<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
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 March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________________ to ________________
Commission File Number 0-20215
MICROTOUCH SYSTEMS, INC.
(Exact name of Registrant as specified in its Charter)
Massachusetts 04-2802971
- ------------------------------------------ ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Griffin Park, Methuen, MA 01844
- ------------------------------------------ ------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: 508-659-9000
- ------------------------------------------ ------------
Indicate by check mark whether the Registrant (1) has filed all reports 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 last 90 days.
Yes X No
-----
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practical date.
As of April 28, 1997 there were outstanding: 7,869,101 shares of common stock of
the Registrant.
Total number of pages: 12
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations - Three
Months Ended March 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 1997 5
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 9,758 $ 9,818
Marketable securities......... 23,705 26,922
Accounts receivable, net of
allowances of $4,315 at
March 31, 1997 and $3,940 at
December 31, 1996............ 19,451 15,976
Inventories.......................... 18,683 15,077
Deferred income taxes......... 5,666 5,505
Prepaid expenses and other
current assets............... 1,153 952
----------- -----------
Total current assets....... 78,416 74,250
Property and equipment, net...... 8,553 7,197
Other assets..................... 3,871 3,601
----------- -----------
$ 90,840 $ 85,048
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 9,772 $ 7,026
Accrued expenses.................... 8,222 8,852
----------- -----------
Total current liabilities......... 17,994 15,878
Commitments and contingencies (Note 6)
Stockholders' equity
Preferred stock, $.01 par
value per share--500,000 shares
authorized, none issued and
outstanding at March 31, 1997 and
December 31, 1996................. --- ---
Common stock, $.01 par value
per share--authorized - 20,000,000
at March 31, 1997 and December 31,
1996; 8,220,623 issued at March 31,
1997 and December 31, 1996........ 82 82
Additional paid-in capital.......... 61,074 60,096
Treasury stock at cost -
376,740 and 536,140 shares
at March 31, 1997 and
December 31, 1996................. (5,579) (7,963)
Cumulative translation
adjustment........................ (831) (533)
Net unrealized gain on
securities available for sale..... 73 105
Retained earnings................... 18,027 17,383
----------- -----------
Total stockholders' equity........ 72,846 69,170
----------- -----------
$ 90,840 $ 85,048
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------- ------
<S> <C> <C>
Net sales............................... $ 30,076 $ 21,055
Cost of sales........................... 18,728 13,129
--------- --------
Gross profit.......................... 11,348 7,926
Operating expenses:
Research and development.............. 1,827 1,512
Sales and marketing................... 4,690 3,274
General and administrative............ 1,876 1,364
Amortization of intangible assets..... 119 111
--------- --------
Total operating expenses........... 8,512 6,261
--------- --------
Operating income...................... 2,836 1,665
Other income............................ 378 302
Arbitration costs....................... --- 127
--------- --------
Income before provision for income
taxes.................................. 3,214 1,840
Provision for income taxes.............. 1,157 672
--------- --------
Net income.............................. $ 2,057 $ 1,168
========= ========
Earnings per share:
Primary............................... $ 0.25 $ 0.14
Fully diluted......................... $ 0.25 $ 0.14
Weighted average common and common
equivalent shares outstanding:
Primary............................... 8,250 8,065
Fully diluted......................... 8,250 8,065
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31,1997
(AMOUNTS IN 000S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Net Unrealized
Gain(Loss) On
Common Stock Additional Cumulative Securities
-------------------- Paid-in Translation Available for Retained
Shares Amount Capital Adjustment Sale Earnings
--------- --------- --------- ------------ ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 8,220,623 $82 $60,096 $(533) $105 $17,383
Exercise of stock options (1,413)
Compensation expense related
to common stock options
& other adj. 8
Effect of exchange rate (298)
changes
Tax benefit related to
exercise of stock options and
disqualifying dispositions 970
Unrealized loss on
securities available for sale,
net of tax (32)
Net income 2,057
--------- --------- --------- ------------ ---------------- --------
Balance March 31, 1997 8,220,623 $82 $61,074 $(831) $ 73 $18,027
========= ========= ========= ============ ================ ========
<CAPTION>
Treasury Stock Total
------------------ Stockholders'
Shares Amount Equity
------- -------- ----------------
<S> <C> <C> <C>
Balance December 31, 1996 (536,140) $(7,963) $69,170
Exercise of stock options 159,400 2,384 971
Compensation expense
related to common stock
options & other adj. 8
