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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1995
COMMISSION FILE NUMBER 0-17393
MEGATEST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2422195
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1321 RIDDER PARK, SAN JOSE, CALIFORNIA 95131
(408) 437-9700
(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 such
filing requirements for the past 90 days. Yes X No
----- ------
The number of shares outstanding of the Registrant's Common Stock as of
February 28, 1995, was 7,180,176.
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MEGATEST CORPORATION
FORM 10-Q
SIX MONTHS ENDED FEBRUARY 28, 1995
INDEX
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
February 28, 1995 and August 31, 1994 . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for
the three-month and six-month periods ended
February 28, 1995 and February 28, 1994 . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the six-month periods ended February 28, 1995 and
February 28, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEGATEST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
ASSETS
FEBRUARY 28, AUGUST 31,
1995 1994
------------ -----------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 2,743 $ 19,404
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . -- 10,069
Accounts receivable, less allowances of $262 and $262 . . . . . . . . . 19,860 23,064
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,930 23,531
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,832 3,532
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 706 668
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 59,071 80,268
Property & equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 16,565 12,122
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 8,693
-------- --------
Total assets . . . . . . . . . . . . . . . . . $ 86,636 $101,083
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,100 $ --
Current portion of long-term obligations . . . . . . . . . . . . . . . 54 66
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . 14,734 18,075
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,842 4,198
Customer advances and deferred revenues . . . . . . . . . . . . . . . . 4,351 2,083
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . 26,081 24,422
-------- --------
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . 388 414
-------- --------
Stockholders' equity:
Common stock: $0.001 par value per share;
Shares outstanding: 7,180 and 7,171 . . . . . . . . . . . . . . . . . 7 7
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 80,670 80,656
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (20,510) (4,416)
-------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 60,167 76,247
-------- ---------
Total liabilities and stockholders' equity . . $ 86,636 $ 101,083
======== =========
The accompanying notes are an integral part of these financial statements.
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MEGATEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, SIX MONTHS ENDED FEBRUARY 28,
------------------------------- -----------------------------
1995 1994 1995 1994
---- ---- ---- ----
Product sales . . . . . . . . . . . . . . . . $ 18,247 $ 23,103 $ 30,449 $ 45,325
Development revenues . . . . . . . . . . . .
-- 188 -- 413
--------- --------- -------- --------
Net revenues . . . . . . . . . . . . 18,247 23,291 30,449 45,738
--------- --------- -------- --------
Cost of sales . . . . . . . . . . . . . . . 12,923 12,820 21,036 24,865
Engineering and product development . . . . . 5,054 3,823 9,474 7,580
Selling, general and administrative . . . . . 4,617 4,228 9,097 8,636
Write-off of acquired in-process technology .
-- -- 8,837 --
--------- --------- -------- --------
Total costs and expenses . . . . . . 22,594 20,871 48,444 41,081
--------- --------- -------- --------
Income (loss) from operations . . . . . . . . (4,347) 2,420 (17,995) 4,657
Other income/(expense) . . . . . . . . . . . 19 370 353 504
--------- --------- -------- --------
Income (loss) before income taxes . . . . . . (4,328) 2,790 (17,642) 5,161
(Provision) benefit for income taxes . . . . 700 (699) 1,548 (1,292)
--------- --------- -------- --------
Income (loss) before accounting change . . . (3,628) 2,091 (16,094) 3,869
Cumulative effect of adopting
new accounting for income taxes . . . . .
-- -- -- 1,700
--------- --------- --------- --------
Net income (loss) . . . . . . . . . . . . . . $ (3,628) $ 2,091 $ (16,094) $ 5,569
========= ========= ========= =======
Income (loss) per share before
accounting change . . . . . . . . . . . . $ (0.51) $ 0.29 $ (2.24) $ 0.55
========= ========= ========= =======
Net income per share . . . . . . . . . . . . $ (0.51) $ 0.29 $ (2.24) $ 0.79
========= ========= ========= =======
Average common and common equivalent
shares outstanding . . . . . . . . . . . . 7,179 7,319 7,177 7,044
========= ========= ========== =======
The accompanying notes are an integral part of these financial statements.
