SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MICROTEST, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
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<PAGE>
MICROTEST, INC.
4747 North 22nd Street
Phoenix, Arizona 85016
NOTICE AND PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 22, 1997
To our Shareholders:
The 1997 Annual Meeting of Shareholders (the "Annual Meeting") of
Microtest, Inc. (the "Company") will be held at 10:00 A.M., Arizona Time, on
Tuesday, July 22, 1997, at the La Posada Red Lion Resort, 4949 East Lincoln
Drive, Scottsdale, Arizona, for the following purposes:
1. To elect two Class I directors to the Board of Directors to
serve for a three-year term; and
2. To transact such other business as may properly come before
the Annual Meeting.
Each outstanding share of the Company's Common Stock entitles the
holder of record at the close of business on May 28, 1997, to vote at the Annual
Meeting or any adjournment thereof. Shares can be voted at the Annual Meeting
only if the holder is present or represented by proxy. A copy of the Company's
1996 Annual Report to Shareholders, which includes audited financial statements,
is enclosed. Management cordially invites you to attend the Annual Meeting.
By Order of the Board of Directors
/s/ Richard G. Meise
Phoenix, Arizona Richard G. Meise
June 5, 1997 President and Chief Executive Officer
IMPORTANT
SHAREHOLDERS ARE EARNESTLY REQUESTED TO SIGN, DATE AND MAIL THE ENCLOSED PROXY.
A POSTAGE-PAID ENVELOPE IS PROVIDED FOR MAILING IN THE UNITED STATES.
<PAGE>
MICROTEST, INC.
4747 North 22nd Street
Phoenix, Arizona 85016
PROXY STATEMENT
This Proxy Statement is furnished to the shareholders of Microtest,
Inc. (the "Company") in connection with the solicitation of proxies to be used
in voting at the Annual Meeting of Shareholders (the "Annual Meeting") to be
held on July 22, 1997. The enclosed proxy is solicited by the Board of Directors
of the Company. The proxy materials were mailed on or about June 5, 1997, to
shareholders of record at the close of business on May 28, 1997.
A person giving the enclosed proxy has the power to revoke it at any
time before it is exercised by either: (i) attending the Annual Meeting and
voting in person; (ii) duly executing and delivering a proxy bearing a later
date; or (iii) sending written notice of revocation to the Secretary of the
Company at 4747 North 22nd Street, Phoenix, Arizona 85016.
The Company will bear the cost of the solicitation of proxies,
including the charges and expenses of brokerage firms and others for forwarding
solicitation material to beneficial owners of the outstanding Common Stock of
the Company. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone or telegraph.
VOTING SECURITIES OUTSTANDING
Only holders of record of Common Stock at the close of business on May
28, 1997, will be entitled to vote at the Annual Meeting. At that date, there
were 8,130,983 shares of Common Stock outstanding. Each share of Common Stock is
entitled to one vote on all matters on which shareholders may vote. There is no
cumulative voting in the election of directors.
Votes cast by proxy or in person at the Annual Meeting will be
tabulated by the inspector of elections appointed for the meeting and such
inspector will determine whether or not a quorum is present. The inspector of
elections will treat abstentions as shares that are present and entitled to vote
for purposes of determining the presence of a quorum, but as unvoted for
purposes of determining the approval of any matter submitted to the shareholders
for a vote. If a broker indicates on the proxy that it does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will not be considered as present and entitled to vote with respect
to that matter.
ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of five
members. The present terms of William C. Turner and Dianne C. Walker, who are
Class I incumbent directors, will expire at the Annual Meeting. Mr. Turner and
Ms. Walker have been nominated for re-election as directors of the Company and,
unless otherwise noted thereon, the shares represented by the
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<PAGE>
enclosed proxy will be voted for the election of Mr. Turner and Ms. Walker as
directors of the Company. If either of them becomes unavailable for any reason,
or if a vacancy should occur before election (which events are not anticipated),
the shares represented by the enclosed proxy may be voted for such other person
or persons as may be determined by the holders of such proxy. The nominees
receiving the highest number of votes cast at the Annual Meeting will be
elected. The directors elected will serve for three years and until their
successors are duly elected and qualified.
INFORMATION CONCERNING DIRECTORS, NOMINEES AND OFFICERS
Information concerning the names, ages, terms, positions with the
Company and business experience of the Company's current directors, director
nominees and executive officers is set forth below.
<TABLE>
<CAPTION>
Term
----
Name Age Position Expires
- ---- --- -------- -------
<S> <C> <C> <C>
William C. Turner(2) 67 Director 1997
Dianne C. Walker (1)(2) 40 Director 1997
Richard G. Meise 61 Chairman of the Board, Chief 1998
Executive Officer and President
Steven G. Mihaylo (1)(2) 53 Director 1998
Roger C. Ferguson (1) 53 Director 1999
Rebecca S. Barker 38 Vice President of Communications ---
and Customer Service
Richard R. Douglas 65 Vice President of Operations, ---
Chief Financial Officer, Treasurer
and Secretary
Christopher C. Hudson 47 Vice President of Network ---
Management Products
Robert M. Tanner 59 Vice President of Worldwide ---
Field Operations
</TABLE>
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
3
<PAGE>
William C. Turner has served as a director of the Company since
February 1995. Mr. Turner has been the Chairman of the Board and Chief Executive
Officer of Argyle Atlantic Corporation, an international business and investment
consulting firm, since 1977. Since 1985, Mr. Turner has served as Chairman of
the International Advisory Council for Avon products, a publicly-held company
that manufactures cosmetics and related products. Mr. Turner has also served as
a director of Goodyear Tire and Rubber Company, a publicly-held company that
manufactures tires and related products, since 1978, and a director of
Rural/Metro Corporation, a publicly-held company that provides emergency
transport services, since 1993.
