<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-22529
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inTEST Corporation
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2370659
- --------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
2 Pin Oak Lane, Cherry Hill, New Jersey 08003
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (609) 424-6886
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Indicate by check X whether the registrants: (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 12 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 90 days.
Yes X No
----- -----
Number of shares of Common Stock, $.01 par value, outstanding as of March 31,
1999:
6,536,034
<PAGE>
inTEST CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 1
Consolidated Statements of Earnings (unaudited) for the
three months ended March 31, 1999 and 1998 2
Consolidated Statements of Comprehensive Earnings
(unaudited) for the three months ended March 31, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity (unaudited)
for the three months ended March 31, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6 -11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures About Market
Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 21-22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Securities Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
--------- --------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,780 $ 8,468
Trade accounts and notes receivable, net of allowance for
doubtful accounts of $168 and $168, respectively 4,138 3,275
Inventories 2,570 2,521
Deferred tax asset 245 245
Refundable domestic and foreign income taxes - 658
Other current assets 189 137
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Total current assets 15,922 15,304
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Machinery and equipment:
Machinery and equipment 1,747 1,690
Leasehold improvements 227 223
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1,974 1,913
Less: accumulated depreciation (1,135) (1,078)
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Net machinery and equipment 839 835
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Other assets 193 195
Goodwill 6,765 6,884
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Total assets $23,719 $23,218
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,149 $ 969
Accrued expenses 866 1,023
Domestic and foreign income taxes payable 381 -
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Total current liabilities 2,396 1,992
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Commitments
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $0.01 par value; 20,000,000 shares authorized;
6,536,034 shares issued and outstanding 65 65
Additional paid-in capital 16,647 16,647
Retained earnings 4,742 4,570
Accumulated other comprehensive expense (131) (56)
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Total stockholders' equity 21,323 21,226
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Total liabilities and stockholders' equity $23,719 $23,218
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues $ 4,811 $ 5,626
Cost of revenues 2,279 2,200
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Gross margin 2,532 3,426
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Operating expenses:
Selling expense 785 741
Research and development expense 653 421
General and administrative expense 863 594
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Total operating expenses 2,301 1,756
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Operating income 231 1,670
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Other income (expense):
Interest income 70 127
Interest expense - (1)
Other (4) 26
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Total other income 66 152
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Earnings before income taxes 297 1,822
Income tax expense 125 668
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Net earnings $ 172 $ 1,154
======= =======
Net earnings per common share - basic $0.03 $0.20
Weighted average common shares outstanding - basic 6,536,034 5,911,034
Net earnings per common share - diluted $0.03 $0.19
Weighted average common and common share
equivalents outstanding - diluted 6,602,317 5,924,949
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net earnings $ 172 $1,154
Foreign currency translation adjustments (75) (42)
------ ------
Comprehensive earnings $ 97 $1,112
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(In thousands, except share data)
(Unaudited except Balance, December 31, 1998)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
----------------- Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Earnings(Expense) Equity
--------- ------ ---------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 6,536,034 $ 65 $16,647 $ 4,570 $ (56) $21,226
Net earnings - - - 172 - 172
Other comprehensive expense - - - - (75) (75)
--------- ---- ------- ------- ----- -------
Balance, March 31, 1999 6,536,034 $ 65 $16,647 $ 4,742 $(131) $21,323
========= ==== ======= ======= ===== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 172 $ 1,154
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 194 64
Foreign exchange (gain)loss (2) 22
Changes in assets and liabilities:
Trade accounts and notes receivable, net (896) 19
Inventories (53) (187)
Refundable domestic and foreign income taxes 663 -
Other current assets (52) (116)
Accounts payable 193 15
Domestic and foreign income taxes payable 380 (409)
Accrued expenses (147) (42)
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Net cash provided by operating activities 452 520
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of machinery and equipment (82) (27)
Other long-term assets (6) (7)
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Net cash used in investing activities (88) (34)
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Effects of exchange rates on cash (52) (8)
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Net cash provided by all activities $ 312 $ 478
======= =======
Cash and cash equivalents at beginning of period $ 8,468 $12,035
Cash at end of period $ 8,780 $12,513
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 1999 and for the three months
ended March 31, 1999 and 1998 is unaudited)
(In thousands, except for share data)
(1) NATURE OF OPERATIONS
inTEST Corporation (the "Company") designs, manufactures and markets
docking hardware, test head manipulators and tester interfaces used by
semiconductor manufacturers during the testing of wafers and packaged
devices. The Company also designs and markets related automatic test
equipment interface products.