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MEGATEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED FEBRUARY 28,
-----------------------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($ 16,094) $ 5,569
Reconciliation to net cash provided by (used for)
operating activities:
Cumulative effect of change in accounting for income taxes . . . . . . . . . . -- (1,700)
Write-off of acquired in-process technology . . . . . . . . . . . . . . . . . 8,837 --
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 --
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 2,066 1,476
Provision for deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . (300)
Changes in:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,204 1,904
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,738) (1,541)
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . (38) (486)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . (5,441) 2,770
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,356) --
Customer advances and deferred revenues . . . . . . . . . . . . . . . . . 2,268 (687)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (477)
-------- --------
Net cash provided by (used for) operating activities . . . . . . . . . . . . . . . (10,534) 6,828
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of tester product line and related technology . . . . . . . . . . . . . (13,897) --
Investment in equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . (1,500) --
Purchases of restricted investments . . . . . . . . . . . . . . . . . . . . . . . . -- (7,747)
Proceeds from sale of short-term investments . . . . . . . . . . . . . . . . . . . 10,069 (2,560)
Property and equipment purchases . . . . . . . . . . . . . . . . . . . . . . . . . (5,471) (2,323)
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (404) --
----------- --------
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . (11,203) (12,630)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 13,617
Borrowings under notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 5,100
Repayments of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . (38) (6)
-------- --------
Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . 5,076 13,611
-------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . (16,661) 7,809
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,404 17,278
-------- --------
End of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,743 $ 25,087
======== ========
The accompanying notes are an integral part of these financial statements.
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MEGATEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
as of February 28, 1995 and for the three-month and six-month periods ended
February 28, 1995 and February 28, 1994 have been prepared on substantially the
same basis as the annual consolidated financial statements and reflect all
adjustments (consisting of only normal recurring adjustments) which are
necessary for a fair statement of the results for the periods presented. The
statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission, but omit certain information and footnote
disclosures necessary to present the statements in accordance with generally
accepted accounting principles. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended August 31, 1994.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
FEBRUARY 28, 1995 AUGUST 31, 1994
----------------- ---------------
Purchased parts . . . . . . . . . . . . . . . . $ 8,557 $ 5,705
Assemblies in process . . . . . . . . . . . . . 9,090 8,285
Finished goods . . . . . . . . . . . . . . . . 14,283 9,541
-------- --------
Inventories. . . . . . . . . . . . . . $ 31,930 $ 23,531
======== ========
NOTE 3 - INCOME TAXES
Effective September 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for
Income Taxes." The cumulative effect of adopting FAS 109 resulted in a
one-time credit to net income of $1,700, or $0.24 per share for fiscal 1994.
FAS 109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or
income tax returns. In estimating future tax consequences, FAS 109 generally
considers all expected future events other than enactments of changes in the
tax law or rates.
In applying the provisions of FAS 109, management fully reserved net
deferred tax assets that may be realized beyond one year after the balance
sheet date because of the uncertainty regarding their realization. The
resulting reduction in the valuation allowance for deferred tax assets of $300
has been reflected as an increase in the benefit for income taxes.
NOTE 4. ACQUISITION
On November 22, 1994, the Company acquired the 1149 Tester product
line and follow-on in-process technology (the "Product Line") of Micro
Component Technology, Inc. ("MCT"). The assets acquired include substantially
all of the equipment, inventory and intellectual property including the
follow-on in-process technology, and the assumption of certain liabilities
associated with the Product Line. Of the amount paid, $2,000 was placed in
escrow (i) to indemnify the Company in the event of a breach of any of the
representations and warranties made by MCT in the purchase agreement, (ii) to
secure performance of MCT's obligations under the purchase agreement, and (iii)
to insure against any shortfalls discovered in the equipment or inventory
intended to be acquired through the Company's post-closing audit of the assets
acquired.
