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 September 28, 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 October 30, 1996, 8,127,042 shares of the registrant's common stock were
outstanding.
This document contains 13 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 6-7
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 7-10
PART II. OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings 10
Item 2 - Changes in Securities 11
Item 3 - Defaults Upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit 11 - Statement regarding computation of per share earnings 13
2
<PAGE>
PART 1. FINANCIAL STATEMENTS
Microtest, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 28, December 31,
1996 (unaudited) 1995
---------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,291 $ 19,907
Accounts receivable - less allowance for doubtful
accounts of $361 and $521, respectively 16,830 15,857
Inventories - net 4,774 6,814
Prepaid expenses 287 681
Income taxes receivable 247 2,100
Deferred income taxes 1,819 1,819
----------------- -------------
Total current assets 52,248 47,178
PROPERTY, PLANT & EQUIPMENT - less accumulated
depreciation of $4,828 and $3,841, respectively 3,158 3,212
INTANGIBLES AND OTHER ASSETS 202 448
DEFERRED INCOME TAXES 240 239
----------------- -------------
TOTAL $ 55,848 $ 51,077
================= =============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,954 $ 4,757
Accrued liabilities 3,201 2,411
Accrued payroll and employee benefits 990 882
----------------- -------------
Total current liabilities 9,145 8,050
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value - authorized,
15,000,000 shares; issued and outstanding,
8,159,682 and 8,159,058 shares, respectively 8 8
Additional paid-in capital 32,589 32,546
Retained income 14,594 11,455
Common stock in treasury at cost - 32,304 shares
and 63,834 shares, respectively (488) (982)
----------------- -------------
Total stockholders' equity 46,703 43,027
----------------- -------------
TOTAL $ 55,848 $ 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 Nine Months Ended
--------------------------------- -----------------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 13,007 $ 15,154 $ 38,287 $ 41,811
TOTAL COST OF SALES 5,071 6,408 15,736 16,697
--------------- --------------- --------------- ---------------
GROSS PROFIT 7,936 8,746 22,551 25,114
OPERATING EXPENSES:
Sales and marketing 3,323 3,272 10,150 9,076
Research and development 1,586 1,563 4,642 4,537
General and administrative 1,028 1,029 2,982 3,009
--------------- --------------- --------------- ---------------
Total operating expenses 5,937 5,864 17,774 16,622
--------------- --------------- --------------- ---------------
UNUSUAL ITEM - Purchased R&D - 450 - 8,776
--------------- --------------- --------------- ---------------
INCOME FROM OPERATIONS 1,999 2,432 4,777 (284)
INVESTMENT INCOME - NET 175 285 586 908
--------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 2,174 2,717 5,363 624
INCOME TAXES:
Provision for income taxes 739 1,057 1,906 3,329
Income tax benefit related to purchased R&D - (180) - (3,390)
--------------- --------------- --------------- ---------------
NET INCOME TAX (BENEFIT)/PROVISION 739 877 1,906 (61)
NET INCOME $ 1,435 $ 1,840 $ 3,457 $ 685
=============== =============== =============== ===============
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ 0.17 $ 0.22 $ 0.42 $ 0.08
=============== =============== =============== ===============
SHARES USED IN PER SHARE
CALCULATION 8,291 8,452 8,255 8,573
=============== ======== ====== =============== ===============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
Microtest, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
September 28, September 30,
1996 1995
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 3,457 $ 685
Adjustments to reconcile net income to net cash
provided by (used in) operating activites:
Depreciation and amortization 1,101 854
Unusual items net of related tax benefit - 5,386
Deferred rent - (16)
Changes in operating assets and liabilities:
Accounts receivable (973) (8,323)
Inventories 2,040 (1,591)
Prepaid expenses and other assets 525 (52)
Accounts payable 197 460
Accrued liabilities 790 (64)
Accrued payroll and employee benefits 108 1,046
Income taxes payable - (852)
Income taxes receivable 1,853 -
-------------- --------------
Net cash provided by (used in) operating activities 9,098 (2,467)
INVESTING ACTIVITES:
Purchases of equipment and leasehold
improvements (933) (1,040)
Acquisition of Optical Media International - (4,650)
Acquisition of Hotware - (450)
-------------- --------------
Net cash provided by (used in) investing activities (933) (6,140)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock and treasury stock 180 2,192
Reduction in income tax liability from disqualifying
dispositions of incentive stock options and
exercises of non-qualified stock options 39 1,667
Purchase of treasury stock - (1,919)
-------------- --------------
Net cash provided by financing activities 219 1,940
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,384 (6,667)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,907 31,590
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,291 $ 24,923
============== ==============
</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 nine months ended September 28, 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
(collectively, the "Company"). 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.
