<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 September 30, 1999
[ ] 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: 978-659-9000
- ----------------------------- ------------
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 October 2, 1999 there were outstanding: 6,672,071 shares of common stock
of the Registrant.
Total number of pages: 15
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MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations - Three
And Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income -
Three and Nine Months Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
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MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in 000s except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 4,396 $ 5,471
Marketable securities.............................................. 17,910 32,191
Accounts receivable, net of allowances of $2,887 at Sept 30,
1999 and $4,955 at December 31, 1998.............................. 25,743 23,265
Inventories........................................................ 17,959 15,954
Deferred income taxes.............................................. 6,455 6,837
Prepaid expenses and other current assets.......................... 1,135 1,217
-------------- ------------
Total current assets......................................... 73,598 84,935
Property and equipment, net.......................................... 20,002 17,452
Other assets......................................................... 2,802 1,958
-------------- ------------
$ 96,402 $ 104,345
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................................................... $ 0 $ 3,760
Accounts payable................................................... 9,733 9,336
Accrued payroll and related costs.................................. 3,267 3,011
Accrued expenses................................................... 10,277 9,768
-------------- ------------
Total current liabilities.................................... 23,277 25,875
Long-term notes payable.............................................. 74 101
-------------- ------------
Total Liabilities............................................ 23,351 25,976
Stockholders' equity
Preferred stock, $.01 par value per share--
500,000 shares authorized, none issued and outstanding
at September 30, 1999 and December 31, 1998..................... -- --
Common stock, $.01 par value per share--authorized -
20,000,000 at Sept. 30, 1999 and December 31, 1998;
8,355,847 and 8,256,128 issued at Sept. 30, 1999 and
December 31, 1998.............................................. 83 82
Additional paid-in capital......................................... 63,615 62,613
Treasury stock at cost - 1,683,776 and 959,576 shares at
Sept. 30, 1999 and December 31, 1998............................ (23,676) (13,503)
Accumulated other comprehensive income/(loss) (Note 5)............. (1,515) (1,382)
Retained earnings.................................................. 34,544 30,559
-------------- ------------
Total stockholders' equity................................... 73,051 78,369
-------------- ------------
$ 96,402 $ 104,345
============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in 000's except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.............................................. $ 38,552 $ 34,948 $ 116,324 $ 107,800
Cost of sales.......................................... 25,053 21,353 74,355 66,826
--------- --------- --------- ---------
Gross profit........................................... 13,499 13,595 41,969 40,974
Operating expenses:
Research and development............................. 3,054 2,773 9,432 7,839
Sales and marketing.................................. 4,817 5,067 15,880 15,855
General and administrative........................... 2,809 2,502 8,208 7,334
Amortization of intangible assets.................... 59 121 273 381
--------- --------- --------- ---------
Total operating expenses.......................... 10,739 10,463 33,793 31,409
--------- --------- --------- ---------
Operating income....................................... 2,760 3,132 8,176 9,565
Other income/(expense)................................. 424 311 988 538
Litigation costs....................................... -- -- 3,303 --
--------- --------- --------- ---------
Income before provision for income taxes............... 3,184 3,443 5,861 10,103
Provision for income taxes............................. 1,019 1,102 1,876 3,233
--------- --------- --------- ---------
Net income............................................. $ 2,165 $ 2,341 $ 3,985 $ 6,870
========= ========= ========= =========
Earnings per share:
Basic................................................ $ 0.31 $ 0.30 $ 0.57 $ 0.88
Diluted.............................................. $ 0.31 $ 0.30 $ 0.56 $ 0.86
Weighted average common and common
equivalent shares:
Basic................................................ 6,881 7,686 7,008 7,794
Diluted.............................................. 7,091 7,815 7,156 7,960
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in 000s)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,985 $ 6,870
