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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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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 JUNE 26, 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 (August 6, 1999).
Common Stock, $.001 par value: 8,310,746 shares
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<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
June 26, 1999 and December 31, 1998 3
Consolidated Statements of Operations-
Three Months and Six Months Ended
June 26, 1999 and June 27, 1998 (as restated) 4
Consolidated Statements of Cash Flows-
Three Months and Six Months Ended
June 26, 1999 and June 27, 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 4. Submission of Matters to a Vote by Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
2
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 26, December 31,
ASSETS 1999 1998
-------- --------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,605 $ 9,618
Restricted investments 517 1,124
Receivables:
Trade accounts, net of allowances of $1,097
and $2,029 6,851 8,171
Income taxes 2,973 2,897
Inventories 5,603 6,572
Prepaid expenses 602 1,148
Deferred income taxes 1,580 1,556
-------- --------
Total current assets 24,731 31,086
-------- --------
PROPERTY AND EQUIPMENT 10,565 10,476
Less accumulated depreciation (7,970) (7,375)
-------- --------
Net property and equipment 2,595 3,101
-------- --------
OTHER ASSETS:
Capitalized software, net 1,634 1,894
Deferred income taxes 1,519 1,519
Other 1,405 1,750
-------- --------
Total other assets 4,558 5,163
-------- --------
$ 31,884 $ 39,350
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,167 $ 4,152
Accrued liabilities 3,572 2,922
Accrued payroll and employee benefits 703 860
Accrued deferred compensation 517 1,124
-------- --------
Total current liabilities 6,959 9,058
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value. Authorized
15,000,000 shares; issued 8,289,136
shares as of June 26, 1999 and 8,253,585
as of December 31, 1998 8 8
Additional paid-in capital 32,999 32,916
Accumulated deficit (6,864) (1,414)
Less treasury stock, at cost, 232,520 shares (1,218) (1,218)
-------- --------
Total stockholders' equity 24,925 30,292
-------- --------
$ 31,884 $ 39,350
======== ========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
(as restated) (as restated)
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET REVENUE $ 9,595 $10,745 $18,596 $20,461
COST OF REVENUE 4,639 4,448 8,590 8,239
Special charge for write-down of
discontinued product inventories 803 -- 803 --
------- ------- ------- -------
Gross profit 4,153 6,297 9,203 12,222
------- ------- ------- -------
OPERATING EXPENSES:
Sales and marketing 3,071 3,269 6,248 6,357
Research and development 2,079 1,920 3,780 3,667
General and administrative 1,660 1,531 3,062 2,566
Special charges 982 -- 1,506 --
------- ------- ------- -------
Total operating expenses 7,792 6,720 14,596 12,590
------- ------- ------- -------
LOSS FROM OPERATIONS (3,639) (423) (5,393) (368)
Other income, net -- 102 63 178
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (3,639) (321) (5,330) (190)
INCOME TAXES (BENEFIT) 306 (79) -- (38)
------- ------- ------- -------
Loss before cumulative effect of a change
in an accounting principle (3,945) (242) (5,330) (152)
CUMULATIVE EFFECT OF A CHANGE IN AN
ACCOUNTING PRINCIPLE, NET OF RELATED TAXES -- -- (117) --
------- ------- ------- -------
NET LOSS $(3,945) $ (242) $(5,447) $ (152)
======= ======= ======= =======
BASIC AND DILUTED LOSS PER SHARE:
Loss before change in an accounting principle $ (.49) $ (.03) $ (.68) $ (.02)
Cumulative effect of a change in an accounting
principle -- -- (.01) --
------- ------- ------- -------
Net loss $ (.49) $ (.03) $ (.69) $ (.02)
======= ======= ======= =======
Weighted average common shares outstanding 8,057 8,127 8,053 8,165
======= ======= ======= =======
</TABLE>
4
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
----------------------
(as restated)
June 26, June 27,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
Net loss $ (5,447) $ (152)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,298 743
Loss on disposition of equipment 142 --
Change in accounts receivable allowances (932) (105)
Decrease in accounts receivable 2,252 2,989
(Increase) decrease in income taxes receivable (76) 12
Decrease in inventories 969 275
Decrease in prepaid expenses and other assets 891 372
Increase in deferred income taxes (24) --
Decrease in accounts payable (1,985) (596)
Increase (decrease) in accrued liabilities 650 (1,581)
(Increase) decrease in accrued payroll and
employee benefits (157) 155
-------- --------
Net cash provided by (used in) operating
activities (2,419) 2,112
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (483) (533)
Capitalized software (194) (514)
-------- --------
Net cash used in investing activities (677) (1,047)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (purchase) sale of common and
treasury stock 83 (546)
-------- --------
Net cash provided by (used in) financing
activities 83 (546)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,013) 519
CASH AND CASH EQUIVALENTS, beginning of period 9,618 11,547
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 6,605 $ 12,066
======== ========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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. The financial statements have been prepared 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 and six months ended June
26, 1999 are not necessarily indicative of the results to be expected for the
full year.