The consolidated entity is comprised of inTEST Corporation (parent) and
seven 100% owned subsidiaries: inTEST Limited (Thame, UK), inTEST
Kabushiki Kaisha (Kichijoji, Japan), inTEST PTE, Limited (Singapore),
inTEST Sunnyvale Corp. (Delaware), inTEST Investments, Inc. (a Delaware
holding company), inTEST IP Corp.(a Delaware holding company) and inTEST
Licensing Corp. (a Delaware holding company).
The Company manufactures its products in the U.S. and the U.K.
Marketing and support activities are conducted worldwide from the
Company's facilities in the U.S., U.K., Japan and Singapore.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
Accounts and transactions have been eliminated upon consolidation. 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 could differ from those
estimates.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim Financial Reporting
---------------------------
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of
normally recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows
for the interim periods presented.
Certain footnote information has been condensed or omitted from these
financial statements. Therefore, these financial statements should be
read in conjunction with the consolidated financial statements and
and accompanying footnotes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
Net Earnings Per Common Share
-----------------------------
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during each period.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during each period. Common share equivalents include stock
options using the treasury stock method.
As discussed in Note 3, pro forma earnings per share information for the
three months ended March 31, 1998 includes certain adjustments to
reflect results as if the Acquisition of TestDesign Corporation had
occurred on January 1, 1998.
New Accounting Pronouncements
-----------------------------
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. This Statement
requires that certain costs related to the development or purchase of
internal software be capitalized and amortized over the estimated useful
life of the software. This Statement also requires that costs related
to the preliminary project stage and the post implementation/operation
stage of an internal use computer software development project be
expensed as incurred. The Company adopted this Statement for the
quarter ended March 31, 1999 as required. The adoption of SOP 98-1 had
no impact on the Company's reported results.
- 7 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivatives and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company plans to adopt this
Statement in the first quarter of 2000, as required. The adoption of
this Statement is not expected to have a material affect on the results
of operations, financial condition or long-term liquidity of the Company.
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION
On August 3, 1998, the Company acquired all of the outstanding capital
stock of TestDesign Corporation ("TestDesign"), a privately held
California corporation (the "Acquisition"). Subsequent to the
Acquisition, the Company changed the name of TestDesign to inTEST
Sunnyvale Corp. TestDesign is engaged in the design and manufacture of
tester interfaces used by the semiconductor industry. The purchase
price was $4.4 million in cash and 625,000 shares of the Company's
Common Stock (subject to certain adjustments). Although the Company's
Common Stock had a market price of $4.75 per share on the closing date
of the transaction, all of the 625,000 shares issued in connection with
the Acquisition are subject to legal restrictions on transfer and have
been valued at a 10% discount to the market price of the shares. In
addition, the Company incurred transaction costs of approximately
$425,000 in completing the Acquisition. The following is an allocation
of the purchase price:
<TABLE>
<S> <C>
Cash payment $4,400
Transaction costs 425
625,000 common shares at $4.28 2,672
------
7,497
Estimated fair value of identifiable assets
Acquired net of liabilities assumes 1,650
------
Goodwill to be amortized over 15 years $5,847
======
</TABLE>
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Continued)
The Acquisition has been accounted for as a purchase and the results of
operations of the acquired business have been included in the Company's
consolidated financial statements since the date of the Acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations for the Company and TestDesign as if
the Acquisition had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Pro forma net revenues $ 4,811 $ 7,572
Pro forma net earnings 172 1,132
Pro forma diluted net earnings per common share $ 0.03 $ 0.17
</TABLE>
(4) SEGMENT INFORMATION
The various products the Company designs, manufactures and markets,
which include docking hardware, test head manipulators and tester
interfaces, are considered by management to be a single product segment.
