SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
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 North 22nd Street, Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 952-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value Nasdaq National Market
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
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Introduction
The Company develops and markets network management and connectivity
products. Its network management products certify whether cabling will support a
proposed LAN installation, as well as troubleshoot cable and other faults that
occur on established LANs. Its connectivity products facilitate both the storage
of information on CD-ROM devices, as well as the sharing of that information
among LAN users.
In 1996, the Company achieved net revenues of $50.4 million and
recorded a net loss of $11.6 million or $(1.43) per share in 1996. This differs
from the Company's previously announced unaudited results of net revenues of
$52.5 million and a net loss of $10.7 million or $(1.31) per share. The
difference is due to a recent determination by the Company that reserves
relating to end user direct sales were inadequate. As a result, net revenues
attributable to such sales decreased as a result of a $2.1 million increase in
the reserves for fourth quarter sales made through OMI's direct sales program.
The Company also recently determined that its interim unaudited results for the
second, third and fourth quarters of 1996 required adjustments as discussed in
Note 10 to the Company's Consolidated Financial Statements included elsewhere in
this Annual Report.
The Company is making changes in the structure of the end user direct
sales program, and the changes will impact operating results for the first
quarter of 1997. In addition to changes to this program, the Company has been
affected by an overall slowing in the growth of the network products industry,
which also will negatively impact first quarter operating results. Accordingly,
the Company will not meet internal operating expectations for the quarter.
Despite overall growth in 1995, during the fourth quarter of 1995 there
was a significant slowing in the market for the Company's products following
increased sales to certain distributors during the third quarter of 1995. In
addition, sales of the Company's relatively new diagnostic product, COMPAS, did
not ramp up as quickly as anticipated.
The Company's operating results have been volatile over the past
several years, particularly on a quarter to quarter basis. For a discussion of
factors that may affect the Company's business, financial condition and future
results, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Future Results and Financial
Condition" included in this Report.
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Results of Operations
<TABLE>
<CAPTION>
(in thousands) 1994 Change 1995 Change 1996
- ------------------------------------------------------- -------- -------- --------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenues $ 39,574 33% $ 52,537 -4% $ 50,442
Gross profit 22,990 33% 30,576 -2% 29,990
As a percentage of revenues 58.1% 58.2% 59.5%
Sales & marketing 8,739 44% 12,585 14% 14,334
As a percentage of revenues 22.1% 24.0% 28.4%
Research & development 4,063 46% 5,913 8% 6,414
As a percentage of revenues 10.3% 11.3% 12.7%
General & administrative 3,410 8% 3,694 13% 4,191
As a percentage of revenues 8.6% 7.0% 8.3%
Interest income 743 66% 1,232 -38% 762
As a percentage of revenues 1.9% 2.3% 1.5%
Income taxes excluding tax benefit from purchased R & D 2,231 38% 3,085 -45% 1,711
Effective tax rate 29.7% 32.1% 29.4%
Net Income (Loss) 5,290 -78% 1,145 -1113% (11,595)
As a percentage of revenues 13.4% 2.2% -23.0%
Net Income (Loss) Excluding
restructuring charges, purchased 5,290 23% 6,531 -37% 4,102
R % D and other unusual items
As a percentage of revenues 13.4% 12.4% 8.1%
</TABLE>
Revenues - Product sales decreased 4% [GRAPHIC OMITTED]
from 1995 to 1996. This is mainly due to Bar Graph showing revenue
increased competition in the Category 5 as $26.5 million for
cable testing market and a softening of 1992, $22.1 million for
the European economy in 1996. Product sales 1993, $39.6 million for
increased from 1994 to 1995 primarily due 1994, $52.5 million for
to the increased demand in the domestic and 1995 and $50.4 million
international marketplaces for DiscPort products. for 1996.
International sales were $14.8 million, $19.1 million and $13.4 million
in 1996, 1995 and 1994, or 29%, 36% and 34% of total revenues, respectively.
International sales decreased in both absolute dollars and as a percentage of
total revenue during 1996 primarily due to the above mentioned weakening in the
European economy in 1996. International sales increased in both absolute dollars
and as a percentage of total revenue during 1995 due to an increased demand for
the Company's DiscPort products in its international markets.
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[GRAPH OMITTED] Gross Profit -Gross profit decreased 2%
Bar Graph showing Gross in 1996. This decrease is due to the
Profit for 1992 of $16.2 decrease in revenue during 1996
million, 1993 of $12.5 partially offset by the introduction of
million, 1994 of 23.0 a manufacturers' representative
million, 1995 of $30.6 program. Discounts to many of the
million, and 1996 of Company's distributors were lowered as
$30.0 million a result of this program. Gross profit
increased 33% in 1995 due to the
corresponding 33% increase in total
revenues during the same time period.
Gross profit as a percentage of total
revenues may fluctuate on a quarterly
basis due to a variety of factors, including changes in product and customer
mixes, the introduction of new products by the Company or its competitors and
other competitive factors, such as pricing pressures.
Sales & Marketing Expenses- Sales and
marketing expenses increased in both
absolute dollars and as a percentage
of total revenues from 1995 to 1996.
The increase is largely due to the [GRAPH OMITTED]
implementation of the above mentioned Bar Graph showing sales and marketing
manufacturers' representative expenses of $6.2 million in 1992, $7.7
compensation program, as well as the million in 1993, $8.7 million in 1994,
addition of personnel to bolster the $12.6 million in 1995, and $14.3
Company's sales force. Sales and million in 1996.
marketing expenses increased in both
absolute dollars and as a percentage
of revenue from 1994 to 1995.
Increased advertising and promotional
expenses, commissions and sales,
marketing and support personnel were
the main contributors to the increase
during this period.
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[GRAPHIC OMITTED] Research & Development Expenses - 1996
Bar Graph showing research and research and development expenses
development expenses of $3.4 million increased in absolute dollars and as a
in 1992, $4.7 million in 1993, $4.1 percentage of total revenues as
million in 1994, $5.9 million in compared to 1995 research and
1995, and $6.4 million in 1996. development expenses primarily due to
an increase in the number of prototypes
developed in 1996 as compared to 1995.
Research and development expenses
increased in both absolute dollars and
as a percentage of revenue from 1994 to
1995. This increase is due primarily to
an increase in personnel stemming from
the acquisition of OMI and use of
outside services.
