SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15 (d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 2-83256
A. Full title of the plan and the address of the plan, if different from
that of the issuer named below:
RELIABILITY INCORPORATED EMPLOYEE STOCK SAVINGS PLAN AND TRUST
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
RELIABILITY INCORPORATED
16400 Park Row
Houston, Texas 77084
P. O. Box 218370
Houston, Texas 77218-8370
1
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
December 31, 1998
TABLE OF CONTENTS
Page
Number
Financial Statements:
Report of Independent Auditors 3
Statements of Net Assets Available for Benefits 4
Statement of Changes in Net Assets Available for Benefits 5
Notes to Financial Statements 6
Supplemental Schedules:
Line 27a - Schedule of Assets Held for Investment Purposes 15
Line 27d - Schedule of Reportable Transactions 16
Signatures 17
Exhibit 23 - Consent of Independent Auditors dated 19
June 7, 1999
2
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
REPORT OF INDEPENDENT AUDITORS
The Administrative Committee
Reliability Incorporated Employee
Stock Savings Plan and Trust
We have audited the accompanying statements of net assets available for
benefits of the Reliability Incorporated Employee Stock Savings Plan and Trust
as of December 31, 1998 and 1997, and the related statement of changes in net
assets available for benefits for the year ended December 31, 1998. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets available for benefits of the Plan at
December 31, 1998 and 1997, and the changes in its net assets available for
benefits for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplemental schedules
of assets held for investment purposes at December 31, 1998 and reportable
transactions for the year ended December 31, 1998, are presented for purposes
of complying with the Department of Labor's Rules and Regulations for Reporting
and Disclosure under the Employee Retirement Income Security Act of 1974 and
are not a required part of the basic financial statements. The supplemental
schedules have been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ ERNST & YOUNG LLP
Houston, Texas
April 30, 1999
3
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31,
1998 1997
Plan assets (at fair value):
Investment in common stock of Reliability
Incorporated $2,621,580 $ 8,716,304
Short-term investments at fair value,
which approximates cost - 3,020
Investments in the Consulting
Group Capital Market Funds:
Large Capitalization Value Equity
Investments Fund 955,248 670,967
Large Capitalization Growth Investments
Fund 946,185 695,359
Small Capitalization Growth Investments
Fund 482,350 447,183
International Equity Investments Fund 326,483 272,090
Stable Value Investments Fund 758,353 1,040,033
Participant Loans Outstanding 83,551 116,256
--------- ----------
Total Investments 6,173,750 11,961,212
Other assets - 259
--------- ----------
Net assets available for benefits $6,173,750 $11,961,471
========= ==========
See accompanying notes.
4
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
Year ended December 31, 1998
Investment income:
Interest and dividends $ 41,756
Net depreciation in fair value
of investments (5,208,144 )
----------
Total investment loss (5,166,388 )
----------
Contributions:
Employee 397,043
Employer 382,559
----------
Total contributions 779,602
----------
Withdrawals and terminations (1,400,935 )
----------
Net decrease in assets available for benefits (5,787,721 )
Net assets available for benefits
at beginning of year 11,961,471
----------
Net assets available for
benefits at end of year $ 6,173,750
==========
See accompanying notes.
5
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE A - PARTICIPATION AND CONTRIBUTIONS
In July 1983, Reliability Incorporated (the "Company" or "Employer") adopted an
Employee Stock Savings Plan and Trust (the "Plan"). Under the Plan, employees
of the Company who meet the requirements described below are eligible to
participate in the Plan.
The following description of the Plan provides only general information.
Participants should refer to the Plan Agreement for a more complete description
of the Plan's provisions. The Plan is subject to certain provisions of the
Employee Retirement Income Security Act of 1974 (ERISA). The Plan is
administered by an Administrative Committee (the "Committee") appointed by the
Board of Directors of the Company. All assets of the Plan are held under
discretionary trust agreements. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Any United States employee of the Employer who has attained the age of 21 and
has completed six months of service with at least 900 hours or one year of
service with at least 1,000 hours, becomes a member ("Member") of the Plan on
the first day of the next month following the date on which the employee
becomes eligible and may elect to make contributions to the Plan as described
below.
Under the Plan, a Member may contribute, through payroll deductions, an amount
("Employee Contribution") equal to 2 to 15 percent of base compensation. Prior
to February 1, 1996 a Member could elect to have all or a portion of his
contributions subject to federal income taxes ("after-tax contributions").
Effective February 1, 1996, no portion of the Employee Contributions are
subject to federal income taxes in accordance with Section 401(k) of the
Internal Revenue Code ("pre-tax contributions"). Base compensation excludes
bonuses, commissions, shift differential, overtime premiums, and similar
payments. Participants may increase or decrease contributions percentages each
pay period.