Dianne C. Walker has served as a consultant on electric utility merger
and acquisitions to various investment banking firms, including Bear Stearns and
Kidder Peabody, since 1990. From January 1983 to October 1989, Ms. Walker served
as an assistant Vice President of Pacific Telecom, Inc.'s Venture Capital
Portfolio. Pacific Telecom is an independent telephone company and a subsidiary
of PacifiCorp where Ms. Walker served as a Director of Mergers and Acquisitions
from May 1987 to October 1989. Ms. Walker currently is on the Board of Directors
of Comdial Corporation, a publicly-held company that manufactures telephone
equipment, as well as Catalina Marketing Corporation, a publicly-held point of
sale promotions firm. In addition, Ms. Walker serves on the Board of Directors
of Satellite Technology Management Wireless, a publicly-held wireless
communications service company and equipment manufacturer, and Arizona Public
Service, a utility company.
Richard G. Meise has been the President, Chief Executive Officer and a
director of the Company since September 1993. In March 1997, he was elected to
serve as the Chairman of the Board. Mr. Meise served as the Company's Executive
Vice President from June 1993 until September 1993. From February 1991 to June
1993, Mr. Meise was the President and Chief Executive Officer of Fluent, Inc., a
digital video network manufacturer. From 1989 to 1991, Mr. Meise served as the
President and Chief Executive Officer of Alloy Computer Products, Inc., a PC and
software products company. Mr. Meise was the President and Chief Operating
Officer of Banyan Systems, Inc., a publicly-held manufacturer of networking
software, from 1986 to 1989.
Steven G. Mihaylo has served as a director of the Company since August
1994. Since 1969, he has been the Chief Executive Officer of Inter-Tel, Inc., a
publicly-held company that designs, manufactures and services digital and analog
telephone systems and voice processing systems, and provides long distance
services. Mr. Mihaylo has also served as a director of MicroAge, Inc., a
publicly-held company that markets and distributes information technology
products and services, since 1988.
Roger C. Ferguson has served as a director of the Company since
September 1993. He served as Chairman of the Board from March 1994 to March
1997. Mr. Ferguson has been the Chief Executive Officer of Datatools, Inc., a
software tools manufacturer, since August 1993. From December 1987 to June 1993,
Mr. Ferguson was the Chief Operating Officer of Network General, a publicly-held
company that manufactures diagnostic products for local area networks.
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<PAGE>
Rebecca S. Barker has served as the Company's Vice President of
Communications and Customer Service since January 1995. She served as the
Company's Director of Customer Service from July 1993 to December 1994. From
November 1991 to July 1993, she served in various management positions within
the Company. From January 1985 to November 1991, Ms. Barker was a Product
Manager at Integris, an integration subsidiary of Bull Information Systems.
Richard R. Douglas has served as the Company's Vice President, Chief
Financial Officer, and Secretary since December 1993 and has announced his
intent to retire effective October 1, 1997. He served as President of The
Douglas Group, a consulting firm, from July 1989 to October 1993. From June 1985
to May 1989, Mr. Douglas was the Corporate Senior Vice President of Marketing
and Service for Storage Technology Corp., a publicly-held company that
manufactures peripheral storage devices. From 1960 to 1985, Mr. Douglas served
in various executive positions for Honeywell, Inc., a publicly-held company that
manufactures automation, avionics, and related products.
Christopher C. Hudson has served as the Company's Vice President of
Network Management Products since July 1993. From May 1986 to July 1993, Mr.
Hudson was the Vice President of GN Navtel, Inc., a Canadian communications test
equipment designer and manufacturer.
Robert M. Tanner has served as the Company's Vice President of
Worldwide Field Operations since May 1994. From February 1992 to April 1994, Mr.
Tanner was the Vice President of U.S. Sales for Data General Corporation, a
publicly-held company that manufactures computers and computer peripheral
equipment. From February 1988 to October 1991, he was the Senior Vice President
of Worldwide Field Operations of Sequent Computer Systems, Inc., a publicly-held
computer manufacturer.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended December 31, 1996, the Board of Directors of the
Company met or acted by written consent on nine occasions. Each of the Company's
directors attended more than 75% of the meetings of the Board of Directors and
of the meetings held by committees of the Board on which such director served.
Compensation Committee. The Compensation Committee of the Board of
Directors, which met or acted by written consent four times during 1996, reviews
all aspects of compensation of officers of the Company and determines or makes
recommendations on such matters to the full Board of Directors. The report of
the Compensation Committee for 1996 is set forth below.
