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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(k) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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Commission file number: 0-20215
MICROTOUCH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Massachusetts 04-2802971
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
300 Griffin Brook Park Drive
Methuen, MA 01844
(Address of principal executive offices) (Zip Code)
</TABLE>
(978) 659-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
$0.01 par value
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 11, 2000, was approximately $82,599,000 (based on
the last price of such stock as reported by NASDAQ Stock Market on such date).
The number of shares outstanding of each of the registrant's classes of
capital stock, as of February 11, 2000 was:
Common Stock, $0.01 par value 6,527,684
Portions of the Registrant's proxy statement for the Annual Meeting of
Stockholders to be held June 22, 2000 are incorporated by reference into Part
III of this Form 10-K.
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Item 1. Business
General
MicroTouch Systems, Inc (the "Company" or "MicroTouch") is a leading
supplier of touch and pen sensitive input systems including touchscreens and
electronic whiteboards. The Company's principal products are its touch
sensitive screens, which are based on the Company's two primary technologies--
analog capacitive sensing (referred to as ClearTek(R)) and resistive membrane
(known as TouchTek(TM)). In both the capacitive and resistive membrane cases,
the screens are configured to CRT monitors and flat panel displays. The
Company believes its touchscreens are well suited for a wide variety of
markets and applications where ease of use, speed, accuracy and durability are
desirable.
Over the last decade, the use of personal computers has grown in a wide
range of applications. As a result, demand has increased for products that
make these systems more accessible to a broader range of users. For example,
the development of graphical user interfaces ("GUIs"), such as Microsoft
Windows, has allowed information to be displayed in an easy to understand
graphic manner. Touch products address this demand by allowing both trained
and untrained computer users to interact with computers in a natural and
intuitive manner.
Touchscreens allow individuals to access information and interact with a
computer simply by touching the computer's screen with a finger. Because
pointing is a natural instinct, touchscreens offer a highly intuitive computer
interface. Touchscreens are designed to allow users to interact with their
system without the use of a keyboard, mouse or trackball. Accordingly, the
ease of use offered by touchscreen-based systems makes them well suited both
for applications for the general public and for specialized applications for
trained computer users.
The Company has expanded its product line primarily through internal
development as well as acquisitions in the past. Technologies acquired through
acquisition include ThruGlass and resistive membrane technology. Over the past
four years, the Company has developed and marketed a new product referred to
as an electronic P.C. whiteboard. This new product, marketed under the
trademark of Ibid(TM), allows the user to write or draw information on a
whiteboard and then to electronically view and transfer the written
information to a desktop or notebook P.C.
The discussion contained in this section and elsewhere in this Annual Report
on Form 10-K 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.
Strategy
MicroTouch's objective is to be the leading worldwide supplier of touch
products and to exploit opportunities in other touch and related markets
through the development and acquisition of complementary technologies and
product lines. The key elements of the Company's strategies are as follows:
Focus on Vertical Markets. The Company's strategy for its touch products is
to focus on vertical markets in which the Company believes touch technology
offers significant benefits and appeals to a broad customer base. The
Company's sales force is organized into geographic territories that focus on
customers within these distinct vertical markets. In addition, specialized
experts exist within the sales force for several of the vertical markets
including point-of-sale cash registers, interactive kiosks, medical
applications, mobile information devices and gaming and entertainment
equipment.
Target Developers of End User Applications. The Company directs its sales
efforts for its touch products toward original equipment manufacturers (OEMs),
value added resellers (VARs), system integrators and high-
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volume end users, which the Company believes are best able to develop and
market applications for the Company's targeted vertical markets. The Company
seeks to have its products designed into the end user systems or products of
these customers.
Provide Flexible Product Offerings. The Company works closely with its
customers to understand their businesses and product requirements. The Company
offers its ClearTek and TouchTek touchscreens, and TouchPen sensors in a
variety of standard and customized configurations to meet the diverse needs of
the markets which it serves. The ThruGlass products which allow for gloved
touch operation of a computer through up to an inch of glass, can also be
customized to meet the requirements of emerging end-user applications.
Enhance and Expand Technology. The Company's traditional technology is its
proprietary analog capacitive sensing technology. MicroTouch seeks to improve
its products by enhancing this technology through the development of new glass
coating techniques, custom ASICs, controllers, software algorithms and
software drivers. The Company also seeks to develop new technologies through
internal development, licensing or acquisitions. The Company has developed
TouchPen, a touch and stylus sensitive device used for pen-based applications.
The Company also markets ThruGlass, which allows touch to be sensed through
other conductive media. During the past two years, the Company has
significantly enhanced its resistive membrane technology through product
development programs similar to those undertaken for the capacitive product
line. Finally, the electronic whiteboard product was developed based on
resistive technology obtained in the 1995 Touch Technology acquisition, a
business engaged in the development and marketing of touch sensitive screens
primarily using resistive membrane technology.
Pursue New Market Opportunities. The Company is currently applying its
existing technologies to new market opportunities where it believes these
technologies can have significant growth potential. These opportunities
include consumer devices for resistive technology and, with respect to
TouchPen applications, use for pen computing, videoconferencing and image
manipulation in interactive kiosks.
Expand International Markets. The Company has increased its international
presence through the opening of foreign sales offices and manufacturing
facilities. The Company currently has touchscreen sales and manufacturing
facilities in the United Kingdom and Australia and sales offices in France,
Germany, Italy, Spain, Japan, Taiwan, Korea and Hong Kong. The Company's
international sales, including U.S export sales, increased from $57.4 million
in 1997 to $71.4 million in 1998 and to $76.0 million in 1999.
Technology
Analog Capacitive Technology. The Company's primary touchscreen technology
is its proprietary analog capacitive sensing technology. This technology
creates a uniform voltage field on the conductive surface of the touch sensor.
When a finger comes into capacitive contact with the conductive layer, it
draws a small amount of current to the point of contact. A controller attached
to the conductive surface determines the point of contact by measuring the
relative current flows from the four corners of the surface.
The Company implements this technology on a glass panel that has a
transparent conductive coating fused to its surface. In most of the Company's
products, a proprietary glass overcoat is then laid over the conductive
coating for additional protection. The conductive glass panel, or sensor, is
driven at its four corners by an A/C sine wave voltage which is dispersed
linearly over the sensor by an electrode pattern located on the perimeter of
the sensor. When a user touches the screen, the controller determines the
point of contact and transmits the location to the computer for processing.
The Company's analog capacitive sensing technology has many favorable
attributes, including:
High Touch Sensitivity. Because the Company's touchscreens rely on
capacitive contact rather than activation by pressure, they offer a high
degree of sensitivity to input from a finger. This is important in
applications characterized by continuous usage such as cash registers,
where a requirement to exert pressure on the screen might be uncomfortable
over time and slow down input and, therefore, customer service.
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Fast Touch Speed. The Company's proprietary software algorithms enable
the controller to detect quickly a touch on the screen. This capability can
enable operators of products such as touch-based cash registers to input
numbers as quickly as they could using buttons or keypads.
High Resolution. The Company's touchscreens have a resolution of at least
1,024 by 1,024 points. Because the controller averages the entire area of
finger contact and reports a single point, even a finger is able to obtain
pixel-level control of the cursor on a display. This resolution allows for
the creation of detailed menus and greater flexibility in screen design.
Resistant Properties. The capacitive nature of the Company's touchscreens
allows them to function unimpaired even when contaminants such as water,
dirt or grease build up on the surface. This is an important feature in
factory environments, public locations and restaurants.
Durability. With its proprietary glass overcoat, the Company's capacitive
touchscreens are scratch, wear and chemical resistant. In addition, the
glass sensor may be optically bonded to the computer screen in a process
designed to give structural support to the screen. Durability is an
important feature in applications such as entertainment and point of sale,
which are characterized by frequent use.
Ease of Integration. The Company's glass sensors are easily fabricated
into a variety of shapes and sizes and are readily installed in displays in
a manner that results in a professional looking fit and finish.