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MEGATEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The acquisition of the Product Line has been accounted for as a
purchase and, accordingly, the results of operations and cash flows of the
Product Line have been included only from the date of acquisition. Excluding
the one-time write-off of in-process technology of $8,837, the results of
operations for the Product Line from the date of acquisition through February
28, 1995 were not material to Megatest's results of operations for the
six-month period ended February 28, 1995. The total purchase price of the
acquisition was as follows:
Cash paid to MCT $ 12,800
Other acquisition costs 1,097
---------
$ 13,897
=========
The allocation of the Company's purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed is based on
preliminary estimates from information currently available. A final allocation
of the purchase price will be determined during the year when appraisals and
other studies are completed. The preliminary purchase price allocation is
summarized as follows:
Inventories $ 5,661
Property and equipment 1,038
In-process technology 8,837
Goodwill 461
--------
Assets acquired 15,997
--------
Accounts payable 1,903
Accrued warranty 197
--------
Liabilities assumed 2,100
--------
Net assets acquired $ 13,897
========
The in-process technology was charged to income during the quarter
ended November 30, 1994. In addition, the Company purchased 315,790 shares of
MCT's nonvoting Series A Preferred Stock at a price of $4.75 per share for a
total of $1,500 cash on November 23, 1994. The investment in equity securities
is included in other assets at February 28, 1995 and is stated at cost, which
approximates fair value.
NOTE 5. NOTES PAYABLE
On December 15, 1994, the Company obtained a $7,500 domestic bank line
of credit which expires in January 1996. The agreement provides for borrowings
up to the lesser of 80% of eligible domestic accounts receivable or the $7,500
committed credit amount. In addition, on February 9, 1995, the Company
obtained an additional $5,000 line of credit guaranteed by the Export-Import
Bank of the United States to support export sales. This agreement provides for
borrowings up to the lesser of 90% of eligible foreign accounts receivable plus
70% of eligible inventory to support such receivables, or the $5,000 committed
credit amount. Borrowings under these lines bear interest at prime (9.0% at
February 28, 1995) plus 1.0% and 0.5% for the domestic and foreign lines of
credit, respectively, and are collateralized by a security interest in
substantially all of the Company's previously unencumbered tangible and
intangible assets. The terms of the credit agreements require, among other
terms, minimum amounts of tangible net worth, minimum ratios of current assets
to current liabilities, and maximum ratios of indebtedness to net worth. The
credit agreements preclude the Company from taking certain actions without
prior bank approval. Transactions subject to such prohibition include the
declaration of cash dividends, certain significant asset acquisitions or
dispositions, incurrence of certain additional indebtedness, and changing the
nature of the Company's business. At February 28, 1995, the Company had
borrowed $5,100 under these lines of credit, but was in violation of certain
covenants. Subsequent to February 28, 1995, the Company received a waiver of
such non-compliance and amended certain financial covenants for the duration of
the agreements. As amended, the credit agreements require the Company to
maintain quarterly profitability beginning with the quarter ending May 31,
1995.
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MEGATEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6. STOCKHOLDER LITIGATION
On December 6, 1994, the Company, its Chief Executive Officer and its
former Chief Financial Officer were named as defendants in a complaint filed in
the United States District Court for the Northern District of California by a
stockholder who claims to represent a class of stockholders that purchased
shares of the Company's common stock between May 18, 1993 and December 5, 1994.
The complaint is based on provisions of federal securities laws and seeks
equitable relief and unspecified damages for losses allegedly resulting from,
among other things, improper disclosure.
On April 7, 1995, the parties filed with the Court a stipulation
seeking a voluntary dismissal of the action without prejudice.
