SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 29, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20666
MICROTEST, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 86-0485884
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
4747 N. 22nd Street, Phoenix, Arizona 85016
-------------------------------------------
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (602) 952-6400
------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
--- ---
As of August 9, 1996, 8,122,537 shares of the registrant's common stock were
outstanding.
This document contains 12 pages
-------------------------------
<PAGE>
INDEX
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MICROTEST, INC.
Page
Facing Page 1
Index 2
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 7-9
PART II. OTHER INFORMATION
- -------- -----------------
Item 1 - Legal Proceedings 10
Item 2 - Changes in Securities 10
Item 3 - Defaults Upon Senior Securities 10
Item 4 - Submission of Matters to a Vote of Security Holders 10
Item 5 - Other Information 10
Signatures 11
Exhibit 11 - Statement regarding computation of per share earnings 12
2
<PAGE>
PART 1. FINANCIAL STATEMENTS
Microtest, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 29, December 31,
1996 (unaudited) 1995
----------------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,992 $ 19,907
Accounts receivable - less allowance for doubtful
accounts of $391 and $521, respectively 14,383 15,857
Inventories - net 5,174 6,814
Prepaid expenses 480 681
Income taxes receivable 966 2,100
Deferred income taxes 1,819 1,819
-------- --------
Total current assets 47,814 47,178
PROPERTY, PLANT & EQUIPMENT - less accumulated
depreciation of $4,466 and $3,841, respectively 3,259 3,212
INTANGIBLES AND OTHER ASSETS 314 448
DEFERRED INCOME TAXES 240 239
-------- --------
TOTAL $ 51,627 $ 51,077
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,016 $ 4,757
Accrued liabilities 2,519 2,411
Accrued payroll and employee benefits 892 882
-------- --------
Total current liabilities 6,427 8,050
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value - authorized,
15,000,000 shares; issued and outstanding,
8,159,534 and 8,159,058 shares, respectively 8 8
Additional paid-in capital 32,519 32,546
Retained income 13,269 11,455
Common stock in treasury at cost - 39,338 shares
and 63,834 shares, respectively (596) (982)
-------- --------
Total stockholders' equity 45,200 43,027
-------- --------
TOTAL $ 51,627 $ 51,077
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
Microtest, Inc.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 13,320 $ 14,014 $ 25,280 $ 26,657
TOTAL COST OF SALES 5,664 5,526 10,665 10,289
-------- -------- -------- --------
GROSS PROFIT 7,656 8,488 14,615 16,368
OPERATING EXPENSES:
Sales and marketing 3,424 3,082 6,827 5,804
Research and development 1,446 1,428 3,056 2,974
General and administrative 893 1,020 1,954 1,980
-------- -------- -------- --------
Total operating expenses 5,763 5,530 11,837 10,758
-------- -------- -------- --------
UNUSUAL ITEM - Purchased R&D -- 8,326 -- 8,326
-------- -------- -------- --------
INCOME FROM OPERATIONS 1,893 (5,368) 2,778 (2,716)
INVESTMENT INCOME - NET 197 341 411 622
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,090 (5,027) 3,189 (2,094)
INCOME TAXES:
Provision for income taxes 774 1,213 1,167 2,272
Income tax benefit related to purchased R&D -- (3,210) -- (3,210)
-------- -------- -------- --------
NET INCOME TAX (BENEFIT)/PROVISION 774 (1,997) 1,167 (938)
NET INCOME $ 1,316 $ (3,030) $ 2,022 $ (1,156)
-------- -------- -------- --------
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ 0.16 $ (0.37) $ 0.24 $ (0.14)
-------- -------- -------- --------
SHARES USED IN PER SHARE
CALCULATION 8,316 8,084 8,266 8,022
-------- -------- -------- --------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
Microtest, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 29, July 1,
1996 1995
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,022 $ (1,156)
Adjustments to reconcile net income to net cash
provided by (used in) operating activites:
Depreciation and amortization 664 411
Unusual items net of related tax benefit - 5,116
Deferred rent - (10)
Changes in operating assets and liabilities:
Accounts receivable 1,474 (4,440)
Inventories 1,640 (1,251)
Prepaid expenses and other assets 289 (295)
Accounts payable (1,741) 255
Accrued liabilities 108 (166)
Accrued payroll and employee benefits 10 227
Income taxes receivable 1,134 (241)
-------- --------
Net cash provided by (used in) operating activities 5,600 (1,550)
INVESTING ACTIVITES:
Purchases of equipment and leasehold
improvements (672) (861)
Acquisition of Optical Media International - (4,650)
-------- --------
Net cash provided by (used in) investing activities (672) (5,511)
-------- --------
FINANCING ACTIVITIES:
Proceeds from sale of common stock and treasury stock 136 889
Reduction in income tax liability from disqualifying
dispositions of incentive stock options and
exercises of non-qualified stock options 21 1,111
Purchase of treasury stock - (1,919)
-------- --------
Net cash provided by financing activities 157 81
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 5,085 (6,980)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,907 31,590
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $24,992 $24,610
======= =======
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
MICROTEST, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the three months and the six months ended June 29, 1996, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. The accompanying financial statements should be read in conjunction with
the Company's most recent Annual Report and Form 10-K.
