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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0 - 20666
MICROTEST, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0485884
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(State or other jurisdiction (IRS employer
of Incorporation) identification number)
4747 North 22nd Street, Phoenix, Arizona 85016
(602) 952-6400
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value Nasdaq National Market
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 and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant was approximately $18,909,592 based on the closing sale price as
reported by the Nasdaq National Market on March 22, 1999.
The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of March 22, 1999 was 8,289,136 shares of Common Stock ($.001
par value).
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's Proxy Statement relating to its 1999 Annual
Meeting of Shareholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.
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TABLE OF CONTENTS
PART I....................................................................... 3
ITEM 1 BUSINESS......................................................... 3
ITEM 2 PROPERTIES....................................................... 15
ITEM 3 LEGAL PROCEEDINGS................................................ 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 15
PART II...................................................................... 16
ITEM 5 MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND
RELATED SHAREHOLDER MATTERS...................................... 16
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA............................. 17
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 19
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 28
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 28
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................... 48
PART III..................................................................... 48
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.................. 48
ITEM 11 EXECUTIVE COMPENSATION........................................... 48
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 48
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 48
PART IV...................................................................... 49
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................................... 49
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Microtest, Inc. ("Microtest" or the "Company") develops, markets and
supports products that make it easier to use, manage and service Local Area
Networks ("LANs"). Founded in 1984, Microtest has become a leading producer of
network management and network connectivity products that are designed to
simplify complex tasks in the networked workplace.
Microtest's Network Management Product ("NMP") line of handheld
certification and troubleshooting tools are used in the installation and
operation of networks. The handheld scanners quickly certify whether network
cabling will support the proposed network infrastructure, monitor network
activity when the network is in use, pinpoint cable problems when they arise,
and provide documentation of the network infrastructure. Products in this line
operate across multiple cable types and network management systems. The
Company's NMP products cost effectively increase network productivity and
reliability by reducing network downtime.
In June 1998, Microtest introduced OMNIScannerTM to its line of NMP
products. OMNIScanner is the world's first digital certification tool for
Category 5E and Category 6 cabling. OMNIScanner has proprietary frequency domain
digital signal processing technology, which provides a dynamic range similar to
a laboratory network analyzer. OMNIScanner was also the first field tester
capable of testing Category 7 cabling and the first to make equal level far end
crosstalk measurements, a requirement for Gigabit Ethernet cabling
certification. This is a time of rapid change in the cabling industry. Every
major cabling standard is undergoing revision to incorporate new measurements,
new higher bandwidth, and higher levels of performance. The Company believes
these changes in cabling standards are creating a replacement market for field
testers, since the new requirements may make the vast majority of network
products installed prior to 1998 obsolete. The OMNIScanner provides a strong
stable platform upon which the Company can build additional software and
hardware options to generate revenues.
Microtest's Network Connectivity Product ("NCP") line consists of a
family of thin-server appliances and server products that allow users to easily
share information on a variety of peripheral devices, including CD, DVD, and
CD-R drives. Microtest's connectivity products enable organizations to develop,
store, manage, and access information and knowledge bases with ease. Microtest's
DiscPort(R) and ZerverTM brands of products include CD/DVD-ROM thin servers, CD
publishing systems, Internet appliances and enterprise servers that let
organizations access information instantly with point-and-click ease.
In 1998, Microtest introduced DiscZerverTM to its line of NCP products.
DiscZerver is a high performance workgroup/department CD/DVD server appliance
employing unique CD/DVD image caching technology that increases network access
performance while greatly reducing network access costs for shared CD/DVD
applications. The DiscZerver joins the WebZerverTM workgroup intranet appliance
in extending the Company's growing line of Zerver network appliances.
MICROTEST IS A DELAWARE CORPORATION, ITS PRINCIPAL EXECUTIVE OFFICES
ARE LOCATED AT 4747 N. 22ND STREET, PHOENIX, ARIZONA 85016, AND ITS TELEPHONE
NUMBER IS (602) 952-6400.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS.
ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY THE COMPANY
FROM TIME TO TIME IN FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR
OTHERWISE. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," AND "PROJECT," AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE THE STATEMENT WAS MADE. SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE
MEANING OF THAT TERM IN SECTION 27A OF THE SECURITIES AND EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS MAY INCLUDE, BUT NOT BE LIMITED TO, PROJECTIONS OF
REVENUES, INCOME OR LOSS, CAPITAL EXPENDITURES, PLANS FOR FUTURE OPERATIONS,
FINANCING NEEDS OR PLANS, THE IMPACT OF INFLATION, YEAR 2000 ISSUES AND PLANS
RELATING TO PRODUCTS OR SERVICES OF THE COMPANY, AS WELL AS ASSUMPTIONS RELATING
TO THE FOREGOING. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS, OR OTHERWISE.
FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED
BY, OR UNDERLYING THE FORWARD-LOOKING STATEMENTS. STATEMENTS IN THIS ANNUAL
REPORT, INCLUDING THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," DESCRIBE FACTORS, AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE
SUCH DIFFERENCES. ADDITIONAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS ARE SET FORTH
IN THIS "BUSINESS" SECTION AND IN THE "MARKET FOR THE COMPANY'S EQUITY
SECURITIES AND RELATED SHAREHOLDER MATTERS" SECTION IN THIS REPORT.
INDUSTRY BACKGROUND
The computer networking industry, which includes local area networking,
enterprise networking, intranets and the Internet continues to grow at a rapid
rate. Recent Dataquest projections indicate compound growth rates in the
networking market will exceed 20% in the near-term.
The world's dependence on networks creates increasing pressure for
improved network performance and reliability, starting at the point of cable
installation. As more demands are placed on the network, products that maintain
and enhance the performance and integrity of the network and that ensure network
compliance with continuously changing U.S. and international standards and
technologies will become more important. This will likely result in greater
dependence upon and increased reliability requirements for these network
products. To offset growing complexities in networking, the products used to
maintain the networks will need to be easy to use, install, manage and own.
Each year, there are new standards, new protocols, faster data
requirements, enhanced operating systems, better data storage options, new
peripheral hardware, more advanced topologies and signaling options, and
additional cabling options. In particular, 1998 saw significant progress towards
new standards for Category 5E and Category 6 cabling. Support of these standards
requires higher bandwidth (250 MHz), higher dynamic range and new measurements
(return loss, power sum near end crosstalk ("NEXT"), equal level far end
crosstalk and power sum equal level far end crosstalk). Furthermore, draft
Gigabit Ethernet cabling standards require test capabilities not available in
the vast majority of existing field test equipment. Many networks incorporate a
variety of different technologies and it is this trend toward complexity that is
creating demand for products that manage network assets. Many of these standards
are in development and it is uncertain when each will become finalized.
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Organizations of all sizes continue to migrate mission-critical
operations and information to their networks, making the work environment more
dependent on the network's ability to have multiple users share information
efficiently. The move toward intranets for information capture and distribution
has also gained momentum. This growing dependence on networking has caused
increasing demand for products and technologies that maximize device and
information sharing capabilities.
CD-ROM remains the mass information storage medium of choice because of
its low cost and easy access via network CD-ROM servers. As the cost of
CD-Recordable drives continue to fall, more organizations may utilize this
storage medium as a viable alternative to other, more expensive memory options.
MARKET FOR THE COMPANY'S PRODUCTS
NETWORK MANAGEMENT PRODUCTS. The advancements of equipment and
technologies enabling high-speed data transmission over twisted-pair and fiber
optic wiring continue to increase in number and complexity. Ensuring that
existing or newly installed wiring can handle these high data speeds is a
critical step in minimizing network downtime, lost productivity and data
transmission problems. NCP service providers and systems integrators worldwide
use Microtest's NMP products to perform the critical certification functions for
modern twisted-pair networking systems and legacy cabling. Newer products, such
as the Company's CertiFiber, perform similar certification functions for fiber
optic cabling. Once the network cabling is installed and the network is running,
management software products continue to help users troubleshoot network
problems with speed and accuracy minimizing network downtime and increasing user
productivity.
NETWORK CONNECTIVITY PRODUCTS. Microtest's NCP products address the
challenges associated with managing devices and sharing large amounts of
information within workgroups or enterprises. Network administrators, librarians
and information resource professionals in all kinds of organizations such as law
firms, educational institutions, libraries and research facilities are some of
the target markets for Microtest's NCP line. CD-ROM is the information storage
medium of choice and, according to Frost & Sullivan, unit shipments of CD-ROM
networking products are being driven by increases in the amount of content
available on CD and DVD. Microtest's CD-ROM networking products are designed to
increase the ease of connecting network users to the content stored on CD-ROMs
and DVD-ROMs. Newer NCP product offerings have also enabled network users to
utilize newer popular storage devices and media, such as JazTM and ZipTM drives.
The core technologies of the Company's NCP products have broadened to expand
beyond the scope of CD devices, to encompass these newer popular media types, as
well as the Internet and intranets.
According to Forrester Research, companies will migrate to full service
intranets for: (1) making easier connections with the outside world, (2)
standardizing multiple competing suppliers, and (3) lowering costs. This market
is growing rapidly. In a study conducted for the American Management
Association, Tierney & Partners indicated that 36% of all companies have an
intranet for inter-organizational communications. The report predicted this
figure would grow to 68% by 1999. Core technologies of the Company's NCP
products have proven to be extensible and adaptable to target these newer market
opportunities.
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COMPANY STRATEGY
The Microtest strategy is to make computer and telecommunications
networks easier to use and mission-critical information easier to share. The
Company provides a variety of easy-to-use hand held products and network
attachable hardware and software products, all designed to address complex
network management problems. To effectively serve its customers, the Company
relies on developing fully integrated solutions, optimizing established
distribution channels and expanding technological and software content across
all product ranges.
DEVELOPING FULLY INTEGRATED SOLUTIONS. Microtest develops integrated,
intuitive hand-held and "plug and play" solutions that can be quickly and easily
used to certify networks or be used on networks in everyday use. The Company's
products are designed to be marketed and sold as complete solutions that
eliminate common network problems experienced by users. For example, in 1998 the
Company introduced OMNIScanner, the industry's first Category 6 cable
certification tool and Discport VT, the successor product to its successful
DiscPort product line that offers fast, efficient tower-like capability packaged
in a small space.
OPTIMIZING ESTABLISHED DISTRIBUTION CHANNELS. The Company's worldwide
indirect sales channels allow it to reach a broad base of customers efficiently.
Products are sold through a worldwide network of distributors, manufacturers'
representative organizations, and value-added resellers that market PC-related
hardware and software products. Microtest also employs Major Account sales
representatives who develop opportunities with enterprise customers for
fulfillment through channel partners.
EXPAND SOFTWARE CONTENT. The Company continues to expand the amount of
software in its products to enable it to meet market demands for greater
functionality and easier adaptation. Increasing software content in integrated
products, while releasing new software products and software upgrades, continues
to be a part of Microtest's strategy.
PRODUCTS
Microtest is a leading supplier of computer network certification and
management products, an industry segment the Company created through its
patented cable radar technology. The Company's handheld cable test tools quickly
pinpoint cable problems, certify whether network cabling will support a proposed
network system, and monitor network activity. They operate across multiple cable
types and network management systems and cost effectively increase network
productivity and reliability by reducing network downtime. Sales of network
management products accounted for 64%, 56% and 59% of the Company's total
revenues in 1998, 1997 and 1996, respectively. In addition, the Company offers a
line of LAN connectivity products that allow users to easily share information
on a variety of peripheral devices, including CD-ROMS.
The Company currently derives substantially all of its revenues from
its OMNIScanner, PentaScanner, Zerver and DiscPort products. Any decrease in
revenues of OMNIScanner, PentaScanner, Zerver or DiscPort products would have a
material adverse effect on the Company's business, financial condition and
operating results.
NETWORK MANAGEMENT PRODUCTS. Cable installers and information system
administrators use Microtest's NMP products to instantly pinpoint physical
cabling problems, which can be a primary cause of network downtime. The Company
designs tools with easy-to-use keypads for entering commands and LCD screens for
displaying results. The Company's NMP products handle the various types of
networks and cables and certify that cable installations will meet the link
performance requirements as well as major industry standards, such as those
issued by the International Standards Organization ("ISO"), Comite European de
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Normalisation Electrotechnique ("CENELEC"), Telecommunications Industry
Association ("TIA") and Electronics Industry Association ("EIA"). Microtest's
test and measurement products utilize a variety of technologies, including Time
Domain Reflectometry ("TDR"), Digital Signal Processing, proprietary ASICs
developed by Microtest, RF signaling technology, as well as Microtest's
knowledge base in making cable measurements. These technologies and know-how are
incorporated into intuitive, easy-to-use, hand-held scanners that allow cabling
and network professionals to use these powerful technological tools with little
or no training.
The following table provides a partial listing of current products in
the NMP line:
NETWORK MANAGEMENT PRODUCTS
CABLE CERTIFICATION TOOLS NETWORK TROUBLESHOOTING TOOLS
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OMNIScannerTM MICROSCANNERTM
PentaScanner+TM NetWare(R)COMPASTM
PentaScannerTM 350 NT COMPASTM Module
CertiFiberTM Internet COMPASTM Module
MTCrimpTM Fiber Solution Kit
OMNIScanner is capable of certifying all cabling classes from Category
3 - 6 up to 300 MHz, an industry first. It is also the only field tester capable
of making accurate measurements on Category 7 cabling. OMNIScanner has
significantly raised the bar for competitive products. Seven months after its
introduction there is still no competitive product available that can match its
capabilities. OMNIScanner with ScanlinkTM provides a powerful combination of
high bandwidth certification and cable management software. Installers who are
testing to the draft Category 5E and Category 6 standards are moving to
OMNIScanner because pre-existing field testers are incapable of making the
demanding measurements that these new standards require. Evaluations of the
OMNIScanner from industry experts as well as independent laboratory analyses
indicate the OMNIScanner accurately meets, and even surpasses, all of the new
requirements. As the rate of these new cabling technologies, such as Category 5E
and Category 6 increases, so will the demand for additional products such as
OMNIScanner.
PentaScanner+, with 2-Way Injector+, has been Microtest's most popular
cable management system and is capable of certifying cable links to 100 MHz
performance specifications. PentaScanner+ offers professional cable installers,
service providers and network administrators an easy-to-use, hand-held solution
for installing, managing and troubleshooting Category 5 and ISO Class D cabling
systems. The 2-Way Injector+ is an accessory to the PentaScanner+ that measures
Near-End Crosstalk ("NEXT") and Attenuation-to-Crosstalk Ratio (ACR) from both
ends of the installed network cable link which saves installation test time.
This product enables cable installers to purchase a hand-held tool that provides
cable-testing accuracy indistinguishable from a network analyzer.
PentaScanner 350 includes all of the Technical Service Bulletin ("TSB")
67 Level II functionality and accuracy of PentaScanner+ and is the only Category
5 tester with Performance Grading. Performance Grading measures and rates the
quality of high-performance links by analyzing the available headroom at 100 MHz
and offers a variety of qualitative performance grading data, not just a
pass/fail test result. PentaScanner 350 also shows the available headroom for
future growth of the LAN. Using PentaScanner 350 ensures a highly reliable cable
installation that will meet future performance requirements without costly
rewiring.
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CertiFiber, introduced in late 1997, is the first fiber optic
certification scanner available today that certifies fiber installations to TIA,
ISO, and other industry specifications. CertiFiber enables fiber optic cable
installers, electrical contractors, field service contractors and computer
network administrators to certify fiber optic cable quickly and accurately.