Effect of exchange rate
changes (298)
Tax benefit related to
exercise of stock options
and disqualifying
dispositions 970
Unrealized loss on
securities available for
sale, net of tax (32)
Net income 2,057
------- -------- ----------------
Balance March 31, 1997 (376,740) $(5,579) $72,846
======= ======== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN 000S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,057 $ 1,168
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities--
Depreciation and amortization 675 460
Deferred income taxes (15) 113
Compensation expense related to
common stock options 8 4
(Increase) decrease in assets--
Accounts receivable (3,474) (1,357)
Inventories (3,606) (890)
Prepaid expenses and other assets (590) (279)
Increase (decrease) in
liabilities--
Accounts payable 2,726 1,708
Accrued expenses (754) (285)
---------- ----------
Net cash provided by (used in) operating activities (2,973) 642
Cash flows provided by(used in)
investing activities:
Purchase of property and equipment, net (1,852) (698)
Sale and maturity of marketable securities 6,647 1,519
Purchase of marketable securities (3,525) (1,463)
---------- ----------
Net cash provided by (used in) investing 1,270 (642)
activities
Cash flows provided by financing
activities:
Exercise of stock options 971 115
Purchase of treasury stock --- (486)
Tax benefit from exercise of stock
options and disqualifying dispositions 970 144
---------- ----------
Net cash provided by (used in)
financing activities 1,941 (227)
Effect of exchange rates on cash (298) (539)
---------- ----------
Net (decrease) in cash (60) (766)
Cash, beginning of period 9,818 5,706
---------- ----------
Cash, end of period $ 9,758 $ 4,940
========== ==========
Supplemental disclosures of cash flow
information:
Interest paid $ 91 $ 16
========== ==========
Income taxes paid $ 548 $ 36
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(1) Nature of Business
------------------
MicroTouch Systems, Inc. develops, manufactures and sells touch
sensitive input systems including touch-sensitive screens, digitizers for pen
computers and kiosk enclosures, as well as electronic digital PC based white
boards.
(2) Consolidated Financial Statements
---------------------------------
The accompanying consolidated financial statements include the
accounts of MicroTouch Systems, Inc. and its wholly-owned subsidiaries (the
Company). All significant intercompany accounts, transactions and profits have
been eliminated.
(3) Interim Consolidated Financial Statements
-----------------------------------------
The accompanying consolidated financial statements as of March 31,
1997 and for the three- month periods ended March 31, 1997 and 1996 include the
accounts of the Company, and have not been audited by independent public
accountants; however, these statements, prepared in accordance with generally
accepted accounting principles, reflect, in the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position as of March 31, 1997, and the results of
operations and cash flows for the three-month periods ended March 31, 1997 and
1996. The results of operations for the three-month period ended March 31, 1997
are not necessarily indicative of the results to be expected for any other
interim period or the entire year.
These consolidated financial statements do not include all disclosures
associated with annual consolidated financial statements and, accordingly,
should be read in conjunction with the footnotes contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
(4) Earnings Per Share
------------------
Earnings per share data are computed using the weighted average number
of shares of common and dilutive common equivalent shares outstanding during the
year. Dilutive common equivalent shares consist of stock options and are
calculated using the treasury stock method.
(5) Recent Accounting Pronouncements
--------------------------------
In February 1997, SFAS No. 128 "Earnings Per Share" was released
effective for fiscal years ending after December 15, 1997. SFAS No. 128
requires the presentation of basic earnings per share (EPS) and diluted EPS.
Basic EPS replaces the primary EPS calculation required under APB Opinion 15.
Basic EPS excludes dilution and is calculated by using the weighted average of
common shares outstanding for the period. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion 15. The pro-forma effect of this
accounting change on the March 31, 1997 EPS data and the March 31 and December
31, 1996 previously reported EPS data is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
Per share amounts 1997 1996 1996
---- ---- ------------
<S> <C> <C> <C>
Primary EPS as reported $.25 $.14 $.71
Effect of SFAS No. 128 .01 .01 .03
---- ---- ----
Basic EPS $.26 $.15 $.74
</TABLE> ==== ==== ====
There is no pro-forma effect on diluted EPS as a result of the adoption of SFAS
No. 128.
7
<PAGE>
(6) Legal Proceedings
-----------------
The Company was involved in an international arbitration entitled
MicroTouch Systems, Inc. v. Nissha Printing Co. Ltd., ("Nissha") which was under
the auspices of the International Chamber of Commerce ("ICC"). The case was
based on the Company's claims that Nissha breached non-competition provisions
and other terms of a distribution agreement between the Company and Nissha.
