 2,149 4,975
Power Sources (611 ) (546 ) (270 )
Provision for restructuring and
shut-down of Services operations (800 ) (607 ) -
General corporate expenses (359 ) (371 ) (407 )
------ ------ ------
$(2,193 ) $ 6,214 $12,310
====== ====== ======
Total assets:
Testing Products $ 6,946 $ 6,702 $13,393
Services 5,783 9,584 10,927
Power Sources 1,388 1,651 2,191
General corporate assets 14,532 15,309 3,290
------ ------ ------
$28,649 $33,246 $29,801
====== ====== ======
Depreciation and amortization:
Testing Products $ 539 $ 717 $ 538
Services (1) 1,934 1,125 970
Power Sources 65 74 105
------ ------ ------
$ 2,538 $ 1,916 $ 1,613
====== ====== ======
Capital expenditures:
Testing Products $ 160 $ 445 $ 641
Services 658 382 2,331
Power Sources 29 26 74
------ ------ ------
$ 847 $ 853 $ 3,046
====== ====== ======
(1) Includes amortization of $164,000 and $16,000 in 1999 and 1998,
respectively.
F-22
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
General corporate assets, in each of the three years, consist of cash
investments that are not specifically identifiable to a segment and, in 1999
and 1998, assets held for sale of $2,135,000 and $2,193,000, respectively.
Financial information by geographic area is as follows:
1999 1998 1997
---- ---- ----
(In thousands)
Revenues from external customers:
United States $ 6,526 $22,657 $28,027
Singapore 7,986 8,188 15,749
Costa Rica 2,039 2,698 3,444
Inter-geographic revenues:
United States 148 - 1,823
Singapore 11 307 317
Eliminations (159 ) (307 ) (2,140 )
------ ------ ------
$16,551 $33,543 $47,220
====== ====== ======
Property, plant and equipment, net:
United States $ 3,483 $ 4,212 $ 6,957
Singapore 3,309 4,495 2,857
Costa Rica 803 829 868
------ ------ ------
$ 7,595 $ 9,536 $10,682
====== ====== ======
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. Inter-segment sales and inter-geographic sales
of manufactured products are priced at cost plus a reasonable profit.
The Company provides products and services to companies in the electronics and
semiconductor industries, many of which are industry leaders. There are a
limited number of companies which purchase testing products and services sold
by the Company. The Company's four largest customers in 1999 (see Note 11)
accounted for approximately 64% of consolidated revenues in 1999. These same
four customers accounted for 65% and 48% of consolidated revenues in 1998 and
1997, respectively. Two other customers accounted for 0%, 25% and 42% of
revenues in 1999, 1998 and 1997, respectively. Accounts receivable are
generally due within 30 days, and collateral is not required due to the credit
worthiness of the customers to which the Company sells.
Accounts receivable at any point in time are concentrated in one or more
of the Company's significant customers, depending on shipments at that point in
time to a particular customer. Historically, the Company's bad debts have been
very low, an indication of the credit worthiness of the customers to which the
Company sells.
F-23
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
The Company's revenues are concentrated in the electronics industry.
However, the Company's customers operate in diverse markets and geographic
areas. Customers of the respective segments are indicated by an "x" in the
table. Revenues from major customers, as a percent of total revenues are as
follows:
Total Testing
Revenues Products Services
-------- -------- --------
1999
----
Customer A 25 % X
Customer B 14 X
Customer C 13 X
Customer D 12 X
Customer E - X
Customer F - X
1998
----
Customer A 1 % X
Customer B 1 X
Customer C 29 X
Customer D 34 X
Customer E 21 X
Customer F 4 X
1997
----
Customer A - % X
Customer B - X
Customer C 19 X
Customer D 29 X
Customer E 32 X
Customer F 10 X
F-24
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
Net income (loss) $(1,256 ) $4,237 $8,132
===== ===== =====
Weighted average shares outstanding 6,628 6,111 6,500
Net effect of dilutive stock options
based on the treasury stock method - 90 104
----- ----- -----
Weighted average shares and
assumed conversions 6,628 6,201 6,604
===== ===== =====
Earnings (loss) per share:
Basic $ (.19 ) $ .69 $ 1.25
===== ===== =====
Diluted $ (.19 ) $ .68 $ 1.23
===== ===== =====
Options to purchase 632,000, 295,000 and 8,000 weighted average shares of
common stock of the Company were excluded from the computation of diluted
earnings (loss) per share during 1999, 1998 and 1997, respectively, as
inclusion of these options in the calculations would have been anti-dilutive.