Resistive Membrane Technology. The Company's TouchTek "resistive membrane"
technology has several attributes that are similar to those of its capacitive
systems. TouchTek screens work by creating a uniform voltage field on a glass
substrate. When a plastic top sheet is compressed into contact with the glass
layer, current is drawn from each side of the glass layer in proportion to the
distance from the edge. An electronic controller calculates the position of
the finger based on the current flows. Some of the Company's resistive
products fall into a category known as 5-wire resistive and the Company has
recently placed more emphasis on offering 4-wire resistive products for
certain specialty consumer device applications as customer requirements
dictate.
ThruGlass Technology. MicroTouch's ThruGlass technology operates by
projecting voltage fields out from the conductive surfaces of transparent
glass connected to a controller. When an individual touches the surface in
front of the projected capacitive touchscreen, minute changes in the voltage
field are detected and the touch is assigned to a location on the sensor.
TouchPen Technology. TouchPen utilizes a modified form of the Company's
analog capacitive technology to sense both a finger and a pen touch.
TouchPen's controller is able to electrically distinguish the hand from the
pen signal, allowing it to reject the hand signal when writing. The touch
performance of TouchPen is equal to the Company's analog capacitive ClearTek
product, while the pen offers even higher resolution of 2,048 by 2,048 to
capture handwriting.
There are several alternative touch technologies currently in use by other
manufacturers. These technologies include (i) resistive membrane products
similar to the Company's; (ii) scanning infrared, which uses a grid of
infrared beams; (iii) surface acoustic wave or "SAW" screens, which are based
on the transmission of acoustic waves across a glass overlay; (iv) guided
acoustic wave or "GAW" screens, which are based on the transmission of
acoustic waves through a glass surface; and (v) piezo technology, in which
piezo, or pressure, sensors convert touch forces into electrical signals.
Products
Markets, Applications and Customers
The Company sells its products into a variety of markets, including self-
service kiosks, point of information displays, point of sale equipment, gaming
and entertainment systems, industrial and medical systems and training and
business systems. Specific customer applications include; airline and movie
theatre ticketing, exhibits and trade shows, tourist information centers,
museum exhibit guides, restaurant and merchandise cash registers,
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customer self service, casino video gaming machines, bartop entertainment
gaming, children's entertainment kiosks, process control, video banking and
ATM's, financial trading and portable information devices.
Touchscreens
The Company's principal product line over the last several years has been
the ClearTek 2000 Touch Screen. The Company recently introduced its next
generation capacitive product, the ClearTek 3000 Touch Screen, in a variety of
configurations, including kits comprised of touch sensors and controllers or
chipsets, and fully configured touchscreen monitors. In addition, the Company
customizes its products to accommodate particular customer needs.
The new ClearTek 3000 Touch Screen system has a resolution of 1,024 by 1,024
points and interprets the entire area of touch contact as a single point,
giving a finger the ability to select targets as small as a single pixel. The
screen detects a touch in as little as 8-12 milliseconds making it fast in
operations such as hitting buttons on a touchscreen-based cash register. The
TouchTek resistive touchscreen systems utilize a conductively coated plastic
top sheet over a conductively coated and rigid bottom sheet, usually glass.
Resistive kits are configured similarly to capacitive kits. The principal
elements of both the ClearTek 3000 and the TouchTek product lines include the
following:
Sensors. The Company's glass sensors, which are installed on the face of
computer screens, are offered in a large number of curved and flat screen
sizes, as well as in custom sizes. Screens may be optically bonded to monitors
through a process developed by the Company to fill the space between the
touchscreen and the monitor with a transparent bonding compound. Optically
bonded sensors increase optical clarity and provide greater structural
support. The Company's ClearTek sensors are overcoated with the Company's
exclusive glass top-coating for added durability and optical clarity.
Controllers. Controllers offered by the Company have USB, serial, PC bus,
ADB or TTL interfaces and will operate with any of the Company's touchscreens.
Capacitive chipsets, which include a proprietary ASIC, are sold to larger
volume OEMs for incorporation into the electronics of their systems.
Software Drivers and Tools. GUI drivers and software tools provided by the
Company include an MS-DOS mouse emulator; Windows, OS/2, Macintosh, Windows
NT, Amiga, and various UNIX drivers; and an MS-DOS software tool for creating
and defining touch zones.
Options. The Company sells a variety of options and accessories, including
power supplies, cables and privacy shields, and also offers retrofitting and
optical bonding services.
Touch Enabled Monitors
The Company also sells several lines of fully integrated standard monitors
which range in size from 13 to 27 inches and support popular graphics
standards. These monitors are typically purchased from display manufacturers
and equipped by the Company with an optically bonded sensor and a controller.
The Company also provides independent integration services for monitor
customers primarily through third party suppliers.
Electronic Whiteboard
The Company markets a line of electronic PC whiteboards including both
personal (2 foot by 3 foot) boards as well as larger (3 foot by 4 foot and 4
foot by 6 foot) conference room boards The Company's electronic whiteboard
product is a variation of the resistive membrane technology used in the
TouchTek line.
Sales and Marketing
MicroTouch markets and sells its touch products primarily through VARs, OEMs
and systems integrators, and to high volume end-users. The Company employs a
direct sales force for domestic sales and certain
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international regions, and supports its marketing efforts with trade show
attendance, telemarketing, advertising and public relations.
As of December 31, 1999, the Company's sales and support function consisted
of 118 persons. The sales force is organized into several geographic sales
groups, each focusing on a separate set of regional customers, and is
augmented by several vertical market specialists.
The Company markets its touch products in Europe through its U.K.
subsidiary, MicroTouch Systems, Ltd. MicroTouch Systems, Ltd. sells through
various European distributors and sells direct in the U.K., Germany, France,
Spain and Italy. This subsidiary also assembles touch monitors from
touchscreen kits exported from the U.S. and monitors purchased in Europe.
During 1998, the Company established a direct sales office in Spain. In Japan,
the Company sells its products through MicroTouch Systems, KK. In 1994
MicroTouch established a direct sales and manufacturing presence to serve the
Australian and New Zealand touchscreen markets providing a base from which to
continue sales of MicroTouch products primarily to the Australian gaming
market. The Company opened a sales office in Taiwan in 1995, in Korea and Hong
Kong in 1997, and in Singapore in 1999. The Company's total international
sales, including U.S. export sales, accounted for approximately 45%, 49% and
48% of total sales in 1997, 1998 and 1999, respectively.
The Company plans to continue to increase its sales presence, both
domestically and overseas, in an effort to broaden its potential customer base
and to intensify its efforts in its targeted markets. As part of this plan,
the Company intends to increase its worldwide sales force and add additional
distributors and agents.
The Company offers a 30-day money back guaranty on its touchscreen products
to first-time buyers. This offer pertains only to the first unit purchased and
is void if the unit is altered by the customer in any way. Additionally, the
Company generally replaces products not meeting its specifications that are
returned by any customer within 30 days of receipt. The Company provides
reserves for estimated returns and believes that such reserves are adequate.
The amount of product returns was approximately $4.5 million, $4.9 million and
$5.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively. While the Company believes that its reserves for product returns
are adequate, there can be no assurance that the Company will not experience
increased product returns. Any such increase in product return claims could
have a material adverse effect on the Company's results of operations.
The Company's customers generally provide direct support to end users for
the Company's products while MicroTouch, in turn, supports its resellers with
application engineers and phone support from its customer service group of
trained technicians. The Company typically offers its customers a product
warranty of up to five years. While the Company believes that its reserves for
warranty claims are adequate, there can be no assurance that the Company will
not experience increased warranty claims. Any such increase in warranty claims
could have a material adverse effect on the Company's results of operations.
