<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
-------------------------------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20666
MICROTEST, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 86-0485884
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS employer identification number)
incorporation)
4747 NORTH 22ND STREET
PHOENIX, ARIZONA 85016
(602) 952-6400
---------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS.
YES X NO
--- ----
AT AUGUST 4, 2000, THERE WERE 8,741,264 SHARES OF COMMON STOCK OUTSTANDING,
EXCLUSIVE OF TREASURY SHARES HELD BY THE REGISTRANT.
<PAGE> 2
MICROTEST, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
July 1, 2000 and December 31, 1999 3
Consolidated Statements of Operations-
Three Months and Six Months Ended
July 1, 2000 and June 26, 1999 4
Consolidated Statements of Cash Flows-
Six Months Ended July 1, 2000 and
June 26, 1999 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 16
</TABLE>
<PAGE> 3
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 1, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
July 1, December 31,
2000 1999
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,956 $ 10,431
Restricted investments -- 293
Accounts receivable, net of allowances for doubtful accounts of $239
and $171, and sales returns of $516 and $422, respectively 8,332 7,828
Inventories, net 3,751 4,289
Prepaid expenses and other current assets 718 864
Income taxes receivable 2,593 2,777
Deferred income taxes 1,030 1,030
-------- --------
Total current assets 29,380 27,512
-------- --------
PROPERTY AND EQUIPMENT, NET 1,957 2,238
-------- --------
OTHER ASSETS:
Capitalized software, net of accumulated amortization of $1,889
and $1,510, respectively 881 1,260
Deferred income taxes 1,783 1,783
Other 753 1,263
-------- --------
Total other assets 3,417 4,306
-------- --------
$ 34,754 $ 34,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,430 $ 2,939
Accrued liabilities 1,993 2,204
Accrued payroll and benefits 1,207 1,160
Accrued deferred compensation -- 293
-------- --------
Total current liabilities 5,630 6,596
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 15,000,000 shares
authorized; 8,685,046 shares and 8,555,137 shares
outstanding, respectively 9 9
Additional paid-in capital 35,177 34,521
Accumulated deficit (4,844) (5,852)
-------- --------
30,342 28,678
Less: treasury stock, at cost, 232,520 shares (1,218) (1,218)
-------- --------
Total stockholders' equity 29,124 27,460
-------- --------
$ 34,754 $ 34,056
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
<TABLE>
<CAPTION>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JULY 1, 2000 AND JUNE 26, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
------------------------- -------------------------
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET REVENUE $ 11,021 $ 9,595 $ 22,622 $ 18,596
COST OF REVENUE 4,723 4,639 9,668 8,590
Special charge for write-down of
discontinued product inventories -- 803 -- 803
-------- -------- -------- --------
Gross profit 6,298 4,153 12,954 9,203
-------- -------- -------- --------
OPERATING EXPENSES:
Sales and marketing 3,134 3,071 6,109 6,248
Research and development 1,838 2,079 3,831 3,780
General and administrative 1,226 1,660 2,594 3,062
Special charge -- 982 -- 1,506
-------- -------- -------- --------
Total operating expenses 6,198 7,792 12,534 14,596
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 100 (3,639) 420 (5,393)
OTHER INCOME, NET 474 -- 608 63
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 574 (3,639) 1,028 (5,330)
INCOME TAX PROVISION -- (306) (20) --
-------- -------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 574 (3,945) 1,008 (5,330)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX -- -- -- (117)
-------- -------- -------- --------
NET INCOME (LOSS) $ 574 $ (3,945) $ 1,008 $ (5,447)
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before change in accounting principle $ 0.07 $ (0.49) $ 0.12 $ (0.66)
Cumulative effect of change in accounting principle -- -- -- (0.02)
-------- -------- -------- --------
Net income (loss) $ 0.07 $ (0.49) $ 0.12 $ (0.68)
======== ======== ======== ========
Weighted average common shares outstanding - basic 8,443 8,057 8,413 8,053
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before change in accounting principle $ 0.06 $ (0.49) $ 0.11 $ (0.66)
Cumulative effect of change in accounting principle -- -- -- (0.02)
-------- -------- -------- --------
Net income (loss) $ 0.06 $ (0.49) $ 0.11 $ (0.68)
======== ======== ======== ========
Weighted average common equivalent
shares outstanding - diluted 8,997 8,057 9,065 8,053
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 1, 2000 AND JUNE 26, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
