SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
-------------------------------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0 - 20666
MICROTEST, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 86-0485884
(State or other jurisdiction of (IRS employer identification number)
incorporation)
4747 NORTH 22ND STREET
PHOENIX, ARIZONA 85016
(602) 952-6400
---------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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 THE
FILING REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE (APRIL 30, 1999).
COMMON STOCK, $.001 PAR VALUE: 8,289,136 SHARES
================================================================================
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
March 27, 1999 and December 31, 1998 3
Consolidated Statements of Operations-
Three Months Ended
March 27, 1999 and
March 28, 1998 (as restated) 4
Consolidated Statements of Cash Flows-
Three Months Ended
March 27, 1999 and
March 28, 1998 (as restated) 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
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MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 27, December 31,
1999 1998
-------- --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,399 $ 9,618
Restricted investments 515 1,124
Receivables:
Trade accounts, net of allowances
of $1,475 and $2,029 7,139 8,171
Income taxes 2,943 2,897
Inventories 6,481 6,572
Prepaid expenses 1,312 1,148
Deferred income taxes 1,888 1,556
-------- --------
Total current assets 28,677 31,086
-------- --------
PROPERTY AND EQUIPMENT 10,687 10,476
Less accumulated depreciation (7,707) (7,375)
-------- --------
Net property and equipment 2,980 3,101
-------- --------
OTHER ASSETS:
Capitalized software, net 1,810 1,894
Deferred income taxes 1,519 1,519
Other 1,732 1,750
-------- --------
Total other assets 5,061 5,163
-------- --------
$ 36,718 $ 39,350
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,207 $ 4,152
Accrued liabilities 3,194 2,922
Accrued payroll and employee benefits 929 860
Accrued deferred compensation 515 1,124
-------- --------
Total current liabilities 7,845 9,058
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value. Authorized
15,000,000 shares; issued 8,289,136 shares
as of March 27, 1999 and 8,253,585 as of
December 31, 1998 8 8
Additional paid-in capital 32,999 32,916
Accumulated deficit (2,916) (1,414)
Less treasury stock, at cost, 232,520 shares (1,218) (1,218)
-------- --------
Total shareholders' equity 28,873 30,292
-------- --------
$ 36,718 $ 39,350
======== ========
The accompanying notes are an integral part of these
financial statements.
3
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MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 27, 1999 AND MARCH 28,1998 (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
(as restated)
March 27, March 28,
1999 1998
------- -------
(unaudited)
NET REVENUE $ 9,001 $ 9,716
COST OF REVENUE 3,951 3,791
------- -------
Gross profit 5,050 5,925
------- -------
OPERATING EXPENSES:
Sales and marketing 3,177 3,088
Research and development 1,701 1,747
General and administrative 1,402 1,035
Special charge 524 --
------- -------
Total operating expenses 6,804 5,870
------- -------
INCOME (LOSS) FROM OPERATIONS (1,754) 55
Other income, net 63 75
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,691) 130
INCOME TAXES (BENEFIT) (306) 40
------- -------
Income (loss) before cumulative effect of
a change in accounting principle (1,385) 90
CUMULATIVE EFFECT OF A CHANGE IN AN
ACCOUNTING PRINCIPLE, NET OF RELATED TAXES (117) --
------- -------
NET INCOME (LOSS) $(1,502) $ 90
======= =======
BASIC EARNINGS PER SHARE:
Income (loss) before cumulative effect of
a change in accounting principle $ (.17) $ .01
Cumulative effect of a change in accounting principle (.02) --
------- -------
Net income (loss) $ (.19) $ .01
======= =======
Weighted average common shares outstanding 8,049 8,189
======= =======
DILUTED EARNINGS PER SHARE:
Income (loss) before cumulative effect of
a change in accounting principle $ (.17) $ .01
Cumulative effect of a change in accounting principle (.02) --
------- -------
Net income (loss) $ (.19) $ .01
======= =======
Weighted average common shares outstanding 8,049 8,371
======= =======
The accompanying notes are an integral part of these financial statements
4
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MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 27, 1999 AND MARCH 28, 1998 (AS RESTATED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
(as restated)
March 27, March 28,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,502) $ 90
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 494 300
Change in accounts receivable allowance (554) 641