(2) INVENTORIES:
Inventories consist of the following (in thousands):
June 26, December 31,
1999 1998
------- -------
(unaudited)
Raw materials $ 1,314 $ 1,946
Work-in-process 175 100
Finished goods 5,172 5,200
------- -------
6,661 7,246
Less allowance for inventory valuation (1,058) (674)
------- -------
$ 5,603 $ 6,572
======= =======
6
<PAGE>
(3) BASIC AND DILUTED LOSS PER SHARE:
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended Six Months Ended
------------------- -------------------
(as restated) (as restated)
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
------- ------- ------- -------
Net loss $(3,945) $ (242) $(5,447) $ (152)
======= ======= ======= =======
Weighted average common
shares outstanding 8,057 8,127 8,053 8,165
Dilutive effect of stock options -- -- -- --
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding 8,057 8,127 8,053 8,165
======= ======= ======= =======
Basic and diluted net loss
per share (.49) (.03) $ (.69) $ (.02)
======= ======= ======= =======
(4) SPECIAL CHARGE:
During the quarter ended June 26, 1999, the Company recognized a special
charge of $1.8 million related to its plan to exit the integrated high-end
CD-ROM enterprise systems business. The pre-tax special charge primarily
consists of $982,000 in employee severance and benefits, future lease payments,
the write-off of fixed assets and capitalized software, and an increase in the
allowance for evaluation units. The charge also includes $803,000 for the
write-down of discontinued product inventories that is included as a component
of cost of revenue.
(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.
7
<PAGE>
In the second quarter the Company announced the discontinuation of its
operations in the high-end CD-ROM enterprise system business. Exiting the
enterprise business, included as a part of the NAS business segment, allows the
Company to focus the Network Attached Storage Division exclusively on entry
level NAS thin-server appliances for the workgroup and remote office market.
The Company does not measure assets or operating expenses separately for
the NTM and NAS business segments.
Information related to the operations of the Company in different business
segments for the second quarter and six months ended June 26, 1999 and June 27,
1998 is set forth below.
Quarter Ended Six Months Ended
--------------------------- --------------------------
NAS NTM Total NAS NTM Total
------- ------- ------- ------- ------- -------
Net revenue: 1999 $ 3,612 $ 5,983 $ 9,595 $ 6,723 $11,873 $18,596
1998 3,322 7,423 10,745 7,232 13,229 20,461
Gross profit: 1999 959 3,194 4,153 2,714 6,489 9,203
1998 1,850 4,447 6,297 4,290 7,932 12,222
Quarter Ended Six Months Ended
-------------------- --------------------
(as restated) (as restated)
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
-------- -------- -------- --------
Gross profit for reportable
segments $ 4,153 $ 6,297 $ 9,203 $ 12,222
Unallocated amounts:
Operating expenses (7,792) (6,720) (14,596) (12,590)
Net interest income -- 102 63 178
-------- -------- -------- --------
Loss before taxes $ (3,639) $ (321) $ (5,330) $ (190)
======== ======== ======== ========
(6) MAJOR CUSTOMERS:
Major customers accounting for more than 10% of total revenues for the
quarter and six months ended June 26, 1999 and June 27, 1998, are summarized
below. Percentage of revenue amount is not presented if less than 10%.
Quarter Ended Six Months Ended
------------------- -------------------
June 26, June 27, June 26, June 27,
Customer 1999 1998 1999 1998
-------- -------- -------- --------
Tech Data -- 12% -- 12%
Ingram Micro -- 17% -- 11%
Graybar Electric Company, Inc. 11% -- 12% --
8
<PAGE>
(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 quarter and six months ended June 26, 1999 and
June 27, 1998, follows:
Quarter Ended Six Months Ended
-------------------- --------------------
(as restated) (as restated)
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
------- ------- ------- -------
Domestic $ 5,984 $ 8,091 $10,877 $13,912
International 3,611 2,654 7,719 6,549
------- ------- ------- -------
Net revenues $ 9,595 $10,745 $18,596 $20,461
======= ======= ======= =======
(8) RESTATEMENT:
The following table presents the Company's selected unaudited quarterly
operating results for the second quarter and six months ended June 27, 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 inter-company account transactions.