General & Administrative Expenses- General and administrative expenses increased
during 1996 in both absolute dollars and as a percentage of revenues mainly
because of an increase in expenses related to the settlement of a lawsuit during
the first quarter of 1996, as well as the legal
costs associated with the defense of two
shareholder lawsuits filed during the
last half of 1996. General and [GRAPHIC OMMITED]
administrative expenses increased in Bar Graph showing general and
absolute dollars but decreased as a adminstrative expenses of $1.5 million
percentage of total revenues from in 1992, $2.7 million in 1993, $3.4
1994 to 1995. The increase in million in 1994, $3.7 million in 1995,
absolute dollars was due primarily to and $4.2 million in 1996
increased legal and consulting fees
as well as increased headcount and
administrative costs associated with
OMI. The decrease in general and
administrative expenses as a
percentage of total revenues was due
to the higher sales volumes in 1995
compared with 1994.
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[GRAPHIC OMITTED] Interest - The Company's interest
Bar Graph showing interest income of income decreased from 1995 to 1996
$243,000 in 1992, $729,000 in 1993, primarily due to a reallocation of
$743,000 in 1994, $1,232,000 in 1995, investments in anticipation of the
and $762,000 in 1996. Company's acquisition activities in
1996. The Company invests the majority
of its excess cash in municipal bond
funds with maturities ranging from 7
days to 3 months.
[GRAPHIC OMITTED] Effective Tax Rate - Excluding the
Bar Graph showing the effective tax effects of purchased research and
rate excluding tax benefit related to development, the Company experienced a
purchased R & D of 38% for 1992, 41% decrease in its effective income tax
for 1993, 30% for 1994, 32% for 1995, rate during 1996. The decrease was
and 29% for 1996. mainly due to the recognition of R & D
tax credits earned in 1996. The
Company's 1995 effective tax rate
includes a tax benefit of $3.4 million
related to purchased research and
development. Excluding the effects of
purchased research and development, the
Company's effective tax rate was 32% in
1995. This represents
an increase from 30% in 1994. The increase was primarily due to the realization
of net operating loss carryforwards during 1994 for which a valuation allowance
had previously been established.
Net Income - The Company's net income decreased in both absolute
dollars and as a percentage of total revenues from 1995 to 1996. During the
fourth quarter of 1996, the Company recorded an expense for research and
development costs associated with software products for which technological
feasibility has not been established and for which no alternative future use
existed arising from the purchase of Logicraft. The expense totaled $15.7
million. Excluding this expense, net income decreased 42% from $6.5 million in
1995 to $4.1 million in 1996. This decrease is mainly attributable to the
decrease in revenues, the overall increase in operating expenses and the
decrease in interest income during 1996. Net income decreased in both absolute
dollars and as a percentage of total revenues from 1994 to 1995. During the
second quarter of 1995, the Company recorded an expense for research and
development costs associated with software products for which technological
feasibility has not been established and for which no alternative future use
existed arising from the purchase of OMI. The expense totaled $8.3 million and a
tax benefit of $3.2 million was recognized. Additionally, during the third
quarter of 1995, the Company recorded an expense for research and development
costs associated with products for which technological feasibility has not been
established and for which no alternative future use existed arising from the
purchase of certain technologies from
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Hotware, Inc. The expense totaled $450,000 and a tax benefit of $180,000 was
recognized. Excluding these items, net income was $6.5 million, a 23% increase
from 1994. This increase was due to higher sales volumes and an increase in
interest income. See Note 5 to the Consolidated Financial Statements included
elsewhere in this Form 10-K.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Bar Graph showing net income/(loss) Bar Graph showing net income/(loss)
of $7.1 million for 1992, $(2.5) excluding restructuring charges,
million for 1993, $5.3 million for purchased R & D, other unusual items
1994, $1.1 million for 1995 and and income from sale of technology of
$(11.6) million for 1996. $3.3 million for 1992, $(1.1) million
for 1993, $5.3 million for 1994, $6.5
million for 1995 and $4.1 for 1996.
Liquidity and Capital Resources
To date, the Company has financed its operations primarily through
operating cash flow and equity financings. At December 31, 1996, the Company had
cash and cash equivalents of $10.3 million. This represents a $9.6 million
decrease in cash and cash equivalents from December 31, 1995 to December 31,
1996. As a result of the decrease in cash and cash equivalent, the Company
intends to secure a $10 million unsecured revolving credit facility with a bank
which will be used for general corporate and working capital purposes. This
decrease in cash and cash equivalents is mainly attributable to the Logicraft
acquisition and an increase in accounts receivable. The increase in accounts
receivable is mainly due to a slowing in the collection process caused by a
mid-year systems conversion along with personnel turnover in the collections
area and the addition of Logicraft receivables due to the year-end acquisition.
Accrued liabilities also showed a significant increase due mainly to the
assumption of Logicraft liabilities and additional accruals for
acquisition-related expenses.
At December 31, 1995, the Company's cash and cash equivalents had
decreased $11.7 million to $19.9 million from December 31, 1994. This decrease
in cash and cash equivalents is mainly attributable to the OMI and Hotware
acquisitions, a stock repurchase program, an increase in receivables and an
increase in inventory at year end. The increase in accounts receivable is
primarily attributable to third quarter sales resulting from extensions of
payment terms to certain of the Company's distributors.
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Capital expenditures were $1.1 million in 1996, $1.4 million in 1995
and $1.3 million in 1994. The Company believes that capital investments of
property and equipment will approximate $1.0 million in 1997. The Company
expects expenditures related to the completion of in-process technology of
Logicraft Information Systems, Inc. acquired during 1996 to approximate $700,000
in 1997. The Company expects that existing cash balances, anticipated cash flow
from operations and the anticipated revolving credit line referenced below will
satisfy the Company's working capital and capital expenditure requirements for
the foreseeable future.
Inflation
The Company does not believe that it is significantly impacted by
inflation because of its rapid inventory turnover and relatively small
investment in capital assets.
Factors That May Affect Future Results and Financial Condition
The Company's future operating results and financial condition are
dependent on the Company's ability to successfully develop, manufacture, and
market technologically innovative products in order to meet dynamic customer
demand patterns. Inherent in this process are a number of factors that the
Company must successfully manage in order to achieve favorable future operating
results and financial condition. Potential risks and uncertainties that could
affect the Company's future operating results and financial condition include,
without limitation, the factors discussed below.
