SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
Date of Report (Date of earliest event reported) December 3, 1998
Reliability Incorporated
(Exact name of registrant as specified in its charter)
Texas 0-7092 75-0868913
(State or other juris- (Commission file (IRS Employer
diction or registration) Number) Identification No.)
16400 Park Row, Houston, Texas 77084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 281-492-0550
1
RELIABILITY INCORPORATED
Form 8-K/A Index
Item. 7 FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS Page
The following combined audited financial
statements are filed with this report:
Report of Independent Auditors 4
Combined Balance Sheet as of October 31, 1998 5
Combined Statement of Income and Comprehensive
Income - Ten Months ended October 31, 1998 6
Combined Statement of Cash Flows - Ten Months
ended October 31, 1998 7
Notes to Combined Financial Statements 8
(b) PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined
financial statements are filed with this report:
Pro Forma Combined Balance Sheet as of
September 30, 1998 14
Pro Forma Combined Statement of Income
for the Nine Months Ended September 30, 1998 15
Pro Forma Combined Statement of Income
for the Year Ended December 31, 1997 16
Notes to Unaudited Pro Forma Combined
Financial Statements 17
(c) Exhibits. The following exhibits are filed
with this report:
23.1 Consent of Independent Auditors dated
February 9, 1999 related to Employee Stock
Savings Plan and 1997 Stock Option Plan 20
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.
Date: February 11, 1999 Reliability Incorporated
By: /s/ Max T. Langley
------------------------
Max T. Langley,
Senior Vice President
2
RELIABILITY INCORPORATED
Form 8-K/A
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
On December 3, 1998, Reliability Incorporated (the "Company") acquired
certain assets and assumed certain liabilities from Basic Engineering Services
and Technology Labs, Inc. ("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 was (i)
$1,000,000 payable in cash, (ii) a note payable of $790,000 bearing interest at
6% per annum and due June 3, 1999, and (iii) 475,000 shares of the Company's
common stock. The common stock was unregistered and is subject to transfer
restrictions. In connection with the acquisition, the Company also entered into
a $50,000 two year covenant not to compete and a two year $300,000 consulting
agreement with the principal shareholder of BEST. The operations acquired are
located in Austin, Texas and Singapore and are used to operate burn-in and test
services laboratories, providing such services to integrated circuit
manufacturers. This acquisition has been accounted for using the purchase
method of accounting.
(a) FINANCIAL STATEMENTS OF OPERATION ACQUIRED
In accordance with Rule 3-05 of Regulation S-X, audited financial
statements for the acquired operation as of and for the ten months ended
October 31, 1998 are filed with this report.
3
Report of Independent Auditors
The Board of Directors
Basic Engineering Services and Technology Labs, Inc.
We have audited the accompanying combined balance sheet of the Texas and
Singapore operations of Basic Engineering Services and Technology Labs, Inc.
(the "Company") as of October 31, 1998, and the related combined statements of
income and comprehensive income and cash flows for the ten months ended October
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Texas and
Singapore operations of Basic Engineering Services and Technology Labs, Inc. at
October 31, 1998, and the combined results of their operations and their cash
flows for the ten months ended October 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
January 29, 1999
Houston, Texas
4
Basic Engineering Services and Technology Labs, Inc.
Texas and Singapore Operations
Combined Balance Sheet
October 31, 1998
(In thousands)
Current assets:
Cash (including restricted cash of $133) $ 873
Accounts receivable (net of allowance for
doubtful accounts of $17) 1,027
Prepaid expenses 55
------
Total current assets 1,955
Fixed assets, at cost:
Machinery and equipment 10,645
Furniture and fixtures 381
Leasehold improvements 460
Computer and office equipment 107
Vehicles 30
------
11,623
Less accumulated depreciation 7,720
------
3,903
------
$ 5,858
======
Current liabilities:
Accounts payable $ 69
Accrued payroll and related costs 379
Accrued other liabilities 110
Income taxes payable 73
Deferred tax liability 227
------
Total current liabilities 858
------
Net assets 5,000
------
$ 5,858
======
See accompanying notes
5
Basic Engineering Services and Technology Labs, Inc.
