SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
(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, 1997
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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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 23, 1998, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $43,611,630.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
8,209,248 shares of Common Stock outstanding on March 23, 1998
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DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's Proxy Statement relating to its 1998
Annual Meeting of Shareholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.
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TABLE OF CONTENTS
Page
PART
I............................................................................4
ITEM 1. BUSINESS....................................................4
ITEM 2. PROPERTIES..................................................16
ITEM 3. LEGAL PROCEEDINGS...........................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY
HOLDERS.....................................................17
PART
II...........................................................................18
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
SECURITIES AND RELATED SHAREHOLDER MATTERS..................18
ITEM 6. SELECTED FINANCIAL DATA.....................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..................................................53
PART III.....................................................................53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY.....................................................53
ITEM 11. EXECUTIVE COMPENSATION......................................53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............54
PART IV......................................................................54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.........................................54
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PART I
ITEM 1. BUSINESS.
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Introduction
Microtest, Inc. ("Microtest" or the "Company") develops, markets and
supports products that make it easier to use, manage and service Local Area
Networks ("LANs"). Founded in 1984, Microtest has become a leading producer of
network management and network connectivity products that are designed to
simplify complex tasks in the workplace.
Microtest's Network Management Product ("NMP") line of handheld
certification and troubleshooting tools are used in the installation and
operation of networks. The handheld scanners quickly certify whether network
cabling will support the proposed network infrastructure, monitor network
activity when the network is in use, pinpoint cable problems when they arise,
and provide documentation of the network infrastructure. Products in this line
operate across multiple cable types and network management systems, and
cost-effectively increase network productivity and reliability by reducing
network downtime.
In late 1997, Microtest introduced CertiFiber(TM), the first
certification tool for fiber optic networks. CertiFiber simplifies the process
of certifying LAN fiber cable installations to industry standards by instantly
delivering a pass/fail result with the push of a single button. CertiFiber
satisfies the growing need among cable installers to reduce the time it takes to
install and certify an ever-increasing number of fiber and mixed copper/fiber
networks. Organizations continue to place mission critical operations and
information knowledge bases onto networks of increasing size and complexity.
Using CertiFiber at the time of installation verifies that the network can
safely and reliably deliver the speed and accuracy users will demand.
Microtest's Network Connectivity Product ("NCP") line consists of a
family of mini-server and server products that allow users to easily share
information on a variety of peripheral devices, including CD-ROM drives.
Microtest connectivity products enable organizations to develop, store, manage
and access information and knowledge bases with ease. The Company's DiscPort(R)
brand of products includes CD-ROM and DVD-ROM mini servers, towers and
enterprise servers that let organizations access information instantly with
point-and-click ease.
In 1997, Microtest introduced WebZerver(TM), an intranet mini-server
that simplifies the process of creating departmental intranet sites. According
to the Gartner Group, an increasing number of organizations are utilizing
intranets to facilitate access and retrieval of critical information. WebZerver
simplifies intranet installation and content publishing, letting users
collaborate and share knowledge and information quickly and easily.
Microtest is a Delaware corporation, its principal executive offices
are located at 4747 N. 22nd Street, Phoenix, Arizona 85016, and its telephone
number is (602) 952-6400.
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This Annual Report on Form 10-K contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe," "expect," "anticipate," and "project," and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities and Exchange Act of 1934,
as amended. Such statements may include, but not be limited to, projections of
revenues, income or loss, capital expenditures, plans for future operations,
financing needs or plans, the impact of inflation and year 2000 issues and plans
relating to products or services of the Company, as well as assumptions relating
to the foregoing. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements. Statements in this Annual
Report, including the Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements are set forth
in "Business" and "Market for the Company's Equity Securities and Related
Shareholder Matters" in this Report.
Industry Background
The computer networking industry, which includes local area networking,
enterprise networking, intranets and the Internet continues to grow at a rapid
rate. In September 1996, Dataquest predicted that the LAN market will experience
a 5-year, 20% compound annual growth rate.
Organizations' growing dependence on networks causes increasing
pressure for improved network performance and reliability, starting at the point
of cable installation. As more demands are placed on the network, products that
maintain and enhance the integrity of the LAN, and that ensure network
compliance with continuously changing U.S. and international standards, will
become ever more important.
Adding to the increased demand on networks is the trend toward
increased complexity. Each year, there are new standards, new protocols, faster
data requirements, enhanced operating systems, better data storage options, new
peripheral hardware, more advanced topologies (wiring configurations), and
additional cabling options. Moreover, many networks incorporate a variety of
different technologies and it is this trend toward complexity which is creating
demand for products that manage network assets.
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Organizations are continuing to migrate mission-critical operations and
information to the network, making the work environment ever more dependent on
the network's ability to have multiple users share information efficiently. This
growing dependence on networking has caused increasing demand for products and
technologies that maximize device and information sharing capabilities. CD-ROM
remains the mass information storage medium of choice because of its low cost
and easy access via network CD-ROM servers. As the cost of CD-Recordable drives
continue to fall, more organizations may utilize this storage medium as a viable
alternative to other, more expensive memory options. The move toward intranets
for information capture and distribution has also gained momentum.
Market for the Company's Products
Network Management Products. In March 1996, World Information
Technologies, Inc. predicted that the market for handheld digital/data test
equipment would exceed $300 million by the year 2000 and, according to Kessler
Marketing Intelligence Corporation, $175 million of that market will be for
fiber test instruments. This is because equipment and technologies continue to
be developed allowing high-speed data transmission over twisted-pair and fiber
optic wiring. In fact, according to World Information Technology, 36% of premise
wiring will be fiber by 1999. Ensuring that existing or newly installed wiring
can handle these high data speeds is a critical step in minimizing network
downtime, lost productivity and data transmission problems later. Service
providers and systems integrators worldwide use Microtest's NMP products to
perform the critical certification functions for modern twisted-pair networking
systems and legacy cabling. Newer products (CertiFiber) perform similar
certification functions for fiber optic cabling. Once the network cabling is
installed and the network is running, management software products continue to
help users troubleshoot network problems with speed and accuracy minimizing
network downtime and increasing user productivity.
Network Connectivity Products. Microtest's NCP products address the
challenges associated with managing devices and sharing large amounts of
information within workgroups, or enterprises. Network administrators,
librarians, and information resource professionals in all kinds of organizations
such as law firms, educational institutions, libraries, and research facilities
are some of the target markets for Microtest's NCP line. CD-ROM is the
information storage medium of choice and, according to Frost & Sullivan, unit
shipments of CD-ROM networking products are being driven by increases in the
amount of content available on CD and DVD. Microtest's CD-ROM networking
products are designed to increase the ease of connecting network users to the
content stored on CD-ROMs and DVD-ROMs. Newer NCP product offerings have also
enabled network users to utilize newer popular storage devices and media, such
as Jaz(TM) and Zip(TM) drives. NCP core technologies have broadened to expand
beyond the scope of CD devices, to encompass these newer popular media types, as
well as the Internet and intranets.
Network administrators charged with developing a structure through
which an organization can develop an enterprise-wide intranet is one primary
market. According to Forrester Research, companies will migrate to full service
intranets for 1) making easier connections with
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the outside world; 2) standardizing multiple competing suppliers; and 3)
lowering costs. This market is growing rapidly. Tierney & Partners, in a study
conducted for the American Management Association (AMA), indicated that 36% of
all companies have an intranet for inter-organizational communications. The
report predicted this figure would grow to 68% by 1999. NCP core technologies
have proven to be extensible and adaptable to target these newer market
opportunities.
Company Strategy
Microtest strives to make computer and telecommunications networks
easier to use, and mission-critical information easier to share. The Company
provides easy-to-use devices and software to solve complex LAN management
problems. To effectively serve its customers, the Company relies on developing
fully integrated solutions, optimizing established distribution channels and
expanding software content across all types of products.
Developing Fully Integrated Solutions. Microtest develops integrated,
intuitive "plug and play" solutions, which can be quickly and easily installed
on a network and brought into everyday use. The Company's products are designed
to be marketed and sold as complete solutions to common network problems
experienced by users. For example, in 1996 the Company introduced a complete
line of network-ready DiscPort Towers, which included the CD-ROM drives, tower
enclosure and CD-ROM networking software. Towers are available in several
configurations, to accommodate the varying needs of different types of users.
Optimizing Established Distribution Channels. The Company's worldwide
indirect sales channels allow it to reach a broad base of customers efficiently.
Products are sold through a worldwide network of distributors and through
manufacturers' representative organizations and value-added resellers ("VARs")
that market PC-related hardware and software products. Microtest also employs
Major Account sales representatives who develop opportunities with enterprise
customers for fulfillment through channel partners.
Expand Software Content. The Company continues to expand the amount of
software in its products to enable it to meet market demands for greater
functionality and easier adaptation. Increasing software content in integrated
products, while releasing new software products and software upgrades, continues
to be important to Microtest.
Products
The Company's products consist of a family of handheld scanners and
network troubleshooting devices which pinpoint cable problems, certify cable
across multiple LAN configurations and troubleshoot network faults. Sales of
network management products accounted for 55%, 59% and 81% of the Company's
total revenues in 1997, 1996 and 1995, respectively. Additionally, the Company
offers a line of LAN connectivity products that allow users to easily share
information on a variety of peripheral devices, including CD-ROMs.
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The Company currently derives substantially all of its revenues from
its PentaScanner and DiscPort products. Any decrease in sales of PentaScanner or
DiscPort products would have a material adverse effect on the Company's
business, financial condition and operating results.
Network Management Products. Cable installers and information system
administrators use Microtest's NMP products to instantly pinpoint physical
cabling problems, which can be a primary cause of network downtime. The Company
designs scanners with easy-to-use keypads for entering commands and LCD screens
for displaying results. The Company's NMP products handle the various types of
networks and cables and certify that cable installations will meet the link
performance requirements as well as major industry standards, such as those
issued by the International Standards Organization ("ISO"), Telecommunications
Industry Association ("TIA") and Electronics Industry Association ("EIA").
Microtest's scanner products utilize a variety of technologies, including Time
Domain Reflectometry (TDR), Digital Signal Processing, proprietary ASICs
developed by Microtest, as well as Microtest's knowledge base in making cable
measurements. These technologies and know-how are incorporated into intuitive,
easy to use handheld scanners that allow cabling and network professionals to
use these powerful technological tools with little or no training.