Adjustments to reconcile net income to net cash provided by
(used in) operating activities--
Depreciation and amortization 3,684 4,872
Deferred income taxes 382 --
Compensation expense related to common stock options 23 191
(Increase) decrease in assets--
Accounts receivable (2,478) (5,212)
Inventories (2,005) 4,569
Prepaid expenses and other assets (1,021) 407
Increase in liabilities--
Accounts payable 397 755
Accrued expenses 894 652
------------ -----------
Net cash provided by operating activities 3,861 13,104
Cash flows provided by (used in) investing activities:
Purchase of property and equipment, net (5,732) (7,431)
Sale and maturity of marketable securities 15,340 5,180
Purchase of marketable securities (1,387) (11,621)
------------ -----------
Net cash provided by (used in) investing activities 8,221 (13,872)
Cash flows provided by financing activities:
Exercise of stock options and sale of common stock, net 850 521
Purchase of treasury stock (10,173) (7,316)
Decrease in notes payable (3,760) --
Increase (decrease) in long term debt (27) 105
------------ -----------
Net cash (used in) financing activities (13,110) (6,690)
Effect of exchange rates on cash (47) (1,063)
------------ -----------
Net (decrease) in cash and cash equivalents (1,075) (8,521)
Cash and cash equivalents, beginning of period 5,471 9,477
------------ -----------
Cash and cash equivalents, end of period $ 4,396 $ 956
============ ===========
Supplemental disclosures of cash flow information:
Interest paid $ 63 $ 40
============ ===========
Income taxes paid $ 2,859 $ 1,281
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in 000s)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 2,165 $ 2,341 $ 3,985 $ 6,870
Currency translation adjustment 765 (1,153) (3) (986)
Unrealized (loss) on marketable securities,
net of tax (59) -- (130) (5)
-------- --------- -------- --------
Comprehensive Income $ 2,871 $ 1,188 $ 3,852 $ 5,879
======== ========= ======== ========
</TABLE>
6
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MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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
whiteboards.
(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.
Certain reclassifications have been made to the 1998 Financial Statements
to conform to current year presentation.
(3) Interim Consolidated Financial Statements
-----------------------------------------
The accompanying consolidated financial statements as of September 30, 1999 and
for the three-month and nine-month periods ended September 30, 1999 and 1998
include the accounts of the Company, and are unaudited; 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 September 30, 1999, and the results of operations and cash flows
for the three-month and nine-month periods ended September 30, 1999 and 1998.
The results of operations for the three-month and nine-month periods ended
September 30, 1999 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, 1998.
(4) Earnings per Share
------------------
Basic earnings per share data are computed using the weighted average
number of common shares outstanding during the year. Diluted earnings per share
are computed using the weighted average number of common shares outstanding
during the year and dilutive potential common shares. Dilutive potential common
shares consist of stock options and are calculated using the treasury stock
method.
Effective January 1, 1997 the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The
calculation of basic and diluted earnings per share is as follows:
7
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
September 30, September 30,
-------------- -------------
1999 1998 1999 1998
---- ----- ---- ----
Basic Earnings Per Share (Amounts in 000's except per share data)
- ------------------------
<S> <C> <C> <C> <C>
Net Income: $2,165 $2,341 $3,985 $6,870
------ ------ ------ ------
Weighted Average Common Shares
Outstanding: 6,881 7,686 7,008 7,794
------ ------ ------ ------
Basic Earnings Per Share $ 0.31 $ 0.30 $ 0.57 $ 0.88
------ ------ ------ ------
Diluted Earnings Per Share
- --------------------------
Net Income: $2,165 $2,341 $3,985 $6,870
------ ------ ------ ------
Weighted Average Common Shares
Outstanding: 6,881 7,686 7,008 7,794
Weighted Average Number of
Dilutive
Potential Common Shares: 210 129 148 166
------ ------ ------ ------
Weighted Average Number of Shares
Outstanding as Adjusted: 7,091 7,815 7,156 7,960
------ ------ ------ ------
Diluted Earnings Per Share: $ 0.31 $ 0.30 $ 0.56 $ 0.86
------ ------ ------ ------
</TABLE>
(5) Comprehensive Income
--------------------
Effective January 1, 1998 the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements. Comprehensive income includes all changes in a company's equity
including, among other things, foreign currency translation adjustments and
unrealized gains and losses on marketable securities classified as available-
for-sale. Because cumulative translation adjustments are considered a component
of permanently invested unremitted earnings of subsidiaries outside of the
United States, no taxes are provided on such amounts.
