SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MICROTEST, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
---------------------------------------------------------------------------
2) Form Schedule or Registration No.
---------------------------------------------------------------------------
3) Filing party:
---------------------------------------------------------------------------
4) Date filed:
---------------------------------------------------------------------------
<PAGE>
MICROTEST, INC.
4747 North 22nd Street
Phoenix, Arizona 85016
NOTICE AND PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 12, 1998
To our Shareholders:
The 1998 Annual Meeting of Shareholders (the "Annual Meeting") of
Microtest, Inc. (the "Company") will be held at 10:00 A.M., Arizona Time,
on Tuesday, May 12, 1998 at the Doubletree La Posada Resort, 4949 East
Lincoln Drive, Scottsdale, Arizona, for the following purposes:
1. To elect two class II directors to the Board of Directors to serve for a
three-year term;
2. To approve the 1998 Director Compensation Plan;
3. To transact such other business as may properly come before the Annual
Meeting.
Each outstanding share of the Company's Common Stock entitles the
holder of record at the close of business on March 26, 1998, to vote at the
Annual Meeting or any adjournment thereof. Shares can be voted at the
Annual Meeting only if the holder is present or represented by proxy. A
copy of the Company's 1997 Annual Report to Shareholders (which includes
the Company's Form 10-K for the year ended December 31, 1997 and audited
financial statements), is enclosed. Management cordially invites you to
attend the Annual Meeting.
By Order of the Board of Directors
Phoenix, Arizona John J. O'Block
April 6, 1998 Secretary
IMPORTANT
SHAREHOLDERS ARE EARNESTLY REQUESTED TO SIGN, DATE AND MAIL THE ENCLOSED
PROXY. A POSTAGE-PAID ENVELOPE IS PROVIDED FOR MAILING IN THE UNITED
STATES.
<PAGE>
MICROTEST, INC.
4747 North 22nd Street
Phoenix, Arizona 85016
PROXY STATEMENT
This Proxy Statement is furnished to the shareholders of Microtest, Inc.
(the "Company") in connection with the solicitation of proxies to be used in
voting at the Annual Meeting of Shareholders (the "Annual Meeting") to be held
on May 12, 1998. The enclosed proxy is solicited by the Board of Directors of
the Company. The proxy materials were mailed on or about April 6, 1998, to
shareholders of record at the close of business on March 26, 1998.
A person giving the enclosed proxy has the power to revoke it at any time
before it is exercised by either: (i) attending the Annual Meeting and voting in
person; (ii) duly executing and delivering a proxy bearing a later date; or
(iii) sending written notice of revocation to the Secretary of the Company at
4747 North 22nd Street, Phoenix, Arizona 85016.
The Company will bear the cost of the solicitation of proxies, including
the charges and expenses of brokerage firms and others for forwarding
solicitation material to beneficial owners of the outstanding Common Stock of
the Company. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone or telegraph.
VOTING SECURITIES OUTSTANDING
Only holders of record of Common Stock at the close of business on March
26, 1998, will be entitled to vote at the Annual Meeting. At the date, there
were 8,209,248 shares of Common Stock outstanding. Each share of Common Stock is
entitled to one vote on all matters on which shareholders may vote. There is no
cumulative voting in the election of directors.
Votes cast by proxy or in person at the Annual Meeting will be tabulated
by the inspector of elections appointed for the meeting and such inspector will
determine whether or not a quorum is present. The inspector of elections will
treat abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter submitted to the shareholders for a vote.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
2
<PAGE>
ELECTION OF DIRECTORS
(Proposal No. 1)
The Board of Directors of the Company currently consists of six members.
The present terms of Richard G. Meise and Steven G. Mihaylo, who are Class II
incumbent directors, will expire at the Annual Meeting. Messrs. Meise and
Mihaylo have been nominated for re-election as directors of the Company and,
unless otherwise noted thereon, the shares represented by the enclosed proxy
will be voted for the election of Mr. Meise and Mr. Mihaylo as directors of the
Company. If either of them becomes unavailable for any reason, or if a vacancy
should occur before election (which events are not anticipated), the shares
represented by the enclosed proxy may be voted for such other person or persons
as may be determined by the holders of such proxy. The nominees receiving the
highest number of votes cast at the Annual Meeting will be elected. The
directors elected will serve for three years and until their successors are duly
elected and qualified.
APPROVAL OF THE MICROTEST, INC. 1998 DIRECTOR
COMPENSATION PLAN
(Proposal No. 2)
The Company's Board of Directors has approved and recommends that the
stockholders approve the adoption of the Microtest, Inc. 1998 Director
Compensation Plan (the "Director Plan"), for non-employee directors of the
Company. The Director Plan sets forth the Board compensation paid by the Company
to non-employee directors and authorizes two types of automatic grants of
nonqualified stock options to all non-employee directors of the Company.
Currently, the Company's Board of Directors is composed of five non-employee
directors. The total number of shares of Common Stock available for awards under
the Director Plan is 150,000. The closing price for the Common Stock on March
26, 1998, as reported on NASDAQ, was $5.50 per share.
The Company currently maintains two option plans for its non-employee
directors. One plan, the non-employee directors Stock Option Plan, provides for
a one-time grant of 10,000 options to a non-employee director upon his or her
first election to office. The other plan, the Annual non-employee directors
Stock Option Plan, provides for the automatic grant of 5,000 options each year
to each non-employee director as of the third business day after public
announcement of the Company's annual earnings. If the Director Plan is approved,
these plans would be superseded and terminated, except for grants of options
already outstanding.
The Board believes that adoption of the Director Plan will promote the
success and enhance the value of the Company by (i) strengthening the Company's
ability to attract and retain the services of experienced and knowledgeable
persons
3
<PAGE>
as non-employee directors of the Company, and (ii) linking the personal interest
of non-employee directors to those of the Company's shareholders. The Director
Plan, if approved by shareholders, has an effective date of January 1, 1998.
The Board of Directors of the Company or a committee, appointed by the
Board, will administer the Director Plan, which initially sets forth a $8,000
annual retainer for non-employee directors and provides for annual option grants
to purchase 1,000 shares in 1998 and 5,000 shares thereafter and anniversary
option grants to purchase 10,000 shares of the Company's Common Stock. The
exercise of annual grants is conditioned upon the directors owning 5,000 shares
of the Company's common stock. The following summary of the Director Plan is
qualified in its entirety by reference to the Director Plan, a copy of which is
included at the end of this proxy statement as Appendix A.
Description of Available Awards
Board Compensation
Each non-employee director is entitled to an annual retainer of $8,000
for consideration for service on the Board plus a $2,000 annual retainer for
each committee membership, or such other amount as determined from time to time
by the Board. The annual retainer is the annual fee paid by the Company to the
director but does not include Board and committee fees. This annual retainer
will be paid quarterly in cash.