Research and Development
The Company's future success depends in large part upon the timely
enhancement of existing products and the continued development of new products
to address new market opportunities. Accordingly, the Company intends to
continue to devote significant resources to increasing the performance of its
existing products, especially its capacitive and resistive technologies,
developing new products from its existing technologies and developing new
technologies. The Company has, in the past, augmented and may continue to
augment its research and development efforts through the acquisition or
licensing of new technologies. The Company's research and development efforts
in the touchscreen area are primarily focused on expanding the range of
configurations offered, enhancing product features, expanding the capability
of drivers to interact with different types of computer operating systems and
refining existing products to increase manufacturing efficiency and reduce
costs. The Company's development efforts are also directed toward improving
the product features and enhancing the underlying technology of its various
product lines. There can be no assurance that the Company
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will successfully complete such development efforts or that these product
developments will achieve market acceptance.
As of December 31, 1999, 83 full-time employees of the Company were engaged
in research and development activities. In addition, the Company frequently
engages independent consultants to supplement its own research and development
efforts and to gain access to expertise in specific technical areas.
Proprietary Rights and Licenses
The Company relies on a combination of patents, trade secrets and know-how
to establish and protect its proprietary rights.
The Company acquired exclusive rights to its core analog capacitive
technology under a worldwide license from Peptek, Inc. and its affiliate, Mr.
Jim Zeeger (the "Peptek License"). Under the Peptek License, the Company has
the exclusive right to use all technology covered by the patent claims in the
manufacture and sale of the Company's touchscreen and similar products. The
patents licensed under the Peptek License include claims of rights to the
configuration of the electrodes installed around the perimeter of the glass
sensor of a touchscreen and in the method used to determine the point of
finger contact on the surface of the glass sensor. The Peptek License requires
the Company to pay royalties based on annual product sales and sublicensing
revenues and includes minimum royalty payment provisions. The Peptek License
may be terminated by the licensor only in the event of a breach of the license
agreement by the Company, which is not remedied within applicable cure periods
and in the event of the Company's bankruptcy.
MicroTouch holds exclusive rights to the patents covering its core
proprietary technology until the respective expiration dates of such patents,
which currently range from 2000 to 2015. The Company also owns certain other
patents and patent applications, related primarily to improvements on, and
extensions of, its core technology, as well as certain software algorithms
used with the Company's products. The Company holds two patents, one of which
will expire in the Year 2000, which cover the configuration of the electrodes
installed around the perimeter of the glass sensor used in the Company's
analog capacitive products. Several other patents related to the Company's
core analog capacitive technology will expire during 2000. Although the
Company has developed considerable know-how and has substantial experience in
the field of analog capacitive technology, which it believes will enable the
Company to compete effectively in the future, the expiration of patents
covering the Company's core proprietary technology during the next several
years may lead to the development by third parties of products that are
competitive with those of the Company. The successful development and
marketing by third parties of competitive products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company acquired exclusive rights to use its ThruGlass proprietary
technology in the touchscreen field, including rights under pending patent
applications, under a worldwide license from Moonstone Designs, Ltd. (the
"Moonstone License"). Under the Moonstone License, the Company has the
exclusive right to use all technology covered by the claims of any patent that
may issue in the manufacture and sale of the Company's projected capacitive
products. There can be no assurance that such patents will issue or that the
claims under such patents may not be reduced from the claims in the patent
applications.
The Company acquired exclusive rights to use certain force based proprietary
technology in the touchscreen field, including rights under three patents,
under a worldwide license. The Company has the exclusive right to use all
technology covered by the claims of the patents in the manufacture and sale of
the Company's products.
Other rights held by the Company include nonexclusive rights to use its
resistive technology, including rights under several patents acquired in 1995.
In addition, two patents have been granted and applications for two additional
U.S. patents on various technology related to whiteboard products have been
submitted. The Company was also granted three patents covering software for
Internet public access computers and kiosks during 1998.
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The Company typically requires persons such as customers, licensees and
employees who have access to proprietary information concerning the Company's
products to sign nondisclosure agreements that prohibit the use of the
Company's proprietary information other than for the specific purpose for
which it was provided.
Other companies are engaged in the development of technologies that may
result in products competitive with those made by the Company. These
development efforts may result in proprietary technology, and possibly
patents, that could impair the value of, or render obsolete, technology owned
or licensed by the Company. Furthermore, there can be no assurance that any
patent owned or licensed by the Company will withstand challenges or otherwise
provide the Company with adequate protection from competitors, or that the
Company will be able to afford the expense of enforcing these patents.
Manufacturing
MicroTouch's touchscreen manufacturing operations consist primarily of the
procurement of glass (coated and fabricated to its specifications) and the
manufacture of touch sensors from that glass, the procurement and testing of
electronic components specified or designed by MicroTouch, and, in some cases,
the integration, including optical bonding, of touchscreen monitors. The
majority of the manufacturing activities for both capacitive and resistive
touchscreens are performed at the Company's principal facility in Methuen,
Massachusetts. The Company also exports touchscreen kits to its foreign
operations for final integration with monitors for distribution in Europe,
Japan, the Pacific Rim and Australia. In addition, certain resistive products
are manufactured in Austin, Texas on a special project basis.
Although the Company generally uses standard parts for its products, certain
components, such as ASICs 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. While the Company maintains some inventory of ASICs, coated
glass and other components, the inventory amounts maintained are not
sufficient to eliminate the potential impact of prolonged supply
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.
Competition
The markets for touch products are highly competitive and subject to rapid
technological change. The Company believes that the principal competitive
factors in its markets are product characteristics such as touch performance,
durability, optical clarity and price, as well as supplier characteristics
such as quality, service, delivery time and reputation. The Company believes
that it competes favorably with respect to these factors, although there can
be no assurance that the Company will be able to continue to compete
successfully in the future.
The Company faces competition from several established touch product vendors
as well as a number of smaller companies. Some of these competitors utilize
analog capacitive sensing and resistive membrane technologies similar to the
Company's technologies. Two of the Company's principal touchscreen
competitors, Elo Touch Systems, Inc., and Carroll Touch Technology, both
subsidiaries of Tyco International Ltd., are operations of that larger,
diversified industrial company which has greater financial, technical,
manufacturing and marketing resources than the Company. Elo Touch Systems
markets touchscreens based primarily on resistive and surface acoustic wave
technology, and Carroll Touch Technology markets touchscreens based primarily
on infrared and guided acoustic wave technology. In addition, several
manufacturers, most notably IBM, have developed proprietary touchscreen
products in the past but are not currently marketing proprietary products.
There are several private companies which have marketed resistive touchscreens
for years and who are, therefore, more established in that market segment than
the Company. In the market for pen-based computers, the Company's TouchPen
product competes with digitizers marketed by several companies and could
compete with
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products that may be developed in the future by manufacturers that have more
significant resources than the Company. Products similar to ThruGlass are
marketed by at least one competitor to the Company, especially in the European
market. Several other companies market electronic whiteboard products similar
to those of the Company.
Backlog
The Company maintains most standard products in inventory and manufactures
other standard, modified standard and custom products pursuant to orders from
customers. Backlog consists of orders for products, which have a scheduled
shipment date within twelve months of the order. Because a large percentage of
the Company's orders require products to be shipped in the same quarter in
which the order was received, and because orders in the backlog may be
canceled and delivery schedules may be changed, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any
succeeding period. As of December 31, 1998 and 1999, the Company had a backlog
of $23.3 million and $21.4 million, respectively.
Employees
As of December 31, 1999, the Company had 845 full-time employees, of which
536 were engaged in manufacturing, 142 were in sales, marketing and customer
service and 83 were in research and development. The Company considers its
relations with its employees to be good.
Item 2. Properties
The Company leases approximately 96,000 square feet of office, engineering
and manufacturing space located at 300 Griffin Park, Methuen, Massachusetts.
