SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 28, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20666
MICROTEST, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 86-0485884
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
4747 N. 22nd Street, Phoenix, Arizona 85016
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(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (602) 952-6400
------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of May 1, 1998, 8,209,248 shares of the registrant's common stock were
outstanding.
This document contains 14 pages
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1
<PAGE>
INDEX
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MICROTEST, INC.
Page
Facing Page 1
Index 2
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 8-10
PART II. OTHER INFORMATION
- --------------------------
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities 11
Item 3 - Defaults Upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit 99 - Private Securities Litigation Reform Act of 1995 Safe
Harbor Complaince Statement for Forward-Looking Statements 13-14
2
<PAGE>
PART I. FINANCIAL STATEMENTS
Microtest, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 28, December 31,
1998 (unaudited) 1997
---------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,020 $ 11,547
Accounts receivable - less allowance for doubtful
accounts of $811 and $892, respectively and less
returns reserve of $1,795 and $1,073, respectively 7,731 12,083
Inventories - less reserve for obsolescence of $519
and $694, respectively 6,022 5,924
Prepaid expenses 1,440 1,459
Income taxes receivable 2,094 2,258
Deferred income taxes 2,216 2,216
-------- --------
Total current assets 33,523 35,487
PROPERTY, PLANT AND EQUIPMENT - less accumulated
depreciation of $6,402 and $6,200, respectively 3,428 3,543
INTANGIBLES AND OTHER ASSETS 2,867 2,777
DEFERRED INCOME TAXES 133 133
-------- --------
TOTAL $ 39,951 $ 41,940
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,538 $ 4,699
Accrued liabilities 1,858 4,130
Accrued payroll and employee benefits 1,105 1,017
-------- --------
Total liabilities 7,501 9,846
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value - authorized, 15,000,000 shares;
issued 8,206,467 and 8,193,320 shares, respectively 8 8
Additional paid-in capital 32,766 32,710
Deficit (324) (186)
Common stock in treasury at cost - 0 and 34,939,
respectively -- (438)
-------- --------
Total stockholders' equity 32,450 32,094
-------- --------
TOTAL $ 39,951 $ 41,940
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
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Microtest, Inc.
Condensed Consolidated Statements of Income (unaudited)
(In thousands)
Three Months Ended
-----------------------
March 28, March 29,
1998 1997
-------- --------
TOTAL REVENUES $ 9,716 $ 11,113
TOTAL COST OF SALES 3,774 4,347
-------- --------
GROSS PROFIT 5,942 6,766
OPERATING EXPENSES:
Sales and marketing 3,088 5,025
Research and development 1,714 2,035
General and adminstrative 966 1,237
-------- --------
Total operating expenses 5,768 8,297
INCOME/(LOSS) FROM OPERATIONS 174 (1,531)
INVESTMENT INCOME 75 118
-------- --------
INCOME/(LOSS) BEFORE INCOME TAXES 249 (1,413)
INCOME TAX PROVISION/(BENEFIT) 76 (427)
-------- --------
NET INCOME/(LOSS) $ 173 $ (986)
======== ========
BASIC EARNINGS PER SHARE:
NET INCOME/(LOSS) PER SHARE $ 0.02 $ (0.12)
======== ========
SHARES USED IN PER SHARE CALCULATION 8,189 8,095
======== ========
DILUTED EARNINGS PER SHARE:
NET INCOME/(LOSS) PER SHARE $ 0.02 $ (0.12)
======== ========
SHARES USED IN PER SHARE CALCULATION 8,371 8,095
======== ========
See notes to condensed consolidated financial statements
4
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Microtest, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
March 28, March 29,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) $ 173 $ (986)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 582 529
Changes in operating assets and liabilities:
Accounts receivable 4,352 5,538
Inventories (98) (2,038)
Prepaid expenses and other assets (451) (789)
Accounts payable (161) (2,836)
Accrued liabilities (2,272) (1,893)
Accrued payroll and employee benefits 88 (50)
Income taxes receivable 164 (219)
-------- --------
Net cash provided by/(used in) operating activities 2,377 (2,744)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (87) (411)
-------- --------
Net cash used in investing activities (87) (411)
FINANCING ACTIVITIES:
Proceeds from sale of common stock and treasury stock 183 354
Reduction in income tax liability from disqualifying dispositions
of incentive stock options and exercises of non-qualified
stock options -- 1
-------- --------
Net cash provided by financing activities 183 355
-------- --------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 2,473 (2,800)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,547 10,282
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,020 $ 7,482
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
MICROTEST, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the three months ended March 28, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. The
accompanying financial statements should be read in conjunction with the
Company's most recent Annual Report and Form 10-K.