The Employer matches the Employee Contribution by an amount ("Employer
Contribution") equal to 50 percent of the Employee Contributions to a maximum
of 2 percent of the Member's base compensation. Also, the Employer annually
contributes, for employed Members, a supplemental amount ("Employer Voluntary
Contribution") equal to 1 percent of the Members' base compensation for the
period during which they were Members. An additional discretionary contribution
may be made. The amount to be contributed, if any, will be determined annually
by the Board of Directors and will be contributed as a percent of each Member's
gross compensation. The contribution for 1998 was 5 percent of the Member's
total compensation.
6
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1998
NOTE A - PARTICIPATION AND CONTRIBUTIONS - Continued
A Member receives a vested interest in the balances in Employer Contribution
accounts plus allocated earnings and realized and unrealized gains and losses
thereon ("Employer Account") based upon years of service (as defined in the
Plan) as follows:
Vested interest in
Years of Service Employer Account
---------------- ------------------
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 100%
A Member always has a 100 percent vested interest in the balance in his
Employee Contributions plus allocated earnings and realized and unrealized
gains and losses thereon (his "Employee Account"). Upon death or total and
permanent disability, a Member is automatically fully vested in his Employer
Account. If the Plan is terminated by the Company, all Members become fully
vested in all their accounts.
NOTE B - PLAN INVESTMENTS
Effective January 1, 1995, the Trustee of the Plan is the Consulting Group of
Smith Barney, Inc. A member may elect to invest his contribution in one or more
of six funds: (i) the Reliability Incorporated ("RI") Common Stock Fund; (ii)
the Large Capitalization Value Equity Investments Fund; (iii) the Large
Capitalization Growth Investments Fund; (iv) the Small Capitalization Growth
Investments Fund; (v) the International Equity Investments Fund; and (vi) the
Stable Value Investments Fund.
Investments are stated at fair value based on quoted market prices.
The contribution to each fund elected may be any whole percentage of the
Member's total contributions. The investment election for future contributions
and existing fund balances may be changed daily. The minimum investment balance
in any selected fund may be any whole percentage of the Member's Employee
Account.
Amounts contributed by the Company are invested solely in the RI Common Stock
Fund. Common stock may be purchased, by the Trustee, directly from the Company
or in the open market. The purchase price per share for stock purchased from
the Company is the closing price on the day prior to the purchase by the
Trustee.
A participant who is 55 years of age and who is 100 percent vested in his
Employer Accounts may elect to have a portion of his balance in these accounts
diversified to other investment funds offered under the Plan. This election may
be made only once during each Plan year.
Administrative expenses are paid by the Company. Gains and losses realized on
the sale of securities in the RI Common Stock Fund are recorded on an average
cost basis.
7
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1998
NOTE C - WITHDRAWALS AND TERMINATIONS
A Member may elect to withdraw all or a portion of his after-tax Employee
Contributions at any time. Certain restrictions apply to withdrawals of pre-tax
Employee Contributions. A Member making a withdrawal from pre-tax Employee
Contributions is not permitted to make future pre-tax Employee Contributions
prior to the first day of the month following the expiration of twelve months
from the date of such withdrawal.
Upon a Member's termination of employment, the Member will generally receive a
benefit in the form of a lump sum distribution. Members who had account
balances prior to January 1, 1996 may also be able to elect certain other forms
of payment.
The non-vested portions of the Employer Accounts of a Member whose employment
is terminated prior to the attainment of seven years of service or who retires
prior to Normal Retirement Age (as defined in the Plan), are forfeited and
allocated among the other Members ($30,166 in 1998 and $8,113 in 1997) in the
ratio that each such Member's defined compensation for the Plan Year, or that
portion of the Plan Year during which he was a Member of the Plan, bears to the
total defined compensation for all Members for the Plan Year. Forfeitures do
not reduce the Employer's Contribution or the Employer's Voluntary
Contributions.
NOTE D - PARTICIPANT LOANS
A participant may borrow up to the lesser of 1) $50,000 or 2) 50 percent of his
or her non-forfeitable accrued benefit. The minimum loan amount is $1,000 and
the maximum loan term is five years for general loans and 15 years for home
loans. Loan payments are made through payroll deductions. Loans are stated at
cost which approximates fair value.
NOTE E - FEDERAL INCOME TAX AND ERISA
A favorable determination letter dated January 17, 1997, was received from the
Internal Revenue Service for the Plan as amended on April 3, 1995 and February
28, 1996, regarding its qualification under Section 401(a) of the Internal
Revenue Code, and the Plan is exempt from federal income taxes under the
provisions of Section 501(a) of the Internal Revenue Code.
The Plan was amended on April 30, 1997 (effective January 1, 1997) to change
the definition of compensation for the purposes of allocating the employer
additional discretionary contribution to include bonuses, commissions, shift
differentials, overtime premiums, and similar payments.