Included in this segment are products the Company designs and markets
which are manufactured by third parties, which include high performance
test sockets, interface boards and probing assemblies. The Company
operates its business worldwide and divides the world into three
geographic segments: North America, Asia-Pacific and Europe. The North
America segment includes the Company's manufacturing, design and service
facilities in New Jersey and California; the Asia-Pacific segment
includes the Company's design and service facilities in Singapore and
Japan; and the Europe segment includes the Company's manufacturing,
design and service facility in the UK.
- 9 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(4) SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
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<S> <C> <C>
Revenues from unaffiliated customers:
North America $ 3,585 $ 4,039
Asia-Pacific 959 1,250
Europe 267 337
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$ 4,811 $ 5,626
======= =======
Affiliate sales or transfers from:
North America $ 290 $ 368
Asia-Pacific - -
Europe 92 76
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$ 382 $ 444
======= =======
Operating income (loss):
North America $ 174 $ 1,506
Asia-Pacific 77 89
Europe (20) 75
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$ 231 $ 1,670
======= =======
Earnings (loss) before income taxes:
North America $ 227 $ 1,624
Asia-Pacific 85 117
Europe (15) 81
------- -------
$ 297 $ 1,822
======= =======
Net earnings (loss):
North America $ 159 $ 1,100
Asia-Pacific 8 (20)
Europe 5 74
------- -------
$ 172 $ 1,154
======= =======
</TABLE>
-10-
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(5) LEGAL PROCEEDINGS
As reported in the Company's 10-K for the year ended December 31, 1998,
the Company and its subsidiary inTEST IP Corp. (which holds title to all
Company intellectual property) filed suit in the Federal District Court
in Washington, D.C. against Reid-Ashman Manufacturing, Inc. and its
President and CEO, Mr. Steven J. Reid (the "Defendants") for
Infringement of a United States patent held by the Company (the "815
Patent") on November 18, 1998.
On April 16, 1999, the Company and the Defendants agreed to dismiss the
complaint in the Federal District Court in Washington, D.C. and re-file
the suit in Federal District Court in Delaware. In addition, the parties
agreed to remove Mr. Steven J. Reid, President and CEO of Reid-Ashman
Manufacturing, Inc., as a defendant in the action. The parties also
stipulated that the statutory period of recovery for damages for any
infringement, which is limited to six years from the filing of the suit,
shall be tolled as of November 18, 1998, the date the original suit was
filed in the Federal District in Washington, D.C.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
The Company designs, manufacturers and markets docking hardware, test
head manipulators and tester interfaces, which are used with automatic
test equipment ("ATE") by semiconductor manufacturers during the testing of
wafers and packaged devices. The Company also designs and markets related ATE
interface products including high performance test sockets, interface boards
and probing assemblies. The Company's products are designed to improve the
utilization and cost-effectiveness of ATE (including testers, wafer probers
and device handlers)during the testing of linear, digital and mixed signal
integrated circuits ("ICs").
The Company's revenues are substantially dependent upon the demand for
ATE by semiconductor manufacturers and, therefore, fluctuate generally as a
result of cyclicality in the semiconductor manufacturing industry. During
the last three years, the demand for ATE by the semiconductor industry
exhibited a high degree of cyclicality. 1996 represented a year of
sequential quarterly declines in orders for and sales of the Company's
products due to a reduced level of semiconductor manufacturing activity which
caused cutbacks in semiconductor manufacturers' capital budgets. 1997 marked
a turnaround in the semiconductor industry which was evidenced by renewal in
demand for ATE and related equipment which resulted in sequential quarterly
increases in orders for and sales of the Company's products.