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The consolidated financial statements
include the accounts of Microtest, Inc. and its wholly-owned subsidiaries
(collectively, the "Company"). The Company develops, markets, and supports
products that make it easier to install, service, and manage local area
networks ("LANs").
B. For interim reporting purposes, the Company ends its quarters on the
Saturday closest to the calendar quarter end, with the fourth quarter
ending on December 31, 1998.
C. Reclassifications - Certain reclassifications have been made to the
1997 consolidated financial statements to conform to the 1998
presentation.
2. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments due under the Company's office operating
leases are as follows:
(Amounts in
Thousands)
1998 $ 753
1999 995
2000 842
2001 148
2002 12
---------
Total minimum rental payments $ 2,750
=========
The Company is involved in certain other legal matters, the outcome of
which is currently unknown. Management believes that the Company's
liability, if any, will
6
<PAGE>
not have a material adverse effect on the Company's financial condition
and results of operations.
3. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which is effective for financial statement 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
has operations in the United Kingdom and Germany. All transactions for the
United Kingdom operations are denominated in U.S. dollars. All
transactions for the German operations are denominated in Deutsch marks.
For the quarter ended March 28, 1998, comprehensive income was $173,000.
4. SUBSEQUENT EVENTS
On April 14, 1998, the Company's Board of Directors authorized the Company
to repurchase up to 800,000 shares of its common stock, or approximately
10% of all shares issued as of that date, for issuance under the Company's
stock option and purchase plans. The stock is to be purchased from time to
time on the open market as conditions permit.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements.
The words "believe," "expect," "anticipate," and "project" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. Such forward-looking statements are within the meaning
of that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
may include, but not be limited to, projections of revenue, income or loss,
capital expenditures, plans for future operations, financing needs or plans, and
plans relating to products or services of the Company, as well as assumptions
relating to the foregoing.
Statements in Exhibit 99 to this Quarterly Report on Form 10-Q, describe
factors, among others, that could contribute to or cause such differences.
Additional factors that could cause actual results to differ materially from
those expressed in such forward-looking statements are set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Results of Operations
Qtr. End Qtr. End
(in thousands) 3/28/98 Change 3/29/97
- --------------------------------------------------------------------------------
Total Revenues $ 9,716 (12.6%) $ 11,113
- --------------------------------------------------------------------------------
During the quarter ended March 28, 1998, total revenues decreased compared to
the quarter ended March 29, 1997 due primarily to a decision not to increase
inventory levels on certain products into the Company's product distribution
channel in anticipation of new product releases, as well as a general weakness
in sales to the Company's Asia Pacific product distributors, which has impacted
the results of the entire industry segment. The Company currently believes that
its second quarter operating results also will be adversely affected by the
above mentioned reasons.
Qtr. End Qtr. End
(in thousands) 3/28/98 Change 3/29/97
- --------------------------------------------------------------------------------
Gross Profit $ 5,942 (12.2%) $ 6,766
% of Total Revenues 61.2% 60.9%
- --------------------------------------------------------------------------------
Gross profit decreased in absolute dollars but increased as a percentage of
total revenues during the three months ended March 28, 1998 compared to the same
period in 1997. The decrease in absolute dollars is due to the decrease in
revenues. Gross profit as a percent of revenues improved slightly during the
first quarter of 1998 due to a decrease in discounts offered to the Company's
product distributors.
