-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NiJAA8tl0PuboKuMW85sEnF0XMav0fq8S+FOz/Aj1Fpk3rS1xvVzBESTQM89xHmb Sywegtait8RUB3j058qWjg== 0000034285-98-000009.txt : 19980805 0000034285-98-000009.hdr.sgml : 19980805 ACCESSION NUMBER: 0000034285-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RELIABILITY INC CENTRAL INDEX KEY: 0000034285 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 750868913 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07092 FILM NUMBER: 98676515 BUSINESS ADDRESS: STREET 1: 16400 PARK ROW STREET 2: P O BOX 218370 CITY: HOUSTON STATE: TX ZIP: 77218 BUSINESS PHONE: 7134920550 FORMER COMPANY: FORMER CONFORMED NAME: FAIRLANE INDUSTRIES INC DATE OF NAME CHANGE: 19800519 10-Q 1 10-Q JUNE 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1998 Commission File Number 0-7092 RELIABILITY INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its charter) TEXAS 75-0868913 - ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 16400 Park Row Post Office Box 218370 Houston, Texas 77218-8370 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (281) 492-0550 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. YES X NO ----------- ----------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 6,106,752 -- Common Stock -- No Par Value as of July 30, 1998 10Qjun98 1 RELIABILITY INCORPORATED FORM 10-Q TABLE OF CONTENTS June 30, 1998 PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Consolidated Balance Sheets: June 30, 1998 and December 31, 1997 3-4 Consolidated Statements of Income: Six Months Ended June 30, 1998 and 1997 5 Three Months Ended June 30, 1998 and 1997 6 Consolidated Statements of Cash Flows: Six Months Ended June 30, 1998 and 1997 7 Notes to Consolidated Financial Statements 8-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-18 PART II - OTHER INFORMATION Item 1. through Item 5. Not applicable. Item 6. Exhibits and Reports on Form 8-K. 19 Signatures 20 The information furnished in this report reflects all adjustments (none of which were other than normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results of the interim periods presented. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements RELIABILITY INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS June 30, December 31, 1998 1997 (unaudited) Current assets: Cash and cash equivalents $11,603 $ 7,108 Accounts receivable 4,837 6,753 Inventories 4,251 4,156 Deferred tax assets 560 601 Other current assets 343 501 ------- ------- Total current assets 21,594 19,119 ------- ------- Property, plant and equipment, at cost: Machinery and equipment 12,286 16,279 Building and improvements 5,026 7,958 Land 530 792 ------- ------- 17,842 25,029 Less accumulated depreciation 10,181 14,347 ------- ------- 7,661 10,682 ------- ------- Assets held for sale 2,193 - ------- ------- $31,448 $29,801 ======= ======= See accompanying notes 3 RELIABILITY INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31, 1998 1997 (unaudited) Current liabilities: Current maturities on long-term debt $ 1,411 $ 401 Accounts payable 1,031 1,659 Accrued liabilities 2,930 4,426 Income taxes payable 895 727 ------- ------- Total current liabilities 6,267 7,213 Long-term debt - 1,560 Deferred tax liabilities 482 386 Commitments and contingencies - - Stockholders' equity: Common stock, without par value; 20,000,000 shares authorized,7,314,702 and 7,269,502 shares issued in 1998 and 1997, respectively 7,078 6,690 Retained earnings 25,478 21,844 ------- ------- 32,556 28,534 Less treasury stock at cost, 1,208,801 and 1,214,211 shares in 1998 and 1997, respectively 7,857 7,892 ------- ------- Total stockholders' equity 24,699 20,642 ------- ------- $31,448 $29,801 ======= ======= See accompanying notes 4 RELIABILITY INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Six Months Ended June 30, 1998 1997 (unaudited) Revenues $20,623 $19,300 Costs and expenses: Cost of revenues 9,713 9,772 Marketing, general and administrative 4,378 3,990 Research and development 1,103 838 Provision for asset impairment 100 - ------- ------- 15,294 14,600 ------- ------- Operating income 5,329 4,700 Interest income (expense), net 145 (93) ------- ------- Income before income taxes 5,474 4,607 ------- ------- Provision (benefit) for income taxes: Current 1,703 1,582 Deferred 137 (37) ------- ------- 1,840 1,545 ------- ------- Net income $ 3,634 $ 3,062 ======= ======= Earnings per share: Diluted $ .58 $ .44 ======= ======= Basic $ .60 $ .44 ======= ======= Weighted average shares: Diluted 6,217 7,004 ======= ======= Basic 6,076 7,004 ======= ====== See accompanying notes 5 RELIABILITY INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Three Months Ended June 30, 1998 1997 (unaudited) Revenues $9,143 $12,609 Costs and expenses: Cost of revenues 3,850 6,062 Marketing, general and administrative 1,979 2,579 Research and development 489 433 ------ ------- 6,318 9,074 ------ ------- Operating income 2,825 3,535 Interest income (expense) net 101 (96) ------ ------- Income before income taxes 2,926 3,439 ------ ------- Provision (benefit) for income taxes: Current 1,005 1,128 Deferred 74 (12) ------ ------- 1,079 1,116 ------ ------- Net income $1,847 $ 2,323 ====== ======== Earnings per share: Diluted $ .30 $ .39 ====== ======= Basic $ .30 $ .39 ====== ======= Weighted average shares: Diluted 6,224 5,946 ====== ======= Basic 6,091 5,946 ====== ======= See accompanying notes 6 RELIABILITY INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended June 30, 1998 1997 (unaudited) Cash flows from operating activities: Net income $ 3,634 $ 3,062 Adjustments to reconcile net income to cash provided (used) by operating activities: Depreciation 944 735 Deferred tax provision (benefit) 137 (37) Provision for inventory obsolescence (18) 353 Provision for asset impairment 100 - Increase (decrease) in operating cash flows: Accounts receivable 1,916 (4,625) Inventories (77) (2,143) Other current assets 158 129 Prepaid income tax - 286 Accounts payable (628) 1,147 Accrued liabilities (1,496) (35) Income taxes payable 168 603 ------ ------ Total adjustments 1,204 (3,587) ------ ------ Net cash provided (used) by operating activities 4,838 (525) ------ ------ Cash flows from investing activities: Expenditures for property, plant and equipment (662) (1,187) Proceeds from sale of equipment 446 - ------ ------ Net cash (used) in investing activities (216) (1,187) ------ ------ Cash flows from financing activities: Payments on long-term debt (550) (180) Borrowings under revolving credit facility - 6,863 Payments under revolving credit facility - (4,157) Proceeds from issuance of common and treasury stock pursuant to stock option and employee stock savings plans 397 - Purchase of treasury stock - (8,256) Other 26 - ------ ------ Net cash (used) by financing activities (127) (5,730) ------ ------ Net increase (decrease) in cash 4,495 (7,442) Cash at beginning of period 7,108 8,504 ------ ------ Cash at end of period $11,603 $ 1,062 ====== ====== Supplemental disclosures: Interest paid $ 81 $ 147 ====== ====== Income taxes paid $ 1,427 $ 690 ====== ====== See accompanying notes 7 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - ----------------------- Reliability Incorporated is a United States based corporation with operations in the United States, Singapore and Costa Rica. The Company and its subsidiaries are principally engaged in the design, manufacture and sale of equipment used to test and condition integrated circuits. Subsidiaries of the Company operate a service facility which conditions integrated circuits as a service to others and manufacture and sell power sources, primarily a line of DC to DC power converters. 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 have been provided principally to only two customers, one in the U.S. (Durham, North Carolina) and one in Singapore. The Company's U.S. services facility was closed in April 1998 (See Note 5). Power sources are sold to U.S., European and Asian based companies that design and sell electronic equipment. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. Accounting Estimates - -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Stock Dividend - -------------- On September 5, 1997, the Company's Board of Directors declared a two- for-one stock split effected as a 100% stock dividend which was distributed on October 6, 1997, to shareholders of record on September 22, 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. Weighted average share and per share data have been restated to reflect the stock split. Treasury stock information has not been restated because the stock split in the form of a dividend did not apply to treasury stock. 8 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 Segment Information - ------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131 - "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). Although SFAS No. 131 is effective beginning the first quarter of 1998, the Company has elected not to report segment information in interim financial statements in the first year of application, consistent with the provisions of the statement. Comprehensive Income - -------------------- As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes new rules for reporting and display of comprehensive income and certain components of comprehensive income which are referred to as "Other Comprehensive Income". The Company does not have any items of Other Comprehensive Income; thus the adoption of SFAS No. 130 had no impact on the Company's net income or shareholders' equity. During the six month periods ended June 30,1998 and 1997, total comprehensive income amounts were $3,634,000 and $3,062,000, respectively, which are the same as net income. Accounting for Derivative Instruments and Hedging Activities - ------------------------------------------------------------ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 - "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which is required to be adopted in years beginning after June 15, 1999. Because the Company does not use derivatives, adoption of the new Statement will not have an effect on earnings or the financial position of the Company. Inventories - ----------- Inventories are stated at the lower of standard cost (which approximates first-in, first-out) or market (replacement cost or net realizable value) and include (in thousands): June 30, December 31, 1998 1997 Raw materials $1,447 $1,611 Work-in-progress 2,342 2,189 Finished goods 462 356 ------ ------ $4,251 $4,156 ====== ====== Inventories are presented net of reserves for excess and obsolete inventories of $844,000 and $871,000 at June 30, 1998 and December 31, 1997, respectively. 