The Company was informed in January, 1997 that while it had won the case
based on the merits of its claim, any recovery of damages was time barred under
the terms of the original agreement between the two parties in the dispute. As
a result, the Company may be required to pay a portion or all of Nissha's fees
and costs associated with the arbitration, which could be as much as $1,900,000,
as determined by the arbitrators in the case. As of March 31, 1997, the Company
has not accrued any amount related to Nissha's fees and costs because the
decision of the arbitration is unknown and the amounts involved can not be
reasonably estimated. The Company will expense fees and costs awarded to Nissha,
if any, upon the arbitrators' decision.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following table sets forth, for the fiscal periods indicated, the percentage
of net sales represented by certain items in MicroTouch's statements of
operations:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
QUARTER ENDED MARCH 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of Sales 62.3 62.4
------------- ------------
Gross Profit 37.7 37.6
Operating Expenses:
Research & Development 6.1 7.2
Sales & Marketing 15.6 15.5
General & Administrative 6.2 6.5
Amortization of Intangible Assets 0.4 0.5
------------- ------------
Total Operating Expenses 28.3 29.7
Operating Income 9.4 7.9
Other Income 1.3 1.4
Arbitration costs --- .6
Income Before Provision for Income Tax 10.7 8.7
Net Income 6.8% 5.5%
</TABLE>
NET SALES Net sales in the quarter ended March 31, 1997 increased over the
corresponding period of 1996 by $9,021,000 or 43%. The increase in net sales
was largely due to increased sales to gaming and entertainment customers and to
sales from the kiosk and resistive touchscreen businesses. International sales
accounted for 37% of net sales for the period, representing an increase from 34%
in the first quarter of 1996, primarily due to increased sales volume in Europe.
GROSS PROFIT Gross profit in the quarter ended March 31, 1997 increased from the
corresponding period of 1996 by $3,422,000 or 43% to $11,348,000. As a
percentage of net sales, gross profit increased slightly from 37.6% in the first
quarter of 1996 to 37.7% in the first quarter of 1997. The increase in gross
profit as a percentage of net sales reflects increased margins in the
touchscreen and kiosk businesses partially offset by production and rework costs
associated with the newly launched PC whiteboard product (Ibid/TM/).
RESEARCH AND DEVELOPMENT Research and development expenses for the quarter ended
March 31, 1997 increased over the corresponding period of 1996 by $315,000 or
21%. As a percentage of net sales, research and development expenses decreased
from 7.2% in the first quarter of 1996 to 6.1% in the first quarter of 1997. The
increase in research and development expenses resulted primarily from continued
development of the Ibid/TM/ product line and from development projects in
touchscreen technologies, especially resisitive products.
9
<PAGE>
SALES AND MARKETING Sales and marketing expenses in the quarter ended March 31,
1997 increased over the corresponding period of 1996 by $1,416,000 or 43%, to
$4,690,000. The increase in sales and marketing expenses resulted primarily from
new product introduction costs associated with the Ibid/TM/ Business Products
Division, as well as expenses resulting from two new international sales offices
that the Company opened in Italy and Taiwan after the first quarter of 1996 and
from general increased spending levels to support sales growth, including
commissions on increased sales levels.
GENERAL AND ADMINISTRATIVE General and administrative expenses in the quarter
ended March 31, 1997 increased from the corresponding period of 1996 by $512,000
or 38% to $1,876,000. As a percentage of net sales, general and administrative
expenses decreased from 6.5% for the first quarter of 1996 to 6.2% for the first
quarter of 1997. The increased spending primarily reflects the ongoing
administrative expenses associated with expanding the infrastructure to support
continued growth.
AMORTIZATION OF INTANGIBLE ASSETS For the quarter ended March 31, 1997,
operating expenses included $119,000 of amortization relating to various
acquisitions and purchases of technologies, as compared to $111,000 for the
quarter ended March 31, 1996.
OPERATING INCOME Operating income in the quarter ended March 31, 1997 increased
from the corresponding period of 1996 by $1,171,000 or 70% to $2,836,000. As a
percentage of net sales, operating income increased from 7.9% in the first
quarter of 1996 to 9.4% for the first quarter of 1997. The increase in
operating income reflects the lower spending in research and development as a
percent of sales and increased operating leverage due to the 43% increase in net
sales over 1996. Domestic operations accounted for 77.7% of operating income in
the first quarter of 1997 as compared to 98.6% in the first quarter of 1996
reflecting the increased operating leverage of the international operations on
the increased international sales.
OTHER INCOME Other income in the quarter ended March 31, 1997 increased from the
corresponding period of 1996 by $76,000 or 24% to $378,000. This included a
foreign currency gain of $41,000 versus a $6,000 loss in 1996. Interest income,
net of interest expenses, on the Company's cash and investment portfolio for the
first quarter of 1997 was $319,000 compared to $308,000 for the first quarter of
1996, reflecting an increase in investment yields in the Company's bond
portfolio. Other income also included $18,000 in recognized gains from sales of
investments required to support capital needs during the first quarter of 1997.