CertiFiber features a one-button Autotest that provides pass/fail results
instantly. Users specify the required fiber standard (such as TIA 568A or
ISO1108) and the number of splices and connectors on a segment and, within
seconds, CertiFiber displays a pass/fail result based on length, propagation
delay and bi-directional dual wavelength loss measurements for 850nm and 1300nm.
CertiFiber is the only dedicated fiber optic tester that can perform all these
measurements critical to determining the Optical Link Budget.
MICROSCANNER is an entry-level scanner that quickly provides extensive
cable information, combining length and wiring connections (wiremap) functions.
It is a low cost scanner and easily confirms continuity, wiremap, and cable
fault locations. MICROSCANNER is the ideal tool for performing a fast,
all-in-one twisted-pair cable check. Small enough to fit in the palm of a hand,
MICROSCANNER quickly verifies cabling by combining the length measurement, using
TDR technology, with wiremap. MICROSCANNER saves time and money by locating
faults and identifying the sources of cabling problems.
In addition, Microtest offers MT CRIMP software enhancements for its
scanners that provide easy-to-use methods for storing, retrieving and managing
network test results and cabling information. These enhancements and upgrades
include additional test functionality, customized test suites and expanded
native language support and communication capabilities to external equipment and
databases. The Company also sells accessories that complement the functions
performed by its scanners.
COMPAS is a network troubleshooting tool designed for IT
administrators, network technicians and third-party service providers who are
tasked with solving common, everyday problems on Ethernet networks. COMPAS
combines the best features of cable testers, protocol analyzers, network
diagnostic utilities and asynchronous data communications testers into a
hand-held, portable tool. Users select the network problem from a simple menu
and COMPAS performs a series of tests designed to identify the cause of the
problem. COMPAS comes with three diagnostic modules: Internet/IP, Netware and
NT.
The Internet COMPAS module allows the user to easily isolate
incorrectly configured hosts and determine whether the problem is a faulty
router on the company intranet or on the Internet at large. This simple
diagnosis can save many hours of labor in troubleshooting the problem. Internet
COMPAS performs tests such as Duplicate IP address detection, IP PING, IP host
summary list and detail and Internet Control Message Protocol ("ICMP")
monitoring and trace route. Also included is Domain Name System ("DNS") support
for simplified troubleshooting and DHCP support for automatic configuration.
The Netware COMPAS module diagnoses problems inside NetWare. It also
troubleshoots Ethernet cabling, protocol and serial link problems. COMPAS'
unique NetTapTM feature lets users plug in COMPAS between any network node and
the hubs to monitor traffic or test the network.
The NT COMPAS module provides information about Windows NT(TM) networks
in seconds. Users add the module to their COMPAS and see the domains and hosts
on their NT networks. NT COMPAS supports IP, NetBeui, and IPX protocols and
configures itself from a DHCP server. The Internet COMPAS module for COMPAS
troubleshoots Internet and intranet connections quickly and easily.
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NETWORK CONNECTIVITY PRODUCTS. Microtest's NCP product line enables
organizations to create, access, share and store large amounts of information
easily. Many of the products in this line focus on CD-ROM/DVD-ROM technology
because it is still the most cost effective and efficient medium for mass data
storage and retrieval. Workgroups or entire organizations requiring instant
access to mission critical information, reference information, research data and
even multimedia files can use CD-ROM as the storage medium and Microtest
connectivity products for instant access and retrieval. These products enable
network users to access and share information, such as customer databases, legal
briefs, medical records, library reference volumes, research data, photo images
and even sound bytes across a network.
In 1997, Microtest advanced its mini-server expertise beyond CD-ROM
local networking toward Internet and intranet technologies and markets.
Continued success in this product line will require Microtest to enhance its
existing products, expand products into product lines and introduce new products
rapidly. To facilitate new and continuing product development, Company personnel
work directly with customers, distribution channels and leaders in other network
industry segments to identify market needs and define appropriate product
specifications.
The following table provides a partial overview of current products in
the NCP line:
NETWORK CONNECTIVITY PRODUCTS
WORKGROUP MINI-THIN SERVERS ENTERPRISE SOFTWARE ENTERPRISE SYSTEMS
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DiscZerverTM DiscPort(R) Executive for DiscPort(R) Enterprise
DiscPort(R), DiscPort(R) PRO Windows NTTM Server (Tower)
DiscPort(R) XL DiscPort(R) Executive for DiscPort(R) Enterprise
WebZerverTM intraNetWare Server (Rack)
Microtest's primary NCP brands are Zerver and DiscPort. These product
lines include workgroup thin servers or appliances, software and enterprise
systems. These products integrate anywhere on a network and allow for the
instantaneous sharing of CD-ROMs, DVD-ROMs and CD-Rs (CD-Recordables).
For larger enterprise applications, Microtest's DiscPort Executive
software and DiscPort Enterprise Servers, available in rack and tower
configurations, allow enterprises to share hundreds of CD-ROM titles with
point-and-click simplicity. These fully integrated solutions include a CPU
running DiscPort Executive software and up to sixty-three high-speed drives. Its
graphical user interface makes managing CD-ROM resources easy, and users can
browse and access CD-ROM resources from their desktop or their intranet browser.
These servers are designed for enterprises with many users who need to access
mission critical information resources on CD-ROM. Microtest also enables
integrators to build their own enterprise servers by offering DiscPort Executive
software separate from the hardware. The software is available in intraNetWare
and Windows NT versions.
With the acquisition of Logicraft Information Systems in 1996, (now
doing business as Microtest Enterprise Group ("MEG" or "Logicraft") Microtest
acquired several additional technologies including Virtual CD, which allow users
to access CD-ROM information at unprecedented speed by imaging, compressing and
downloading CD-ROM data to the user's hard drive for faster retrieval. Virtual
CD is now available as private labeled retail software through a number of key
publishing partners worldwide.
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In 1997, Microtest expanded its line of thin servers with WebZerver.
WebZerver helps users implement intranet workgroup sites across organizations
for collaborative document sharing and threaded discussions. Should the need
arise to provide access to other databases through the intranet, however, users
can quickly and easily attach external storage CD, DVD, Hard Disk, Jaz or Zip
drives.
In 1998, Microtest added DiscZerver to its line of NCP products. The
DiscZerver is a unique CD/DVD image-caching appliance that affords high
performance data access to CD/DVD-based information while reducing costs for
such systems substantially over non-caching devices. DiscZerver is now available
through a number of Network Attached Storage ("NAS") vendors worldwide. A unique
embodiment of the DiscZerver is the DiscZerver VT which uses DiscZerver
technology to craft a virtual tower of CD/DVD-ROMs in a small, low cost, easily
installed and managed package.
SALES, DISTRIBUTION AND CUSTOMERS
SALES. The Company's sales, marketing and distribution strategy is to
use a multiple channel, worldwide distribution network. The network includes
distributors, value added resellers ("VARs") and dealers, manufacturer's
representatives as well as selected original equipment manufacturers ("OEMs")
and licensees. The Company's sales organization manages the activities of these
distribution channels, directs sales leads to these distribution channels and
responds to sales calls from distributors, resellers, dealers and end users. In
addition, the Company has a telesales department that assists the sales efforts
of its sales representatives.
DISTRIBUTION NETWORK. The Company sells its products through an
established worldwide network of distributors, VARs and dealers that market
PC-related hardware and software products. The Company focuses a significant
amount of its sales and marketing resources on its distribution channel,
providing ongoing communication and support to channel participants.
Distribution network support programs include:
* ads in trade magazines
* regular mailings of product, promotional and technical materials
* participation in industry trade shows
* incentive programs for distributors, VAR and dealer sales personnel
* cooperative marketing programs
A dedicated sales force manages and supports the Company's
distributors, VARs and dealers. The Company provides technical and sales product
training to all of its distributors and dealers, who in turn provide technical
and sales training to their customers who purchase Microtest products. Microtest
also provides a strong set of VAR professional service offerings that include
installation services, installation planning and pre-sale site planning.
North American sales accounted for approximately 68%, 72% and 71% of
the Company's total revenues in 1998, 1997 and 1996, respectively. The Company's
United States distributors include national distributors, cable and wire
distributors, and catalog merchandisers.
In 1998, the Company signed an agreement with Progressive Electronics
of Tempe, Arizona whereby Progressive Electronics would become an OEM supplier
of the Microtest MicroScanner. The Company considers OEM suppliers an excellent
distribution vehicle and will consider similar opportunities in the future.
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To address international markets, the Company has developed
relationships with distributors throughout Europe. The Company supports its
European distributors through offices located in the United Kingdom and Germany.
In addition, the Company has developed relationships with distributors located
in Canada, Mexico, Central and South America and the Pacific Rim. All
international sales are denominated in United States dollars. Revenues outside
of North America accounted for 32%, 28% and 29% of the Company's total revenues
in 1998, 1997 and 1996, respectively.
CUSTOMERS. The primary target market for the Company's products include
local area network ("LAN") management personnel, LAN installers, field service
personnel, resellers and technical end users with departmental applications. The
Company's end user customers span a broad range of industries that utilize LANs,
including technology, industrial, transportation, retail, health care, financial
services, government and education. As summarized in the Notes to the
Consolidated Financial Statements, major customers each accounting for more than
10% of total revenue in 1998, 1997 or 1996 were Tech Data Corporation, Ingram
Micro Inc., and Graybar Electric Company, Inc. The Company maintains a customer
support organization in both North America and Europe to answer customer
questions concerning the use of the Company's products.
PRODUCT DEVELOPMENT
The Company believes that its continued success will depend upon its
ability to enhance its existing products, expand products into product lines,
introduce new products on a timely basis, and continue to develop technology
that can be incorporated into commercially viable products addressing the
demands of the networking industry. To facilitate new and continuing product
development, Company personnel work directly with customers, distribution
channels, and leaders in other network industry segments to identify market
needs and define appropriate product specifications. Microtest employees
participate in numerous professional groups and technical committees including
the following:
* Institute of Electrical & Electronic Engineers ("IEEE") 802.3
committee
* Comite European de Normalisation Electrotechnique (CENELEC),
* ISO, International Electro-technical Commission ("IEC"),
* Certified Network Expert ("CNX") Technical Advisory Board, TIA
TR41.8.1
* Building Industry Consulting Services International ("BICSI").
The Company believes that tracking developments in the latest
high-speed technologies, like Integrated Service Digital Network ("ISDN"),
Asymmetric Digital Subscriber Line ("ADSL"), Very High Speed Digital Subscriber
Line ("VDSL"), Gigabit Ethernet, and Asynchronous Transfer Mode ("ATM"), will
facilitate the development of products supporting the networks of the future.
As one of the early entrants into the cable troubleshooting and
certification markets, the Company has developed a substantial level of
proprietary technology. The Company embodies a substantial portion of its TDR
technology in a custom gate array to deter reverse engineering. Microtest has
obtained several United States patents on portions of its technologies.
Microtest leverages its proprietary technology and industry expertise into new
product offerings to enhance the troubleshooting, certification and connectivity
capabilities of its product lines. The Company also routinely evaluates the
acquisition or licensing of complementary products and technologies. There can
be no assurance that any new products developed or acquired by the Company will
be successful or profitable.
11
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ACQUISITIONS
In recent years, the Company has strategically acquired network
connectivity product offerings. In December 1996, the Company completed the
acquisition of Logicraft Information Systems, Inc., a leading developer and
manufacturer of enterprise CD-ROM networking systems. Subsequent to the
acquisition, Logicraft was renamed Microtest Enterprise Group. The Company
acquired all of the capital stock of Logicraft for approximately $12.5 million
and assumed certain Logicraft liabilities totaling approximately $4.5 million,
which were paid off immediately after the closing. As a result of the allocation
of the purchase price, the Company recorded an expense of $15.7 million in the
fourth quarter of 1996 to record purchased in-process research and development
relating to products for which technological feasibility had not been
established and for which no alternative future use existed. Microtest acquired
Logicraft to give it broader reach throughout the entire CD-networking spectrum,
most notably at the enterprise and NT levels.
The Company intends to continue to evaluate acquisition opportunities
as they are presented from time to time. The Company may face competition from
other suppliers or manufacturers of network hardware or software products or
other third parties for acquisition opportunities as they become available.
There can be no assurance that the Company will identify acquisition candidates
that will result in successful combinations in the future. Any future
acquisitions by the Company may result in the incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, which could
adversely affect the Company's profitability or could involve the potentially
dilutive issuance of additional equity securities. In addition, acquisitions
involve numerous risks, including difficulties in assimilation of the acquired
company's operations, particularly in the period immediately following the
consummation of such transactions, the diversion of the attention of the
Company's management from other business and the potential loss of customers,
key employees and suppliers of the acquired company, all of which could have a
material adverse effect on the Company's business and operating results.
MANUFACTURING
The Company is dependent on a small number of third-party vendors for
the manufacturing of all of the Company's products. Whenever possible these
manufacturers are ISO 9000 certified. All are required to achieve approval via
the Company's formal supplier evaluation process. The Company's internal
operations consist of supplier management, quality assurance, final product
configuration and packaging and order consolidation and fulfillment. The Company
retains a skilled, permanent, core workforce, utilizing temporary employees to
accommodate workload fluctuations.
In 1998, the Company expanded its warehousing operation in the United
Kingdom to better service the European market. The Company maintains authorized
customer service centers in Phoenix, Arizona, the United Kingdom and Japan.
ISO 9001 COMPLIANCE
In October 1997, as part of its commitment to customer satisfaction and
continuous improvement, the Company formally implemented a Quality Management
System. In July 1998, that system was certified by an accredited independent
auditor to be in compliance with ISO 9001 standards. These standards provide for
the control and improvement of development, operational and business processes.
The Company is required to demonstrate continued compliance by collection and
review of objective evidence thereof and by subjection to routine independent
audits.
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SUPPLIES
Certain components used in the Company's products are presently
available from or supplied by only one source and others are available from
limited sources. Although the Company does not have long-term supply contracts
with any of its component suppliers, to date it has been able to obtain supplies
of components and products in a timely manner. However, in the event that
certain of its suppliers or contractors were to experience financial or other
difficulties that resulted in a reduction or interruption in supply to the
Company, the Company's results of operations would be adversely affected until
the Company established alternate sources.
BACKLOG
Historically the Company has not maintained significant backlog because
it fills substantially all of its orders within 30 days after receipt of a firm
purchase order. The Company does not believe that backlog is a reliable
long-term indicator of future sales or earnings.
COMPETITION
The market for networking products is extremely fast moving and
competitive, and competition in the Company's market segment is continually
increasing. Rapid technological advances and emerging industry standards can
quickly change competitive conditions. This often requires frequent new product
introductions, added product features and rapid improvements in the relative
price or performance of products. Failure to keep pace with technological
advances or market changes would adversely affect the Company's competitive
position and operating results. The Company's products compete on the basis of
ease-of-use, product features, quality, reliability and price.
In the network management and certification market, the Company
competes with products manufactured by Wavetek Corporation, Scope Communications
(a division of Hewlett Packard), Fluke Corporation and Datacom-Textron. To a
lesser extent, the Company competes with manufacturers of time domain
reflectometers, ohmmeters, voltmeters and oscilloscopes. The Company's network
troubleshooting products compete with the products from Fluke Corporation,
Network Associates and Hewlett-Packard Company.
The Company's network connectivity products compete with products from
Meridian Data, Inc., Micro Design International, Ornetix, Procom Technology and
Axis Communications, Inc. The Company also competes indirectly with suppliers of
personal computers and network operating systems, such as Microsoft and Novell,
to the extent that these companies include CD-ROM networking utilities as part
of their operating systems.
The Company's competitors include large domestic and international
companies, many of which have significantly greater financial, technical,
manufacturing, marketing, sales and distribution resources than the Company.