9 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 Income Taxes - ------------ Deferred income taxes are provided under the liability method and reflect the net tax effects of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The differences between the effective rate reflected in the provision for income taxes on income before income taxes and the amounts determined by applying the statutory U.S. tax rate of 34% are analyzed below (in thousands) for the six month periods ended: June 30, 1998 1997 Provision at statutory rate $1,861 $1,566 Change in valuation allowance - (45) Tax effects of: Lower effective income tax rates related to undistributed foreign earnings (149) (151) Foreign expenses for which a tax benefit is not available 87 95 State income taxes, net 34 54 Other 7 26 ----- ----- Provision for income taxes $1,840 $1,545 ===== ===== Effective January 1, 1997, the Company changed its policy with respect to providing U.S. income taxes on undistributed earnings of a foreign subsidiary. Demand for services provided by the subsidiary necessitates permanently reinvesting future earnings of the subsidiary. Deferred U.S. income taxes have not been provided on earnings of the subsidiary that were accumulated after January 1, 1997. 2. LONG-TERM DEBT AND DEBT AGREEMENTS Long-term debt consisted of the following (in thousands): June 30, December 31, 1998 1997 Mortgage payable; due in monthly install- ments of $26,777 ($196,777 as explained below), including interest at 9% $1,411 $1,961 Revolving line of credit (described below) - - ------ ------ 1,411 1,961 Less current maturities 1,411 401 ------ ------ Long-term debt due after one year $ -0- $1,560 ====== ====== The mortgage was payable in 180 equal monthly installments, including interest at 9%. The Company began paying an additional principal payment of $20,000 each month in 1997 and $170,000 each month in 1998. Current maturities as of June 30, 1998 assume the Company will continue making the additional $170,000 principal payment, resulting in the note being paid in 10 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 full on March 1, 1999. The mortgage is collateralized by land and a building. During 1997, the Company amended its Loan Agreement with Wells Fargo Bank Texas, N.A. to increase its credit availability to $4.0 million (compared to $2.0 million at December 31, 1996) and to extend the term of the Loan Agreement to December 31, 1999. Interest is payable at the bank's prime rate minus 1/4% (8-1/4% at June 30, 1998). The unpaid principal of the note is due December 31, 1999. The Loan Agreement provides for a revolving line of credit, secured by substantially all assets of the Company which are located in the U.S., except for land and buildings. The credit facility requires compliance with certain financial loan covenants related to the Company's current ratio, debt service coverage and funded debt to net income before income taxes plus non-cash items plus interest expense. The agreement prohibits the payment of cash dividends by the Company unless otherwise agreed to by the bank. The Company was in compliance with the financial requirements of the agreement at June 30, 1998, and there were no balances outstanding under the agreement at June 30, 1998 or December 31, 1997. The Company's Singapore subsidiary maintains an agreement with a Singapore bank to provide an overdraft facility to the subsidiary of 500,000 Singapore dollars (U.S. $298,000) at the bank's prime rate plus 2% (9.5% at June 30, 1998). There were no balances outstanding at June 30, 1998, but amounts utilized under letter of credit commitments totalled $136,000, resulting in credit availability of $162,000 at June 30, 1998. The loan is collateralized by all assets of the subsidiary and requires maintenance of a minimum net worth of the Singapore subsidiary. Payment of dividends requires written consent from the bank, and continuation of the credit facility is at the discretion of the bank. Interest income (expense) for the six month periods ended June 30, is presented net as follows (in thousands): 1998 1997 Interest income 226 103 Interest (expense) $(81) $(196) ---- ---- Interest income (expense), net $145 $ (93) ==== ==== 3. TREASURY STOCK PURCHASE 