Texas and Singapore Operations
Combined Statement of Income and Comprehensive Income
Ten Months ended October 31, 1998
(In thousands)
Revenue $8,731
Cost of sales 6,192
Marketing, general and administrative 975
-----
Operating income 1,564
Foreign exchange (loss), net (13 )
Other, net 12
-----
Income before income taxes 1,563
Provision for income taxes 121
-----
Net income 1,442
Foreign currency translation 65
-----
Comprehensive income $1,507
=====
See accompanying notes
6
Basic Engineering Services and Technology Labs, Inc.
Texas and Singapore Operations
Combined Statement of Cash Flows
Ten months ended October 31, 1998
(In thousands)
Cash flows from operating activities:
Net income $ 1,442
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 1,278
Foreign exchange loss, net 13
Loss on disposal of fixed assets 68
Deferred tax provision 67
Increase (decrease) in operating cash flows:
Accounts receivable 515
Prepaid expenses 7
Accounts payable (153 )
Accrued liabilities (99 )
Income taxes payable (330 )
------
Total adjustments 1,366
------
Net cash provided by operating activities 2,808
------
Cash flows from investing activities:
Expenditures for fixed assets (377 )
Proceeds from sale of fixed assets 8
------
Net cash used in investing activities (369 )
------
Cash flows from financing activities:
Cash flow transferred to BEST (2,226 )
------
Net cash used in financing activities (2,226 )
------
Effect of exchange rate changes on cash 17
------
Net increase in cash (exclusive of restricted cash) 230
Cash (exclusive of restricted cash) at January 1, 1998 510
------
Cash (exclusive of restricted cash) at October 31, 1998 $ 740
======
See accompanying notes
7
Basic Engineering Services and Technology Labs, Inc.
Texas and Singapore Operations
Notes to Combined Financial Statements
October 31, 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Basic Engineering Services and Technology Labs, Inc. ("BEST") is a U.S.
corporation with operations in California, Texas and Singapore. The
accompanying combined financial statements reflect the assets, liabilities and
results of operations of BEST's Texas and Singapore operations, which were
acquired by Reliability Incorporated on December 3, 1998 in the form of an
asset purchase (see Note 6). BEST's Texas and Singapore operations operate
burn-in and test services laboratories, providing services to primarily four
integrated circuit manufacturers.
The accompanying combined financial statements are presented as if BEST's
Texas and Singapore operations had existed as an entity separate from its
parent, BEST, during the period presented and include the assets, liabilities,
revenues and expenses that are directly related to the Texas and Singapore
operations. Because all of BEST's Texas and Singapore results were included in
the financial statements of BEST, separate meaningful historical equity
accounts do not exist for these operations. Earnings per share data have been
omitted from the combined statement of income and comprehensive income because
the Texas and Singapore operations had no equity securities outstanding during
the period presented.
The accompanying combined financial statements have been prepared
specifically to comply with Rule 3-05 of Regulation S-X. Since BEST did not
keep discrete accounting records for its Texas and Singapore operations,
certain allocations (including corporate salaries and administrative costs,
engineering support, insurance costs, rent, etc.) are reflected in the
accompanying combined financial statements (see Note 4).
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of BEST's Texas
and Singapore operations. All transactions between the Texas and Singapore
operations have been eliminated.
RESTRICTED CASH
Restricted cash relates to amounts pledged as security for certain lease
agreements. These restrictions are expected to be lifted upon expiration of the
respective leases (2001).
FIXED ASSETS
For financial statement purposes, depreciation is computed principally on
the straight-line method, using estimated useful lives of 3 to 5 years.
REVENUE RECOGNITION
Generally, revenues are recognized when services are provided.
8
Basic Engineering Services and Technology Labs, Inc.
Texas and Singapore Operations
Notes to Combined Financial Statements
October 31, 1998
FOREIGN CURRENCY
The accounting records of BEST's Singapore operations are maintained in
Singapore dollars which is the functional currency. Transactions occurring in
Singapore during the period involving foreign currencies other than the
Singapore dollar are recorded at the exchange rates approximating those at the
transaction dates. At the balance sheet date, recorded monetary balances
denominated in foreign currencies other than the Singapore dollar are revalued
to reflect the exchange rates prevailing at that date. The resulting net
exchange gains or losses are credited or charged to foreign exchange loss (net)
in the accompanying combined statement of income and comprehensive income.
