<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 SEPTEMBER 30, 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 NOVEMBER 11, 2000, THERE WERE 8,780,422 SHARES OF COMMON STOCK OUTSTANDING,
EXCLUSIVE OF TREASURY SHARES HELD BY THE REGISTRANT.
<PAGE> 2
MICROTEST, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations-
Three Months and Nine Months Ended
September 30, 2000 and September 25, 1999 4
Consolidated Statements of Cash Flows-
Nine Months Ended
September 30, 2000 and September 25, 1999 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 16
<PAGE> 3
<TABLE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
September 30, December 31,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,602 $ 10,431
Restricted investments -- 293
Accounts receivable, net of allowances for doubtful accounts of $382
and $171, and sales returns of $443 and $422, respectively 7,815 7,828
Inventories, net 4,238 4,289
Prepaid expenses and other current assets 652 864
Income taxes receivable 2,682 2,777
Deferred income taxes 1,030 1,030
-------- --------
Total current assets 30,019 27,512
-------- --------
PROPERTY AND EQUIPMENT, NET 1,830 2,238
-------- --------
OTHER ASSETS:
Capitalized software, net of accumulated amortization of $2,060
and $1,510, respectively 710 1,260
Deferred income taxes 1,783 1,783
Other 576 1,263
-------- --------
Total other assets 3,069 4,306
-------- --------
$ 34,918 $ 34,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,467 $ 2,939
Accrued liabilities 2,050 2,204
Accrued payroll and benefits 1,106 1,160
Accrued deferred compensation -- 293
-------- --------
Total current liabilities 5,623 6,596
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 15,000,000 shares authorized;
8,770,422 shares and 8,555,137 shares outstanding, respectively 9 9
Additional paid-in capital 35,584 34,521
Accumulated deficit (5,080) (5,852)
-------- --------
30,513 28,678
Less: treasury stock, at cost, 232,520 shares (1,218) (1,218)
-------- --------
Total stockholders' equity 29,295 27,460
-------- --------
$ 34,918 $ 34,056
======== ========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
3
<PAGE> 4
<TABLE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET REVENUE $ 10,493 $ 11,297 $ 33,115 $ 29,893
COST OF REVENUE 4,517 5,146 14,185 13,736
Special charge for write-down of
discontinued product inventories -- -- -- 803
-------- -------- -------- --------
Gross profit 5,976 6,151 18,930 15,354
-------- -------- -------- --------
OPERATING EXPENSES:
Sales and marketing 3,044 2,985 9,153 9,233
Research and development 1,992 1,726 5,823 5,506
General and administrative 1,445 1,220 4,039 4,282
Special charge (credit) -- (230) -- 1,276
-------- -------- -------- --------
Total operating expenses 6,481 5,701 19,015 20,297
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (505) 450 (85) (4,943)
OTHER INCOME, NET 249 73 857 136
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (256) 523 772 (4,807)
INCOME TAX BENEFIT 20 -- -- --
-------- -------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (236) 523 772 (4,807)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX -- -- -- (117)
-------- -------- -------- --------
NET INCOME (LOSS) $ (236) $ 523 $ 772 $ (4,924)
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before change in accounting principle $ (0.03) $ 0.06 $ 0.09 $ (0.60)
Cumulative effect of change in accounting principle -- -- -- (0.01)
-------- -------- -------- --------
Net income (loss) $ (0.03) $ 0.06 $ 0.09 $ (0.61)
======== ======== ======== ========
Weighted average common shares outstanding - basic 8,509 8,078 8,445 8,062
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before change in accounting principle $ (0.03) $ 0.06 $ 0.09 $ (0.60)
Cumulative effect of change in accounting principle -- -- -- (0.01)
-------- -------- -------- --------
Net income (loss) $ (0.03) $ 0.06 $ 0.09 $ (0.61)
======== ======== ======== ========
Weighted average common equivalent
shares outstanding - diluted 8,509 8,123 9,029 8,062
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE> 5
<TABLE>
MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999
(IN THOUSANDS)
<CAPTION>
Nine Months Ended
---------------------------
September 30, September 25,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 772 $ (4,924)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,701 1,834
Loss on disposition of equipment -- 142
Change in accounts receivable allowances 232 (892)
(Increase) decrease in accounts receivable (219) 403
(Increase) decrease in income taxes receivable 95 (72)
Decrease in inventories 51 2,459
Decrease in prepaid expenses and other assets 899 873