Decrease in accounts receivable 1,586 3,711
(Increase) decrease in income taxes receivable (46) 128
(Increase) decrease in inventories 91 (98)
(Increase) decrease in prepaid expenses and other assets (146) 143
Increase in deferred income taxes (332) --
Decrease in accounts payable (945) (161)
Increase (decrease) in accrued liabilities 272 (2,272)
Increase in accrued payroll and employee benefits 69 88
-------- --------
Net cash provided by (used in) operating activities (1,013) 2,570
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (211) (87)
Capitalized software (78) (193)
-------- --------
Net cash used in investing activities (289) (280)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common and treasury stock 83 183
-------- --------
Net cash provided by financing activities 83 183
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,219) 2,473
CASH AND CASH EQUIVALENTS, beginning of period 9,618 11,547
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 8,399 $ 14,020
======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts
of Microtest, Inc. (the "Company") and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1998 Annual Report to Shareholders and report
on Form 10-K. The results of operations for the three months ended March 27,
1999 are not necessarily indicative of the results to be expected for the full
year.
(2) INVENTORIES:
Inventories consist of the following (in thousands):
March 27, December 31,
1999 1998
------- -------
(unaudited)
Raw materials $ 1,353 $ 1,946
Work-in-process 130 100
Finished goods 5,740 5,200
------- -------
7,223 7,246
Less allowance for inventory valuation (742) (674)
------- -------
$ 6,481 $ 6,572
======= =======
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(3) EARNINGS (LOSS) PER SHARE:
The following table sets forth the computation of basic and diluted net
income (loss) per share:
(as restated)
March 27, March 28,
1999 1998
--------- ---------
Net income (loss) $ (1,502) $ 90
========== ==========
Weighted average common shares
outstanding 8,049 8,189
Dilutive effect of stock options - 182
---------- ----------
Weighted average common and common
equivalent shares outstanding 8,049 8,371
========== ==========
Basic net income (loss) per share $ (.19) $ .01
========== ==========
Diluted net income (loss) per share $ (.19) $ .01
========== ==========
(4) SPECIAL CHARGE:
During the quarter ended March 27, 1999, the Company recognized a
special charge of $524,000 to recognize severance payments for the restructuring
of the Company's management organization.
(5) SEGMENTS:
For organizational, marketing and financial reporting purposes, the
Company has organized into two reportable business segments: (1) Network Test
and Measurement ("NTM" formerly referred to as NMP), and (2) Network Attached
Storage ("NAS" formerly referred to as NCP). In addition, the NAS business
segment develops and sells CD-ROM networking systems and service maintenance
contracts in the United States and Germany.
The NTM business segment consists of products that are used by service
providers and system integrators to perform critical cabling certification and
network diagnostics. The NTM line consists of cable certification tools such as
OMNIScanner, PentaScanner, CertiFiber, and network trouble shooting tools such
as MICROSCANNER and COMPAS.
The NAS business segment consists of products that address challenges
associated with managing network devices and sharing large amounts of
information within workgroups or enterprises. Network administrators, librarians
and information resource professionals in organizations such as law firms,
educational institutions, libraries and research facilities are some of the
target markets for Microtest's NAS line. The NAS line consists primarily of
Zerver and DiscPort products.
The Company does not measure assets or operating expenses separately
for the NTM and NAS business segments.
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Information related to the operations of the Company in different
business segments for the first quarter ended March 27, 1999 and March 28, 1998
is set forth below.
NAS NTM Total
------- -------- -------
Net revenue: 1999 $ 3,111 $ 5,890 $ 9,001
1998 3,910 5,806 9,716
Gross profit: 1999 1,755 3,295 5,050
1998 2,440 3,485 5,925
March 27, March 28,
1999 1998
----------- ----------
Gross profit for reportable segments $ 5,050 $ 5,925
Unallocated amounts:
Operating expenses (6,804) (5,870)
Net interest income 63 75
----------- ----------
Income (loss) before taxes $ (1,691) $ 130
=========== ==========
(6) MAJOR CUSTOMERS:
Major customers accounting for more than 10% of total revenues for the
first quarter ended March 27, 1999 and March 28, 1998, are summarized below.