July 1, June 26,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,008 $ (5,447)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 858 1,298
Loss on disposition of equipment -- 142
Change in accounts receivable allowances 162 (932)
(Increase) decrease in accounts receivable (666) 2,252
(Increase) decrease in income taxes receivable 184 (76)
Decrease in inventories 538 969
Decrease in prepaid expenses and other assets 656 891
Increase in deferred income taxes -- (24)
Decrease in accounts payable (509) (1,985)
Increase (decrease) in accrued liabilities (211) 650
Increase (decrease) in accrued payroll and employee benefits 47 (157)
-------- --------
Net cash provided by (used in) operating activities 2,067 (2,419)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (198) (483)
Capitalized software -- (194)
-------- --------
Net cash used in investing activities (198) (677)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 656 83
-------- --------
Net cash provided by financing activities 656 83
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,525 (3,013)
CASH AND CASH EQUIVALENTS, beginning of period 10,431 9,618
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 12,956 $ 6,605
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
MICROTEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts
of Microtest, Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair statement of the results of operations and consolidated
financial position for the interim periods presented. Certain information and
footnote disclosures normally included in full year financial statements have
been condensed or omitted pursuant to interim reporting rules and regulations.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's 1999 Annual Report to shareholders
and report on Form 10-K. The results of operations for the three months and six
months ended July 1, 2000 are not necessarily indicative of the results to be
expected for a full fiscal year.
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.
(2) INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
July 1, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Raw materials $ 1,364 $ 1,154
Work-in-progress 65 99
Finished goods 2,581 3,738
------- -------
4,010 4,991
Less: Allowance for excess and
obsolete inventory (259) (702)
------- -------
$ 3,751 $ 4,289
======= =======
</TABLE>
6
<PAGE> 7
(3) EARNINGS (LOSS) PER SHARE:
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 574 $ (3,945) $ 1,008 $ (5,447)
======= ======== ======= ========
Weighted average common shares
outstanding 8,443 8,057 8,413 8,053
Effect of stock options 554 -- 652 --
------- -------- ------- --------
Weighted average common equivalent
shares outstanding 8,997 8,057 9,065 8,053
======= ======== ======= ========
Basic net income (loss) per share $ 0.07 $ (0.49) $ 0.12 $ (0.68)
======= ======== ======= ========
Diluted net income (loss) per share $ 0.06 $ (0.49) $ 0.11 $ (0.68)
======= ======== ======= ========
</TABLE>
(4) SPECIAL CHARGE:
During the three months ended June 26, 1999, the Company recognized a
special charge of $1.8 million associated with its plan to exit the integrated
high-end CD-ROM enterprise systems business, the related closure of its Nashua,
New Hampshire facility and restructuring its management organization. The
pre-tax special charge primarily consists of $1.0 million in employee severance
and benefits, future lease payments, the write-off of certain fixed assets and
capitalized software, and an increase in the allowance for evaluation units. The
charge also includes $0.8 million for the write-down of discontinued product
inventories that is included as a component of cost of revenue. As of July 1,
2000 and December 31, 1999, the Company had $0.05 million and $0.1 million,
respectively, accrued for employee severance related to the Company's
restructuring. The change in the accrual relates to severance payments made
during the period.
(5) CHANGE IN ACCOUNTING PRINCIPLE:
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities," the Company expensed $0.1 million, after the
effect of income taxes, of previously capitalized international product
translation costs during the first quarter of 1999.
(6) SEGMENTS:
The Company is organized into two reportable business segments: Network
Test and Measurement ("NTM") and Network Appliance and Storage ("NAS").
7
<PAGE> 8
The NTM business segment includes hand-held products used as network
certification and troubleshooting tools in the installation and operation of
computerized networks. The NTM segment consists of devices for testing fiber
optic and copper networks, as well as, active operational local-area networks
(LANs). The NTM business segment consists of products that are used by service
providers and system integrators to perform critical cabling certification and
network diagnostics.
