| Item 1. | Financial Statements: | 3 | ||
| Unaudited Consolidated Balance Sheet as of September 30, 2007 |
||||
| Unaudited Consolidated Statements of Operations: |
||||
| 4 | ||||
| 5 | ||||
| Unaudited Consolidated Statements of Cash Flows: |
||||
| 6 | ||||
| 7 | ||||
| Item 2. | Management’s Discussion and Analysis | 16 | ||
| Item 3. | Controls and Procedures | 20 | ||
| PART II – OTHER INFORMATION | ||||
| Item 5. | Other information | 21 | ||
| Item 6. | Exhibits | 21 | ||
| Signatures | 22 | |||
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| Item 1. | Financial Statements |
UNAUDITED CONSOLIDATED BALANCE SHEET (In thousands)
| September 30, 2007 |
||||
| ASSETS | ||||
| Current assets: |
||||
| Cash and cash equivalents |
$ | 12 | ||
| Prepaid expenses |
31 | |||
| Assets of discontinued operations |
3,055 | |||
| Assets held for sale – current portion |
617 | |||
| Total current assets |
3,715 | |||
| Other assets: |
||||
| Assets held for sale |
225 | |||
| $ | 3,940 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
| Current liabilities: |
||||
| Accounts payable |
2 | |||
| Accrued liabilities |
259 | |||
| Accrued liabilities of discontinued operations |
3,283 | |||
| Total current liabilities |
3,544 | |||
| Stockholders’ equity: |
||||
| Common stock, without par value; 20,000,000 shares authorized; 6,690,265 shares issued |
9,767 | |||
| Accumulated deficit |
(8,277 | ) | ||
| Less treasury stock at cost, 354,300 shares |
(1,094 | ) | ||
| Total stockholders’ equity |
396 | |||
| $ | 3,940 | |||
See accompanying notes.
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Table of Contents
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Nine Months Ended September 30, | ||||||||
| 2007 | 2006 | |||||||
| Revenue |
$ | — | $ | — | ||||
| Costs and expenses: |
||||||||
| Cost of goods sold |
— | — | ||||||
| General and administrative |
409 | 919 | ||||||
| Impairment of real estate held for sale |
159 | — | ||||||
| Total cost and expenses |
568 | 919 | ||||||
| (Gain) on the sale of assets |
(3 | ) | (1,542 | ) | ||||
| Operating income (loss) from continuing operations |
(565 | ) | 623 | |||||
| Other income (expense): |
||||||||
| Interest (expense) |
— | (170 | ) | |||||
| Interest income |
19 | 35 | ||||||
| Other income |
2 | 39 | ||||||
| Total other income (expense) |
21 | (96 | ) | |||||
| Income (loss) from continuing operations, before income taxes |
(544 | ) | 527 | |||||
| Provision for income taxes |
— | — | ||||||
| Income (loss) from continuing operations |
(544 | ) | 527 | |||||
| (Loss) from discontinued operations, including loss on disposal of $918 in 2007 and income tax effect of nil for 2007 and 2006 |
(1,287 | ) | (556 | ) | ||||
| Net (loss) |
$ | (1,831 | ) | $ | (29 | ) | ||
| Basic earnings (loss) per share: |
||||||||
| Continuing operations |
$ | (0.09 | ) | $ | 0.08 | |||
| Discontinued operations |
(0.20 | ) | (0.09 | ) | ||||
| Net (loss) |
$ | (0.29 | ) | $ | (0.01 | ) | ||
| Diluted earnings (loss) per share: |
||||||||
| Continuing operations |
$ | (0.09 | ) | $ | 0.08 | |||
| Discontinued operations |
(0.20 | ) | (0.09 | ) | ||||
| Net (loss) |
$ | (0.29 | ) | $ | (0.01 | ) | ||
| Weighted average shares: |
||||||||
| Basic |
6,336 | 6,336 | ||||||
| Diluted |
6,336 | 6,336 | ||||||
See accompanying notes.