Once qualified, the Plan is required to operate in conformity with the Internal
Revenue Code to maintain its qualification. The Plan Administrative Committee
is not aware of any course of action or series of events that have occurred
that might adversely affect the Plan's qualified status.
8
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE F - STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31, 1998
Non-Par-
Total Participant ticipant
Plan Directed Directed
Plan assets (at fair value):
Investment in common stock of
Reliability Incorporated $2,621,580 $ 232,589 $2,388,991
Short-term investments - - -
Investments in the Consulting
Group Capital Market Funds:
Large Capitalization Value
Equity Investments Fund 955,248 955,248 -
Large Capitalization Growth
Investments Fund 946,185 946,185 -
Small Capitalization Growth
Investments Fund 482,350 482,350 -
International Equity
Investments Fund 326,483 326,483 -
Stable Value Investments
Fund 758,353 758,353 -
Loan Fund 83,551 83,551 -
--------- --------- ---------
Net Assets Available for Benefits $6,173,750 $3,784,759 $2,388,991
========= ========= =========
9
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE F - STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31, 1997
Non-Par-
Total Participant ticipant
Plan Directed Directed
Plan assets (at fair value):
Investment in common stock of
Reliability Incorporated $ 8,716,304 $ 919,036 $7,797,268
Short-term investments 3,020 1,620 1,400
Investments in the Consulting
Group Capital Market Funds:
Large Capitalization Value
Equity Investments Fund 670,967 670,967 -
Large Capitalization Growth
Investments Fund 695,359 695,359 -
Small Capitalization Growth
Investments Fund 447,183 447,183 -
International Equity
Investments Fund 272,090 272,090 -
Stable Value Investments
Fund 1,040,033 1,040,033 -
Loan Fund 116,256 116,256 -
---------- --------- ---------
Total investments 11,961,212 4,162,544 7,798,668
Other assets 259 - 259
---------- --------- ---------
Net Assets Available for Benefits $11,961,471 $4,162,544 $7,798,819
========== ========= =========
10
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE F - STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
December 31, 1998
Reliability Incorporated
Common Stock Fund
Non-Par-
Total Participant ticipant
Plan Directed Directed
Investment income (loss):
Interest and dividends $ 41,756 $ 15 $ 1,518
Net appreciation (depreciation)
in fair value of investments (5,208,144 ) (551,863 ) (5,114,092 )
---------- ------- ---------
Total investment income (loss) (5,166,388 ) (551,848 ) (5,112,574 )
---------- ------- ---------
Contributions:
Employee 397,043 39,556 -
Employer 382,559 - 349,188
---------- ------- ---------
Total contributions 779,602 39,556 349,188
---------- ------- ---------
Withdrawals and terminations (1,400,935 ) (19,625 ) (577,391 )
Investment transfers - (154,886 ) (69,051 )
Transfers (to) from Loan Fund - 356 -
---------- ------- ---------
Net increase (decrease) in assets
available for benefits (5,787,721 ) (686,447 ) (5,409,828 )
Net assets available for
benefits at beginning of year 11,961,471 919,036 7,798,819
---------- ------- ---------
Net assets available for benefits
at end of year $ 6,173,750 $ 232,589 $ 2,388,991
========== ======= =========
11
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE F - STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS BY
INVESTMENT FUND - (Continued)
December 31, 1998
Large Cap- Large Small
italiza- Capital- Capital-
tion Value ization ization
Equity Growth Growth
Fund Fund Fund
Participant Directed
Investment income (loss):
Interest and dividends $ 17,157 $ 4,922 $ 303
Net appreciation (depreciation)
in fair value of investments 81,125 250,950 16,334
------- ------- -------
Total investment income 98,282 255,872 16,637
------- ------- -------
Contributions:
Employee 73,165 76,781 67,561
Employer 3,932 10,805 8,158
------- ------- -------
Total contributions 77,097 87,586 75,719
------- ------- -------
Withdrawals and terminations (91,145 ) (109,585 ) (69,087 )
Investment transfers 222,511 29,107 16,491
Transfers (to) from Loan Fund (22,767 ) (12,509 ) (4,865 )
------- ------- -------
Net increase (decrease) in assets
available for benefits 283,978 250,471 34,895
Net assets available for
benefits at beginning of year 671,270 695,714 447,455
------- ------- -------
Net assets available for benefits
at end of year $955,248 $ 946,185 $482,350
======= ======= =======
12
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE F - STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS BY
INVESTMENT FUND - (Continued)
December 31, 1998
Inter-
national Stable
Equity Value Loan
Fund Fund Fund
Participant Directed
Investment income (loss):
Interest and dividends $ 9,176 $ 417 $ 8,248
Net appreciation (depreciation)
in fair value of investments 54,992 54,410 -
------- --------- -------
Total investment income (loss) 64,168 54,827 8,248
------- --------- -------
Contributions:
Employee 42,086 97,894 -
Employer 4,042 6,434 -
------- --------- -------
Total Contributions 46,128 104,328 -
------- --------- -------
Withdrawals and terminations (34,337 ) (421,030 ) (78,735 )
Investment transfers (23,175 ) (20,997 ) -
Transfers (to) from Loan Fund 1,369 634 37,782
------- --------- -------
Net increase (decrease) in assets
available for benefits 54,153 (282,238 ) (32,705 )
Net assets available for benefits
at beginning of year 272,330 1,040,591 116,256
------- --------- -------
Net assets available for benefits
at end of year $326,483 $ 758,353 $ 83,551
======= ========= =======
13
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE G - YEAR 2000 ISSUE (unaudited)
The Plan Sponsor has determined that it will be necessary to take certain steps
in order to ensure that the Plan's information systems are prepared to handle
year 2000 dates. The Plan Sponsor is taking a two phase approach. The first
phase addresses internal systems that must be modified or replaced to function
properly. Internal resources are being utilized to replace or modify existing
software applications, and test the software and equipment for the year 2000
modifications. The Plan Sponsor anticipates substantially completing this phase
of the project by September 1999. Costs associated with modifying software and
equipment are not estimated to be significant and will be paid by the Plan
Sponsor.