Each non-employee director will be entitled to a fee equal to $1,500 for
each Board meeting, a fee equal to $1,000 for each Board committee meeting that
is not in conjunction with a Board meeting and a fee equal to $750 for each
telephonic Board or committee meeting attended. Such amounts may be adjusted
from time to time in the Board's discretion. In addition, the Company will
reimburse each non-employee director for reasonable expenses incurred by the
non-employee director for traveling to and attending Board and Board committee
meetings.
Stock Options
Under the Plan, a non-employee director is entitled to two types of
option grants.
The first is the annual option grant under which the non-employee
director will be granted an option to purchase 1,000 shares in 1998 and 5,000
shares thereafter of the Company's Common Stock on the third business day
following the public release of the Company's fiscal year-end earnings
information. These annual option grants are immediately exercisable and the
exercise price is equal to the fair market value of the per share price of the
Company's Common Stock on the date of grant. Under the current Microtest Annual
non-employee director
4
<PAGE>
Stock Option Plan, the five Microtest non-employee directors are entitled to an
annual grant of 5,000 shares, which required that 25,000 shares be available
under that plan for 1998. However, only 20,000 shares were available for grant
under that plan. To make up the difference, options to purchase 1,000 shares to
each non-employee director have been granted in 1998, subject to stockholder
approval.
The second type of option grant is the anniversary option grant under
which the non-employee director will be granted an option to purchase 10,000
shares of the Company's Common Stock upon first being elected or appointed to
the Board and thereafter on the third business day following the public release
of the Company's fiscal or quarterly earnings information immediately following
the third anniversary of the non-employee director's election or appointment to
the Board and each successive third year anniversary thereafter. Twenty-five
percent of the anniversary option grants is immediately exercisable and vest 25%
over the next three years. In the event of a "Change of Control", as defined in
the Director Plan, all options will become exercisable. The exercise price of
the anniversary option grants is equal to the fair market value of the per share
price of the Company's Common Stock on the date of grant.
If a director granted options under the Director Plan ceases to be a
director for any reason the director will forfeit his or her unvested options.
The vested but unexercised options will be exercisable for one year after
ceasing to be a director.
The grant of an option to a non-employee director under the Director Plan
will not produce any taxable income to the director, and the Company will not be
entitled to a deduction at that time. On the date the option is exercised, the
director will recognize ordinary income equal to the difference between the fair
market value of the Common Stock on the date of exercise and the exercise price.
The Company is entitled to a corresponding deduction in the same amount and in
the same year in which the director recognizes income.
Subject to shareholder approval, the Company has granted 1,000 options to
each of the Company's five non-employee directors under the Director Plan under
the annual grant provisions. In addition, the Company has granted options to
acquire 10,000 shares of common stock under the Director Plan to Roger Ferguson,
Steven Mihaylo, William Turner and Dianne Walker, under the anniversary grant
provisions, also subject to shareholder approval.
5
<PAGE>
INFORMATION CONCERNING DIRECTORS, NOMINEES AND OFFICERS
Information concerning the names, ages, terms, positions with the Company
and business experience of the Company's current directors, director nominees
and executive officers is set forth below.
Name Age Position Term
- ---- --- -------- ----
Expires
-------
Richard G. Meise 62 Chairman of the Board and 1998
Chief Executive Officer
Steven G. Mihaylo(2) 54 Director 1998
Roger C. Ferguson(1)(2) 54 Director 1999
William C. Turner(2) 68 Director 2000
Dianne C. Walker(1)(2) 41 Director 2000
Kent C. Mueller(1) 57 Director 2001
Charles V. Mihaylo 51 President and Chief ---
Operating Officer
John J. O'Block 57 Vice President of ---
Operations, Chief
Financial Officer,
Treasurer and Secretary
David R. Coffin 44 Vice President of ---
Research and
Development
- --------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
6
<PAGE>
Tim M. Furst 42 Vice President of ---
Sales-Asia Pacific
and the Americas
Klaus M. Romanek 48 Vice President and ---
Managing Director of
European Operations
Robert M. Tanner 60 Vice President of ---
Marketing and Services
Richard G. Meise has been 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 President from October
1993 until June 1997 and 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. Mr. Mihaylo is the brother of Charles V.
Mihaylo, the Company's President and Chief Operating Officer.
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 was the Chief Executive Officer of Datatools, Inc., a software tools
manufacturer, from August 1993 until the Company was sold in 1997. From December
1987 to June 1993, Mr. Ferguson was the Chief Operating Officer of
7
<PAGE>
Network General, a publicly-held company that manufacturers diagnostic products
for local area networks.
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 consulting firm to
multi-national corporations, 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 for 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 director of the Company since January
1994. Ms. Walker has acted 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
for 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. 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.
Kent C. Mueller has served as a director of the Company since December
1997. Mr. Mueller has served as the President and Chief Executive Officer of
Kent Mueller Ventures, a high technology oriented investment fund, since March,
1996. In August, 1986, Mr. Mueller founded Mastersoft, Inc., a computer software
developer, and served as its President and Chief Executive Officer until it was
acquired by Adobe Systems, Inc. in October, 1995. Prior to Mastersoft, Inc., Mr.
Mueller held senior executive positions with Capex/Computer Associates, Intel
Corporation and Ampex Corporation. Additionally, Mr. Mueller has served as
Chairman and director of XANTEL Corporation, director of Quality Care Solutions,
Inc. and director of CoreData, Inc. Mr. Mueller is a trustee and member of the
executive committee of Westminster College in Fulton, Missouri, is a founder of
the Arizona Software Association and was named Inc. Magazine's Arizona High Tech
Entrepreneur of the Year in 1994.
Charles V. Mihaylo assumed the position of President and Chief Operating
Officer of the Company in June 1997. Prior to his current position, he was
President of long-distance reseller Inter-Tel NetSolutions, Inc. from 1994
through 1997.
8
<PAGE>
Mr. Mihaylo was President and Chief Executive Officer of OMAC, Inc., a research
and development aircraft company from 1983 to 1993. He founded and formed his
own full-service accounting firm in 1972. In 1984, it was sold to Coopers &
Lybrand L.L.P. Mr. Mihaylo began his career as an auditor for Hurdman &
Cranston, Penny & Company, an international accounting firm, where he progressed
through various managerial positions between 1967 and 1971 and was at a local
CPA firm from 1971 to 1972 until starting his own firm. Mr. Mihaylo is the
brother of Steven G. Mihaylo, a director of the Company.
John J. O'Block joined Microtest in November 1997 as Vice President,
Operations and Chief Financial Officer. From 1994 to 1997, he was Executive Vice
President and Chief Financial Officer for Inter-Tel NetSolutions, Inc., a
long-distance reseller. From 1988 through 1993, Mr. O'Block performed various
roles at OMAC, Inc., including Vice President, Finance and Chief Financial
Officer, Corporate Secretary, Treasurer and member of the Board of Directors.
Mr. O'Block's tenure with the Baker Division of Otis Elevator Company began in
1968 and spanned almost twenty years. There he progressed through several
managerial levels, ultimately achieving the position of Controller and a seat on
the Board of Directors.