Cumulative translation gains or losses arising from translating the
Singapore dollar-denominated financial statements into U.S. dollars are
reflected in net assets in the accompanying combined balance sheet. Cumulative
translation adjustments totaled $33,000 (loss) and $98,000 (loss) as of October
31, 1998 and January 1, 1998, respectively.
INCOME TAXES
BEST is a Subchapter S corporation. As a result, U.S. income taxes are
the liability of BEST's shareholders. BEST's Singapore operations are subject
to income taxation under Singapore law. 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 combined 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 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.
CONCENTRATION OF RISKS
Approximately 30% of BEST's combined Texas and Singapore operations'
revenues were denominated in Singapore dollars during the ten months ended
October 31, 1998, thereby subjecting the operations to risks related to foreign
currency fluctuations between the U.S. and Singapore dollar. In addition,
BEST's Texas and Singapore operations are dependent on four significant
customers. For the ten months ended October 31, 1998 these customers were
Motorola Semiconductor, Advanced Micro Devices, Cypress Semiconductor and
Alliance Semiconductor.
9
Basic Engineering Services and Technology Labs, Inc.
Texas and Singapore Operations
Notes to Combined Financial Statements
October 31, 1998
2. NET ASSETS
Changes in net assets during the ten months ended October 31, 1998 were
as follows (in thousands):
Balance at January 1, 1998 $ 4,567
Cash flow transferred to BEST (2,226 )
Net income 1,442
Fixed assets transferred from BEST 1,267
Translation adjustments 65
Other (115 )
------
Balance at October 31, 1998 $ 5,000
======
3. INCOME TAXES
The income tax provision is based on income before income taxes of
$520,000 related to BEST's Singapore operations and consist solely of Singapore
income taxes. The differences between the effective rate reflected in the
income tax provision and the amounts determined by applying the statutory
Singapore income tax rate of 26% are analyzed below (in thousands):
Provision at statutory rate $ 406
Less effect of domestic earnings
not subject to income taxes (271 )
Less 10% Singapore tax rebate (14 )
----
$ 121
====
Current $ 54
Deferred 67
----
$ 121
====
Deferred tax liabilities consisted primarily of differences between the
depreciation rates required under Singapore tax regulations and those used for
financial statement purposes, offset by capital allowances. Income taxes paid
during the ten months ended October 31, 1998 totaled $255,000.
4. RELATED PARTY TRANSACTIONS
BEST provided certain administrative, engineering, cash management,
facility rental and other support to its Texas and Singapore operations. The
accompanying combined financial statements reflect allocations of these types
of costs which, in management's opinion, appropriately state the Texas and
Singapore operations' share of such costs. These allocations were based upon
various factors, including time spent by BEST's corporate office personnel on
Texas and Singapore operations activities and, in the case of rent, square
footage occupied by the respective operation.
10
Basic Engineering Services and Technology Labs, Inc.
Texas and Singapore Operations
Notes to Combined Financial Statements
October 31, 1998
For purposes of the combined financial statements, the intercompany
account between the Texas and Singapore operations and BEST has been included
as an element of net assets. These amounts are unsecured, interest free and
have no fixed repayment terms. All excess cash flows are considered to be
transferred to BEST and are included in this intercompany account.
BEST's Singapore operation purchased $1,267,000 of fixed assets from
BEST's corporate office, at net book value, during the ten months ended October
31, 1998.
5. OPERATING LEASE COMMITMENTS
BEST's Texas and Singapore operations lease manufacturing and office
facilities under non-cancelable operating leases with initial terms of one year
or more. Rent expense totaled $295,000 during the ten months ended October 31,
1998. Future minimum rental payments under these leases are as follows:
$314,000, $312,000, $270,000, $133,000 and $55,000 during the fiscal years
ended October 31, 1999 through 2003, respectively.
6. SALE OF CERTAIN ASSETS AND LIABILITIES
Effective December 3, 1998, Reliability Incorporated acquired certain
assets and assumed certain liabilities from BEST related to its Texas and
Singapore operations. The assets acquired included equipment, furniture and
fixtures, contracts, work-in-progress, backlog, proprietary rights, books and
records and customer lists. The liabilities assumed consisted of employee-
related obligations. As consideration for the sale, BEST received from
Reliability Incorporated (i) $1,000,000 in cash; (ii) a note payable of
$790,000 bearing interest at 6% per annum and due June 3, 1999, and (iii)
475,000 shares of Reliability Incorporated common stock.