1998, like 1996, represented a year of sequential quarterly declines in
orders for and sales of the Company's products, however to a more significant
degree than in 1996. During 1998, worldwide demand for ICs fell dramatically
due to excess inventory of older IC designs, and slower transition to new IC
designs resulting from softening demand for end user products. In addition,
the economic downturns in many world economies, especially those in Southeast
Asia and Japan, exacerbated the semiconductor industry downturn. The
combination of these conditions contributed to a reduced demand for products
manufactured by semiconductor manufacturers, which in turn significantly
reduced their need for new or additional ATE equipment.
In early 1999, the Company has seen an increase in the level of orders
for it products over the last quarter of 1998. Orders booked during the
first quarter of 1999 were $7.2 million compared to $4.3 million during the
fourth quarter of 1998, an increase of $2.9 million or 69%. As a result
of the increase in booking activity, the Company's backlog increased from
$3.4 million at December 31, 1998 to $5.1 million at March 31, 1999. The
- 12 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
increase in the Company's bookings and backlog reflects the renewed demand
for ATE by semiconductor manufacturers resulting from both increased demand
for ICs worldwide combined with back end ATE capacity constraints caused by
the significantly reduced capital spending during 1998. While bookings and
backlog are calculated on the basic of firm orders, no assurance can be given
that customers will purchase the equipment subject to such orders. As a
result, the Company's bookings for any period and backlog at any particular
date are not necessarily indicative of actual sales for any succeeding period.
Results of Operations
- ---------------------
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998:
Revenues. Revenues were $4.8 million for the quarter ended March 31,
1999 compared to $5.6 million for the same period in 1998, a decrease of
$815,000 or 15%. The decrease in revenue over the comparable prior period
reflects the aforementioned cyclical trends of the ATE industry and,
particularly, the higher demand for ATE and related products in the three
months ended March 31, 1998 as demand for ATE was decreasing, as compared
with the lower, albeit increasing, demand for ATE and related products in the
three months ended March 31, 1999. The decrease in revenue from the
comparable prior period was offset, in part, by the revenues of TestDesign
Corporation ("TestDesign") which was acquired by the Company on August 3,
1998 (the "Acquisition").
Gross Margin. Gross margin declined to 53% for the quarter ended
March 31, 1999 compared to 61% for the comparable period in 1998. The
reduction in gross margin was primarily the result of the additional fixed
costs of manufacturing of TestDesign which were impacted unfavorably by the
lower revenue levels during the quarter. In addition, material costs as a
percentage of sales increased over the comparable prior period due to the
higher component material costs of the TestDesign product line.
Selling Expense. Selling expense was $785,000 for the quarter ended
March 31, 1999 compared to $741,000 for the same period in 1998, an
increase of $44,000 or 6%. The increase was attributable to several factors
including the additional salary expense of TestDesign sales staff and
increased advertising costs offset by a reduction in commission expenses for
external sales representatives.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Research and Development Expense. Research and development expense was
$653,000 for the quarter ended March 31, 1999 compared to $421,000 for the
same period in 1998, an increase of $232,000 or 55%. The increase was
attributable to the additional salary expense of TestDesign engineering and
technical staff coupled with an increase in the number of engineering and
technical staff and increases in travel expenses offset in part by reductions
in spending on research and development materials in 1999 as compared to 1998.
General and Administrative Expense. General and administrative expense
was $863,000 for the quarter ended March 31, 1999 compared to $594,000 for
the same period in 1998, an increase of $269,000 or 45%. The increase was
primarily attributable to the additional salary and other administrative
costs of TestDesign and the amortization of goodwill resulting from the
Acquisition.