Percentage of revenue amount is not presented if less than 10%.
March 27, March 28,
Customer 1999 1998
-------- ------------- -------------
Graybar Electric Company, Inc. 12% -
Tech Data Corporation - 13%
(7) DOMESTIC AND INTERNATIONAL OPERATIONS:
The Company markets its products domestically and internationally
through its own direct sales organization and through a multiple channel,
worldwide distribution network. A summary of domestic and international net
revenues to unaffiliated customers for the first quarter ended March 27, 1999
and March 28, 1998, follows:
March 27, March 28,
1999 1998
--------- ---------
Domestic $ 4,893 $ 5,821
International 4,108 3,895
----------- ---------
Net revenues $ 9,001 $ 9,716
=========== =========
8
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(8) RESTATEMENT:
The following table presents the Company's selected unaudited quarterly
operating results for the first quarter ended March 28, 1998 as originally
reported, and as restated. The Company restated its quarterly results for the
first three quarters of 1998 to correct errors identified during the 1998
year-end audit. The errors were primarily attributable to system changes and
turnover in the finance department that occurred during the first half of 1998.
The corrections related primarily to various adjustments correcting the
provision for sales returns, correcting software capitalization and amortization
and intercompany account transactions.
Quarter ended March 28, 1998
-------------------------------------
As originally reported As restated
---------------------- -----------
Net revenue $ 9,716 $ 9,716
Cost of revenue 3,774 3,791
Gross profit 5,942 5,925
Total operating expenses 5,768 5,870
Net income 173 90
Net income per common share -
basic and diluted $ .02 $ .01
(9) COMMITMENTS AND CONTINGENCIES:
The Company is involved in certain legal matters incidental to its
business, the outcome of which is currently unknown. Management believes that
the Company's liability, if any, with respect to such matters, will not have a
material adverse affect on the Company's financial condition and results of
operations.
On March 8, 1999, a purported class action lawsuit was filed against
Microtest, Inc. and certain former officers in the United States District Court
for the District of Arizona. The suit claims that Microtest violated Section
10(b) of the Securities Exchange Act of 1934 by making public misrepresentations
or failing to disclose material facts regarding its financial results. The suit
was filed as a class action on behalf of all purchasers of Microtest stock
between April 14, 1998 and March 2, 1999. A similar suit was filed on April 7,
1999, but has not, as of the date of this filing, been served on the Company.
Microtest intends to vigorously defend these lawsuits. The eventual outcome of
these claims cannot be predicted with any degree of legal certainty.
The Securities and Exchange Commission ("SEC") is engaged in an
investigation relating primarily to accounting matters of the Company. The SEC
has not, to date, asserted any specific claims or remedy with respect to the
Company.
9
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MICROTEST, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company restated its quarterly results for the first three quarters
of 1998 to correct errors identified during the 1998 year-end audit. The errors
were primarily attributable to system changes and turnover in the finance
department that occurred during the first half of 1998. The corrections related
primarily to various adjustments correcting the provision for sales returns,
correcting software capitalization and amortization and intercompany account
transactions. See Note 8.
REVENUE. Net revenue for the Company's first quarter ended March 27,
1999 was $9.0 million, a decrease of 7.4% from revenue of $9.7 million for the
corresponding quarter last year. The overall decrease was primarily attributable
to intensified competition and the Company's decision to withdraw from the low
margin tower business. The lower than anticipated revenue from new DiscPort 2,
DiscPort VT, and DiscZerver products were unable to offset the tower revenues.
The Company distributes its products in both the U.S. and international
markets. U.S. net revenues were $4.9 million and $5.8 million for the first
quarters of 1999 and 1998, respectively, representing 54% of net revenue and 60%
of net revenue, respectively, for those periods. The 16% decrease in U.S. net
revenue in the first quarter of 1999 from the first quarter of 1998 resulted
primarily from a decline in the sales of Network Attached Storage ("NAS")
products.