NOTE 7. SUBSEQUENT EVENTS
On March 6, 1995, the Company borrowed an additional $3,400 under the
domestic line of credit, thereby reaching the maximum amount available under
that line. An additional $1,300 remained available for future borrowing under
the foreign line of credit as of February 28, 1995, based on eligible foreign
accounts receivable and inventory on such date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
In the second quarter of fiscal 1995, Megatest reported net revenues
of $18.2 million. While the Company reported record incoming orders during the
quarter, many of such orders were received late in the quarter or were
for shipment in a later quarter, and thus could not be converted to revenue
during the second quarter. As a result, the Company reported a net loss of
$3.6 million for the three months ended February 28, 1995. During the second
quarter of fiscal 1995, the Company continued its operating cost reduction
efforts, including the implementation of a 10% salary reduction for all
salaried employees which ended February 28, 1995. Excluding
one-time charges totaling approximately $1.4 million (see Cost of Sales and
Engineering and Product Development discussions, below), the costs related to
the 1149 product line acquired in November 1994, and product material expenses,
the Company's base operating spending for the second quarter of fiscal 1995 was
4% and 15% below second and fourth quarters, respectively, of fiscal 1994.
Acquisition of Product Line
On November 22, 1994, the Company acquired the 1149 Tester product
line and follow-on in-process technology (the "Product Line") from Micro
Component Technology, Inc. ("MCT") for $12.8 million. In addition, the Company
incurred acquisition related expenses of $1.1 million. The purchase of the
Product Line included substantially all of the assets and intellectual property
and the assumption of certain liabilities, approximating $2.1 million,
associated with the Product Line. The Product Line features a low cost logic
IC test system that is expected to complement the Company's Polaris logic test
systems, and opens markets in which the Company has not previously participated
with its existing products, such as FPGAs, PLDs and certain microcontrollers.
As a result of the acquisition of the Product Line, the Company incurred a
one-time write-off of in-process technology of $8.8 million, which contributed
to the Company's first quarter loss. Excluding the one-time write-off of
in-process technology, the results of operations for the Product Line from the
date of acquisition through February 28, 1995 were not material to Megatest's
results of operations.
Net Revenues
The Company's net revenues for the three-month and six-month periods
ended February 28, 1995 decreased 21.6% and 33.4%, respectively, from the
corresponding periods in the prior fiscal year. The Company experienced
declines in sales in all geographic areas and in all product lines during the
first quarter of fiscal 1995, and believes such declines were due primarily to
delayed orders from its customers. Of the $18.2 million in total net revenue
in the second quarter of fiscal 1995, 30% consisted primarily of revenue
from sales of spare parts and service contracts.
Cost of Sales and Gross Margin on Product Sales
Gross margin as a percent of net revenues for the three-month and
six-month periods ended February 28, 1995 was 29.2% and 30.9%, respectively.
For the second quarter, the 29.2% gross margin represents a decline of 16
percentage points from the same period of fiscal 1994, and a decline of 4.3
percentage points from the first quarter of fiscal 1995. The low gross margin
in the second quarter of fiscal 1995 resulted primarily from the low shipment
level, as manufacturing spending could not be scaled back in proportion to the
decline in revenues from the anticipated rate of sales. In addition, the
Company increased inventory reserves by $0.9 million for certain components
which the Company plans to upgrade to higher performance levels to better match
customer requirements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Engineering and Product Development Expense
Engineering and product development expenses for the three-month and
six-month periods ended February 28, 1995 increased 32.2% and 25.0%,
respectively, from the corresponding periods in fiscal 1994. As a percentage
of net revenue, engineering and product development expenses increased 11
percentage points to 27.7% from the corresponding three-month period of fiscal
1994, and increased 15 percentage points to 31.1% from the corresponding
six-month period of fiscal 1994. The increase in engineering and product
development expenditures includes $0.5 million related to the Product Line,
$0.5 million of certain costs associated with accelerated development of the
Company's new Vega Series logic testers, and the Company's continuing
commitment to maintaining a high level of engineering and product development
effort. The Company intends to continue to invest significant resources in the
development of next generation products for both memory and logic applications.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of
fiscal 1995 increased 9% from the same quarter of the prior fiscal year. For
the six months ended February 28, 1995, selling, general, and administrative
expenses increased 5% from the corresponding six-month period of fiscal 1994.
The year-to-year increase in dollar expenditures was attributable primarily to
increased hiring and employee compensation, and the addition of the Product
Line. Selling, general and administrative expenses are expected to continue to
increase both sequentially and year-to-year.