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 may be used to issue shares under the 1997 Stock Option Plan and to fund the Company's contributions to its employee stock savings plan. 4. COMMITMENTS A subsidiary of the Company leases a conditioning services and office facility under a non-cancelable operating lease agreement, expiring in 2000. Future minimum rental payments under the lease at June 30, 1998 are as follows: 1998 - $136,000; 1999 - $282,000; and 2000 - $133,000. The Company leases manufacturing and office space in its U.S. facility to a third party under an agreement expiring in January 2001. Future income 11 RELIABILITY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 under the lease will be: 1998 - $89,000; 1999 - $179,000; 2000 - $179,000; 2001 - $15,000. 5. SHUT-DOWN OF FACILITY AND ASSETS HELD FOR SALE The Company's North Carolina services facility accounted for approximately 10% of consolidated revenues in 1997 and provided service 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 Company recorded a $100,000 impairment reserve related to the machinery and equipment located at the Durham facility in the first quarter of 1998 in order to state these assets at their estimated realizable value. Land and a building located in Durham, are presented as assets held for sale in the accompanying consolidated balance sheet at their estimated net realizable value of $2,193,000. The assets held for sale are being actively marketed, although no assurances can be given that they will be sold during 1998. 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 the first quarter of 1998, and it is currently estimated that there will be no significant additional expenses related to the shut-down. 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): Six months ended Three months ended June 30, June 30, 1998 1997 1998 1997 Numerator for basic and diluted earnings per share - net income $3,634 $3,062 $1,847 $2,323 ===== ===== ===== ===== Denominator: Denominator for basic earnings per share - weighted average shares 6,076 7,004 6,091 5,946 Dilutive effect assuming conversion of stock options 141 - 133 - ----- ----- ----- ----- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 6,217 7,004 6,224 5,946 ====== ===== ===== ===== Earnings per share: Diluted $ .58 $ .44 $ .30 $ .39 ====== ===== ===== ===== Basic $ .60 $ .44 $ .30 $ .39 ====== ===== ===== ===== Stock options related to the purchase of 253,000 shares of common stock were not included in the computation of diluted earnings per share for the first two quarters of 1998 because the options' respective exercise prices were greater than the average market price of the common stock and, therefore, the effect would have been antidilutive. 12 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this document contain forward- looking statements that involve risks and uncertainties. All forward- looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth elsewhere in this document. FINANCIAL CONDITION The primary sources of Reliability's liquidity are cash provided by operations and retained earnings. The Company maintains lines of credit to supplement the primary sources of capital. Changes in the Company's financial condition and liquidity since June 30, 1997 are generally attributable to changes in cash flows from operating activities, the purchase of 1.3 million shares of the Company's Common Stock in March 1997 and repayment of borrowings that were used to partially finance the purchase of the Common Stock. Certain ratios and amounts monitored by management in evaluating the Company's financial resources and performance are presented in the following chart. The periods presented related to the profitability ratios are for the six months ended June 30, and twelve months ended December 31: June 30, December 31, June 30, 1998 1997 1997 Working capital: Working capital (in thousands) $15,327 $11,906 $9,547 Current ratio 3.5 to 1 2.7 to 1 2.5 to 1 Equity ratios: Total liabilities to equity 0.3 0.4 0.8 Assets to equity 1.3 1.4 1.8 Profitability ratios: Gross profit 53 % 50 % 49 % Return on revenues 18 % 17 % 16 % Return on assets (annualized) 23 % 27 % 24 % Return on equity (annualized) 29 % 39 % 42 % The Company's financial condition improved throughout 1997 and has remained very strong during 1998. Working capital increased to $15.3 million at June 30, 1998, from $9.5 million at June 30, 1997, and the ratio of current assets to current liabilities increased from 2.5 to 1 at June 30, 1997, to 3.5 to 1 at June 30, 1998. The Company's current ratio and working capital were lower at June 30, 1997 due to the fact the Company had used excess cash to partially fund the purchase of treasury stock in March 1997. The Company purchased 1.3 million shares from a shareholder for $8.3 million. The Company used $5.8 million of its cash balances and $2.5 million from its line of credit to purchase the stock. The amount borrowed 13 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 was paid in