(6) Segment Information
-------------------
Effective December 31, 1998 the Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information (SFAS
No. 131). SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing
their performance. The Company's chief operating decision maker is the Chief
Executive Officer (CEO).
8
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The Company operates in one industry segment consisting of the development,
manufacture and sale of touch sensitive input systems. The Company's
technologies are managed as one segment, or one strategic unit, because it
offers similar products in similar markets and the factors determining strategic
decisions are comparable for all products and markets.
(7) Litigation Expense
------------------
The Company has been a defendant in a case entitled Behne v. MicroTouch
Systems Inc., in the United States District Court in the Northern District of
California. The case arose from claims by Ms. Behne, a former employee of
MicroTouch, regarding gender discrimination, retaliation and misrepresentation
during her employment at the Company. In March, 1999 a jury found the Company
not liable on the discrimination and retaliation claims, but awarded the
plaintiff approximately $2,600,000 in compensatory and punitive damages under
the misrepresentation claim. While this matter continues under the appeals
process, the Company has established a reserve for the full amount of the
judgement, as well as estimated associated legal fees, in the amount of
$3,303,000.
9
<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
---------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 65.0 61.1 63.9 62.0
------------ ------------- -------------- -------------
Gross Profit 35.0 38.9 36.1 38.0
Operating Expenses:
Research & Development 7.9 7.9 8.1 7.3
Sales & Marketing 12.5 14.5 13.7 14.7
General & Administrative 7.3 7.2 7.1 6.8
Amortization of Intangible Assets 0.2 0.3 0.2 0.3
------------ ------------- -------------- -------------
Total Operating Expenses 27.9 29.9 29.1 29.1
------------ ------------- -------------- -------------
Operating Income 7.1 9.0 7.0 8.9
Other Income 1.1 0.9 0.8 0.5
Arbitration costs -- -- 2.8 --
------------ ------------- -------------- -------------
Income Before Provision for Income Tax 8.2 9.9 5.0 9.4
Net Income 5.6 6.7 3.4 6.4
</TABLE>
Net Sales Net sales in the quarter ended September 30, 1999 increased over the
corresponding period of 1998 by $3,604,000 or 10% to $38,552,000. For the nine-
month period ended September 30, 1999, net sales increased $8,524,000 or 8% to
$116,324,000. The increase in both the three and nine-month periods ended
September 30, 1999 were due to volume increases in North America, partially
offset by lower than anticipated sales in Europe and earthquake related power
outages in Taiwan, which delayed shipments in late September. For the quarter
ended September 30, 1999, international sales accounted for 42% of net sales for
the period, representing a decrease from 43% in the third quarter of 1998, and
reflecting the Taiwan disruption. For the nine-month period ended September 30,
1999, international sales accounted for 42% of net sales as compared to 47% for
the nine-month period ended September 30, 1998. The decrease reflected the
decline in European volume in the first half of 1999 combined with the effect
of increased sales in the U.S.
Gross Profit Gross profit for the quarter ended September 30, 1999 decreased
$96,000 or 0.7% as compared to the third quarter of 1998 to $13,499,000. As a
percentage of net sales, gross profit decreased from 38.9% in the third quarter
of 1998 to 35.0% in the third quarter of 1999. The gross profit percentage
decline was due to a change in product mix reflecting an increase in lower-
margin flat touchscreens, continuing lower than historical margins in the
Factura Kiosk business and the impact of expanding resistive touch screen
production at the Methuen plant. For the nine-month period ended September 30,
1999, gross profit increased by $995,000 or 2.4% to $41,969,000. As a percentage
of net sales, gross profit for the period decreased to 36.1% from 38.0% in the
same period in 1998, reflecting the reasons above.