David R. Coffin was named Vice President, Research & Development for the
Company in July 1997. He joined Microtest in 1996 as Vice President of the
Network Connectivity Division. Prior to Microtest, Mr.Coffin was President and
CEO for Irys Networking Corporation, a microcomputer networking technology
development firm, from 1991 to 1995. He also was Director of the Networked
MicroSystems operation of Group Bull from 1987 to 1990. From 1982 to 1986, Mr.
Coffin held the position of Systems & Networks Marketing Manager at Intel
Corporation. He is on the Arizona Software Association's Board of Directors and
is a published writer of technical articles and research papers.
Tim M. Furst has served as the Company's Vice President of Sales - Asia
Pacific and The Americas for Microtest, Inc. since July 1997. For the two years
prior to this appointment, Mr. Furst headed up the Company's Sales Team in North
and South America. Mr. Furst joined Microtest in 1991 and orchestrated the
Company's international growth. Prior to joining Microtest, Mr. Furst held
numerous Sales and Executive Management positions in the computer industry. He
served in the U.S. Air Force as a Captain and Search and Rescue Pilot. Mr. Furst
is a graduate of the U.S. Air Force Academy and earned his MBA at the University
of North Dakota.
Dr. Klaus Romanek joined Microtest in October 1997 as Vice President and
Managing Director of the European Operations and a member of the Board of
Directors of Microtest GmbH, Microtest Europe Limited and H+H Zebtrumfuer
Rechnerkommunikation GmbH. Before joining Microtest, Dr. Romanek worked for six
years at Wavetek, where he served as Vice President and General Manager of the
Munich-based Sales and Marketing Operation and later for the Wireless
9
<PAGE>
Division in Germany. He also served on the Board of Directors for Wavetek's
Austrian Division. Prior to his employment at Wavetek, Dr. Romanek worked in a
number of marketing functions for Kontron Elektronik GmbH, a subsidiary of
Hofmann LaRoche, later BMW. During that time, he served as a member of the Board
of Directors for Createc GmbH, a wholly owned subsidiary of Kontron. Dr. Romanek
holds a Master's Degree and Ph.D. in Physics from the University of Stuttgart,
Germany, where he specialized in semiconductor and laser physics.
Robert M. Tanner has served as the Company's Vice President of Marketing
and Services since July 1997. From May 1994 to June 1997, Mr. Tanner was the
Vice President of Worldwide Field Operations. From February 1992 to April 1994,
Mr. Tanner was the Vice President of U.S. Sales for Data General Corporation, a
publicly-held company that manufactures computers and computer peripheral
equipment. From February 1988 to October 1991, he was the Senior Vice President
of Worldwide Field Operations of Sequent Computer Systems, Inc., a publicly-held
computer manufacturer.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended December 31, 1997, the Board of Directors of the
Company met or acted by written consent on eleven occasions. Each of the
Company's directors attended more than 75% of the meetings of the Board of
Directors and the meetings held by committees of the Board on which such
director served.
Compensation Committee. The Compensation Committee of the Board of
Directors, which met or acted by written consent four times during 1997, reviews
all aspects of compensation of officers of the Company and determines or makes
recommendations on such matters to the full Board of Directors. The report of
the Compensation Committee for 1997 is set forth below.
Audit Committee. The Audit Committee, which met six times during 1997,
represents the Board of Directors in evaluating the quality of the Company's
financial reporting process and internal financial controls through
consultations with the independent auditors, internal management and the Board
of Directors.
Other Committees. The Company does not maintain a standing nominating
committee or other committees performing similar functions.
DIRECTOR COMPENSATION
During 1997, 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 received
10
<PAGE>
$1,500 per Board meeting attended, $1,000 per committee meeting attended, and
$750 per telephonic Board or committee meeting attended.
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, 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 non-employee
directors Stock Option Plan.
OPTION GRANTS PURSUANT TO NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Number of Securities
Date of Grant Underlying Stock Options Exercise Price
------------- ------------------------ --------------
Roger C. Ferguson 9/28/92 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
Kent C. Mueller 12/12/97 10,000 $ 4.75
None of the non-employee directors listed above exercised any of their
options under the non-employee directors Stock Option Plan during 1997.
In January 1994, the Company adopted an Annual non-employee directors
Stock Option Plan. Under the Annual non-employee directors Stock Option 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 non-employee directors Stock Option Plan.
11
<PAGE>
OPTION GRANTS PURSUANT TO ANNUAL NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Number of Securities
Date of Grant Underlying Stock Options Exercise Price
------------- ------------------------ --------------
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
2/9/98 4,000(1) $ 6.6250
Steven G. Mihaylo 2/7/95 5,000 $20.2500
2/16/96 5,000 $ 7.7500
2/14/97 5,000 $ 9.6875
2/9/98 4,000(1) $ 6.6250
William C. Turner 2/7/95 5,000 $20.2500
2/16/96 5,000 $ 7.7500
2/14/97 5,000 $ 9.6875
2/9/98 4,000(1) $ 6.6250
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
2/9/98 4,000(1) $ 6.6250
Kent C. Mueller 2/9/98 4,000(1) $ 6.6250
(1) 4,000 shares were granted in 1998 because of the lack of options available
for grant under this plan on February 9, 1998. An additional 1,000 options will
be granted to each non-employee director upon approval of the 1998 Director
Compensation Plan.
None of the non-employee directors listed above exercised any of their
options under the Annual non-employee directors Stock Option Plan during 1997.
In addition to the grants issued under the non-employee directors Stock
Option Plan and the Annual non-employee directors Stock Option Plan during 1997,
each non-employee director was granted 4,000 options under the Company's
Long-Term Incentive Stock Option Plan (the "LTIP") on June 4, 1997 with an
exercise price of $3.875. These shares vest in 800 share increments over a
five-year period.
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, 1997, 1996, and 1995, of those persons who were,
at December 31, 1997, (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").
12
<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>
Richard G. Meise 1997 $235,000 $ -- $ 6,000(4) -- $ 61,433
Chief Executive Officer 1996 200,000 83,750(2) 6,000(4) 15,887 69,963
1995 200,000 83,750(2) 6,000(4) 35,810 2,310
Charles V. Mihaylo(5) 1997 $117,565 $ 75,000(3) $ 3,500(4) 325,000 $ 689
President and Chief
Operating Officer
Richard R. Douglas(6) 1997 $175,000 $ -- -- -- $ 2,375
Vice President of Operations 1996 150,000 92,125 -- 9,982 1,817
Chief Financial Officer 1995 150,000 92,125 -- 22,500 2,250
Treasurer and Secretary
David R. Coffin(7) 1997 $125,000 $ 14,467 $ -- 25,000 $ 16,945
Vice President of Research
and Development
Tim M. Furst(8) 1997 $105,000 $ -- $151,146(9) 71,166 $ 8,203
Vice President of Sales-Asia
Pacific and the Americas
Robert M. Tanner 1997 $125,000 $ -- $ 51,353(10) -- $ 30,909
Vice President of Marketing 1996 125,000 -- 60,000(10) 7,985 42,247
and Service 1995 125,000 -- 58,910(10) 18,000 1,621
</TABLE>
(1) Detail of amounts reported in the "All Other Compensation" column for
1997 and 1996 is provided in the table below. Split dollar insurance
represents the present value of the interest projected to accrue for
employee's benefit on current year's insurance premium paid by the
Company. For a discussion of the Company's split-dollar life insurance
program, see the report of the Compensation Committee for 1997 set forth
below.