For the second phase of the project, Plan management established formal
communications with its third party service providers to determine that they
have developed plans to address their own year 2000 problems as they relate to
the Plan's operations. All third party service providers have indicated that
they will be year 2000 compliant by the latter part of 1999. If modification of
data processing systems of either the Plan, the Plan Sponsor, or its service
providers are not completed timely, the year 2000 problem could have a material
impact on the operations of the Plan. Plan management has not developed a
contingency plan, because they are confident that all systems will be year 2000
ready.
NOTE H - SUBSEQUENT EVENT
The Company completed, in December 1998, the acquisition of certain operations
of Basic Engineering Services and Technology Labs, Inc. The acquisition
resulted in 61 employees being added to the Company's Plan effective January
1999.
14
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
LINE 27a - SCHEDULE OF ASSETS
HELD FOR INVESTMENT PURPOSES
EIN - 75-0868913
Plan Number - 001
December 31, 1998
Identity Current
of Issue Description Cost Value
Reliability Incorporated*
Common stock $1,996,640 $2,621,580
--------- ---------
The Consulting Group
Capital Market Funds*:
Large Capitalization
Value Equity Investments 929,058 955,248
Large Capitalization
Growth Investments 658,147 946,185
Small Capitalization
Growth Investments 491,869 482,350
International Equity Investments 302,754 326,483
Stable Value Investments 677,183 758,353
--------- ---------
3,059,011 3,468,619
--------- ---------
Loan Fund* - Participant Loans
(Interest Rates: 7% - 9.5%) - 83,551
--------- ---------
TOTAL INVESTMENTS $5,055,651 $6,173,750
========= =========
*Party-in-interest
See accompanying notes.
15
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
LINE 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
EIN - 75-0868913
Plan Number - 001
Year ended December 31, 1998
Identity Descrip-
of Party tion Purchases Cost Selling Net gain
Involved of Asset Price of Asset Price or (loss)
- -------- -------- --------- -------- ------- --------
Series of transactions in excess of 5% of Plan assets:
Reliability
Incorporated
Common Stock $ 449,644 $ 325,030 $ 793,596 $468,566
========= ========= ========= =======
The Consulting Group
Capital Market Funds:
Large Capitaliza-
tion Value Equity
Investments $ 485,447 $ 167,295 $ 174,535 $ 7,240
Large Capitaliza-
tion Growth
Investments 191,291 130,676 158,194 27,518
Small Capitaliza-
tion Growth
Investments 122,418 92,196 89,185 (3,011 )
International
Equity Investments 94,833 76,474 79,532 3,058
Stable Value 242,258 528,883 580,298 51,415
--------- --------- --------- -------
$1,136,247 $ 995,524 $1,081,744 $ 86,220
========= ========= ========= =======
Smith Barney
Short-term
investment funds $2,081,582 $2,084,601 $2,084,602 $ -
========= ========= ========= =======
See accompanying notes.
16
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
trustees (or other persons who administer the employee benefit plan) have duly
caused this annual report to be signed by the undersigned thereunto duly
authorized.
RELIABILITY INCORPORATED EMPLOYEE
STOCK SAVINGS PLAN AND TRUST
/s/ Max T. Langley
Max T. Langley
Date: June 8, 1999 Administrative Committee Member
17
RELIABILITY INCORPORATED
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
INDEX TO EXHIBITS
Exhibit Page
Number Description of Exhibits Number
23. Consent of Independent Auditors dated 19
June 7, 1999
18