International sales were $4.1 million and $3.9 million for the first
quarters of 1999 and 1998, respectively, representing 46% of net revenue and 40%
of net revenue, respectively, for those periods. The 6% increase in
international sales in the first quarter of 1999 from the first quarter of 1998
resulted primarily from increased sales in South America and Germany.
GROSS PROFIT. The Company's gross profit was $5.1 million or 56% of net
revenue and $5.9 million or 61% of net revenue for the three months ended March
27, 1999 and March 28, 1998, respectively. The decrease in the first quarter
gross margin was primarily the result of an increase in warranty reserves and in
the amortization of capitalized software over the same quarter last year.
Warranty reserves were increased to reflect anticipated repair costs as the
Company expands its international service capabilities. In addition, gross
margins may fluctuate on a quarterly basis because of product mix, pricing
actions and changes in sales and inventory allowances.
SALES AND MARKETING. Sales and marketing expenses were $3.2 million or
35% of net revenue and $3.1 million or 32% of net revenue for the first quarters
of 1999 and 1998, respectively. The increase in marketing and sales expenses in
absolute dollars for the first quarter of 1999 over the corresponding period in
1998 is due primarily to an increase of $200,000 in reserves for evaluation
units that are outstanding and are not expected to be recovered.
RESEARCH AND DEVELOPMENT. Research and development expenses remained
constant at $1.7 million for the first quarters of 1999 and 1998, representing
approximately 18% of net revenue. The Company capitalized approximately $78,000
and $193,000 during the first quarters ended March 27, 1999 and March 28, 1998,
respectively, of software development costs for new products for which
technological feasibility has been determined. These costs will be amortized
over the expected number of units to be sold, or three years, whichever method
is faster, and charged to cost of revenue. These amortization charges will
result in lowering the Company's net income in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.4 million or 16% of net revenue, and $1.0 million or 11% of net revenue for
the first quarters of 1999 and 1998, respectively. The increase in general and
administrative expenses as a percentage of net revenue, as well as in
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aggregate dollars, for the first quarter of 1999 over the corresponding period
in 1998 is due primarily to an increase in professional fees for additional
first quarter work.
SPECIAL CHARGE. The special charge recorded in the first quarter of
1999 represents severance expenses taken to recognize the restructuring of the
Company's management organization.
EFFECTIVE TAX RATE. The effective tax rate on income before income
taxes was 18% for the first quarter ended March 27, 1999 and 31% for the
corresponding period in the prior year. The effective tax rates differ from the
expected statutory federal income tax rate for those periods as a result of the
inclusion of state income taxes, tax benefits from the Company's Foreign Sales
Corporation and Research and Development tax credits.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. The cumulative
effect of a change in an accounting principle, recorded in the first quarter of
1999, reflects the write-off of international product translation costs that had
previously been capitalized. The write-off is in accordance with AICPA Statement
of Position 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES."
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $8.4 million at March 27,
1999 compared to $9.6 million at December 31, 1998. Working capital was $20.8
million at March 27, 1999 compared to $22.0 million at December 31, 1998. The
decrease in cash and cash equivalents and working capital was primarily a result
of reductions in accounts payable and funding of the cash used in operating
activities.
The Company funds its working capital requirements on a short-term
basis primarily through existing cash balances. The Company has no long-term
obligations and anticipates that existing cash balances and cash flows from
operations will be adequate to meet the Company's cash requirements for at least
the next year.
