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 March 29, 1997
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 May 9, 1997, 8,130,983 shares of the registrant's common stock were
outstanding.
This document contains 15 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 8-10
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
Exhibit 99 - Private Securities Litigation Reform Act of 1995 Safe
Harbor Complaince Statement for Forward-Looking Statements 14 - 15
2
<PAGE>
PART I. FINANCIAL STATEMENTS
Microtest, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 29, December 31,
1997 (unaudited) 1996
---------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,482 $ 10,282
Accounts receivable - less allowance for doubtful
accounts of $723 and $582, respectively and less
returns reserve of $1,446 and $3,030, respectively 12,006 17,544
Inventories - net 8,201 6,163
Prepaid expenses 1,503 823
Income taxes receivable 689 291
Deferred income taxes 3,121 3,121
-------- --------
Total current assets 33,002 38,224
PROPERTY, PLANT AND EQUIPMENT - less accumulated
depreciation of $5,320 and $4,943, respectively 3,676 3,642
INTANGIBLES AND OTHER ASSETS 789 832
DEFERRED INCOME TAXES 615 615
-------- --------
TOTAL $ 38,082 $ 43,313
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,743 $ 5,579
Accrued liabilities 3,268 4,983
Accrued payroll and employee benefits 1,030 1,079
-------- --------
Total liabilities 7,041 11,641
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value - authorized, 15,000,000 shares;
issued 8,159,058 and 8,159,058 shares 8 8
Additional paid-in capital 32,596 32,593
Deficit (1,134) (485)
Common stock in treasury at cost - 27,476 and 27,970 (429) (444)
-------- --------
Total stockholders' equity 31,041 31,672
-------- --------
TOTAL $ 38,082 $ 43,313
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
Microtest, Inc.
Condensed Consolidated Statements of Income (unaudited)
(In thousands)
Three Months Ended
------------------------
March 29, March 30,
1997 1996
--------- ---------
TOTAL REVENUES $ 11,113 $ 11,960
TOTAL COST OF SALES 4,347 5,001
-------- --------
GROSS PROFIT 6,766 6,959
OPERATING EXPENSES:
Sales and marketing 5,025 3,403
Research and development 2,035 1,611
General and adminstrative 1,237 1,060
-------- --------
Total operating expenses 8,297 6,074
(LOSS)/INCOME FROM OPERATIONS (1,531) 885
INVESTMENT INCOME 118 215
-------- --------
(LOSS)/INCOME BEFORE INCOME TAXES (1,413) 1,100
INCOME TAX (BENEFIT)/PROVISION (427) 393
-------- --------
NET (LOSS)/INCOME $ (986) $ 707
======== ========
NET (LOSS)/INCOME PER COMMON AND
EQUIVALENT SHARE $ (0.12) $ 0.09
======== ========
SHARES USED IN PER SHARE CALCULATION 8,095 8,200
======== ========
See notes to condensed consolidated financial statements
4
<PAGE>
Microtest, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
March 29, March 30,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss)/income $ (986) $ 707
Adjustments to reconcile net (loss)/income to net cash
provided by (used in) operating activities:
Depreciation and amortization 529 382
Changes in operating assets and liabilities:
Accounts receivable 5,538 3,205
Inventories (2,038) (19)
Prepaid expenses and other assets (789) 63
Accounts payable (2,836) (1,998)
Accrued liabilities (1,893) (598)
Accrued payroll and employee benefits (50) 182
Income taxes receivable (219) 396
-------- --------
Net cash provided by (used in) operating activities (2,744) 2,320
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (411) (277)
-------- --------
Net cash used in investing activities (411) (277)
FINANCING ACTIVITIES:
Proceeds from sale of common stock and treasury stock 354 102
Reduction in income tax liability from disqualifying dispositions
of incentive stock options and exercises of non-qualified
stock options 1 --
-------- --------
Net cash provided by financing activities 355 102
-------- --------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (2,800) 2,145
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,282 19,907
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,482 $ 22,052
======== ========
</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 ended March 29, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. 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, 1997.
C. New Accounting Standards - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Accounting Standards No. 128
"Earnings Per Share," which is effective for both interim and annual
periods ending after December 15, 1997. The Company does not believe the
adoption of the standard will have a significant effect on previously
reported earnings per share.
D. Reclassifications - Certain reclassifications have been made to the
1996 consolidated financial statements to conform to the 1997
presentation.
2. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments due under the Company's office operating
leases are as follows:
(Amounts in
Thousands)
1997 $ 762
1998 1,004
1999 995
2000 842
2001 148
2002 12
---- ------
Total minimum rental payments $3,763
======
6
<PAGE>
In April 1997, the two shareholder lawsuits filed against the Company,
Richard G. Meise, Richard R. Douglas and David C. Bolles in September and
October 1996 relating to the reporting of interim results were dismissed
without prejudice.
The Company is involved in certain other legal matters, the outcome of
which is currently unknown. Management believes that the Company's
liability, if any, will not have a material adverse effect on the
Company's financial condition and results of operations.