2. COMMITMENTS AND CONTINGENCIES
In September and October 1996, two shareholder lawsuits were filed against
the Company, Richard G. Meise, Richard R. Douglas and David C. Bolles in
6
<PAGE>
connection with reporting of interim results. The Company believes that
the shareholders' lawsuits are without merit and it intends to vigorously
defend against them.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe," "expect," "anticipate," and "project" and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements may include, but not be limited to, projections of revenue, income,
or loss, capital expenditures, plans for future operations, financing needs or
plans, and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, or otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements. Statements in this Quarterly
Report, including the Notes to the Condensed Consolidated Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements are set forth
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Results of Operations
- ---------------------
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 9/28/96 Change 9/30/95 9/28/96 Change 9/30/95
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $ 13,007 (14.2%) $ 15,154 $38,287 (8.4%) $41,811
- ---------------------------------------------------------------------------------------------------------
</TABLE>
During both the third quarter and the nine months ended September 28, 1996,
total revenues decreased compared to the same periods in 1995 due primarily to
increased competition in the Category 5 cable testing market.
7
<PAGE>
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 9/28/96 Change 9/30/95 9/28/96 Change 9/30/95
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit $ 7,936 (9.3%) $ 8,746 $ 22,551 (10.2%) $ 25,114
% of Total
Revenues 61.0% 57.7% 58.9% 60.1%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit decreased during the nine months ended September 28, 1996 compared
to the same period in 1995 primarily due to the Company's response to
competitive pricing pressures and an increased focus on lower margin
connectivity products. However, gross profit improved during the third quarter
of 1996 due to a change in the Company's discount structure stemming from the
initiation of a new manufacturers' representative program near the end of the
second quarter of 1996, Compas sales growth and increased software content in
its connectivity products.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 9/28/96 Change 9/30/95 9/28/96 Change 9/30/95
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales & $3,323 1.6% $3,272 $10,150 11.8% $9,076
Marketing
% of Total
Revenues 25.5% 21.6% 26.5% 21.7%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
For both the quarter ended and the nine months ended September 28, 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, as well as
the implementation of a new manufacturers' representative compensation program.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 9/28/96 Change 9/30/95 9/28/96 Change 9/30/95
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research & $1,586 1.5% $1,563 $4,642 2.3% $4,537
Development
% of Total
Revenues 12.2% 10.3% 12.1% 10.9%
</TABLE>
Research and development expenses increased in absolute dollars and as a
percentage of total revenues in both the third quarter and the nine months ended
September 28, 1996, compared with the same periods in 1995. The nominal increase
in absolute dollars is due to inflation and a higher number of prototypes
developed during the third quarter. To date, the Company has expensed all R&D
costs as incurred.
8
<PAGE>
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 9/28/96 Change 9/30/95 9/28/96 Change 9/30/95
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General & $1,028 (0.0%) $1,029 $2,982 (0.8%) $3,009
Administrative
% of Total
Revenues 7.9% 6.8% 7.8% 7.2%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
General and administrative expenses remained relatively flat in absolute dollars
in both the third quarter and the nine months ended September 28, 1996, compared
to the same periods in 1995.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 9/28/96 Change 9/30/95 9/28/96 Change 9/30/95
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Taxes $739 (30.1%) $1,057 $1,906 (42.7%) $3,329
(excluding income
tax benefit related to
purchased R&D)
Effective Tax
Rate 34.0% 33.4% 35.5% 35.4%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Company's effective tax rate experienced a nominal increase during both the
third quarter and the nine months ended September 28, 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 throughout the entire nine months September 28,
1996.
<TABLE>
<CAPTION>
Qtr. End Qtr. End Y-T-D Y-T-D
(in thousands) 9/28/96 Change 9/30/95 9/28/96 Change 9/30/95
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $1,435 22.0% $1,840 $3,457 404.7% $685
% of Total
Revenues 11.0% 12.1% 9.0% 1.6%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Net income decreased in both absolute dollars and as a percentage of total
revenues for the third quarter of 1996 as compared to the third quarter of 1995
and increased in both absolute dollars and as a percentage of total revenues for
the nine months ended September 28, 1996 as compared to the same period in 1995.