7. YEAR 2000 READINESS (unaudited)
Based on a recent and ongoing assessment, management has determined that
it will be required to modify or replace portions of its software so that
computer systems will function properly with respect to dates in the Year 2000
and thereafter. BEST's Texas and Singapore operations are currently
transitioning onto Reliability Incorporated's financial systems, which are
expected to be Year 2000 compliant by March 1999. Other systems specific to
BEST's Texas and Singapore operations which require Year 2000 remediation are
expected to be Year 2000 compliant by June 1999. Management has also initiated
communications with its significant suppliers and major customers to determine
the extent to which the business is vulnerable to any third party's failure to
remedy their own Year 2000 issues. No significant issues have been identified.
The costs of Year 2000 remediation are not material to the combined
financial statements. Management presently believes that with modifications to
existing software, the Year 2000 issue will not pose significant operational
problems and will not materially affect future financial results. In addition,
Reliability Incorporated is developing a contingency plan to address unforeseen
Year 2000 problems, should they occur.
11
RELIABILITY INCORPORATED
Form 8-K/A
(b) PRO FORMA FINANCIAL INFORMATION
On December 3, 1998, Reliability Incorporated (the "Company") acquired
certain assets and assumed certain liabilities from Basic Engineering Services
and Technology Labs, Inc. ("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 was (i)
$1,000,000 payable in cash, (ii) a note payable of $790,000 bearing interest at
6% per annum and due June 3, 1999, and (iii) 475,000 shares of the Company's
common stock. The common stock was unregistered and is subject to transfer
restrictions. In connection with the acquisition, the Company also entered into
a $50,000 two year covenant not to compete and a two year $300,000 consulting
agreement with the principal shareholder of BEST. The operations acquired are
located in Austin, Texas and Singapore and are used to operate burn-in and test
services laboratories, providing such services to integrated circuit
manufacturers. This acquisition has been accounted for using the purchase
method of accounting.
The unaudited pro forma combined balance sheet has been prepared as if
the transaction occurred as of the Company's latest interim balance sheet dated
September 30, 1998. The unaudited pro forma combined statements of operations
for the year ended December 31, 1997 and the nine months ended September 30,
1998 give effect to the acquisition as if it had occurred at the beginning of
the periods presented. These statements were prepared by taking into
consideration only those transactions known to have a continuing impact to
operations as a result of the acquisition.
The unaudited pro forma combined financial statements have been prepared
by the Company and all calculations have been made based upon certain
assumptions and adjustments described in the notes thereto and should be read
in conjunction therewith. Included in these assumptions is the presumption that
no additional selling, general and administrative costs are required because
the current infrastructure is deemed sufficient to support the additional
activities anticipated from the acquisition. The unaudited pro forma combined
financial statements were prepared utilizing the accounting policies of the
Company. The allocation of the purchase price, which may be subject to certain
adjustments as the Company finalizes the allocation of the purchase price in
accordance with generally accepted accounting principles, are included in the
unaudited pro forma combined financial statements. The purchase price has been
allocated based upon the estimated fair values of the assets acquired and
liabilities assumed. The excess of the purchase price over the estimated fair
value of the net assets acquired at the acquisition date has been recorded as
goodwill.
The unaudited pro forma combined financial information is presented for
informational purposes only and is not necessarily indicative of the results of
operations or the financial position which would have been achieved had the
acquisition been consummated at the beginning of the periods presented. In
addition, the unaudited pro forma combined financial information does not
purport to be indicative of the results of operations or financial position
which may be achieved in the future.
12
RELIABILITY INCORPORATED
Form 8-K/A
The unaudited pro forma combined financial information should be read in
conjunction with the Company's historical consolidated financial statements and
notes thereto contained in the 1997 Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and
September 30, 1998 and the historical combined financial statements of BEST's
Texas and Singapore operations contained elsewhere in this Form 8-K/A.