Income Tax Expense. Income tax expense decreased to $125,000 for the
quarter ended March 31, 1999 from $668,000 for the comparable period in
1998, an decrease of $543,000. The Company's effective tax rate was 42% for
the first quarter of 1999 compared to 37% for the same period in 1998. The
increase in the effective tax rate is primarily the result of a higher
percentage of earnings attributable to the Company's Japanese subsidiary in
1999 as compared to 1998 and the higher effective tax rate on such earnings.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operations for the three months ended March 31,
1999 was $452,000. Accounts receivable increased $896,000 from December 31,
1998 to March 31, 1999 due to the increase in sales activity during the first
quarter of 1999. Inventories increased $53,000 as a result of materials
purchases for future product shipments. Refundable domestic and foreign
income taxes decreased $663,000 due to a refund of excess Federal taxes paid
during 1998. Other current assets increased $52,000, primarily as a result
of increases in prepaid expenses. Accounts payable increased $193,000 due
to the higher production levels during the first quarter of 1999. Accrued
expenses decreased $147,000 primarily as a result of the timing of payments
of previously accrued expenses. Domestic and foreign income taxes payable
decreased $380,000 as a result of the refund of excess Federal taxes received
during the first quarter and the accrual of income taxes on the quarterly
earnings.
Purchases of machinery and equipment and other assets were $88,000 for
the three months ended March 31, 1999. The Company plans to spend
approximately $300,000 during the second quarter of 1999 to renovate and
expand its UK manufacturing facility and to purchase a coordinate measuring
machine for this facility.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company believes that existing cash and cash equivalents, its $1.5
million unused line of credit and the anticipated net cash provided from
operations will be sufficient to satisfy the Company's cash requirements
including those of its new subsidiary for the foreseeable future. However,
additional acquisitions may require additional equity or debt financing to
meet working capital requirements or capital expenditure needs. Although the
Company, as an S corporation, historically paid cash dividends to its
stockholders, the Company does not anticipate that it will pay dividends in
the foreseeable future.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations, a
temporary inability to process transactions, send invoices, or engage in
normal business activities.
Currently, the Company has a program in process to analyze potentially
affected business and process systems and replace or correct all non-
compliant critical business and process systems that it will require in the
new millennium. Prior to the acquisition of TestDesign, the Company had
completed its review and testing of its then existing systems and determined
that they were Year 2000 compliant. The Company has identified those systems
of TestDesign which are not yet Year 2000 compliant and has begun converting
them to systems which are Year 2000 compliant. The Company has substantially
completed the system modifications at TestDesign and anticipates that all of
its systems will be Year 2000 compliant by mid-1999.
The products that the Company has sold and currently sells are not
date-sensitive, and therefore the Company believes its product related
exposures are low.
In conjunction with the Company's Year 2000 effort, all suppliers that
are critical to the function of the Company are being surveyed to insure
readiness and non-disruption to the Company supply chain. The Company relies
on subcontractors for fabrication and certain other processes performed on
its products and utilizes third-party network equipment and software products
which may or may not be Year 2000 compliant. In addition, the Company relies
on utility and telecommunications suppliers to operate its businesses
worldwide. The Company has sent questionnaires to these critical suppliers
to determine the extent to which the Company's operations are exposed to
- 15-
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
failure of Year 2000 issues. The Company has received responses from over
90% of its domestic suppliers and it still awaiting responses from most of
its foreign suppliers. The Company intends to replace any critical raw
materials and fabrication suppliers which cannot demonstrate Year 2000
compliance before the end of the third quarter of 1999. There can be no
assurance that the Company will be successful in its efforts to identify and
resolve any Year 2000 issues involving its suppliers or to continue receiving
products and services from these suppliers if Year 2000 problems were to
materialize. The failure to resolve these issues could result in the shut-
down of some or all of the Company's operations, which would have a material
adverse effect on the Company.