The NAS business segment consists of a family of server appliances and
server products. Server appliances are network infrastructure devices designed
to facilitate the exchange of information over a computing network. The
Company's server appliances use Linux as an open source operating system and
encompass hard disk storage devices, as well as, optical (CD-ROM and DVD-ROM)
storage devices. NAS products are designed to enable organizations to easily
develop, store, manage, and access information and knowledge bases. The NAS
reportable business segment includes the Company's H+H subsidiary that develops
and sells several software products, CD-ROM networking systems and service
maintenance contracts in Europe.
In the second quarter of 1999, the Company announced the
discontinuation of its operations in the high-end CD-ROM enterprise system
business. Exiting the enterprise business, included as a part of the NAS
business segment, allowed the Company to focus the Network Appliance and Storage
Division exclusively on NAS thin-server appliances for the workgroup and
departmental markets.
The Company does not measure assets or operating expenses separately
for the NTM and NAS business segments.
Information related to the operations of the Company in different
business segments for the three months and six months ended July 1, 2000 and
June 26, 1999, respectively, is set forth below (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
NAS NTM Total NAS NTM Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue: 2000 $ 2,260 $ 8,761 $11,021 $ 5,067 $17,555 $22,622
1999 (1) 3,612 5,983 9,595 6,723 11,873 18,596
Gross profit: 2000 $ 1,279 $ 5,019 $ 6,298 $ 3,147 $ 9,807 $12,954
1999 (1) 959 3,194 4,153 2,714 6,489 9,203
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross profit for reportable segments(1) $ 6,298 $ 4,153 $ 12,954 $ 9,203
Unallocated amounts:
Operating expenses (6,198) (7,792) (12,534) (14,596)
Other income, net 474 -- 608 63
-------- -------- -------- --------
Income (loss) before income taxes $ 574 $ (3,639) $ 1,028 $ (5,330)
======== ======== ======== ========
</TABLE>
(1) Includes net revenue and gross profit of $1.6 million and $0.1 million (net
of special charge for write-down of discontinued product inventories of $0.8
million) during the three months ended June 26, 1999, and $3.1 million and $1.0
million (net of special charge for write-down of discontinued product
inventories of $0.8 million) during the six months ended June 26, 1999,
respectively, from the NAS enterprise systems market which the Company exited
during the third quarter of 1999.
8
<PAGE> 9
Net revenues to unaffiliated customers by geographic area for the three
months and six months ended July 1, 2000 and June 26, 1999, respectively,
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
North America $ 6,309 $ 5,984 $12,442 $10,877
International 4,712 3,611 10,180 7,719
------- ------- ------- -------
Net revenues $11,021 $ 9,595 $22,622 $18,596
======= ======= ======= =======
</TABLE>
(7) MAJOR CUSTOMERS:
Major customers accounting for more than 10% of total revenues for the
three months and six months ended July 1, 2000 and June 26, 1999, respectively,
are summarized below. Percentage of revenue is not presented if less than 10%.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
July 1, June 26, July 1, June 26,
Customer 2000 1999 2000 1999
------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Graybar Electric Company, Inc. 11% 11% 10% 12%
Anixter, Inc. 11% -- -- --
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES:
The Company is subject to legal claims in the ordinary course of
business. 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 and April 7, 1999, the Company was named as a
defendant in two purported class action lawsuits filed in the United States
District Court for the District of Arizona. The two lawsuits contain
substantially the same allegations and were brought on behalf of a class of
persons who purchased Microtest common stock between April 14, 1998 and March 2,
1999. The complaints allege claims under Section 10(b) and SEC Rule 10b-5 of the
Securities and Exchange Act of 1934. The claims further allege that the Company
made misrepresentations or omissions concerning its financial statements that
artificially inflated the price of the Company's common stock. On November 29,
1999, a motion to dismiss the lawsuit was filed. On January 10, 2000, the Court
heard arguments on the motion to dismiss. This motion is currently pending. The
Company intends to defend the actions vigorously. The Company
9
<PAGE> 10
is unable to predict the ultimate outcome of this litigation. If the lawsuits
were ultimately determined adversely to the Company, it could have a material
effect on our results of operations and financial condition.