The decrease from the third quarter of 1996 as compared to the third quarter of
1995 is due primarily to a decrease in sales during the same time periods as
discussed above. The nine months ended September 30, 1995 included a net of tax
charge of $5.4 million of research and development charged off in connection
with the acquisition of Optical Media International and Hotware.
9
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company has financed its operations primarily through operating cash flows
and equity financings. At September 28, 1996, the Company had cash and cash
equivalents of $28.3 million. This represents a $8.4 million increase in cash
equivalents during the nine months ended September 28, 1996, due primarily to
reductions in inventory and income taxes receivable. 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.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
In September and October 1996, the Company, Richard G. Meise, Richard R.
Douglas and David C. Bolles were named as defendants in two shareholder lawsuits
brought in the Maricopa County Superior Court for the State of Arizona, entitled
James T. Zelloe, et al. v. Microtest, Inc. et al., Cause No. CV96-16655 and
Richard Fluegel et al. v. Microtest, Inc. et al., Cause No. CV96-19144. The
plaintiffs in these lawsuits purport to represent a class of plaintiffs who
purchased the Company's common stock between April 13, 1995 and January 17,
1996. The plaintiffs allege, among other things, that certain statements made by
the Company and its representatives, as well as the financial statements
contained in the Company's Quarterly Reports on Form 10-Q filed during 1995,
were false and misleading due to the Company's purported improper recognition of
revenue on certain sales of products to distributors and resellers in violation
of generally accepted accounting principles. More specifically, the plaintiffs
allege that certain sales of products to distributors and resellers were
contingent on resale and, as a result, the Company should not have recognized
revenue on such sales and did not properly reserve for returns on such sales.
Furthermore, according to the plaintiffs, the Company should have disclosed that
future demand for its products would be constrained by the alleged excess levels
of products held by its distributors as a result of the Company's purported
contingent sales in 1995. The lawsuits include causes of action for securities
fraud and common law fraud and seek unspecified damages and the recovery of
attorneys' fees and costs. The Company maintains that its statements and
financial statements were true and correct and that its recognition of revenue
was proper and in accordance with generally accepted accounting principles. The
Company believes that the shareholder class action lawsuits are without merit,
and it intends to file a motion to dismiss the lawsuits and to vigorously defend
against them.
The Company is from time to time involved in other legal proceedings of a
character normally incident to its business, including various claims and
pending actions against the Company seeking damages.
10
<PAGE>
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
None
Item 5. - Other Information
On September 4, 1996, the Board of Directors accepted the resignation of
David C. Bolles. Mr. Bolles founded Microtest in 1984 and has served on the
Board since then.
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
11
<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: November 8, 1996 /s/ Richard G. Meise
----------------------------
Richard G. Meise
Chief Executive Officer
Date: November 8, 1996 /s/ Richard R. Douglas
----------------------------
Richard R. Douglas
Chief Financial Officer
12
MICROTEST, INC.
EXHIBIT 11
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------- ------------------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 1,435 $ 1,840 $ 3,457 $ 685
================== =============== ================ ================
Common shares outstanding at end of period 8,128 8,010 8,128 8,010
Adjustment to reflect weighted average for
shares issued during period 1 (50) (25) 51
Adjustment for options and warrants calculated
under the treasury stock method:
Options 162 492 152 512
------------------ --------------- ---------------- ----------------
Common and equivalent shares outstanding 8,291 8,452 8,255 8,573
================== =============== ================ ================
Net income (loss) per share $ 0.17 $ 0.22 $ 0.42 $ 0.08
================== =============== ================ ================
</TABLE>
13
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 28,291
<SECURITIES> 0
<RECEIVABLES> 17,191
<ALLOWANCES> 361
<INVENTORY> 4,774
<CURRENT-ASSETS> 52,248
<PP&E> 7,986
<DEPRECIATION> 4,828
<TOTAL-ASSETS> 55,848
<CURRENT-LIABILITIES> 9,145
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 46,695
<TOTAL-LIABILITY-AND-EQUITY> 55,848
<SALES> 38,287
<TOTAL-REVENUES> 38,287
<CGS> 15,736
<TOTAL-COSTS> 33,510
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,363
<INCOME-TAX> 1,906
<INCOME-CONTINUING> 4,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,457
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