full during the third quarter of 1997. The Company obtained increases in its available line of credit from $2.0 million to $7.5 million in March 1997 and to $20 million in August 1997. The changes were related to the purchase of Company stock and possible need to finance increases in capital expenditures and other working capital items. The need to purchase capital assets and finance working capital items did not materialize, thus the amount available under the line of credit was reduced to $4.0 million on December 31, 1997. Demand for the Company's products and services increased during the first quarter of 1998 resulting in an increase in the Company's backlog to $16.7 million at March 31, 1998, compared to $14.1 million at December 31, 1997. Backlog declined to $10.8 million at June 30, 1998 due to decreases in demand, during the second quarter of 1998, for products and services sold by the Company. Operating at changing levels of demand for products and services has affected various elements of cash provided by operations. Net cash provided by operating activities for the six months ended June 30, 1998 was $4.8 million, contrasted with $0.5 million used in the first six months of 1997. The principal items contributing to the cash provided by operations in 1998 were net income plus depreciation which totaled $4.6 million and a $1.9 million decrease in accounts receivable. Cash provided by operations was reduced by a $0.6 million decrease in accounts payable and a $1.5 million decrease accrued liabilities. The decrease in accounts receivable and accounts payable relate to normal changes in items of this nature, resulting from the timing of receipt of purchased items and invoicing customers and collecting accounts receivable. The decrease in accounts receivable was also affected by the fact that certain products were shipped in the latter part of the fourth quarter of 1997, resulting in accounts receivable being somewhat high at December 31, 1997. Accrued liabilities decreased $1.5 million due to payment of performance bonuses related to 1997 profitability and a general reduction in most items included in accrued liabilities due to payment of year-end accruals in the first quarter of 1998. A slow down in capital spending by the semiconductor industry has resulted in a reduction in new orders for testing equipment sold by the Company. Visibility into the second half of 1998 and the first half of 1999 is being affected by a softening in demand for semiconductor equipment and a depressed DRAM pricing environment. These factors are expected to affect the Company's bookings of new business during the remainder of 1998. Based on currently available information, the Company's forward-looking projections indicate that revenues for the third quarter ending September 30, 1998 will be $9.0 to $9.5 million and revenues for the first nine months of 1998 will be approximately $30.0 million compared to $32.8 million for the first nine months of 1997 and revenues for the full year ending December will be $35 to $38 million. Management is optimistic about the long-term outlook for the semiconductor equipment industry and the Company, but believes that the imbalance in supply and demand for certain semiconductors will adversely affect the semiconductor equipment industry and the Company for several more quarters. A general uncertainty concerning the short-term outlook for the semiconductor market and the proposed sale of the Texas Instrument DRAM business to Micron Technology are factors that are being monitored by the Company. 14 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 The Company does not anticipate incurring any additional material expenses related to the shut-down of the Durham facility, provided the $2.2 million of assets held for sale at June 30, 1998 can be disposed of at their currently estimated net realizable value. Capital expenditures during the first six months of 1998 and 1997 were $0.7 million and $1.2 million, respectively. Expenditures for 1998 include equipment required by the Singapore services facility to support demand for services provided by the subsidiary. Proceeds from the sale of equipment were $0.4 million in 1998 and are related to disposal of assets at the Durham facility. The Company believes its cash and cash equivalent balances, future cash generated from operations and available lines of credit will be sufficient to meet the cash requirements of the Company for the remainder of 1998 and first half of 1999. RESULTS OF OPERATIONS Six months ended June 30, 1998 compared to six months ended June 30, 1997. Revenues. Revenues for the 1998 six-month period were $20.6 million compared to $19.3 million for the 1997 period. Revenues in the Testing Products segment increased $4.1 million. The revenue increase relates to increased demand for products supplied by the semiconductor industry, which translates to increased requirements for products supplied by the Company. Services and Power Sources