ARBITRATION COSTS The Company incurred no arbitration cost during the first
quarter of 1997, versus $127,000 incurred during the comparable quarter of 1996,
related to its international arbitration versus Nissha Printing Company Ltd.,
(Nissha). The Company was informed in January 1997, that while it had won the
case based on the merits of its claim, any recovery of damages was time barred
under the terms of the original agreement between the two parties in the
dispute. As a result, the Company may be required to pay a portion or all of
Nissha's fees and costs associated with the arbitration, which could be as much
as $1,900,000, as determined by the arbitrators in the case. As of March 31,
1997, the Company has not accrued any amount related to Nissha's fees and costs
because the decision of the arbitration is unknown and the amounts involved can
not be reasonably estimated. The Company will expense the fees and costs awarded
to Nissha, if any, upon the arbitrators' decision.
PROVISION FOR INCOME TAXES The Company's effective tax rates were 36.0% and
36.5%, in the first quarter of 1997 and 1996, respectively. The effective tax
rates in both periods differed from the federal statutory rate of 34% primarily
as a result of the provision for state income taxes and the inability of the
company to record a tax benefit from certain foreign operating loss
carryforwards, partially offset by the benefit related to the Company's foreign
sales corporation and tax exempt interest income.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had net working capital of $60,422,000,
including approximately $33,463,000 in cash, cash equivalents and marketable
securities. The Company reported net cash used in operating activities of
$2,973,000 for the quarter ended March 31, 1997. The use of cash was required to
support both the expanding touchscreen business and the new Ibid product line.
Additionally, the Company maintains a $3,000,000 bank line of credit. As of
March 31, 1997, the Company had no borrowings under its bank line of credit.
The Company is currently constructing a 57,000 square-foot facility on land
purchased in 1995. During the quarter ended March 31, 1997 the Company incurred
$951,000 of costs associated with the construction. The total construction cost
is expected to be between $2.5 and $3 million and should be ready for occupancy
by June 1997.
Pending operational needs, the Company has invested its cash in investment
grade, interest-bearing securities. The Company believes that these cash
investments, together with anticipated cash flows from operations pursuant to
its current operating plan, will be sufficient to meet the Company's working
capital and capital expenditure requirements, at least through 1998. While the
Company regularly evaluates acquisition candidates, conducts preliminary
discussions regarding acquisitions and intends to pursue acquisition
opportunities available to it, there can be no assurance that any such
acquisition will be made or if any such acquisition is completed, that cash
consideration will be offerred by the Company.
The discussion contained in this section, as well as elsewhere in this Form 10-
Q, may contain forward-looking statements based on the current expectations of
the Company's management. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Company was involved in an international arbitration entitled
MicroTouch Systems, Inc. v. Nissha Printing Co. Ltd., ("Nissha") which was under
the auspices of the International Chamber of Commerce ("ICC"). The case was
based on the Company's claims that Nissha breached non-competition provisions
and other terms of a distribution agreement between the Company and Nissha.
The Company was informed in January, 1997 that while it had won the case
based on the merits of its claim, any recovery of damages was time barred under
the terms of the original agreement between the two parties in the dispute. As
a result, the Company may be required to pay a portion or all of Nissha's fees
and costs associated with the arbitration, which could be as much as $1,900,000,
as determined by the arbitrators in the case. As of March 31, 1997, the Company
has not accrued any amount related to Nissha's fees and costs because the
decision of the arbitration is unknown and the amounts involved can not be
reasonably estimated. The Company will expense fees and costs awarded to Nissha,
if any, upon the arbitrators' decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule. Filed herewith.
(b) None
11
<PAGE>
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.
MicroTouch Systems, Inc.
Dated: May 14, 1997 BY: /s/ Geoffrey P. Clear
-------------------------
Geoffrey P. Clear
Vice President -
Finance & Administration,
Chief Financial Officer &
Treasurer
12
<PAGE>
EXHIBIT INDEX
27. Financial Data Schedule. Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,758
<SECURITIES> 23,705
<RECEIVABLES> 23,766
<ALLOWANCES> 4,315
<INVENTORY> 18,683
<CURRENT-ASSETS> 78,416
<PP&E> 13,811
<DEPRECIATION> 5,258
<TOTAL-ASSETS> 90,840
<CURRENT-LIABILITIES> 17,944
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 72,764
<TOTAL-LIABILITY-AND-EQUITY> 90,840
<SALES> 30,076
<TOTAL-REVENUES> 30,076
<CGS> 18,728
<TOTAL-COSTS> 18,728
<OTHER-EXPENSES> 8,099
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 3,214
<INCOME-TAX> 1,157
<INCOME-CONTINUING> 2,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,057
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