Fluctuations in Quarterly Operating Results - The Company's revenues
may vary significantly from quarter to quarter due to a variety of factors,
including changes in the Company's product and customer mix, the introduction of
new products by the Company or its competitors, and other factors, including
pricing pressures and economic conditions in the United States and Europe. The
Company operates with relatively little backlog and substantially all of its
revenues in each quarter result from orders received in that quarter. In
addition, the Company incurs significant operating start-up expenses in
anticipation of future revenues. If near-term demand for the Company's products
weakens or if orders are not shipped in any quarter as anticipated, the
Company's results of operations for that quarter could be adversely affected.
The Company's quarterly operating results may vary significantly depending on
various factors, including the introduction of new products by the Company's
competitors, market acceptance of new products, the mix of software and system
sales, , adoption of new technologies and standards, prices and other forms of
competition, the cost, quality and availability of third party components used
in the Company's systems, changes in the Company's distribution arrangements,
and the inability of the Company to accurately monitor end user demand for its
products due to the sales of products through distributors and VARs and
unanticipated product returns to the extent such returns exceed the Company's
reserves for future returns. The Company's operating results will also be
affected by the economic condition of the computer industry, which has from time
to time experienced cyclical, depressed business conditions, often in connection
with or in anticipation of a decline in general economic conditions. Due to all
of the foregoing factors, the Company's revenues or operating results may in one
or more future quarters be below the expectations of stock market analysts and
investors. In such event, the
30
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price of the Company's common stock would likely decline, and such decline could
be substantial.
Dependence on Third Party Distributors - The Company derives
substantially all of its product sales through distributors and VARs. Two of the
Company's distributors accounted for 28% of the Company's revenues in 1996. The
loss of certain distributors or VARs would have a material adverse effect on the
Company's business and operating results. The Company's contractual
relationships with its distributors and VARs are generally cancelable upon
notice to the Company. Certain of the Company's distributors and VARs also act
as distributors for competitors of the Company and could devote greater effort
and resources to marketing competitive products. In addition, effective
distributors and VARs must devote significant technical, marketing, and sales
resources to an often lengthy sales cycle. There can be no assurance that the
Company's current distributors and VARs will continue to market the Company's
products effectively or that economic or industry conditions will not adversely
affect such distributors and VARs. Because the Company sells a significant
portion of its products through distributors and VARs, it is difficult for the
Company to monitor end user demand for its products on a current basis. Initial
stocking orders may not be indicative of long-term end user demand. The
Company's customers typically are allowed by contract to return products,
subject to certain limitations, without charge or penalty. While the Company
provides for a reserve for future returns, there can be no assurance that the
reserve will adequately cover actual product returns. Excessive or unanticipated
returns could materially adversely affect the Company's business, operating
results, or financial condition. The Company's operating results could also be
materially adversely affected by changes in distributors' inventory strategies,
which could occur rapidly and, in many cases, may not be related to end user
demand. New products may require different marketing, sales, and distribution
strategies than those for the Company's current products. There can be no
assurance that the Company's distributors and VARs will choose or be able to
effectively market these new products or to continue to market the Company's
existing products. A failure of the Company's distributors and VARs to
successfully market the Company's product would have a material adverse effect
on the Company's business and results of operations.
Dependence on Third Party Suppliers - The Company is dependent on a
small number of third party vendors for the manufacturing of all of the
Company's products. The Company also is dependent on a small number of suppliers
for certain key components used in its product, including CD-ROM drives,
microprocessors, integrated circuits and power modules. The Company purchases
these components pursuant to purchase orders placed from time to time, does not
carry significant inventories of these components, and has no long-term supply
arrangements. The loss of any of the Company's third-party manufacturers or key
suppliers could have a material adverse effect upon the Company's business,
financial condition and operating results. Although the Company believes that
alternative sources of product manufacturing and components could be arranged,
the process of qualifying new suppliers could be lengthy. There can be no
assurance that any additional source would be available to the Company on a
timely basis or at a cost acceptable to the Company. Any disruption or reduction
in the future supply of any key components currently obtained from limited
sources could have a material adverse effect on the Company's business,
financial condition and operating results.
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Rapid Technological Change; Potential for Product Defects - The market
for the Company's products is characterized by rapid technological advances,
evolving industry standards in computer hardware and software technology,
changes in customer requirements, and frequent new product introductions and
enhancements. The Company's future success will depend on its ability 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 developments, satisfy diverse and evolving customer requirements,
or otherwise achieve market acceptance. There can be no assurances that the
Company will be successful in continuing to develop and market on a timely and
cost-effective basis new products or product enhancements that respond to
technological advances by others, or that these products will achieve market
acceptance. In addition, companies in the industry have in the past experienced
delays in the development, introduction, and marketing of new and enhanced
products, and there can be no assurance that the Company will not experience
delays in the future. Any failure by the Company to anticipate or respond
adequately to changes in technology and customer preferences, or any significant
delays in product development or introduction, would have a material adverse
effect on the Company's business, financial condition and results of operations.
Due to the complexity and sophistication, the Company's products from
time to time may contain defects or "bugs" which can be difficult to correct.
Moreover, as the Company continues to develop and enhance its products, there
can be no assurance that the Company will be able to identify and correct
defects in such a manner as will permit the timely introduction of such product.
Furthermore, despite extensive testing, the Company has from time to time
discovered defects only after its products have been commercially released.
There can be no assurance that product defects will not 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. Any such event could materially adversely affect the Company's
business, financial condition and results of operations.
Over the past two years, CD-ROM drive technology has advanced
significantly. Additionally, the pace of new drive introductions has increased.
As a result, the Company may find itself holding an inventory of obsolete
drives. Additionally, the Company's contracts with its distributors allow for
product return, or price protection credits, based on current inventory levels
of current and obsolete products under certain limited circumstances. The
Company estimates and accrues an allowance for such occurrences, but there can
be no assurance that actual inventory writedowns, product returns, or price
protection credits will not exceed the Company's estimates. Any of the foregoing
events could materially adversely affect the Company's business, financial
condition and results of operations.