Quarter Ended Six Months Ended
---------------------- ---------------------
As Originally As Originally
Reported As restated Reported As restated
-------- -------- -------- --------
Net revenue $ 11,125 $ 10,745 $ 20,841 $ 20,461
Cost of revenue 4,452 4,448 8,226 8,239
Gross profit 6,673 6,297 12,615 12,222
Total operating expenses 6,059 6,720 11,827 12,590
Net income (loss) 541 (242) 714 (152)
Net income per common
share - basic and diluted $ .07 (.03) .09 (.02)
(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 April 7,
1999. 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
<PAGE>
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.
REVENUE. Net revenue for the Company's second quarter ended June 26, 1999
was $9.6 million, a decrease of 11% from revenue of $10.7 million for the
corresponding quarter last year. Net revenue for the six months ended June 26,
1999 was $18.6 million, a decrease of 9% from revenue of $20.5 million for the
corresponding period last year. The decrease for the quarter was primarily
because of product shipments originally scheduled for the second quarter were
delayed at customer request into early July. The decrease year over year was
also attributable to intensified competition and the Company's decision to
withdraw from the low margin tower business. The lower than anticipated revenue
from the new DiscZerver products were unable to offset the decreased tower
revenues.
The Company distributes its products in both the U.S. and international
markets. U.S. net revenues were $6.0 million, or 62% of net revenues, and $8.1
million, or 75% of net revenues, for the second quarters of 1999 and 1998,
respectively. U.S. net revenues were $10.9 million, or 58% of net revenue, and
$13.9 million, or 68% of net revenue, for the six months ended June 26, 1999 and
June 27, 1998, respectively. The decrease in U.S. net revenue for the quarter
and six months ended June 26, 1999,was primarily attributable to intensified
competition.
International sales were $3.6 million, or 38% of net revenue, and $2.6
million, or 25% of net revenue, for the second quarters of 1999 and
1998,respectively. International sales were $7.7 million, or 42% of net revenue,
and $6.5 million, or 32% of net revenue, for the first six months of 1999 and
1998, respectively. The increase in international sales in the second quarter of
1999 and six months ended June 26, 1999, resulted primarily from increased sales
in South America and Europe.
GROSS PROFIT. The Company's gross profit was $4.2 million, or 44% of net
revenue, and $6.3 million, or 59% of net revenue, for the second quarters ended
June 26, 1999 and June 27, 1998, respectively. Gross profit was $9.2 million, or
49% of net revenue, and $12.2 million, or 60% of net revenue, for the six months
ended June 26, 1999 and June 27, 1998, respectively. The decrease in the second
quarter and first six months gross margins as a percentage of net revenue from
1998 to 1999 was primarily attributable to a decrease in revenue and increases
in amortization of capitalized software, volume rebates, changes in product mix
and returns, and an adjustment in the cost of revenue portion of the returns
reserve. In addition, gross margin was adversely affected by a special charge of
$803,000. The special charge represents the write-down of discontinued product
inventories as a result of the Company's exit from the high-end CD-ROM
enterprise business.
SALES AND MARKETING. Sales and marketing expenses were $3.1 million, or 32%
of net revenue, and $3.3 million, or 30% of net revenue, for the second quarters
of 1999 and 1998, respectively. Sales and marketing expenses were $6.2 million,
10
<PAGE>
or 34% of net revenue, and $6.4 million, or 31% of net revenue, for first six
months of 1999 and 1998, respectively. The decrease in sales and marketing
expenses in absolute dollars for the second quarter of 1999 and the first six
months of 1999 over the corresponding periods in 1998 is due primarily to
reduced cooperative advertising expenses. In addition, sales promotion expenses,
which were charged to sales and marketing expense in the prior year, have been
recorded as reduction of revenue in the current year. The increase in sales and
marketing expenses as a percentage of net revenue for the second quarter and
first six months of 1999 over the corresponding periods in the prior year is
primarily due to an overall decrease in the Company's revenue.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.1
million, or 22% of net revenue, and $1.9 million, or 18% of net revenue, for the
second quarters of 1999 and 1998, respectively. For the first six months of
1999, research and development expenses were $3.8 million, or 20% of net
revenue, compared with $3.7 million, or 18% of net revenue, for the same period
of 1998. The increase in research and development expenses for the second
quarter and six months ended June 26, 1999 compared with the same periods in the
prior year, is primarily attributable to the substantial completion of a
third-party research and development project in the current quarter of
approximately $300,000. In addition, capitalized software for the six months
ended June 26, 1999 compared with the same period in the prior year decreased by
over $300,000 as a result of the completion of certain research and development
projects.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.7
million, or 17% of net revenue, and $1.5 million, or 14% of net revenue, for the
second quarters of 1999 and 1998, respectively. For the six months ended June
26, 1999 general and administrative expenses were $3.1 million, or 16% of net
revenue, compared with $2.6 million, or 13% of net revenue, for the
corresponding period in the prior year. The increase in general and
administrative expenses as a percentage of net revenue, as well as in aggregate
dollars, for the second quarter of 1999 over the corresponding period in 1998 is
due primarily to the resolution of certain sales tax related issues. The
increase in general and administrative expenses for the six months ended June
26, 1999 compared with the same period in the prior year is also attributable to
additional expenses for professional fees.