The total expense of the Company's Year 2000 effort is currently
estimated at less than $100,000, for the identification and remediation of
any Year 2000 problems related to the Company's internal systems. If
required modifications to existing software and hardware are not made, or
are not completed in a timely manner, the Year 2000 could have a material
impact on the operations of the Company. There can be no assurance that the
costs to remediate any Year 2000 problems which may be identified in the
future will not exceed the Company's current estimate or that the Company
will be able to resolve these issues in a timely manner. The expenses of the
Year 2000 project are being funded through operating cash flows.
The Company does not currently have any information concerning Year
2000 compliance status of its customers. If any of the Company's significant
customers and suppliers do not successfully and in a timely manner achieve
Year 2000 compliance, and as a result of such non-compliance such customers
operations are disrupted, shut-down or otherwise impacted, the Company's
business or operations could be adversely affected. There can be no
assurance that another company's failure to ensure Year 2000 capability would
not have an adverse effect on the Company.
The Company has not yet developed a comprehensive contingency plan to
address situations which it believes to be beyond its control (i.e. such as
utilities and telecommunications). There can be no assurance that the
Company will be able to develop a contingency plan that will adequately
address issues that may arise in the Year 2000. The failure of the Company to
successfully resolve such issues could result in a shut-down of some or all of
the Company's operations, which would have a material adverse effect on the
Company.
- 16 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
International Operations
- ------------------------
Revenues generated by the Company's foreign subsidiaries were 26% and
28% of consolidated revenues for the three months ended March 31, 1999 and
1998, respectively. The Company anticipates that revenues generated by the
Company's foreign subsidiaries will continue to account for a significant
portion of consolidated revenues in the foreseeable future. These revenues
generated by the Company's foreign subsidiaries will continue to be subject
to certain risks, including changes in regulatory requirements, tariffs and
other barriers, political and economic instability, an outbreak of
hostilities, foreign currency exchange rate fluctuations, potentially adverse
tax consequences and the possibility of difficulty in accounts receivable
collection. The Company cannot predict whether quotas, duties, taxes or
other charges or restrictions will be implemented by the United States or any
other country upon the importation or exportation of the Company's products
in the future. Any of these factors or the adoption of restrictive policies
could have a material adverse effect on the Company business, financial
condition or results of operations.
Revenues denominated in foreign currencies were 16% and 22% of
consolidated revenues for the three months ended March 31, 1999 and 1998,
respectively. Although the Company operates its business such that a
significant portion of its product costs are denominated in the same currency
that the associated sales are made in, there can be no assurance that the
Company will not be adversely impacted in the future due to its exposure to
foreign operations. Revenues denominated in currencies other than U.S.
dollars expose the Company to currency fluctuations, which can adversely
affect results of operations.
The portion of the Company's consolidated revenues that were derived
from sales to the Asia Pacific region were 20% and 22% for the three months
ended March 31, 1999 and 1998, respectively. Countries in the Asia Pacific
region, including Japan, have experienced economic instability resulting in
weaknesses in their currency, banking and equity markets. Although the
current economic instability in the Asia Pacific region has not materially
adversely affected the Company's order backlog, balance sheet, or results of
operations to date, there can be no assurance that continued economic
instability will not in the future have a material adverse affect on demand
for the Company's products and its consolidated results of operations.
Cautionary Statement Regarding Forward Looking Statements
- ---------------------------------------------------------
This Report contains certain statements of a forward-looking nature
relating to future events, such as statements regarding the Company's plans
and strategies or future financial performance. Such statements can be
- 17 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. Investors and
prospective investors are cautioned that such statements are only projections
and that actual events or results may differ materially from those expressed
in any such forward-looking statements. In addition to the factors described
in this Report, the Company's actual consolidated quarterly or annual
operating results have been affected in the past, or could be affected in the
future, by additional factors, including, without limitation: changes in
business conditions and the economy, generally; the ability of the Company to
obtain patent protection, and enforce its patent rights, for existing and
developing proprietary technologies; the ability of the Company to integrate
successfully businesses, technologies or products which it may acquire; the
effect of the loss of, or reduction in orders from, a major customer; and
competition from other manufacturers of docking hardware, test head
manipulators, tester interfaces and related ATE interface products.