During the second quarter of 1997, the Company obtained a $10 million
unsecured revolving credit facility with a bank that is utilized for general
corporate and working capital purposes. The credit facility carries an interest
rate equal to the bank's "Reference Rate" defined as the rate of interest in
effect for such day as publicly announced from time to time by the bank as its
reference rate or the Offshore Rate plus 1.50. Major convenants of the credit
facility include: (1) the Company, on a consolidated basis, not incurring a net
and operating loss in two consecutive quarters, (2) the Company maintaining a
modified quick ratio of no less than 1.50, (3) the Company maintaining a
tangible net worth of no less than 90% of the Company's tangible net worth at
December 31, 1996, and (4) the Company not permitting its total liabilities to
exceed .75 times tangible net worth. The Company and the bank are currently
negotiating an amendment to the credit facility that will extend the expiration
date to June 30, 1999. No amounts were outstanding under this credit facility as
of March 27, 1999.
RISK FACTORS
The market for the Company's products is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The Company's future success will depend on its
ability to continue to enhance its current product line and to continue to
develop and introduce new products that keep pace with competitive product
introductions and technological developments, satisfy diverse and evolving
customer requirements or otherwise achieve market acceptance. There can be no
assurance that the Company will be successful in continuing to develop and
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market, in a timely and cost effective manner, 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 affect 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 that will permit the timely introduction of such
products. 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 have a material adverse affect on
the Company's business, financial condition and results of operations.
Over the past three years, CD-ROM drive technology has advanced
significantly. In addition, the pace of new drive introductions has increased.
As a result, the Company may find itself holding an inventory of obsolete
drives. The Company's contracts with its distributors allow for product returns
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 have a
material adverse affect on the Company's business, financial condition and
results of operations.
YEAR 2000 ISSUES
Like many other organizations, the year 2000 computer issue creates
risks for the Company. Many computer systems were originally designed to
recognize calendar years by their last two digits. Calculations performed using
these truncated fields would not work properly with dates during or after the
year 2000. To address these year 2000 issues, the Company has initiated a
comprehensive assessment and remediation program to resolve any year 2000 issues
with respect to its information technology ("IT") systems, its non-IT systems,
products and the systems of third parties with which it has a material
relationship. The Company estimates that as of May 6, 1999, it has completed
approximately 90% of the effort it believes necessary or prudent to adequately
address potential year 2000 issues they have identified.
The IT systems section of its year 2000 program focuses on the
Company's computer hardware and software. The Company has completed the
assessment phase of its program. The Company's current IT systems which were
determined not to be compliant have entered the remediation phase during which
the Company will either replace or otherwise remedy such systems. The
remediation phase for IT systems is expected to be completed by June 30, 1999.
Some minor systems may be converted later in 1999.
The non-IT systems section includes the hardware, software and
associated embedded computer technologies that are used to operate Company
facilities, equipment and other activities that are not related to IT systems.
The Company's building management has provided the Company with a complete
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list of vendors indicating compliance. The current telephone system is compliant
and long distance and local telephone service are compliant.
The Company's current products and all planned future releases, with
minor exceptions, are year 2000 compliant. Registered customers have been
notified of non-compliant products and any available upgrade. This information
was also made available on the Company's Web site as of June 1998.
The Company is continuing the process of identifying, prioritizing and
communicating with critical suppliers, distributors and customers to determine
the extent to which the Company may be vulnerable in the event those parties
fail to properly identify and remedy their own year 2000 issues. The Company
believes that non-compliant systems related to the Company's top suppliers would
present the greatest risk to the Company. Questionnaires have been sent to those
suppliers and they have stated that they are compliant or expect compliance by
the end of 1999. The Company intends to monitor the progress made by these
critical third parties and formulate appropriate contingency and business
continuation plans as needed.
The Company currently believes that the worst case scenario with
respect to the year 2000 issue is the failure of a supplier, including utility
suppliers, to become year 2000 compliant, which could result in the temporary
interruption of the supply of necessary products or services. This could result
in interruptions in production for a period of time, which in turn could result
in potential lost sales and profits. In addition, marketing and administrative
expense could increase if automated functions would need to be performed
manually.
The total cost of the Company's year 2000 Plan is not expected to be
material to the Company's financial condition. The estimated total cost of the
Plan should not exceed $750,000 and is being funded through operating cash flows
and existing cash balances. To date, the Company has incurred capital
expenditures of approximately $350,000 related to this project. None of the
Company's other information technology projects have been delayed or deferred as
a result of the implementation of the year 2000 Compliance Plan. The Company
does not expect that the incremental costs of this project will have a material
adverse affect on the Company's consolidated financial statements or results of
operations in any future periods.