Other Income and Expense
Other income was minimal for the quarter ended February 28, 1995,
compared to $0.4 million for the same quarter in fiscal 1994. Other income
consists primarily of interest income from the investment of the Company's cash
balances offset by interest expense on notes payable. The decrease in net
interest income in the second quarter of fiscal 1995 is attributable to lower
cash balances and the interest expense incurred on line-of-credit borrowings
necessitated by the Product Line acquisition and net cash used for operations
in the first and second quarters of fiscal 1995.
Income Taxes
The Company's effective tax rate for the second quarter of fiscal 1995
was 16% compared to 25% for the same quarter of the prior fiscal year. The
reduction in the rate was primarily attributable to adjustments to the deferred
tax valuation allowance associated with the Company's lower than anticipated
earnings during the quarter. The Company anticipates that the quarterly
effective tax rate for the remainder of fiscal 1995 and for fiscal 1996 will be
approximately 20% to 25%.
Net Income/(Loss)
The Company had a net loss of $3.6 and $16.1 million for the
three-month and six-month periods ended February 28, 1995, versus net income of
$2.1 million and $5.6 million, respectively, for the corresponding periods in
the prior fiscal year. The year-to-date net loss included an $8.8 million
write-off in the first quarter of in-process technology associated with the
purchase of the 1149 tester product line from MCT on November 22, 1994. Net
income for last year's first quarter included a gain of $1.7 million related to
the adoption of FAS 109, "Accounting for Income Taxes." The per share loss was
$.51 for the three-month period and $2.24 for the six-month period ended
February 28, 1995, versus net income per share of $.29 and $0.55, respectively,
for the same periods last year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's total current assets were 2.3 times total current
liabilities at February 28, 1995, compared to 3.3 times at August 31, 1994 and
4.1 times at February 28, 1994. In November 1994, the Company used $13.9
million of its available cash to acquire the Product Line and made a $1.5
million investment in MCT Preferred Stock. The MCT acquisition included
$5.7 million of 1149 Tester inventory, $1.0 million of equipment and other
fixed assets, and the assumption of $2.1 million of trade payables, warranty
and other liabilities associated with the 1149 Tester product line.
Accounts receivable decreased $3.2 million during the first six months
of fiscal 1995 due to the low revenue level recorded for the first and second
quarters and to continued emphasis on receivables management. Excluding
inventory acquired from MCT, inventories increased $2.7 million during the
first six months of fiscal 1995, primarily due to the low shipment level and
demonstration units at customer sites. The Company continues to monitor
inventory levels carefully based on current and projected sales levels and has
implemented programs to reduce inventory going forward.
Investing activities used $11.2 million in the first half of fiscal
1995, compared to $12.6 million in the comparable period last year. Excluding
cash payments to acquire the Product Line and MCT Preferred Stock, investing
activities consisted primarily of purchases of $5.5 million of property and
equipment, offset by the sale of $10.1 million of short-term investments to
fund the Product Line acquisition. Financing activities provided $5.1 million
in the first half of fiscal 1995, representing borrowings under the Company's
lines of credit.
At February 28, 1995, the Company's cash, cash equivalents and
short-term investments were $2.7 million, compared to $29.5 million at August
31, 1994. The decrease primarily reflects the cash used to acquire the Product
Line from MCT and to fund operations during the first and second quarters. On
December 15, 1994, the Company obtained a $7,500 domestic bank line of credit
which expires in January 1996. The agreement provides for borrowings up to the
lesser of 80% of eligible domestic accounts receivable or the $7.5 million
committed credit amount. In addition, on February 9, 1995, the Company
obtained an additional $5.0 million line of credit guaranteed by the
Export-Import Bank of the United States to support export sales. This
agreement provides for borrowings up to the lesser of 90% of eligible foreign
accounts receivable plus 70% of eligible inventory to support such receivables,
or the $5.0 million committed credit amount. Borrowings under these lines bear
interest at prime (9.0% at February 28, 1995) plus 1.0% and 0.5% for the
domestic and foreign lines of credit, respectively, and are collateralized by a
security interest in substantially all of the Company's previously unencumbered
tangible and intangible assets. The terms of the credit agreements require,
among other terms, minimum amounts of tangible net worth, minimum ratios of
current assets to current liabilities, and maximum ratios of indebtedness to
net worth. The credit agreements preclude the Company from taking certain
actions without prior bank approval. Transactions subject to such prohibition
include the declaration of cash dividends, certain significant asset
acquisitions or dispositions, incurrence of certain additional indebtedness,
and changing the nature of the Company's business. At February 28, 1995, the
Company had borrowed $5.1 million under these lines of credit, but was in
violation of certain covenants. Subsequent to February 28, 1995, the Company
received a waiver of such non-compliance and amended certain financial
covenants for the duration of the agreements. As amended, the credit
agreements require the Company to maintain quarterly profitability beginning
with the quarter ending May 31, 1995.