The following table provides a partial listing of current products in
the NMP line:
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Network Management Products
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Cable Certification Tools Network Troubleshooting Tools
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PentaScanner+(TM) NetWare(R) COMPAS(TM)
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PentaScanner(TM) 350 NT COMPAS(TM) Module
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CertiFiber(TM) Internet COMPAS(TM) Module
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MTCrimp(TM) Fiber Solution Kit
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MICROSCANNER(TM)
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PentaScanner+ with 2-Way Injector+ is Microtest's best selling cable
management system and is capable of certifying cable links to 100 MHz
performance specifications. PentaScanner+ offers professional cable installers,
service providers and network administrators an easy-to-use, handheld solution
for installing, managing and troubleshooting Category 5 and ISO Class D cabling
systems. The 2-Way Injector+ is an accessory to the PentaScanner+ that measures
Near-End Crosstalk (NEXT) and Attenuation-to-Crosstalk Ratio (ACR) from both
ends of the installed network cable link which saves installation test time.
This product enables cable installers to purchase a handheld tool that provides
cable-testing accuracy indistinguishable from a network analyzer.
PentaScanner 350 includes all of the Technical Service Bulletin ("TSB")
67 Level II functionality and accuracy of PentaScanner+, and is the only
Category 5 tester with Performance Grading. Performance Grading measures and
rates the quality of high-performance links by analyzing the available headroom
at 100 MHz and offers a variety of qualitative performance grading data, not
just a pass/fail test result. PentaScanner 350 also shows the
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available headroom for future growth of the LAN. Using PentaScanner 350 ensures
a highly reliable cable installation that will meet future performance
requirements without costly rewiring.
CertiFiber, introduced in late 1997, is the first fiber optic
certification scanner that certifies fiber installations to TIA, ISO, and other
industry specifications. CertiFiber enables fiber optic cable installers,
electrical contractors, field service contractors and computer network
administrators to certify fiber optic cable fast and accurately. CertiFiber
features a one-button Autotest that provides pass/fail results instantly. Users
specify the required fiber standard (such as TIA 568A or ISO1108) and the number
of splices and connectors on a segment and, within seconds, CertiFiber displays
a pass/fail result based on length, propagation delay and bi-directional dual
wavelength loss measurements for 850nm and 1300nm. CertiFiber is the only tester
that can perform all these measurements critical to determining the Optical Link
Budget.
MICROSCANNER is an entry level scanner that quickly provides extensive
cable information, combining length and wiring connections (wiremap) functions.
It is a low cost scanner, and easily confirms continuity, wiremap, and cable
fault locations. MICROSCANNER is the ideal tool for performing a fast,
all-in-one twisted-pair cable check. Small enough to fit in the palm of a hand,
MICROSCANNER quickly verifies cabling by combining the length measurement, using
TDR technology, with wiremap. MICROSCANNER saves time and money by locating
faults and identifying the sources of cabling problems.
Additionally, Microtest offers MT CRIMP software enhancements for its
scanners that provide easy-to-use methods for storing, retrieving and managing
network test results and cabling information. These enhancements and upgrades
include additional test functionality, customized test suites, expanded native
language support and communication capabilities to external equipment and
databases. The Company also sells accessories that complement the functions
performed by its scanners.
Also part of Microtest's NMP line, NetWare COMPAS ("COMPAS") is a
network troubleshooting tool designed for IT administrators, network technicians
and third-party service providers who are tasked with solving common, everyday
problems on Ethernet LANs. COMPAS combines the best features of cable testers,
protocol analyzers, network diagnostic utilities, and asynchronous data
communications testers into a handheld, portable tool. Users select the network
problem from a simple menu and COMPAS performs a series of tests designed to
identify the cause of the problem. COMPAS also diagnoses problems inside NetWare
fileservers via the COMPAS NetWare Loadable Module (NLM). COMPAS also
troubleshoots Ethernet cabling and protocol and serial link problems. COMPAS'
unique NetTap(TM) feature lets users plug in COMPAS between any network node and
the hubs, to monitor traffic or test the network.
Microtest offers two modules for COMPAS as well. The optional NT COMPAS
module provides information about Windows NT(TM) network in seconds. Users add
the module to their COMPAS and see the domains and hosts on their NT networks.
NT COMPAS supports IP, NetBeui, and IPX protocols and configures itself from a
DHCP server. The Internet COMPAS
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module for COMPAS troubleshoots Internet and intranet connections quickly and
easily. In addition to the COMPAS tests, Internet COMPAS allows the user to
easily isolate incorrectly configured hosts and determine whether the problem is
a faulty router on the company intranet, or on the Internet at large. Often
times, this simple diagnosis can save many hours of labor in troubleshooting the
problem. Internet COMPAS performs tests such as Duplicate IP address detection,
IP PING, IP host summary list and detail, and Internet Control Message Protocol
(ICMP) monitoring and trace route. Also included is Domain Name System (DNS)
support for simplified troubleshooting, and DHCP support for automatic
configuration.
Network Connectivity Products. Microtest's NCP line enables
organizations to create, access, share and store large amounts of information
easily. Most of the products in this line focus on CD-ROM technology because it
is still the most cost-effective and efficient medium for mass data storage and
retrieval. Workgroups or entire organizations requiring instant access to
mission critical information, reference information, research data, and even
multimedia files can use CD-ROM as the storage medium and Microtest connectivity
products for instant access and retrieval. These products enable network users
to access and share information, such as customer databases, legal briefs,
medical records, library reference volumes, research data, photo images, and
even sound bytes across a network.
In 1997, Microtest advanced its mini-server expertise beyond CD-ROM
into the intranet technologies and markets. This new direction is an important
next step in advancing the product line into the Internet age. Continued success
in this product line will require Microtest to enhance its existing products,
expand products into product lines, and introduce new products rapidly. To
facilitate new and continuing product development, Company personnel work
directly with customers, distribution channels, and leaders in other network
industry segments to identify market needs and define appropriate product
specifications.
The following table provides a partial overview of current products in
the NCP line:
<TABLE>
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<S> <C> <C>
Network Connectivity Products
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Workgroup Mini-Servers Enterprise Software Enterprise Systems
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DiscPort(R) Executive for DiscPort(R) Enterprise Server
DiscPort(R) intraNetWare (Rack)
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DiscPort(R) Executive for DiscPort(R) Enterprise Server
DiscPort(R) XL Windows NT(TM) (Tower)
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DiscPort(R) PRO LANCD(R)
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DiscPort(R) Towers
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WebZerver(TM)
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</TABLE>
Microtest's primary NCP brand is DiscPort. The product line includes a
category of workgroup mini-servers software and enterprise systems. These
products integrate anywhere on a network and allow for the instantaneous sharing
of CD-ROMs. DiscView PRO is the common software platform that features a
transparent user interface by design, and enables users to view information on
CDs.
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For larger enterprise applications, Microtest's DiscPort Enterprise
Servers, available in rack and tower configurations, allows enterprises to share
hundreds of CD-ROM titles with point-and-click simplicity. These fully
integrated solutions include a CPU running DiscPort Executive software and up to
sixty-three high-speed drives. Its graphical user interface makes managing
CD-ROM resources easy, and users can browse and access CD-ROM resources from
their desktop or their intranet browser. These servers are designed for
enterprises with many users who need to access mission critical information
resources on CD-ROM. Microtest also enables integrators to build their own
enterprise servers by offering DiscPort Executive software separate from the
hardware. The software is available in intraNetWare and Windows NT versions.
With the acquisition of Logicraft Information Systems (now doing
business as Microtest Enterprise Group ("MEG")), in 1996, Microtest acquired
several additional technologies including Virtual CD, which allows users to
access CD-ROM information at unprecedented speed by imaging, compressing and
downloading CD-ROM data to the user's hard drive for faster retrieval. In 1997,
the Company introduced DiscPort Enterprise server for Windows NT. Within a short
time, the majority of sales for these large servers have moved to the NT
platform.
In 1997, Microtest expanded its line of mini-servers and its CD-ROM
storage platform with WebZerver. WebZerver helps users implement intranet
workgroup sites across organizations for collaborative document sharing and
threaded discussions. Should the need arise to provide access to other databases
through the intranet, however, users can quickly and easily attach external
storage CD, DVD, Hard Disk, Jaz, or Zip drives.
Sales, Distribution and Customers
Sales. The Company's sales, marketing and distribution strategy is to
use a multiple channel, worldwide distribution network. The network includes
distributors, VARs and dealers, manufacturer's representatives as well as
selected OEMs and licensees. The Company's sales organization manages the
activities of these distribution channels, directs sales leads to these
distribution channels and responds to sales calls from distributors, resellers,
dealers and end users. In addition, the Company has a telesales department that
assists the sales efforts of its sales representatives.
Distribution Network. The Company sells its products through an
established worldwide network of distributors, VARs and dealers that market
PC-related hardware and software products. The Company focuses a significant
amount of its sales and marketing resources on its distribution channel,
providing ongoing communication and support to channel participants.
Distribution network support programs include ads in trade magazines to generate
demand; regular mailings of product, promotional and technical materials;
participation in industry trade shows; incentive programs for distributors, VAR
and dealer sales personnel; and cooperative marketing programs. A dedicated
sales force manages and supports the Company's distributors, VARs and dealers.
The Company provides technical and sales product training to all of its
distributors and dealers, who in turn provide technical and sales training to
their customers who
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purchase Microtest products. Microtest also provides a strong set of VAR
professional service offerings that includes installation services, installation
planning and pre-sale site planning.
North American sales accounted for approximately 76%, 71%, and 64% of
the Company's total revenues in 1997, 1996 and 1995, respectively. The Company's
United States distributors include national distributors, cable and wire
distributors, and catalog merchandisers.
To address international markets, the Company has developed
relationships with distributors throughout Europe. The Company supports its
European distributors through offices located in the United Kingdom and Germany.
In addition, the Company has developed relationships with distributors located
in Canada, Mexico, South America and the Pacific Rim. All international sales
are denominated in United States dollars. Sales outside of North America
accounted for 24%, 29% and 36% of the Company's total revenues in 1997, 1996 and
1995, respectively. The decrease in sales outside of North America is primarily
due to a weakening of the European and Asia Pacific economy in 1997 coupled with
the restructuring of the management group of the Company's European operations
in October 1997. See footnote 9 in the Notes to the Consolidated Financial
Statements for information by geographic area.