Competition - The markets for the Company's products are extremely
competitive. The Company expects that competition will increase as more
companies enter the market and as existing competitors continue to change and
expand product offerings. Pricing is very aggressive in the Company's industry,
and the Company expects pricing pressures to continue to intensify. The
Company's current competitors in the CD-ROM networking market include other
suppliers of CD-ROM networking software and hardware such as Meridian Data,
Inc., Micro Design
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International, CBS, Reed Technology and Information Services, Inc., Ornetix,
SciNet, Inc., Axis Communication, Inc. and Compact Devices, Inc. The Company
also competes indirectly with suppliers of personal computers and network
operating systems such as Microsoft and Novell, to the extent such companies
include CD-ROM networking utilities as part of their operating systems. The
Company's potential competitors in the hardware area include companies in the
personal computer market and certain CD-ROM manufacturers. The Company's current
competitors in the network management and certification market include other
suppliers of network management and certification software and hardware such as
Wavetek Corporation, Scope Communications, Inc., Fluke Corporation and Datacom
Technologies, Inc. The Company's competitors include large domestic and
international companies, many of which have significantly greater financial,
technical, manufacturing, marketing, sales and distribution resources than the
Company. There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new or emerging
technologies, evolving industry trends, or changing customer requirements. There
also can be no assurance that the Company will have the financial resources,
technical expertise, or marketing, sales, distribution, customer service, and
technical support capabilities to compete successfully.
Product Concentration - The Company currently derives substantially all
of its revenue from its PentaScanner and DiscPort products. The market for these
products is characterized by rapid technological advances, evolving standards in
computer hardware and software technology, changes in customer requirements and
frequent new product introductions and enhancements. Any decrease in sales of
the Company's PentaScanner or DiscPort products as a result of the foregoing or
other factors would have a material adverse effect on the Company's business,
financial condition and operating results.
International Operations - Sales outside of North America account for
29%, 36% and 34% of the Company's revenues in 1996, 1995 and 1994, respectively.
An important element of the Company's strategy is to expand its international
operations. There can be no assurance that the Company will be able to continue
to successfully localize, market, sell and deliver products internationally. The
inability of the Company to successfully expand its international operations in
a timely and cost effective manner could materially adversely affect the
Company's business, financial condition and results of operations. The Company's
business and results of operations could be materially adversely affected by
risks inherent in conducting business internationally, such as changes in
currency exchange rates, longer payment cycles, difficulties in staffing and
managing international operations, problems in collecting accounts receivable,
seasonal reductions in business activity during the summer months in Europe and
certain other parts of the world, and tariffs, duties and other trade barriers.
The Company seeks to mitigate its direct exposure to exchange rate fluctuation
by selling only in United States currency.
Litigation - As described in this Annual Report under the caption
"Legal Proceedings," the Company is a defendant in class action shareholder
lawsuits and in other litigation incidental to the Company's business. The
Company may be required to incur substantial legal fees and costs in defending
against these legal proceedings, which could have a material adverse effect on
the Company's operating results. Although the Company believes that the claims
asserted against
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the Company in these proceedings are without merit, there can be no assurance
that the Company will be successful in defending against any of the legal
proceedings in which it is involved. Moreover, although the Company intends to
vigorously defend itself against such proceedings, the Company could make a
business decision to settle such claims instead of continuing to incur
substantial legal fees and costs. Further, there can be no assurance that the
Company will not be named as a defendant in additional legal proceedings,
especially if the Company's actual operating results do not meet or exceed
anticipated results. If the Company is unsuccessful in defending against any of
these proceedings, decides to pay a substantial sum to settle any of the
proceedings or is named as a defendant in additional legal proceedings, it could
have a material adverse effect on the Company's business, financial condition
and operating results.
Dependence on Key Personnel; Management of Growth - Due to the
specialized nature of the Company's business, the Company's future success is
highly dependent upon the continued services of its key engineering personnel
and executive officers and upon its ability to attract and retain qualified
engineering, sales and marketing, management and manufacturing personnel for its
operations. Competition for such personnel is intense. There can be no assurance
that the Company will be successful in attracting or retaining such personnel.
The loss of any key personnel or the Company's inability to attract and retain
qualified employees could have a material adverse effect on the Company's
business, financial condition and results of operations. To manage its growth,
the Company must continue to implement and improve its operational, financial,
and management information systems and expand, train, and manage its workforce.
The Company believes that success in its industry requires substantial capital
in order to maintain the flexibility to take advantage of opportunities as they
may arise. The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products, or
technologies. Such investment or acquisitions may be funded by internally
generated cash, marketable securities, debt or additional equity. The sale of
additional equity could result in dilution in the equity ownership of the
Company's shareholders. The Company's failure to manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Proprietary Rights - The Company's success depends in
part upon protecting its proprietary technology. The Company relies on a
combination of intellectual property laws, nondisclosure agreements and other
protective measures to protect its proprietary information. There can be no
assurance, however, that the steps taken by the Company will be adequate to
deter misappropriation or independent third party development of its technology
or that its intellectual property rights can be successfully defended if
challenged. In addition, the laws of certain foreign countries do not protect
the Company's intellectual property rights to the same extent as the laws of the
United States. Given the rapid development of technology, there can be no
assurance that certain aspects of the Company's products do not or will not
infringe upon the existing or future proprietary rights of others or that, if
licenses or rights are required to avoid infringement, such licenses or rights
could be obtained or obtained on terms that are acceptable to the Company.
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MICROTEST, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Years Ended December 31, 1994, 1995 and 1996, and
Independent Auditors' Report
36
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INDEPENDENT AUDITORS' REPORT
Board of Directors of
Microtest, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Microtest, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Microtest, Inc. and subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 27, 1997
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------
ASSETS 1995 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,907 $ 10,282
Accounts receivable - less allowance for doubtful accounts of
$521 and $582 and less returns reserve of $919 and $3,030 14,938 17,544
Inventories - less reserve for obsolescence of $717 and $540 (Note 2) 6,814 6,163
Prepaid expenses 681 823
Income taxes receivable (Note 4) 2,100 291
Deferred income taxes (Note 4) 1,819 3,121
-------- --------
Total current assets 46,259 38,224
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net (Note 3) 3,212 3,642
INTANGIBLES AND OTHER ASSETS - Net (Note 3) 448 832
DEFERRED INCOME TAXES (Note 4) 239 615
-------- --------
TOTAL $ 50,158 $ 43,313
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,757 $ 5,579
Accrued liabilities (Note 9) 1,492 4,983
Accrued payroll and employee benefits 882 1,079
-------- --------
Total liabilities 7,131 11,641
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 7):
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 32,546 32,593
Retained income/(Deficit) 11,455 (485)
Common stock in treasury at cost - 63,824 and 27,970 shares (982) (444)
-------- --------
Total stockholders' equity 43,027 31,672
-------- --------
TOTAL $ 50,158 $ 43,313
======== ========
</TABLE>
See notes to consolidated financial statements.