The Company believes that its cash flow from operations, together with
its cash balances and funds available under working capital lines of credit,
will provide sufficient financing resources to meet both working capital and
capital expenditure requirements through fiscal 1995 based on recent order
rates and anticipated revenue levels. However, the Company is also in
discussions with several lenders to secure asset-based long-term debt financing
to further enhance its liquidity and to provide additional flexibility to fund
future growth.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 6, 1994, the Company, its Chief Executive Officer and
former Chief Financial Officer were named as defendants in a complaint filed in
the United States District Court for the Northern District of California by a
stockholder who claims to represent a class of stockholders that purchased
shares of the Company's common stock between May 18, 1993 and December 5, 1994.
The complaint is based on provisions of federal securities laws and seeks
equitable relief and unspecified damages for losses allegedly resulting from,
among other things, improper disclosure.
On April 7, 1995, the parties filed with the Court a stipulation
seeking a voluntary dismissal of the action without prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of the Company, held on January
12, 1995 in San Jose, California, the Stockholders (i) elected members of the
Company's Board of Directors; (ii) approved amendments to the Company's 1990
Stock Option Plan increasing the number of shares reserved for issuance
thereunder by 1,000,000 shares and limiting the number of shares issuable under
options granted under the Plan to an employee in any fiscal year; (iii) did not
approve a proposed amendment to the Company's Restated Certificate of
Incorporation to eliminate cumulative voting; and (iv) ratified the Company's
appointment of Price Waterhouse as independent auditors.
The vote for nominated directors was as follows:
NOMINEE FOR WITHHELD
--------------------- --------- -------------
John E. Halter 4,943,869 74,493
James W. Bagley 4,969,472 48,890
Stephen J. Bisset 4,969,397 48,965
Winston H. Chen, Ph.D. 4,969,472 48,890
David A. Hodges 4,969,422 48,940
Steven J. Sharp 4,411,963 606,399
The vote for amending the 1990 Stock Option Plan was as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--------------- ------------- ----------- -------------
3,478,036 631,020 1,815 907,491
The vote for amending the Restated Certificate of Incorporation was as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--------------- ------------- ----------- -------------
2,349,156 1,757,432 4,283 907,491
The vote for ratifying the appointment of Price Waterhouse was as follows:
FOR AGAINST ABSTAIN
--------------- ------------- -----------
4,993,858 21,771 2,733
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
10.11 Loan and Security Agreement between the Registrant and Bank of the West dated February 9, 1995.
10.12 Borrower Agreement between the Registrant and Bank of the West dated February 10, 1995.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On Form 8-K/A filed with the Commission on February 6,
1995, the Company amended its Form 8-K dated November 22, 1994 to
provide financial statements and other proforma information
regarding the assets it acquired from Micro Component Technology,
Inc. on November 22, 1994.
All other items specified by Part II of this report are
inapplicable and accordingly have been omitted.
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MEGATEST CORPORATION
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 thereunto duly authorized, in the City of San Jose and State of
California, on April 11, 1995.
MEGATEST CORPORATION
Date: April 11, 1995 By: /s/ John E. Halter
-----------------------
John E. Halter
President
Chief Executive Officer
Date: April 11, 1995 By: /s/ Paul W. Emery II
-----------------------
Paul W. Emery II
Vice President, Finance
Chief Financial Officer
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