Audit Committee. The Audit Committee, which met four times during 1996,
represents the Board of Directors in evaluating the quality of the Company's
financial reporting process and
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<PAGE>
internal financial controls through consultations with the independent auditors,
internal management and the Board of Directors.
Other Committees. The Company does not maintain a standing nominating
committee or other committees performing similar functions.
DIRECTOR COMPENSATION
During 1996, the Company paid each non-employee director an $8,000
annual retainer for their service as a Board member plus a $2,000 annual
retainer for each committee membership. In addition, non-employee directors
receive $1,500 per Board meeting attended, $1,000 per committee meeting
attended, and $750 per telephonic Board or committee meeting attended.
On April 13, 1995, William C. Turner was granted a non-qualified option
covering 15,000 shares of the Company's common stock at an exercise price of
$21.25 in exchange for his services as a consultant to the Company. On January
26, 1996, Mr. Turner accepted the Company's offer to cancel the original grant
in light of the significant decrease in the price of the Company's common stock
and to replace it with a non-qualifed option covering 5,558 shares at the then
fair market value of $7.875 per share. Under this option, 555 shares vested
immediately, 1,667 vest six months after the date of grant, 1,667 vest twelve
months after the date of grant, and the remaining 1,669 vest eighteen months
after the date of grant.
The Company also has adopted two stock option plans under which options
are granted to non-employee directors. Under the Non-Employee Directors Stock
Option Plan adopted in 1993 (the "1993 Directors Plan"), each non-employee
director is entitled to a one-time grant of 10,000 options upon his or her first
election as a director (or, for directors then in office, at the time the plan
was adopted). One-fourth of the options vest immediately upon grant, and the
remainder vest in equal increments annually over a three-year period. The
following table sets forth the options received by the non-employee directors
pursuant to the 1993 Directors Plan.
OPTION GRANTS PURSUANT TO 1993 DIRECTORS PLAN
<TABLE>
<CAPTION>
Number of Securities
Date of Grant Underlying Stock Options Exercise Price
------------- ------------------------ --------------
<S> <C> <C> <C>
Roger C. Ferguson 9/28/93 10,000 $ 5.50
Dianne C. Walker 1/28/94 10,000 $ 9.75
Steven G. Mihaylo 8/8/94 10,000 $12.25
William C. Turner 2/1/95 10,000 $23.50
</TABLE>
None of the non-employee directors listed above exercised any of their
options under the 1993 Directors Plan during 1996.
6
<PAGE>
In January 1994, the Company adopted an Annual Non-Employee Directors
Stock Option Plan (the "Annual Directors Plan"). Under the Annual Directors
Plan, each non-employee director is entitled to a grant of 5,000 options each
year at the end of the third business day after public announcement of the
Company's annual earnings. The options vest six months and a day after the date
of grant. The following table sets forth the options received by the
non-employee directors pursuant to the Annual Directors Plan.
OPTION GRANTS PURSUANT TO ANNUAL DIRECTORS PLAN
<TABLE>
<CAPTION>
Number of Securities
Date of Grant Underlying Stock Options Exercise Price
------------- ------------------------ --------------
<S> <C> <C> <C>
Roger C. Ferguson 1/28/94 5,000 $9.7500
2/7/95 5,000 $20.2500
2/16/96 5,000 $7.7500
2/14/97 5,000 $9.6875
Steven G. Mihaylo 2/7/95 5,000 $20.2500
2/16/96 5,000 $7.7500
2/14/97 5,000 $9.6875
William C. Turner 2/7/95 5,000 $20.2500
2/16/96 5,000 $7.7500
2/14/97 5,000 $9.6875
Dianne C. Walker 1/28/94 5,000 $9.7500
2/7/95 5,000 $20.2500
2/16/96 5,000 $7.7500
2/14/97 5,000 $9.6875
</TABLE>
None of the non-employee directors listed above exercised any of their
options under the 1993 Annual Directors Plan during 1996.
EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended December 31, 1996, 1995 and 1994, of those persons who were,
at December 31, 1996, (i) the Chief Executive Officer, and (ii) the other
executive officers of the Company whose annual salary and bonus exceeded
$100,000 (collectively, the "Named Officers").