The lease covering these properties expires in April 2003. The Company also
leases an aggregate of approximately 97,000 square feet of additional space at
its other locations including those in the U.K., France, Germany, Italy,
Japan, Australia, Spain, Hong Kong, Korea, Taiwan and Austin, Texas. In
addition, the Company is leasing approximately 88,000 square feet in
Rochester, New York, the lease for which expires in November, 2002.
Approximately 35,000 square feet of this space is currently sublet and the
Company is attempting to sublease the remaining space.
During 1998 the Company expanded the building it owns, which is adjacent to
the Methuen, Massachusetts corporate headquarters. This facility now has
70,000 square feet of space and houses the Company's information technology
function, administrative staff and additional touchscreen and whiteboard
manufacturing space. In 1999, the Company leased 44,000 square feet of
warehouse space in Lawrence, Mass.
Item 3. Legal Proceedings
The Company had been 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.
In January 1997, the Company was informed that while it had won the case
based on the merits of its claims, 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 was required to pay a portion ($595,000) of
Nissha's fees and costs associated with the arbitration. The Company expensed
these fees and costs awarded to Nissha as part of its second quarter 1997
financial results, thus completing the Company's involvement in the matter.
During the period from mid 1995 to early 1997, the Company was involved in a
case entitled Elo Touch Systems, Inc. v. The Graphics Technology Company,
Inc., MicroTouch Systems, Inc. et al, which was in the United States District
Court in Knoxville, Tennessee. The case arose from claims by Elo Touch Systems
("Elo") that The Graphics Technology Company, Inc. (the predecessor to the
Company's Touch Technology business)
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manufactured and sold, and that the Company intended to manufacture and sell
in the future, certain products which infringe certain patent rights held by
Elo. This case was settled by a cross-licensing agreement reached among the
parties during 1997.
The Company was a plaintiff in a case entitled MicroTouch Systems, Inc. and
Peptek, Inc. v. Elo Touch Systems, Inc. which was in the United States
District Court in Knoxville, Tennessee. The case arose from claims by the
Company and Peptek, Inc. ("Peptek") that Elo manufactured and sold products
that infringed certain patent rights held by Peptek and exclusively licensed
to the Company. This case was settled by a cross-licensing agreement reached
among the parties during 1997.
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
initial jury judgement, as well as associated legal fees, in the amount of
$3,303,000, of which approximately $2,900,000 remained in the reserve at
December 31, 1999.
In addition to the matters described above, the Company is subject to
various investigations, claims and legal proceedings covering a wide range of
matters that arise in the ordinary course of its business activities. Each of
these matters is subject to various uncertainties, and it is possible that
some of these matters may be resolved unfavorably to the Company. The Company
has established accruals for loss contingencies that are probable and
reasonably estimable. Management believes that any liability that may
ultimately result from the resolution of these matters in excess of amounts
provided will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company submitted no matters to a vote of its shareholders during the
fourth quarter of 1999.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is quoted on the Nasdaq Stock Market under the
symbol "MTSI." The following table sets forth the range of high and low sales
prices per share.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1999
First Quarter............................................. $19.56 $11.88
Second Quarter............................................ $15.56 $12.25
Third Quarter............................................. $17.50 $14.56
Fourth Quarter............................................ $17.94 $12.06
1998
First Quarter............................................. $19.63 $13.38
Second Quarter............................................ $20.94 $14.50
Third Quarter............................................. $18.63 $10.88
Fourth Quarter............................................ $16.88 $12.25
</TABLE>
The Company has never paid a cash dividend on its common stock and currently
expects that future earnings will be retained for use in its business. As of
February 11, 2000, the Company had 245 stockholders of record and approximately
4,000 beneficial stockholders.
11
<PAGE>
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below for each of the
five years in the period ended December 31, 1999 have been derived from the
Company's consolidated financial statements. The consolidated financial
statements for each of the five years in the period ended December 31, 1999
have been audited by Arthur Andersen LLP, independent public accountants. This
data should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto and other financial information appearing elsewhere in
this document.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.......................... $76,718 $95,045 $128,481 $144,370 $157,491
Cost of sales...................... 47,735 58,995 83,553 88,950 104,323
------- ------- -------- -------- --------
Gross profit................... 28,983 36,050 44,928 55,420 53,168
Operating expenses:
Research and development......... 5,027 7,225 7,985 10,904 12,816
Sales and marketing.............. 11,607 13,568 18,765 21,235 20,862
General and administrative....... 5,314 6,360 7,944 10,012 11,225
Amortization of intangible assets
and purchased technology........ 381 460 477 502 333
Write-off of purchased technology
and related assets.............. 1,985 -- -- -- --
Purchased in-process research and
development and related costs... 3,000 -- -- -- --
Non-recurring charge............. -- -- -- -- 1,950
------- ------- -------- -------- --------
Total operating expenses....... 27,314 27,613 35,171 42,653 47,186
------- ------- -------- -------- --------
Operating income................... 1,669 8,437 9,757 12,767 5,982
Other income, net.................. 2,014 1,464 579 1,009 1,249
Arbitration/litigation costs....... 1,019 954 595 -- 3,303
------- ------- -------- -------- --------
Income before provision for income
taxes............................. 2,664 8,947 9,741 13,776 3,928
Provision for income taxes......... 980 3,250 3,330 4,408 1,257
------- ------- -------- -------- --------
Net income......................... $ 1,684 $ 5,697 $ 6,411 $ 9,368 $ 2,671
======= ======= ======== ======== ========
Earnings per share:
Basic............................ $ 0.21 $ 0.74 $ 0.81 $ 1.22 $ 0.39
Diluted.......................... $ 0.20 $ 0.71 $ 0.77 $ 1.20 $ 0.38
Weighted average common shares
outstanding and dilutive potential
common shares outstanding
Basic............................ 8,114 7,695 7,941 7,672 6,914
Diluted.......................... 8,607 8,066 8,349 7,815 7,065
<CAPTION>
December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................... $55,748 $58,372 $ 63,265 $ 59,060 $ 46,801
Total assets....................... 76,353 85,048 94,837 104,345 97,104
Stockholders' equity............... 63,851 69,170 78,948 78,369 69,508
</TABLE>
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The discussion contained in this section as well as elsewhere in this Annual
Report on Form 10-K 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.
The following table sets forth for the fiscal periods indicated, the
percentage of total revenues represented by certain items in MicroTouch's
statement of operations:
Percentage of Total Revenues
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Total Revenues...................................... 100.0% 100.0% 100.0%
Cost of Sales....................................... 65.0 61.6 66.2
Gross Profit...................................... 35.0 38.4 33.8
Operating Expenses:
Research and Development.......................... 6.2 7.6 8.1
Sales and Marketing............................... 14.6 14.7 13.3
General and Administrative........................ 6.2 6.9 7.1
Amortization of Intangible Assets and Purchased
Technology....................................... 0.4 0.4 0.2
Non-recurring Charge.............................. 0.0 0.0 1.2
Total Operating Expenses........................ 27.4 29.6 29.9
Operating Income.................................... 7.6 8.8 3.9
Other Income, net................................... 0.5 0.7 0.8
Arbitration Litigation Costs........................ 0.5 0.0 2.1
Income Before Provision for Income Taxes............ 7.6 9.5 2.6
Net Income.......................................... 5.0 6.5 1.7
</TABLE>
Years Ended December 31, 1999 and 1998
Net Sales. Net sales in the year ended December 31, 1999 increased from the
corresponding period of 1998 by $13.1 million, or 9.1%, to $157.5 million. The
increase in net sales primarily reflects increased volumes in North America
and Asia Pacific, offset by decreased volume in Europe. In the year ended
December 31, 1999, sales from international operations were 46.3% of total
sales compared with 47.7% in the comparable period of 1998. This decrease
primarily reflects lower touchscreen volume in Europe, offset by higher
touchscreen volume in Asia Pacific, combined with the impact of increased
sales in North America.