Research and Development Research and development expenses for the quarter
ended September 30, 1999 increased over the corresponding period of 1998 by
$281,000 or 10.1%. As a percentage of net sales, research and development
expenses held constant from third quarter 1998 to third quarter 1999 at 7.9%.
Research and development continues to focus on programs to develop improvements
in
10
<PAGE>
touchscreen technologies, especially a next generation version of capacitive and
resistive products. For the nine-month period ended September 30, 1999, research
and development spending increased $1,593,000 or 20.3% over the same period in
1998. As a percentage of net sales, research and development expenses increased
from 7.3% in the nine month period ended September 30, 1998 to 8.1% for the
corresponding period of 1999. The increase in research and development expenses
resulted primarily from continued development projects in touchscreen
technologies.
Sales and Marketing Sales and marketing expenses in the quarter ended September
30, 1999 decreased by $250,000 or 4.9% over the corresponding period of 1998. As
a percentage of net sales, sales and marketing expenses decreased from 14.5% in
the third quarter of 1998 to 12.5% in the third quarter of 1999. The decrease in
sales and marketing expenses reflects vacancies which have yet to be filled in
the sales organization, particularly the Vice President of Sales. A new Vice
President of Sales has been hired and will join the Company during the fourth
quarter. For the nine-month period ended September 30, 1999, sales and marketing
expenses increased by $25,000 or .2% to $15,880,000. As a percentage of net
sales, sales and marketing expenses decreased to 13.7% in the first nine months
of 1999 as compared to 14.7% in the first nine months of 1998.
General and Administrative General and administrative expenses in the quarter
ended September 30, 1999 increased from the corresponding period of 1998 by
$307,000 or 12.3% to $2,809,000. For the nine-month period ended September 30,
1999, general and administrative expenses increased over the corresponding
period of 1998 by $874,000 or 11.9% to $8,208,000. As a percentage of net sales,
general and administrative expense increased slightly from 7.2% to 7.3% for the
three-month period ended September 30, 1999 and from 6.8% to 7.1% for the nine-
month period ended September 30, 1999 as compared to the corresponding periods
in 1998. The increased spending primarily reflects higher Information Technology
expenses, especially costs associated with the establishment of the Company's
e-commerce website, Touchstore.com.
Amortization of Intangible Assets For the quarter ended September 30, 1999,
operating expenses included $59,000 of amortization relating to various
acquisitions and purchases of technologies, as compared to $121,000 for the
quarter ended September 30, 1998. For the nine-month period ended September 30,
1999, amortization expense was $273,000 as compared to $381,000 for the
comparable period of 1998.
Operating Income Operating income in the quarter ended September 30, 1999
decreased from the corresponding period of 1998 by $372,000 or 11.9% to
$2,760,000. As a percentage of net sales, operating income decreased from 9.0%
in the third quarter of 1998 to 7.1% for the third quarter of 1999. For the
nine-month period ended September 30, 1999, operating income of $ 8,176,000
reflects a decrease of $1,389,000 or 14.5 % over the comparable period of 1998.
For the quarter ended September 30, 1999 the decrease in operating income
reflects the previously discussed gross margin decline as well as increased
expenses to develop next generation capacitive technology and to establish
infrastructure to support anticipated business growth. For the nine-month period
ended September 30, 1999, the decrease in operating income is primarily the
result of this increase in operating expenses. International operating income in
the quarter ended September 30, 1999 increased by 5.9% as compared to the third
quarter of 1998, due to improved performance in Europe. For the nine-month
period ended September 30, 1999, international operating income decreased by
37.1% from the corresponding period of 1998 due to the previously discussed
European sales decline in the first half.
Other Income Other income in the quarter ended September 30, 1999 increased by
$113,000 or 36.3% to $424,000 as compared to the corresponding period of 1998.