7
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
-------------------------------------------- ------------------------------
Securities
Underlying
Name and Other Annual Stock All Other
Principal Position Year Salary Bonus Compensation Options Compensation(1)
------------------ ---- ------ ----- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard G. Meise 1996 $ 200,000 $ 83,750 (2) $ 6,000 (3) 15,887 $69,963
President & Chief Executive 1995 200,000 83,750 (2) 6,000 (3) 35,810 2,310
Officer 1994 149,874(4) 166,025 (2) 6,000 (3) -- 2,310
Rebecca M. Barker 1996 $83,038 -- -- 11,735 $28,693
Vice President of Communications &
Customer Service (5)
Richard R. Douglas 1996 $ 150,000 $92,125 (2) -- 9,982 $ 1,817
Vice President of Operations, Chief 1995 150,000 92,125 (2) -- 22,500 2,250
Financial Officer, Treasurer, and 1994 110,000 121,500 (2) -- -- 1,650
Secretary
Christopher C. Hudson 1996 $ 135,000 -- -- 7,985 $39,262
Vice President of Research and 1995 135,000 -- -- 18,000 2,025
Development 1994 125,000 $60,000 -- 45,000 1,875
Robert M. Tanner 1996 $ 125,000 -- $ 60,000 (6) 7,985 $ 42,247
Vice President of Worldwide 1995 125,000 -- 58,910 (7) 18,000 1,621
Sales 1994 84,135(8) -- 60,717 (9) 100,000 505
</TABLE>
(1) Detail of amounts reported in the "All Other Compensation" column for 1996
is provided in the table below. Split dollar insurance represents the
present value of the interest projected to accrue for the employee's
benefit on the current year's insurance premium paid by the Company. For a
discussion of the Company's Split-dollar insurance program, see the report
of the Compensation Committee for 1996 set forth below.
<TABLE>
<CAPTION>
Item Mr. Meise Ms. Barker Mr. Douglas Mr. Hudson Mr. Tanner
<S> <C> <C> <C> <C> <C>
Company Contribution to Defined $2,375 $975 $1,817 $1,636 $755
Contribution Savings Plans
Split Dollar Insurance Premium Value $ 67,588 $ 27,718 -- $ 37,626 $ 41,492
-------- -------- -- -------- --------
Total All Other Compensation $ 69,963 $28,693 $ 1,817 $ 39,262 $ 42,247
-------- ------- ------- - -------- --------
</TABLE>
(2) Represents the portion of 1994 deferred compensation which vested during
the fiscal year ended December 31. For a discussion of the Company's
Deferred Compensation Program, see the report of the Compensation Committee
for 1996 set forth below.
(3) Represents a car allowance.
(4) Excludes reimbursed moving expenses of $31,007.
(5) Ms. Barker was hired by the Company in November 1991 and later named Vice
President of Communications and Customer Service.
(6) Represents sales commission of $60,000 for the fiscal year ended December
31, 1996.
(7) Represents sales commissions of $58,910 for the fiscal year ended December
31, 1995.
(8) Excludes reimbursed moving expenses of $27,586.
(9) Represents sales commissions of $60,717 for the fiscal year ended December
31, 1994.
8
<PAGE>
The following table sets forth information with respect to the grants
of stock options pursuant to the Company's Long-Term Incentive Plan during the
fiscal year ended December 31, 1996, to the Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------ Potential Realizable
Value at Assumed
% of Total Annual Rates of
Number of Options Exercise Stock Price
Securities Granted to or Base Appreciation for
Underlying Employees Price Option Term(3)
Options in Fiscal (per Expiration ----------------
Name Granted(#)(1) Year share)(2) Date 5%($) 10%($)
---- ------------- ---- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Meise 15,887 (4) 2.82% $7.875 1/26/06 $78,681 $199,393
Rebecca M. Barker 1,996 (5) 0.35% $7.875 1/26/06 $9,885 $25,051
Rebecca M. Barker 5,989 (6) 1.06% $7.875 1/26/06 $29,661 $75,166
Rebecca M. Barker 3,750 (7) 0.67% $9.625 12/23/06 $22,699 $57,524
Richard R. Douglas 9,982 (8) 1.77% $7.875 1/26/06 $49,436 $125,281
Christopher C. 7,985 (9) 1.42% $7.875 1/26/06 $39,546 $100,218
Hudson
Robert M. Tanner 7,985 (9) 1.42% $7.875 1/26/06 $39,546 $100,218
</TABLE>
(1) On October 10, 1995, the Company granted options with an exercise price of
$17.75, the fair market value on the date of grant. On January 26, 1996,
the Company gave optionees the opportunity to cancel the October 10, 1995,
grants in light of the significant decrease in the price of the Company's
common stock and to exchange them for options granted January 26, 1996,
reducing the number of shares of the Company's common stock subject to each
option in direct proportion to the reduction in the exercise price.
(2) All options were granted at the fair market value (the closing price of the
common stock on the Nasdaq National Market, as reported in the Wall Street
Journal) on the date of grant. The exercise price and tax withholding
obligations related to exercise may be paid by delivery of already owned
shares or by offset of the underlying shares, subject to certain
conditions.
(3) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation. Actual gains, if any, on stock option exercises are dependent
on the future performance of the common stock, overall stock market
conditions, as well as the optionholder's continued employment through the
vesting period. The amounts reflected in this table may not necessarily be
achieved.
(4) Non-qualified stock options granted on January 26, 1996, which vest 1,588
immediately and the remainder in 2,859 share increments over a five-year
period beginning January 26, 1997.
(5) Incentive stock options granted on January 26, 1996, which vest 199
immediately and the remainder in 359 share increments over a five-year
period beginning January 26, 1997.
(6) Non-qualified stock options granted on January 26, 1996, which vest 598
immediately and the remainder in 1,078 share increments over a five-year
period beginning January 26, 1997.
(7) Non-qualified stock options granted on December 23, 1996, which vest in 750
share increments over a five-year period beginning December 26, 1997.