13
Reliability Incorporated
Pro Forma Combined Balance Sheet
(Unaudited)
September 30, 1998
(In thousands)
Historical
---------- Pro Forma Pro Forma
Reliability BEST Adjustments Combined
----------- ---- ----------- --------
Current assets:
Cash and cash equivalents $14,832 $ - $(1,000 ) (A) $13,832
Accounts receivable 5,146 - - 5,146
Inventories 2,053 7 - 2,060
Deferred tax assets 569 - - 569
Other current assets 496 34 - 530
------ ----- ------ ------
Total current assets 23,096 41 (1,000 ) 22,137
------ ----- ------ ------
Property, plant and
equipment, net 7,284 3,861 (1,184 ) (B) 9,961
Assets held for sale 2,193 - 2,193
Intangible assets - - 1,148 (C) 1,148
------ ----- ------ ------
$32,573 $3,902 $(1,036 ) $35,439
====== ===== ===== ======
Current liabilities:
Current maturities on
long-term debt $ 849 $ - $ - $ 849
Note payable - - 790 (A) 790
Accounts payable 189 - - 189
Accrued liabilities 3,719 349 - 4,068
Income taxes payable 1,184 - - 1,184
------ ----- ------ ------
Total current liabilities 5,941 349 790 7,080
------ ----- ------ ------
Deferred tax liabilities 512 - - 512
Stockholders' equity
Common stock 7,181 - 1,727 (A) 8,908
Retained earnings 26,783 - - 26,783
------ ----- ------ ------
33,964 - 1,727 35,691
Less treasury stock, at cost 7,844 - - 7,844
------ ----- ------ ------
Total stockholders' equity 26,120 - 1,727 27,847
------ ----- ------ ------
$32,573 $ 349 $ 2,517 $35,439
====== ===== ====== ======
See accompanying notes
to pro forma combined financial statements.
14
Reliability Incorporated
Pro Forma Combined Statement of Income
(Unaudited)
Nine Months Ended September 30, 1998
(In thousands, except per share data)
Historical
---------- Pro Forma Pro Forma
Reliability BEST Adjustments Combined
----------- ---- ----------- --------
Revenues $29,826 $7,952 $ - $37,778
Costs and expenses:
Cost of revenues 13,943 5,555 (254 ) (D) 19,244
Marketing, general and
administrative 6,871 869 136 (E) 7,876
Research and development 1,636 - - 1,636
Provision for asset impairment 100 - - 100
------ ----- ---- ------
22,550 6,424 (118 ) 28,856
------ ----- ---- ------
Operating income 7,276 1,528 118 8,922
Interest income (expense) 295 8 (24 ) (F) 241
(38 ) (G)
Other income, net - 9 - 9
------ ----- ---- ------
Income before income taxes 7,571 1,545 56 9,172
Provision for income taxes 2,632 136 442 (H) 3,210
------ ----- ---- ------
Net income $ 4,939 $1,409 $(386 ) $ 5,962
====== ===== ==== ======
Earnings per share:
Diluted $ .80 $ .89
Basic $ .81 $ .91
Weighted average number of shares
used in earnings per share
calculations
Diluted 6,208 475 (I) 6,683
Basic 6,088 475 (I) 6,563
See accompanying notes
to pro forma combined financial statements.
15
Reliability Incorporated
Pro Forma Combined Statement of Income
(Unaudited)
Year Ended December 31, 1997
(In thousands, except per share data)
Historical
---------- Pro Forma Pro Forma
Reliability BEST Adjustments Combined
----------- ---- ----------- --------
Revenues $47,220 $12,930 $ - $60,150
Costs and expenses:
Cost of revenues 23,653 8,125 (338 ) (D) 31,440
Marketing, general and
administrative 9,679 1,418 182 (E) 11,279
Research and development 1,578 - - 1,578
------ ----- ----- ------
34,910 9,543 (156 ) 44,297
------ ----- ----- ------
Operating income 12,310 3,387 156 15,853
Interest income (expense) (66 ) 15 (24 ) (F) (131 )
(56 ) (G)
Other income, net - 65 - 65
------ ----- ----- ------
Income before income taxes 12,244 3,467 76 15,787
Provision for income taxes 4,112 323 1,090 (H) 5,525
------ ----- ----- ------
Net income $ 8,132 $3,144 $(1,014 ) $10,262
====== ===== ===== ======
Earnings per share:
Diluted 1.23 1.45
Basic $1.25 $1.47
Weighted average number of shares
used in earnings per share
calculations
Diluted 6,604 475 (I) 7,079
Basic 6,500 475 (I) 6,975
See accompanying notes
to pro forma combined financial statements.