revenues decreased $2.7 and $0.1 million, respectively. Revenues in the Testing Products segment were $12.3 million for the first half of 1998, which is an increase of 50% over the first half of 1997. The increase is related to increased demand resulting in volume increases and higher unit prices due to product mix changes. Revenues from the sale of CRITERIA and loader and unloader products increased $4.6 million, while revenues from the sale of INTERSECT products decreased $0.5 million. Revenues in the Services segment for the 1998 period were $6.6 million, a decrease of 29% compared to the corresponding 1997 period. The decrease is related to both of the Company's services facilities. The Company closed its North Carolina services facility in April 1998, as explained in the Notes to the Consolidated Financial Statements. Revenues in the Services segment for the 1998 six months period decreased $2.7 million compared to the 1997 six months period. The shut down of the North Carolina facility accounted for $1.4 million of the decrease, volume decreases at the Singapore facility accounted for $0.1 million and the remaining decrease of $1.2 million relates to a reduction in the sale of burn-in boards at the Singapore facility. The decrease in the sale of burn-in boards results from the fact the Singapore facility's customer periodically purchases new burn- in boards related to product mix changes and the customer temporarily has the correct quantity and type of burn-in boards. Revenues in the Power Sources segment were $1.7 million for the first half of 1998, reflecting a 3% decrease from the 1997 period. Revenues were affected by general reductions in demand, an aging product line and a decline in market penetration resulting in volume decreases. 15 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 Costs and Expenses. Total costs and expenses for the 1998 period increased $0.7 million or 5% compared to the 7% revenue increase of $1.3 million. Cost of revenues decreased $0.1 million; marketing, general and administrative expenses increased $0.4 million and research and development expenses increased $0.3 million. A provision for asset impairment of $0.1 million, related to the closing of the North Carolina services facility, was recorded in March 1998. The increase in gross profit from 49% in the 1997 period to 53% in the 1998 period is attributable to the Testing Products segment. The typical 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 higher percent of total consolidated revenues in the 1998 six months period resulting in the increase in gross profit in 1998 compared to 1997. Marketing, general and administrative expenses for the 1998 period increased $0.4 million. The increase in expenses is related to an increase in Testing Products revenues which resulted in an increase in volume related expenses, such as commissions, warranty and similar expenses and an increase in incentive compensation expense accruals which are directly related to the increase in profitability. Expenses in the Services segment declined $0.5 million. Approximately 40% of the decrease relates to closing of the Company's North Carolina facility in April 1998. Research and development expenses for the 1998 period increased $0.3 million. Reliability is committed to a significant research and development program and development costs are projected to remain at current levels or increase somewhat during the remainder of the year. The change in net interest reflects an increase in interest income and a decrease in interest expense. Interest income increased due to a significant increase in cash and interest expense decreased due to the fact the Company is using excess cash balances to accelerate payments on long- term debt associated with the purchase of the Company's U.S. facility. The Company's effective tax rate was 34% for the six months periods ended June 30, 1998 and 1997. The principal items affecting the Company's tax rate in 1998 and 1997 were tax benefits not available to a foreign subsidiary due to net operating loss limitations, state income tax expense, U.S. tax which was not provided on earnings of a foreign subsidiary and, in 1997, a change in the valuation allowance resulting from utilization of foreign tax credits. Earnings Per Common Share. Diluted earnings per share increased $.14 for the 1998 six month period; $.06 of the increase was due to a decrease in the average number of shares outstanding. Three months ended June 30, 1998 compared to three months ended June 30, 1997. Revenues. Revenues for the 1998 three-month period were $9.1 million compared to $12.6 million for the 1997 period. Revenues in the Services, Power Sources and Testing Products segments decreased $3.1, $0.3 and $0.1 million, respectively. 