(8) Non-qualified stock options granted on January 26, 1996, which vest 998
immediately and the remainder in 1,796 share increments over a five-year
period beginning January 26, 1997.
(9) Non-qualified stock options granted on January 26, 1996, which vest 798
immediately and the remainder in 1,437 share increments over a five-year
period beginning January 26, 1997.
9
<PAGE>
The following table sets forth information with respect to
the exercise and value of stock options granted pursuant to the Company's
Incentive Stock Option Plan, Non-Qualified Stock Option Plan and Long-Term
Incentive Plan, during the fiscal year ended December 31, 1996, to the Named
Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at Fiscal
Shares at Fiscal Year End (#) Year End ($) (2)
Acquired on Value ---------------------- ----------------
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ------------- --------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Meise 0 $ ---- 131,589 64,298 $587,980 $251,809
Rebecca S. Barker 500 $2,975 799 10,936 $1,498 $13,943
Richard R. Douglas 0 $ ---- 76,499 42,483 $169,748 $89,468
Christopher C. 0 $ ---- 22,799 18,186 $97,748 $61,599
Hudson
Robert M. Tanner 0 $ ---- 25,799 57,186 $7,748 $25,974
</TABLE>
(1) Represents the selling price of the underlying securities on the date of
exercise minus the exercise price of the options.
(2) Represents the difference between the closing price of the Company's common
stock on December 31, 1996 and the exercise price of the options.
EMPLOYMENT AGREEMENTS
The Company's employment agreements with Richard G. Meise and Richard
R. Douglas expired on December 31, 1996. Accordingly, the Company currently does
not have employment agreements with any of its executive officers.
Richard R. Douglas has announced his intention to retire effective
October 1, 1997. The Company has agreed to continue his full salary until
December 31, 1997, and Mr. Douglas will continue as a consultant to the Company
for a period of nine months following the date of his retirement. In addition,
the Company has agreed to accelerate the vesting of all unvested stock options
to vest at the end of 1997 and provide nine months following Mr. Douglas' last
day as a consultant to exercise outstanding options.
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<PAGE>
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company's Compensation Committee (the "Committee") is composed
entirely of independent outside members of the Company's Board of Directors. The
Committee reviews and approves each of the elements of the executive
compensation program of the Company and periodically assesses the effectiveness
and competitiveness of the program in total. In addition, the Committee
administers the key provisions of the executive compensation program and reviews
with the Board of Directors in detail all aspects of compensation for the
Company's executives. The Committee has furnished the following report on
executive compensation:
Overview and Philosophy
The Company's compensation program for executive officers is primarily
comprised of base salary, annual bonus and long-term incentives in the form of
stock option grants. Executives also participate in various other benefit plans,
including medical and retirement plans, generally available to all employees of
the Company.
The Company's philosophy is to pay base salaries to executives that
enable the Company to attract, motivate and retain highly qualified executives.
The annual bonus program is designed to reward for performance based on
financial results. Stock option grants are intended to result in no reward if
the stock price does not appreciate, but may provide substantial rewards to
executives as shareholders benefit from stock price appreciation.
Base Salary
Each Company executive receives a base salary which, when aggregated
with their maximum bonus amount, is intended to be competitive with similarly
situated executives in the electronics industry. In setting base salaries for
1995, the Committee hired Wyatt Company, independent compensation consultants,
who presented a study of comparable levels of compensation of the top five
executives in approximately a dozen comparable technology companies. All three
studies indicated that the base salaries at Microtest were significantly lower
than comparable companies for the CEO and CFO. The Company targets base pay at
the level required to attract and retain highly qualified executives. In
determining salaries, the Committee also takes into account individual
experience and performance and specific needs particular to the Company. The
Company did not increase the base salaries for executive officers during 1996.
Annual Bonus Program
In addition to a base salary, executives are eligible to receive an
annual bonus. At the beginning of each year, the Committee establishes a
targeted maximum bonus for each executive and establishes performance criteria
for the executive to achieve the bonus. The amount of the targeted bonus and the
performance criteria vary with the position and role of the executive within the
Company, although all bonuses are significantly tied to the Company's financial
11
<PAGE>
performance. Revenue and financial performance improved from 1995 to 1996;
however, the Company failed to achieve the internal goals set by the Committee.
Therefore, no annual bonuses were earned in 1996.
Deferred Compensation Program
In 1993, the Company's Chief Executive Officer and Chief Financial
Officer entered into employment agreements which, among other things, provided
for a one-year term of employment (through December 31, 1994), a minimum salary
and a bonus opportunity. (See "Employment Agreements" above.) Pursuant to the
employment agreements, the Company's Compensation Committee developed a bonus
program for these officers based primarily on exceeding targeted income from
operations for 1994. Based on the financial performance of the Company during
these officers' leadership, the Compensation Committee determined that it would
be in the best interests of the Company to extend Messrs. Meise's and Douglas'
employment agreements through December 31, 1996, and to subject a portion of
their 1994 bonus program to vesting and deferred payout provisions as an
inducement for these officers to remain with the Company.