Customers. The primary target market for the Company's products include
LAN management personnel, LAN installers, field service personnel, resellers,
and technical end users with departmental applications. The Company's end user
customers span a broad range of industries that utilize LANs, including
technology, industrial, transportation, retail, health care, financial services,
government and education. As summarized in footnote 8 in the Notes to the
Consolidated Financial Statements, major customers accounting for more than 10%
of total revenue in 1995, 1996 and 1997 were Graybar Electric Company, Inc. 0%,
11% and 11%, Ingram Micro, Inc. 15%, 18% and 13% and Anixter 21%, 0% and 0%,
respectively. The Company maintains a customer support organization in both
North America and Europe to answer customer questions concerning the use of the
Company's products.
Product Development
The Company believes that its continued success will depend upon its
ability to enhance its existing products, expand products into product lines,
introduce new products on a timely basis and continue to develop technology that
can be incorporated into commercially viable products addressing the demands of
the LAN industry. To facilitate new and continuing product development, Company
personnel work directly with customers, distribution channels, and leaders in
other network industry segments to identify market needs and define appropriate
product specifications. Microtest employees participate in numerous professional
groups and technical committees including the following: Institute of Electrical
& Electronic Engineers ("IEEE") 802.3 committee, ISO, International
Electro-technical Commission ("IEC"), Certified Network Expert ("CNX") Technical
Advisory Board, TIA TR41.8.1, and Building Industry Consulting Services
International ("BICSI"). The Company believes that tracking developments in the
latest high-speed technologies, like Integrated Service Digital Network
("ISDN"), Asymmetric Digital Subscriber Line ("ADSL") and Asynchronous Transfer
Mode ("ATM"), will facilitate the development of products supporting the
networks of the future.
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As one of the early entrants into the cable troubleshooting and
certification markets, the Company has developed a substantial level of
proprietary technology. The Company embodies a substantial portion of its TDR
technology in a custom gate array to deter reverse engineering, and Microtest
has obtained several United States patents on portions of its technologies.
Microtest leverages its proprietary technology and industry expertise into new
product offerings to enhance the troubleshooting, certification and connectivity
capabilities of its product lines. The Company also routinely evaluates the
acquisition or licensing of complementary products and technologies. There can
be no assurance that any new products developed or acquired by the Company will
be successful or profitable.
Acquisitions
In recent years, the Company has strategically acquired network
connectivity product offerings. In December 1996, the Company completed the
acquisition of Logicraft Information Systems, Inc. ("Logicraft"), a leading
developer and manufacturer of enterprise CD-ROM networking systems. Subsequent
to the acquisition, Logicraft was renamed Microtest Enterprise Group ("MEG").
The Company acquired all of the capital stock of Logicraft for approximately
$12.5 million and assumed certain Logicraft liabilities totaling approximately
$4.5 million, which were paid off immediately after the closing. As a result of
the allocation of the purchase price, the Company recorded an expense of $15.7
million 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. Microtest acquired Logicraft to give it
broader reach throughout the entire CD-networking spectrum, most notably at the
enterprise and NT levels.
In June 1995, the Company completed the acquisition of Optical Media
International ("OMI"), a pioneer in the CD-ROM and CD-R industry. The Company
acquired all of the outstanding stock of OMI for approximately $4 million in
cash and the assumption of OMI-related debt of $660,000. As a result of the
allocation of the purchase price, the Company recorded an expense of $8.3
million and a related tax benefit of $3.2 million 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 acquired OMI to develop networkable CD-R technology. CD-R
technology is used in the areas of records archiving, information transfer,
computer data back-up and mass storage.
In August 1995, the Company acquired the technologies of Hotware, Inc.,
an independent software company for $450,000 in cash. Hotware has developed
technologies in the LAN information access market and has made significant
contributions over the past several years to existing Microtest product
technology.
The Company intends to continue to evaluate acquisition opportunities
as they are presented from time to time. The Company may face competition from
other suppliers or manufacturers of network hardware or software products or
other third parties for acquisition opportunities as they become available.
There can be no assurance that the Company will identify acquisition candidates
that will result in successful combinations in the future. Any future
acquisitions by the Company may result in the incurrence of additional debt
13
<PAGE>
and amortization of expenses related to goodwill and intangible assets, which
could adversely affect the Company's profitability, or could involve the
potentially dilutive issuance of additional equity securities. In addition,
acquisitions involve numerous risks, including difficulties in assimilation of
the acquired company's operations, particularly in the period immediately
following the consummation of such transactions, the diversion of the attention
of the Company's management from other business, and the potential loss of
customers, key employees and suppliers of the acquired company, all of which
could have a material adverse effect on the Company's business and operating
results.
Manufacturing and Backlog
The Company contracts with domestic manufacturers to build its
products. These manufacturers comply with industry-accepted (IPC) standards and
are, whenever possible, ISO 9002 certified. The Company's internal operations
consist of supplier management, incoming test and inspection, final product
configuration and packaging and order consolidation and shipment. The Company
retains a skilled, permanent, core workforce, utilizing temporary employees to
accommodate workload fluctuations. The Company maintains three authorized repair
centers, one in Phoenix, Arizona, one in the United Kingdom and one in Japan.
Certain components used in the Company's products are presently
available from or supplied by only one source and others are available from
limited sources. Although the Company does not have long-term supply contracts
with any of its component suppliers, to date it has been able to obtain supplies
of components and products in a timely manner. However, in the event that
certain of its suppliers or contract manufacturers were to experience financial
or other difficulties that resulted in a reduction or interruption in supply to
the Company, the Company's results of operations would be adversely affected
until the Company established alternate sources.
In 1995, the Company began the documentation process to become ISO 9001
certified. In 1997, the Company continued this process by conducting numerous
internal audits and reviews in preparation for final approval expected in 1998.
ISO 9001 requires that business processes are documented and ensures that
mechanisms are developed to continually improve general business practices and
products.
Historically, the Company has not maintained significant backlog
because it fills substantially all product orders within 30 days after receipt
of a firm purchase order. The Company does not believe that backlog is a
reliable long-term indicator of future sales or earnings.
Competition
The market for LAN products is extremely fast-moving and competitive, and
competition in the Company's market segment is continually increasing. Rapid
technological advances and emerging industry standards can quickly change
competitive conditions in the LAN industry. This often requires frequent new
product introductions, added product features and rapid
14
<PAGE>
improvements in the relative price or performance of networking products.
Failure to keep pace with technological advances or market changes would
adversely affect the Company's competitive position and operating results. The
Company's products compete on the basis of ease-of-use, product features,
quality, reliability and price.
In the network management and certification market, the Company
competes with products manufactured by Wavetek Corporation, Scope
Communications, Fluke Corporation and Datacom Technologies. To a lesser extent,
the Company competes with manufacturers of time domain reflectometers, ohm
meters, volt meters and oscilloscopes. The Company's network troubleshooting
products compete with the products from Scope Communications, Fluke Corporation,
Network General, and Hewlett-Packard Company. To a lesser extent, the Company
competes with manufacturers of software-based protocol analyzers, such as
Triticom and Intel.
The Company's network connectivity products compete with products from
Meridian Data, Inc.; Micro Design International; Ornetix; SciNet, Procom
Technology, and Axis Communications, Inc. The Company also competes indirectly
with suppliers of personal computers and network operating systems, such as
MicroSoft and Novell, to the extent that these companies include CD-ROM
networking utilities as part of their operating systems.
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.
Further, the markets served by the Company's connectivity products continue to
grow at rates that naturally attract new entrants into those markets. 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 at
lower prices 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.
Proprietary Rights
Microtest relies upon a combination of copyright, trademark, trade
secret and patent protection to establish and protect the Company's proprietary
rights in its products and technologies. In addition, the Company generally
enters into nondisclosure and confidentiality agreements with its employees,
distributors, customers and suppliers with access to sensitive information and
limits access to and distribution of its software documentation and other
proprietary information. The Company has several trademarks, including
Microtest(R), DiscPort(R), DiscView(R), PairScanner(R), PentaScanner(TM),
CertiFiber(TM), and FiberEye(R), as well as MEG's disk-caching technology called
FastCD(TM), and disc management utility software called AutoShare(TM).
15
<PAGE>
The Company embodies a substantial portion of its TDR technology in a
custom gate array to deter reverse engineering. The Company has obtained a
United States patent on a portion of its technology related to TDR.
In 1997, the Company obtained two additional patents: one for a method
and apparatus for concurrently measuring near end crosstalk at two ends of a
cable and one for developing a foreign file system establishing method which
uses a native file system virtual device driver.
There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of its
technology or independent third-party development of its technology, or that its
patents or registered trademarks can be successfully enforced. Because of the
rapid pace of technological change in the LAN product industry, the Company
believes that patent protection for its products is less significant to its
success than the knowledge, ability and experience of its employees and the
frequent introduction and market acceptance of new products and product
enhancements.
Given the rapid pace of technological development in the LAN industry,
there can be no assurance that certain aspects of the Company's products do not
or will not infringe the existing or future proprietary rights of others. The
Company believes that if such infringement existed, it could obtain the
requisite licenses or rights to use such technology. However, there can be no
assurance that such licenses or rights could be obtained or obtained on terms
that would not have a material adverse effect on the Company.
Employees
As of March 1, 1998, the Company employed 218 persons on a full-time
basis: 84 in sales, marketing and customer support, 31 in manufacturing, 64 in
research and development and 39 in administration. Many of the Company's
employees are highly skilled in certain disciplines and the Company's continued
growth and success will depend in part on its ability to retain management and
key employees and, where appropriate, hire new employees. The Company has never
had a work stoppage, no employees are represented by a labor organization and
the Company considers its employee relations to be good.
ITEM 2. PROPERTIES.
-----------
The Company's principal corporate offices and research and development
facilities are located in a 49,000 square foot facility in Phoenix, Arizona. The
lease for this facility commenced October 1, 1992, and continues for a period of
eight years. Current monthly rental payments for this facility are approximately
$75,000. The Company believes that this facility is adequate to meet its needs.
The Company also leases sales and support offices in California, Illinois and
the United Kingdom. The Company's subsidiaries lease office space for sales,
support and research and development in New Hampshire and Germany.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
------------------
The Company is involved in various legal proceedings incidental to its
business. Management does not believe that any of these legal proceedings will
have a material adverse effect on the financial condition or operating results
of the Company.
ITEM 4. SUBMISSION OF MATTERS.
----------------------
The Company did not submit any matter to a vote of its shareholders
during the fourth quarter of 1997.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND RELATED
-----------------------------------------------------------------------
SHAREHOLDER MATTERS
-------------------
The Company's Common Stock has been traded in the over-the-counter
market and quoted through the Nasdaq National Market ("Nasdaq") since October
30, 1992, under the symbol "MTST." The following table sets forth the quarterly
high and low sale prices of the Common Stock as reported on Nasdaq.