Gross Profit. Gross profit for the year ended December 31, 1999 decreased
from the year ended December 31, 1998 by $2.3 million or 4.0%, to $53.2
million. As a percentage of net sales, gross profit decreased from 38.4% in
the year ended December 31, 1998 to 33.8% in the year ended December 31, 1999.
The decrease in gross margin percent was primarily due to (a) a change in
product mix reflecting a shift to flat touchscreens, which currently yield a
lower gross profit, (b) the impact of expanding resistive touchscreen
production at the Methuen plant, and (c) continued lower than historical gross
profit in the Factura kiosk business, which has since been divested.
13
<PAGE>
Research and Development. Research and development expenses for the year
ended December 31, 1999 increased over the corresponding period of 1998 by
$1.9 million, or 17.5%, to $12.8 million. As a percentage of net sales,
research and development expenses increased from 7.6% in the year ended
December 31, 1998 to 8.1% in the year ended December 31, 1999. The increase in
spending both on an absolute dollar basis and as a percentage of net sales
reflects the continued investment in programs to develop improvements in
touchscreen technologies, especially a next generation version of capacitive
and resistive products.
Sales and Marketing. Sales and marketing expenses of $20.9 million for the
year ended December 31, 1999 remained relatively flat with the corresponding
period of 1998. As a percentage of net sales, sales and marketing expenses
decreased from 14.7% for the year ended December 31, 1998 to 13.3% for the
corresponding period of 1999.
General and Administrative. General and administrative expenses for the year
ended December 31, 1999 increased from the corresponding period of 1998 by
$1.2 million, or 12.1%, to $11.2 million. As a percentage of net sales,
general and administrative expenses increased slightly from 6.9% for the
fiscal year ended December 31, 1998 to 7.1% for the corresponding period of
1999. The increase in spending both on an absolute dollar basis and as a
percentage of net sales reflects increased Information Technology expenses,
especially costs associated with the establishment of the Company's e-commerce
website, Touchstore.com.
Amortization of Intangible Assets. For the year ended December 31, 1999,
operating expenses included $333,000 of amortization relating to various
acquisitions and purchases of technologies, as compared to $502,000 for the
corresponding period of 1998.
Non-recurring Factura Charge. During the fourth quarter of 1999, the Company
committed to a plan to dispose of its Factura kiosk business. As a result, the
Company recorded a pre-tax non-recurring charge of $1,950,000 in the fourth
quarter of 1999. On January 18, 2000, the Company completed the sale of
certain of the assets of the Factura division to Factura Corporation, a new
company partially owned by former management of the division. As a result of
this transaction, the Company received cash and promissory notes in the
approximate amount of $400,000 and will receive certain lease payments over a
5-year period. The Company may also receive additional payments based upon the
buyer achieving certain specified revenue levels over the next five years The
non-recurring charge includes (i) $43,000 associated with personnel reductions
of approximately 12 positions at the Factura division prior to the sale, (ii)
$417,000 associated with estimated lease costs for the Factura facility
subsequent to the sale date (net of estimated sublease income), (iii) $210,000
associated with legal and other exit costs, and (iv) $1,280,000 associated
with a loss on the sale of the non-cash assets of the Factura division. No
amounts had been paid as of December 31, 1999. Included in the consolidated
results of operations for 1997, 1998 and 1999 are Factura sales and operating
income, respectively, of $7.7 million and $80,000 in 1997, and Factura sales
and operating losses, respectively, of $6.9 million and $856,000 in 1998 and
$4.4 million and $1.5 million in 1999. The loss on the sale consists primarily
of the writedown to fair value of certain fixed assets and goodwill.
Operating Income. Operating income for the fiscal year ended December 31,
1999 decreased from the $12.8 million amount reported for fiscal year 1998.
This decrease is primarily due to the decrease in gross percent outlined
above, as well as the non-recurring charge of $1.95 million related to
Factura.
Other Income, net. Other income in the year ended December 31, 1999 was $1.2
million as compared to $1.0 million for the corresponding period of 1998.
Other income in the 1999 period included $1.1 million in interest income, net
of interest expense, as compared to $1.5 million of net interest income for
the year ended December 31, 1998. Foreign exchange gains were $135,000 in the
year ended December 31, 1999, primarily due to currency fluctuations in the
Far East, as compared to a loss of $340,000 for the corresponding period of
1998.
Litigation Costs. During the first quarter of 1999, the Company recorded a
charge of $3.3 million related to a judgement against the Company in a
lawsuit. 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. (See Note 8 to Consolidated Financial
Statements and "Business--Legal Proceedings".)
14
<PAGE>
Provision for Income Taxes. The Company's effective tax rate for the years
ended December 31, 1999 and 1998 was 32.0%. The 1999 effective tax rate
differed from the federal statutory rate of 34% primarily as a result of the
benefit related to tax-exempt interest income and the utilization of foreign
net operating losses.
Geographic Segments. Domestic pre-tax income of $527,000 represented a
decrease of $8.8 million or 94% from 1998. This decrease in pre-tax profit is
primarily the result of the $3.3 million litigation charge, the Factura $1.95
million non-recurring charge, and the impact of reduced gross margin
percentages as discussed above. International pre-tax income of $3.4 million
represented a decrease of $1.0 million or 23% from the corresponding period of
1998. This decrease was primarily due to the impact of reduced gross margin
percentages especially in Europe, as discussed above.
Years Ended December 31, 1998 and 1997
Net Sales. Net sales in the fiscal year ended December 31, 1998 increased
from the corresponding period of 1997 by $15.9 million, or 12%, to $144.4
million. The increase in net sales primarily reflects increased international
sales volume. Sales from international operations were $68.9 million or 47.7%
of total sales and represented an increase of $15.0 million or 28% over
international sales in the comparable period of 1997. This increase primarily
reflects higher touchscreen volume into the European and Asia Pacific
(excluding Japan) markets.
Gross Profit. Gross profit for the fiscal year ended December 31, 1998
increased over the fiscal year ended December 31, 1997 by $10.5 million or
23%, to $55.4 million. As a percentage of net sales, gross profit increased
from 35.0% in the fiscal year ended December 31, 1997 to 38.4% in the fiscal
year ended December 31, 1998. The increase in gross margin percent primarily
reflects the impact of a $2.3 million (pretax) special non-recurring charge
related to the Company's whiteboard products in 1997, as well as increased
touchscreen product yields and improved manufacturing efficiencies in 1998.
Research and Development. Research and development expenses for the fiscal
year ended December 31, 1998 increased over the corresponding period of 1997
by $2.9 million, or 37%, to $10.9 million. As a percentage of net sales,
research and development expenses increased from 6.2% in the fiscal year ended
December 31, 1997 to 7.6% in the fiscal year ended December 31, 1998. The
increase in spending both on an absolute dollar basis and as a percentage of
net sales reflects the initiation of a program to develop a next generation
capacitive product line with improved performance and cost savings over the
existing product line, as well as advancing its resistive technology The
Company expects that total research and development expenses will most likely
increase in the future on an absolute spending basis and as a percentage of
net sales primarily due to the research on the Company's core touchscreen
technology.
Sales and Marketing. Sales and marketing expenses for the fiscal year ended
December 31, 1998 increased over the corresponding period of 1997 by $2.5
million, or 13%, to $21.2 million. As a percentage of net sales, sales and
marketing expenses increased slightly from 14.6% for the fiscal year ended
December 31, 1997 to 14.7% for the corresponding period of 1998. The increase
in absolute spending in 1998 was also the result of sales costs associated
with supporting large OEM customers and expanding the Company's Internet
presence, as well as the development of a remote sales information systems
sales program.
General and Administrative. General and administrative expenses for the
fiscal year ended December 31, 1998 increased from the corresponding period of
1997 by $2.1 million, or 26%, to $10.0 million. As a percentage of net sales,
general and administrative expenses increased from 6.2% for the fiscal year
ended December 31, 1997 to 6.9% for the corresponding period of 1998,
primarily as a result of spending to improve systems supporting the Company's
infrastructure in the Information Technology and E-commerce areas and legal
expenses.