SPECIAL CHARGE. In the second quarter of 1999 the Company recorded a
special charge under operating expenses for its plan to exit the high-end CD-ROM
enterprise system business. This charge represents employee severance and
benefits, future lease payments, the write-off of fixed assets and capitalized
software and an increase in the Company's allowance for evaluation units. The
charge also includes a write-down of discontinued product inventories that was
included as a component of cost of revenue. The special charge of $524,000
recorded in the first quarter of 1999, represents severance expenses recorded to
recognize the restructuring of the Company's management organization.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. The cumulative
effect of a change in 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."
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $6.6 million at June 26, 1999
compared to $9.6 million at December 31, 1998. Working capital was $17.8 million
at June 26, 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, purchase of equipment 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.
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
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.
12
<PAGE>
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 August 1, 1999, it has completed
approximately 99% 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 been replaced or otherwise corrected for compliance. The
remediation phase for IT systems is completed, although 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 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 has also been
made available on the Company's Web site since 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 total cost of the Plan is
being funded through operating cash flows. The Company anticipates that the
remaining expenditures to complete the Company's year 2000 Plan are less than
$20,000. None of the Company's other information technology projects have been
delayed or
13
<PAGE>
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
material internal systems and third-party issues. Estimated costs associated
with developing and implementing contingency measures are not currently
estimable.
14
<PAGE>
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. A similar suit was filed April 7, 1999.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Shareholders' Meeting was held on May 24, 1999.
(b) At the Annual Shareholders' Meeting, proposals were considered for (i)
the election of Roger C. Ferguson and Vincent C. Hren as Class III
Incumbent Directors to serve for three year terms and (ii) an increase
in the maximum number of shares of the Company's common stock
available for sale under the Employee Stock Purchase Plan from 200,000
shares to 400,000 shares.
The director-nominees were elected and the increase to the amount of
shares available for sale under the Employee Stock Purchase Plan was
approved with the voting results as follows:
<TABLE>
<CAPTION>
Proposal Votes For Votes Against Votes Withheld Abstained Not Voted
- -------- --------- ------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Election of Roger C. Ferguson
as a Class III Incumbent Director 6,493,356 86,179 -- -- 1,709,601
Election of Vincent C. Hren as
a Class III Incumbent Director 6,495,420 84,115 -- -- 1,709,601
Approval of an increase to the
maximum number of shares
available under the
Employee Stock Purchase Plan 6,334,425 218,705 -- 26,405 1,709,601
</TABLE>
15
<PAGE>
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
10.18 Non-Qualified Stock Option Agreement with Filed herewith
Vincent C. Hren
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
None.
16
<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.
August 10, 1999 /s/ Vincent C. Hren
----------------------------------------
Vincent C. Hren
President and Chief Executive Officer
August 10, 1999 /s/ Daniel J. Predovic
----------------------------------------
Daniel J. Predovic
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
17
NON-QUALIFIED STOCK OPTION AGREEMENT
(Corrected Form)
This Non-Qualified Stock Option Agreement is made as of this 7th day of
January, 1999 (which date is hereinafter referred to as the "Date of Grant") by
and among MICROTEST, INC., a Delaware corporation (hereinafter referred to as
the "Company") and Vincent Hren (hereinafter referred to as "Officer").