Period High Low
------ ---- ---
1996 First Quarter . . . . . . . . . . . . . . $12.25 $5.00
Second Quarter . . . . . . . . . . . . . 12.25 7.00
Third Quarter . . . . . . . . . . . . . . 11.50 7.00
Fourth Quarter . . . . . . . . . . . . . 10.88 6.88
1997 First Quarter . . . . . . . . . . . . . . 10.38 4.38
Second Quarter . . . . . . . . . . . . . 4.88 3.38
Third Quarter . . . . . . . . . . . . . . 6.63 3.81
Fourth Quarter . . . . . . . . . . . . . 8.13 3.88
The closing price of the Company's Common Stock on March 23, 1998 was
$5.31 per share.
As of March 23, 1998, there were 8,209,248 shares of Common Stock
outstanding, which were held of record by 245 holders. The Company estimates
that there are approximately 6,073 beneficial owners of the Company's common
stock.
The Company has not paid any cash dividends on its Common Stock. The
Company presently intends to retain earnings for use in its business and does
not anticipate paying cash dividends on its outstanding shares in the
foreseeable future.
Factors That May Affect Future Stock Performance
The performance of the Company's common stock is dependent upon several
factors, including those set forth below and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations Factors That May
Affect Future Results and Financial Condition."
Possible Volatility of Stock Price - The Company believes that factors
such as announcements of developments related to the Company's business,
announcements by competitors, quarterly fluctuations in the Company's financial
results, conditions in the CD-ROM networking industry, conditions in the network
management and certification industry, changes in the general economy, and other
factors could cause the price of the Company's
18
<PAGE>
Common Stock to fluctuate substantially. In addition, in recent years the stock
market in general, and the market for share of small capitalization technology
stocks in particular, have experienced extreme fluctuations, which have often
been unrelated to the operation performance of affected companies. Such
fluctuations could have a material adverse effect on the market price of the
Company's Common Stock.
Certain Charter and Bylaw Provisions - The Company's Certificate of
Incorporation and Bylaws empower the Board of Directors, without approval of the
shareholders, to fix the right and preferences and to issue shares of preferred
stock and divide the Company's Board of Directors into three classes. These
provisions, as well as other provisions in such documents, could have the effect
of deterring unsolicited takeovers or delaying or preventing changes in control
or management of the Company, including transactions in which shareholders might
otherwise receive a premium for their shares over the current market prices.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The consolidated balance
sheets as of December 31, 1996 and 1997, and the consolidated statements of
operations for each of the three years in the period ended December 31, 1997 and
the independent auditors' report thereon, are included in Item 8 of this Form
10-K.
19
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues.................................................... $ 22,142 $ 39,574 $ 52,537 $ 50,442 $ 49,592
Cost of sales and services ................................. 9,680 16,584 21,961 20,452 20,266
-------------------------------------------------------
Gross profit ........................................... 12,462 22,990 30,576 29,990 29,326
Total operating expenses .................................... 15,045 16,212 22,192 24,939 29,254
Restructuring charges, purchased R & D
and other unusual items(1) ............................... (3,358) -- (8,776) (15,697) --
Income from sale of technology(1) .......................... 959 -- -- -- --
-------------------------------------------------------
Income (loss) from operations ............................... (4,982) 6,778 (392) (10,646) 72
Interest income - net ....................................... 729 743 1,232 762 120
-------------------------------------------------------
Income (loss) before income taxes ........................... (4,253) 7,521 840 (9,884) 192
Provision (benefit) for income taxes ........................ (1,730) 2,231 (305) 1,711 (131)
-------------------------------------------------------
Net income (loss) ........................................... $ (2,523) $ 5,290 $ 1,145 $(11,595) $ 323
=======================================================
Diluted net income (loss) per common and
equivalent share (1) ........................................ $ (0.34) $ 0.64 $ 0.13 $ (1.43) $ 0.04
=======================================================
Net income (loss) excluding restructuring charges,
purchased R&D, other unusual items (1) ...................... $ (1,100) $ 5,290 $ 6,531 $ 4,102 $ 323
=======================================================
Diluted net income (loss) per common and equivalent
share excluding restructuring charges, purchased R&D,
other unusual items (1) ..................................... $ (0.14) $ 0.64 $ 0.77 $ 0.50 $ 0.04
=======================================================
Shares used in per share calculation ........................ 7,503 8,269 8,534 8,104 8,249
=======================================================
Balance Sheet Data:
Working capital ............................................. $ 29,576 $ 36,635 $ 39,128 $ 26,583 $ 26,256
Total assets ................................................ 36,537 47,642 50,158 43,313 41,874
Shareholders' equity ........................................ 33,433 40,579 43,027 31,672 32,094
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of the impact on net income of restructuring
charges, purchased R&D, other unusual items.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
------------------------------------
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 1997, the Company recorded net revenues of $49.6 million and net
income of $323,000 or $.04 per share, as compared to net revenues of $50.4
million and a net loss of $11.6 million or $(1.43) per share in 1996.
International sales compared to the prior year decreased 8% and 17% for 1997 and
1996, as compared to an increase of 43% in 1995. The decrease is due to the
tightening of the European economy and the loss of sales during the
restructuring of the Company's European management group. The Company fully
integrated Logicraft, which was acquired in December 1996, into its corporate
structure and has began realizing the synergies of the acquisition.
During 1996, the Company terminated its end user direct sales program
and implemented a manufactures' representative program. As a result of the
manufacturers' representative program, the Company lowered its discount
structure to the distributors represented by selected manufacturers'
representatives and, in turn, increased commission expense.
In December 1996, the Company acquired the capital stock of Logicraft
for approximately $12.5 million and the assumption of $4.5 million in
liabilities. As a result of the allocation of the purchase price, the Company
recorded a $15.7 million expense to record the value of software research
acquired relating to products for which technological feasibility had not been
established and for which no alternative future existed. Logicraft is now doing
business as Microtest Enterprise Group ("MEG").
21
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 Change 1996 Change 1997
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $52,537 -4% $ 50,442 -2% $ 49,592
Gross profit 30,576 -2% 29,990 -2% 29,326
As a percentage of revenues 58.2% 59.5% 59.1%
Sales & marketing 12,585 14% 14,334 13% 16,253
As a percentage of revenues 24.0% 28.4% 32.8%
Research & development 5,913 8% 6,414 28% 8,212
As a percentage of revenues 11.3% 12.7% 16.6%
General & administrative 3,694 13% 4,191 14% 4,789
As a percentage of revenues 7.0% 8.3% 9.7%
Interest income 1,232 -38% 762 -84% 120
As a percentage of revenues 2.3% 1.5% 0.2%
Income taxes excluding tax benefit from purchased R & D 3,085 -45% 1,711 -108% (131)
Effective tax rate, excluding tax benefit from purchased R&D 32.1% 29.4% -68.2%
Net Income (Loss) 1,145 -1113% (11,595) 103% 323
As a percentage of revenues 2.2% -23.0% 0.7%
Net Income (Loss) excluding restructuring charges,
purchased R & D other unusual items and Income
from sale of technology 6,531 -37% 4,102 100% -
As a percentage of revenues 12.4% 8.1% 0.0%
</TABLE>
Revenues - Product sales decreased $800,000 or 2% from $50.4 million in 1996 to
$49.6 million in 1997. MEG contributed $11.3 million to revenue during 1997.
Product sales, excluding MEG decreased $12.2 million or 24%. The decrease was
attributable to continued market softness in the network connectivity products
industry, intensified competition and sluggish European sales. Product sales
decreased $2.1 million or 4% from $52.5 million in 1995 to $50.4 million in
1996. This decrease was a result of increased competition in the Category 5
cable testing market and a softening of the European economy in 1996.
[GRAPH OMMITED]
Bar Graph showing revenue as $22.1 million for 1993, $39.6 million for 1994,
$52.5 million for 1995, $50.4 million for 1996 and $49.6 million for 1997.
22
<PAGE>
International sales were $19.1 million, $14.8 million and $ 13.7 million in
1995, 1996 and 1997 or 36%, 29% and 28% of total revenues, respectively.
International sales continued to decrease in 1997 in both absolute dollars and
as a percentage of sales primarily due to the weakening of the European economy
and the restructuring of the Company's European management group in October
1997.
[GRAPH OMITTED]
Bar graph showing Gross Profit of $12.5 million for 1993, $23 million for 1994,
$30.6 million for 1995, $30 million for 1996 and $29.3 million for 1997.
Gross Profit - Gross profit decreased $700,000 or 2% from $30.0 in 1996 to $29.3
in 1997. Gross profit as a percentage of sales remained comparable at 59.5% and
59.1% for 1996 and 1997, respectively. The decrease in gross profit was a result
of the decrease in revenue and a charge to the obsolete inventory reserve of
approximately $400,000 during the third quarter of 1997. This charge was
recorded to account for potentially excess inventory levels of several of the
Company's products that may become obsolete with the introduction of CertiFiber,
which occurred during the fourth quarter. This decrease was partially offset by
higher software content in several of its products, which results in higher
gross margins.
Gross profit decreased $600,000 or 2% from $30.6 in 1995 to $29.9 in 1996. The
decrease was primarily attributable to the decrease in revenue of $2.1 million,
which was offset by the introduction of the manufactures' representative
program. Discounts to many of the Company's distributors were lowered as a
result of this program. The manufacturers' representative program pays
commissions to selected representatives of the Company for selling the Company's
products from Company's distributors to end users. As a result of this program,
the Company lowered its discount structure to the distributors represented by
these selected manufacturers' representatives and, in turn, increased commission
expenses.
Sales & Marketing Expenses - Sales and marketing expenses increased $2.0 million
or 14% from $14.3 million in 1996 to $16.3 million in 1997. The increase was due
largely to an increase in employees and other costs attributable to the
Logicraft acquisition made during the fourth quarter of 1996, increased
commissions paid as a result of the manufacturers' representative program, which
was introduced in mid-1996, and severance costs associated with restructuring of
the Company's European operations and sales force to take advantage of the
synergies of the Logicraft acquisition.
23
<PAGE>
Sales and marketing expenses increased $1.7 million or 14% from $12.6 million in
1995 to $14.3 million in 1996. The increase was due to the implementation of the
manufacturers' representative compensation program, as well as the addition of
personnel to bolster the Company's sales force.