<TABLE>
<CAPTION>
Item Mr. Meise Mr. Mihaylo Mr. Douglas Mr. Coffin Mr. Furst Mr. Tanner
------------------ ------- ------------------ ------- ------- ------------------
1997 1996 1997 1997 1996 1997 1997 1997 1996
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company Contribution
to Defined Contribution
Savings Plan $ 2,375 $ 2,375 $ 689 $ 2,375 $ 1,817 $ 1,775 $ 2,375 $ 946 $ 755
Split Dollar Insurance
Premium Value $59,058 $67,588 $ -- $ -- $ -- $15,170 $ 5,828 $29,963 $41,492
------- ------- ------- ------- ------- ------- ------- ------- -------
Total All Other
Compensation $61,433 $69,963 $ 689 $ 2,375 $ 1,817 $16,945 $ 8,203 $30,909 $42,247
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(2) Represents the portion of 1994 deferred compensation which vested during
the fiscal year ended December 31, 1995 and 1996.
(3) Represents a signing bonus.
(4) Represents a car allowance.
(5) Mr. Mihaylo was hired by the Company in June 1997.
13
<PAGE>
(6) Mr. Douglas retired from the Company on December 31, 1997.
(7) Mr. Coffin was named Vice President of Research and Development in July
1997.
(8) Mr. Furst was named Vice President of the Americas and Asia Pacific Sales
in July 1997.
(9) Represents a car allowance of $5,500 and sales commissions of $145,646
for the year ended December 31, 1997.
(10) Represents sales commissions of $51,353, $60,000 and $58,910 for the
years ended December 31, 1997, 1996 and 1995 respectively.
Except as otherwise noted, the following table sets forth information
with respect to the grants of stock options pursuant to the Company's Long-Term
Incentive Plan during the fiscal year ended December 31, 1997, to the named
officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------ Potential Realizable
Value at Assumed
% of Total Annual Rates of
Number of Options Exercise Stock Price
Securities Granted to or Base Appreciation for
Underlying Employees Price Option Term (2)
Options in Fiscal (per Expiration ---------------------
Name Granted # Year share) (1) Date 5% ($) 10% ($)
---- --------- ---- ---------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Meise -- -- $ -- -- $ -- $ --
Charles V. Mihaylo 150,000(3) 20% $ 3.8125 6/9/03 197,681 448,470
175,000(4) 23% $ 3.8125 6/9/07 426,469 1,080,757
Richard R. Douglas -- -- -- -- -- --
David R. Coffin 10,000(5) 1% $ 3.8750 6/4/07 24,370 61,758
15,000(6) 2% $ 6.8125 10/22/07 64,265 162,861
Tim M. Furst 11,166(7) 1% $ 3.8750 6/4/07 27,211 68,958
30,000(8) 4% $ 6.8125 10/22/07 128,530 325,721
30,000(9) 4% $ 4.7500 12/12/07 89,617 227,108
Robert M. Tanner -- -- -- -- -- --
</TABLE>
(1) 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.
(2) Gains are reported net of 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.
14
<PAGE>
(3) Non-qualified stock options granted on June 9, 1997, pursuant to
Mihaylo's employment agreements with the Company, which vest at the end
of six years, but which will be accelerated at the rate of 25,000 shares
per year upon satisfaction of performance criteria established by the
Board of Directors, see "Employment Agreements" below. 25,000 shares have
vested to date.
(4) Non-qualified stock options granted on June 9, 1997, pursuant to
Mihaylo's employment agreements with the Company, which vest in 35,000
share increments over a five-year period beginning June 9, 1998, see
"Employment Agreements" below.
(5) Incentive stock options granted on June 4, 1997, which vest in 2,000
share increments over a five-year period beginning June 4, 1998.
(6) Incentive stock options granted on October 22, 1997, which vest in 3,000
share increments over a five-year period beginning October 22, 1998.
(7) Incentive stock options granted on June 4, 1997, which vest in 2,233
share increments over a five-year period beginning June 4, 1998.
(8) Incentive stock options granted on October 22, 1997, which vest in 6,000
share increments over a five-year period beginning October 22, 1998.
(9) Non-qualified stock options granted on December 12, 1997, which vest in
6,000 share increments over a five-year period beginning December 12,
1998
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, 1997, to the Named Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF DECEMBER 31, 1997
<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 - $ - 184,448 11,439 $ - $ -
Charles V. Mihaylo - $ - - 325,000 $ - $ 264,063
Richard R. Douglas - $ - 111,795 7,187 $ - $ -
David M. Coffin - $ - 14,381 61,977 $ - $ 7,500
Tim M. Furst - $ - 10,851 81,526 $ - $ 8,375
Robert M. Tanner - $ - 52,236 30,749 $ - $ -
</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, 1997 and the exercise price of the options.
15
<PAGE>
EMPLOYMENT AGREEMENTS
On June 9, 1997, the Company entered into an employment agreement with
Charles V. Mihaylo that establishes Mr. Mihaylo's annual base salary at
$200,000, provides for a bonus paid upon signing of the employment agreement of
$75,000, includes non-qualified grants of 150,000 and 175,000 stock options,
enables Mr. Mihaylo to participate in an executive bonus program, and provides
for severance compensation in the amount of one year's salary in the event he is
terminated without cause. The agreement is for a term of five years, but is
terminable by the Company for cause. The agreement defines "cause" generally as
a breach of the employment agreement, failure to follow the Board's directions,
acts of dishonesty with respect to the Company, or criminal conduct. The
employment agreement prohibits Mr. Mihaylo from competing with the Company for a
period of one year following termination of employment with the Company. For
information on the stock option grants, see "Option Grants in Last Fiscal Year"
included above.
The Company currently does not have employment agreements with any other
of its executive officers.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company's Compensation Committee (the "Committee") is composed
entirely of independent outside members of the Company's Board of Directors. The
Committee reviews and approves each of the elements of the executive
compensation program of the Company and periodically assesses the effectiveness
and competitiveness of the program in total. In addition, the Committee
administers the key provisions of the executive compensation program and reviews
with the Board of Directors the compensation program for the Company's
executives. The Committee has furnished the following report on executive
compensation.
Overview and Philosophy
The Company's compensation program for executive officers is primarily
comprised of base salary, annual bonus and long-term incentives in the form of
stock option grants. Executives also participate in various other benefit plans,
including medical and retirement plans, generally available to all employees of
the Company.