RECITALS
A. From time to time, the Company grants stock options to key employees and
officers of the Company as an incentive to encourage key employees and officers
to remain in its employment and to enhance the ability of the Company to attract
new employees and officers whose services are considered unusually valuable by
providing an opportunity to have a proprietary interest in the success of the
Company; and
B. The Compensation Committee (the "Committee") of the Company's Board of
Directors believes that the granting of the Option herein described to Officer
is consistent with the stated purposes for the grant of a stock option;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company and Officer agree
as follows:
1. Grant of Option. The Company hereby grants to Officer the right and
option (hereinafter referred to as the "Option") to purchase an aggregate of
200,000 shares (such number being subject to adjustment as provided in paragraph
number 12 hereof) of Microtest Common Stock (the "Stock") on the terms and
conditions herein set forth. This Option may be exercised in whole or in part
and from time to time only to the extent the Option is vested and as hereinafter
provided.
2. Vesting. Subject to paragraph 13 below, the Option shall vest as
follows:
(a) One-third of the shares shall vest twelve (12) months after the
Date of Grant;
(b) One-third of the shares shall vest twenty-four (24) months after
the Date of Grant;
(c) One-third of the shares shall vest thirty-six (36) months after
the Date of Grant;
3. Purchase Price. The price at which Officer shall be entitled to purchase
the Stock covered by the Option shall be $2.9375 per share (the Fair Market
Value on the Date of Grant).
4. Term of Option. The Option hereby granted shall be and remain in force
and effect for a period of ten (10) years from the Date of Grant, through and
including the normal close of business of the Company on January 7, 2009
(hereinafter referred to as the "Expiration Date"), subject to earlier
termination as provided in paragraphs 8 and 9 hereof.
1
<PAGE>
5. Exercise of Option. The Option may be exercised by Officer at any time
and from time to time on or after twelve (12) months and one day after the Date
of Grant, and through the Expiration Date as to all or any part of the shares of
the Stock then vested by delivery to the Company of written notice of exercise
and payment of the purchase price as provided in paragraphs 5 and 6 hereof.
6. Method of Exercising Option. Subject to the terms and conditions of this
Option Agreement, the Option may be exercised by timely delivery to the Company
of written notice, which notice shall be effective on the date received by the
Company (the "Effective Date"). The notice shall state Officer's election to
exercise the Option, the number of shares in respect of which an election to
exercise has been made, the method of payment elected (see paragraph 7 hereof),
the exact name or names in which the shares will be registered and the Social
Security number of Officer. Such notice shall be signed by the Officer and shall
be accompanied by payment of the purchase price of such shares. In the event the
Option shall be exercised by a person or persons other than Officer pursuant to
paragraph 9 hereof, such notice shall be signed by such other person or persons
and shall be accompanied by proof acceptable to the Company of the legal right
of such person or persons to exercise the Option. All shares delivered by the
Company upon exercise of the Option as provided herein shall be fully paid and
nonassessable upon delivery.
7. Method of Payment for Options. Payment for shares purchased upon the
exercise of the Option shall be made by the Officer in cash or such other method
permitted by the Committee in its sole discretion, including (i) tendering
shares, (ii) surrendering a stock award valued at Fair Market Value on the date
of surrender, (iii) authorizing a third party to sell the shares (or a
sufficient portion thereof) acquired upon exercise of a stock option and
assigning the delivery to the Company of a sufficient amount of the sale
proceeds to pay for all the shares acquired through such exercise, or (iv) any
combination of the above. For purposes of this Agreement, "Fair Market Value"
means with respect to Stock or any other property, the fair market value of such
Stock or other property as determined by the Committee in its discretion, under
one of the following methods: (i) the average of the closing bid and asked
prices 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 prices are so reported for that date, such prices on the
next preceding date for which closing bid and asked prices were reported; or
(ii) the price as determined by such methods or procedures as may be established
from time to time by the Committee.
8. Termination of Services. In the event that Officer's services are
terminated by the Company for any reason other than for Cause, as defined below,
then Officer may at any time within three (3) months next succeeding the
effective date of such termination (or such later date as the Committee may
determine) exercise the Option to the extent that Officer was entitled to
exercise the Option at the date of termination, provided that in no event shall
the Option, or any part thereof, be exercisable after the Expiration Date. If
Officer's services are terminated for Cause, the Option shall lapse at the time
of such termination. For purposes of this Agreement, "Cause" means if the
Committee, in its reasonable and good faith discretion, determines that Officer
(i) has developed or pursued interests substantially adverse to the Company,
(ii) materially breached any employment, engagement or confidentiality agreement
or otherwise failed to satisfactorily discharge his or her duties, (iii) has not
devoted all or substantially all of his or her business time, effort and
attention to the affairs of the Company (or such lesser amount as has been
agreed to in writing by the Company), (iv) is convicted of a felony involving
moral turpitude, or (v) has engaged in activities or omissions that are
detrimental to the well-being of the Company.