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UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Three Months Ended September 30, | ||||||||
| 2007 | 2006 | |||||||
| Revenue |
$ | — | $ | — | ||||
| Costs and expenses: |
||||||||
| Cost of goods sold |
— | — | ||||||
| General and administrative |
20 | 292 | ||||||
| Impairment of real estate held for sale |
159 | — | ||||||
| Total cost and expenses |
179 | 292 | ||||||
| (Gain) on the sale of assets |
(3 | ) | — | |||||
| Operating income (loss) from continuing operations |
(176 | ) | (292 | ) | ||||
| Other income (expense): |
||||||||
| Interest (expense) |
— | — | ||||||
| Interest income |
— | 21 | ||||||
| Other income |
2 | 2 | ||||||
| Total other income (expense) |
2 | 23 | ||||||
| Income (loss) from continuing operations, before income taxes |
(174 | ) | (269 | ) | ||||
| Provision for income taxes |
— | — | ||||||
| Income (loss) from continuing operations |
(174 | ) | (269 | ) | ||||
| (Loss) from discontinued operations, including loss on disposal of $918 in 2007 and income tax effect of nil for 2007 and 2006 |
(1,235 | ) | (127 | ) | ||||
| Net income (loss) |
$ | (1,409 | ) | $ | (396 | ) | ||
| Basic earnings (loss) per share: |
||||||||
| Continuing operations |
$ | (0.03 | ) | $ | (0.04 | ) | ||
| Discontinued operations |
(0.19 | ) | (0.02 | ) | ||||
| Net income (loss) |
$ | (0.22 | ) | $ | (0.06 | ) | ||
| Diluted earnings (loss) per share: |
||||||||
| Continuing operations |
$ | (0.03 | ) | $ | (0.04 | ) | ||
| Discontinued operations |
(0.19 | ) | (0.02 | ) | ||||
| Net income (loss) |
$ | (0.22 | ) | $ | (0.06 | ) | ||
| Weighted average shares: |
||||||||
| Basic |
6,336 | 6,336 | ||||||
| Diluted |
6,336 | 6,336 | ||||||
See accompanying notes.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine Months Ended September 30, | ||||||||
| 2007 | 2006 | |||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | (1,831 | ) | $ | (29 | ) | ||
| Income (loss) from discontinued operations |
(1,287 | ) | (556 | ) | ||||
| Income (loss) from continuing operations |
(544 | ) | 527 | |||||
| Adjustments to reconcile net income to cash (used) by operating activities: |
||||||||
| Depreciation |
— | 4 | ||||||
| Stock option expense |
— | 25 | ||||||
| Impairment loss on real estate |
159 | — | ||||||
| (Gain) on sale of assets |
(3 | ) | (1,630 | ) | ||||
| Provision for inventory obselence |
— | (11 | ) | |||||
| (Gain) / loss on equity investments |
— | (59 | ) | |||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(2 | ) | 215 | |||||
| Prepaid expenses |
1 | 106 | ||||||
| Inventories |
— | 41 | ||||||
| Accounts payable |
(1 | ) | (29 | ) | ||||
| Accrued liabilities |
69 | (201 | ) | |||||
| Total adjustments |
223 | (1,539 | ) | |||||
| Net cash (used) by continuing operations |
(321 | ) | (1,012 | ) | ||||
| Net cash (used) by discontinued operations |
(84 | ) | (200 | ) | ||||
| Net cash (used) by operating activities |
(405 | ) | (1,212 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
(1 | ) | — | |||||
| Proceeds from sale of investment securities |
— | 208 | ||||||
| Proceeds from sale of assets |
— | 4,108 | ||||||
| Proceeds from sale of discontinued operation |
— | 300 | ||||||
| Acquisition of business (net of cash acquired) |
(787 | ) | — | |||||
| Net cash (used) provided by investing activities |
(788 | ) | 4,616 | |||||
| Cash flows from financing activities: |
||||||||
| Increase in short-term debt |
— | 330 | ||||||
| Repayments of short-term debt |
(53 | ) | (2,886 | ) | ||||
| Net cash (used) by financing activities |
(53 | ) | (2,556 | ) | ||||
| Net (decrease) increase in cash |
(1,246 | ) | 848 | |||||
| Cash and cash equivalents: |
||||||||
| Beginning of period |
1,258 | 742 | ||||||
| End of period |
$ | 12 | $ | 1,590 | ||||
| Supplemental cash flow information: |
||||||||
| Interest paid |
— | 167 | ||||||
| Owner financing of acquisition costs |
2,635 | — | ||||||
See accompanying notes.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
1. DISCONTINUANCE OF ALL OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Discontinuance of all Operations and Liquidity
During the past six years, Reliability Incorporated and its subsidiaries (collectively referred to as “Reliability” or the “Company”) has sustained significant negative financial results, including substantial decreases in revenues, net income, backlog, and cash flows from operating activities that are generally attributable to operating losses. Due to the deterioration in its financial position, the Company has undergone significant restructuring to reduce its expenses and improve its liquidity, including: the closure of its Power Sources’ Costa Rica facility, significant downsizing of its domestic and international workforce, the sale of its Power Sources division, the closure of its Services division in Singapore, eliminated all research and development for test equipment, and the sale of its Houston headquarters facility. As a result of these actions, the Company significantly reduced its expenses. However, based upon its current financial position, and an evaluation of the prospects for continuing to operate its historical business lines, the Company concluded that it should explore some other possibilities.
On April 1, 2007, Reliability completed the merger of its wholly owned subsidiary, Reliability-Medallion, Inc., a Florida corporation, into Medallion Electric Acquisition Corporation and the indirect acquisition, through Medallion Electric Acquisition Corporation, of Medallion Electric, Inc. Medallion Electric Acquisition Corporation was incorporated under the laws of the State of Florida on December 8, 2006 to facilitate a merger between business entities and was considered to be a development stage company with no operations at March 31, 2007. On June 21, 2007, the Company changed the name of Medallion Electric Acquisition Corporation (“MEAC”) to Reliability Contractors of Florida, Inc. Reliability Contractors of Florida, Inc. is a wholly-owned subsidiary of Reliability.