Further, the markets served by the Company's connectivity products continue to
grow at rates that attract new entrants into those markets. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to those developed by the Company, offer them at
lower prices or adapt more quickly than the Company to new or emerging
technologies, evolving industry trends or changing customer requirements. There
can be no assurance that the Company will have the financial resources,
technical expertise, or marketing, sales, distribution, customer service, and
technical support capabilities to compete successfully.
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PROPRIETARY RIGHTS
Microtest relies upon a combination of copyright, trademark, trade
secret and patent protection to establish and protect the Company's proprietary
rights in its products and technologies. In addition, the Company generally
enters into nondisclosure and confidentiality agreements with its employees,
distributors, customers and suppliers with access to sensitive information and
limits access to and distribution of its software documentation and other
proprietary information. The Company has several trademarks, including
Microtest(R), DiscPort(R), DiscView(R), PairScanner(R), PentaScannerTM,
CertiFiberTM, FiberEye(R), OMNIScannerTM, DiscZerverTM as well as MEG's
disk-caching technology called FastCDTM and disc management utility software
called AutoShareTM.
The Company embodies a substantial portion of its TDR technology in a
custom gate array to deter reverse engineering. The Company has obtained a
United States patent on a portion of its technology related to TDR. In 1997, the
Company obtained two additional patents: one for a method and apparatus for
concurrently measuring near end crosstalk at two ends of a cable, and one for
developing a foreign file system establishing a method which uses a native file
system virtual device driver.
There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of its
technology or independent third-party development of its technology or that its
patents or registered trademarks can be successfully enforced. Because of the
rapid pace of technological change in the LAN product industry, the Company
believes that patent protection for its products is less significant to its
success than the knowledge, ability and experience of its employees and the
frequent introduction and market acceptance of new products and product
enhancements.
Given the rapid pace of technological development in the LAN industry,
there can be no assurance that certain aspects of the Company's products do not
or will not infringe the existing or future proprietary rights of others. The
Company believes that if such infringement existed, it may be able to obtain the
requisite licenses or rights to use such technology. However, there can be no
assurance that such licenses or rights could be obtained or could be obtained on
terms that would not have a material adverse affect on the Company.
EMPLOYEES
As of March 1, 1999, the Company employed 219 persons on a full-time
basis: 81 in sales, marketing and customer support, 34 in manufacturing, 69 in
research and development and 35 in administration. Many of the Company's
employees are highly skilled in certain disciplines and the Company's continued
growth and success will depend, in part, on its ability to retain management and
key employees and, where appropriate, hire new employees. The Company has never
had a work stoppage, no employees are represented by a labor organization and
the Company considers its employee relations to be good.
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ITEM 2. PROPERTIES
The Company's principal corporate offices and research and development
facilities are located in a 49,000 square foot facility in Phoenix, Arizona. The
lease for this facility commenced October 1, 1992, and continues for a period of
eight years. Current monthly rental payments for this facility are approximately
$75,000. The Company believes that this facility is adequate to meet its needs.
The Company also leases sales and support offices in California, Illinois and
the United Kingdom. The Company's subsidiaries lease office space for sales,
support and research and development in New Hampshire and Germany.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to its
business. Management does not believe that any of these legal proceedings will
have a material adverse affect on the financial condition or operating results
of the Company.
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 claim or remedy with respect to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its shareholders
during the fourth quarter of 1998.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock has been traded in the over-the-counter
market and quoted through the Nasdaq National Market ("Nasdaq") since October
30, 1992, under the symbol "MTST". The following table sets forth the quarterly
high and low sale prices of the Common Stock as reported on Nasdaq.
PERIOD HIGH LOW
------ ---- ---
1998 First Quarter ....................... $ 6.63 $ 4.63
Second Quarter ...................... 5.63 4.50
Third Quarter ....................... 5.50 3.22
Fourth Quarter ...................... 3.75 2.34
1997 First Quarter ....................... $10.38 $ 4.38
Second Quarter ...................... 4.88 3.38
Third Quarter ....................... 6.63 3.81
Fourth Quarter ...................... 8.13 3.88
The closing price of the Company's Common Stock on March 22, 1999 was
$2.28 per share.
As of March 22, 1999, there were 8,289,136 shares of Common Stock
outstanding, which were held by over 400 shareholders of record. The Company
estimates that there are approximately 6,000 beneficial owners of the Company's
Common Stock.
The Company has not paid any cash dividends on its Common Stock. The
Company presently intends to retain earnings for use in its business and does
not anticipate paying cash dividends on its outstanding shares in the
foreseeable future.
FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE
The performance of the Company's Common Stock is dependent upon several
factors, including those set forth below and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results and Financial Condition."
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes that factors
such as announcements of developments related to the Company's business,
announcements by competitors, quarterly fluctuations in the Company's financial
results, conditions in the CD-ROM networking industry, conditions in the network
management and certification industry, changes in the general economy, and other
factors could cause the price of the Company's Common Stock to fluctuate
substantially. In addition, in recent years the stock market in general, and the
market for share of small capitalization technology stocks in particular, have
experienced extreme fluctuations, which have often been unrelated to the
operational performance of affected companies. Such fluctuations could have a
material adverse affect on the market price of the Company's Common Stock.
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<PAGE>
CERTAIN CHARTER AND BYLAW PROVISION. The Company's Certificate of
Incorporation and Bylaws empower the Board of Directors, without approval of the
shareholders, to issue shares of preferred stock, to fix the rights and
preferences, and divide the Company's Board of Directors into three classes.
These provisions, as well as other provisions in such documents, could have the
effect of deterring unsolicited takeovers or delaying or preventing changes in
control or management of the Company, including transactions in which
shareholders might otherwise receive a premium for their shares over the current
market prices.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The consolidated balance
sheets as of December 31, 1998 and 1997, and the consolidated statements of
operations for each of the three years in the period ended December 31, 1998,
and the independent auditors' report thereon, are included in Item 8 of this
Form 10-K.
17
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenue ............................. $ 41,650 $ 49,592 $ 50,442 $ 52,537 $39,574
Cost of revenue ......................... 17,903 20,266 20,452 21,961 16,584
-------- -------- -------- -------- -------
Gross profit ......................... 23,747 29,326 29,990 30,576 22,990
Total operating expenses(1) ............. 26,237 29,254 40,636 30,968 16,212
-------- -------- -------- -------- -------
Income (loss) from operations ........... (2,490) 72 (10,646) (392) 6,778
Interest and other income, net........... 324 120 762 1,232 743
-------- -------- -------- -------- -------
Income (loss) before income taxes ....... (2,166) 192 (9,884) 840 7,521
Income taxes (benefit) .................. (1,258) (131) 1,711 (305) 2,231
-------- -------- -------- -------- -------
Net income (loss) ....................... $ (908) $ 323 $(11,595) $ 1,145 $ 5,290
======== ======== ======== ======== =======
Diluted earnings (loss) per share ....... $ (.11) $ .04 $ (1.43) $ .13 $ .64
======== ======== ======== ======== =======
Net income (loss) excluding purchased
in-process research and development ..... $ (908) $ 323 $ 4,102 $ 6,531 $ 5,290
======== ======== ======== ======== =======
Diluted earnings (loss) per share
excluding purchased in-process research
and development(1) ...................... $ (.11) $ .04 $ .51 $ .77 $ .64
======== ======== ======== ======== =======
Weighted average common and equivalent
shares outstanding ...................... 8,099 8,249 8,104 8,534 8,269
======== ======== ======== ======== =======
BALANCE SHEET DATA:
Working capital ......................... $ 22,028 $ 25,641 $ 26,583 $ 39,128 $36,635
Total assets ............................ 39,350 42,805 43,313 50,158 47,642
Shareholders' equity .................... 30,292 32,094 31,672 43,027 40,579
</TABLE>
(1) Includes $15,697 and $8,776 of purchased in-process research and
development in 1996 and 1995, respectively.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company develops and markets network management and connectivity
products. Its network management products certify whether cabling will support a
proposed local area network ("LAN") installation, as well as troubleshoot cable
and other faults that occur on established LANs. Its connectivity products
facilitate both the storage of information on CD-ROM devices, as well as the
sharing of that information among LAN users.
In 1998, the Company recorded net revenue of $41.7 million and a net loss
of $908,000, or $.11 per share, as compared to net revenues of $49.6 million and
net income of $323,000, or $.04 per share, in 1997. International revenue
accounted for 32%, 28% and 29% of the Company's net revenue in 1998, 1997, and
1996, respectively. In aggregate dollars, international revenue decreased
$300,000 to $13.4 million from $13.7 million in 1997. The decrease is due to the
tightening of the European economy and weak sales to the Asia Pacific region.
In the fourth quarter of 1998, the Company made a number of significant
adjustments, including the following: $370,000 was reserved for anticipated
sales returns, $200,000 was reserved for obsolete inventory, $200,000 was
written-off for evaluation units not expected to be recovered, $800,000 was
written-off for prepaid royalties for software products that are rapidly
reaching obsolescence, and $430,000 was recorded in executive search and other
professional fees.
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 the provision for sales returns, software capitalization and
amortization and inter-company account transactions.
The Company has made significant changes to its executive management to
address the issues that led to the need for the restatement of earnings. In
January 1999, the Board hired an experienced President and Chief Executive
Officer and charged him with instituting all required changes in accounting
management, staff, systems, controls and policies. In March 1999, the Company
hired a new Chief Financial Officer of proven abilities to direct and implement
this program. In addition, the President and Chief Executive Officer is looking
to strengthen senior management, generally, and is reviewing the Company's
strategic direction.
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RESULTS OF OPERATIONS
The following table presents selected items from the Company's
consolidated statements of operations expressed as percentages of net revenue,
for the years indicated.
DECEMBER 31, 1998 1997 1996
------------ ---- ---- ----
Net revenue 100% 100% 100%
---- ---- ----
Gross margin 57 59 59
---- ---- ----
Operating expenses:
Selling and marketing 30 33 28
Research and development 19 17 13
General and administrative 13 10 8
Purchased in-process research
and development -- -- 31
---- ---- ----
Income (loss) from operations (6) -- (21)
---- ---- ----
Net income (loss) (2%) 1% (23%)
==== ==== ====
REVENUE. Net revenue decreased $7.9 million, or 16%, to $41.7 million in
1998 from $49.6 million in 1997. The decrease was primarily attributable to
intensified competition and the Company's decision in the second quarter of 1998
to withdraw from the lower margin tower business. The lower than anticipated
revenue from new higher margin DiscPort2, DiscPort VT and DiscZerver products
were unable to offset the lower margin tower revenues. In the first half of
1998, the Company also experienced a general weakness in sales to the Asia
Pacific region.
Net revenue decreased $800,000, or 2%, to $49.6 million in 1997 from $50.4
million in 1996. This decrease was a result of market softness in the network
connectivity products industry, intensified competition and a softening of the
European economy in 1997.
International sales were $13.4 million, $13.7 million and $14.8 million in
1998, 1997 and 1996, or 32%, 28% and 29% of net revenue, respectively.
International sales continued to decrease in 1998, in both absolute dollars, and
as a percentage of net revenue primarily due to the weakening of the Asia
Pacific economy.
GROSS PROFIT. Gross profit decreased $5.6 million, or 19%, to $23.7 in
1998 from $29.3 in 1997. Gross margin as a percentage of net revenue decreased
from 59.1% in 1997 to 57.1% in 1998. The decrease in gross profit was a result
of the decrease in revenue, and a change in the product mix.
Gross profit decreased $700,000, or 2%, to $29.3 in 1997 from $30.0
million in 1996. Gross margin as a percentage of net revenue remained constant
at 59.1%. The decrease in absolute dollars was a result of the decrease in
revenue, and a change in the product mix. This decrease was partially offset by
higher software content in several of its products.
SALES AND MARKETING. Sales and marketing expenses decreased $3.6
million, or 22%, to $12.7 million in 1998 from $16.3 million in 1997. The
decreases are primarily due to synergies created from the integration of
Logicraft Information Systems, now doing business as Microtest Enterprise Group.
Logicraft was acquired during the fourth quarter of 1996, and was not fully
integrated into Microtest until the third quarter of 1997. The integration of
Logicraft into Microtest included a significant reduction in staffing during the
first and second quarters of 1997. In addition, new cost control measures were
implemented during the second half of 1997, which benefited 1998.
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<PAGE>
Sales and marketing expenses increased $2.0 million, or 13%, to $16.3
million in 1997 from $14.3 million in 1996. The increase was due largely to an
increase in employees and other costs attributable to the Logicraft acquisition
made during the fourth quarter of 1996, increased commissions paid as a result
of the manufacturers' representative program, that was introduced in mid-1996,
and severance costs associated with restructuring of the Company's European
operations and sales force.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$300,000, or 4%, to $7.9 million in 1998 from $8.2 million in 1997. The decrease
resulted primarily from the capitalization of software development costs during
1998 for new products. The Company capitalized approximately $1.0 million of
software development costs in 1998. The software development costs were
partially offset by the fourth quarter 1998 write-off of $800,000 in prepaid
royalties for software products that are rapidly reaching obsolescence. In
addition, there was a 12% decrease in the number of Logicraft employees in 1998
compared to 1997 after the complete integration of Logicraft, as discussed
above.
Research and development expenses increased $1.8 million, or 28%, to
$8.2 million in 1997 from $6.4 million in 1996. The increase resulted primarily
from an increase in the number of employees due to the acquisition of Logicraft
during the fourth quarter of 1996, as well as the development of an increased
number of prototypes than experienced in 1996. The Company has restructured its
research and development work force to integrate Logicraft into the research and
development process.
The Company capitalized approximately $1.1 million $770,000 and $90,000
in 1998, 1997 and 1996, respectively, of software development costs for new
products for which technological feasibility has been determined, in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED."
These costs will be amortized over the life of the associated products of
approximately two to three years as a charge 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
increased $800,000, or 17%, to $5.6 million in 1998 from $4.8 million in 1997.
The increase was a result of an increase in professional fees and allowances for
doubtful accounts over the prior year as well as a restructuring of the European
operations in 1998. In addition, during the fourth quarter of 1998, the Company
incurred charges of approximately $430,000 relating to a legal settlement,
additional professional fees, and the search and hiring of its new President and
Chief Executive Officer.
General and administrative expenses increased $600,000, or 14%, to $4.8
million in 1997 from $4.2 million in 1996. The increase was a result of the
additional personnel and other administrative costs attributable to the
Logicraft acquisition during the fourth quarter of 1996, legal expenses incurred
to defend the Company against class-action lawsuits that were dismissed during
the second quarter of 1997, and an increase in the allowance for doubtful
accounts of approximately $310,000.
INTEREST AND OTHER INCOME. Interest and other income, net, increased
$204,000 from $120,000 in 1997 to $324,000 in 1998. The increase was primarily
attributable to the Company consolidating their various investment accounts with
lower interest rates in 1997 into one investment account with a higher interest
rate in 1998. In addition, the Company had higher average cash balances in 1998
when compared to 1997. The average cash balance for 1998 and 1997 was
approximately $12.7 million and $8.0 million, respectively.
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<PAGE>
Interest and other income decreased $642,000 to $120,000 in 1997 from
$762,000 in 1996. The decrease in interest and other income was attributable to
a higher average cash balance during 1996 when compared to 1997. The average
cash balances for 1997 and 1996 were approximately $8.0 million and $21.0
million, respectively. The decrease in the average cash balance of $13.0 million
is the result of $12.5 million in cash paid for the acquisition of Logicraft. A
loss of $200,000 was also included in other income related to the disposition of
certain fixed assets during 1997.