8
<PAGE>
Qtr. End Qtr. End
(in thousands) 3/28/98 Change 3/29/97
- --------------------------------------------------------------------------------
Sales & Marketing $3,088 (47.7%) $5,025
% of Total
Revenues 31.8% 45.2%
- --------------------------------------------------------------------------------
For the quarter ended March 28, 1998, sales and marketing expenses decreased in
absolute dollars and as a percentage of total revenues compared to the same
period in 1997. The decrease is primarily due to the integration of Logicraft
Information Systems, now doing business as Microtest Enterprise Group ("MEG").
MEG was acquired during the fourth quarter of 1996 and was not fully integrated
into Microtest until the third quarter of 1997. The integration of MEG into
Microtest included a significant reduction in headcount during the second and
third quarters of 1997. Additionally, the Company implemented new cost control
measures during 1997.
Qtr. End Qtr. End
(in thousands) 3/28/98 Change 3/29/97
- --------------------------------------------------------------------------------
Research & Development $1,714 (15.8%) $2,035
% of Total
Revenues 17.6% 18.3%
- --------------------------------------------------------------------------------
Research and development expenses decreased in absolute dollars and as a
percentage of total revenues in the quarter ended March 28, 1998, compared with
the same period in 1997. The decrease stems primarily from a decrease in the
number of employees due to the integration of MEG, as discussed above. The
Company capitalized approximately $220,000 and $0 during the first quarters
ended March 28, 1998 and March 29, 1997, 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.
Quarter. End Quarter. End
(in thousands) 3/28/98 Change 3/29/97
- --------------------------------------------------------------------------------
General & Administrative $ 966 (21.9%) $1,237
% of Total
Revenues 9.9% 11.1%
- --------------------------------------------------------------------------------
General and administrative expenses decreased in both absolute dollars and as a
percentage of total revenues during the first quarter ended March 28, 1998,
compared to the same period in 1997. This decrease is mainly the result of the
decrease in personnel and other administrative costs attributable to integration
of MEG and cost control measures implemented during 1997, as previously
mentioned.
9
<PAGE>
Qtr. End Qtr. End
(in thousands) 3/28/98 Change 3/29/97
- --------------------------------------------------------------------------------
Income Taxes $ 76 117.8% $(427)
Effective Tax Rate 30.5% 30.2%
- --------------------------------------------------------------------------------
The Company's effective tax rate remained relatively flat during the first
quarter ended March 28, 1998, compared to the same period of the preceding year.
Qtr. End Qtr. End
(in thousands) 3/28/98 Change 3/29/97
- --------------------------------------------------------------------------------
Net Income/(Loss) $173 117.5% $(986)
% of Total
Revenues 1.8% (8.9%)
- --------------------------------------------------------------------------------
Net income increased in both absolute dollars and as a percentage of total
revenues for the first quarter of 1998 as compared to the first quarter of 1997.
This increase is due primarily to a significant decrease in operating expenses
for the quarter ended March 28, 1998 as compared with the quarter ended March
29, 1997. As discussed above, MEG was fully integrated into Microtest during the
second and third quarters of 1997. The integration included a significant
headcount reduction. Also, the Company's implementation of new cost control
measures during 1997 aided in the decrease in operating expenses.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its operations primarily through operating cash flows
and equity financings. At March 28, 1998, the Company had cash and cash
equivalents of $14.0 million. This represents a $2.5 million increase in cash
equivalents during the three months ended March 28, 1998, due primarily to the
collection of accounts receivable.
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. No amounts were outstanding under this
credit facility and the Company was in compliance with all loan covenants at
March 28, 1998.
Capital expenditures during the quarter ended March 28, 1998 were approximately
$87,000, the majority of which was for computer hardware and software. The
Company's capital budget for the remaining three quarters of 1998 is
approximately $613,000, which includes software, hardware, leasehold
improvements and other of $143,000, $170,000, $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.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is from time to time involved in legal proceedings of a
character normally incident to its business, including various claims and
pending actions against the Company seeking damages.