2
<PAGE>
9. Disability or Death of Officer. In the event of the disability or death
of Officer, the Option may be executed to the extent that Officer was entitled
to exercise it at the time of such event, provided that in no event shall the
Option, or any part thereof, be exercisable after the Expiration Date. The
Option may be exercised at any time within 12 months (or such later date as the
Committee may determine), by, as applicable, the Officer, the Officer's legal
representative or representatives, by the person or persons entitled to do so
under Officer's last will and testament or, if the Officer fails to make a
testamentary disposition of such Option or shall die intestate, by the person or
persons entitled to receive such Option under the applicable laws of descent and
distribution. The Committee shall have the right to require evidence
satisfactory to it of the rights of any person or persons seeking to exercise
the Option under this paragraph 9 to exercise the Option. The term "Disability"
shall mean any illness or other physical or mental condition of Officer which
renders the Officer incapable of performing his customary and usual duties for
the Company, or any medically determinable illness or other physical or mental
condition resulting from a bodily injury, disease or mental disorder which in
the judgment of the Committee is permanent and continuous in nature. The
Committee may require such medical or other evidence as it deems necessary to
judge the nature and permanency of Officer's condition.
10. Nontransferability. The Option granted by this Option Agreement shall
be exercisable only during the term of the Option provided in paragraph 4 hereof
and, except as provided in paragraphs 8 and 9 above, only by Officer during his
lifetime and while an Officer of the Company. No right or interest of Officer in
the option may be pledged, encumbered, or hypothecated to or in favor of any
party other than the Company, or shall be subject to any lien, obligation, or
liability of Officer to any other party other than the Company.
11. Delivery of Shares. No shares of Stock shall be delivered upon exercise
of the Option until (i) the purchase price shall have been paid in full in the
manner herein provided; (ii) applicable taxes required to be withheld have been
paid or withheld in full; (iii) approval of any governmental authority required
in connection with the Option, or the issuance of shares thereunder, has been
received by the Company; and (iv) if required by the Committee, Officer has
delivered to the Committee an Investment Letter in form and content satisfactory
to the Company as provided in paragraph 14 hereof.
12. Adjustments. In the event a stock dividend is declared upon the Stock,
the shares of Stock then subject to the Option shall be increased
proportionately without any change in the aggregate purchase price therefor. In
the event the Stock shall be changed into or exchanged for a different number or
class of shares of Stock or of another corporation, whether through
reorganization, recapitalization, stock split-up, combination of shares, there
shall be substituted for each such share of Stock then subject to the Option the
number and class of shares of Stock into which each outstanding share of Stock
shall be so exchanged, all without any change in the aggregate purchase price
for the shares then subject to the Option.
13. Change of Control. Upon a Change of Control the Option shall vest and
become fully exercisable. For purposes of this Agreement, "Change in Control"
means and includes each of the following: (i) there shall be consummated any
consolidation or 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 Company's 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; (ii)
there shall be consummated 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); (iii) the shareholders of the Company shall
3
<PAGE>
approve any plan or proposal for liquidation or dissolution of the Company; (iv)
any person (as such term is used in Sections 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, shall become 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 of the Microtest, Inc. Long-Term
Incentive Plan shall become the beneficial owner of 50% or more of the Company's
outstanding Stock; or (v) during any period of two consecutive years,
individuals who were directors of the Company at the beginning of such period
shall fail to constitute a majority of the Company's Board of Directors, unless
the election, or the nomination for election by the Company's shareholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
14. Securities Act. The Company shall have the right, but not the
obligation, to cause the shares of Stock issuable upon exercise of the Option to
be registered under the appropriate rules and regulations of the Securities and
Exchange Commission. The Company shall not be required to deliver any shares of
Stock pursuant to the exercise of all or any part of the Option if, in the
opinion of counsel for the Company, such issuance would violate the Securities
Act of 1933 or any other applicable federal or state securities laws or
regulations. The Committee may require that Officer, prior to the issuance of
any such shares pursuant to exercise of the Option, sign and deliver to the
Company a written statement ("Investment Letter") stating (i) that Officer is
purchasing the shares for investment and not with a view to the sale or
distribution thereof; (ii) that Officer will not sell any shares received upon
exercise of the Option or any other shares of the Company that Officer may then
own or thereafter acquire except either (a) through a broker on a national
securities exchange or (b) with the prior written approval of the Company; and
(iii) containing such other terms and conditions as counsel for the Company may
reasonably require to assure compliance with the Securities Act of 1933 or other
applicable federal or state securities laws and regulations. Such Investment
Letter shall be in form and content acceptable to the Committee in its sole
discretion. If shares of Stock or other securities issuable pursuant to the
exercise of the Option have not been registered under the Securities Act of 1933
or other applicable federal or state securities laws or regulations, such shares
shall bear a legend restricting the transferability thereof, such legend to be
substantially in the following form:
"The shares represented by this certificate have not been registered or
qualified under federal or state securities laws. The shares may not be
offered for sale, sold, pledged or otherwise disposed of unless so
registered or qualified, unless an exemption exists or unless such
disposition is not subject to the federal or state securities laws, and the
availability of any exemption or the inapplicability of such securities
laws must be established by an opinion of counsel, which opinion and
counsel shall both be reasonably satisfactory to the Company."