The Securities and Exchange Commission ("SEC") is engaged in an
investigation relating primarily to accounting matters of the Company. They have
requested and received documents from us and taken testimony from certain former
employees. The SEC has not indicated whether they intend to formally expand the
scope of the investigation, or take any other measures. They have not, to date,
asserted any specific claims, or remedy. The Company is unable to predict the
effect, if any, of this inquiry.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Except for the historical information contained herein, this Report
contains forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. Such statements may include, but not be limited to, projections of
revenues, income or loss, capital expenditures, plans for future operations,
financing needs or plans, the impact of inflation, and plans relating to our
products or services, as well as assumptions relating to the foregoing.
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. Additional risk factors that
could cause actual results to differ materially from those expressed in such
forward-looking statements are set forth in Exhibit 99, which is attached hereto
and incorporated by reference into this Quarterly Report on Form 10-Q. 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. This Report should be read in conjunction with our Report
on Form 10-K for the fiscal year ended December 31, 1999.
All references to "we," "our," "us," or "Microtest" refer to Microtest,
Inc. and its subsidiaries.
RESULTS OF OPERATIONS
REVENUE. Net revenue for the three months ended July 1, 2000 was $11.0
million, an increase of 15% from net revenue of $9.6 million for the
corresponding period last year. Net revenue for the six months ended July 1,
2000 was $22.6 million, an increase of 22% from net revenue of $18.6 million for
the corresponding period last year. The increase in net revenue for the three
months ended July 1, 2000, over the corresponding period in 1999, was primarily
due to increased NTM demand for our OMNIScanner(TM), OMNIFiber(TM), and
MICROSCANNER(TM) products. This increase was offset by a decrease in NAS revenue
as the revenue from the newly released FileZerver(TM) product did not fully
offset the decreased revenue from the enterprise business exited in the third
quarter of 1999. The increase in revenue for the six months ended July 1, 2000,
over the corresponding period in 1999, is due to increased NTM growth due to
products introduced in the second half of 1999. Revenue growth, exclusive of the
prior year effect of discontinuance of our NAS enterprise product sales, was 38%
and 46% for the three months and six months ended July 1, 2000, respectively,
over the corresponding periods in 1999.
We distribute our products in both North American and international
markets. North American net revenue was $6.3 million and $6.0 million,
representing 57% and 62% of total net revenue, for the three months ended July
1, 2000 and June 26, 1999, respectively. North American net revenue was $12.4
million and $10.9 million, representing 55% and 59% of total net revenue, for
the six months ended July 1, 2000 and June 26, 1999, respectively. The 5%
increase and 14% increase in North American net revenue for the three months and
six months ended July 1, 2000, respectively, over the corresponding periods in
1999, was primarily attributable to increased domestic demand for our
OMNIScanner and OMNIFiber products.
11
<PAGE> 12
International net revenue was $4.7 million and $3.6 million,
representing 43% and 38% of total net revenue, for the three months ended July
1, 2000 and June 26, 1999, respectively. International net revenue was $10.2
million and $7.7 million, representing 45% and 41% of total net revenue, for the
six months ended July 1, 2000 and June 26, 1999, respectively. International net
revenue increased 31% and 32% for the three months and six months ended July 1,
2000, respectively, over the corresponding periods in 1999, which resulted
primarily from expanding our sales and marketing presence in Europe, Latin
America, and the Asia Pacific region during the latter half of 1999.
GROSS PROFIT. Gross profit was $6.3 million, or 57.1% of net revenue,
for the three months ended July 1, 2000, and $5.0 million, or 51.7% of net
revenue, exclusive of special charges, for the three months ended June 26, 1999.
Gross profit was $13.0 million, or 57.3% of net revenue, for the six months
ended July 1, 2000, and $10.0 million, or 53.8% of net revenue, exclusive of
special charges, for the six months ended June 26, 1999. The increase in gross
margin for the three months and six months ended July 1, 2000, over the
corresponding periods in 1999 (exclusive of special charges), was primarily
attributable to greater sales of higher margin NTM products and a decrease in
the sales of lower margin CD-ROM enterprise systems products. During the three
months ended June 26, 1999, overall gross margin was adversely affected by a
special charge of $0.8 million. The special charge represented the write-down of
discontinued product inventories as a result of our planned exit from the
high-end CD-ROM enterprise business.