The Company's philosophy is to pay base salaries to executives that
enable the Company to attract, motivate and retain highly qualified executives.
The annual bonus program is designed to reward for performance based primarily
on financial results. Stock option grants are intended to result in no reward if
the stock price does not appreciate, but may provide substantial rewards to
executives as shareholders benefit from stock price appreciation.
16
<PAGE>
Base Salary
Each Company executive receives a base salary which, when aggregated with
their maximum bonus amount, is intended to be competitive with similarly
situated executives in the electronics industry. In determining salaries, the
Committee also takes into account individual experience and performance and
specific needs particular to the Company. The Company decreased the base
salaries for several of its executive officers during 1997 to properly align
their base salaries with the other executives in the Company as well as with
other similar positions in company's comparable to Microtest.
Annual Bonus Program
In addition to a base salary, executives are eligible to receive an
annual bonus. At the beginning of each year, the Committee establishes a
targeted maximum bonus for each executive and establishes performance criteria
for the executive to achieve the bonus. The amount of the targeted bonus and the
performance criteria vary with the position and role of the executive within the
Company, although all bonuses are significantly tied to the Company's financial
performance. The Company failed to achieve the internal goals set by the
Committee. Therefore, no annual bonuses were earned in 1997.
Options
The Company believes that it is important for executives to have an
equity stake in the Company and, toward this end, makes option grants to key
executives from time to time. In making option awards, the Committee reviews the
level of awards granted to executives at other technology companies, the awards
granted to other executives within the Company and the individual officer's
specific role at the Company.
In 1994, the Internal Revenue Code was amended to add a limitation on the
tax deduction a publicly-held company may take on compensation aggregating more
than $1 million for selected executives in any given year. The law and related
regulations are subject to numerous qualifications and exceptions. Gains
realized on non-qualified stock options, or incentive stock options that are
subject to a "disqualifying disposition," are subject to the new tax limitation
unless they meet certain requirements. To date, the Company has not been subject
to the deductibility limitation and has generally structured its equity-based
compensation to comply with the exception to the limitation. In connection with
the hiring of Charles Mihaylo as Chief Operating Officer, the Company granted
Mr. Mihaylo options to acquire shares of common stock. The grant was an integral
part of Mr. Mihaylo's employment agreement and a significant inducement for him
to join the Company and, accordingly, was not granted under a plan previously
approved by the Company's shareholders. See
17
<PAGE>
"Employment Agreements" above. If as a result of substantial appreciation in the
Company's stock and the exercise of substantial option holdings Mr. Mihaylo's
compensation were to exceed $1 million in a given year the excess may not be
deductible. The compensation element of an option does not, however, result in a
charge to earnings on the Company's financial statements.
18
<PAGE>
Other Benefits
Executive officers are eligible to participate in benefit programs
designed for all full-time employees of the Company. These programs include
medical, disability and life insurance and a qualified retirement program
allowed under Section 401(k) of the Internal Revenue Code, as amended.
In addition, the Company has purchased split-dollar life insurance for
certain key personnel, including officers of the Company, to assist the Company
in attracting, retaining and rewarding key personnel by providing tax-deferred
capital accumulation. Under this plan, the Company pays the annual split-dollar
life insurance premium in return for which the Company retains an assignment
against the policy cash value and death benefit equal to its cumulative
contributions. The Company will recover its total contributions at the earlier
of (i) the date on which the cash surrender value equals the Company's total
contributions or (ii) the death, termination or retirement of the insured. Upon
retirement, the insured may keep his or her shares of the policy to provide
continuing death benefit; surrender the policy for the cash surrender value; or
annuitize the cash value for supplemental retirement income.
19
<PAGE>
Chief Executive Officer Compensation
In September 1993, Richard G. Meise was hired as the Company's Chief
Executive Officer. At the time he was hired, Mr. Meise entered into an
employment agreement with the Company providing for an annual base salary, a
bonus plan and stock options. The Agreement terminated in 1996 and Mr. Meise's
compensation is now established annually by the Compensation Committee based
upon the factors described above.
During 1997, Mr. Meise received an annual base salary of $235,000. He did
not receive a bonus award. As of March 26, 1998, Mr. Meise held options to
purchase an aggregate of 220,887 shares with exercise prices ranging from
$4.6875 to $7.8750 per share.
This report is made by Dianne C. Walker and Roger C. Ferguson, who served
on the Company's Compensation Committee for all of 1997 and William C. Turner
who joined the Committee in June 1997. Steven G. Mihaylo served on the
Compensation Committee until his resignation in June 1997.
COMPENSATION COMMITTEE
Dianne C. Walker Roger C. Ferguson William C. Turner
STOCK PRICE PERFORMANCE GRAPH
The graph below compares cumulative total return of the Company, the
Standard & Poor's (S&P) 500 Stock Index and the H & Q Technology Index from
December 31, 1992 to December 31, 1997. The graph assumes that $100 was invested
on December 31, 1992, and any dividends were reinvested.
20
<PAGE>
MICROTEST, INC. STOCK PERFORMANCE
Dec Mar Jun Sep Dec Mar Jun Sep
92 93 93 93 93 94 94 94
Microtest, Inc. 100.00 58.06 43.55 35.48 59.68 56.45 90.32 101.61
H&Q Technology 100.00 106.25 108.96 111.27 117.41 121.74 111.37 127.00
S&P 500 100.00 104.37 104.88 107.59 110.08 105.91 106.35 111.55
Dec Mar Jun Sep Dec Mar Jun Sep
94 95 95 95 95 96 96 96
Microtest, Inc. 153.23 138.71 143.55 127.42 64.52 45.16 50.81 57.96
H&Q Technology 141.04 157.94 197.02 222.66 210.89 214.95 230.25 244.43
S&P 500 111.53 122.39 134.08 144.73 153.45 156.40 167.53 177.85
Dec Mar Jun Sep Dec
96 97 97 97 97
Microtest, Inc. 62.90 29.03 25.81 35.88 29.84
H&Q Technology 262.10 249.83 300.71 364.43 307.29
S&P 500 190.71 181.78 218.8 265.16 223.59
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.