- 18 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to currency exchange rate risk in the normal course
of its business. The Company employs risk management strategies including
the use of forward exchange rate contracts to manage this exposure. The
Company's objective in managing currency exchange risk is to minimize the
impact of significant currency exchange rate fluctuations primarily in the
Japanese Yen. The Company's Japanese operations expose its earnings to
change in currency exchange rates because it's Japanese subsidiary makes
its sales in Japanese Yen and purchases its sales inventory in U.S. dollars.
Forward exchange rate contracts are used to establish a fixed conversion rate
between the Japanese Yen and the U.S. dollar so that the level of the
Company's gross margin from sales in Japan is not negatively impacted from
significant movements in the Japanese Yen to U.S. dollar exchange rate. The
Company purchases forward exchange rate contracts on a monthly basis in the
amounts necessary to pay the U.S. dollar denominated obligations of its
Japanese subsidiary. As of March 31, 1999, there were no forward exchange
rate contracts outstanding.
It is the Company's policy to enter into forward exchange rate contracts
only to the extent necessary to achieve the desired objectives of management
in limiting the Company's exposure to significant fluctuations in currency
exchange rates. The Company does not hedge all of its currency exchange rate
risk exposures in a manner that would completely eliminate the impact of
changes in currency exchange rates on its net income. The Company does not
expect that its results of operations or liquidity will be materially
affected by these risk management activities.
The notional amounts of the Company's forward exchange rate contracts
are used only to satisfy current payments to material vendors to be exchanged
and are not a measure of the Company's credit risk or its future cash
requirements. Exchange risk related to forward exchange rate contracts is
limited to movement in the exchange rates that would provide a more favorable
exchange rate than that locked in the forward contract and forward contract
amounts purchased in excess of the amount needed by the Company to satisfy
its obligations. The Company manages that rate risk by limiting the size of
the forward contracts purchased to the known amount of obligations due and
not purchasing forward contracts with settlement dates beyond 30 days. The
Company believes that the risk of loss due to exchange rate fluctuations is
remote and that any losses would not be material to its financial condition
or results of operations.
- 19 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's 10-K for the year ended December
31, 1998, the Company and its subsidiary inTEST IP Corp. (which
holds title to all Company intellectual property) filed suit in the
Federal District Court in Washington, D.C. against Reid-Ashman
Manufacturing, Inc. and its President and CEO, Mr. Steven J. Reid
(the "Defendants") for infringement of a United States patent held
by the Company (the "815 Patent") on November 18, 1998.
On April 16, 1999, the Company and the Defendants agreed to
dismiss the complaint in the Federal District Court in Washington,
D.C. and re-file the suit in Federal District Court in Delaware. In
addition, the parties agreed to remove Mr. Steven J. Reid, President
and CEO of Reid-Ashman Manufacturing, Inc., as a defendant in the
action. The parties also stipulated that the statutory period of
recovery for damages for any infringement, which is limited to six
years from the filing of the suit, shall be tolled as of November 18,
1998, the date the original suit was filed in the Federal District in
Washington, D.C.
- 20 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 2. Changes in Securities and Use of Proceeds
On June 17, 1997, the Company's Registration Statement on
Form S-1 covering the Offering of 2,275,000 shares of the
Company's Common Stock, Commission file number 333-26457,
was declared effective. The Offering commenced on
June 20, 1997, managed by Janney Montgomery Scott, Inc.
and Needham & Company, Inc. as representatives of the
several underwriters named in the Registration Statement
(the "Underwriters").