-38-
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1994 1995 1996
<S> <C> <C> <C>
REVENUES (Notes 8 and 9) $ 39,574 $ 52,537 $ 50,442
COST OF SALES 16,584 21,961 20,452
-------- -------- --------
Gross profit 22,990 30,576 29,990
-------- -------- --------
OPERATING EXPENSES:
Sales and marketing (Note 9) 8,739 12,585 14,334
Research and development 4,063 5,913 6,414
General and administrative 3,410 3,694 4,191
-------- -------- --------
Total operating expenses 16,212 22,192 24,939
-------- -------- --------
UNUSUAL ITEM - Purchased R & D (Note 5) (8,776) (15,697)
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 6,778 (392) (10,646)
INTEREST INCOME - Net 743 1,232 762
-------- -------- --------
INCOME/(LOSS) BEFORE INCOME TAXES 7,521 840 (9,884)
INCOME TAX PROVISION/(BENEFIT) (Note 4) 2,231 (305) 1,711
-------- -------- --------
NET INCOME/(LOSS) $ 5,290 $ 1,145 $(11,595)
======== ======== ========
NET INCOME/(LOSS) PER COMMON
AND EQUIVALENT SHARE $ .64 $ .13 $ (1 .43)
======== ======== ========
COMMON AND EQUIVALENT SHARES OUTSTANDING 8,269 8,534 8,104
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-39-
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Retained Total
-------------------- --------------------- Paid-In Income/ Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 7,632 $ 8 (78) $ (468) $ 27,693 $ 6,200 $ 33,433
Common stock issued upon:
Exercise of stock options 327 1,125 1,125
Employee Stock Purchase Plan 30 184 184
Exercise of stock warrants 44 264 (96) 168
Disqualifying dispositions of stock options 379 379
Net income 5,290 5,290
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1994 7,989 8 (34) (204) 29,381 11,394 40,579
Common stock issued upon:
Exercise of stock options 161 128 2,019 914 (1,084) 1,849
Employee Stock Purchase Plan 9 7 114 130 244
Disqualifying dispositions of stock options 2,121 2,121
Treasury stock purchase (165) (2,911) (2,911)
Net income 1,145 1,145
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 8,159 8 (64) (982) 32,546 11,455 43,027
Common stock issued upon:
Exercise of stock options 27 394 4 (279) 119
Employee Stock Purchase Plan 20 254 (66) 188
Disqualifying dispositions of stock options 43 43
Treasury stock purchase (11) (110) (110)
Net loss (11,595) (11,595)
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 8,159 $ 8 (28) $ (444) $ 32,593 $ (485) $ 31,672
======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-40-
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1994 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) $ 5,290 $ 1,145 $(11,595)
Adjustments to reconcile net income/(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,751 1,512 1,460
Deferred provision for income taxes (1,132) 370 (833)
Allowance for doubtful accounts 90 311 61
Deferred rent (38) (27) (32)
Loss on sale of marketable securities 76
Compensation expense related to vested, non-qualified stock options 4
Purchased R & D - net of related tax benefit 5,386 15,697
Change in operating assets and liabilities:
Accounts receivable (734) (8,984) (321)
Inventories (2,315) (3,300) 1,107
Prepaid expenses and other assets 85 (217) (20)
Accounts payable 1,216 1,423 (1,610)
Accrued liabilities 1,660 (1,053) 1,089
Income taxes payable 1,496 (941)
Income taxes receivable 1,687 21 1,852
-------- -------- --------
Net cash provided by (used in) operating activities 9,136 (4,354) 6,855
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (1,278) (1,383) (1,056)
Acquisitions - net of cash acquired (5,100) (15,621)
Proceeds from sale of marketable securities 7,895
-------- -------- --------
Net cash provided by (used in) investing activities 6,617 (6,483) (16,677)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from sale of common and treasury stock 1,097 2,065 307
Purchase of treasury stock (2,911) (110)
-------- -------- --------
Net cash provided by (used in) financing activities 1,097 (846) 197
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,850 (11,683) (9,625)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,740 31,590 19,907
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 31,590 $ 19,907 $ 10,282
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Microtest,
Inc. and its wholly-owned subsidiaries, Microtest, Inc., International, a
foreign sales corporation, Optical Media International and Logicraft
Information Systems, Inc. (collectively, the "Company"). All intercompany
transactions are eliminated. The Company develops, markets and supports
products that make it easier to manage and service local area networks.
The following are the significant accounting policies of the Company:
a. Inventories are stated at the lower of cost (first-in, first-out
("FIFO") basis) or market.
b. Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are computed utilizing the straight-line method based
on the estimated useful lives of the related assets or, for leasehold
improvements, the lease term, if shorter. Estimated useful lives are
as follows:
Useful Life
Equipment 3 - 5 years
Furniture and fixtures 7 years
Leasehold improvements 5 years
c. Income Taxes - Income taxes are provided based upon the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, which among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of the financial statements.
d. Research and Development Expenses - Costs and expenses which can be
clearly identified as research and development are charged to research
and development expense as incurred. Costs which relate to prototype
and experimental models which are sold to customers are charged to
cost of sales.
e. Revenue Recognition - The Company recognizes revenue from product
sales to distributors upon shipment. Sales to distributors in the
United States, Canada and Europe account for the majority of the
Company's net sales. The Company recognizes revenue from product sales
to direct end users upon customer commitment. The Company has
established a program which, under specified conditions, enables
distributors and resellers to return products to the Company for
credit against additional purchases or in the event the Company
reduces its selling prices, to receive credits for the reduction in
selling price. The amount of potential product returns, including
returns under the Company's warranty program, and credits for selling
price reductions, is estimated and provided for in the period of sale.
42
<PAGE>
f. Consolidated Statements of Cash Flows - For purposes of the
consolidated statements of cash flows, the Company considers all
highly liquid investments with an initial maturity of three months or
less to be cash equivalents.
g. Net income (loss) per common and equivalent share has been computed
using the weighted average number of common shares and common share
equivalents outstanding during each period. Stock options and warrants
have been included as common equivalent shares utilizing the treasury
stock method only when their effect is dilutive.
h. Stock Based Compensation - The Company accounts for its stock based
compensation plan based on Accounting Principles Board ("APB") Opinion
No. 25. In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, Accounting for Stock Based Compensation. The
Company has determined that it will not change to the fair value
method and will continue to use APB Opinion No. 25 for measurement and
recognition of employee stock based transactions (Note 7).
i. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
j. Product Concentration - The market for the Company's products is
characterized by rapidly changing technology, short product life
cycles and evolving industry standards. The Company has derived
substantially all of its revenues from the development and sales of a
limited number of cable management and network connectivity devices
for the local area network ("LAN") industry.
k. Reclassifications - Certain reclassifications were made to the 1994
and 1995 financial statements to conform with the 1996 presentation.