15. Federal and State Taxes. Upon exercise of the Option, or any part
thereof, Officer may incur certain liabilities for federal, state or local taxes
and the Company may be required by law to withhold such taxes for payment to
taxing authorities. Upon determination by the Company of the amount of taxes
required to be withheld, if any, with respect to the shares to be issued
pursuant to the exercise of the Option, Officer shall pay all Federal state and
local tax withholding requirements by having the Company withhold Stock (to the
extent that Stock is issued pursuant to the Award) having a Fair Market Value on
the date that tax is to be determined equal to the tax otherwise required to be
withheld.
4
<PAGE>
16. Administration. This Option Agreement shall at all times be
administered by the Committee and decisions of the majority of the Committee
with respect thereto and to this Option Agreement shall be final and binding
upon Officer and the Company.
17. Obligation to Exercise. Officer shall have no obligation to exercise
any option granted by this Agreement.
18. Disclaimer of all Employment Terms. Officer acknowledges and agrees
that: (i) he serves the Company at the discretion of Company's Board of
Directors, and (ii) this Option Agreement in no way constitutes an employment
agreement between Officer and Company, nor does he have such an agreement.
Subject to the foregoing, Officer agrees to be bound by all employment policies
and procedures of Company, including, but not limited to, the Company's Employee
Handbook.
19. Non-Competition. In consideration of this Option Agreement, Officer
covenants and agrees that he will not, during the term of his employment with
the Company and for one (1) year after any termination of his services, within
any jurisdiction in which the Company does business:
(a) Directly or indirectly participate or assist in the ownership,
management, operation or control of any business similar to or competitive with
Company; provided, however, that Officer may own, directly or indirectly, solely
as an investment, securities of any person which are traded on any national
securities exchange or in the over the counter market if Officer (x) is not a
controlling person of, or a member of a group which controls, such person or (y)
does not, directly or indirectly, own 1% or more of any class of securities of
such person; or
(b) Directly or indirectly solicit for employment any person who is,
or within the six month period preceding the date of such solicitation was, an
employee of Company; or
(c) Call on or directly or indirectly solicit or divert or take away
from Company any person, firm, corporation, or other entity who is a customer or
supplier of Company.
20. Confidentiality and Nondisclosure. It is understood that in the course
of Officer's term of service with Company, Officer will become acquainted with
Company Confidential Information. Officer recognizes that Company Confidential
Information has been developed or acquired at great expense, is proprietary to
Company, and is and shall remain the exclusive property of Company. Accordingly,
Officer agrees that he will not, without the express written consent of Company,
during Officer's term of service with Company and thereafter or until such time
as Company Confidential Information becomes generally known, or readily
ascertainable by proper means, by persons unrelated to Company, disclose to
others, copy, make any use of, or remove from Company's premises any Company
Confidential Information, except as Officer's duties for Company may
specifically require. For purposes of this Agreement, "Company Confidential
Information" shall mean confidential, proprietary information or trade secrets
of Company including without limitation the following: (1) customer lists and
customer information as compiled by Company, including customer orders, product
usage, product volumes, pricing, customer technology, sale and contract terms
and conditions, contract expirations, and other compiled customer information;
(2) Company's internal practices and procedures; (3) Company's financial
condition and financial results of operation to the extent not generally
available to the public; (4) supply of materials information, including sources
and costs; (5) information relating
5
<PAGE>
to designs, formulas, developmental or experimental work, know-how, products,
processes, computer programs, source codes, data bases, designs, schematics,
inventions, creations, original works of authorship, or other subject matter
related to Company's research and development, strategic planning,
manufacturing, engineering, purchasing, finance, marketing, promotion,
distribution, and selling activities, whether now existing, or acquired,
developed, or made available anytime in the future to Company; (6) all
information which Officer has a reasonable basis to consider confidential or
which is treated by Company as confidential; and (7) any and all information
having independent economic value to Company that is not generally known to, and
not readily ascertainable by proper means by, persons who can obtain economic
value from its disclosure or use. Officer acknowledges that such information is
Company Confidential Information whether disclosed to or learned by Officer or
originated by Officer during employment by Company. In the event that
information is not clearly and obviously publicly available, all information
about Company shall be presumed to be confidential.