EFFECTIVE TAX RATE. The Company's effective income tax rate varies from
the statutory rate primarily because of research and development credits earned
as well as tax benefits earned from the Company's Foreign Sales Corporation.
NET INCOME (LOSS). Net income (loss) decreased $1.2 million to a net
loss of $908,000 in 1998 from net income of $323,000 in 1997. The decrease was
primarily attributable to a charge of approximately $800,000 taken in the fourth
quarter of 1998, to write-off prepaid royalties that the Company determined had
become impaired. In addition, the Company recorded charges of approximately
$200,000 to write-off evaluation units not expected to be recovered, and
$430,000 of charges in the fourth quarter of 1998 relating to a legal
settlement, professional fees and executive search fees.
Net income increased $11.9 million to net income of $323,000 in 1997
from a net loss of $11.6 million in 1996. The increase was primarily
attributable to a charge for purchased in-process research and development costs
in the fourth quarter of 1996 of $15.7 to record the Logicraft acquisition.
Technological feasibility had not been established and no alternative future use
existed for certain products acquired. The expense recorded for in-process
research and development costs was based on an allocation of the purchase price
to fair values of assets and liabilities acquired. The allocation of the
purchase price to purchased research and development costs was based on an
independent appraisal of the fair value of complete and in-process technology
acquired. Excluding the $15.7 million research and development charge in 1996,
net income decreased to $323,000 in 1997 from $4.1 million in 1996. The decrease
was a result of the decrease in revenue, increase in operating expenses, and a
decrease in investment and other income.
FUTURE RESULTS. The Company's future operating results may be affected
by a number of factors, including general economic conditions in the Company's
markets, the Company's ability to develop, manufacture and sell its products
profitably, the strength of the Company's distribution channels, competition in
general, and competitive pricing in particular.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through operating
cash flows. At December 31, 1998, the Company had cash and cash equivalents of
$9.6 million. This represents a $1.9 million decrease in cash equivalents
compared to December 31, 1997, due primarily to the timing of the collection of
accounts receivable, the payment of accounts payable and lower revenues in 1998
compared to 1997.
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
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<PAGE>
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. At December 31, 1998, the Company was not
in compliance with the covenants that address quarterly losses and tangible net
worth requirements. 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 December
31, 1998.
During the year ended December 31, 1998, the Company generated $746,000
of cash from operating activities, a decrease of $2.7 million from 1997 and a
decrease of $6.2 million from 1996. The decrease in cash flows from operations
was primarily due to decreased profitability, and changes in accounts
receivable, accounts payable and accrued liabilities.
Purchases of property and equipment for 1998 were approximately
$700,000. During 1998, the Company purchased upgrades for computer hardware and
software, leasehold improvements, tooling, equipment, and furniture and
fixtures. The Company's capital expenditure budget for 1999 is approximately
$1.5 million, which includes purchases for software, hardware, leasehold
improvements, and other equipment. Management believes that cash flows from
operations and current cash balances will be sufficient to meet the cash needs
of the Company in the foreseeable future.
INFLATION
Inflation has not been a significant factor in the Company's operations to
date.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are
dependent on the Company's ability to successfully develop, manufacture, and
market technologically innovative products in order to meet dynamic customer
demand patterns. Inherent in this process is a number of factors that the
Company must successfully manage in order to achieve favorable future operating
results and financial condition. Potential risks and uncertainties that could
affect the Company's future operating results and financial condition include,
without limitation, the factors discussed below.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's revenues may
vary significantly from quarter to quarter due to a variety of factors,
including changes in the Company's product and customer mix, the introduction of
new products by the Company or its competitors, and other factors, including
pricing pressures and economic conditions in the United States, Europe and Asia
Pacific. The Company operates with relatively little backlog and substantially
all of its net revenue in each quarter results from orders received in that
quarter. In addition, the Company incurs significant operating start-up expenses
in anticipation of future revenue. If near-term demand for the Company's
products weakens or if orders are not shipped in any quarter as anticipated, the
Company's results of operations for that quarter could be adversely affected.
Sales of products through distributors and VARs and unanticipated product
returns may exceed the Company's allowances for future returns. The Company's
operating results will also be affected by the economic condition of the
computer industry, which has from time to time experienced cyclical, depressed
business conditions, often in connection with or in anticipation of a decline in
general economic conditions. Due to all of the foregoing factors, the Company's
revenues or operating results may in one or more future quarters be below the
expectations of stock market analysts and investors. In such event, the price of
the Company's common stock would likely decline, and such decline could be
substantial.
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS. The Company derives substantially
all of its product sales through distributors and VARs. Two of the Company's
distributors accounted for 21% of the Company's revenue in 1998. The loss of
certain distributors or VARs would have a material adverse affect on the
23
<PAGE>
Company's business and operating results. The Company's contractual
relationships with its distributors and VARs are generally cancelable upon
notice to the Company. Certain of the Company's distributors and VARs also act
as distributors for competitors of the Company and could devote greater effort
and resources to marketing competitive products. In addition, effective
distributors and VARs must devote significant technical, marketing and sales
resources to an often-lengthy sales cycle. There can be no assurance that the
Company's current distributors and VARs will continue to market the Company's
products effectively or that economic or industry conditions will not adversely
affect such distributors and VARs. The Company's operating results could also be
materially adversely affected by changes in distributors' inventory strategies,
which could occur rapidly and, in many cases, may not be related to end user
demand. New products may require different marketing, sales and distribution
strategies than those for the Company's current products. There can be no
assurance that the Company's distributors and VARs will choose or be able to
effectively market these new products or to continue to market the Company's
existing products. A failure of the Company's distributors and VARs to
successfully market the Company's products would have a material adverse affect
on the Company's business and results of operations.
DEPENDENCE ON THIRD-PARTY SUPPLIERS. The Company is dependent on a small
number of third-party vendors for the manufacturing of all of the Company's
products. The Company also is dependent on a small number of suppliers for
certain key components used in its products, including CD-ROM drives,
microprocessors, integrated circuits and power modules. The Company purchases
these components pursuant to purchase orders placed from time to time, does not
carry significant inventories of these components and has no long-term supply
arrangements. The loss of any of the Company's third-party manufacturers or key
suppliers could have a material adverse affect upon the Company's business,
financial condition and operating results. Although the Company believes that
alternative sources of product manufacturing and components could be arranged,
the process of qualifying new suppliers could be lengthy. There can be no
assurance that any additional source would be available to the Company on a
timely basis or at a cost acceptable to the Company. Any disruption or reduction
in the future supply of any key components currently obtained from limited
sources could have a material adverse affect on the Company's business,
financial condition and operating results.
RAPID TECHNOLOGICAL CHANGE; POTENTIAL FOR PRODUCT DEFECTS. The market for
the Company's products is characterized by rapid technological advances,
evolving industry standards in computer hardware and software technology,
changes in customer requirements and frequent new product introductions and
enhancements. The Company's future success will depend on its ability to
continue to enhance its current product line and to continue to develop 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
24
<PAGE>
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.
COMPETITION. The markets for the Company's products are extremely
competitive. The Company expects that competition will increase as more
companies enter the market and as existing competitors continue to change and
expand their product offerings. Pricing is very aggressive in the Company's
industry and the Company expects pricing pressure to continue to intensify. The
Company's current competitors in the CD-ROM networking market include other
suppliers of CD-ROM networking software and hardware such as Meridian Data,
Inc., Micro Design International, CBS, Reed Technology and Information Services,
Inc., Ornetix, SciNet, Inc., Axis Communication, Inc. and Compact Devices, Inc.
The Company also competes indirectly with suppliers of personal computers and
network operating systems such as Microsoft and Novell, to the extent such
companies include CD-ROM networking utilities as part of their operating
systems. The Company's potential competitors in the hardware area include
companies in the personal computer market and certain CD-ROM manufacturers. The
Company's current competitors in the network management and certification market
include other suppliers of network management and certification software and
hardware such as Wavetek Corporation, Scope Communications, Inc., Fluke
Corporation and Datacom Technologies, Inc. The Company's competitors include
large domestic and international companies, many of which have significantly
greater financial, technical, manufacturing, marketing, sales and distribution
resources than the Company. There can be no assurance that the Company's current
or potential competitors will not develop products comparable or superior to
those developed by the Company or adapt more quickly than the Company to new or
emerging technologies, evolving industry trends, or changing customer
requirements. There also can be no assurance that the Company will have the
financial resources, technical expertise, marketing, sales, distribution,
customer service and technical support capabilities to compete successfully.
PRODUCT CONCENTRATION. The Company currently derives substantially all of
its revenues from its OMNIScanner, PentaScanner, Zerver and DiscPort products.
The market for these products is characterized by rapid technological advances,
evolving standards in computer hardware and software technology, changes in
customer requirements and frequent new product introductions and enhancements.
Any decrease in sales of the Company's OMNIScanner, PentaScanner, Zerver or
DiscPort products as a result of the foregoing, or other factors, would have a
material adverse affect on the Company's business, financial condition and
operating results.
INTERNATIONAL OPERATIONS. Sales outside of North America accounted for 32%,
28% and 29% of the Company's revenue in 1998, 1997 and 1996, respectively. An
important element of the Company's strategy is to expand its international
operations. There can be no assurance that the Company will be able to continue
to successfully localize, market, sell and deliver products internationally. The
inability of the Company to successfully expand its international operations in
a timely and cost effective manner could have a material adverse affect on the
Company's business, financial condition and results of operations. The Company's
25
<PAGE>
business and results of operations could be materially adversely affected by
risks inherent in conducting business internationally, such as changes in
currency exchange rates, longer payment cycles, difficulties in staffing and
managing international operations, problems in collecting accounts receivable,
seasonal reductions in business activity during the summer months in Europe and
certain other parts of the world and tariffs, duties and other trade barriers.
The Company seeks to mitigate its direct exposure to exchange rate fluctuation
by selling only in United States currency.
LITIGATION. From time to time the Company is involved in various legal
proceedings incidental to its business. Management does not believe that any
current legal proceedings will have a material adverse 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 claim or remedy with respect to the
Company.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF GROWTH. Due to the specialized
nature of the Company's business, the Company's future success is highly
dependent upon the continued services of its key engineering personnel and
executive officers and upon its ability to attract and retain qualified
engineering, sales and marketing, management and manufacturing personnel for its
operations. Competition for such personnel is intense. There can be no assurance
that the Company will be successful in attracting or retaining such personnel.
The loss of any key personnel or the Company's inability to attract and retain
qualified employees could have a material adverse affect on the Company's
business, financial condition and results of operations. To manage its growth,
the Company must continue to implement and improve its operations, financial and
management information systems and expand, train and manage its workforce. The
Company believes that success in its industry requires substantial capital in
order to maintain the flexibility to take advantage of opportunities as they may
arise. The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products, or
technologies. Such investment or acquisitions may be funded by internally
generated cash, marketable securities, debt or additional equity. The sale of
additional equity could result in dilution of the equity ownership of the
Company's shareholders. The Company's failure to manage growth effectively could
have a material adverse affect on the Company's business, financial conditional
and results of operations.
DEPENDENCE ON PROPRIETARY RIGHTS. The Company's success depends in part
upon protecting its proprietary technology. The Company relies on a combination
of intellectual property laws, nondisclosure agreements and other protective
measures to protect its proprietary information. There can be no assurance,
however, that the steps taken by the Company will be adequate to deter
misappropriation or independent third-party development of its technology or
that its intellectual property rights can be successfully defended if
challenged. In addition, the laws of certain foreign countries do not protect
the Company's intellectual property rights to the same extent as the laws of the
United States. Given the rapid development of technology, there can be no
assurance that certain aspects of the Company's products do not or will not
infringe upon the existing or future proprietary rights of others or that, if
licenses or rights are required to avoid infringement, such licenses or rights
could be obtained or obtained on terms that are acceptable to the Company.
26
<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 March 1, 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 list of vendors
indicating compliance. The current telephone system will be compliant by the end
of the first quarter of 1999. 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 in 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.
27
<PAGE>
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. 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 is developing 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated balance sheets of the Company as of December 31, 1998 and 1997
and consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998, together with
the related notes and the report of Deloitte & Touche LLP, independent auditors,
are set forth on the following pages. Other required financial information is
set forth herein, as more fully described in Item 14 hereof.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Microtest, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Microtest, Inc.
and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 25, 1999
29
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(in thousands, except share amounts)
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,618 $ 11,547
Restricted investments 1,124 865
Accounts receivable, net of allowances
for doubtful accounts of $637 and $892,
and sales returns of $1,392 and $1,073 8,171 12,083
Inventories 6,572 5,924
Prepaid expenses 1,148 1,459
Income taxes receivable 2,897 2,258
Deferred income taxes 1,556 2,216
-------- --------
Total current assets 31,086 36,352
-------- --------
PROPERTY AND EQUIPMENT, NET 3,101 3,543
-------- --------
OTHER ASSETS:
Capitalized software, net of accumulated
amortization of $706 and $282 1,894 1,270
Deferred income taxes 1,519 133
Other 1,750 1,507
-------- --------
Total other assets 5,163 2,910
-------- --------
$ 39,350 $ 42,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,152 $ 4,699
Accrued liabilities 2,922 4,130
Accrued payroll and employee benefits 860 1,017
Accrued deferred compensation 1,124 865
-------- --------
Total current liabilities 9,058 10,711
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 5, 8, and 9)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 15,000,000
shares authorized; 8,253,585 shares and
8,193,320 shares issued and outstanding 8 8
Additional paid-in capital 32,916 32,710
Accumulated deficit (1,414) (186)
-------- --------
31,510 32,532
Less treasury stock, at cost, 232,520
shares and 34,196 shares (1,218) (438)
-------- --------
Total stockholders' equity 30,292 32,094
-------- --------
$ 39,350 $ 42,805
======== ========
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except per share amounts)
1998 1997 1996
-------- -------- --------
NET REVENUE $ 41,650 $ 49,592 $ 50,442
COST OF REVENUE 17,903 20,266 20,452
-------- -------- --------
Gross profit 23,747 29,326 29,990
-------- -------- --------
OPERATING EXPENSES:
Sales and marketing 12,720 16,253 14,334
Research and development 7,912 8,212 6,414
General and administrative 5,605 4,789 4,191
Purchased research and development -- -- 15,697
-------- -------- --------
Total operating expenses 26,237 29,254 40,636
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (2,490) 72 (10,646)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (46) (54) (1)
Interest income 393 317 769
Other (23) (143) (6)
-------- -------- --------
Total other income, net 324 120 762
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (2,166) 192 (9,884)
INCOME TAXES (BENEFIT) (1,258) (131) 1,711
-------- -------- --------
NET INCOME (LOSS) $ (908) $ 323 $(11,595)
======== ======== ========
BASIC EARNINGS PER SHARE:
Net income (loss) $ (.11) $ .04 $ (1.43)
======== ======== ========
Weighted average common shares outstanding 8,099 8,139 8,104
======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income (loss) $ (.11) $ .04 $ (1.43)
======== ======== ========
Weighted average common equivalent
shares outstanding 8,099 8,249 8,104
======== ======== ========
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Total
-------------- ---------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 8,159 $8 64 $ (982) $32,546 $ 11,455 $ 43,027
Net loss -- -- -- -- -- (11,595) (11,595)
Issuance of common stock upon
exercise of stock options -- -- (27) 394 4 (279) 119
Disqualifying disposition of
stock options -- -- -- -- 43 -- 43
Issuance of common stock under
employee stock purchase plan -- -- (20) 254 -- (66) 188
Purchase of treasury stock -- -- 11 (110) -- -- (110)
----- ---- ---- ------- ------- -------- --------
BALANCE, December 31, 1996 8,159 8 28 (444) 32,593 (485) 31,672
Net income -- -- -- -- -- 323 323
Issuance of common stock upon
exercise of stock options 1 -- -- 8 2 (5) 5
Disqualifying disposition of
stock options -- -- -- -- -- 1 1
Issuance of common stock under
employee stock purchase plan 33 -- (11) 102 115 (20) 197
Purchase of treasury stock -- -- 17 (104) -- -- (104)
----- ---- ---- ------- ------- -------- --------
BALANCE, December 31, 1997 8,193 8 34 (438) 32,710 (186) 32,094
Net loss -- -- -- -- -- (908) (908)
Issuance of common stock upon
exercise of stock options 15 -- -- -- 29 -- 29
Issuance of common stock under --
employee stock purchase plan 46 (34) 438 177 (320) 295
Purchase of treasury stock -- -- 233 (1,218) -- -- (1,218)
----- ---- ---- ------- ------- -------- --------
BALANCE, December 31, 1998 8,254 $ 8 233 $(1,218) $32,916 $ (1,414) $ 30,292
===== ==== ==== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (908) $ 323 $(11,595)
Adjustments to reconcile net loss to net
cash provided by operating activities--
Depreciation and amortization 1,599 1,887 1,460
Change in accounts receivable allowance 64 310 61
Purchased research and development -- -- 15,697
Deferred income taxes (726) 1,387 (833)
(Increase) decrease in accounts receivable 3,848 5,151 (321)
(Increase) decrease in inventories (648) (264) 907
(Increase) decrease in prepaid expenses
and other assets 68 (1,568) 270
(Increase) decrease in income taxes receivable (639) (1,967) 1,852
Increase (decrease) accounts payable and
accrued liabilities (1,755) (1,733) (750)
Increase (decrease) in accrued payroll
and employee benefits (157) (62) 197
------- ------- --------
Net cash provided by operating activities 746 3,464 6,945
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (733) (1,526) (1,056)
Capitalized software (1,048) (772) (90)
Purchase of business -- -- (15,621)
------- ------- --------
Net cash used in investing activities (1,781) (2,298) (16,767)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 324 203 307
Purchase of treasury stock (1,218) (104) (110)
------- ------- --------
Net cash provided by (used in) financing
activities (894) 99 197
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,929) 1,265 (9,625)
CASH AND CASH EQUIVALENTS, beginning of year 11,547 10,282 19,907
------- ------- --------
CASH AND CASH EQUIVALENTS, end of year $ 9,618 $11,547 $ 10,282
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $ 65 $ 219 $ 750
======= ======= ========
Cash paid for interest $ 9 $ 55 $ 1
======= ======= ========
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except percentages, shares and per share amounts)
(1) SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Microtest, Inc.