2. INVENTORIES
Inventories consisted of the following at December 31:
1995 1996
(Amounts in Thousands)
Raw materials $ 1,647 $ 1,242
Work-in-progress 23 153
Finished goods 5,861 5,308
------- -------
Total 7,531 6,703
Less reserve for obsolescence (717) (540)
------- -------
Inventories - net $ 6,814 $ 6,163
======= =======
43
<PAGE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS AND INTANGIBLES
Equipment and leasehold improvements consisted of the following at
December 31:
1995 1996
(Amounts in Thousands)
Equipment $ 5,081 $ 6,522
Furniture and fixtures 1,469 1,530
Leasehold improvements 503 533
------- -------
Total 7,053 8,585
Less accumulated depreciation and amortization (3,841) (4,943)
------- -------
Equipment and leasehold improvements - net $ 3,212 $ 3,642
======= =======
Intangibles consisted of the following at December 31:
1995 1996
(Amounts in Thousands)
Purchased software $ 1,355 $ 594
Non-compete agreement and other intangibles 902 238
------- -------
Intangibles - gross 2,257 832
Less accumulated amortization (1,985)
------- -------
Intangibles - net $ 272 $ 832
======= =======
Purchased software and other intangibles are amortized over their
estimated useful life of 2 to 3 years. Amortization is accelerated when
there is deemed to be a reduction in the estimated revenues or other
benefits arising from such intangibles.
4. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 are as follows:
1994 1995 1996
(Amounts in Thousands)
Current:
Federal $ 2,982 $ (675) $ 2,326
State 381 149
Foreign 69
------- ------- -------
Total current provision 3,363 (675) 2,544
Deferred (1,132) 370 (833)
------- ------- -------
Total provision for income taxes $ 2,231 $ (305) $ 1,711
======= ======= =======
44
<PAGE>
The Company's current income tax liability was reduced and additional
paid-in capital increased approximately $379,000, $2,121,000 and $43,000
during 1994, 1995 and 1996, respectively, resulting from disqualifying
dispositions of incentive stock options. Cash payments for income taxes
were approximately $1,864,000, $3,329,000 and $750,000 in 1994, 1995 and
1996, respectively.
A reconciliation of the difference between the provision for income taxes
and income taxes at the statutory United States federal income tax rate is
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
(Amounts in Thousands)
<S> <C> <C> <C>
Income taxes at statutory United States federal income tax rate $ 2,557 $ 286 $(3,361)
Increase (decrease) in taxes:
Acquired research and development 5,337
State taxes - net 451 50 90
Research and development credits (224) (350) (111)
Tax exempt interest income (104) (363) (261)
Reversal of valuation allowance (599)
Other - net 150 72 17
------- ------- -------
Total $ 2,231 $ (305) $ 1,711
======= ======= =======
</TABLE>
The components of deferred income taxes at December 31 are as follows:
1995 1996
(Amounts in Thousands)
Current:
Nondeductible accruals and reserves $ 1,549 $ 2,880
Inventory costs capitalized for income tax purposes 270 241
------- -------
Total current 1,819 3,121
------- -------
Noncurrent:
Excess of tax over book depreciation (153) (71)
Excess of book over tax amortization 293 466
Deferred rent 29 10
Deferred compensation 70 210
------- -------
Total noncurrent 239 615
------- -------
Total deferred income taxes $ 2,058 $ 3,736
======= =======
5. ACQUISITIONS
On December 17, 1996, the Company purchased all of the issued and
outstanding shares of capital stock (the "Logicraft Stock") of Logicraft
Information Systems, Inc., a Delaware corporation ("Logicraft"). The
consideration for the acquisition of all of the Logicraft stock was
$12,517,000 in
45
<PAGE>
cash. Additionally, Microtest assumed $4,483,000 in debt that Logicraft
owed to Information Handling Services, Inc. ("IHS"), the previous majority
owner of Logicraft. Immediately following the closing, this debt was
repaid. Logicraft develops and sells CD-ROM networking products and
technologies. The acquisition was accounted for using the purchase method
of accounting, and accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based upon their fair
values at the date of acquisition. As a result of the allocation of the
purchase price, the Company recorded an expense of $15,697,000 in the
fourth quarter of 1996 to record the value of software research it
acquired relating to products for which technological feasibility has not
been established and for which no alternative future use existed.
The Company is still in the process of evaluating the fair value of the
assets of Logicraft and may adjust the allocation of the purchase price in
1997.
On June 6, 1995, the Company acquired all of the outstanding capital stock
of Optical Media International ("OMI"), a California corporation, for cash
of $4,000,000 and assumption of OMI-related debt of $660,000. OMI
specializes in CD-ROM and CD-Recordable technology. The acquisition was
accounted for using the purchase method of accounting, and accordingly,
the purchase price has been allocated to the assets purchased and the
liabilities assumed based upon the fair values at the date of acquisition.
As a result of the allocation of the purchase price, the Company recorded
an expense of $8,326,000 and related tax benefit of $3,210,000 in the
second quarter of 1995 to record the value of software research it
acquired relating to products for which technological feasibility has not
been established and for which no alternative future use existed.
The accompanying consolidated statements of operations reflect the
operating results of Logicraft and OMI since the effective dates of the
acquisitions. Pro forma unaudited consolidated operating results of the
Company, OMI and Logicraft for the years ended December 31, 1995 and 1996,
assuming the acquisitions had been made as of January 1, 1995, are
summarized below:
Year Ended
December 31, 1995 December 31, 1996
(In Thousands, Except
Per Share Amounts)
Net revenues $ 67,796 $ 64,747
======== ========
Net (loss) $ (1,445) $ 171
======== ========
Net (loss) per common share $ (.16) $ .02
======== ========
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as the decrease in interest income
imputed on the consideration for the acquisitions, the decrease in
amortization expense as a result of applying the purchase method of
accounting for the acquisitions and the increase in amortization expense
associated with the capitalization of certain acquisition costs. The pro
forma results exclude the expenses related to the purchase of in-process R
& D in 1995 and 1996. The pro forma financial information is not
necessarily indicative of the results of operations as they would have
been had the transactions been affected on the assumed dates.