Amortization of Intangible Assets. For the fiscal year ended December 31,
1998, operating expenses included $502,000 of amortization relating to various
acquisitions and purchases of technologies, as compared to $477,000 for the
corresponding period of 1997.
15
<PAGE>
Operating Income. Operating income for the fiscal year ended December 31,
1998 of $12.8 million represented an increase of $3.0 million, or 31%, over
the fiscal year ended December 31, 1997. This increase is primarily due to the
revenue increase discussed above and the absence of the previously discussed
special whiteboard restructuring charge of $2.3 million taken in 1997.
Other Income, net. Other income in the fiscal year ended December 31, 1998
was $1.0 million as compared to $0.6 million for the corresponding period of
1997. Other income in the 1998 period included $1.5 million in interest
income, net of interest expenses, as compared to $1.4 million of net interest
income for the fiscal year ended December 31, 1997. Foreign exchange losses
were $340,000 in the fiscal year ended December 31, 1998, primarily due to
currency fluctuations in the Far East, as compared to a loss of $999,000 for
the corresponding period of 1997.
Arbitration Costs. During 1997, the Company expensed a final payment
amounting to $595,000 in its international arbitration versus Nissha Printing
Company Ltd. (See Note 8 to Consolidated Financial Statements)
Provision for Income Taxes. The Company's effective tax rate for the fiscal
years ended December 31, 1998 and 1997 was 32.0% and 34.2%, respectively. The
effective tax rates 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 tax-exempt interest income.
Geographic Segments. Domestic pre-tax income of $9.3 million represented an
increase of $1.8 million or 24% over 1997. This increase in pre-tax profit
primarily reflects the impact of the $2.3 million non-recurring charge taken
in 1997. International pretax income of $4.4 million represented an increase
of $2.2 million or 101% over the corresponding period of 1997 on the strength
of the previously discussed international sales increases and improved gross
margins.
Liquidity and Capital Resources
As of December 31, 1999, the Company had net working capital of $46.8
million, including approximately $19.9 million in cash and marketable
securities. The Company reported a net cash flow from operating activities of
$1.3 million for the year ended December 31, 1999. Additionally, the Company
maintains a $7.5 million bank line of credit, including letters of credit, in
the U.S. and a $2.4 million bank line of credit in the U.K. As of December 31,
1999, the Company had $3.1 million outstanding under the U.S. line of credit
and $1.5 million outstanding under the U.K line of credit.
The Company's capital expenditures were approximately $7.7 million in 1999.
During 1999, the Board of Directors of the Company approved additional
extensions to a repurchase program of the Company's common stock, originally
approved in December 1997 and extended during 1998. Under the 1999 extensions,
the amount of common stock to be repurchased is not to exceed $13.0 million.
In the year ended December 31, 1999, the Company repurchased approximately
894,000 shares at an aggregate cost of $12.8 million, of which 168,000 shares
at an aggregate cost of $2.2 million relate to extensions approved in 1998.
These shares have been and will be used for the Company's stock option plans,
employee stock purchase plan and for other corporate purposes, possibly
including acquisitions.
Pending operational needs, the Company has invested its cash in investment
grade, short term, interest-bearing securities. The Company believes that
these 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 2001. While the Company regularly evaluates acquisition candidates,
conducts preliminary discussions regarding acquisitions and may pursue
acquisition opportunities available to it, there can be no assurance that any
such acquisition will be made or, if made, whether such acquisition will be
financially successful.
16
<PAGE>
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. While the Company maintains some
inventory of ASICs, coated glass and other components, the inventory amounts
maintained are not sufficient to eliminate the potential impact of prolonged
supply 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.
Year 2000 Compliance
During 1999 the Company completed its Year 2000 readiness program. In
connection with this program, the Company converted or upgraded, and tested,
all systems and products that had material Year 2000 compliance issues. The
Company has not segregated the cost of making these items compliant as the
related software conversion or upgrades were installed by existing employees
and consultants of the Company in conjunction with their normal duties, and
would have been purchased in the normal course of business.
Subsequent to December 31, 1999, the Company has not experienced any
material Year 2000 transition issues. However, there can be no assurance that
a material customer or vendor will not experience a Year 2000 transition
issue, or that such transition issue will not have a material negative impact
on the Company's consolidated financial position, results of operations, or
cash flow.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data
1.Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Public Accountants............................. F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999......... F-2
Consolidated Statements of Operations and Comprehensive Income for
each of the three years in the period ended December 31, 1999....... F-3
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1999......................... F-4
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1999.................................. F-5
Notes to Consolidated Financial Statements........................... F-6
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MicroTouch Systems, Inc:
We have audited the accompanying consolidated balance sheets of MicroTouch
Systems, Inc (a Massachusetts corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations and
comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999 These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MicroTouch
Systems, Inc and subsidiaries as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
-------------------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 2000
F-1
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1)....................... $ 5,471 $ 4,329
Marketable securities (Note 1)........................... 32,191 15,566
Accounts receivable, net of allowances of $4,955 and
$1,701 at December 31, 1998 and 1999, respectively...... 23,265 30,387
Inventories (Note 1)..................................... 15,954 18,014
Deferred income taxes (Note 4)........................... 6,837 4,854
Prepaid expenses and other current assets................ 1,217 1,177
-------- --------
Total current assets................................... 84,935 74,327
Property and equipment, at cost (Note 1)
Machinery and equipment.................................. 16,070 23,361
Furniture and fixtures................................... 1,560 1,930
Leasehold improvements................................... 4,283 4,220
Land and buildings....................................... 6,426 6,516
-------- --------
28,339 36,027
Less--Accumulated depreciation and amortization............ 10,887 15,052
-------- --------
Net property and equipment............................. 17,452 20,975
Other assets............................................... 1,958 1,802
-------- --------
Total assets............................................... $104,345 $ 97,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 2)................................... $ 3,760 $ 4,635
Accounts payable......................................... 9,336 10,190
Accrued payroll and related costs........................ 3,011 2,763
Accrued expenses......................................... 9,768 9,938
-------- --------
Total current liabilities.............................. 25,875 27,526
Long-term notes payable.................................... 101 70
-------- --------
Total liabilities...................................... 25,976 27,596
Stockholders' equity (Note 3)
Preferred stock, $.01 par value per share--500,000 shares
authorized, none issued and outstanding at December 31,
1998 and 1999........................................... -- --
Common stock, $.01 par value per share--20,000,000 shares
authorized, 8,256,128 and 8,379,861 shares issued at
December 31, 1998 and 1999, respectively................ 82 84
Additional paid-in capital............................... 62,613 64,107
Treasury stock at cost, 959,576 and 1,853,276 shares at
December 31, 1998 and 1999, respectively................ (13,503) (26,292)
Accumulated other comprehensive loss..................... (1,382) (1,621)
Retained earnings........................................ 30,559 33,230
-------- --------
Total stockholders' equity............................. 78,369 69,508
-------- --------
Total liabilities and stockholders' equity............... $104,345 $ 97,104
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MICROTOUCH SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales (Notes 1 and 6)........................ $128,481 $144,370 $157,491
Cost of sales.................................... 83,553 88,950 104,323
-------- -------- --------
Gross profit................................. 44,928 55,420 53,168
Operating expenses:
Research and development....................... 7,985 10,904 12,816
Sales and marketing............................ 18,765 21,235 20,862
General and administrative..................... 7,944 10,012 11,225
Amortization of intangibles.................... 477 502 333
Non-recurring charge........................... -- -- 1,950
-------- -------- --------