The Company believes that, with the exception of the 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) Roger Ferguson filed two late
Forms 4 with respect to the purchase of 4,000 shares of stock in May 1997, and
the purchase of 10,000 shares of stock in July 1997; (ii) Tim Furst filed one
late Form 4 with respect to the purchase and sale of 3,900 shares of stock in
May 1997; (iii) Richard Meise filed one late Form 4 with respect to the purchase
of 25,000 shares of stock in May 1997; (iv) Charles Mihaylo filed one late Form
3 related to his appointment as President and Chief Operating Officer of the
Company in June 1997; (v) John O'Block filed one late Form 3 related to his
appointment as Vice President and Chief Financial Officer of the Company in
November 1997; (vi) Klaus Romanek filed one late Form 3 related to his
appointment as Vice President and Managing Director of European Operations of
the Company in October 1997; and (vii)
21
<PAGE>
Dianne Walker filed one late Form 4 related to the purchase of 5,400 shares of
stock in May 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of March 26, 1998, 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 (1) Percent Owned
-------------------- ---------------------- -------------
Richard G. Meise (2) 241,825 3.0%
Charles V. Mihaylo (3) 10,000 *
Richard R. Douglas (4) 121,811 1.5%
David M. Coffin (5) 27,870 *
Tim M. Furst (6) 16,328 *
Robert M. Tanner (7) 78,673 *
William C. Turner (8) 40,558 *
Dianne C. Walker (9) 31,000 *
Roger C. Ferguson (10) 34,500 *
Steven G. Mihaylo (11) 30,000 *
Kent C. Mueller (12) 20,000 *
All directors and Named Officers
as a group (11 persons) (13) 652,565 8.0%
- -----------------------
* Represents less that 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, and Messrs. Meise, C. Mihaylo,
Douglas, Coffin, Furst, Tanner, Turner, Ferguson, S. Mihaylo, and Mueller
is c/o Microtest, Inc., 4747 North 22nd Street, Phoenix, Arizona 85016.
22
<PAGE>
(2) Represents 187,308 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 54,517 shares held by
Mr. Meise. Does not include 33,579 shares issuable upon exercise of other
options. Mr. Meise is the Chairman of the Board and Chief Executive
Officer of the Company.
(3) Represents 10,000 shares held by Mr. Mihaylo. Does not include 325,000
shares issuable upon exercise of other options. Mr. Mihaylo is the
President and Chief Operating Officer of the Company.
(4) Represents 113,592 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 8,219 shares held by
Mr. Douglas. Does not include 30,390 shares issuable upon exercise of
other options. Mr. Douglas was the Vice President of Operations and Chief
Financial Officer; he retired from this position effective December 31,
1997.
(5) Represents 23,626 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 4,244 shares held by
Mr. Coffin. Does not include 52,732 shares issuable upon exercise of
other options. Mr. Coffin is the Vice President of Research and
Development.
(6) Represents 12,726 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 3,602 shares held by
Mr. Furst. Does not include 79,662 shares issuable upon exercise of other
options. Mr. Furst is Vice President of Sales - Asia Pacific and The
Americas.
(7) Represents 78,673 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days. Does not include 4,312
shares issuable upon exercise of other options. Mr. Tanner is Vice
President of Marketing and Service.
(8) Represents 30,558 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 10,000 shares held by
Mr. Turner. Does not include 8,000 shares issuable upon exercise of other
options. Mr. Turner is a director of the Company.
(9) Represents 25,000 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 6,000 shares held by
Ms. Walker. Does not include 8,000 shares issuable upon exercise of other
options. Ms. Walker is a director of the Company.
(10) Represents 24,500 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 10,000 shares held by
Mr. Ferguson. Does not include 8,000 shares issuable upon exercise of
other options. Mr. Ferguson is a director of the Company.
(11) Represents 25,000 shares issuable upon exercise of options that either
are exercisable immediately or within 60 days and 5,000 shares held by
Mr. Mihaylo. Does not include 8,000 shares issuable upon exercise of
other options. Mr. Mihaylo is a director of the Company.
(12) Represents 20,000 shares held by Mr. Mueller. Does not include 14,000
shares issuable upon exercise of other
options. Mr. Mueller is a director of the Company.
(13) Includes all shares included in notes (2) through (12) above.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
The Company believes all transactions it has entered into with affiliates
are at arm's length and on terms equivalent or similar to terms under which the
Company would conduct business with unaffiliated third parties.
RELATIONSHIP WITH
INDEPENDENT ACCOUNTANTS
The principal independent public accounting firm utilized by the Company
during the fiscal year ended December 31, 1997, was Deloitte & Touche LLP,
independent certified public accountants (the "Auditors"). It is presently
contemplated that the Auditors will be retained as the principal accounting firm
to be utilized by the Company during the current fiscal year. A representative
of the Auditors will attend the Annual Meeting for the
23
<PAGE>
purpose of responding to appropriate questions and will be afforded an
opportunity to make a statement if the Auditors so desire.
SHAREHOLDER PROPOSALS
The Board of Directors will consider proposals from shareholders for
nominations to the class of directors whose terms expire at the 1999 Annual
Meeting of Shareholders that are made in writing to the Secretary of the
Company, are received at least 90 days prior to the 1999 Annual Meeting and
contain sufficient background information concerning the nominee to enable
proper judgment to be made as to his or her qualifications, as more fully
provided in the Company's Certificate of Incorporation and Bylaws. Proposals of
shareholders as to other matters intended to be presented at the 1999 Annual
Meeting must be received by the Company by December 7, 1998, for inclusion in
the Company's proxy materials relating to such Meeting.
OTHER MATTERS
The Board of Directors does not intend to present at the Annual Meeting
any matters other than those described herein and does not presently know of any
matters that will be presented by other parties.
MICROTEST, INC.
Richard G. Meise Charles V. Mihaylo
Chief Executive Officer President and Chief Operating Officer
and Chairman of the Board
April 6, 1998
24
<PAGE>
APPENDIX A
1998 DIRECTOR COMPENSATION PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment of the Plan. Microtest, Inc., a Delaware corporation
(the "Company"), establishes the "Microtest, Inc. 1998 Director Compensation
Plan" (the "Plan") for its non-employee directors, as set forth in this
document. The Plan sets forth the Board Compensation payable to non-employee
directors and grants Nonqualified Stock Options to non-employee directors,
subject to the terms below.
Subject to the approval of the Plan by the Company's shareholders,
the Plan will become effective January 1, 1998 (the "Effective Date"). However,
Options granted under the Plan will be canceled if the Plan is not approved by
the Company's shareholders at its next regularly scheduled shareholders' meeting
after the Effective Date.
1.2 Purpose of the Plan. The purpose of the Plan is to further the
Company's short- and long-term objectives by attracting and retaining the
services of non-employee directors of outstanding competence and by linking the
personal interests of non-employee directors to those of the Company's
shareholders.
1.3 Duration of the Plan. The Plan will begin on the Effective Date and
shall remain in effect until all Stock under the Plan has been granted or
purchased according to the Plan's provisions or until the Board of Directors
exercises its right to terminate the Plan. However, no Option may be granted
under the Plan after December 31, 2007.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. Whenever used in the Plan, the following terms shall
have the meanings set forth below and, when the meaning is intended, the initial
letter of the word is capitalized:
(a) "Anniversary Grant Date" means the date of the initial election or
appointment of a non-employee director to the Board and, thereafter, the third
business day following the public release of the Company's fiscal or quarterly
earnings information immediately following the third anniversary of the
non-employee director's initial election or appointment and each successive
third year anniversary thereafter. For those individuals who have completed
three years of service as a non-employee director as of the Effective Date,
their Grant Date shall be the third business day following the public release of
the Company's fiscal year-end earnings information immediately following the
Effective Date.