46
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments due under the Company's office operating
leases are as follows:
(Amounts in
Thousands)
1997 $ 742
1998 241
1999 232
2000 206
2001 148
2002 12
------
Total minimum rental payments $1,581
======
Rent expense for 1994, 1995 and 1996 was approximately $673,000, $691,000
and $982,000, respectively.
In September and October 1996, two purported class action lawsuits were
filed against the Company in the Maricopa County Superior Court for the
State of Arizona. The suits 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. The Company believes
that the shareholder lawsuits are without merit and it intends to
vigorously defend against them. The Company expects that the ultimate
resolution of the lawsuits will not have a material effect on the
Company's financial position and the results of operations taken as a
whole.
The Company is involved in certain 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.
The Company utilizes contract manufacturing for virtually all of its
product requirements. Under these agreements, the Company is obligated to
purchase in the ordinary course of business products manufactured under
these contracts at contract prices. Some contracts require the Company to
purchase all inventory and components in the event of contract
cancellation.
7. EMPLOYEE BENEFIT PLANS
Stock Plans - The Company currently has five fixed stock option plans: the
1989 Incentive Stock Option Plan ("1989 Incentive Plan"), the 1989
Non-Qualified Stock Option Plan ("1989 Non-Qualified Plan"), the 1995
Long-Term Incentive Plan ("LTIP"), the 1993 Non-Employee Directors Plan
("1993 Directors Plan"), and the 1993 Annual Non-Employee Directors Plan
("1993 Annual Plan"). The 1989 Incentive Plan permitted the granting of
options to employees and the 1989 Non-Qualified Plan permitted the
granting of options to employees, directors, and consultants to purchase
the Company's common stock at not less than the fair market value on the
date of grant. Both of these plans were canceled upon adoption of the LTIP
on May 10, 1995, although grants outstanding at the time of cancellation
were not affected. The LTIP permits the granting of
47
<PAGE>
incentive stock options, non-qualified stock options and other stock-based
awards to employees, officers, and consultants to purchase the Company's
common. The Company is authorized to grant options to acquire up to
600,000 shares under the LTIP. The period during which options granted
under the above plans are exercisable is fixed by the Board of Director at
the date of grant but is not to exceed ten years. The 1993 Directors Plan
permits the one-time grant of 10,000 options to purchase the Company's
common stock and the 1993 Annual Plan permits the annual grant of 5,000
options to purchase the Company's common stock to each non-employee
director at not less than the fair market value on the date of grant.
Under the two directors plans, the Company is authorized to grant options
to acquire up to 200,000 shares. Vesting of options granted under these
two plans is defined by the plan with a term not to exceed five years.
A summary of the status of the Company's five fixed stock options plans as
of December 31, 1994, 1995, 1996, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,103,938 $4.79 1,135,821 $7.61 1,432,304 $12.43
Granted 462,850 $11.17 653,330 $18.23 589,148 $8.86
Exercised (327,128) $3.44 (288,862) $6.39 (26,567) $4.74
Cancelled (103,839) $5.26 (67,985) $11.60 (621,609) $17.06
----------------------- ------------------------ -----------------------
Outstanding at end
of year 1,135,821 $7.61 1,432,304 $12.43 1,373,276 $9.00
======================= ======================== =======================
Options exercisable at
end of year 313,547 415,939 622,289
============= ============= =============
Weighted average fair
value of options granted
during the year $ 9.74 $ 4.20
=========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise as of Exercise
Exercise Prices 12/31/96 Life (in yrs) Price 12/31/96 Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.80-$5.50 330,250 6.61 $5.13 281,421 $5.11
$6.25-$9.00 368,465 8.37 $7.82 165,751 $7.73
$9.50-$13.25 549,132 8.67 $9.93 117,154 $10.24
$14.63-$20.25 114,929 5.49 $18.21 52,863 $18.78
$23.50-$24.25 10,500 3.34 $23.54 5,100 $23.52
=========================================================================
$3.80-$24.25 1,373,276 7.78 $9.00 622,289 $8.09
=========================================================================
</TABLE>
48
<PAGE>
On May 18, 1992, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 200,000 shares of common stock is reserved
for issuance under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions, which may
not exceed 10% of an employee's compensation, at 85% of the lower of the
fair market value of the common stock at the beginning or at the end of
each offering period, as defined. The weighted-average fair value of those
purchase rights granted in 1995 and 1996 was $3.89 and $8.29. Transactions
related to the plan are summarized as follows:
Weighted Average
Shares Purchase Price
-------- --------------
Available at December 31, 1993 192,936
Purchases (29,978) $ 6.13
--------
Available at December 31, 1994 162,958
Purchases (16,080) $ 15.16
--------
Available at December 31, 1995 146,878
Purchases (20,499) $ 9.04
--------
Available at December 31, 1996 126,379
========
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for its fixed stock
options plans and its stock purchase plan. Had compensation cost for the
Company's stock option plans and its stock purchase plan been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Company's net income/(loss)
and earnings/(loss) per share for the years ended December 31, 1995 and
1996 would have been reduced to the pro forma amounts indicated below:
December 31, 1995 December 31, 1996
----------------- -----------------
Net income/(loss)
As reported (in '000s) $ 1,145 ($ 11,595)
Pro forma (in '000s) ($ 729) ($ 13,577)
Net income/(loss) per common and
equivalent share
As reported $ 0.13 ($ 1.43)
Pro forma ($ 0.09) ($ 1.69)
The fair value of options granted under the Company's fixed stock option
plans during 1995 and 1996 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-averaged
assumptions used:
49
<PAGE>
1995 1996
------- -------
Expected volatility 75.00% 75.00%
Expected term 4 years 4 years
Dividend yield 0.00% 0.00%
Risk-free interest rate 6.90% 5.45%
The fair value of purchase rights granted under the Employee Stock Purchase
Plan is measured using the Black-Scholes option-pricing model with the
following weighted-averaged assumptions used:
1995 1996
------- -------
Expected volatility 75.00% 75.00%
Expected term 1 year 1 year
Dividend yield 0.00% 0.00%
Risk-free interest rate 6.38% 5.12%
401(k) Plan - Under the Company's 401(k) Plan, full-time employees may
contribute to the Plan between 1% and 15% of their total covered
compensation, in lieu of receiving such amounts as taxable salary or
wages. The Company may, in its discretion, make matching contributions
equal to a percentage of an employee's covered compensation contributed to
the 401(k) Plan for the year, or in a fixed dollar amount, as determined
each year by the Board of Directors. The Company's contribution to the
Plan was approximately $78,000, $137,000 and $117,000 during 1994, 1995
and 1996, respectively.