[GRAPH OMITTED]
Bar Graph showing Sales and Marketing Expenses of $7.7 million for 1993, $8.7
Million for 1994, $12.6 million for 1995, $14.3 million for 1996 and $16.3
million for 1997.
Research & Development Expenses - Research and development expense increased to
$8.2 million in 1997, $1.8 million or 28% increase as compared to $6.4 million
in 1996. The increase stemmed primarily from an increase in the number of
employees due to the acquisition of Logicraft during the fourth quarter of 1996,
as well as the development of an increased number of prototypes than experienced
in 1996. The Company has restructured its research and development work force to
fully integrate MEG into the research and development process.
[GRAPH OMITTED]
Bar graph showing Research and Development Expenses of $4.7 million for 1993,
$4.1 million for 1994, $5.9 million for 1995, $6.4 million for 1996 and $8.2
million for 1997.
The Company capitalized approximately $1,000,000, $90,000 and $0 in 1997, 1996
and 1995, respectively, of software development costs for new products for which
technological feasibility has been determined. These costs will be amortized
over the life of the associated products of approximately two to four years as a
charge to cost of goods sold. These amortization charges may result in lowering
the Company's net income in future periods.
Research and development expense increased $500,000 or 8% from $5.9 million in
1995 to $6.4 million in 1996. This increase was primarily attributable to an
increase in the number of prototypes developed in 1996 as compared to 1995.
24
<PAGE>
General & Administrative Expenses - General and administrative expenses
increased to $4.8 million in 1997, a $600,000 or 14% increase as compared to
$4.2 million in 1996. The increase was a result of the increase in personnel and
other administrative costs attributable to the Logicraft acquisition during the
fourth quarter of 1996, legal expenses incurred to defend the Company against
class-action lawsuits that were dismissed during the second quarter of 1997 and
an increase in the bad debt reserve of approximately $310,000.
[Graph Omitted]
Bar Graph showing general and administrative expenses of $2.7 million for 1993,
$3.4 million for 1994, $3.7 million for 1995, $4.2 million for 1996 and $4.8
million for 1997.
General and administrative expenses increased $500,000 or 13% from $3.7 million
in 1995 million to $4.2 million in 1996. This increase resulted from increases
in legal expenses related to the settlement of a lawsuit during the first
quarter of 1996, as well as legal costs associated with the defense of
shareholder lawsuits filed during the second half of 1996.
[Graph Omitted] Bar Graph showing interest and other income of $729,000
for 1993, $743,000 for 1994, $1,232,000 for 1995, $762,000 for 1996 and $120,000
for 1997.
Interest & Other Income - Interest and other income (net) decreased $642,000 or
84% from $762,000 in 1996 to $120,000 in 1997. The decrease in interest and
other income is attributable to a higher average cash balance during 1996 as
compared to 1997. The average cash balance for 1996 and 1997 was approximately
$21.0 million and $8.0 million, respectively. The decrease in the average cash
balance of $13.0 million is a result of cash paid of $12.5 million for
Logicraft. A loss of $200,000 was included in other income related to the
disposition of Optical Media International fixed assets during 1997.
Interest and other income decreased $470,000 or 38% from $1.2 million
in 1995 to $762,000 in 1996. The decrease was a result of the reallocation of
investments in anticipation of the 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.
25
<PAGE>
Effective Tax Rate - The Company experienced a decrease in the effective tax
rate from 1996 to 1997. The decrease was a result of recognition of research and
development credits earned in 1997. The decrease from 1995 to 1996 was
attributable to the recognition of research and development credits, excluding
the effects of purchased research and development.
Net Income - Net income increased $11.9 million from $(11.6) million in 1996 to
$323,000 in 1997. The increase was primarily attributable to a charge for
research and development expense in the fourth quarter of 1996 of $15.7 to
record the value of software research the Company acquired in the Logicraft
acquisition for which technological feasibility had not been established and for
which no alternative future use existed. The expense recorded for research and
development costs were determined based on allocation of the purchase price to
fair values of assets and liabilities acquired. The allocation of the purchase
price to purchased research and development costs was based on an independent
appraisal of the fair value of complete and incomplete technology acquired.
Excluding the $15.7 million research and development charge in 1996, net income
decreased from $4.1 million in 1996 to $323,000 in 1997. The decrease was a
result of the decrease in revenue, increase in operating expenses and a decrease
in investment and other income. The Company has implemented cost control
measures, including headcount reductions, to fully integrate MEG into
Microtest's operating plan.
Net income decreased $12.7 million from $1.1 million in 1995 to $(11.6)
million in 1996. This decrease was primarily a result of the charge to research
and development expense as discussed above. Excluding this expense, the
remaining decrease was mainly attributable to the decrease in revenue, the
overall increase in operating expenses and the decrease in interest income.
During the second quarter of 1995, the Company recorded an expense for research
and development costs associated with software products for which technological
feasibility had not been established and for which no alternative future use
existed arising from the purchase of Optical Media International. 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 had not been established and for which no future use
existed arising from the purchase of certain technologies from Hotware, Inc. The
expense totaled $450,000 and a tax benefit of $180,000 was recognized.
[Graph Omitted]
Bar Graph showing Net Income/(Loss) of $(2.5) million for 1993, $5.3 million for
1994, $1.1 million for 1995, $(11.6) million for 1996 and $.3 for 1997.
[Graph Omitted]
Bar Graph showing Net Income excluding Restructuring Charges, Purchased R&D and
Other Unusual Items of $(1.1) million for 1993, $5.3 million for 1994, $6.5
million for 1995, $4.1 million for 1996 and $.3 million for 1997.
26
<PAGE>
Future Results - The Company's future operating results may be affected
by a number of factors, including general economic conditions in the Company's
markets, the Company's ability to develop, manufacture and sell its products
profitably, the strength of the Company's distribution channels, competition in
general and competitive pricing in particular.
Liquidity and Capital Resources
The Company has financed its operations primarily through operating
cash flows and equity financings. At December 31, 1997, the Company had cash and
cash equivalents of $11.5 million. This represents a $1.3 million increase in
cash equivalents compared to December 31, 1996, due primarily to the collection
of accounts receivable and management of Company payables.
During the second quarter of 1997, the Company obtained a $10 million
unsecured revolving credit facility with Bank of America during, which is
utilized for general corporate and working capital purposes. The credit facility
carries an interest rate equal to Bank of America's "Reference Rate" defined by
Bank of America as "the rate of interest in effect for such day as publicly
announced from time to time by the Bank in San Francisco, California as its
`reference rate'" or the Offshore Rate plus 1.50%. Major convenants of the
credit facility include: (i) the Company, on a consolidated basis, not incurring
a net and operating loss in two consecutive quarters; (ii) the Company
maintaining a modified quick ratio of no less than 1.50; (iii) the Company
maintaining a Tangible Net Worth of no less than 90% of the Company's Tangible
Net Worth at December 31, 1997; and (iv) the Company not permitting its total
liabilities to exceed 0.75 times Tangible Net Worth. No amounts were outstanding
under this credit facility and the Company was in compliance with all loan
covenants at December 31, 1997.
Capital expenditures for 1997 were approximately $1.2 million. During
1997, the Company invested $600,000 to upgrade computer hardware and software,
$500,000 in tooling and approximately $60,000 in machinery and equipment and
furniture and fixtures. The Company's capital expenditure budget for 1998 is
approximately $700,000, which includes software, hardware, leasehold
improvements and other of $200,000, $200,000, $100,000 and $200,000,
respectively.
Management believes cash flows from operations and available cash under
the credit facility will be sufficient to meet the cash needs of the Company in
the foreseeable future.
27
<PAGE>
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, Europe and Asia
Pacific. 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 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 23% of the Company's revenue in 1997. The loss of
certain distributors or VARs would have a
28
<PAGE>
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.
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
29
<PAGE>
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 in 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 their 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 three 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 pressure 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 Desin
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
30
<PAGE>
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, 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 accounted for
34%, 29% and 28% of the Company's revenue in 1995, 1996 and 1997, 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 - From time to time the Company is involved in various legal
proceedings incidental to its business. Management does not believe that any
current legal proceedings will have a material adverse effect on the financial
condition or operating results of the Company, but there can be no assurances in
this regard.
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
31
<PAGE>
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 operations, 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 of 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 conditional 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.
Year 2000 Issues - Many currently installed computer systems and software
products, including several used by the Company, are coded to accept only two
digit entries in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. Therefore, the Company's date critical functions
related to the year 2000 and beyond, such as sales, distribution, purchasing,
inventory control, merchandise, facilities, and financial systems may be
adversely affected unless these computer systems are or become year 2000
compliant. The Company began work several years ago to prepare its
computer-based systems for the year 2000 and is utilizing both internal and
external resources to identify, correct, or reprogram, and test its systems for
year 2000 compliance. The Company is in the final stages of implementing the
required changes to its internal computer systems. The Company continues to
evaluate the estimated costs associated with these efforts based on actual
experience and does not expect the future costs of resolving its internal year
2000 issues to materially exceed the year 2000 related costs incurred in recent
years. No assurance can be given that the Company's computer systems will be
year 2000 compliant in a timely manner or that the Company will not incur
significant additional expenses pursuing year 2000 compliance. Furthermore, even
if the Company's systems are year 2000 compliant, there can be no assurance that
the Company will not be adversely affected by the failure of others to become
year 2000 compliant or by the failure of the Company's vendors to provide year
2000 compliant products for resale or configuration by the Company. For example,
32
<PAGE>
the Company may be adversely affected by, among other things, warranty and other
claims made by the Company's customers related to product failures caused by the
year 2000 problem, the distribution or inaccuracy of data provided to the
Company by non-year 2000 compliant third parties, and the failure of the
Company's service providers, such as security, data processing, and independent
shipping companies to become year 2000 compliant. There can be no assurance that
the year 2000 problem will not have a material adverse effect on the Company in
the future.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
Consolidated balance sheets of the Company as of December 31, 1996 and
1997 and consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997,
together with the related notes and the report of Deloitte & Touche LLP,
independent auditors, are set forth on the following pages. Other required
financial information is set forth herein, as more fully described in Item 14
hereof.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Microtest, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Microtest, Inc.