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The consolidated financial statements
include the accounts of Microtest, Inc. and its wholly-owned subsidiaries.
The Company develops, markets, and supports products that make it easier
to install, service, and manage local area networks ("LANs").
B. For interim reporting purposes, the Company ends its quarters on the
Saturday closest to the calendar quarter end, with the fourth quarter
ending on December 31, 1996.
C. Reclassifications - Certain reclassifications have been made to the
1995 consolidated financial statements to conform to the 1996
presentation.
D. In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting
for Stock-Based Compensation" which will become effective for the Company
beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but
does not require) compensation cost to be measured based on the fair value
of the equity instrument awarded. Companies are permitted, however, to
continue to apply APB Opinion No. 25, which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company
will continue to apply APB Opinion No. 25 in its financial statements and
will disclose in a footnote the pro forma effect on net income and
earnings per share, as if the Company had applied the new Standard in its
year-end financial statements.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 6/29/96 Change 7/1/95 6/29/96 Change 7/1/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $ 13,320 (5.0%) $ 14,014 $25,280 (5.2%) $ 26,657
- -----------------------------------------------------------------------------------------------------------
</TABLE>
During both the second quarter and the six months ended June 29, 1996, total
revenues decreased compared to the same periods in 1995 due primarily to
increased competition in the Category 5 cable testing market.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 6/29/96 Change 7/1/95 6/29/96 Change 7/1/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit $ 7,656 (9.8%) $ 8,488 $ 14,615 (10.7%) $ 16,368
% of Total Revenues 57.5% 60.6% 57.8% 61.4%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit decreased during both the second quarter of 1996 and the six months
ended June 29, 1996, compared to the same periods in 1995 primarily due to the
Company's response to competitive pricing pressures and an increased focus on
lower margin connectivity products.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 6/29/96 Change 7/1/95 6/29/96 Change 7/1/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales & Marketing $3,424 11.1% $3,082 $6,827 17.6% $5,804
% of Total Revenues 25.7% 22.0% 27.0% 21.8%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
For both the quarter ended and the six months ended June 29, 1996, sales and
marketing expenses increased in absolute dollars and as a percentage of total
revenues compared to the same periods in 1995. The increase is due largely to
the addition of personnel to bolster the Company's sales force.
7
<PAGE>
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 6/29/96 Change 7/1/95 6/29/96 Change 7/1/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research & Development $1,446 1.3% $1,428 $3,056 2.8% $2,974
% of Total Revenues 10.9% 10.2% 12.1% 11.2%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Research and development expenses increased in absolute dollars and as a
percentage of total revenues in both the second quarter and the six months ended
June 29, 1996, compared with the same periods in 1995. The nominal increase in
absolute dollars is due to inflation. To date, the Company has expensed all R&D
costs as incurred.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 6/29/96 Change 7/1/95 6/29/96 Change 7/1/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General & $893 (12.5%) $1,020 $1,954 (1.3%) $1,980
Administrative
% of Total Revenues 6.7% 7.3% 7.7% 7.4%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
General and administrative expenses decreased in absolute dollars in both the
second quarter and the six months ended June 29, 1996, compared to the same
periods in 1995 due to increased cost control.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 6/29/96 Change 7/1/95 6/29/96 Change 7/1/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Taxes $774 (36.2%) $1,213 $1,167 (48.6%) $2,272
(excluding income tax
benefit related to
purchased R&D)
Effective Tax Rate 37.0% 36.8% 36.6% 36.5%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's effective tax rate experienced a nominal increase during both the
second quarter and the six months ended June 29, 1996, compared to the same
periods of the preceding year primarily because the benefits of the research and
development tax credit formerly afforded under Section 41 of the Internal
Revenue Code were not available to date in 1996.