Total operating expenses..................... 35,171 42,653 47,186
-------- -------- --------
Operating income........................... 9,757 12,767 5,982
Other income, net................................ 579 1,009 1,249
Arbitration/litigation costs (Note 8)............ 595 -- 3,303
-------- -------- --------
Income before income taxes....................... 9,741 13,776 3,928
Income taxes (Note 4)............................ 3,330 4,408 1,257
-------- -------- --------
Net income....................................... $ 6,411 $ 9,368 $ 2,671
======== ======== ========
Earnings per share (Note 1):
Basic.......................................... $ 0.81 $ 1.22 $ 0.39
Diluted........................................ $ 0.77 $ 1.20 $ 0.38
Weighted average and dilutive potential common
shares outstanding (Note 1):
Basic.......................................... 7,941 7,672 6,914
Diluted........................................ 8,349 7,815 7,065
Comprehensive income:
Net income....................................... $ 6,411 $ 9,368 $ 2,671
Currency translation adjustment.................. (558) (523) (60)
Unrealized gain (loss) on marketable securities,
net of tax expense (benefit) of $(10), $70 and
$(84)........................................... (21) 148 (179)
-------- -------- --------
Comprehensive income............................. $ 5,832 $ 8,993 $ 2,432
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock Total
---------------- Paid-in Comprehensive Retained -------------------- Stockholders'
Shares Amount Capital Income (loss) Earnings Shares Amount Equity
--------- ------ ---------- ------------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1996................... 8,220,623 $ 82 $60,096 $ (428) $17,383 (536,140) $ (7,963) $69,170
Exercise of stock
options................ (2,551) 310,979 4,560 2,009
Employee stock purchase
plan................... 42 28,112 416 458
Compensation expense
related to common stock
options................ 30 30
Effect of exchange rate
changes................ (558) (558)
Tax benefit related to
exercise of stock
options and
disqualifying
dispositions........... 1,795 1,795
Unrealized loss on
securities available
for sale, net of tax... (21) (21)
Purchase of treasury
stock.................. (23,000) (346) (346)
Net income.............. 6,411 6,411
--------- ---- ------- -------- ------- ---------- -------- -------
Balance December 31,
1997................... 8,220,623 82 61,963 (1,007) 21,243 (220,049) (3,333) 78,948
Exercise of stock
options................ 15,632 247 (52) 8,725 111 306
Employee stock purchase
plan................... 19,873 205 15,048 227 432
Compensation expense
related to common stock
options................ 198 198
Effect of exchange rate
changes................ (523) (523)
Unrealized gain on
securities available
for sale, net of tax... 148 148
Purchase of treasury
stock.................. (763,300) (10,508) (10,508)
Net income.............. 9,368 9,368
--------- ---- ------- -------- ------- ---------- -------- -------
Balance December 31,
1998................... 8,256,128 82 62,613 (1,382) 30,559 (959,576) (13,503) 78,369
Exercise of stock
options................ 79,719 1 772 773
Employee stock purchase
plan................... 44,014 1 479 480
Compensation expense
related to common stock
options................ 30 30
Effect of exchange rate
changes................ (60) (60)
Tax benefit related to
exercise of stock
options and
disqualifying
dispositions........... 213 213
Unrealized loss on
securities available
for sale, net of tax... (179) (179)
Purchase of treasury
stock.................. (893,700) (12,789) (12,789)
Net income.............. 2,671 2,671
--------- ---- ------- -------- ------- ---------- -------- -------
Balance December 31,
1999................... 8,379,861 $ 84 $64,107 $ (1,621) $33,230 (1,853,276) $(26,292) $69,508
========= ==== ======= ======== ======= ========== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 6,411 $ 9,368 $ 2,671
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization.................. 3,116 5,870 4,959
Compensation expense related to common stock
options....................................... 30 198 30
Tax benefit from exercise of stock options and
disqualifying dispositions.................... 1,795 -- 213
(Increase) decrease in assets--
Accounts receivable........................... (1,372) (5,917) (7,122)
Inventories................................... (3,998) 3,121 (2,060)
Prepaid expenses and other current assets..... (52) (106) 40
Deferred income taxes......................... (1,364) 32 1,983
Other assets.................................. 750 (60) (177)
Increase (decrease) in liabilities--
Accounts payable.............................. (1,177) 3,487 854
Accrued expenses.............................. 1,188 2,739 (78)
-------- -------- --------
Net cash provided by operating activities.... 5,327 18,732 1,313
Cash flows from investing activities:
Purchase of property and equipment, net......... (8,551) (9,540) (7,688)
Sale and maturity of marketable securities...... 16,287 12,240 17,372
Purchase of marketable securities............... (14,967) (19,006) (1,387)
-------- -------- --------
Net cash provided by (used in) investing
activities.................................. (7,231) (16,306) 8,297
Cash flows from financing activities:
Exercise of stock options and sale of common
stock, net..................................... 2,467 738 1,253
Increase in notes payable....................... -- 3,861 844
Purchase of treasury stock...................... (346) (10,508) (12,789)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 2,121 (5,909) (10,692)
Effect of exchange rates on cash................. (558) (523) (60)
-------- -------- --------
Net decrease in cash and cash equivalents........ (341) (4,006) (1,142)
Cash and cash equivalents, beginning of period... 9,818 9,477 5,471
-------- -------- --------
Cash and cash equivalents, end of period......... $ 9,477 $ 5,471 $ 4,329
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid................................... $ 30 $ 135 $ 136
======== ======== ========
Income taxes paid............................... $ 3,369 $ 1,929 $ 4,201
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Summary of Significant Accounting Policies
a) Nature of the Business
MicroTouch Systems, Inc. develops, manufactures and sells touch and pen
input systems, including touch sensitive screens, digitizers for pen
computers, ThruGlass products, and electronic P.C whiteboards.
b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MicroTouch Systems, Inc. and its wholly owned subsidiaries (together, the
"Company"). All significant intercompany accounts, transactions and profits
have been eliminated.
c) Earnings per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No 128, Earnings Per Share. Basic earnings per
share is computed using the weighted average number of common shares
outstanding during the year. Diluted earnings per share is 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. Included in
diluted earnings per share are 408,000, 143,000 and 151,000 dilutive potential
common shares for 1997, 1998 and 1999, respectively. Excluded from diluted
earnings per share were options to purchase 12,000, 585,000 and 943,000 shares
in 1997, 1998 and 1999, respectively. These shares were excluded as the
exercise price was greater than the average market price of the common shares
during the respective years.
d) Cash and Cash Equivalents
The Company held no liquid investments with original maturities of less than
90 days at December 31, 1998 or December 31, 1999. Cash equivalents are stated
at cost, which approximates market value.
e) Marketable Securities
Marketable securities consist of investment-grade, federal tax-exempt
municipal bonds. The aggregate market value, cost basis, and unrealized gains
and losses of securities available for sale, by major security type, as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Market Unrealized Unrealized
Value Cost Basis Gains Losses
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Tax Exempt Securities at
December 31, 1998.............. $32,191,000 $31,850,000 $344,000 $ 3,000
=========== =========== ======== ========
Tax Exempt Securities at
December 31, 1999.............. $15,566,000 $15,710,000 $ 7,000 $151,000
=========== =========== ======== ========
</TABLE>
Securities available for sale in the accompanying balance sheet at December
31, 1998 and 1999 include $7,782,000 and $4,454,000 respectively, with
contractual maturities of one year or less, $23,346,000 and $10,158,000
respectively, with contractual maturities of one through five years and
$1,063,000 and $954,000 respectively, with maturities of more than five years.
Expected maturities may differ from contractual maturities as a result of the
Company's intent to sell these securities prior to maturity and as a result of
call options that enable the issuer to redeem these securities at an earlier
date.
F-6
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
f) Inventories
Inventories, consisting of material, material overhead, labor and
manufacturing overhead, are stated at the lower of cost (first-in, first-out)
or market and consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
----------- -----------
<S> <C> <C>
Raw materials..................................... $ 6,286,000 $ 5,231,000
Work-in-process................................... 1,167,000 3,608,000
Finished goods.................................... 8,501,000 9,175,000
----------- -----------
$15,954,000 $18,014,000
=========== ===========
</TABLE>
g) Property and Equipment
The Company provides for depreciation and amortization, using the straight-
line method, through charges to operations in amounts that allocate the cost
of property and equipment over their estimated useful lives. The estimated
useful life for property and equipment is 3 to 7 years except for a building
owned by the Company, the life of which is 25 years.