and subsidiaries (the "Company") as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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 the Company at December 31, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 4, 1998
35
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------
<S> <C> <C>
ASSETS 1996 1997
CURRENT ASSETS:
Cash and cash equivalents $ 10,282 $ 11,547
Accounts receivable - less allowance for doubtful accounts of
$582 and $892 and less returns reserve of $3,030 and $1,073, respectively 17,544 12,083
Inventories - less reserve for obsolescence of
$540 and $694, respectively (Note 2) 5,660 5,924
Prepaid expenses 823 1,459
Income taxes receivable (Note 4) 291 2,258
Deferred income taxes (Note 4) 3,121 2,216
-------------- --------------
Total current assets 37,721 35,487
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net (Note 3) 3,642 3,543
INTANGIBLES AND OTHER ASSETS - Net (Note 3) 1,335 2,777
DEFERRED INCOME TAXES (Note 4) 615 133
-------------- --------------
TOTAL $ 43,313 $ 41,940
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,579 $ 4,699
Accrued liabilities (Note 9) 4,983 4,130
Accrued payroll and employee benefits 1,079 1,017
-------------- --------------
Total liabilities 11,641 9,846
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 6 and 7)
STOCKHOLDERS' EQUITY (Note 7):
Common stock, $.001 par value - authorized, 15,000,000 shares;
issued and outstanding, 8,159,058 and 8,193,320 shares, respectively 8 8
Additional paid-in capital 32,593 32,710
Retained Deficit (485) (186)
Common stock in treasury at cost - 27,970 and 34,196 shares, respectively (444) (438)
-------------- --------------
Total stockholders' equity 31,672 32,094
-------------- --------------
TOTAL $ 43,313 $ 41,940
============== ==============
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------
1995 1996 1997
<S> <C> <C> <C>
REVENUES (Notes 8 and 9) $ 52,537 $ 50,442 $ 49,592
COST OF SALES 21,961 20,452 20,266
-------- -------- --------
Gross profit 30,576 29,990 29,326
-------- -------- --------
OPERATING EXPENSES:
Sales and marketing (Note 9) 12,585 14,334 16,253
Research and development 5,913 6,414 8,212
General and administrative 3,694 4,191 4,789
-------- -------- --------
Total operating expenses 22,192 24,939 29,254
-------- -------- --------
UNUSUAL ITEM - Purchased R & D (Note 5) (8,776) (15,697)
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (392) (10,646) 72
INTEREST AND OTHER INCOME - Net 1,232 762 120
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 840 (9,884) 192
INCOME/(BENEFIT) TAX PROVISION (Note 4) (305) 1,711 (131)
-------- -------- --------
NET INCOME/(LOSS) $ 1,145 $(11,595) $ 323
======== ======== ========
BASIC EARNINGS PER SHARE:
NET INCOME/(LOSS) PER SHARE $ 0.14 $ (1.43) $ 0.04
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,073 8,104 8,139
======== ======== ========
DILUTED EARNINGS PER SHARE:
NET INCOME/(LOSS) PER SHARE $ 0.13 $ (1.43) $ 0.04
======== ======== ========
WEIGHTED AVERAGE COMMON & EQUIVALENT SHARES OUTSTANDING 8,534 8,104 8,249
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
37
<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, 1995 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
Common stock issued upon:
Exercise of stock options 1 1 8 2 (5) 5
Employee Stock Purchase Plan 33 10 102 115 (20) 197
Disqualifying dispositions of stock options 1 1
Treasury stock purchase (17) (104) (104)
Net income 323 323
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 8,193 $ 8 (34) $ (438) $ 32,710 $ (186) $ 32,094
-------- -------- -------- -------- -------- -------- --------
</TABLE>
38
See notes to financial statements.
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1995 1996 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) $ 1,145 $(11,595) $ 323
Adjustments to reconcile net income/(loss) to net cash (used in)/
provided by operating activities:
Depreciation and amortization 1,512 1,460 1,887
Deferred provision for income taxes 370 (833) 1,387
Allowance for doubtful accounts 311 61 310
Deferred rent (27) (32) (24)
Purchased R & D - net of related tax benefit 5,386 15,697
Changes in operating assets and liabilities:
Accounts receivable - net (8,984) (321) 5,151
Inventories - net (3,300) 907 (264)
Prepaid expenses and other assets (217) 180 (2,340)
Accounts payable 1,423 (1,610) (880)
Accrued liabilities (1,053) 1,089 (891)
Income taxes payable (941)
Income taxes receivable 21 1,852 (1,967)
-------- -------- --------
Net cash (used in) provided by operating activities (4,354) 6,855 2,692
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (1,383) (1,056) (1,526)
Acquisition of business (5,100) (15,621)
-------- -------- --------
Net cash (used in) investing activities (6,483) (16,677) (1,526)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from sale of common and treasury stock 2,065 307 203
Purchase of treasury stock (2,911) (110) (104)
-------- -------- --------
Net cash (used in) provided by financing activities (846) 197 99
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,683) (9,625) 1,265
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 31,590 19,907 10,282
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,907 $ 10,282 $ 11,547
-------- -------- --------
</TABLE>
39
See notes to consolidated financial statements.
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- - --------------------------------------------------------------------------------
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 ("OMI") and
Logicraft Information Systems, Inc. ("Logicraft") (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. Long-lived assets and
certain identifiable intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Estimated useful lives are as follows:
Useful Life
Equipment 3 - 5 years
Furniture and fixtures 7 years
Leasehold improvements 5 years
Intangibles and other assets - Software and other intangibles are
amortized over their estimated useful life of 2 to 4 years and the
non-compete agreement is being amortized over its contractual term of
five years. Software development costs are capitalized when
technological feasibility has been established.
c. Income Taxes - Income taxes are provided based upon the provisions of
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 that relate to prototype
and experimental models that are sold to customers are charged to cost
of sales.
40
<PAGE>
e. Revenue Recognition - The Company generally recognizes revenue from
product sales upon shipment. Sales to distributors in the United
States, Canada and Europe account for the majority of the Company's
net sales. 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. During 1996, the Company had a direct sales
program under which the Company recognized revenue from product sales
to direct end users upon customer commitment and shipment. Customer
commitment means receipt by the Company of a valid purchase order from
the customer.
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. In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which is effective for financial statements for both interim and
annual periods ending after December 15, 1997. The Company has
implemented this Statement and, as required, has restated earnings per
share ("EPS") for all periods presented. This new standard requires
dual presentation of "basic" and "diluted" EPS on the face of the
earnings statement. Basic earnings per common share is computed on the
weighted average number of shares of common stock outstanding during
each period. Earnings per common share assuming dilution is computed
on the weighted average number of shares of common stock outstanding
plus additional shares representing the exercise of outstanding common
stock options using the treasury stock method. Because the Company
incurred a loss for the year ended December 31, 1996, the effects of
the potential dilutive securities are not included in the calculation.
h. New accounting pronouncements - In June 1997, the FASB issued SFAS No.
130, Reporting Comprehensive Income, which is effective for financial
statement for periods ending after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company does not believe the
adoption of SFAS No. 130 will have a material impact on its results of
operations or financial condition.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information, which is effective for
fiscal years beginning after December 15, 1997 and establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures
about product and services, geographic areas, and major customers. The
Company does not believe that the adoption of SFAS No. 131 will have a
significant effect on its reporting of segment information.
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.
41
<PAGE>
k. Reclassifications - Certain reclassifications were made to the 1995
and 1996 financial statements to conform with the 1997 presentation.
l. Stock Based Compensation - As permitted by SFAS No. 123 "Accounting
for Stock Based Compensation," the Company measures compensation cost
in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") but provides pro
forma disclosures of net income and earnings per share as if the fair
value method (as defined in SFAS 123) had been applied beginning in
1995.
2. INVENTORIES
Inventories consisted of the following at December 31:
1996 1997
(Amounts in Thousands)
Raw materials $ 1,242 $ 1,367
Work-in-progress 153 155
Finished goods 4,805 5,096
------- -------
Total 6,200 6,618
Less reserve for obsolescence (540) (694)
------- -------
Inventories - net $ 5,660 $ 5,924
======= =======
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS INTANGIBLES AND OTHER ASSETS
Equipment and leasehold improvements consisted of the following at
December 31:
1996 1997
(Amounts in Thousands)
Equipment $ 6,522 $ 8,181
Furniture and fixtures 1,530 1,020
Leasehold improvements 533 542
------- -------
Total 8,585 9,743
Less accumulated depreciation and amortization (4,943) (6,200)
------- -------
Equipment and leasehold improvements - net $ 3,642 $ 3,543
======= =======
42
<PAGE>
Intangibles and other assets consisted of the following at December 31:
1996 1997
(Amounts in Thousands)
Software $ 594 $ 1,366
Non-compete agreement and other assets 741 1,673
----- -------
Intangibles - gross 1,335 3,039
Less accumulated amortization (262)
----- -------
Intangibles - net $1,335 $ 2,777
====== =======
4. INCOME TAXES
The components of the (benefit)/provision for income taxes for the years
ended December 31 are as follows:
1995 1996 1997
(Amounts in Thousands)
Current:
Federal $ (675) $ 2,326 $(1,427)
State 149 (91)
Foreign 69
------- ------- -------
Total current (benefit) provision (675) 2,544 (1,518)
Deferred 370 (833) 1,387
------- ------- -------
Total (benefit) provision for income taxes $ (305) $ 1,711 $ (131)
======= ======= =======
The Company's current income tax liability was reduced and additional
paid-in capital increased approximately $2,121,000, $43,000 and $0
during 1995, 1996 and 1997, respectively, resulting from disqualifying
dispositions of incentive stock options. Cash payments for income taxes
were approximately $3,329,000, $750,000 and $0 in 1995, 1996 and 1997,
respectively, resulting from disqualifying dispositions of incentive
stock options.
A reconciliation of the difference between the (benefit)/provision for
income taxes and income taxes at the statutory U.S. federal income tax
rate is as follows for the years ended December 31:
43
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
(Amounts in Thousands)
<S> <C> <C> <C>
Income taxes at statutory U. S. federal income tax rate $ 286 $(3,361) $ 65
Increase (decrease) in taxes:
Acquired research and development 5,337
State taxes - net 50 90 3
Research and development credits (350) (111) (217)
Tax exempt interest income (363) (261) (24)
Other - net 72 17 42
------- ------- -------
Total $ (305) $ 1,711 $ (131)
======= ======= =======
</TABLE>
The components of deferred income taxes at December 31 are as follows:
1996 1997
(Amounts in Thousands)
Nondeductible accruals and reserves $ 2,880 $ 1,593
Inventory costs capitalized for income tax purposes 241 623
------- -------
Total current 3,121 2,216
------- -------
Excess of tax over book depreciation (71) (322)
Excess of book over tax amortization 466 18
Other 220 437
------- -------
Total noncurrent 615 133
------- -------
Total deferred income taxes $ 3,736 $ 2,349
======= =======
5. ACQUISITIONS
On December 17, 1996, the Company purchased all of the issued and outstanding
shares of the capital stock of Logicraft a Delaware corporation. The
consideration for the acquisition of all of the Logicraft stock was $12,517,000
in 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 product 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.