SALES AND MARKETING. Sales and marketing expenses were $3.1 million, or
28% of net revenue and 32% of net revenue, for the three months ended July 1,
2000 and June 26, 1999, respectively. Sales and marketing expenses were $6.1
million, or 27% of net revenue, and $6.2 million, or 33% of net revenue, for the
six months ended July 1, 2000 and June 26, 1999, respectively. The decrease in
sales and marketing expenses as a percentage of net revenue for the three months
and six months ended July 1, 2000, compared to the corresponding periods in
1999, is primarily due to reduced expenses as a result of our exiting the CD-ROM
enterprise system NAS business during the third quarter of 1999 and increased
overall revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1.8
million, or 16% of net revenue, and $2.1 million, or 22% of net revenue, for the
three months ended July 1, 2000 and June 26, 1999, respectively. Research and
development expenses were $3.8 million, or 17% of net revenue and 20% of net
revenue, for the six months ended July 1, 2000 and June 26, 1999, respectively.
The decrease in research and development expenses for the three months ended
July 1, 2000, compared to the corresponding period in 1999, is primarily due to
reduced contract research and development services. The decrease in research and
development expenses as a percentage of net revenue for the three months and six
months ended July 1, 2000, compared to the corresponding periods in 1999, is
primarily due increased overall revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.2 million, or 11% of net revenue, and $1.7 million, or 18% of net revenue,
for the three months ended July 1, 2000 and June 26, 1999, respectively. General
and administrative expenses were $2.6 million, or 12% of net revenue, and $3.1
million, or 17% of net revenue, for the six months ended July 1, 2000 and June
26, 1999, respectively. The decrease in general and administrative expenses for
the three months and six months ended July 1, 2000, compared to the
corresponding periods in 1999, as well as the decrease as a percentage of net
revenue for the indicated periods, is due to a decrease in professional fees, as
well as, improved collection of our receivables and thus lower bad debt expense
in 2000.
SPECIAL CHARGE. In the second quarter of 1999 we recorded a special
charge of $1.8 million to reflect the cost of our exiting the high-end CD-ROM
enterprise system business. $1.0 million of this
12
<PAGE> 13
charge represents employee severance and benefits, future lease payments, the
write-off of fixed assets and capitalized software and an increase in our
allowance for evaluation units. The charge also included a $0.8 million
write-down of discontinued product inventories that was included as a component
of cost of revenue. The special charge of $0.5 million recorded in the first
quarter of 1999 represented severance expenses recorded to recognize the
restructuring of our management organization.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. The cumulative
effect of a change in accounting principle, recorded in the first quarter of
1999, reflects the write-off of international product translation costs that had
previously been capitalized. The write-off is in accordance with AICPA Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities."
LIQUIDITY AND CAPITAL RESOURCES
We held cash and cash equivalents of $13.0 million at July 1, 2000
compared to $10.4 million at December 31, 1999. Working capital was $23.8
million at July 1, 2000 compared to $20.9 million at December 31, 1999. During
the six months ended July 1, 2000, cash flows provided by operations were $2.1
million, resulting primarily from net income of $1.0 million, noncash
depreciation and amortization of $0.9 million, decreases in inventory of $0.5
million, income tax receivables of $0.2 million, and other assets of $0.7
million, offset by increases in net trade receivables of $0.5 million and
decreases in accounts payable and accrued liabilities of $0.7 million. Cash
flows used in investing activities were $0.2 million for the six months ended
July 1, 2000, primarily for purchases of equipment. Cash flows provided by
financing activities were $0.6 million for the six month ended July 1, 2000, due
to the exercise of common stock options and issuance of common stock in
connection with our employee stock purchase plan.
Historically, we have financed our cash requirements principally
through cash flows from operating activities, the sale of common stock through
an initial public offering in October 1992 and the exercise of stock options. We
have no long-term debt and expect that our existing working capital, together
with cash flows from operations, will be sufficient to meet our operating and
capital needs for at least the next year.
13
<PAGE> 14
MICROTEST, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are subject to litigation in the ordinary course
of business. Our insurance coverage may not be adequate to cover all liabilities
arising out of such claims. We are not engaged in any legal proceedings in the
ordinary course of business that are expected to have a material adverse effect
on our financial condition or results of operations.