16 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 Revenues in the Testing Products segment were $6.6 million for the first three months of 1998, which is a $0.1 million decrease over the same period in 1997. Normal cyclical changes in customer requirements to purchase capital assets resulted in revenues from the sale of CRITERIA and loader and unloader products increasing $1.8 million and revenues from the sale of INTERSECT products decreasing $1.9 million. Revenues in the Services segment for the 1998 period were $1.8 million, compared to $4.9 million in the corresponding 1997 period. The shutdown of the North Carolina facility accounted for $1.1 million of the decrease, volume decreases at the Singapore facility accounted for $0.4 million and the remaining decrease of $1.6 million relates to a reduction in the sale of burn-in boards at the Singapore facility. The decrease in the sale of burn-in boards results from the fact the Singapore facility's customer periodically purchases new burn-in boards related to product mix changes and the customer temporarily has the correct quantity and type of burn-in boards. Revenues in the Power Sources segment were $0.7 million for the three months ended June 30, 1998, reflecting a 34% decrease from the 1997 period. Revenues were affected by general reductions in demand, an aging product line and a decline in market penetration resulting in volume decreases. Costs and Expenses. Total costs and expenses for the 1998 three month period decreased $2.7 million or 30% compared to the 27% revenue decrease. Cost of revenues decreased $2.2 million; marketing, general and administrative expenses decreased $0.6 million and research and development expenses increased $0.1 million. The increase in the gross profit as a percent of revenues in the 1998 quarter results from the same factors discussed in the above six months discussion. The gross profit for 1998 was affected somewhat by a decrease in the gross profit in the Power Sources segment, which is related to volume decreases. Marketing, general and administrative expenses for the 1998 quarter decreased $0.6 million, or 23%, compared to a 27% decrease in revenues. Expenses in the Services segment declined $0.5 million. A significant portion of the decrease in the Services segment relates to closing of the Company's North Carolina facility. The Company's effective tax rate was 32% for the three months ended June 30, 1997, compared to an effective tax rate of 37% for the 1998 period. In general, items affecting the tax rates for the quarters ended June 30, 1998 and 1997 are the same as those noted in the six months discussion above. The higher effective rate in 1998 is related to the Company's Singapore facility. Tax benefits associated with fixed asset expenditures were lower in 1998 than in 1997 due to a decrease in expenditures. The Company disclosed information related to Southeast Asia economic conditions in Form 10-K for the year ended December 31, 1997. There have been no significant changes in the information discussed in the Form 10-K and readers are referred to the Form 10-K for further information. 17 RELIABILITY INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 The Company disclosed information related to the impact of year 2000 in Form 10-K for the year ended December 31, 1997. There have been no significant changes in matters related to the impact of the year 2000 on the Company, and readers are referred to the Form 10-K for further information. SAFE HARBOR STATEMENT "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this Form 10-Q regarding Reliability's business which are not historical facts are "forward looking statements" that involve risk and uncertainties, including, but not limited to, market acceptance of Company products and services, the effects of general economic conditions, the impact of competition, product development schedules, problems with technology, delivery schedules, and supply and demand changes for Company products and services and its customers' products and services. Actual results may materially differ from projections. 18 RELIABILITY INCORPORATED OTHER INFORMATION PART II. OTHER INFORMATION Items 1 through 5. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Company during the quarter ended June 30, 1998 19 RELIABILITY INCORPORATED SIGNATURES June 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RELIABILITY INCORPORATED (Registrant) August 4, 1998 /s/Larry Edwards President and Chief Executive Officer August 4, 1998 /s/Max T. Langley Sr. Vice President - Finance and Chief Financial Officer 20 EX-27 2 FDS ARTICLE 5 JUNE 1998
5 This schedule contains summary financial information extracted from the applicable SEC Form and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 11,603 0 4,837 0 4,251 21,594 17,842 10,181 31,448 6,267 0 0 0 7,078 17,621 31,448 20,623 20,623 9,713 9,713 5,481 100 (145) 5,474 1,840 3,634 0 0 0 3,634 .60 .58 Shares and Earnings Per Share for the 1997 periods (prior year) have been adjusted in the financial statements to reflect a two-for-one stock split effected in the form of a dividend which was effective as of September 22, 1997.
-----END PRIVACY-ENHANCED MESSAGE-----