8. EXPORT SALES
Export sales, primarily to customers in Europe, were approximately
$13,400,000, $19,080,000 and $14,783,000 in 1994, 1995 and 1996,
respectively.
9. OTHER
Major customers accounting for more than 10% of total revenues in any
given year are summarized below. Percentage of revenue amounts are not
presented if less than 10% in any year.
Customer 1994 1995 1996
A 19% 21%
B 15% 11%
C 14% 15% 18%
Sales and marketing expenses included advertising expense of approximately
$1,270,000, $1,909,000 and $2,056,000 in 1994, 1995 and 1996,
respectively.
Accrued liabilities include accrued acquisition expenses of $1,093,000 at
December 31, 1996.
50
<PAGE>
10. UNAUDITED QUARTERLY FINANCIAL INFORMATION
1995 Quarters
--------------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Amounts)
Total revenues $ 12,643 $ 14,014 $ 15,154 $ 10,726
Cost of sales and services 4,762 5,526 6,408 5,265
Gross profit 7,881 8,488 8,746 5,461
Net income/(loss) 1,876 (3,030) 1,840 459
Net income/(loss) per common and
equivalent share $ .22 $ (.37) $ .22 $ .06
1996 Quarters
--------------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Amounts)
Total revenues $ 11,960 $ 12,666 $ 12,136 $ 13,680
Cost of sales and services 5,001 5,501 4,853 5,097
Gross profit 6,959 7,165 7,283 8,583
Net income/ (loss) 707 982 991 (14,275)
Net income/(loss) per common and
equivalent share $ .09 $ .12 $ .12 $ (1.75)
Net charges relating to the acquisition of R&D were $5,116,000, $.63 per
common and equivalent share, in the second quarter of 1995 and $270,000,
$.03 per common and equivalent share, in the third quarter of 1995.
Charges relating to the acquisition of R & D were $15,697,000, $1.92 per
common and equivalent share, in the fourth quarter of 1996.
Quarterly results for 1996 vary from the previously published results due
to changes to recording sales under the Company's direct end user sales
program during the second, third and fourth quarters of 1996. Previously
published Quarterly Reports on Form 10-Q were changed by reducing second
quarter total revenues, cost of sales and services, gross profit, net
income and net income per common and equivalent share by $654,000,
$163,000, $491,000, $334,000 and $.04, respectively and third quarter
total revenues, costs of sales and services, gross profit, net income and
net income per common and equivalent share by $871,000, $218,000,
$653,000, $444,000 and $0.05, respectively. As a result of changes to
second and third quarter, fourth quarter total revenues, cost of sales and
services, gross profit, and net income were increased by $1,525,000,
$381,000, $1,144,000 and $778,000, respectively, which reduced the loss by
$.10 per share.
The sum of quarterly earnings per share information may not agree to the
annual amount due to the use of the treasury stock method.
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.
* * * * * *
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The Company has never filed a Current Report on Form 8-K to report a
change in accountants because of a disagreement over accounting principles or
procedures, financial statement disclosure or otherwise.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
------------------------------------------------
INFORMATION CONCERNING DIRECTORS, NOMINEES AND OFFICERS
Information concerning the names, ages, terms, positions with the
Company and business experience of the Company's directors, director nominees
and executive officers as of April 30, 1997 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.
52
<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.
53
<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.
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.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
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.
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").
55
<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 $60,717 for the fiscal year ended December
31, 1994.
56
<PAGE>
The following table sets forth information with respect to the grants
of stock options pursuant to the Company's Long-Term Incentive Plan during the
fiscal year ended December 31, 1996, to the Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------ Potential Realizable
Value at Assumed
% of Total Annual Rates of
Number of Options Exercise Stock Price
Securities Granted to or Base Appreciation for
Underlying Employees Price Option Term(3)
Options in Fiscal (per Expiration ----------------
Name Granted(#)(1) Year share)(2) Date 5%($) 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.
57
<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.
58
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
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.
59
<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.
60
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
-------------------------------------------------------------------
(a) Financial Statements and Schedules.
----------------------------------- Page or
Method of Filing
----------------
(i) Financial Statements.
(1) Independent Auditors' Report................................ Page 37
(2) Consolidated Financial Statements:
Balance Sheets - December 31, 1995 and 1996................ Page 38
Statements of Operations - For the Years Ended December 31,
1994, 1995 and 1996........................................ Page 39
Statements of Stockholders' Equity - For the Years Ended
December 31, 1994, 1995 and 1996........................... Page 40
Statements of Cash Flows - For the Years Ended December 31,
1994, 1995 and 1996........................................ Page 41
Notes to Consolidated Financial Statements - December 31,
1994, 1995 and 1996........................................ Page 42
(ii) Financial Statements Schedules.
Schedules have been omitted because of the absence of
conditions under which they are required or because the
required material information is included in the Consolidated
Financial Statements or Notes to the Consolidated Financial
Statements included herein.
(b) Reports on Form 8-K.
On December 30, 1996, the Company filed a Current Report on
Form 8-K dated December 17, 1996, disclosing its acquisition
of Logicraft Information Systems, Inc. The required financial
statements relating to the acquisition were filed on March 3,
1997.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report on Form 10-K/A to
be signed on its behalf by the undersigned, thereunto duly authorized, this 16th
day of June, 1997.
MICROTEST, INC.
By:/s/Richard G. Meise
-------------------------------------
Richard G. Meise
President & Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K/A has been signed below by the following persons on
behalf of the Company and in the capacities and on the date indicated.
Name and Signature Title Date
- ------------------ ----- ----
Chief Executive Officer, President & June 16, 1997
/s/ Richard G. Meise Chairman of the Board (Principal
- ----------------------- Executive Officer)
Richard G. Meise
Roger C. Ferguson
V.P. & Chief Financial Officer June 16, 1997
* (Principal Financial and Accounting
- ----------------------- Officer)
Richard R. Douglas
* Director June 16, 1997
- -----------------------
Roger C. Ferguson
* Director June 16, 1997
- -----------------------
Steven G. Mihaylo
* Director June 16, 1997
- -----------------------
William C. Turner
* Director June 16, 1997
- -----------------------
Dianne C. Walker
* By /s/ Richard G. Meise
----------------------
Richard G. Meise
Attorney-in-Fact
62