Item 2. - Changes in Securities
None
Item 3. - Defaults Upon Senior Securities
Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders
None
Item 5. - Other Information
None
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 99 - Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward-Looking Statements
b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the three months
ended March 28, 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICROTEST, INC.
---------------
Registrant
Date: May 11, 1998 /s/ Richard G. Meise
-------------------------------
Chief Executive Officer and
Chairman of the Board
Date: May 11, 1998 /s/ Charles V. Mihaylo
-------------------------------
President and
Chief Operating Officer
Date: May 11, 1998 /s/ John J. O'Block
-------------------------------
John J. O'Block
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-28-1998
<EXCHANGE-RATE> 1
<CASH> 14,020
<SECURITIES> 0
<RECEIVABLES> 10,337
<ALLOWANCES> 2,606
<INVENTORY> 6,022
<CURRENT-ASSETS> 33,523
<PP&E> 9,830
<DEPRECIATION> 6,402
<TOTAL-ASSETS> 39,951
<CURRENT-LIABILITIES> 7,501
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 32,442
<TOTAL-LIABILITY-AND-EQUITY> 39,951
<SALES> 9,716
<TOTAL-REVENUES> 9,716
<CGS> 3,774
<TOTAL-COSTS> 9,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75)
<INCOME-PRETAX> 249
<INCOME-TAX> 76
<INCOME-CONTINUING> 173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
MICROTEST, INC.
EXHIBIT 99
Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"), Congress encouraged public companies to make "forward-looking
statements"1 by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. Microtest, Inc. (the
"Company" or "Microtest") intends to qualify both its written and oral
forward-looking statements for protection under the PSLRA.
To qualify oral forward-looking statements for protection under the
PSLRA, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements. Microtest provides the following information in
connection with its continuing effort to qualify forward-looking statements for
the safe harbor protection of the PSLRA.
Important factors currently known to management that could cause actual
results to differ materially from those in forward-looking statements include,
but are not limited to, the following: (i) changes in the Company's product and
customer mix; (ii) introduction of new products by the Company or its
competitors; (iii) pricing pressures and economic conditions in the United
States, Europe and the Pacific Rim; (iv) the economic condition of the computer
industry; (v) failure of the Company to continue to enhance its current product
line and to continue to develop and introduce new products that keep pace with
competitive product introductions and technological advances, satisfy diverse
and evolving customer requirements, or otherwise achieve market acceptance; (vi)
loss of or reduction in purchases by certain of the Company's distributors and
VARs; (viii) any reduction in sales of the Company's PentaScanner or DiscPort
products from which the Company derives substantially all of its revenue; (ix)
the inability of the Company to accurately monitor end user demand for its
products; (x) unanticipated product returns to the extent such returns exceed
the Company's reserves; (xi) the cost, quality and availability of third-party
components used in the Company's systems; (xii) the loss of any of the Company's
third-party manufacturers or key suppliers; (xiii) any disruption or reduction
in the future supply of key components currently obtained from limited sources;
(xiv) defects in the Company's products that could cause delays in product
introductions and shipments, cause loss of or delays in market acceptance,
result in increased costs, require design modifications or impair customer
satisfaction; (xv) inventory writedowns, product returns or price protection
credits that exceed the Company's estimates; (xvi) the inability of the Company
to expand its international operations in a timely and cost effective manner, as
well as other risks in conducting business internationally; (xvii) recruiting,
hiring and retaining the services of key engineering, sales and marketing,
management and manufacturing personnel; (xviii) failure of the Company to
protect its proprietary information and technology; and (xviv)
- ------------------------
1 "Forward-looking statements" can be identified by use of words such as
"expect," "believe," "estimate," "project," "forecast," "anticipate," "plan,"
and similar expressions.
13
<PAGE>
the inability of the Company or failure of the Company's vendors to become year
2000 complaint.
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, Microtest undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to projections
over time.
14