7. EMPLOYEE STOCK SAVINGS PLAN
The Company sponsors an Employee Stock Savings Plan (the "Plan"). The Plan
allows eligible United States employees to contribute up to 15% of defined
compensation to the Plan and to elect to have contributions not be subject to
Federal income taxes under Section 401(k) of the Internal Revenue Code. The
Company matches employee contributions to the Plan at a rate equal to 50% of
the employee's contribution, but the Company's matching contribution is limited
to 2% of the employee's defined compensation. The Company also makes a
voluntary contribution of an amount equal to 1% of the defined compensation of
all participants. Effective January 1, 1997, the Company also contributes a
profit sharing amount based on the consolidated profits of the Company. The
F-25
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
maximum profit sharing contribution is 5% of compensation. The Company's
contributions for matching, voluntary and profit sharing contributions were
$110,000 in 1999, $386,000 in 1998 and $501,000 in 1997. Employee contributions
are invested in Company stock or other investment options offered by the Plan.
The Company's contributions are invested solely in Company stock, and vest with
the employee over seven years.
The Company has registered and reserved 500,000 shares of common stock
for sale to the Plan. The Plan purchased in the open market 94,000, 2,000 and
27,000 shares during 1999, 1998 and 1997, for an aggregate purchase price of
$453,000, $25,000 and $368,000, respectively. During 1998 and 1997, the Plan
purchased 16,000 and 33,000 shares, respectively, of stock from the Company for
an aggregate purchase price of $122,000 and $524,000, respectively. The
purchase price per share for stock purchased from the Company was the closing
price on the day prior to purchase by the Plan. At December 31, 1999, 101,000
reserved shares remain unissued under the registration statement.
8. COMMITMENTS
The Company leases various manufacturing and office facilities under non-
cancelable operating lease agreements, expiring through 2001. Rental expense
for 1999, 1998 and 1997 was $403,000, $321,000 and $273,000, respectively.
Future minimum rental payments, net of sublease amounts, under operating
leases in effect at December 31, 1999 are: 2000 - $280,000 and 2001 -
$119,000.
The Company leases manufacturing and office space in its U.S. facility to
a third party under an agreement expiring in January 2001. Rental income for
1999, 1998 and 1997 was $179,000, $179,000 and $180,000, respectively. Future
sublease income under the lease will be: 2000 - $179,000; and 2001 - $15,000.
In addition, the Company entered into an agreement in October 1999 to sub-lease
the Austin, Texas Services facility to a third party for a period and rental
equal to the Company's remaining obligation under the lease. Rental expense and
rental income for 1999 was $39,000 and the remaining lease obligations and sub-
lease income are: 2000 - $157,000 and 2001 - $39,000.
F-26
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
9. ACCRUED LIABILITIES
Accrued liabilities at December 31, consist of the following:
1999 1998
---- ----
(In thousands)
Payroll $ 685 $2,490
Insurance payable 98 78
Deferred income 64 18
Warranty 53 148
Other 129 311
----- -----
$1,029 $3,045
===== =====
10. 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 purchase price of approximately
$3.9 million consisted of (i) $1,000,000 payable in cash, (ii) a note payable
of $790,000, and (iii) 475,000 shares of the Company's common stock. The common
stock was unregistered and is subject to certain transfer restrictions. The
operations acquired were located in Austin, Texas and Singapore and are used to
operate burn-in and test services laboratories, providing such services to
integrated circuit manufacturers. This acquisition has been accounted for using
the purchase method of accounting. Accordingly, the assets acquired and
liabilities assumed were recorded at their estimated fair values as of the date
of acquisition. The principal assets acquired were $2.7 million of equipment
and goodwill. The excess of the purchase price over the net identifiable assets
acquired was $1.2 million and is being amortized over a seven-year period on a
straight-line basis. The results of operations related to this acquisition have
been included in the Company's consolidated financial statements since December
3, 1998. The Austin, Texas facility was closed in September 1999. Impaired
goodwill was written off when the facility was closed (See Note 11).