7
<PAGE>
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.
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.
Statements in Exhibit 99 to this Quarterly Report on Form 10-Q, 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, 1996.
Results of Operations
- ---------------------
Qtr. End Qtr. End
(in thousands) 3/29/97 Change 3/30/96
- --------------------------------------------------------------------------------
Total Revenues $ 11,113 (7.1%) $ 11,960
During the quarter ended March 29, 1997, total revenues decreased compared to
the quarter ended March 30, 1996 due primarily to a general softness in industry
sales, which has impacted the results of the entire industry segment.
Additionally, in an effort to lower their inventory levels, two of the Company's
major distributors reduced their orders during the quarter. The Company
currently believes that its second quarter operating results also will be
adversely affected by the general softness in industry sales.
Qtr. End Qtr. End
(in thousands) 3/29/97 Change 3/30/96
- --------------------------------------------------------------------------------
Gross Profit $ 6,766 (2.8%) $ 6,959
% of Total Revenues 60.9% 58.2%
- --------------------------------------------------------------------------------
Gross profit decreased in absolute dollars but increased as a percentage of
total revenues during the three months ended March 29, 1997 compared to the same
period in 1996. The decrease in absolute dollars is due to the decrease in
revenues. Gross profit as a percent of revenues improved during the first
quarter of 1997 due to a reduction in the Company's discount structure relating
to the manufacturers' representative program that was introduced near the end of
the second quarter of 1996.
8
<PAGE>
Qtr. End Qtr. End
(in thousands) 3/29/97 Change 3/30/96
- --------------------------------------------------------------------------------
Sales & Marketing $5,025 47.7% $3,403
% of Total
Revenues 45.2% 28.5%
- --------------------------------------------------------------------------------
For the quarter ended March 29, 1997, sales and marketing expenses increased in
absolute dollars and as a percentage of total revenues compared to the same
period in 1996. The increase is due largely to an increase in employees and
other costs attributable to Logicraft Information Systems ("Logicraft") acquired
during the fourth quarter of 1996 as well as costs resulting from changes made
to the end user direct sales program. The Company restructured its sales force
during the first quarter of 1997 to fully integrate Logicraft into the sales
mix. Costs relating to this restructuring totaled approximately $189,000.
Additionally, the Company reduced its discount structure, as mentioned above,
and has experienced increased sales commissions as a result.
Qtr. End Qtr. End
(in thousands) 3/29/97 Change 3/30/96
- --------------------------------------------------------------------------------
Research & Development $2,035 26.3% $1,611
% of Total
Revenues 18.3% 13.5%
- --------------------------------------------------------------------------------
Research and development expenses increased in absolute dollars and as a
percentage of total revenues in the quarter ended March 29, 1997, compared with
the same period in 1996. The increase stems primarily from an increase in the
number of employees due to the acquisition of Logicraft during the fourth
quarter of 1996 as well as the development of a higher number of prototypes than
experienced during the first quarter of 1996. During the first quarter, the
Company restructured its research and development work force to fully integrate
Logicraft into the research and development process. To date, the Company has
expensed all R&D costs as incurred.
Qtr. End Qtr. End
(in thousands) 3/29/97 Change 3/30/96
- --------------------------------------------------------------------------------
General & Administrative $1,237 16.7% $1,060
% of Total
Revenues 11.1% 8.9%
- --------------------------------------------------------------------------------
General and administrative expenses increased in both absolute dollars and as a
percentage of total revenues during the first quarter ended March 29, 1997,
compared to the same period in 1996. This increase is mainly the result of the
increase in personnel and other administrative costs attributable to Logicraft
acquired during the fourth quarter of 1996.
9
<PAGE>
Qtr. End Qtr. End
(in thousands) 3/29/97 Change 3/30/96
- --------------------------------------------------------------------------------
Income Taxes $(427) (208.7%) $393
Effective Tax Rate 30.2% 35.7%
- --------------------------------------------------------------------------------
The Company's effective tax rate experienced a decrease during the first quarter
ended March 29, 1997, compared to the same period of the preceding year
primarily because the research and development tax credit afforded under Section
41 of the Internal Revenue Code, which was not available during the three months
ended March 30, 1996, was reinstituted in the third quarter of 1996.
Qtr. End Qtr. End
(in thousands) 3/29/97 Change 3/30/96
- --------------------------------------------------------------------------------
Net (Loss)/Income $(986) (239.5%) $707
% of Total
Revenues (8.9%) 5.9%
- --------------------------------------------------------------------------------
Net (loss)/income decreased in both absolute dollars and as a percentage of
total revenues for the first quarter of 1997 as compared to the first quarter of
1996. This decrease is due primarily to an increase in personnel and other
operating expenses relating to Logicraft as discussed above .