We, Richard G. Meise, our former Chief Executive Officer, Charles
Mihaylo, our former Chief Operating Officer and John O'Block, our former Chief
Financial Officer have been named as defendants in two purported class action
lawsuits: Great Neck Capital Appreciation Investment Partnership, L.P., et. al.
v. Microtest, Inc., et. al., CIV 99-0438 PHX EHC filed on March 8, 1999, in
United States District Court for the District of Arizona and Banks v. Microtest,
Inc., et. al., CIV 99-672 PHX EHC filed on April 7, 1999 in United States
District Court for the District of Arizona. The two lawsuits contain
substantially the same allegations and were brought on behalf of a class of
persons who purchased our common stock between April 14, 1998 and March 2, 1999.
The complaints allege claims under Section 10(b) and SEC Rule 10b-5 of the
Securities and Exchange Act of 1934. The claims further allege that we made
misrepresentations or omissions concerning our financial statements and public
disclosures that artificially inflated the price of our common stock. The
plaintiffs seek an unspecified amount of actual damages, attorney's fees and
costs. On November 29, 1999, a motion to dismiss the lawsuit was filed. On
January 10, 2000, the Court heard arguments on the motion to dismiss. This
motion is currently pending. We intend to defend the actions vigorously. We are
unable to predict the ultimate outcome of this litigation. If the lawsuits were
ultimately determined adversely to us, it could have a material effect on our
results of operations and financial condition.
The Securities and Exchange Commission ("SEC") is engaged in an
investigation relating primarily to our accounting matters. They have requested
and received documents from us and taken testimony from certain former
employees. The SEC has not indicated whether they intend to formally expand the
scope of the investigation, or take any other measures. They have not, to date,
asserted any specific claims, or remedy. We are unable to predict the effect, if
any, of this inquiry.
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Shareholders' Meeting was held on May 30,
2000.
(b) At the Annual Shareholders' Meeting, proposals were considered
for:
(i) the election of William C. Turner and Dianne C. Walker as
Class I Incumbent Directors to serve for three year terms
and;
(ii) an increase to the number of shares available under the
Long Term Incentive Plan.
The director nominees who were elected to the Company's Board
of Directors for a three year term and the number of shares cast for
and the number of shares withheld, with respect to each of these
persons, are as follows:
<TABLE>
<CAPTION>
Proposal Votes For Votes Withheld
------------------------------- --------- --------------
<S> <C> <C>
Election of William C. Turner
as a Class I Incumbent Director 8,118,939 66,171
Election of Dianne C. Walker
as a Class I Incumbent Director 8,118,939 66,171
</TABLE>
The following Directors' terms of office continued after the
2000 Annual Shareholders' Meeting:
Kent C. Mueller
Vincent C. Hren
The amendment to the Long Term Incentive Plan was approved by
the shareholders. The number of shares cast in favor of the approval,
the number against, the number abstaining, and the number of broker
non-votes are listed below. Broker non-votes represent shares for which
the broker did not have discretionary authority to vote on a particular
matter and for which no instructions were received; thus, those shares
are not considered as present and entitled to vote with respect to that
matter. A matter is approved if a majority of the votes cast are cast
in its favor.
<TABLE>
<CAPTION>
Broker
Proposal Votes For Votes Against Abstain Non-Vote
-------------------------------- --------- ------------- ------- ---------
<S> <C> <C> <C> <C>
Approval of the amendment to the
Long Term Incentive Plan 2,725,212 356,326 54,558 5,049,014
</TABLE>
15
<PAGE> 16
ITEM 5. OTHER INFORMATION
During the second quarter of 2000, the resignations of Roger C.
Ferguson and Steven G. Mihaylo as Directors of the Company were accepted. Roger
B. Hackett was appointed to the Board of Directors as a replacement Director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Page or
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
27 Financial Data Schedule Filed herewith
99 Private Securities Litigation Reform Act of 1995 Safe Harbor Filed herewith
Compliance Statement for Forward-Looking Statements
</TABLE>
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MICROTEST, INC.
August 14, 2000 /s/ Vincent C. Hren
------------------------------------------
Vincent C. Hren
President and Chief Executive Officer
August 14, 2000 /s/ William R. Crowell
------------------------------------------
William R. Crowell
Vice President, Secretary and Chief
Financial Officer
(Principal Financial and Accounting Officer)
16