25
<PAGE>
(b) "Annual Grant Date" means the third business day following the public
release of the Company's fiscal year-end earnings information.
(c) "Annual Retainer" means the annual fee payable by the Company to a
non-employee director, including amounts payable for service as a chairperson of
a committee of the Board, but excluding Board and committee meeting fees.
(d) "Board" or "Board of Directors" means the Board of Directors of
Microtest, Inc., and includes any committee of the Board of Directors designated
by the Board to administer part or all of this Plan.
(e) "Change of Control" means and includes each of the following:
(1) any merger of the Company in which the Company is not the continuing
or surviving entity, or pursuant to which Stock would be converted into cash,
securities or other property, other than a merger of the Company in which the
holders of the Stock immediately prior to the merger have the same proportionate
ownership of beneficial interest of common stock or other voting securities of
the surviving entity immediately after the merger;
(2) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of assets or earning power aggregating more than
40% of the assets or earning power of the Company and its subsidiaries (taken as
a whole);
(3) the shareholders of the Company shall approve any plan or proposal
for liquidation or dissolution of the Company;
(4) any person (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act), other than any employee benefit plan of the Company or any
subsidiary of the Company or any entity holding shares of capital stock of the
Company for or pursuant to the terms of any such employee benefit plan in its
role as an agent or trustee for such plan, becomes the beneficial owner (within
the meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the
Company's outstanding Stock or any beneficial owner of 20% or more of the
Company's outstanding Stock as of the Effective Date shall becomes the
beneficial owner of 50% or more of the Company's outstanding Stock; or
(5) during any period of two consecutive years, individuals who at the
beginning of such period fail to constitute a majority of the Board, unless the
election, or the nomination for election by the Company's shareholders, of each
new director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
26
<PAGE>
(f) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(g) "Committee" means the committee of the Board of Directors appointed
by the Board to administer this Plan.
(h) "Company" means Microtest, Inc., a Delaware corporation, or any
successor thereto as provided in Section 10.2 herein.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor Act thereto.
(j) "Fair Market Value" means the fair market value of such Stock as
determined by the Board in its discretion, under one of the following methods:
(i) the closing price for the Stock as reported on any national securities
exchange on which the Stock is then listed (which shall include the Nasdaq
National Market) for that date or, if no price is so reported for that date,
such price on the next preceding date for which the closing price was reported;
or (ii) the price as determined by such methods or procedures as may be
established from time to time by the Board.
(k) "Non-employee director" means any individual who is a member of the
Board of Directors, but who is not otherwise an employee of the Company.
(l) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares, granted under Article 7, which is not intended to be an incentive stock
option qualifying under Code Section 422.
(m) "Option" means a Nonqualified Stock Option under this Plan.
(n) "Participant" means a non-employee director of the Company who has
outstanding an award granted under the Plan.
(o) "Stock" means the shares of common stock of Microtest, Inc..
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
2.3 Severability. In the event that a court of competent jurisdiction
determines that any portion of this Plan is in violation of any statute, common
law, or public policy, then only such portion shall be stricken. All portions of
this Plan that do not violate any statute or public policy shall continue in
full force and effect.
27
<PAGE>
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Board or a
Committee of two or more non-employee directors appointed by the Board to
administer the Plan, subject to the restrictions set forth in this Plan. Except
as otherwise provided, reference to the Committee shall refer to the Board if
the Board does not appoint a Committee to administer the Plan.
3.2 Administration by the Committee. The Committee shall have full power,
discretion, and authority to interpret and administer this Plan in a manner
which is consistent with the Plan's provisions. However, in no event shall the
Committee have the power to take any action that would result in the Plan not
being treated as a formula plan under Section 16 of the Exchange Act.
3.3 Decisions Binding. All decisions made by the Committee pursuant to
the provisions of the Plan, and all related orders or resolutions of the
Committee shall be final, conclusive, and binding on all persons, including the
Company, its stockholders, employees, Participants, and their estates and
beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3
herein, the total number of shares of Stock available for grant under the Plan
may not exceed 150,000. The Stock issued may be authorized and unissued Stock or
Stock reacquired by the Company, as determined by the Committee.
4.2 Lapsed Awards. If any Option granted under this Plan terminates,
expires, or lapses for any reason, any Stock subject to purchase pursuant to
such Option again shall be available for the grant under the Plan.
4.3 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, Stock combination, or other change in the corporate
structure of the Company affecting the Stock, the number and/or type of Stock
subject to any outstanding Award, the Option exercise price per share under any
outstanding Option, will be automatically adjusted so that the proportionate
interests of the Participants will be maintained as before the occurrence of
such event. Any adjustment pursuant to this Section 4.3 will be conclusive and
binding for all purposes of this Plan.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Persons eligible to participate in this Plan are limited
to non-employee directors.
28
<PAGE>
5.2 Actual Participation. All eligible non-employee directors shall
receive an Annual Retainer under Article 6 and shall receive grants of Options
pursuant to Article 7.
ARTICLE 6. BOARD COMPENSATION
6.1 Annual Retainer. In consideration for service on the Board, each
non-employee director shall be entitled to an Annual Retainer equal to $8,000
plus a $2,000 Annual Retainer for each committee membership, or such other
amounts as determined from time to time by the Board. The Annual Retainer(s)
shall be paid in quarterly installments provided that the non-employee director
is providing services as a member of the Board on such date. If a non-employee
director terminates service on the Board prior to the last day of a calendar
quarter, the non-employee director shall be entitled to receive a pro rata
portion of his Annual Retainer(s) for such quarter.
6.2 Board and Committee Fees and Expenses. Each non-employee director
shall be entitled to a fee equal to $1,500 for each Board meeting, a fee equal
to $1,000 for each Board committee meeting that is not in conjunction with a
Board meeting and a fee equal to $750 for each telephonic Board or committee
meeting attended. Such amounts may be adjusted from time to time in the Board's
discretion. In addition, the Company shall reimburse each non-employee director
for reasonable expenses incurred by the non-employee director for traveling to
and attending Board and Board committee meetings.
6.3 Method of Payment. A non-employee director's Annual Retainer shall be
paid in cash. The Board and Board committee fees will be paid in cash promptly
after such meetings.
ARTICLE 7. OPTION GRANTS
7.1 Annual Grant of Options. Subject to the limitation on the number of
shares that may be awarded under this Plan, each non-employee director shall be
granted an Option to purchase 1,000 shares of Stock on the Annual Grant Date
occurring in 1998 and 5,000 shares of Stock on each Anniversary Date thereafter.
The Option granted pursuant to this Section 7.1 shall be immediately vested and
exercisable as of the relevant Annual Grant Date.