16
RELIABILITY INCORPORATED
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On December 3, 1998, Reliability Incorporated (the "Company") acquired
certain assets and assumed certain liabilities from Basic Engineering Services
and Technology Labs, Inc. ("BEST"). The assets acquired included equipment,
furniture and fixtures, inventory, 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 was (i) $1,000,000 payable in cash, (ii) a note payable of $790,000
bearing interest at 6% per annum and due June 3, 1999, and (iii) 475,000 shares
of the Company's common stock. The common stock was unregistered and is subject
to transfer restrictions. In connection with the acquisition, the Company also
entered into a $50,000 two year covenant not to compete and a two year $300,000
consulting agreement with the principal shareholder of BEST. The operations
acquired are located in Austin, Texas and Singapore and are used to operate
burn-in and test services laboratories, providing such services to integrated
circuit manufacturers. This acquisition has been accounted for using the
purchase method of accounting.
The unaudited pro forma combined balance sheet has been prepared as if
the transaction occurred as of the Company's latest interim balance sheet date,
September 30, 1998. The unaudited pro forma combined statements of operations
for the year ended December 31, 1997 and the nine months ended September 30,
1998 give effect to the acquisition as if it had occurred at the beginning of
the periods presented. These statements were prepared by taking into
consideration only those transactions known to have a continuing impact to
operations as a result of the acquisition.
The unaudited pro forma combined financial statements have been prepared
by the Company and all calculations have been made based upon certain
assumptions and adjustments described in the notes thereto and should be read
in conjunction therewith. Included in these certain assumptions is the
presumption that no additional selling, general and administrative costs are
required because the current infrastructure is deemed sufficient to support the
additional activities anticipated from the acquisition. The unaudited pro forma
combined financial statements were prepared utilizing the accounting policies
of the Company. The allocation of the purchase price, which may be subject to
certain adjustments as the Company finalizes the allocation of the purchase
price in accordance with generally accepted accounting principles, are included
in the unaudited pro forma combined financial statements. The purchase price
has been allocated based upon the estimated fair values of the assets acquired
and liabilities assumed. The excess of the purchase price over the estimated
fair value of the net assets acquired at the acquisition date has been recorded
as goodwill.
17
RELIABILITY INCORPORATED
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
2. PRO FORMA ADJUSTMENTS TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS ARE AS FOLLOWS:
(A) To reflect the consideration paid which consisted of $1,000,000 in cash,
a note payable for $790,000 and 475,000 shares of the Company's common
stock.
(B) To reduce the net book value of fixed assets acquired based on a
preliminary analysis of fair value. The final analysis is not yet
completed; as a result, the final adjustment may differ.
(C) To reflect the estimated excess of acquisition cost over the fair value
of the assets acquired. Of this amount, $1,098,000 relates to goodwill
and $50,000 relates to a covenant not to compete.
(D) To reflect lower depreciation resulting from the reduction in basis of
property and equipment acquired based on the preliminary analysis of the
fair value of the fixed assets acquired, using estimated useful lives
ranging from 3 to 4 years.
(E) To reflect amortization of goodwill over a period of seven years and the
covenant not to compete over a period of two years.
(F) To reflect the increase in interest expense due to the issuance of the
$790,000 note payable at 6% interest for six months.
(G) To reflect a reduction in interest income for the cash portion of the
purchase price.
(H) To adjust the tax provision for income taxes of the pro forma combined
group to the Company's historical effective tax rate of 35%. BEST's
historical combined financial statements reflect only Singapore income
taxes as BEST is a Subchapter S corporation whose U.S. income taxes are
the liability of BEST's shareholders
(I) To reflect the 475,000 shares of common stock issued pursuant to the
purchase agreement.
18
Reliability Incorporated
Index to Exhibits
Exhibit Number Description of Exhibit Page Number
23.1 Consent of Independent
Auditors dated February 9, 1999 20
19