and its wholly owned subsidiaries (the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND RESTRICTED INVESTMENTS
The Company considers all short-term investments with a maturity at the date of
purchase of three months or less to be cash equivalents. Restricted investments
are equity securities and other investments that are restricted for the payment
of deferred compensation to former officers of the Company, in February 1999 and
December 2000.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided over the estimated useful lives of the assets ranging from
three to seven years using the straight-line method. Leasehold improvements are
amortized using the straight-line method over the shorter of the remaining lease
term or the estimated useful life of the improvements. Depreciation for income
tax purposes is computed using accelerated methods. Maintenance and repairs are
charged to expense as incurred.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs of new products (costs incurred after development of
a working model or a detailed program design and when technological feasibility
has been established) are capitalized and amortized over the expected number of
units to be sold, or three years, whichever method is faster.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair market value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
34
<PAGE>
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales upon shipment. Sales
to distributors in the United States, Canada and Europe account for the majority
of the Company's net sales. The Company has established a program, which, under
specified conditions, enables distributors and resellers to return products to
the Company for credit against additional purchases, or in the event the Company
reduces its selling prices, to receive credits for the reduction in selling
price. The amount of potential product returns, including returns under the
Company's warranty program, and credits for selling price reductions, is
estimated and provided for in the period of sale. During 1996, the Company had a
direct sales program under which the Company recognized revenue from product
sales to direct end users upon customer commitment and shipment. Customer
commitment means receipt by the Company of a valid purchase order from the
customer.
RESEARCH AND DEVELOPMENT
Expenses that can be clearly identified as research and development are charged
to research and development expense as incurred. Costs that relate to prototype
and experimental models that are sold to customers are charged to cost of
revenue. Development of new software products and enhancements to existing
software products are expensed as incurred until technological feasibility has
been established. After technological feasibility is established, any additional
costs are capitalized.
INCOME TAXES
The Company accounts for income taxes under the asset and liability approach.
Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. The Company
has not provided for foreign withholding taxes or U.S. deferred income taxes on
accumulated undistributed earnings of foreign subsidiaries. If such earnings
were to be repatriated, such earnings could be subject to foreign withholding
tax and U.S. residual tax. The determination of the amount of unrecognized
withholding and U.S. taxes on those estimated earnings is not practicable.
EARNINGS PER SHARE
Basic earnings per share is computed on the weighted average number of shares of
common stock outstanding during each period. Diluted earnings per share is
computed on the weighted average number of shares of common stock outstanding
plus the dilutive effect of stock options calculated using the treasury stock
method. Potential dilutive securities are not considered if the result would be
antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Because the
Company sells a significant portion of its products through distributors and
value added resellers, it is difficult for the Company to monitor end user
demand for its products on a current basis. Initial stocking orders may not be
35
<PAGE>
indicative of long-term end user demand. The Company's customers typically are
allowed by contract to return products, subject to certain limitations, without
charge or penalty. Significant estimates included in the Company's financial
statements include the allowance for doubtful accounts, allowance for sales
returns, allowance for inventory valuation, and deferred tax valuation
allowance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value because
their maturity is generally less than three months. The carrying amount of
accounts receivable, accounts payable and accrued liabilities approximates fair
value since they are expected to be collected or paid within 90 days of
year-end.
PRODUCT CONCENTRATION
The market for the Company's product is characterized by rapidly changing
technology, short product life cycles and evolving industry standards. The
Company has derived substantially all of its revenues from the development and
sales of a limited number of cable management and network connectivity devices
for the local area network ("LAN") industry.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION." In accordance with the provisions of SFAS No. 123, the Company
applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES" and related interpretations in accounting for its stock-based
plans.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "REPORTING COMPREHENSIVE INCOME," which is effective in 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income, and its
components in a full set of general-purpose financial statements. The adoption
of this pronouncement had an insignificant effect on the Company's financial
statements.
In 1998, the Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," which establishes standards for the way
public business enterprises report information about operating segments. It also
establishes standards for related disclosures about product and services,
geographic areas, and major customers (see Notes 10, 11 and 12).
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 requires that an enterprise
recognize all derivatives as either assets or liabilities in the statement of
financial position, and measure those instruments at fair value. The statement
is effective for the Company's year ending December 31, 2000. The Company has
not completed the process of evaluating the impact that will result from
adopting SFAS No. 133. The Company is therefore unable to disclose the impact
that adopting SFAS No. 133 will have on its financial position and results of
operations when such statement is adopted.
36
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
(2) ACQUISITIONS:
On December 17, 1996, the Company purchased all of the issued and outstanding
shares of capital stock of Logicraft Information Systems, Inc. ("Logicraft").
The consideration for the acquisition was $12,517 in cash. In addition,
Microtest assumed $4,483 in debt that Logicraft owed to Information Handling
Services, Inc., the previous majority owner of Logicraft. Immediately following
the closing, this debt was repaid. Logicraft develops and sells CD-ROM
networking products and technologies. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon their
fair values at the date of acquisition. As a result of the allocation of the
purchase price, the Company recorded an expense of $15,697 in the fourth quarter
of 1996 to record purchased in-process research and development relating to
products for which technological feasibility had not been established and for
which no alternative future use existed.
The accompanying consolidated statements of operations reflect the operating
results of Logicraft since the effective date of the acquisition. Pro forma
unaudited consolidated operating results of the Company and Logicraft for the
year ended December 31, 1996, assuming the acquisition had been made as of
January 1, 1996 is summarized below:
1996
-------
Net revenue $64,747
=======
Net income $ 171
=======
Net income per common share $ .02
=======
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as the decrease in interest income imputed on
the consideration for the acquisition, and the increase in amortization expense
associated with the capitalization of certain acquisition costs. The pro forma
results exclude the expenses related to the purchase of in-process research and
development in 1996. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
transactions been affected on the assumed dates.
(3) INVENTORIES:
Inventories at December 31, consisted of the following:
1998 1997
------ ------
Raw materials $1,946 $1,367
Work-in-progress 100 155
Finished goods 5,200 5,096
------ ------
7,246 6,618
Less allowances for inventory valuation (674) (694)
------ ------
$6,572 $5,924
====== ======
37
<PAGE>
(4) PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consisted of the following:
1998 1997
-------- -------
Equipment $ 8,782 $ 8,181
Furniture and fixtures 1,054 1,020
Leasehold improvements 640 542
-------- -------
10,476 9,743
Less accumulated depreciation and amortization (7,375) (6,200)
-------- -------
$ 3,101 $ 3,543
======== =======
(5) LEASES:
The Company leases office space and other equipment under capital and operating
leases that expire at various dates through 2002. The future minimum lease
commitments under these leases are payable as follows:
Year Ending Capital Operating
December 31, Leases Leases
------------ ------ ------
1999 $ 32 $1,318
2000 32 1,004
2001 14 181
2002 -- 6
----- ------
Total minimum lease obligations $ 78 $2,509
===== ======
Rental expense under operating leases totaled approximately $1,262, $1,051 and
$982 for 1998, 1997 and 1996, respectively.
(6) INCOME TAXES:
Components of income tax (benefit) expense for the years ended December 31, are
as follows:
1998 1997 1996
------- ------- -------
Current (benefit) expense:
Federal $ (697) $(1,427) $ 2,326
State (24) (91) 149
Foreign 189 -- 69
------- ------- -------
Total current (benefit) expense (532) (1,518) 2,544
Deferred (benefit) expense (726) 1,387 (833)
------- ------- -------
Total income taxes (benefit) $(1,258) $ (131) $ 1,711
======= ======= =======
38
<PAGE>
The Company's current income tax liability was reduced and additional paid-in
capital increased approximately $-0-, $1 and $43 during 1998, 1997 and 1996,
respectively, resulting from disqualifying dispositions of incentive stock
options.
A reconciliation of the difference between income taxes (benefit) and income
taxes at the statutory U.S. federal income tax rate for the years ended December
31, is as follows:
1998 1997 1996
----- ----- -----
Computed "expected" tax (benefit) expense $ (702) $ 65 $(3,361)
Foreign sales corporation benefit (206) -- --
Acquired research and development -- -- 5,337
State taxes, net (97) 3 90
Research and development credits (248) (217) (111)
Tax exempt interest income (24) (24) (261)
Other, net 19 42 17
------- ----- -------
Total income tax (benefit) expense $(1,258) $(131) $ 1,711
======= ===== =======
The components of deferred income taxes at December 31, are as follows:
1998 1997
------- -------
Nondeductible accruals and reserves $ 1,358 $ 1,593
Inventory costs capitalized for income tax purposes 198 623
------- -------
Total current deferred income taxes 1,556 2,216
------- -------
Excess of tax over book depreciation (202) (322)
Net operating loss carryforwards 2,025 1,654
Tax credit carryforwards 880 52
Other 140 43
------- -------
Total noncurrent deferred income taxes 2,843 1,427
Less: valuation allowance (1,324) (1,294)
------- -------
Net noncurrent deferred income taxes 1,519 133
------- -------
Total deferred income taxes $ 3,075 $ 2,349
======= =======
At December 31, 1998, the Company has net operating loss carryforwards of $3,371
and $12,281 for federal and state income tax reporting purposes, respectively.
The federal net operating losses expire in the years 2001 through 2010 if not
utilized prior to that time. The state net operating losses expire over various
years depending on the various state laws. The Company also has foreign tax,
general business and alternative minimum tax credit carryforwards of $36, $627,
and $216, respectively. The foreign tax credit carryforward expires in the year
2003 and the general business credit carryforwards expire in various amounts in
the years 2011 - 2016 if not utilized prior to that time. The alternative
minimum tax credit may be carried forward indefinitely.
39
<PAGE>
The federal net operating loss of $3,371 and $3,367 of state net operating
losses relate to the acquisition of Logicraft, Inc. Due to restrictions on the
availability of the Logicraft net operating losses to offset the Company's
income, a valuation allowance has been established for the entire federal and
state tax benefit. The valuation allowance reduces deferred tax assets to an
amount that represents the Company's best estimate of the amount of such
deferred tax assets that, more likely than not, will be realized. Limitations
imposed by Section 382 of the Internal Revenue Code, as amended, impose
restrictions on the Company's ability to utilize the net operating loss of
Logicraft.
(7) FINANCING ARRANGEMENTS:
During the second quarter of 1997, the Company obtained a $10 million unsecured
revolving credit facility with a bank, which is utilized for general corporate
and working capital purposes. The Company pays interest at a referenced rate
plus 1.5% and is required to pay a quarterly fee for the unused portion of the
credit facility. The credit facility includes provisions that require the
Company to meet certain covenants. At December 31, 1998, the Company was not in
compliance with the convenants that address quarterly losses and tangible net
worth requirements. 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 December
31, 1998.
(8) COMMITMENTS AND CONTINGENCIES:
LITIGATION
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 effect 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. 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 claim or remedy with respect to the Company.
PURCHASE COMMITMENTS
The Company utilizes contract manufacturing for virtually all of its product
requirements. Under these agreements, the Company is obligated to purchase, in
the ordinary course of business, products manufactured under these contracts at
contract prices. Some contracts require the Company to purchase all inventory
and components in the event of contract cancellation.
40
<PAGE>
(9) EMPLOYEE BENEFIT PLANS:
STOCK OPTION PLANS
The Company currently has six fixed stock option plans of which two are still
active: the 1989 Incentive Stock Option Plan ("1989 Incentive Plan"), the 1989
Non-Qualified Stock Option Plan ("1989 Non-Qualified Plan"), the 1995 Long-Term
Incentive Plan ("LTIP"), the 1993 Non-Employee Directors Plan ("1993 Directors
Plan"), the 1994 Annual Non-Employee Directors Plan ("1994 Annual Plan"), and
the 1998 Non-employee Directors Stock Option Plan (the "1998 Directors Plan").
The 1989 Incentive Plan permitted the granting of options to employees and the
1989 Non-Qualified Plan permitted the granting of options to employees,
directors, and consultants to purchase the Company's common stock at not less
than the fair market value on the date of grant. Both of these plans were
cancelled upon adoption of the LTIP on May 10, 1995, although grants outstanding
at the time of cancellation were not affected.
The LTIP permits the granting of incentive stock options, non-qualified stock
options and other stock-based awards to employees, officers, and consultants to
purchase the Company's common stock. The Company is authorized to grant options
to acquire up to 600,000 shares under the LTIP. The period during which options
granted under the above plans are exercisable is fixed by the Board of Directors
at the date of grant but is not to exceed ten years. The 1993 Directors Plan
permitted a one-time grant of 10,000 options to purchase the Company's common
stock and the 1994 Annual Plan permits an annual grant of 5,000 options to
purchase the Company's common stock to each non-employee director at not less
than the fair market value on the date of grant. Under the two directors' plans,
the Company was authorized to grant options to acquire up to 200,000 shares.
Vesting of options granted under these two plans is defined by the plan with a
term not to exceed five years. Upon adoption of the 1998 Directors Plan, the
1993 Directors Plan and the 1994 Annual Plan were terminated, although grants
outstanding at the time of cancellation were not affected.