This was primarily due to a foreign exchange gain of $106,000 in the third
quarter of 1999 as compared to a foreign exchange loss of $98,000 for the
comparable period of 1998. For the nine months ended September 30, 1999, other
income increased $450,000 or 83.6% to $988,000 over the nine months ended
September 30, 1998. This increase reflects a foreign exchange gain of $162,000
for the nine month period ended September 30, 1999 as compared to a foreign
exchange loss of $502,000 for the comparable period of 1998. Interest income,
net of interest expenses, for the nine month period ended September 30, 1999 was
11
<PAGE>
$825,000, as compared to $1,040,000 for the comparable period ended September
30, 1998, reflecting a decrease in the size of the Company's investment
portfolio, which is discussed under "Liquidity and Capital Resources".
Other Expense - Litigation During the first quarter of 1999 the Company recorded
a charge of $3,303,000 in relation to a judgement against the Company in a
lawsuit in which a former employee of the Company sued for gender
discrimination, retaliation and misrepresentation. While the Company was found
not liable for the discrimination and retaliation claims, the jury awarded the
plaintiff approximately $2,600,000 in compensatory and punitive damages under
the misrepresentation claim. While the matter is continuing in post-trial
proceedings, the Company has established a reserve for the full amount of the
judgement, as well as estimated associated legal fees.
Provision for Income Taxes The Company's effective tax rate for both the three
and nine-month periods ended September 30, 1999 and June 30, 1998 was 32.0%. The
effective tax rates in all periods differed from the federal statutory rate of
34% primarily as a result of the provision for state income taxes, partially
offset by the benefit related to the Company's foreign sales corporation and
tax-exempt interest income.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had net working capital of $50,321,000,
including $22,306,000 in cash, cash equivalents and marketable securities. The
Company reported net cash provided by operating activities of $3,861,000 for the
nine-month period ended September 30, 1999. Additionally, the Company maintains
bank lines of credit totaling $8.5 million. As of September 30, 1999, the
Company had no borrowings under its bank lines of credit. During the nine-month
period ended September 30, 1999 the major uses of cash were to pay down
borrowings under the Company's lines of credit, purchase capital equipment and
purchase shares of the Company's stock under the Company's buyback program
discussed below.
In May, 1999 the Board of Directors of the Company extended for the fourth time
a repurchase program of the Company's common stock, originally approved in
December, 1997 and extended in 1998 and 1999. The amount of common stock to be
repurchased under this program is not to exceed $23.0 million. During the nine-
month period ended September 30, 1999 the Company repurchased approximately
724,000 shares at an aggregate cost of $10.2 million. Since December 1997 the
Company has purchased approximately 1.45 million shares at an aggregate cost of
approximately $20.9 million. These shares have been and will be used for the
Company's stock option plan, employee stock purchase plan and for other
corporate purposes, possibly including acquisitions.
During the first nine months of 1999 the Company invested $5.7 million in
capital expenditures. Major capital expenditures included investment in the
Company's touchscreen manufacturing operations and computer information systems
to support the infrastructure of its expanding worldwide operations.
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 2000. 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 offered 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
12
<PAGE>
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.
Foreign Exchange Exposure
Significant portions of the Company's operations are conducted in foreign
countries, including the United Kingdom of Great Britain, Germany, France,
Italy, Spain, Australia, Taiwan, Japan, Hong Kong and Korea. Exchange rate
fluctuations between the U.S. dollar and the currencies of these countries,
including various European currencies and the Australian dollar, result in
fluctuations in the amounts relating to foreign operations reported in the
Company's consolidated financial statements. In general, the Company's policy is
not to enter into derivative financial instruments or other financial
instruments to manage foreign currency exchange rate risk. The Company can
provide no assurances that it will not enter into such financial instruments in
the future.