7.2 Anniversary Grant of Options. Subject to the limitation on the number
of shares that may be awarded under this Plan, each non-employee director shall
be granted an Option to purchase 10,000 shares of Stock on each Anniversary
Grant Date. The Option granted pursuant to this Section 7.2 shall vest 25% on
the Anniversary Grant Date, 25% on the first anniversary of the Anniversary
Grant Date, 25% on the second anniversary of the Anniversary Grant
29
<PAGE>
Date, and the remaining 25% on the third anniversary of the Anniversary Grant
Date provided, however, that a non-employee director shall not be permitted to
exercise any Option granted under this Section 7.2 until he owns (beneficially
or otherwise) 5,000 shares of Stock other than shares of Stock subject to
unexercised options under this Plan or any other Company plan.
7.3 Individual Award Agreement. Each Option grant shall be evidenced by
an individual agreement that will not include any terms or conditions that are
inconsistent with the terms and conditions of this Plan.
7.4 Option Price. The purchase price per share available for purchaser
under an Option granted pursuant to this Article 7 shall be equal to the Fair
Market Value on the Grant Date.
7.5 Duration of Options. Unless earlier terminated, forfeited, or
surrendered pursuant to a provision of this Plan, each Option granted under this
Article 7 shall expire on the tenth anniversary date of its grant.
7.6 Payment. Options shall be exercised by the delivery of a written
notice of exercise to the Secretary of the Company, setting forth the number of
shares with respect to which the Option is to be exercised, accompanied by full
payment for the Stock. The Option price upon exercise of any Option shall be
payable to the Company in full either: (a) in cash or its acceptable equivalent,
or (b) by tendering previously acquired Stock having a Fair Market Value at the
time of exercise equal to the total Option price (provided that the Stock
tendered upon Option exercise have been held by the Participant for at least six
(6) months prior to their tender to satisfy the Option price), or (c) by a
combination of (a) and (b). The proceeds from such a payment shall be added to
the general funds of the Company and shall be used for general corporate
purposes.
7.7 Restrictions on Share Transferability. To the extent necessary to
ensure that Options granted under this Article 7 comply with applicable law, the
Board shall impose restrictions on any Stock acquired pursuant to the exercise
of an Option under this Article 7, including, without limitation, restrictions
under applicable Federal securities laws, under the requirements of any stock
exchange or market upon which such Stock is then listed and/or traded, and under
any blue sky or state securities laws applicable to such Stock.
7.8 Termination of Service on the Board of Directors. If the service of a
Participant on the Board terminates for any reason, any outstanding Options that
are not vested as of such dated shall be forfeited. The Options that are
otherwise exercisable as of the date of such termination shall be exercisable by
the Participant for one year after such termination, unless the Options expire
earlier under Section 7.5.
30
<PAGE>
7.9 Nontransferability of Options. No Option granted under this Article 7
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all Options granted to a Participant under this Article 7 shall be
exercisable during his or her lifetime only by such Participant.
ARTICLE 8. CHANGE IN CONTROL
In the event of a Change in Control of the Company, all Options granted
under this Plan that are still outstanding and not yet vested, shall become
immediately vested and exercisable. Upon, or in anticipation of, such an event,
the Committee may cause every Option outstanding hereunder to terminate at a
specific time in the future and shall give each Participant the right to
exercise Options during a period of time as the Committee shall determine,
except in the event that the surviving or resulting entity agrees to assume the
Options on terms and conditions that substantially preserve the Participant's
rights and benefits of the Option then outstanding.
ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION
9.1 Amendment, Modification, and Termination. The Board may, at any time
and from time to time, terminate, amend or modify the Plan; provided, however
that to the extent necessary and desirable to comply with any applicable law,
regulation or stock exchange rule, the Company shall obtain shareholder approval
of any Plan amendment in such a manner and to such a degree as required.
9.2 Awards Previously Granted. Unless required by law, no termination,
amendment, or modification of this Plan shall in any manner adversely affect any
Option previously granted under this Plan, without the written consent of the
Participant holding such Option.
ARTICLE 10. MISCELLANEOUS
10.1 Beneficiary Designation. Each Participant under this Plan may, from
time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under this Plan is to be paid
in the event of his or her death. Each designation will revoke all prior
designations by the same Participant, shall be in a form prescribed by the
Committee, and will be effective only when filed by the Participant in writing
with the Committee during his or her lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be paid
to the Participant's estate.
10.2 Successors. All obligations of the Company under this Plan, with
respect to Options, cash or Stock granted hereunder, shall be binding on any
31
<PAGE>
successor to the Company, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
10.3 Requirements of Law. The granting of Options, cash and Stock under
the Plan shall be subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or national securities exchanges as
may be required. Notwithstanding any other provision set forth in this Plan, the
Committee may, at its sole discretion, terminate, amend, or modify this Plan in
any way necessary to comply with the applicable requirements of Rule 16b-3
promulgated by the Securities and Exchange Commission as interpreted pursuant to
no-action letters and interpretive releases.
10.4 Governing Law. This Plan, and all agreements hereunder, shall be
governed by the laws of the State of Delaware.
32
<PAGE>
<TABLE>
<S> <C>
Please Detach and Mail in the Envelope Provided
- ------------------------------------------------------------------------------------------------------------------------------------
____ |
A [X} Please mark your | |
votes as in this | |
example. |______
VOTE FOR
NOMINEES WITHHELD FOR
listed below ALL FOR AGAINST ABSTAIN
_____ _____ ____ ____ ____
1. ELECTION | | | | 2. Approval of the 1998 Director | | | | | |
OF TWO | | | | Nominees: Richard G. Meise Compensation Plan. | | | | | |
DIRECTORS |_____| |_____| Steven G. Mihaylo |____| |____| |____|
WITHHELD FOR (Write that nominee's name in THIS PROXY WILL BE VOTED AS DIRECTOR OR, IF NO CONTRARY
the space provided below) DIRECTION IS INDICATED, WILL BE VOTED FOR THE ELECTION OF
DIRECTOR NOMINEES, APPROVAL OF 1998 DIRECTOR COMPENSATION
PLAN, AND AS PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS
AS MAY COME BEFORE THE MEETING.
__________________________________________
Signature(s)________________________________________________________________________________________________ Date ______________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
PLEASE PRESENT THIS TICKET FOR ADMISSION TO THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, MAY 12, 1998, AT 10:00 A.M., ARIZONA TIME, AT THE
DOUBLETREE LA POSADA RESORT, 4949 EAST LINCOLN DRIVE, SCOTTSDALE, ARIZONA.
- --------------------------------------------------------------------------------
Please mark your
A[X] votes as in this
example
VOTE FOR
NOMINEES WITHHELD FOR
listed below ALL
1. ELECTION OF [ ] [ ] Nominees: Richard G. Meise
TWO DIRECTORS Steven G. Mihaylo
WITHHELD FOR (Write that nominee's name in
the space provided below)
- ------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of the 1998 Director Compensation Plan. [ ] [ ] [ ]
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR THE ELECTION OF DIRECTOR NOMINEES, APPROVAL OF 1998 DIRECTOR
COMPENSATION PLAN, AND AS PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY
COME BEFORE THE MEETING.
Signature(s) Date
----------------------------------------------- --------------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