Under the 1998 Directors Plan, non-employee directors are entitled to two types
of option grants. The first is the annual option grant under which the
non-employee director will be granted an option to purchase 1,000 shares in
1998, and 5,000 shares annually thereafter of the Company's common stock on the
third business day following the public release of the Company's year-end
earnings. These annual option grants are immediately exercisable and the
exercise price is equal to the fair market value of the Company's common stock
on the date of grant.
The second type of option grant is the anniversary option grant under which the
non-employee director will be granted an option to purchase 10,000 shares of the
Company's common stock upon first being elected or appointed to the Board. In
addition, on the third anniversary and each successive anniversary, each
non-employee director will be granted an option to purchase 10,000 shares of the
Company's common stock on the third business day following the public release of
the Company's annual or quarterly earnings. Twenty-five percent of the
anniversary options grants is immediately exercisable and 25% vests over each of
the next three years. In the event of a "change in control," as defined in the
1998 Director Plan, all options will become exercisable. The exercise price of
the anniversary option grants is equal to the fair market value of the per share
price of the Company's common stock on the date of grant.
41
<PAGE>
A summary of combined stock option activity with respect to the above plans for
the three-year period ended December 31, 1998 follows:
Options Outstanding
--------------------------------
Weighted Average
Shares Exercise Price
------ --------------
Balance, January 1, 1996 1,432,304 $12.43
Granted 589,148 8.86
Cancelled (625,486) 17.06
Exercised (26,567) 4.74
--------- ------
Balance, December 31, 1996 1,369,399 9.00
Granted 806,028 5.03
Cancelled (268,200) 10.40
Exercised (1,224) 4.68
--------- ------
Balance, December 31, 1997 1,906,003 6.97
Granted 314,350 4.66
Cancelled (410,369) 8.66
Exercised (5,667) 5.05
--------- ------
Balance, December 31, 1998 1,804,317 $ 6.18
========= ======
The weighted average fair value of options outstanding was $4.66, $5.93 and
$4.20 per share in 1998, 1997 and 1996, respectively.
The following table summarizes information about the stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- - --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 2.78 $ 4.16 539,277 8.0 $ 3.78 108,665 $ 3.74
$ 4.63 $ 6.81 737,968 7.6 $ 5.23 317,818 $ 5.38
$ 7.75 $10.75 457,459 4.7 $ 8.71 367,474 $ 8.74
$12.25 $17.75 30,113 6.2 $14.81 23,613 $14.50
$18.50 $24.25 39,500 4.9 $20.72 37,048 $20.84
$ 2.78 $24.25 1,804,317 6.9 $ 6.18 854,618 $ 7.54
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option and purchase plans. In
compliance with SFAS No. 123, the Company has elected to provide pro forma
disclosure of its net income (loss). Accordingly, no compensation expense has
been recognized for its fixed stock options plans and its stock purchase plan.
42
<PAGE>
Had compensation expense for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under those plans, the
Company's pro forma net income (loss) and earnings (loss) per share for the
years ended December 31, 1998, 1997 and 1996 would have been as indicated below:
1998 1997 1996
---- ---- ----
Net income (loss):
As reported $ (908) $ 323 $(11,595)
Pro forma (2,036) (666) (13,577)
Diluted net income (loss) per
common and equivalent share:
As reported $ (.11) $ .04 $ (1.43)
Pro forma (.25) (.08) (1.68)
The fair value of options granted under the Company's fixed stock option plans
during 1998, 1997 and 1996 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted averaged
assumptions used:
1998 1997 1996
---- ---- ----
Expected volatility 77.0% 92.0% 75.0%
Expected term 5 years 5 years 4 years
Dividend yield 0% 0% 0%
Risk-free interest rate 5.5% 6.2% 5.4%
The fair value of purchase rights granted under the Employee Stock Purchase Plan
is measured using the Black-Scholes option-pricing model with the following
weighted average assumptions used:
1998 1997 1996
---- ---- ----
Expected volatility 77.0% 92.0% 75.0%
Expected term 1 year 1 year 1 year
Dividend yield 0% 0% 0%
Risk-free interest rate 5.5% 5.8% 5.1%
EMPLOYEE STOCK PURCHASE PLAN
On May 18, 1992, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 200,000 shares of common stock are reserved for
issuance under the Purchase Plan. In March 1999, the Board of Directors approved
an amendment to the plan that would increase the number of shares by an
additional 200,000. This amendment is to be voted upon by the shareholders of
the Company at the 1999 Annual Meeting. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 10% of an employee's compensation, at 85% of the lower of the fair market
value of the common stock at the beginning or at the end of each offering
period, as defined. During 1998, 80,189 shares of common stock were purchased at
a weighted average price per share of $3.73. In 1997 and 1996, 43,891 shares and
20,499 shares of common stock were purchased at a weighted average price per
share of $4.48 and $9.04, respectively. At December 31, 1998, 2,299 shares of
common stock were available for issuance under the plan. The weighted average
fair value of those purchase rights granted in 1998, 1997 and 1996 was $1.58,
$4.79 and, $8.29, respectively.
43
<PAGE>
401(k) PLAN
The Company maintains a contributory profit-sharing plan for the majority of its
employees meeting certain requirements. The plan qualifies under Section 401(k)
of the Internal Revenue Code, and allows employees to contribute up to 15% of
their compensation, subject to maximum annual limitations prescribed by the
Internal Revenue Service. The Company may, in its discretion, make matching
contributions equal to a percentage of an employee's compensation contributed to
the Plan for the year, or in a fixed dollar amount, as determined each year by
the Board of Directors. The Company's contribution to the Plan was approximately
$116, $127 and $117 during 1998, 1997 and 1996, respectively.
STOCK REPURCHASE
On April 14, 1998, the Company's Board of Directors authorized the Company to
repurchase up to 800,000 shares of its common stock, or approximately 10% of all
shares issued as of that date, for issuance under the Company's stock option and
purchase plans. The stock was purchased, from time to time, on the open market
as conditions permit. To date, the Company has repurchased 232,520 shares at an
average price of $5.24 per share. During the third quarter of 1998, the Board of
Directors discontinued the repurchase of the Company's common stock.
(10) SEGMENTS:
For organizational, marketing and financial reporting purposes, the Company has
organized into two reportable business segments: (1) Network Connectivity
Products ("NCP") and (2) Network Management Products ("NMP"). In addition, the
NCP business segment develops and sells CD-ROM networking systems and service
maintenance contracts in the United States and Germany.
The NCP 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 NCP line. The NCP line consists primarily of Zerver and DiscPort
products.
The NMP business segment consists of products that are used by service providers
and system integrators to perform critical cabling certification and network
diagnostics. The NMP line consists of cable certification tools such as
OMNIScanner, PentaScanner and CertiFiber and network trouble shooting tools such
as MICROSCANNER and COMPAS.
Information related to the operations of the Company in different business
segments is set forth below. The accounting policies of the business segments
are the same as those described in Significant Accounting Policies (see Note 1).
44
<PAGE>
The Company does not measure assets or operating expenses separately for the NCP
and NMP business segments.
NCP NMP TOTAL
--- --- -----
Net revenue: 1998 $14,854 $26,796 $41,650
1997 21,844 27,748 49,592
1996 20,996 29,446 50,442
Gross profit: 1998 9,244 14,503 23,747
1997 13,219 16,107 29,326
1996 12,293 17,697 29,990
1998 1997 1996
-------- -------- --------
Gross profit for reportable segments $ 23,747 $ 29,326 $ 29,990
Unallocated amounts:
Operating expenses (26,237) (29,254) (40,636)
Net interest income 324 120 762
-------- -------- --------
Income (loss) before taxes $ (2,166) $ 192 $ (9,884)
======== ======== ========
Unallocable assets $ 39,350 $ 42,805 $ 43,313
======== ======== ========
(11) MAJOR CUSTOMERS:
Major customers accounting for more than 10% of total revenues for 1998, 1997
and 1996 are summarized below. Percentage of revenue amounts is not presented if
less than 10% in any year.
CUSTOMER 1998 1997 1996
-------- ---- ---- ----
Graybar Electric Company, Inc. -- 11% 11%
Ingram Micro, Inc. 11% 13% 18%
Tech Data Corporation 10% -- --
(12) 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 three-year period ended December 31, 1998,
follows:
1998 1997 1996
------- ------- -------
Domestic $28,294 $35,924 $35,659
International 13,356 13,668 14,783
------- ------- -------
Net revenues $41,650 $49,592 $50,442
======= ======= =======
45
<PAGE>
The Company did not have revenues or transfers between geographic areas during
1996 or 1997, but began shipping to a distribution center in the United Kingdom
in July 1998.
(13) EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
1998 1997 1996
------ ------ ------
Net income $ (908) $ 323 $(11,595)
====== ====== ========
Weighted average common shares
outstanding 8,099 8,139 8,104
Dilutive effect of stock options -- 110 --
------ ------ --------
Weighted average common and common
equivalent shares outstanding 8,099 8,249 8,104
====== ====== ========
Basic net income (loss) per share $ (.11) $ .04 $ (1.43)
====== ====== ========
Diluted net income (loss) per share $ (.11) $ .04 $ (1.43)
====== ====== ========
(14) SUPPLEMENTAL FINANCIAL INFORMATION:
A summary of additions and deductions related to the allowances for accounts
receivable and inventory for the years ended December 31, 1998, 1997 and 1996
follows:
Balance at Balance at
Beginning End of
of Period Additions Deductions Period
--------- --------- ---------- ------
ALLOWANCES FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1998 $ 892 $ 401 $ (656) $ 637
====== ====== ======= ======
Year ended December 31, 1997 $ 582 $ 490 $ (180) $ 892
====== ====== ======= ======
Year ended December 31, 1996 $ 521 $ 833 $ (772) $ 582
====== ====== ======= ======
ALLOWANCES FOR SALES RETURNS:
Year ended December 31, 1998 $1,073 $5,375 $(5,056) $1,392
====== ====== ======= ======
Year ended December 31, 1997 $3,030 $2,970 $(4,927) $1,073
====== ====== ======= ======
Year ended December 31, 1996 $ 919 $8,390 $(6,279) $3,030
====== ====== ======= ======
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<PAGE>
ALLOWANCES FOR INVENTORY VALUATION:
Year ended December 31, 1998 $694 $ 672 $ (692) $674
==== ====== ======= ====
Year ended December 31, 1997 $540 $2,833 $(2,679) $694
==== ====== ======= ====
Year ended December 31, 1996 $717 $ 453 $ (630) $540
==== ====== ======= ====
(15) UNAUDITED QUARTERLY FINANCIAL INFORMATION:
The following table presents the Company's selected unaudited quarterly
operating results for the eight quarters ended December 31, 1998. In addition,
the table presents unaudited operating results for the first, second, and third
quarters of 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.
1998 Quarters (as originally reported)
--------------------------------------
First Second Third
----- ------ -----
Net revenue $9,716 $11,125 $10,111
Cost of revenue 3,774 4,452 4,090
Gross profit 5,942 6,673 6,021
Total operating expenses 5,768 6,059 5,756
Net income (loss) 173 541 393
Net income (loss) per common share $ .02 $ .07 $ .05
<TABLE>
<CAPTION>
1998 Quarters (as restated)
------------------------------------------------------
First Second Third Fourth Total
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Net revenue $ 9,716 $10,745 $10,111 $11,078 $41,650
Cost of revenue 3,791 4,448 4,156 5,508 17,903
Gross profit 5,925 6,297 5,955 5,570 23,747
Total operating expenses 5,870 6,720 5,775 7,872 26,237
Net income (loss) 90 (242) 333 (1,089) (908)
Net income (loss) per common share $ .01 $ (.03) $ .04 $ (.13) $ (.11)
1997 Quarters
------------------------------------------------------
First Second Third Fourth Total
----- ------ ----- ------ -----
Net revenue $11,113 $11,945 $12,391 $14,143 $49,592
Cost of revenue 4,347 5,004 5,335 5,580 20,266
Gross profit 6,766 6,941 7,056 8,563 29,326
Total operating expense 8,297 6,864 6,520 7,573 29,254
Net income (loss) (986) 132 332 845 323
Net income (loss) per common share $ (.12) $ .02 $ .04 $ .10 $ .04
</TABLE>
In the fourth quarter of 1998, significant adjustments included increases of
$370 in anticipated sales returns, $200 was reserved for obsolete inventory,
$200 was written-off for evaluation units not expected to be recovered, $800 was
written-off for prepaid royalties for software products that are rapidly
reaching obsolescence, and $430 was recorded in executive search and other
professional fees.
47
<PAGE>
The sum of quarterly earnings (loss) per share information may not agree to the
annual amount due to the use of the treasury stock method of calculating
earnings (loss) per share.
For interim reporting purposes, the Company ends its quarters on the Saturday
closest to the calendar quarter end with the fourth quarter ending on December
31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning continuing directors, nominees and executive
officers of the Company is set forth under the caption "Information Concerning
Directors, Nominees and Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement relating to its 1999
Annual Meeting of Stockholders to be held May 24, 1999, which is incorporated by
reference into this Form 10-K Report. With the exception of the foregoing
information and other information specifically incorporated by reference into
this Form 10-K Report, the Registrant's Proxy Statement is not being filed as a
part hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item 11 is incorporated by reference to
the caption "Executive Compensation" and "Employment Agreements" in the Proxy
Statement; provided, however, that the "Compensation Committee Report on
Executive Compensation" and the "Stock Price Performance Graph" contained in the
Proxy Statement are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Common Stock beneficially owned by each
director of the Company, by all officers and directors of the Company as a group
and by each shareholder known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock is incorporated herein by reference to
"Security Ownership of Certain Beneficial Owners and Management" from the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this item is incorporated herein by reference
to "Certain Transactions and Relationships" in the Proxy Statement.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULE. Page or
Method
of Filing
---------
(i) Financial Statements
(1) Independent Auditors' Report........................ Page 29
(2) Consolidated Financial Statements:
Balance Sheets - December 31, 1998 and 1997......... Page 30
Statements of Operations - For the Years
Ended December 31, 1998, 1997 and 1996.............. Page 31
Statements of Stockholders' Equity - For
the Years Ended December 31, 1998, 1997
and 1996............................................ Page 32
Statements of Cash Flows - For the Years
Ended December 31, 1998, 1997 and 1996.............. Page 33
Notes to Consolidated Financial Statements -
December 31, 1998, 1997 and 1996.................... Page 34
(ii) Financial Statement Schedules
(iii) See Item 14(c) below
Included in Auditors'
Independent Auditors' Report................ Report at Page 29
Schedules have been omitted because of the absence of conditions
under which they are required or because the required material
information is included in the Consolidated Financial Statements
or Notes to the Consolidated Financial Statements included
herein.
(b) REPORTS OF FORM 8-K.
During the last quarter of 1998, the Company filed
no reports on Form 8-K.