44
<PAGE>
On June 6, 1995, the Company acquired all of the outstanding capital stock of
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 since the effective date of the acquisition. Pro forma
unaudited consolidated operating results of the Company and Logicraft for the
year ended December 31, 1996, assuming the acquisition had been made as of
January 1, 1996 is summarized below:
(In Thousands, Except Per Share Amounts)
1996
Net revenues $ 64,747
========
Net income $ 171
========
Net income per common share $ .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 acquisition, 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 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.
45
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments due under the Company's office operating lease
are as follows:
(Amounts in
Thousands)
1998 1,004
1999 995
2000 842
2001 148
2002 12
--------
Total minimum rental payments $ 3,001
========
Rent expense for 1995, 1996 and 1997 was approximately $691,000, $982,000, and
$1,051,138 respectively.
During the second quarter of 1997, the Company obtained a $10 million unsecured
revolving credit facility with Bank of America which is utilized for general
corporate and working capital purposes. The Company pays interest at a
referenced rate plus 1.5% and is required to pay a quarterly fee for the unused
portion of the credit facility. No amounts were outstanding under this credit
facility and the Company was in compliance with all loan covenants at December
31, 1997.
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
1994 Annual Non-Employee Directors Plan ("1994 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,
46
<PAGE>
1995, although grants outstanding at the time of cancellation were not affected.
The LTIP permits the granting of incentive stock options, non-qualified stock
options and other stock-based awards to employees, officers, and consultants to
purchase the Company's common stock. 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 Directors
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 1994 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.
47
<PAGE>
A summary of the status of the Company's five fixed stock options plans as of
December 31, 1995, 1996, 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- ---------------------- ----------------------
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 1,135,821 $7.61 1,432,304 $12.43 1,369,399 $9.00
Granted 653,330 $18.23 589,148 $8.86 806,028 $5.03
Exercised (288,862) $6.39 (26,567) $4.74 (1,224) $4.68
Cancelled (67,985) $11.60 (621,609) $17.06 (268,200) $10.40
-----------------------------------------------------------------------------------
Outstanding at
end of year 1,432,304 $12.43 1,373,276 $9.00 1,906,003 $6.97
===================================================================================
Options exercisable at
end of year 415,939 622,289 759,633
============= =========== =============
Weighted average fair
value of options
granted during the year $9.74 $4.20 $5.93
========== ========== ===========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<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 12/31/97 Life (in yrs) Price 12/31/97 Price
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$3.69 - $3.81 401,982 7.55 $3.80 26,982 $3.80
$3.88 - $5.25 424,646 7.59 $4.74 219,631 $5.22
$5.38 - $7.75 420,393 7.73 $6.47 195,559 $6.88
$7.88 - $9.63 409,891 8.09 $8.99 136,568 $8.97
$9.69 - $24.25 249,091 6.30 $13.41 180,893 $13.45
--------------------------------------------------------------------------------
$3.69 - $24.25 1,906,003 7.55 $6.97 759,633 $8.23
================================================================================
</TABLE>
On May 18, 1992, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 200,000 shares of common stock are reserved for
issuance under the Purchase
48
<PAGE>
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, 1996 and
1997 was $3.89, $8.29 and $4.79, respectively. Transactions related to the plan
are summarized as follows:
Weighted Average
Shares Purchase Price
-----------------------------------
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
Purchases (43,891) $4.48
------------
Available at December 31, 1997 82,488
============
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 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, 1996 and 1997 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996 December 31, 1997
--------------------------------------------------------
Net income/(loss)
<S> <C> <C> <C> <C>
As reported (in '000s) $1,145 ($11,595) $323
Pro forma (in '000s) ($729) ($13,577) ($666)
Diluted net income/(loss) per common
and equivalent share
As reported $0.13 ($1.43) $0.04
Pro forma ($0.09) ($1.69) ($0.08)
</TABLE>
The fair value of options granted under the Company's fixed stock option plans
during 1995, 1996 and 1997 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 1997
------------ ------------- ------------
Expected volatility 75.00% 75.00% 92.00%
Expected term 4 years 4 years 5 years
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.90% 5.45% 6.18%
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-average assumptions used:
1995 1996 1997
------------ ------------- ------------
Expected volatility 75.00% 75.00% 92.00%
Expected term 1 year 1 year 1 year
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.38% 5.12% 5.80%
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 $137,000, $117,000, and
$127,000 during 1995, 1996 and 1997, respectively.
8. OTHER
Major customers accounting for more than 10% of total revenues in any given year
are summarized below. Percentages of revenue amounts are not presented if less
than 10% in any year.
Customer 1995 1996 1997
Graybar Electric Company, Inc. 11% 11%
Ingram Micro, Inc. 15% 18% 13%
Anixter 21%
Sales and marketing expenses included advertising expense of approximately
$1,909,000, $2,056,000, and $1,668,000 in 1995, 1996 and 1997, respectively.
50
<PAGE>
9. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
The Company did not have sales or transfers between geographic areas during
1995, 1996 or 1997
<TABLE>
<CAPTION>
1995 1996 1997
(Amounts in Thousands)
<S> <C> <C> <C>
Sales to unaffiliated customers:
Americas $ 30,762 $ 29,765 $ 33,281
Direct 2,582 1,315
OEM 2,675 3,312 1,328
-------- -------- --------
Total domestic sales to unaffiliated customers 33,437 35,659 35,924
-------- -------- --------
Europe 15,911 11,665 10,974
Asia Pacific 3,189 3,118 2,694
-------- -------- --------
Total sales to unaffiliated customers $ 52,537 $ 50,442 $ 49,592
======== ======== ========
</TABLE>
10. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1996 Quarters (As Originally Reported)
------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Second Third Fourth
(In Thousands, Except Per Share Amounts)
Total revenues $ 11,960 $ 13,320 $ 13,007 $ 13,680
Cost of sales and services 5,001 5,664 5,071 5,097
Gross profit 6,959 7,656 7,936 8,583
Net income/ (loss) 707 1,316 1,435 (14,275)
Net income/(loss) per common and equivalent share $ .09 $ .16 $ .17 $ (1.75)
1996 Quarters (As Restated in 1996 Form 10-K)
------------------------------------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Amounts)
Total revenues $ 12,666 $ 12,136
Cost of sales and services 5,501 4,853
Gross profit 7,165 7,283
Net income 982 991
Net income per common and equivalent share $ .12 $ .12
1997 Quarters
------------------------------------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Amounts)
Total revenues $ 11,113 $ 11,945 $ 12,391 $ 14,143
Cost of sales and services 4,347 5,004 5,335 5,580
Gross profit 6,766 6,941 7,056 8,563
Net (loss)/income (986) 132 332 845
Net income per common and equivalent share $ (.12) $ .02 $ .04 $ .10
</TABLE>
51
<PAGE>
Charges relating to the acquisition of R & D were $15,697,000, $1.92 per common
and equivalent share, in the forth quarter of 1996.
Quarterly results for 1996 vary from the originally 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. With respect to its now
discontinued end user direct sales program, the company increased recorded
reserves by $2.1 million in the fourth quarter of 1996 as actual returns related
to sales made between September and December 1996 were greater than expected as
a result of changes in the product mix sold through the end user direct sales
program that occurred in the fourth quarter of 1996. The recorded reserves for
direct sales as of December 31, 1996 have proven to be sufficient to cover
actual product returns and allowances. Originally 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, cost 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 $.05, respectively. As a result of changes to the second and third
quarter, fourth quarter total revenues, cost of sales and services, gross
profit, and net income were increased by a net of $1,525,000, $381,000,
$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.
* * * * * *
52
<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 continuing directors, nominees and executive
officers of the Company is set forth under the caption "Information Concerning
Directors, Nominees and Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement relating to its 1998
Annual Meeting of Stockholders to be held May 12, 1998, which is incorporated by
reference into this Form 10-K Report. With the exception of the foregoing
information and other information specifically incorporated by reference into
this Form 10-K Report, the Registrant's Proxy Statement is not being filed as a
part hereof.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information responsive to this Item 11 is incorporated by reference to
the caption "Executive Compensation" and "Employment Agreements" in the Proxy
Statement; provided, however, that the "Compensation Committee Report on
Executive Compensation" and the "Stock Price Performance Graph" contained in the
Proxy Statement are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information concerning the Common Stock beneficially owned by each
director of the Company, by all officers and directors of the Company as a group
and by each shareholder known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock is incorporated herein by reference to
"Security Ownership of Certain Beneficial Owners and Management" from the Proxy
Statement.
53
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information responsive to this item is incorporated herein by
reference to "Certain Transactions and Relationships" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
<TABLE>
<CAPTION>
(a) Financial Statements and Schedule. Page or
Method of Filing
----------------
<S> <C> <C>
(i) Financial Statements
(1) Independent Auditors' Report.................................... Page 35
(2) Consolidated Financial Statements:
Balance Sheets - December 31, 1996 and 1997................ Page 36
Statements of Operations - For the Years Ended December 31,
1995, 1996 and 1997........................................ Page 37
Statements of Stockholders' Equity - For the Years Ended
December 31, 1995, 1996 and 1997........................... Page 38
Statements of Cash Flows - For the Years Ended December 31,
1995, 1996 and 1997........................................ Page 39
Notes to Consolidated Financial Statements - December 31,
1995, 1996 and 1997........................................ Page 40
(ii) Financial Statement Schedules.
(iii) See Item 14(c) below.
Independent Auditors' Report........................................ Included in Auditors'
Report at Page 35
Schedule II - Valuation and Qualifying Account Page 60
</TABLE>
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 of Form 8-K.
During the last quarter of 1997, the Company filed no reports
on Form 8-K.