In September 1994, the Company and these individuals amended their
employment agreements to implement these terms. As revised, the bonus program
provided that only 33% of the deferred bonus amount vested at the end of 1994,
33.5% of the deferred bonus amount vested at the end of 1995, and the remaining
33.5% vested on December 31, 1996. The deferred amounts will be invested at the
direction of the employees in various instruments and securities and held in
trust for their benefit and be paid out in monthly installments beginning
January 1998 and ending five years later. The revised program also provides for
immediate vesting upon a change in control of the Company (as defined) or a
termination of the employee by the Company without cause (as defined) or upon
disability or death. Under this program Mr. Meise has deferred $250,000 and Mr.
Douglas has deferred $275,000.
Options
The Company believes that it is important for executives to have an
equity stake in the Company and, toward this end, makes option grants to key
executives from time to time. In making option awards, the Committee reviews the
level of awards granted to executives at other technology companies, the awards
granted to other executives within the Company and the individual officer's
specific role at the Company.
In January 1994, the Internal Revenue Service issued proposed
regulations implementing a new limitation on the tax deduction a publicly-held
company may take on executive compensation. Gains realized on non-qualified
stock options or incentive stock options that are subject to a "disqualifying
disposition" are subject to the new tax limitation unless they meet certain
requirements. During 1996, there were no losses associated with the new
deduction limitation.
12
<PAGE>
Report on Repricing of Options
In August 1995, the Committee approved stock option grants to several
officers and other employees. These options were granted at the then fair market
value of $22.50 with various vesting criteria and expired 10 years after the
grant date. In light of the significant decline in market value of the Company's
common stock, the Committee decided to cancel those grants and exchange them for
options granted October 10, 1995, at the then fair market value of $17.75,
reducing the number of shares subject to each option by approximately 10%. The
options contained various vesting criteria and expired 10 years after the grant
date. Subsequent to that repricing, the market value of the Company's common
stock again declined significantly. In light of this, the Committee decided to
give optionees the opportunity cancel those grants and to exchange them for
options granted January 26, 1996, at the then fair market value of $7.875,
reducing the number of shares subject to each option in direct proportion to the
reduction in exercise price. The options contain various vesting criteria and
expire 10 years after the grant date.
The following table sets forth information with respect to the
repricing of options held by any executive officer during the last ten completed
fiscal years.
TEN YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Number of Length of
Securities Market Price Original Option
Underlying of Stock at Exercise Price Term Remaining
Options Time of at Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended (#) Amendment ($) Amendment ($) Price Amendment
---- ---- ----------- ------------- ------------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Meise 1/26/96 15,887 $7.875 $17.75 $7.875 117 Months
10/10/95 40,000 $17.750 $22.50 $17.750 119 Months
Rebecca S. Barker 1/26/96 5,989 $7.875 $17.75 $7.875 117 Months
1/26/96 1,996 $7.875 $17.75 $7.875 117 Months
10/10/95 15,000 $17.750 $22.50 $17.750 119 Months
10/10/95 5,000 $17.750 $22.50 $17.750 119 Months
Richard R. Douglas 1/26/96 9,982 $7.875 $17.75 $7.875 117 Months
10/10/95 25,000 $17.750 $22.50 $17.750 119 Months
Christopher C. Hudson 1/26/96 7,985 $7.875 $17.75 $7.875 117 Months
10/10/95 20,000 $17.750 $22.50 $17.750 119 Months
Robert M. Tanner 1/26/96 7,985 $7.875 $17.75 $7.875 117 Months
10/10/95 20,000 $17.750 $22.50 $17.750 119 Months
</TABLE>
13
<PAGE>
Other Benefits
Executive officers are eligible to participate in benefit programs
designed for all full-time employees of the Company. These programs include
medical, disability and life insurance and a qualified retirement program
allowed under Section 401(k) of the Internal Revenue Code, as amended (the
"Code").
In addition, the Company has purchased split-dollar life insurance for
certain key personnel, including officers of the Company, to assist the Company
in attracting, retaining and rewarding key personnel by providing tax-deferred
capital accumulation. Under this plan, the Company pays the annual split dollar
life insurance premium in return for which the Company retains an assignment
against the policy cash value and death benefit equal to its cumulative
contributions. The Company will recover its total contributions at the earlier
of (i) the date on which the cash surrender value equals the Company's total
contributions or (ii) the death, termination or retirement of the insured. Upon
retirement, the insured may keep his or her shares of the policy to provide
continuing death benefit; surrender the policy for the cash surrender value; or
annuitize the cash value for supplemental retirement income.
Chief Executive Officer Compensation
In September 1993, Richard G. Meise was hired as the Company's Chief
Executive Officer in an effort to improve the Company's financial performance.
At the time he was hired, Mr. Meise entered into an employment agreement with
the Company providing for an annual base salary, a bonus plan and stock options.
As a result of negotiations between Mr. Meise and the Company and based on the
factors and criteria discussed above, Mr. Meise's annual base salary was set at
$132,000. Mr. Meise's annual base salary was set at a relatively low level, with
the bonus plan and stock options providing him with the incentive to improve the
Company's financial performance.