49
<PAGE>
(c) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Page or
Number Description Method of Filing
- - ------ ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated by reference to
Incorporation of the Company, dated May Exhibit 3.1 to Form S-1
19, 1992 Registration Statement #33-52264
("Form S-1 #33-52264")
3.2 Bylaws of the Company Incorporated by reference to
Exhibit 3.2 to Form S-1 #33-52264
10.1 Lease Agreement between Camelback Incorporated by reference to
Associates II Limited Partnership and the Exhibit 10.5 to Form S-1 #33-52264
Company dated June 19, 1992, relating to
Company's principal offices and facilities
10.2 Incentive Stock Option Plan Incorporated by reference to
Exhibit 10.7 of Amendment No. 1 to
Form S-1 #33-52264
10.3 Non-Qualified Stock Option Plan Incorporated by reference to
Exhibit 10.8 of Amendment No. 1 to
Form S-1 #33-52264
10.4 Employee Stock Purchase Plan Incorporated by reference to
Exhibit 10.9 of Amendment No. 1 to
Form S-1 #33-52264
10.5 401(k) Retirement Savings Plan Incorporated by reference to
Exhibit 10.12 to Form S-1 #33-52264
10.6 Non-Employee Directors Stock Option Plan Incorporated by reference to
Exhibit 4 to Form S-8 #33-67948
10.7 Annual Non-Employee Directors Stock Option Incorporated by reference to
Plan Exhibit 4 to Form S-8 #33-79070
10.8 Form of Indemnity agreement between Incorporated by reference to
directors and certain former officers of Exhibit 10.18 to Form S-1 #33-52264
the Company, and the Company
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.9 Agreement of Purchase and Sale of Stock Incorporated by reference to
between Optical Media International and Exhibit 2 of Form 8-K Report dated
the Company dated June 6, 1995 June 6, 1995
10.10 1994 Profit Sharing Plan Incorporated by reference to
Exhibit 10.15 of Form 10-K Report
dated December 31, 1993
10.11 Long-Term Incentive Plan Incorporated by reference to
Exhibit 10.16 of Form 190K Report
dated December 31, 1994
10.12 Deferred Compensation Plan Incorporated by reference to
Exhibit 10.17 of Form 10-K Report
dated December 31, 1994
10.13 Agreement of Purchase and Sale of Stock Incorporated by reference to
between Logicraft Information Systems, Exhibit 2 of Current Report on Form
Inc. and the Company dated December 17, 8-K dated December 17, 1996
1996
10.14 1998 Director Compensation Plan Incorporated by reference to
Appendix A of the Company's 1998
Proxy Statement
10.15 Consulting Agreement with Richard G. Meise Filed herewith
10.16 Severance Agreement of Charles V. Mihaylo Filed herewith
10.17 Agreement with Tim C. Furst Filed herewith
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Deloitte & Touche LLP Filed herewith
24.1 Power of Attorney of Dianne C. Walker Filed herewith
24.2 Power of Attorney of Roger C. Ferguson Filed herewith
24.3 Power of Attorney of Steven G. Mihaylo Filed herewith
24.4 Power of Attorney of William C. Turner Filed herewith
24.5 Power of Attorney of Richard G. Meise Filed herewith
24.6 Power of Attorney of Kent C. Mueller Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
(d) See Item 14 (a) (ii).
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MICROTEST, INC.
/s/ Vincent C. Hren
-------------------------------------
Vincent C. Hren
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name and Signature Title Date
- - ------------------ ----- ----
- - --------------------------- Chairman of the Board March 31, 1999
Kent C. Mueller*
/s/ Vincent C. Hren
- - --------------------------- President and Chief Executive March 31, 1999
Vincent C. Hren Officer
/s/ Daniel J. Predovic Vice President, Chief Financial March 31, 1999
- - --------------------------- Officer, Secretary and Treasurer
Daniel J. Predovic (Principal Financial and Accounting
Officer)
- - ---------------------------
Roger C. Ferguson* Director March 31, 1999
- - ---------------------------
Richard G. Meise* Director March 31, 1999
- - ---------------------------
Steven G. Mihaylo* Director March 31, 1999
- - ---------------------------
William C. Turner* Director March 31, 1999
- - ---------------------------
Dianne C. Walker* Director March 31, 1999
*By /s/ Vincent C. Hren
--------------------------- March 31, 1999
Vincent C. Hren
Attorney-in-Fact
52
<PAGE>
BOARD OF DIRECTORS AND OFFICERS
BOARD OF DIRECTORS CORPORATE OFFICERS
KENT C. MUELLER VINCENT C. HREN
Chairman of the Board of Microtest, Inc. President and Chief Executive
President and Chief Executive Officer, Officer
Kent Mueller Ventures
DANIEL J. PREDOVIC
VINCENT C. HREN Vice President, Chief Financial
President and Chief Executive Officer Officer, Secretary and Treasurer
Microtest, Inc.
DAVID R. COFFIN
STEVEN G. MIHAYLO Vice President, Research and
Chief Executive Officer and Secretary Development
Inter-tel, Incorporated
KLAUS M. ROMANEK
WILLIAM C. TURNER Vice President and Managing
Chairman Director, European Operations
Argyle Atlantic Corporation
ROGER C. FERGUSON
Consultant
RICHARD G. MEISE
Consultant
DIANNE C. WALKER
Consultant
53
<PAGE>
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Microtest, Inc. 1999 Annual Meeting of Shareholders will be held at 10:00
a.m. Mountain Standard Time on Monday, May 24, 1999 at the Doubletree La Posada
Resort, 4949 East Lincoln Drive, Scottsdale, Arizona.
SHAREHOLDER INFORMATION
Microtest common stock trades on the NASDAQ National Market under the symbol
MTST. Shareholders and prospective investors are welcome to call, write or fax
with questions or requests for additional information. Copies of Microtest's
Report on Form-10K for the fiscal year ended December 31, 1998 and additional
copies of this Annual Report may be obtained without charge by directing
inquiries to:
Microtest, Inc.
Investor Relations
4747 North 22nd Street
Phoenix, Arizona 85016
(602) 952-6400, Fax: (602) 952-6604
www.microtest.com
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Phoenix, Arizona
INDEPENDENT COUNSEL
Snell & Wilmer L.L.P.
Phoenix, Arizona
CORPORATE HEADQUARTERS
Microtest, Inc.
4747 North 22nd Street
Phoenix, Arizona 85016
(602) 952-6400
BRANCH AND SUPPORT OFFICES
Schaumburg, Illinois; Irvine, California; Nashua, New Hampshire;
Crawley, England; Gottingen, Germany; Munich, Germany
EXHIBIT 10.15
RETIREMENT AGREEMENT AND MUTUAL RELEASE
OF RICHARD G. MEISE
This Retirement Agreement and Mutual Release is made and entered into by and
between RICHARD G. MEISE (hereinafter referred to as "Employee") and MICROTEST,
INC. (hereinafter referred to collectively with all of its subsidiaries (where
appropriate) as the "Company").
In consideration of the acts, payments, covenants and mutual agreements herein
described and agreed to be performed, Employee and the Company agree as follows:
1. Retirement of Employment - Employee retires his position as Chairman and
CEO of the Company and all subsidiaries, effective January 18, 1999. He
will remain an outside director until the annual meeting of stockholders of
the Company held in 1999, his resignation as a director to be effective at
such time.
2. Consulting Services - Upon reasonable request of the Board or CEO, employee
agrees to render consulting services to the Company for the period from
January 18, 1999 through January 1, 2001. However, after April 30, 1999 the
Employee shall not have to consult for more than 5 days a month or 16 days
a quarter, and consulting services shall be rendered at reasonable,
mutually agreed upon times. In the event additional time is required after
April 30, 1999 the Company shall pay the Employee $1,000 per diem.
Among other things, Employee may be asked to assist in the potential sale
of the Company's connectivity product line. In the event of such a sale,
Employee would not be entitled to any fee or payment (additional to the
payments described herein) for such assistance.
3. Payments - The Company shall pay to Employee $100,000 per annum as a
consulting fee through January 1, 2001, payable in bi-weekly installments.
Employee shall be responsible for all income taxes, self-employment taxes
and similar obligations with respect to any payments made hereunder, and
shall defend, indemnify and hold harmless the Company and the affiliated
persons enumerated in Paragraph 5 below against any tax liabilities,
payments, interest and penalties and related attorneys' fees and costs that
may arise therefrom.
4. Benefits and Options -
a. Effective January 18, 1999, Employee shall be entitled to medical
insurance benefits to the extent provided to executive staff. The
Company shall pay for these benefits through February 2001.
b. The Company has granted to Employee options to acquire shares of
Common Stock. The Company agrees that the options will continue to
vest through January 27, 1999 and each party agrees that as of such
date Employee will have 190,164 shares of common stock purchasable
<PAGE>
pursuant to vested options. The Company further agrees to extend the
exercise period for vested options through February 28, 2001. All
other options shall terminate.
c. The Company will provide to the Employee the current laptop he is
using as well as his cell phone and reimburse him for business-related
charges through January 1, 2001.
5. Release and Covenant Not to Sue - Employee hereby forever releases,
discharges, cancels, waives, and acquits for himself, his spouse and his
heirs, executors, administrators and assigns, the Company and any and all
of its affiliates, subsidiaries, corporate parents, agents, directors,
officers, owners, employees, attorneys, successors and assigns, of and from
any and all rights, claims, demands, causes of action, obligations damages,
penalties, fees, costs, expenses, and liability of any nature whatsoever,
whether in law or equity, which Employee has, had or may hereafter have
against them, or any of them arising out of, or by reason of, any cause,
matter, or thing whatsoever existing as of the date of execution of the
Agreement, WHETHER KNOWN TO THE PARTIES AS THE TIME OF EXECUTION OF THIS
AGREEMENT OR NOT, other than for breach of this Agreement.
This FULL WAIVER OF ALL CLAIMS includes, without limitation, attorney's
fees, any claims, demands, or causes of action arising out of, or relating
in any manner whatsoever to the employment and/or retirement of Employee by
the Company, such as, BUT NOT LIMITED TO, any charge, claim, lawsuit or
other proceeding arising under the Civil Rights Act of 1866, 1964, 1991,
Title VII as amended by the Civil Rights Acts of 1991, the Americans with
Disabilities Act, the Age Discrimination in Employment Act (ADEA), the
Labor Management Relations Act (LMRA), the Employee Retirement Income
Security Act (ERISA), the Consolidated Omnibus Budget Reconciliation Act,
the Fair Labor Standards Act (FLSA), the Equal Pay Act, the Rehabilitation
Act of 1973, the Arizona Civil Rights Act, the Family and Medical Leave Act
of 1993, Worker's Compensation Claims, or any other federal, state, or
local statute, or any contract, agreement, plan or policy. Employee further
covenants and agrees not to institute, nor cause to be instituted, any
legal proceeding, including filing any claim or complaint with any
government agency alleging any violation of law or public policy or seeking
worker's compensation, against the Company and/or any and all of its
affiliates, subsidiaries, corporate parents, directors, agents, officers,
owners, employees, successors and assignees premised upon any legal theory
or claim whatsoever, including without limitation, contract, tort, wrongful
discharge, personal injury, interference with contract, breach of contract,
defamation, negligence, infliction of emotional distress, fraud, or deceit,
except to enforce the terms of this Agreement.
Employee acknowledges that the considerations afforded him under this
Agreement, including the payments and considerations described in
Paragraphs 3 and 4 above, are in full and complete satisfaction of any
claims Employee may have, or may have had relating to the Company,
including any arising out of his employment with the Company (or any
subsidiary) or the retirement therefrom.
Company hereby forever releases, discharges, cancels, waives, and acquits
Employee of and from any and all rights, claims, demands, causes of action,
obligations, damages, penalties, fees, costs, expenses, and liability of
any nature whatsoever, whether in law or equity, which Company has had or
<PAGE>
may hereafter have against him from the date of this Agreement, WHETHER
KNOWN OR UNKNOWN TO THE PARTIES AT THE TIME OF EXECUTION OF THIS AGREEMENT,
other than for breach of this Agreement, and except for any action or
omission as to which the Employee is not entitled to mandatory
indemnification under section 145 of the Delaware Corporate Code, or as to
any matter set forth in section 102(b)(7)(i) to (iv) thereof (as if
Employee were a director).
6. Time Period of Considering or Canceling This Agreement - Employee
acknowledges that he has been offered a period of time of at least
twenty-one (21) days to consider whether to sign this Agreement, which he
hereby waives, and the Company agrees that Employee may cancel this
Agreement at any time during the seven (7) days following the date on which
this Agreement has been signed by all parties to this Agreement. In order
to cancel or revoke this Agreement, Employee must deliver to the Dianne
Walker at 3086 Fairway Hills Court, Park City, Utah 84060 written notice
stating that Employee is canceling or revoking this Agreement. If this
Agreement is timely canceled or revoked, none of the provisions of this
Agreement shall be effective or enforceable and the Company shall not be
obligated to make the payments to Employee or to provide Employee with the
other benefits described in this Agreement.
7. Confidentiality - Employee and the Company agree to maintain in confidence
the terms and existence of this Agreement and the discussions that led to
its creation and execution, with the exception that the Company may
disclose this Agreement and its terms to the extent required or appropriate
under applicable securities exchange or other laws or regulations and the
Employee may disclose such matters to any attorney who is providing advice
to Employee, to any accountant or federal or state tax agency for purposes
of complying with any tax laws, or as otherwise required by law. These
obligations, as well as the duties imposed upon Employee by law or the
confidentiality agreement that the Employee has entered into with the
Company attached as Exhibit "A", shall continue during and survive the
termination of Employee's employment (including as a director and
consultant).
8. Non-Competition - Employee covenants and agrees that he will not, during
his employment as a consultant and service as a director of the Company and
for one (1) year after termination of both capacities, within any
jurisdiction in which the Company does business:
(i) Directly or indirectly participate in or assist in the ownership,
management, operation or control of any business similar to or
competitive with the Company; PROVIDED, HOWEVER, that Employee 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 Employee (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
(ii) 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 the Company; or
(iii) Call on or directly or indirectly solicit or divert or take away
from the Company any person, firm, corporation, or other entity who
is a customer or supplier of the Company.
<PAGE>
9. Reasonableness of Scope; Remedies -
a. Employee acknowledges and agrees that a breach by Employee of the
provisions of Sections 7 and 8 of this Agreement will cause the
Company irreparable injury and damage that cannot be reasonably or
adequately compensated by damages at law. Employee further
acknowledges and agrees that he has such skills and abilities that the
provisions of this Sections 7 and 8 will not prevent him from earning
a living. Employee expressly agrees that the Company shall be entitled
to injunctive or other equitable relief to prevent a threatened
breach, breach or continued breach of Sections 7 and 8 hereof in
addition to any other remedies legally available to it. Employee
further agrees that the time periods described in Sections 7 and 8
shall be extended for a period equal to the duration of any breach of
this Agreement by Employee.
b. Employee agrees that upon the commencement by him of employment with
any third party during the period in which the terms of Sections 7 or
8 hereof are in effect, Employee shall promptly disclose to each such
new employer the terms of Sections 7 and 8. Employee further agrees
and authorizes the Company to notify others, including customers of
the Company and any such future employers of Employee, of the terms of
this Agreement and of Employee's obligations hereunder.
10. Reliance - Employee warrants and represents that: (i) he has relied on his
own judgment regarding the consideration for and language of this
Agreement; (ii) he has been given a reasonable period of time to consider
this Agreement, has been advised to consult with counsel of his own
choosing before signing this Agreement, and has consulted with counsel or
voluntarily elected not to consult with independent counsel; (iii) the
Company has not in any way coerced or unduly influenced him to execute this
Agreement; and (iv) this Agreement is written in a manner that is
understandable to him and he has read and understood all paragraphs of this
Agreement.
11. Nature of the Agreement - This Agreement and all provisions thereof,
including all representations and promises contained herein, are
contractual and not a mere recital and shall continue in permanent force
and effect. Except as provided in paragraph 7, above, this Agreement
constitutes the sole and entire agreement of the parties with respect to
the subject matter hereof, superseding all prior agreements and
understandings between the parties, and there are no agreements of any
nature whatsoever between the parties hereto except as expressly stated
herein. This Agreement may not be modified or changed unless done so in
writing, signed by both parties. In the event that any portion of this
Agreement is found to be unenforceable for any reason whatsoever, the
unenforceable provision shall be considered to severable, and the remainder
of the Agreement shall continue to be in full force and effect. This
Agreement shall be governed by and construed in accordance with the laws of
the State of Arizona without regard to choice of law principles.