Increase in deferred income taxes -- (24)
Decrease in accounts payable (472) (2,213)
Decrease in accrued liabilities (154) (316)
Increase (decrease) in accrued payroll and employee benefits (54) 299
-------- --------
Net cash provided by (used in) operating activities 2,851 (2,431)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (743) (651)
Capitalized software -- (194)
-------- --------
Net cash used in investing activities (743) (845)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 1,063 126
-------- --------
Net cash provided by financing activities 1,063 126
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,171 (3,150)
CASH AND CASH EQUIVALENTS, beginning of period 10,431 9,618
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 13,602 $ 6,468
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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 nine
months ended September 30, 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>
September 30, December 31,
2000 1999
------- -------
(unaudited)
<S> <C> <C>
Raw materials $ 1,464 $ 1,154
Work-in-progress 40 99
Finished goods 2,927 3,738
------- -------
4,431 4,991
Less: Allowance for excess and
obsolete inventory (193) (702)
------- -------
$ 4,238 $ 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 Nine Months Ended
------------------------------- -------------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (236) $ 523 $ 772 $ (4,924)
======== ======== ======== ========
Weighted average common shares
outstanding 8,509 8,078 8,445 8,062
Effect of stock options -- 45 584 --
-------- -------- -------- --------
Weighted average common equivalent
shares outstanding 8,509 8,123 9,029 8,062
======== ======== ======== ========
Basic net income (loss) per share $ (0.03) $ 0.06 $ 0.09 $ (0.61)
======== ======== ======== ========
Diluted net income (loss) per share $ (0.03) $ 0.06 $ 0.09 $ (0.61)
======== ======== ======== ========
</TABLE>
(4) SPECIAL CHARGE:
During the three months ended September 25, 1999, the Company
recorded a special credit of $0.2 million as part of its exit from the
integrated high-end CD-ROM enterprise systems business. The credit related to
the sale of the Company's active enterprise maintenance contracts and its
enterprise customer database. For the nine months ended September 25, 1999, the
Company recorded net special charges of $2.1 million to reflect the cost of its
exit from 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 special charge also includes $0.8 million
for the 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 the Company's management organization. These charges were
offset by the special credit of $0.2 million that was recorded in the third
quarter of 1999. As of September 30, 2000 and December 31, 1999, the Company had
approximately $23,000 and $100,000, respectively, accrued for employee severance
related to the Company's restructuring. The change in the accrual relates
to severance payments made during the period.
7
<PAGE> 8
(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").
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 separately for the NTM and NAS
business segments.
8
<PAGE> 9
Information related to the operations of the Company in different
business segments for the three months and nine months ended September 30, 2000
and September 25, 1999, respectively, is set forth below (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- -----------------------------------------
NAS NTM Total NAS NTM Total
--- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue: 2000 $ 2,438 $ 8,055 $10,493 $ 7,505 $25,610 $ 33,115
1999 (1) 2,790 8,507 11,297 9,908 19,985 29,893
Gross profit: 2000 $ 1,368 $ 4,608 $ 5,976 $ 4,515 $14,415 $ 18,930
1999 (1) 1,472 4,679 6,151 4,188 11,166 15,354
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ---------------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Gross profit for reportable segments (1) $ 5,976 $ 6,151 $ 18,930 $ 15,354
Unallocated amounts:
Operating expenses ( 6,481) (5,701) (19,015) (20,297)
Other Income, net 249 73 857 136
--------- --------- --------- ----------
Income (loss) before income taxes $ (256) $ 523 $ 772 $ (4,807)
========= ========= ========= ==========
</TABLE>
(1) Includes net revenue and gross profit of $0.5 million and $0.3 million
during the three months ended September 25, 1999, and $3.6 million and $1.3
million (net of special charge for write-down of discontinued product
inventories of $0.8 million) during the nine months ended September 25, 1999,
respectively, from the NAS CD-ROM enterprise systems business which the Company
exited during the third quarter of 1999.