The costs of the year 2000 project and the dates on which the Company
believes it will complete the year 2000 modifications and testing are based on
management's best estimates. These were derived utilizing numerous assumptions
regarding future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those currently anticipated. Examples of factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and embedded technology and similar
uncertainties. In addition, there can be no guarantee that the systems or
products of other entities will be converted on a timely basis, or that failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse affect on the Company.
The Company presently believes it has an effective Compliance Plan in
place to anticipate and resolve potential year 2000 issues in a timely manner.
Concurrent with the remediation of the Company's systems and evaluation of
third-party systems, the Company continues to develop contingency plans to
mitigate the risks that could occur in the event of disruption due to
non-compliant systems. Contingency plans may include looking for alternative
suppliers, increasing inventory levels or other actions deemed prudent. It is
expected that assessment, remediation and contingency planning activities will
be on going throughout 1999 with the goal of appropriately resolving all
13
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material internal systems and third-party issues. Estimated costs associated
with developing and implementing contingency measures are not currently
estimable.
14
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MICROTEST, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 affect on the financial condition or
operating results of the Company, but there can be no assurances in this regard.
On March 8, 1999, a purported class action lawsuit was filed against Microtest,
Inc. and certain former officers in the United States District Court for the
District of Arizona. The suit claims that Microtest violated Section 10(b) of
the Securities Exchange Act of 1934 by making public misrepresentations or
failing to disclose material facts regarding its financial results. The suit was
filed as a class action on behalf of all purchasers of Microtest stock between
April 14, 1998 and March 2, 1999. Microtest intends to vigorously defend the
suit. The eventual outcome of this claim cannot be predicted with any degree of
legal certainty.
The Securities and Exchange Commission ("SEC") is engaged in an
investigation relating primarily to accounting matters of the Company. The SEC
has not, to date, asserted any specific claims or remedy with respect to the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Page or
Number Description Method of Filing
- ------ ----------- ----------------
3.1 Amended and Restated Certificate of Incorporated by
Incorporation of the Company dated reference to Exhibit 3.1
May 19, 1992 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
27 Financial Data Schedule Filed herewith
99 Private Securities Litigation Reform Act Filed herewith
of 1995 Safe Harbor Compliance Statement
for Forward-Looking Statements
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated March 15, 1999, announcing
that a class action lawsuit was filed against Microtest, Inc. and certain former
officers in the United States District Court for the District of Arizona.
15
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MICROTEST, INC.
Date: May 11, 1999 By /s/ Vincent C. Hren
-------------------------------------
Vincent C. Hren
President and Chief Executive Officer
By /s/ Daniel J. Predovic
-------------------------------------
Daniel J. Predovic
Vice President, Secretary and Chief
Financial Officer
(Principal Financial Officer)
16
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-27-1999
<EXCHANGE-RATE> 1
<CASH> 8,399
<SECURITIES> 0
<RECEIVABLES> 8,614
<ALLOWANCES> 1,475
<INVENTORY> 6,481
<CURRENT-ASSETS> 28,677
<PP&E> 10,687
<DEPRECIATION> 7,707
<TOTAL-ASSETS> 36,718
<CURRENT-LIABILITIES> 7,845
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 28,865
<TOTAL-LIABILITY-AND-EQUITY> 36,718
<SALES> 9,001
<TOTAL-REVENUES> 9,001
<CGS> 3,951
<TOTAL-COSTS> 11,854
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (63)
<INCOME-PRETAX> (1,691)
<INCOME-TAX> (306)
<INCOME-CONTINUING> (1,385)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (117)
<NET-INCOME> (1,502)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</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 OMNIScanner 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) 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.
- --------
1 "Forward-looking statements" can be identified by use of words such as
"expect," "believe," "estimate," "project," "forecast," "anticipate," "plan,"
and similar expressions.
17