Of the 2,275,000 shares sold pursuant to the Offering,
1,820,000 shares were sold by the Company and 455,000 were sold
by certain selling stockholders (the "Selling Stockholders").
In addition, the Underwriters exercised an over-allotment option
to purchase an additional 341,250 shares of the Company's Common
Stock from the Selling Stockholders. The total price to the
public for the shares offered and sold by the Company and the
Selling Stockholders was $13,650,000 and $5,971,875,
respectively.
The amount of expenses incurred for the Company's account in
connection with the Offering are as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $1,023,750
Finders' fees: None
Expenses paid to or for the Underwriters: 16,650
Other expenses: 954,758
----------
Total expenses: $1,995,158
==========
</TABLE>
All of the foregoing expenses were direct or indirect payments
to persons other than (i) directors, officers or their
associates; (ii) persons owning ten percent (10%) or more of the
Company's Common Stock; or (iii) affiliates of the Company.
The net proceeds of the Offering to the Company (after deducting
the foregoing expenses) was $11,654,842. From the effective
date of the Registration Statement, the net proceeds have been
used for the following purposes:
- 21 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 2. Changes in Securities and Use of Proceeds (Continued)
<TABLE>
<S> <C>
Construction of plant, building and facilities $ -
Purchase and installation of machinery
and equipment 378,870
Purchase of real estate -
Acquisition of other business (including
transaction costs 4,825,000
Repayment of indebtedness 388,098
Working capital 599,725
Temporary investments, including cash &
cash equivalents 4,862,384
Other purposes (for which at least $100,000
has been used), including:
Payment of final S corporation distribution 600,765
-----------
$11,654,842
===========
</TABLE>
In connection with the termination of the Company's status as
an S corporation, the Company used $601,000 of the net proceeds
to pay a portion of the $4.3 million final distribution of
previously taxed but undistributed earnings of the Company.
All of the foregoing payments with the exception of the final S
corporation distribution were direct or indirect payments to
persons other than (i) directors, officers or their associates;
(ii) persons owning ten percent (10%) or more of the Company's
Common Stock; or (iii) affiliates of the Company.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
- 22 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Articles of Incorporation: Previously filed by the
Company as an Exhibit to the Company's Registration
Statement on Form S-1, File No. 333-26457, and
Incorporated herein by reference.
3.2 By-Laws: Previously filed by the Company as an Exhibit
to the Company's Registration Statement on Form S-1,
File No. 333-26457, and incorporated herein by
reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
- 23 -
<PAGE>
Signatures
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.
inTEST Corporation
Date: May 11, 1999 /s/ Robert E. Matthiessen
----------------- ------------------------------------
Robert E. Matthiessen
President and Chief Executive Officer
Date: May 11, 1999 /s/ Hugh T. Regan, Jr.
----------------- ------------------------------------
Hugh T. Regan, Jr.
Treasurer and Chief Financial Officer
<PAGE>
Index to Exhibits
Item 6. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation: Previously filed by the
Company as an Exhibit to the Company's Registration
Statement on Form S-1, File No. 333-26457, and
Incorporated herein by reference.
3.2 By-Laws: Previously filed by the Company as an Exhibit
to the Company's Registration Statement on Form S-1,
File No. 333-26457, and incorporated herein by
reference.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001036262
<NAME> INTEST CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,780
<SECURITIES> 0
<RECEIVABLES> 4,138
<ALLOWANCES> 168
<INVENTORY> 2,570
<CURRENT-ASSETS> 15,922
<PP&E> 1,974
<DEPRECIATION> 1,135
<TOTAL-ASSETS> 23,719
<CURRENT-LIABILITIES> 2,396
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 21,258
<TOTAL-LIABILITY-AND-EQUITY> 23,719
<SALES> 4,811
<TOTAL-REVENUES> 4,811
<CGS> 2,279
<TOTAL-COSTS> 2,301
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 297
<INCOME-TAX> 125
<INCOME-CONTINUING> 172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
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