Net revenues to unaffiliated customers by geographic area for the three
months and nine months ended September 30, 2000 and September 25, 1999,
respectively, follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ------------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
North America $ 6,904 $ 7,518 $19,346 $18,394
International 3,589 3,779 13,769 11,499
------- ------- ------- -------
Net revenues $10,493 $11,297 $33,115 $29,893
======= ======= ======= =======
</TABLE>
9
<PAGE> 10
(7) MAJOR CUSTOMERS:
Major customers accounting for more than 10% of total revenues for the
three months and nine months ended September 30, 2000 and September 25, 1999,
respectively, are summarized below. Percentage of revenue is not presented if
less than 10%.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------------------------------
September 30, September 25, September 30, September 25,
Customer 2000 1999 2000 1999
------------------------------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Graybar Electric Company, Inc. 12% 16% 11% 13%
Anixter -- 10% -- --
</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. During November
1999, a motion to dismiss the lawsuit was filed. During September 2000, the
Court ruled in favor of the Company and granted the Company's motion to dismiss
the lawsuit without prejudice. An amended complaint has been subsequently filed.
The Company has, in turn, filed a motion to dismiss the amended complaint. The
Company intends to continue to vigorously defend these actions. The Company 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 the Company and taken testimony from
certain former employees. During November 2000, the SEC requested and the
Company agreed to extend the statute of limitations for their investigation
until April 30, 2001. 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
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(9) NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
that the FASB believes were causing difficulties in implementation. SFAS 133,
as amended by SFAS 138, is not expected to have a material impact on the
Company's consolidated results of operations, financial position, or cash flows.
11
<PAGE> 12
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 September 30, 2000 was
$10.5 million, representing a 7% decrease from net revenue of $11.3 million for
the corresponding period last year. Net revenue for the nine months ended
September 30, 2000 was $33.1 million, representing an increase of 11% from net
revenue of $29.9 million for the corresponding period last year. Exclusive of
the effect of the NAS enterprise systems business exited in the prior year,
revenue decreased by 3% and increased by 26% for the three months and nine
months ended September 30, 2000, respectively, in comparison to similar periods
in 1999.
Our products are distributed in both North American and international
markets. North American net revenue was $6.9 million and $7.5 million,
representing approximately 66% of total revenue, for the three months ended
September 30, 2000 and September 25, 1999, respectively. North American revenue
was flat, exclusive of the effect of the NAS enterprise systems business exited
in the prior year. North American net revenue was $19.3 million and $18.4
million, representing 58% and 62% of total net revenue, for the nine months
ended September 30, 2000 and September 25, 1999, respectively. Year-to-date
North American revenue increased 30%, exclusive of the effect of the NAS
enterprise systems business exited in the prior year, primarily the result of
additional revenues from NTM products introduced during late 1999.
International net revenue was $3.6 million and $3.8 million,
respectively, for the three months ended September 30, 2000 and September 25,
1999, respectively, representing 34% of
12
<PAGE> 13
total net revenue for both periods. The decrease in international revenue is
primarily attributable to a stronger U.S. dollar to Euro currencies, which
resulted in higher end-user prices for our products, and, to a lesser extent, to
unfavorable currency translations from our German H + H subsidiary.
International net revenue was $13.8 million and $11.5 million, respectively, for
the three quarters ended September 30, 2000 and September 25, 1999,
respectively, representing 42% and 38% of total net revenue, respectively, for
these periods. The increase in year-to-date international net revenue is the
result of expansion of our sales and marketing activities within these markets
during the last half of 1999, offset by the effect of currency differences
discussed above.
GROSS PROFIT. Gross profit was $6.0 million, or 57.0% of net revenue,
for the three months ended September 30, 2000, and $6.2 million, or 54.4% of net
revenue for the three months ended September 25, 1999. Gross profit was $19.0
million, or 57.2% of net revenue, for the nine months ended September 30, 2000,
and $16.2 million, or 54.0% of net revenue, exclusive of special charges, for
the nine months ended September 25, 1999. The increase in gross margin
percentage for the three months and nine months ended September 30, 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 nine
months ended September 25, 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 $3.0 million, or
29% and 27% of net revenue, for the three months ended September 30, 2000 and
September 25, 1999, respectively. Sales and marketing expenses were $9.2
million, or 28% and 31% of net revenue, for the nine months ended September 30,
2000 and September 25, 1999, respectively. The increase in sales and marketing
expenses as a percentage of net revenue for the three months ended September 30,
2000, compared to the corresponding period in 1999 is due to increased marketing
expenditures in the NAS segment for our products introduced during 2000. The
decrease in sales and marketing expenses as a percentage of net revenue for the
nine months ended September 30, 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 $2.0
million, or 19% of net revenue, and $1.7 million, or 15% of net revenue, for the
three months ended September 30, 2000 and September 25, 1999, respectively.