Mr. Meise has been granted options to purchase a total of 235,887
shares of the Company's common stock, 20,000 of which were granted for his work
as Chief Operating Officer and 200,000 of which were granted in connection with
his promotion to Chief Executive Officer. Mr. Meise was granted 35,810
additional stock options in 1995, but subsequently exchanged them for 15,887
stock options granted in 1996. All options were granted at fair market value and
expire ten years after the grant date. The options have exercise prices ranging
from $5.25 per share to $7.875 per share with various vesting periods.
During 1996, Mr. Meise received an annual base salary of $200,000. In
addition, Mr. Meise vested $83,750 in 1994 deferred compensation which is
subject to deferred payout provisions as described above. Mr. Meise's employment
agreement with the Company, which expired on December 31, 1996, has not been
renewed or extended. The Committee believes that the stock options previously
granted to Mr. Meise provide him with sufficient incentive to improve the
Company's financial performance.
14
<PAGE>
This report is made by Dianne C. Walker and Steven G. Mihaylo, who
served on the Company's Compensation Committee for all of 1996.
COMPENSATION COMMITTEE
Dianne C. Walker Steven G. Mihaylo
15
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The graph below compares cumulative total return of the Company, the
Standard & Poor's (S&P) 500 Stock Index and the H & Q Technology Index from
October 30, 1992 (the date the Company went public) to December 31, 1996. The
graph assumes that $100 was invested on October 30, 1992, and any dividends were
reinvested.
MICROTEST, INC. STOCK PERFORMANCE
<TABLE>
<CAPTION>
Oct 30 Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec-
92 92 93 93 93 93 94 94 94 94
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Microtest, 100.00 91.18 52.94 39.71 32.35 54.41 51.47 82.35 92.65 139.71
Inc.
H&Q
Technology 100.00 112.07 119.08 122.11 124.71 131.59 136.44 124.82 142.33 158.07
S&P 500 100.00 101.67 109.24 109.77 112.61 115.22 110.05 111.32 116.76 116.74
Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec-
95 95 95 95 96 96 96 96
Microtest, 126.47 130.88 116.18 58.52 41.18 46.32 52.85 57.35
Inc.
H&Q
Technology 177.00 220.80 249.54 236.35 240.90 258.05 273.93 293.74
S&P 500 128.11 148.34 151.49 160.61 169.23 176.83 182.29 197.49
</TABLE>
16
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely upon a review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that, with the exception of filings detailed below, during the
Company's preceding fiscal year all Section 16(a) filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were complied
with except (i) Hightech Investments Limited Partnership filed two late Forms 4
with respect to the sale of 150,000 shares of stock in April 1996, and the sale
of 50,000 shares of stock in June 1996; (ii) Teresa Poppen filed a late Form 4
with respect to the sale of 9,666 shares of stock in June 1996; and (iii)
Rebecca Barker filed a late Form 3 with respect to her election as an executive
officer of the Company in January 1996.
17
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May 12, 1997, the number and
percentage of outstanding shares of common stock beneficially owned by each
person known by the Company to beneficially own more than 5% of such stock and
by each director and Named Officer of the Company and by all directors and Named
Officers of the Company as a group.
Name and Address of Shares
Beneficial Owner (1) Beneficially Owned Percent Owned
-------------------- ------------------ -------------
High Tech Investments Limited
Partnership (2) 546,782 6.7%
Richard G. Meise (3) 209,856 2.6%
Richard R. Douglas (4) 114,597 1.4%
Robert M. Tanner (5) 56,402 *
Christopher C. Hudson (6) 43,653 *
William C. Turner (7) 21,390 *
Dianne C. Walker (8) 20,000 *
Roger C. Ferguson (9) 19,500 *
Steven G. Mihaylo (10) 17,500 *
Rebecca S. Barker (11) 13,786 *
All directors and Named Officers
as a group (10 persons) (12) 516,684 6.4%
- ---------------------------
* Represents less than 1% of the Company's outstanding common stock.
(1) To the Company's knowledge, the persons named in the table have sole voting
and sole investment power with respect to all shares of common stock shown
as beneficially owned by them, subject to community property laws, where
applicable, and the information contained in the footnotes hereunder. The
address of Ms. Walker, Ms. Barker and Messrs. Meise, Ferguson, Mihaylo,
Turner, Douglas, Hudson and Tanner is c/o Microtest, Inc., 4747 North 22nd
Street, Phoenix, Arizona 85016.
18
<PAGE>
(2) Represents shares held by High Tech Investments Limited Partnership, as to
which David Bolles may be deemed to be the beneficial owner by virtue of
his status as general partner of the partnership. Mr. Bolles is the founder
and the former Chairman of the Board of the Company.
(3) Represents 184,448 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days and 25,804 shares held by Mr.
Meise. Does not include 11,439 shares issuable upon exercise of other
options. Mr. Meise is the Chairman of the Board, President and Chief
Executive Officer of the Company.
(4) Represents 111,795 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days and 2,802 shares held by Mr.
Douglas. Does not include 7,187 shares issuable upon exercise of other
options. Mr. Douglas is the Vice President of Operations and Chief
Financial Officer.