12. No Admission of Liability - Nothing contained in this Agreement shall be
construed in any manner as an admission by any party that they have
violated any statue, law or regulation, or breached any contract or
agreement.
<PAGE>
13. No Disparagement - Employee and the Company agree that as part of the
consideration for this Agreement, neither party will make disparaging or
derogatory remarks, whether oral or written, about the other party or its
subsidiaries, affiliates, officers, directors, employees or agents.
RICHARD G. MEISE MICROTEST, INC.
/s/ Richard G. Meise By: /s/ Kent c. Mueller
- - ----------------------------- -----------------------------
Its:
- - ----------------------------- ----------------------------
Dated: Dated:
------------------------ --------------------------
EXHIBIT 10.16
SEVERANCE AGREEMENT AND MUTUAL RELEASE
OF CHARLES V. MIHAYLO
This Severance Agreement and Mutual Release (this "Agreement") is made
and entered into by and between CHARLES V. MIHAYLO (hereinafter referred to as
"Employee") and MICROTEST, INC. (hereinafter referred to collectively with all
of its subsidiaries (where appropriate) as the "Company").
WHEREAS, the parties have mutually agreed that is in their respective
best interests to bring their employment relationship to an amicable conclusion,
effective immediately.
NOW, THEREFORE, in consideration of the acts, payments, covenants and
mutual agreements herein described and agreed to be performed, Employee and the
Company agree as follows:
1. TERMINATION OF EMPLOYMENT. Employee hereby resigns his positions as
President and Chief Operating Officer of the Company and all subsidiaries,
effective December 4, 1998.
2. CONSULTING SERVICES. From time to time upon the reasonable request
of the Chief Executive Officer, Employee agrees to render consulting services to
the Company for the period from December 4, 1998 through July 31, 1999. However,
the Employee shall not have to consult for more than 10 hours in any one month
and consulting services shall be rendered at reasonable, mutually agreed upon
times.
3. PAYMENTS. The Company shall pay to Employee his current salary as a
consulting fee through July 31, 1999, payable in bi-weekly installments.
Employee shall be responsible for all income taxes, self-employment taxes and
similar obligations with respect to any payments made hereunder, and shall
defend, indemnify and hold harmless the Company and the affiliated persons
enumerated in Paragraph 5 below against any tax liabilities, payments, interest
and penalties and related attorneys' fees and costs that may arise therefrom.
4. BENEFITS AND OPTIONS.
a. Effective December 4, 1998, Employee shall be entitled to COBRA
benefits to the extent provided by law. The Company shall pay for these
benefits until he obtains coverage through a subsequent employer, or until
December 31, 1999, whichever occurs first.
b. The Company has granted to Employee unexercised options to acquire
an aggregate of 60,000 shares of vested common stock. Options will stop
vesting as of December 2, 1999 and all unvested options will terminate. The
Company hereby agrees to extend the exercise period for vested shares
through October 31, 1999.
<PAGE>
5. RELEASE AND COVENANT NOT TO SUE. Employee hereby forever releases,
discharges, cancels, waives, and acquits for himself, his spouse and his heirs,
executors, administrators and assigns, the Company and any and all of its
affiliates, subsidiaries, corporate parents, agents, directors, officers,
owners, employees, attorneys, successors and assigns, of and from any and all
rights, claims, demands, causes of action, obligations, damages, penalties,
fees, costs, expenses, and liability of any nature whatsoever, whether in law or
equity, which Employee has, had or may hereafter have against them, or any of
them arising out of, or by reason of, any cause, matter, or thing whatsoever
existing as of the date of execution of this Agreement, WHETHER KNOWN TO THE
PARTIES AT THE TIME OF EXECUTION OF THIS AGREEMENT OR NOT, other than for breach
of this Agreement.
This FULL WAIVER OF ALL CLAIMS includes, without limitation, attorney's
fees, any claims, demands, or causes of action arising out of, or relating in
any manner whatsoever to, the employment and/or termination of the employment of
Employee by the Company, such as, BUT NOT LIMITED TO, any charge, claim, lawsuit
or other proceeding arising under the Civil Rights Act of 1866, 1964, 1991,
Title VII as amended by the Civil Rights Act of 1991, the Americans with
Disabilities Act, the Age Discrimination in Employment Act (ADEA), the Labor
Management Relations Act (LMRA), the Employee Retirement Income Security Act
(ERISA), the Consolidated Omnibus Budget Reconciliation Act, the Fair Labor
Standards Act (FLSA), the Equal Pay Act, the Rehabilitation Act of 1973, the
Arizona Civil Rights Act, the Family and Medical Leave Act of 1993, Worker's
Compensation Claims, or any other federal, state, or local statute, or any
contract, agreement, plan or policy. Employee further covenants and agrees not
to institute, nor cause to be instituted, any legal proceeding, including filing
any claim or complaint with any government agency alleging any violation of law
or public policy or seeking worker's compensation, against the Company and/or
any and all of its affiliates, subsidiaries, corporate parents, directors,
agents, officers, owners, employees, successors and assignees premised upon any
legal theory or claim whatsoever, including without limitation, contract, tort,
wrongful discharge, personal injury, interference with contract, breach of
contract, defamation, negligence, infliction of emotional distress, fraud, or
deceit, except to enforce the terms of this Agreement.
Employee acknowledges that the considerations afforded him under this
Agreement, including the payments and considerations described in Paragraphs 3
and 4 above, are in full and complete satisfaction of any claims Employee may
have, or may have had relating to the Company, including any arising out of his
employment with the Company (or any subsidiary) or the termination thereof.
Company hereby forever releases, discharges, cancels, waives, and
acquits Employee of and from any and all rights, claims, demands, causes of
action, obligations, damages, penalties, fees, costs, expenses, and liability of
any nature whatsoever, whether in law or equity, which Company has had or may
hereafter have against him from the date of this Agreement, WHETHER KNOWN OR
UNKNOWN TO THE PARTIES AT THE TIME OF EXECUTION OF THIS AGREEMENT, other than
for breach of this Agreement, and except for any action or omission as to which
the Employee is not entitled to mandatory indemnification under ss.145 of the
Delaware Corporate Code, or as to any matter set forth in ss.102(b)(7)(i) to
(iv) thereof (as if Employee were a director).
6. TIME PERIOD OF CONSIDERING OR CANCELING THIS AGREEMENT. Employee
acknowledges that he has been offered a period of time of at least twenty-one
(21) days to consider whether to sign this Agreement, which he hereby waives,
and the Company agrees that Employee may cancel this Agreement at any time
during the seven (7) days following the date on which this Agreement has been
signed by all parties to this Agreement. In order to cancel or revoke this
Agreement, Employee must deliver to the Company at 4747 North 22nd Street,
Phoenix, Arizona 85016-4708, attention Richard Meise, written notice stating
that Employee is canceling or revoking this Agreement. If this Agreement is
timely canceled or revoked, none of the provisions of this Agreement shall be
effective or enforceable and the Company shall not be obligated to make the
<PAGE>
payments to Employee or to provide Employee with the other benefits described in
this Agreement.
7. CONFIDENTIALITY. Employee and the Company agree to maintain in
confidence the terms and existence of this Agreement and the discussions that
led to its creation and execution, with the exception that the Company may
disclose this Agreement and its terms to the extent required or appropriate
under applicable securities exchange or other laws or regulations and that the
Employee may disclose such matters to any attorney who is providing advice to
Employee, to any accountant or federal or state tax agency for purposes of
complying with any tax laws, or as otherwise required by law. Further, Employee
acknowledges his continuing obligations to the Company under paragraphs 10, 11,
12, 13, 14, 16 and 23 of Employment Agreement dated June 9, 1997, which is
incorporated herein by reference and shall apply to this agreement as if fully
set forth herein, and acknowledges that he has returned to the Company and has
not retained in his possession any confidential or proprietary information or
any copy or embodiment thereof. These obligations, as well as any other duties
imposed upon Employee by law or any separate confidentiality or similar
agreement the Employee has entered into with the Company, shall survive the
termination of Employee's employment. Employee shall be permitted to obtain
employment that is not otherwise inconsistent with paragraph 10 of his
Employment Agreement without losing any of the benefits of paragraphs 3 and 4
hereof. The Company acknowledges that Employee shall be permitted to use and/or
work in the field of the service initiative which Employee presented to the
Board of Directors in October 1998 and that such employment by Employee will not
violate paragraph 10 of Employee's Employment Agreement or constitute use by
Employee of the Company's proprietary information. Nothing contained herein
preclude the Company from engaging in the same or similar business as the
service initiative which Employee presented to the Board of Directors in October
1998 or from using information developed or compiled by Employee in connection
therewith.
8. RELIANCE. Employee warrants and represents that: (i) he has relied
on his own judgment regarding the consideration for and language of this
Agreement; (ii) he has been given a reasonable period of time to consider this
Agreement, has been advised to consult with counsel of his own choosing before
signing this Agreement, and has consulted with counsel or voluntarily elected
not to consult with independent counsel; (iii) the Company has not in any way
coerced or unduly influenced him to execute this Agreement; and (iv) this
Agreement is written in a manner that is understandable to him and he has read
and understood all paragraphs of this Agreement.
<PAGE>
9. NATURE OF THE AGREEMENT. This Agreement and all provisions thereof,
including all representations and promises contained herein, are contractual and
not a mere recital and shall continue in permanent force and effect. Except as
provided in paragraph 7, above, this Agreement constitutes the sole and entire
agreement of the parties with respect to the subject matter hereof, superseding
all prior agreements and understandings between the parties, and there are no
agreements of any nature whatsoever between the parties hereto except as
expressly stated herein. This Agreement may not be modified or changed unless
done so in writing, signed by both parties. In the event that any portion of
this Agreement is found to be unenforceable for any reason whatsoever, the
unenforceable provision shall be considered to be severable, and the remainder
of the Agreement shall continue to be in full force and effect. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Arizona without regard to choice of law principles.
10. NO ADMISSION OF LIABILITY. Nothing contained in this Agreement
shall be construed in any manner as an admission by any party that they have
violated any statue, law or regulation, or breached any contract or agreement.
11. NO DISPARAGEMENT. The Company agrees to use reasonable efforts to
ensure that the current officers and directors of the Company during the term of
their employment do not, and Employee agrees that he will not, make disparaging
or derogatory remarks, whether oral or written, about the other party or, in the
case of Employee, the Company or its subsidiaries, affiliates, officers,
directors, employees or agents.
12. PRESS RELEASE. The parties acknowledge that the press release
attached hereto as Exhibit A is mutually acceptable and will be issued promptly
following the date hereof.
13. REFERENCE. The parties acknowledge that the letter attached hereto
as Exhibit B is mutually acceptable to both parties and may be utilized by Mr.
Mihaylo for presentation to future employers.
CHARLES V. MIHAYLO MICROTEST, INC.
/s/ Richard G. Meise
/s/ Charles V. Mihaylo By: /s/ Kent C. Mueller
- - ----------------------------- -----------------------------
Its:
- - ----------------------------- ----------------------------
Dated: Dated:
------------------------ --------------------------
EXHIBIT 10.17
AGREEMENT WITH TIM C. FURST
July 27, 1998
Mr. Tim Furst
9842 South 43rd Place
Phoenix, AZ 85044
Dear Tim:
Microtest has accepted your resignation effective July 31, 1998. The Company has
agreed to provide the following:
1. For not going to work for a direct competitor and for not recruiting from
Microtest any of its current employees for a period of one year you will
receive a payment of $60,000.
2. The Company's coverage for health, dental and vision insurance until
December 31, 1998 or until you are covered by a new employer's policies,
whichever comes first. This coverage has a dollar value of $2,978.95.
3. In consideration of your nearly achieving your second quarter 1998 revenue
objective, you will receive a performance bonus of $20,000.
4. The Company will forgive the $5,000.00 travel advance extended to you in
1997.
5. You have the option of assuming both company-owned insurance policies: a
$350,000 policy with an annual premium of $6,899.00; and, a $650,000 policy
with an annual premium of $7,200.00. The policies have cost the Company
$20,697.00 to date. You've stated your desire to acquire coverage
comparable to these policies. The option is yours; however, Microtest can
bear no responsibility for information you have received independently
regarding the cost of similar coverage.
Separate from the above, you will receive a check in the amount of $13,314.32
for accrued but unused vacation time.
Tim, I'd like to take this opportunity to thank you personally for the eight
successful years you've contributed to Microtest.
Sincerely,
/s/ Richard G. Meise
Richard G. Meise
Chief Executive Officer
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
------------------ -----------------------------
H + H Germany
Logicraft Information Systems, Inc. Delaware
Microtest Europe United Kingdom
Microtest GmbH Germany
Microtest, Inc., International Guam
Optical Media International California
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-53922, 33-53924, 33-53926, 33-93796, 333-68427 and 333-68417 of Microtest,
Inc. on Forms S-8 of our report dated March 25, 1999, appearing in this Annual
Report on Form 10-K of Microtest, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 29, 1999
EXHIBIT 24.1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Vince Hren his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him/her and in his/her name, place, and
stead, in any and all capacities, to sign the Annual Report on Form 10K for the
fiscal year ended December 31, 1998, for filing with the Securities and Exchange
Commission by Microtest, Inc., a Delaware corporation, together with any and all
amendments to such Form 10K, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: 3/26/99
/s/ Dianne C. Walker
------------------------------
Dianne C. Walker
EXHIBIT 24.2
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Vince Hren his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him/her and in his/her name, place, and
stead, in any and all capacities, to sign the Annual Report on Form 10K for the
fiscal year ended December 31, 1998, for filing with the Securities and Exchange
Commission by Microtest, Inc., a Delaware corporation, together with any and all
amendments to such Form 10K, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: 3/26/99
/s/ Roger C. Ferguson
------------------------------
Roger C. Ferguson
EXHIBIT 24.3
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Vince Hren his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him/her and in his/her name, place, and
stead, in any and all capacities, to sign the Annual Report on Form 10K for the
fiscal year ended December 31, 1998, for filing with the Securities and Exchange
Commission by Microtest, Inc., a Delaware corporation, together with any and all
amendments to such Form 10K, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: 3/26/99
/s/ Steven G. Mihaylo
------------------------------
Steven G. Mihaylo
EXHIBIT 24.4
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Vince Hren his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him/her and in his/her name, place, and
stead, in any and all capacities, to sign the Annual Report on Form 10K for the
fiscal year ended December 31, 1998, for filing with the Securities and Exchange
Commission by Microtest, Inc., a Delaware corporation, together with any and all
amendments to such Form 10K, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: 3/26/99
/s/ William C. Turner
------------------------------
William C. Turner
EXHIBIT 24.5
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Vince Hren his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him/her and in his/her name, place, and
stead, in any and all capacities, to sign the Annual Report on Form 10K for the
fiscal year ended December 31, 1998, for filing with the Securities and Exchange
Commission by Microtest, Inc., a Delaware corporation, together with any and all
amendments to such Form 10K, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: 3/26/99
/s/ Richard G. Meise
------------------------------
Richard G. Meise
EXHIBIT 24.6
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Vince Hren his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him/her and in his/her name, place, and
stead, in any and all capacities, to sign the Annual Report on Form 10K for the
fiscal year ended December 31, 1998, for filing with the Securities and Exchange
Commission by Microtest, Inc., a Delaware corporation, together with any and all
amendments to such Form 10K, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: 3/26/99
/s/ Kent C. Mueller
------------------------------
Kent C. Mueller
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