21. Reasonableness of Scope; Remedies. Officer acknowledges and agrees that
a breach by Officer of the provisions of Sections 19 and 20 of this Agreement
will cause Company irreparable injury and damage that cannot be reasonably or
adequately compensated by damages at law. Officer further acknowledges and
agrees that he has such skills and abilities that the provisions of this
Sections 19 and 20 will not prevent him from earning a living. Officer expressly
agrees that Company shall be entitled to injunctive or other equitable relief to
prevent a threatened breach, breach or continued breach of Sections 19 or 20
hereof in addition to any other remedies legally available to it.
22. Arbitration. Any dispute between the parties, whether arising out of or
in connection with this Agreement, shall be determined by arbitration, which,
other than the relief provided in Section 21 hereof, shall be the exclusive
remedy of the parties. Any such dispute shall be submitted to and be resolved in
accordance with the rules and regulations of the American Arbitration
Association. The arbitration shall be held in Phoenix, Arizona. The arbitrators
shall state in writing the reasons for the award. The arbitrators shall award
compensatory damages to the prevailing party. The arbitrators shall have no
authority to award consequential or punitive or statutory damages, and the
parties hereby waive any claim to those damages to the fullest extent allowed by
law.
23. Governing Law. This Option Agreement shall be interpreted and
administered under the laws of the State of Arizona without regard to conflict
of law principles.
24. Amendments. This Option Agreement may be amended only by a written
agreement executed by the Company and Officer. The Company and Officer
acknowledge that changes in federal tax laws enacted subsequent to the Date of
Grant, and applicable to stock options, may provide for tax benefits to the
Company or Officer. In any such event, the Company and Officer agree that this
Option Agreement may be amended as necessary to secure for the Company and
Officer any benefits that may result from such legislation. Any such amendment
shall be made only upon the mutual consent of the parties, which consent (of
either party) may be withheld for any reason.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option Agreement to be duly
executed and Officer has hereunto set his or her hand as of the date first
written above.
MICROTEST, INC.
By /s/ Dianne Walker
--------------------------------------
Chairman of the Compensation Committee
OFFICER
/s/ Vincent Hren
-----------------------------------------
Vincent Hren
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-26-1999
<EXCHANGE-RATE> 1
<CASH> 6,605
<SECURITIES> 0
<RECEIVABLES> 7,948
<ALLOWANCES> 1,097
<INVENTORY> 5,603
<CURRENT-ASSETS> 24,731
<PP&E> 10,565
<DEPRECIATION> 7,970
<TOTAL-ASSETS> 31,884
<CURRENT-LIABILITIES> 6,959
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 24,917
<TOTAL-LIABILITY-AND-EQUITY> 31,884
<SALES> 18,596
<TOTAL-REVENUES> 18,596
<CGS> 9,393
<TOTAL-COSTS> 23,989
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (63)
<INCOME-PRETAX> (5,330)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (117)
<NET-INCOME> (5,447)
<EPS-BASIC> (0.69)
<EPS-DILUTED> (0.69)
</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; (vii) any reduction in sales of the Company's OMNIScanner or DiscPort
products from which the Company derives substantially all of its revenue; (xiii)
the inability of the Company to accurately monitor end user demand for its
products; (ix) unanticipated product returns to the extent such returns exceed
the Company's reserves; (x) the cost, quality and availability of third-party
components used in the Company's systems; (xi) the loss of any of the Company's
third-party manufacturers or key suppliers; (xii) any disruption or reduction in
the future supply of key components currently obtained from limited sources;
(xiii) 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; (xiv) inventory writedowns, product returns or price protection
credits that exceed the Company's estimates; (xv) 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; (xvi) recruiting,
hiring and retaining the services of key engineering, sales and marketing,
management and manufacturing personnel; (xvii) failure of the Company to protect
its proprietary information and technology; and (xviii) 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.
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(1) "Forward-looking statements" can be identified by use of words such as
"expect," "believe," "estimate," "project," "forecast," "anticipate," "plan,"
and similar expressions.