Liquidity and Capital Resources
- -------------------------------
The Company has financed its operations primarily through operating cash flows
and equity financings. At March 29, 1997, the Company had cash and cash
equivalents of $7.5 million. This represents a $2.8 million decrease in cash
equivalents during the three months ended March 29, 1997, due primarily to
increases in inventory resulting from lower than expected sales. As a result of
the use of cash and cash equivalents over the past two quarters, the Company is
negotiating to obtain a $10 million unsecured revolving credit facility with a
bank which will be used for general corporate and working capital purposes.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
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.
10
<PAGE>
et al., Cause No. CV96-16655 and Richard Fluegel et al. v. Microtest, Inc. et
al., Cause No. CV96-19144. In April 1997, the lawsuits were dismissed without
prejudice.
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.
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
None
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 11 - Statement regarding computation of per share earnings
Exhibit 99 - Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward-Looking Statements
b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the three months ended
March 29, 1997. On March 3, 1997, the Company filed an amendment to its
Current Report on Form 8-K dated December 17, 1996, to include the
required financial and pro forma financial information concerning the
acquisition of Logicraft Information Systems, Inc.
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: May 12, 1997 /s/ Richard G. Meise
--------------------------------
Richard G. Meise
Chief Executive Officer
Date: May 12, 1997 /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)
Three Months Ended
------------------------
March 29, March 30,
1997 1996
---------- ---------
Net (loss) income $ (986) $ 707
======= =======
Common shares outstanding at end of period 8,132 8,106
Adjustment to reflect weighted average for
shares issued during period (37) (3)
Adjustment for options and warrants calculated
under the treasury stock method:
Options -- 97
Warrants -- --
------- -------
Common and equivalent shares outstanding 8,095 8,200
------- -------
Net (loss) income per share $ (0.12) $ 0.09
======= =======
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-29-1997
<EXCHANGE-RATE> 1
<CASH> 7,482
<SECURITIES> 0
<RECEIVABLES> 14,175
<ALLOWANCES> 2,169
<INVENTORY> 8,201
<CURRENT-ASSETS> 33,003
<PP&E> 8,996
<DEPRECIATION> 5,320
<TOTAL-ASSETS> 38,082
<CURRENT-LIABILITIES> 7,041
<BONDS> 0
8
0
<COMMON> 0
<OTHER-SE> 31,033
<TOTAL-LIABILITY-AND-EQUITY> 38,082
<SALES> 11,113
<TOTAL-REVENUES> 11,113
<CGS> 4,347
<TOTAL-COSTS> 12,644
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (118)
<INCOME-PRETAX> (1,413)
<INCOME-TAX> (427)
<INCOME-CONTINUING> (986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (986)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
MICROTEST, INC.
EXHIBIT 99
Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"), Congress encouraged public companies to make "forward-looking
statements"1 by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. Microtest, Inc. (the
"Company" or "Microtest") intends to qualify both its written and oral
forward-looking statements for protection under the PSLRA.
To qualify oral forward-looking statements for protection under the
PSLRA, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements. Microtest provides the following information in
connection with its continuing effort to qualify forward-looking statements for
the safe harbor protection of the PSLRA.
Important factors currently known to management that could cause actual
results to differ materially from those in forward-looking statements include,
but are not limited to, the following: (I) changes in the Company's product and
customer mix; (ii) introduction of new products by the Company or its
competitors; (iii) pricing pressures and economic conditions in the Untied
States and Europe; (iv) the economic condition of the computer industry; (v)
failure of the Company to continue to enhance its current product line and to
continue to develop and introduce new products that keep pace with competitive
product introductions and technological advances, satisfy diverse and evolving
customer requirements, or otherwise achieve market acceptance; (vi) loss of or
reduction in purchases by certain of the Company's distributors and VARs; (viii)
any reduction in sales of the Company's PentaScanner or DiscPort products from
which the Company derives substantially all of its revenue; (ix) the inability
of the Company to accurately monitor end user demand for its products; (x)
unanticipated product returns to the extent such returns exceed the Company's
reserves; (xi) the cost, quality and availability of third-party components used
in the Company's systems; (xii) the loss of any of the Company's third-party
manufacturers or key suppliers; (xiii) any disruption or reduction in the future
supply of key components currently obtained from limited sources; (xiv) defects
in the Company's products that could cause delays in product introductions and
shipments, cause loss of or delays in market acceptance, result in increased
costs, require design modifications or impair customer satisfaction; (xv)
inventory writedowns, product returns or price protection credits that exceed
the Company's estimates; (xvi) the inability of the Company to expand its
international operations in a timely and cost effective manner, as well as other
risks in conducting business internationally; (xvii) recruiting, hiring and
retaining the services of key engineering, sales and marketing, management and
manufacturing personnel; and (xviii) failure of the Company to protect its
proprietary information and technology.
- --------
1 "Forward-looking statements" can be identified by use of words such as
"expect," "believe," "estimate," "project," "forecast," "anticipate," "plan,"
and similar expressions.
14
<PAGE>
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainities which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, Microtest undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to projections
over time.
15