8
<PAGE>
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 6/29/96 Change 7/1/95 6/29/96 Change 7/1/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $1,316 143% ($3,030) $2,022 275% ($1,156)
% of Total Revenues 9.9% (21.6%) 8.0% (4.3%)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Net income increased in both absolute dollars and as a percentage of total
revenues for both the second quarter and the six months ended June 29, 1996,
compared to the same periods in 1995, which included a net of tax charge of $5.1
million of research and development charged off in connection with the
acquisition of Optical Media International.
Liquidity and capital resources
- -------------------------------
The Company has financed its operations primarily through operating cash flows
and equity financings. At June 29, 1996, the Company had cash and cash
equivalents of $25.0 million. This represents a $5.1 million increase in cash
equivalents during the six months ended June 29, 1996, due primarily to
reductions in accounts receivable and inventory. The Company does not anticipate
significant capital expenditures and expects that existing cash balances and
anticipated cash flows from operations will satisfy the Company's working
capital requirements for the foreseeable future.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is from time to time involved in legal proceedings of a
character normally incident to its business, including various claims and
pending actions against the Company seeking damages.
The Company was a defendant in an action in the Maricopa County Superior
Court in and for the State of Arizona entitled Chauncey Stephen Brambach, et.
al. v. Microtest, Inc., Cause No. CV 94-18966. In July 1996, summary judgment
was entered in favor of the Company.
Item 2. - Changes in Securities
None .
Item 3. - Defaults Upon Senior Securities
Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on May 14, 1996. The
shareholders elected the following persons to serve three-year terms as
directors of the company: David C. Bolles and Roger C. Ferguson. The votes for
and against (withheld) each nominee were as follows:
Nominee Votes For Votes Withheld
David C. Bolles 7,580,076 101,595
Roger C. Ferguson 7,571,426 110,245
Roger C. Ferguson, Richard G. Meise, Steven G. Mihaylo, William C. Turner and
Dianne C. Walker continued as directors following the meeting.
Item 5. - Other Information
None
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibit 11 - Statement regarding computation of per share earnings
b) Reports on Form 8-K
None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICROTEST, INC.
---------------
Registrant
Date: August 13, 1996 /s/ Richard G. Meise
------------------------------------
Richard G. Meise
Chief Executive Officer
Date: August 13, 1996 /s/ Richard R. Douglas
------------------------------------
Richard R. Douglas
Chief Financial Officer
11
MICROTEST, INC.
EXHIBIT 11
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (loss) $ 1,316 $(3,030) $ 2,022 $(1,156)
------- -------- ------- --------
Common shares outstanding at end of period 8,120 7,997 8,120 7,997
Adjustment to reflect weighted average for
shares issued during period 11 87 (1) 25
Adjustment for options and warrants calculated
under the treasury stock method:
Options 185 147
Warrants -- -- -- --
------- -------- ------- --------
Common and equivalent shares outstanding 8,316 8,084 8,266 8,022
======= ======= ======= =======
Net income (loss) per share $ 0.16 $ (0.37) $ 0.24 $ (0.14)
======= ======= ======= =======
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1
<CASH> 24,992
<SECURITIES> 0
<RECEIVABLES> 14,774
<ALLOWANCES> 391
<INVENTORY> 5,174
<CURRENT-ASSETS> 47,814
<PP&E> 7,725
<DEPRECIATION> 4,466
<TOTAL-ASSETS> 51,627
<CURRENT-LIABILITIES> 6,427
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 45,192
<TOTAL-LIABILITY-AND-EQUITY> 51,627
<SALES> 25,280
<TOTAL-REVENUES> 25,693
<CGS> 10,665
<TOTAL-COSTS> 22,502
<OTHER-EXPENSES> 75
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,189
<INCOME-TAX> 1,167
<INCOME-CONTINUING> 2,022
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,022
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