F-27
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
11. SHUT-DOWN AND RESTRUCTURING OF FACILITIES AND ASSETS HELD FOR SALE
The following table reports activity in the accrued shut-down and
restructuring accounts during the years ended December 31:
1999 1998
---- ----
(In thousands)
Accrued costs at January 1 $ 300 $ -
Provision for shut-down and restructuring:
Employee severance 30 207
Excess leased facilities - 200
Other expenses 80 100
---- ----
110 507
---- ----
Cash payments charged to accounts:
Employee severance (72 ) (207 )
Lease payments (101 ) -
Other payments (27 ) -
---- ----
(200 ) (207 )
---- ----
Disposal of excess equipment (138 ) -
---- ----
Accrued costs at December 31 $ 72 $ 300
==== ====
The Company's Austin, Texas facility (which was part of the Services
segment) provided services principally to one customer and accounted for 14%
and 1% of the Company's consolidated revenues during 1999 and 1998,
respectively. The facility was closed on September 30, 1999 because the
customer notified the Company that it would cease sending product to the
facility. The Company recorded an $800,000 provision for shut-down in September
1999 related to the closing of this facility. The provision included a $875,000
write-off of impaired goodwill and a $257,000 write-down to adjust certain
fixed assets at the facility to their estimated fair value as determined by
management based on its knowledge of market conditions. Proceeds related to the
sale of certain fixed assets totaled $442,000 and are included as a reduction
of the provision for shut-down. The provision also included employee severance
costs related to 32 employees of $30,000 and $80,000 of other expenses to
complete the shut-down. A substantial portion of the remaining fixed assets
related to the Austin facility were disposed of during the fourth quarter of
1999. The Company has not included an accrual for future rent obligations
related to the leased facility in Austin because
F-28
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
it has entered into a sub-lease agreement with a third party equal to the
Company's remaining obligation under the lease agreement. It is currently
estimated that there will be no significant additional expenses related to the
shut-down.
Services provided to Texas Instruments Incorporated accounted for
substantially all of the revenues of the Company's Singapore Services facility
in 1998. 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.
Micron accounted for 8% of 1999 consolidated revenues and completely
discontinued utilizing the Company's services during the fourth quarter of
1999. 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, 57 Singapore
employees were terminated and a $507,000 provision for restructuring was
recorded in the fourth quarter of 1998. The restructuring provision included
$207,000 for severance costs paid to employees who were terminated during 1998;
$200,000 related to costs associated with excess leased facilities and $100,000
related to other expenses.
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 2000. In connection with the shut-down of the facility, 46 Durham
employees were terminated. Severance and other related shut-down costs, which
were not material, were recorded in 1998.
F-29
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
1999
----
Net sales $ 4,320 $ 4,961 $ 4,935 $ 2,335
Gross profit 1,561 2,070 1,743 427
Net income (loss) (262 ) 184 (507) (1) (671 )
Earnings (loss) per share:
Basic (.04 ) .03 (.08 ) (.10 )
Diluted (.04 ) .03 (.08 ) (.10 )
1998
----
Net sales $11,480 $ 9,143 $ 9,203 $ 3,717
Gross profit 5,617 5,293 4,973 1,330
Net income (loss) 1,787 (2) 1,847 1,305 (702 ) (3)
Earnings (loss) per share:
Basic .29 .30 .21 (.11 )
Diluted .29 .30 .21 (.11 )
(1) The net loss for the quarter ended September 30, 1999 includes a $800,000
provision for shut-down of the Company's Austin, Texas Services facility.
(2) Net income for the quarter ended March 31, 1998 includes a $100,000
impairment reserve related to assets held for sale.
(3) The net loss for the quarter ended December 31, 1998 includes a $507,000
provision for restructuring of the Company's Singapore operations.