54
<PAGE>
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit Page or
Number Description Method of Filing
- - ------ ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Incorporated by reference
Company, dated May 19, 1992 to Exhibit 3.1 to Form S-1
Registration Statement
#33-52264 ("Form S-1
#33-52264")
3.2 Bylaws of the Company Incorporated by reference
to Exhibit 3.2 to Form S-1
#33-52264
10.1 Lease Agreement between Camelback Associates II Incorporated by reference
Limited Partnership and the Company dated to Exhibit 10.5 to Form S-1
June 19, 1992, relating to Company's #33-52264
principal offices and facilities
10.2 Incentive Stock Option Plan Incorporated by reference
to Exhibit 10.7 of
Amendment No. 1 to Form S-1
#33-52264
10.3 Non-Qualified Stock Option Plan Incorporated by reference
to Exhibit 10.8 of
Amendment No. 1 to Form S-1
#33-52264
10.4 Employee Stock Purchase Plan Incorporated by reference
to Exhibit 10.9 of
Amendment No. 1 to Form S-1
#33-52264
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C>
10.5 401(k) Retirement Savings Plan Incorporated by reference
to Exhibit 10.12 to Form
S-1 #33-52264
10.6 Non-Employee Directors Stock Option Plan Incorporated by reference
to Exhibit 4 to Form
S-8 #33-67948
10.7 Annual Non-Employee Directors Stock Option Plan Incorporated by reference
to Exhibit 4 to Form
S-8 #33-79070
10.8 Form of Indemnity agreement between directors and certain officers Incorporated by reference
of the Company and the Company to Exhibit 10.18 to Form
S-1 #33-52264
10.9 Agreement of Purchase and Sale of Stock between Optical Media Incorporated by reference
International and the Company dated June 6, 1995 to Exhibit 2 of Form 8-K
10.10 1994 Profit Sharing Plan Incorporated by reference
to Exhibit 10.15 of Form
10-K Report dated December
31, 1993
10.11 Long-Term Incentive Plan Incorporated by reference
to Exhibit 10.16 of Form
190K Report dated December
31, 1994
10.12 Deferred Compensation Plan Incorporated by reference
to Exhibit 10.17 of Form
10-K Report dated December
31, 1994
10.13 Agreement of Purchase and Sale of Stock between Logicraft Incorporated by reference
Information Systems, Inc. and the Company dated December 17, 1996 to Exhibit 2 of Current
Report on Form 8-K dated
December 17, 1996
10.14 1998 Director Compensation Plan Filed herewith
11 Statement Regarding Computation of Per Share Earnings Filed herewith
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Deloitte & Touche LLP Filed herewith
24.1 Power of Attorney of Dianne C. Walker Filed herewith
24.2 Power of Attorney of Roger C. Ferguson Filed herewith
24.3 Power of Attorney of Steven G. Mihaylo Filed herewith
24.4 Power of Attorney of William C. Turner Filed herewith
24.5 Power of Attorney of Kent C. Mueller Filed herewith
</TABLE>
(d) See Item 14 (a)(ii)
57
<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 to be
signed on its behalf by the undersigned, thereunto duly authorized, this 31st
day of March, 1998.
MICROTEST, INC.
By: /s/ Charles V. Mihaylo
------------------------------
Charles V. Mihaylo
President & Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the Company and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
- - ------------------ ----- ----
<S> <C> <C>
* Chairman of the Board, Chief Executive March 31, 1998
- - ------------------------------ Officer (Principal Executive Officer)
Richard G. Meise
/s/ Charles V. Mihaylo President and Chief Operating Officer March 31, 1998
- - -------------------------------
Charles V. Mihaylo
/s/ John J. O'Block Vice President & Chief Financial Officer March 31, 1998
- - ------------------------------ (Principal Financial and Accounting Officer)
John J. O'Block
* Director March 31, 1998
- - ------------------------------
Roger C. Ferguson
* Director March 31, 1998
- - ------------------------------
Steven G. Mihaylo
* Director March 31, 1998
- - ------------------------------
William C. Turner
* Director March 31, 1998
- - ------------------------------
Dianne C. Walker
* Director March 31, 1998
- - ------------------------------
Kent C. Mueller
* By /s/ Charles V. Mihaylo March 31, 1998
--------------------------
Charles V. Mihaylo
Attorney-in-Fact
</TABLE>
58
<PAGE>
MICROTEST, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs & at End of
of Period Expenses Deductions Period
--------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1997 $ 582 $ 490 $ 180 (1) $ 892
1996 521 354 293 (1) 582
1995 210 319 8 (1) 521
Reserve for obsolete inventories:
1997 $ 540 $ 1,497 $ 1,343 $ 694
1996 717 165 540
1995 1,319 602 717
Accumulated depreciation and amortization:
1997 $ 4,943 $ 1,625 $ 368 $6,200
1996 3,841 1,460 358 4,943
1995 2,408 1,512 79 3,841
Reserve for product returns:
1997 $ 3,003 $ 1,899 $ 3,829 $1,073
1996 919 6,239 4,155 3,003
1995 919 919
</TABLE>
(1) Amounts represents write-offs of accounts receivable balances.
59
EXHIBIT 10.14
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 Nonemployee
Directors, as set forth in this document. The Plan sets forth the
Board Compensation payable to Nonemployee Directors and grants
Nonqualified Stock Options to Nonemployee 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 Nonemployee Directors of outstanding
competence and by linking the personal interests of Nonemployee
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 Nonemployee 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 Nonemployee 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 Nonemployee Director as of the Effective Date, their
Grant Date shall be the third business day following the public
release of the
60
<PAGE>
Company's fiscal year-end earnings information immediately following
the Effective Date.
(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 Nonemployee 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
61
<PAGE>
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.
(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) "Nonemployee 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 Nonemployee 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
62
<PAGE>
this Plan that do not violate any statute or public policy shall
continue in full force and effect.
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Board
or a Committee of two or more Nonemployee 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.
63
<PAGE>
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Persons eligible to participate in this Plan
are limited to Nonemployee Directors.
5.2 Actual Participation. All eligible Nonemployee 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 Nonemployee 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 Nonemployee Director is
providing services as a member of the Board on such date. If a
Nonemployee Director terminates service on the Board prior to the
last day of a calendar quarter, the Nonemployee 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 Nonemployee
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 Nonemployee Director for
reasonable expenses incurred by the Nonemployee Director for
traveling to and attending Board and Board committee meetings.
6.3 Method of Payment. A Nonemployee 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
Nonemployee 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.
64
<PAGE>
7.2 Anniversary Grant of Options. Subject to the limitation on
the number of shares that may be awarded under this Plan, each
Nonemployee 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 Date, and the
remaining 25% on the third anniversary of the Anniversary Grant Date
provided, however, that a Nonemployee 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.
65
<PAGE>
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.
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
66
<PAGE>
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 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.
67
MICROTEST, INC.
EXHIBIT 11
STATEMENT OF COMPUTATION OF COMMON
AND COMMON EQUIVALENT SHARES
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income/(loss) $ 1,145 $(11,595) $ 323
======== ======== ========
Common shares outstanding at end of period 8,095 8,131 8,159
Adjustment to reflect weighted average for
shares issued during period (22) (27) (20)
Adjustments for options and warrants calculated
under the treasury stock method:
Options 461 -- 110
Warrants -- -- --
-------- -------- --------
Common and equivalent shares outstanding 8,534 8,104 8,249
======== ======== ========
Net income/(loss) per share $ .13 $ (1.43) $ .04
======== ======== ========
</TABLE>
68
EXHIBIT 21
MICROTEST, INC.
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary Jurisdiction of Incorporation
- - ------------------ -----------------------------
Logicraft Information Systems, Inc. Delaware
Optical Media International California
Microtest, Inc., International Guam
69
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-53922, 33-53924, 33-53926, 33-67946, 33-67948, 33-68120, 33-79070, and
33-81668 of Microtest, Inc. on forms S-8 of our report dated February 4, 1998,
appearing in this Annual Report on Form 10-K of Microtest, Inc. for the year
ended December 31, 1997.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 25, 1998
70
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Charles V. Mihaylo and John J. O'Block, and each of them, her true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for her and in her name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, for filing with the Securities and Exchange Commission by
Microtest, Inc., a Delaware corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: March 30, 1998
/s/ Dianne C. Walker
---------------------
Dianne C. Walker
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 30th day of March, 1998, before me, the undersigned Notary
Public, personally appeared Dianne C. Walker, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that she executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Betty Peterson
-------------------
Notary Public
My commission expires 7-29-2001
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Charles V. Mihaylo and John J. O'Block, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, for filing with the Securities and Exchange Commission by
Microtest, Inc., a Delaware corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: March 31, 1998
/s/ Roger C. Ferguson
----------------------
Roger C. Ferguson
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 31st day of March, 1998, before me, the undersigned Notary
Public, personally appeared Roger C. Ferguson, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Betty Peterson
-------------------
Notary Public
My commission expires 7-29-2001
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Charles V. Mihaylo and John J. O'Block, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, for filing with the Securities and Exchange Commission by
Microtest, Inc., a Delaware corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: March 30, 1998
/s/ Steven G. Mihaylo
----------------------
Steven G. Mihaylo
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 30th day of March, 1998, before me, the undersigned Notary
Public, personally appeared Steven G. Mihaylo, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Betty Peterson
-------------------
Notary Public
My commission expires 7-29-2001
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Charles V. Mihaylo and John J. O'Block, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, for filing with the Securities and Exchange Commission by
Microtest, Inc., a Delaware corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: March 30, 1998
/s/ William C. Turner
----------------------
William C. Turner
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 30th day of March, 1998, before me, the undersigned Notary
Public, personally appeared William C. Turner, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Betty Peterson
-----------------------
Notary Public
My commission expires 7-29-2001
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Charles V. Mihaylo and John J. O'Block, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, for filing with the Securities and Exchange Commission by
Microtest, Inc., a Delaware corporation, together with any and all amendments to
such Form 10-K, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: March 30, 1998
/s/ Kent C. Mueller
----------------------
Kent C. Mueller
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 30th day of March, 1998, before me, the undersigned Notary
Public, personally appeared William C. Turner, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Betty Peterson
-----------------------
Notary Public
My commission expires 7-29-2001
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1997 CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 11,547
<SECURITIES> 0
<RECEIVABLES> 14,048
<ALLOWANCES> 1,965
<INVENTORY> 5,924
<CURRENT-ASSETS> 35,487
<PP&E> 9,743
<DEPRECIATION> 6,200
<TOTAL-ASSETS> 41,940
<CURRENT-LIABILITIES> 9,846
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 32,086
<TOTAL-LIABILITY-AND-EQUITY> 41,940
<SALES> 49,592
<TOTAL-REVENUES> 49,592
<CGS> 20,266
<TOTAL-COSTS> 49,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (120)
<INCOME-PRETAX> 192
<INCOME-TAX> (131)
<INCOME-CONTINUING> 323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 323
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