Supply Exposure
Although the Company generally uses standard parts for its product, certain
components, such as ASICs, topsheets and the coated glass used in the production
of touch sensors, are currently available only from a single source. In the
event that suppliers are unable to fulfill the Company's requirements, the
resulting interruption in production would have an adverse impact on the
Company's operating results. The Company maintains an inventory of ASICs, coated
glass and other components in order to limit the potential impact of such
interruptions. While the Company believes that there are other companies that
are capable of manufacturing these sole source components, the inability to
obtain sufficient components as required, or to develop alternative sources if
and when needed, would adversely affect the Company's operating results.
READINESS FOR YEAR 2000
The Company has taken actions to understand the nature and extent of the work
required to make its systems, products and infrastructure Year 2000 compliant.
The Company does not believe that any material Year 2000 issues exist with
software or embedded technology contained within its product offerings. System
hardware, software and microprocessor controlled equipment that support the
Company's infrastructure have been inventoried and assessed for Year 2000
compliance. To the extent necessary to address material Year 2000 issues, the
Company has installed current releases or upgrades from software vendors. During
the second quarter of 1999, the Company conducted a testing program to confirm
that all installed software upgrades, which have been represented by software
vendors as compliant, functioned with dates posted as 2000. While all known
conversions and upgrades have been completed, the Company plans to continue
testing in the fourth quarter in anticipation of January 1st operations. Because
the upgrades were installed by existing employees and consultants of the Company
in conjunction with their normal duties, and the software upgrades would have
been purchased in the normal course of business, the Company has not segregated
the cost of making these systems compliant. Based on available information,
including assurances from software vendors that their products are compliant,
the Company believes that it will be able to manage its total Year 2000
transition without any material adverse effect on its business operations,
products, operating results or financial condition.
The Company has not fully determined the extent to which the systems of
customers and vendors with whom the Company has material relationships may not
be compliant. There can be no assurance that the systems of other companies
which the Company deals with will be converted on a timely basis. No assurance
can be given that such failure to convert by another company will not have a
material negative effect on the Company's consolidated financial position,
results of operations or cash flow.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been a defendant in a case entitled Behne v. MicroTouch Systems
Inc., in the United States District Court in the Northern District of
California. The case arose from claims by Ms. Behne, a former employee of
MicroTouch, regarding gender discrimination, retaliation and misrepresentation
during her employment at the Company. In March, 1999 a jury found the Company
not liable on the discrimination and retaliation claims, but awarded the
plaintiff approximately $2,600,000 in compensatory and punitive damages under
the misrepresentation claim. While the matter continues under the appeals
process, the Company has established a reserve for the full amount of the
judgement, as well as associated legal fees, in the amount of $3,303,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27. Financial Data Schedule. Filed herewith.
(b) None
14
<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: November 11, 1999 BY: /s/ Geoffrey P. Clear
---------------------
Geoffrey P. Clear
Vice President -
Finance & Administration,
Chief Financial Officer &
Treasurer
15
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 0 4,396
<SECURITIES> 0 17,910
<RECEIVABLES> 0 28,630
<ALLOWANCES> 0 2,887
<INVENTORY> 0 17,959
<CURRENT-ASSETS> 0 73,598
<PP&E> 0 34,071
<DEPRECIATION> 0 14,069
<TOTAL-ASSETS> 0 96,402
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 83
<OTHER-SE> 0 72,968
<TOTAL-LIABILITY-AND-EQUITY> 0 96,402
<SALES> 38,552 116,324
<TOTAL-REVENUES> 38,552 116,324
<CGS> 25,053 74,355
<TOTAL-COSTS> 25,053 74,355
<OTHER-EXPENSES> 10,196 35,874
<LOSS-PROVISION> 107 171
<INTEREST-EXPENSE> 12 63
<INCOME-PRETAX> 3,184 5,861
<INCOME-TAX> 1,019 1,876
<INCOME-CONTINUING> 2,165 3,985
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,165 3,985
<EPS-BASIC> .31 .57
<EPS-DILUTED> .31 .56
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