F-30
<PAGE>
RELIABILITY INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
---- ---- ----
Reserves for obsolete and excess inventory:
Reserves at beginning of year $ 775 $ 871 $1,509
Additions charged to costs and expenses 150 40 233
Amounts charged to reserve (497 ) (136 ) (871 )
---- ----- -----
Reserves at end of year $ 428 $ 775 $ 871
==== ===== =====
S-1
<PAGE>
RELIABILITY INCORPORATED
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
In accordance with paragraph (3) of General Instruction G to Form 10-K,
Part III of this Report is omitted because the Company will file with the
Securities and Exchange Commission, not later than 120 days after the end of
1999, a definitive proxy statement pursuant to Regulation 14A involving the
election of directors.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following financial statements are filed as part of this report:
1. Consolidated Financial Statements and Supplementary Data.
Listed in the Index to Financial Statements provided in
response to Item 8 hereof (see p. F-1 for Index).
2. Financial Statement Schedule. Listed in the Index to
Financial Statements provided in response to Item 8 hereof
(see p. F-1 for Index).
(b) The following exhibits are filed as part of this report:
3.1 Restated Articles of Incorporation (with amendment). Reference
is made to Exhibit 3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995.
3.2 Amended and Restated Bylaws. Reference is made to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
21. List of subsidiaries.
23. Consent of Independent Auditors, dated March 13, 2000, related
to Employee Stock Savings Plan and Trust.
23.1 Consent of Independent Auditors, dated March 13, 2000, related
to 1997 Stock Option Plan.
27. Financial Data Schedule.
(c) No reports on Form 8-K were required to be filed by the Company
during the last quarter of the fiscal year covered by this report.
26
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: March 15, 2000
RELIABILITY INCORPORATED (Registrant)
BY /s/ Max T. Langley
Max T. Langley, Senior Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE: March 15, 2000
BY /s/ Larry Edwards
Larry Edwards, Chairman of the Board of
Directors, President and
Chief Executive Officer
DATE: March 15, 2000
By /S/ Max T. Langley
Max T. Langley, Senior Vice President,
Chief Financial Officer
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
/s/ Larry Edwards DATE: March 15, 2000
Larry Edwards, Director
/s/ W. L. Hampton DATE: March 15, 2000
W. L. Hampton, Director
/s/ John R. Howard DATE: March 15, 2000
John R. Howard, Director
/s/ Thomas L. Langford DATE: March 15, 2000
Thomas L. Langford, Director
/s/ Philip Uhrhan DATE: March 15, 2000
Philip Uhrhan, Director
27
<PAGE>
RELIABILITY INCORPORATED
INDEX TO EXHIBITS
Exhibit Page
Number Description Number
- ------- ----------- ------
21. List of Subsidiaries. 29
23. Consent of Independent Auditors, dated March 13, 2000,
related to Employee Stock Savings Plan and Trust. 30
23.1 Consent of Independent Auditors, dated March 13, 2000,
related to 1997 Stock Option Plan. 31
27. Financial Data Schedule. 32
28
RELIABILITY INCORPORATED
EXHIBIT 21
LIST OF SUBSIDIARIES
Name Place of Incorporation
---- ----------------------
RICR de Costa Rica, S.A. Costa Rica
Reliability Singapore Pte Ltd. Singapore
29
RELIABILITY INCORPORATED
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-47803) pertaining to the Reliability Incorporated
Employee Stock Savings Plan and Trust and in the related Prospectus of our
report dated January 28, 2000, with respect to the consolidated financial
statements and schedule of Reliability Incorporated included in the Annual
Report (Form 10-K) for the year ended December 31, 1999, filed with the
Securities and Exchange Commission.
BY/s/ERNST & YOUNG LLP
Houston, Texas
March 13, 2000
30
RELIABILITY INCORPORATED
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-26659) pertaining to the Reliability Incorporated
1997 Stock Option Plan and in the related Prospectus of our report dated
January 28, 2000, with respect to the consolidated financial statements and
schedule of Reliability Incorporated included in the Annual Report (Form 10-K)
for the year ended December 31, 1999, filed with the Securities and Exchange
Commission.
BY/s/ERNST & YOUNG LLP
Houston, Texas
March 13, 2000
31
<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>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13573
<SECURITIES> 0
<RECEIVABLES> 1267
<ALLOWANCES> 0
<INVENTORY> 1616
<CURRENT-ASSETS> 17938
<PP&E> 19532
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0
0
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</TABLE>