Medallion Electric, Inc. (“Medallion Electric” or “Medallion”) was incorporated in the State of Florida in 1980. Medallion Electric is an electrical contracting company, located in Coral Springs, Florida, specializing in electrical contracting services to residential homebuilders, with its major assets consisting of contracts for services to be performed and accounts receivable. Medallion Electric is a wholly-owned subsidiary of Reliability Contractors of Florida, Inc. (collectively referred to as “Reliability Florida” or “Electrical Contracting Services”).
All of the funds used for the initial acquisition payment and the Company’s transaction costs related to the merger and acquisition were paid out of the Company’s cash on hand. The Company funded $750,000 to finance the acquisition. $100,000 of such funds was made available to Medallion Electric as working capital; $150,000 was used by MEAC to pay its transaction related expenses. The remaining $500,000 was used to make the initial payment to Mr. Ronald Masaracchio (“Masaracchio”), the only shareholder of Medallion Electric for 100% of the stock of Medallion Electric. The remainder of the purchase price consisted of two notes- one for $500,000 due in six months and one for $1.4 million due in six months. The Company secured the $500,000 note with the pledge of its real property in North Carolina; the $1.4 million note was secured with the assets of Medallion Electric.
The Company planned to pay the notes from the Company’s working capital, funds generated by Electrical Contracting Services, additional debt and/or equity financing, and the sale of a part of its real estate located in North Carolina. However, in early September, 2007 it became apparent, the Company was not generating enough funds and had not been successful in raising debt or equity funds to meet all of the obligations which would be due on October 1, 2007. Therefore, the Reliability Board of Directors passed a resolution on September 25, 2007 that instructed management to enter into an agreement to sell Medallion Electric, Inc. back to the previous owner, Mr. Masaracchio.
In connection with the negotiation and settlement of the relationship with Medallion, Alex Katz, an officer of Reliability and Reliability Contractors, and Mark Spoor, an officer of Reliability Contractors and Medallion, resigned from their positions and employment with such companies prior to consummation of the transaction.
On October 12, 2007, the Company and its subsidiaries Reliability Contractors of Florida, Inc. and Medallion Electric, Inc. entered into a Settlement, Sale of Stock and Release Agreement (“Agreement”) with Mr. Masaracchio, pursuant to which Reliability Contractors sold back to Masaracchio the stock of Medallion effective October 1, 2007. The Company agreed to pay Mr. Masaracchio $325,000 upon the closing of the sale of part of the Company’s North Carolina real estate, which was under a purchase and sale contract, and transfer 100% of the Medallion stock to Masaracchio. Masaracchio agreed to release all the liens against the Company’s assets, cancel all the notes, and release the Company from any and all of its obligations to him. In addition to the $325,000, Reliability transferred to Masaracchio all the Medallion stock which held assets that were valued at approximately $1.7 million on Reliability’s balance sheet and liabilities which were generated in the normal course of business at Medallion valued at approximately $650,000.
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RELIABILITY INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
Upon the closing of the sale of a portion of Reliability’s North Carolina real estate on October 26, 2007, Mr. Masaracchio received the $325,000, and the sale of Medallion Electric, the release of the liens, and cancellation of all the obligations was consummated. At the time of the sale, Masaracchio held two notes totaling $1.9 million, which were due October 1, 2007, and an earnout agreement which called for a minimum payment of $750,000 over three years. The notes were secured by the assets of Medallion and the North Carolina property owned by Reliability. The sale of Medallion back to Masaracchio included a release of all liability on the notes and the earnout agreement, assumption of all Medallion ordinary course of business debts and obligations, mutual releases between Reliability and Masaracchio, including a release of the security for the notes. The net proceeds from the sale of a part of the North Carolina real estate to Reliability, after the $325,000 payment and all other expenses of the sale, were $292,000. The Company retained the ownership of 10 acres of land in North Carolina.
Upon the sale of Medallion Electric and cancellation of related liabilities, the Company has remaining assets (including the 10 acres of land in North Carolina) exceeding liabilities of approximately $260,000.
The accompanying financial statements for the three and nine month period ended September 30, 2007, have been prepared assuming the Company will continue as a going concern. However, upon the completion of the sale of Medallion Electric, the Company has no further operating activities. The Company has concluded that it should pursue one, or some combination, of the following courses of action: sell its remaining real estate holdings; invest in another line of business through a purchase or merger; make distributions to its shareholders from the proceeds of some of the assets, possibly through a dividend or corporate liquidation. There can be no assurances that the Company will be able to successfully complete any of these transactions or be able to maintain sufficient liquidity over a period of time that will allow it to carry out these actions, in which case the Company might be forced to liquidate or seek protection under the Federal bankruptcy statutes, or both.
The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
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RELIABILITY INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-QSB and Item 10 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
The consolidated financial statements include the financial transactions and accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2006.
The Company’s business segments, Power Sources, Services, Testing Products, and Electrical Contracting Services are reported as discontinued operations in the accompanying Balance Sheet and Statement of Operations for each period presented. Certain income and expenses on the consolidated statement of operations and statement of cash flows for the periods ended September 30, 2006, related to these discontinued operations, have been reclassified to be consistent with the classifications adopted for the periods ended September 30, 2007. These reclassifications had no effect on net income.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management 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.