Research and development expenses were $5.8 million, or 18% of net revenue, and
$5.5 million, or 18% of net revenue, for the nine months ended September 30,
2000 and September 25, 1999, respectively. The increase in research and
development expenses for the three months and nine months ended September 30,
2000, compared to the corresponding periods in 1999, is primarily due to
increased investment in research and development activities in connection with
our NAS products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.4 million, or 13% of net revenue, and $1.2 million, or 11% of net revenue,
for the three months ended September 30, 2000 and September 25, 1999,
respectively. General and administrative expenses were $4.0 million, or 12% of
net revenue, and $4.3 million, or 14% of net revenue, for the nine months ended
September 30, 2000 and September 25, 1999, respectively. The increase in general
and administrative expenses for the three months ended September 30, 2000,
compared to the corresponding period in 1999, as well as the increase as a
percentage of net revenue for the
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<PAGE> 14
indicated period, is primarily due to increased occupancy costs. The decrease in
general and administrative expenses for the nine months ended September 30,
2000, compared to the corresponding period in 1999, as well as the decrease as a
percentage of net revenue for the indicated period, is primarily due to a
decrease in professional fees.
SPECIAL CHARGE (CREDIT). In the third quarter of 1999, we recorded a
special credit of $0.2 million as part of our exit from the integrated high-end
CD-ROM enterprise systems business. The credit related to the sale of our
active enterprise maintenance contracts and our enterprise customer database.
For the nine months ended September 25, 1999, we recorded net special charges
of $2.1 million to reflect the cost of our exiting the integrated high-end
CD-ROM enterprise systems business. Approximately $1.0 million of this pre-tax
special 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 $0.8
million for the 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. These charges
were offset by the special credit of $0.2 million that was recorded in the
third quarter of 1999.
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 $13.6 million at September 30,
2000 compared to $10.4 million at December 31, 1999. Working capital was $24.4
million at September 30, 2000 compared to $20.9 million at December 31, 1999.
During the nine months ended September 30, 2000, cash flows provided by
operations were $2.9 million, resulting primarily from net income of $0.8
million, noncash depreciation and amortization of $1.7 million, decreases in
inventory of $0.1 million, income tax receivables of $0.1 million, and other
assets of $0.9 million, offset by decreases in accounts payable and accrued
liabilities of $0.7 million. Cash flows used in investing activities were $0.7
million for the nine months ended September 30, 2000, primarily for purchases of
equipment. Cash flows provided by financing activities were $1.1 million for the
nine month ended September 30, 2000, associated with stock issued in connection
with employee benefit plans.
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 the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
that the FASB believes were causing difficulties in implementation. SFAS 133, as
amended by SFAS 138, is not expected to have a material impact on the Company's
consolidated results of operations, financial position, or cash flows.
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<PAGE> 15
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. During
September 2000, the Court ruled in our favor and granted our motion to dismiss
the lawsuit without prejudice. An amended complaint has been subsequently filed.
We have, in turn, filed a motion to dismiss the amended complaint. We intend to
continue to vigorously defend these actions. 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. During November 2000, the SEC requested and we agreed to extend the
statute of limitations for their investigations until April 30, 2001. They have
not, to date, asserted any specific claims, or remedy. We are unable to predict
the effect, if any, of this inquiry.
15
<PAGE> 16
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.
November 13, 2000 /s/ Vincent C. Hren
---------------------------------------
Vincent C. Hren
President and Chief Executive Officer
November 13, 2000 /s/ William R. Crowell
---------------------------------------
William R. Crowell
Vice President, Secretary and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
16