(5) Represents 56,402 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days. Does not include 26,583 shares
issuable upon exercise of other options. Mr. Tanner is the Vice President
of Worldwide Field Operations.
(6) Represents 43,486 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days and 167 shares held by Mr.
Hudson. Does not include 32,499 shares issuable upon exercise of other
options. Mr. Hudson is the Vice President of Network Management Products.
(7) Represents 21,390 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days. Does not include 9,168 shares
issuable upon exercise of other options. Mr. Turner is a director of the
Company.
(8) Represents 20,000 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days. Does not include 5,000 shares
issuable upon exercise of other options. Ms. Walker is a director of the
Company.
(9) Represents 19,500 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days. Does not include 5,000 shares
issuable upon exercise of other options. Mr. Ferguson is a director of the
Company.
(10) Represents 17,500 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days. Does not include 7,500 shares
issuable upon exercise of other options. Mr. Mihaylo is a director of the
Company.
(11) Represents 13,286 shares issuable upon exercise of options that either are
exercisable immediately or within 60 days and 500 shares held by Ms.
Barker. Does not include 17,849 shares issuable upon exercise of other
options. Ms. Barker is the Vice President of Communications and Customer
Service.
(12) Includes all shares included in notes (3) through (11) above.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
The Company believes all transactions it has entered into with
affiliates are at arm's length and on terms equivalent or similar to terms under
which the Company would conduct business with unaffiliated third parties.
RELATIONSHIP WITH
INDEPENDENT ACCOUNTANTS
The principal independent public accounting firm utilized by the
Company during the fiscal year ended December 31, 1996, was Deloitte & Touche
LLP, independent certified public accountants (the "Auditors"). It is presently
contemplated that the Auditors will be retained as the principal accounting firm
to be utilized by the Company during the current fiscal year. A representative
of the Auditors will attend the Annual Meeting for the purpose of responding to
appropriate questions and will be afforded an opportunity to make a statement if
the Auditors so desire.
19
<PAGE>
SHAREHOLDER PROPOSALS
The Board of Directors will consider proposals from shareholders for
nominations to the class of directors whose terms expire at the 1998 Annual
Meeting of Shareholders that are made in writing to the Secretary of the
Company, are received at least 90 days prior to the 1998 Annual Meeting and
contain sufficient background information concerning the nominee to enable
proper judgment to be made as to his or her qualifications, as more fully
provided in the Company's Certificate of Incorporation and Bylaws. Proposals of
shareholders as to other matters intended to be presented at the 1998 Annual
Meeting must be received by the Company by January 10, 1998, for inclusion in
the Company's proxy materials relating to such Meeting.
OTHER MATTERS
The Board of Directors does not intend to present at the Annual Meeting
any matters other than those described herein and does not presently know of any
matters that will be presented by other parties.
MICROTEST, INC.
/s/ Richard G. Meise
Richard G. Meise
President and Chief Executive Officer
June 5, 1997
20
<PAGE>
This Proxy is Solicited on Behalf of the Board of Directors
MICROTEST, INC.
1997 ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Richard G. Meise and Richard R.
Douglas, or any one of them acting in the absence of the other with full powers
of substitution, the true and lawful attorneys and proxies for the undersigned
and to vote, as designated below, all shares of Common Stock of MICROTEST, INC.
(the "Company") that the undersigned is entitled to vote at the Annual Meeting
of Shareholders (the "Meeting") to be held on Tuesday, July 22, 1997, at 10:00
a.m., Arizona Time, at the La Posada Red Lion Resort, 4949 East Lincoln Drive,
Scottsdale, Arizona, and at any and all adjournments thereof, and to vote all
shares of Common Stock which the undersigned would be entitled to vote, if then
and there personally present, on the matters set forth below:
(Continued, and tobe marked, dated and signed, on the other side)
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
<PAGE>
<TABLE>
<CAPTION>
Please mark
your votes as [X]
indicated in
this example
<S> <C> <C> <C>
WITHHELD
FOR FOR ALL
1. ELECTION OF TWO DIRECTORS: [ ] [ ] THIS PROXY WILL BE VOTED AS DIRECTED OR, IF
VOTE FOR nominees listed below CONTRARY DIRECTION IS INDICATED, WILL BE VOTED
FOR THE ELECTION OF DIRECTOR NOMINEES, AND AS
William C. Turner SAID PROXIES DEEM ADVISABLE ON SUCH OTHER
Dianne C. Walker MATTERS AS MAY COME BEFORE THE MEETING.
WITHHELD FOR:(Write that nominee's name in the space povided below.)
________________________________________________________________________________
______
|
|
|
Signature ___________________________________________Signature ___________________________________________Date______________________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such.
- ------------------------------------------------------------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
===============================================
PLEASE PRESENT THIS TICKET FOR ADMISSION TO THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
TUESDAY, JULY 22, 1997, AT 10:00 A.M., ARIZONA
TIME, AT THE LA POSADA RED LION RESORT, 4949
EAST LINCOLN DRIVE, SCOTTSDALE, ARIZONA.
===============================================
</TABLE>