Maintenance and repairs are charged to operations as incurred. When property
and equipment is sold or otherwise disposed of, the asset cost and accumulated
depreciation are removed from the accounts, and the resulting gain or loss, if
any, is included in the results of operations.
h) Revenue Recognition
The Company recognizes product revenue upon shipment. Service revenues are
recognized as the services are provided. The Company provides allowances for
estimated sales returns and bad debts and provides for the estimated cost of
warranty at the time of product shipment.
i) Foreign Currency Translation
The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at year end. Revenues and
expenses are translated using exchange rates in effect during the year. Gains
and losses from foreign currency translation are credited or charged to
cumulative translation adjustment included in stockholders' equity in the
accompanying consolidated balance sheets. Gains and losses from foreign
currency transactions are included in other income and amounted to a loss of
approximately $999,000 for the year ended December 31,1997, a loss of
approximately $340,000 for the year ended December 31, 1998 and a gain of
approximately $135,000 for the year ended December 31, 1999.
j) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting periods. Actual results could differ from those estimates.
k) Disclosures About Fair Value of Financial Instruments
SFAS No 107, Disclosures About Fair Value of Financial Instruments, requires
that disclosure be made of estimates of the fair value of each class of
financial instrument. Financial instruments held by the Company as of December
31, 1999 consist primarily of cash equivalents and marketable securities,
short-term trade receivables, payables and notes payable for which the
carrying amounts approximate fair values.
F-7
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
l) Capitalized Software Development Costs
Software development costs for new software and for enhancements to existing
software are expensed as incurred prior to the establishment of technological
feasibility and subsequent to general release of the product. Otherwise
software development costs are capitalized and amortized over the estimated
life of the product. There were no capitalized software costs as of December
31, 1998 and 1999.
m) Other Assets
The Company periodically assesses the realizability of its long-lived assets
in accordance with SFAS No 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. At each balance sheet
date, the Company evaluates the realizability of goodwill based on
expectations of non-discounted future cash flows for each subsidiary having a
material goodwill balance. If the sum of the expected non-discounted future
cash flow is less than the carrying amount of goodwill, the Company would
recognize an impairment loss.
n) 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 non-owner related 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.
o) Recent Accounting Pronouncements
In March 1998, The American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
computer software costs associated with internal use software to be expensed
as incurred until certain capitalization criteria are met. The adoption of SOP
98-1 did not have a material impact on the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5 requires all costs associated with pre-opening, pre-
operating and organization activities to be expensed as incurred. The Company
adopted SOP 98-5 effective January 1, 1999. The adoption of SOP 98-5 did not
have a material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No 137, issued in June 1999, deferred the effective date of SFAS No 133 to
fiscal years beginning after June 15, 2000.
2) Line of Credit
The Company has demand bank lines of credit in the U.S totaling $7,500,000,
including letters of credit, under which the Company may borrow on an
unsecured basis at the bank's prime rate. There was a balance of $2,264,000
outstanding under these lines at December 31, 1998 and $3,105,000 outstanding
at December 31, 1999.
F-8
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has a demand bank line of credit in the United Kingdom in the
amount of approximately $2,400,000 under which the Company may borrow on a
secured basis at a negotiated rate. There was a balance of $1,500,000
outstanding under this line at December 31, 1998 and $1,530,000 outstanding at
December 31, 1999.
3) Stockholders' Equity
a) Equity Incentive Plans
In 1992, the stockholders of the Company approved the 1992 Equity Incentive
Plan (the 1992 Plan) which replaced the Company's 1983 Incentive Stock Option
Plan (the 1983 Plan). In June 1997 and 1998, the 1992 Plan was amended by the
stockholders of the Company. The 1992 Plan, as amended, authorizes the grant
of stock options (incentive and non-qualified), stock appreciation rights
(SARs), performance shares or restricted stock (individually and collectively,
the Awards) for the purchase of an aggregate of 2,750,000 shares of common
stock, including shares that are issuable pursuant to outstanding stock
options under the 1983 Plan. Incentive stock options will be granted at not
less than the fair market value at the date of grant. Non-qualified stock
options will be granted at not less than 50% of the fair market value at the
date of grant. Options granted on or before July 31, 1998 vest ratably over
four years. Options granted after July 31, 1998 vest over three years at a
rate of 20% in the first year and 40% in each of the second and third years.
At December 31, 1999, options to purchase 1,472,727 shares of common stock
were outstanding and 341,818 shares of common stock were available for future
grants under the 1992 Plan. As of December 31, 1999, no SARs, performance
shares or other restricted stock have been awarded under the 1992 Plan.
In 1998, the Board of Directors adopted a new stock option plan (the 1998
Plan). The 1998 Plan authorizes the grant of non-qualified stock options (the
Awards) for the purchase of an aggregate of 1,000,000 shares of common stock.
Options will be granted at not less than the fair market value at the date of
grant and generally vest over three years. At December 31, 1999, options to
purchase 266,800 shares of common stock were outstanding and 733,200 shares of
common stock were available for future grants under the 1998 Plan.
The Board of Directors has appointed the Compensation Committee (the
Committee) to administer the 1992 Plan and the 1998 Plan. The Committee
generally selects the individuals who will receive the Awards, and the terms
and conditions of those Awards.
In 1993, options to purchase 200,000 shares were granted to the Company's
Chairman of the Board of Directors under a 10 year performance incentive
agreement pursuant to the 1992 Plan. As of December 31, 1999, 160,000 shares
have been exercised and the remaining 40,000 shares, which are included in the
1992 Plan above, were exercisable under this grant.
In 1994, the Board of Directors adopted the 1994 Director Stock Option Plan
(the 1994 Plan) which was approved by the stockholders at the 1995 annual
stockholders' meeting The 1994 Plan authorizes the grant of non-qualified
stock options to all directors of the Company who are not employees of the
Company or any of its subsidiaries. An aggregate of 200,000 shares of common
stock have been authorized for issuance under the 1994 Plan. The Board of
Directors administers the 1994 Plan. Under the terms of the 1994 Plan, as
amended, each non-employee director, upon initial election to the Board of
Directors, shall receive options to purchase 10,000 shares of common stock. In
lieu of grants upon election, current directors received initial grants upon
the effective date of the adoption of the 1994 Plan. Immediately following the
annual meeting of the stockholders each year, each non-employee director of
the Company continuing in office shall automatically be granted options to
purchase 5,000 shares of common stock. Options will be granted at not less
than fair market value Options granted before June 24, 1998 generally vested
over two years. Options granted on or after June 24, 1998 vest over three
years. At December 31, 1999, options to purchase 102,500 shares of common
stock were outstanding and 62,500 shares of common stock were available for
future grants under the 1994 Plan.
F-9
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the stock option activity for the years ended
December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares per Share
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996..................... 1,169,200 $1.75 - $25.75
Granted............................................ 385,307 15.75 - 31.50
Terminated......................................... (60,043) 6.19 - 26.00
Exercised.......................................... (310,979) 1.75 - 17.81
---------
Outstanding at December 31, 1997..................... 1,183,485 1.75 - 31.50
Granted............................................ 516,745 11.81 - 19.25
Terminated......................................... (109,873) 7.75 - 31.50
Exercised.......................................... (24,357) 6.19 - 16.89
---------
Outstanding at December 31, 1998..................... 1,566,000 1.75 - 31.50
Granted............................................ 443,350 11.88 - 17.13
Terminated......................................... (87,604) 12.81 - 31.50
Exercised.......................................... (79,719) 1.75 - 15.75
---------
Outstanding at December 31, 1999..................... 1,842,027 $1.75 - $31.50
=========
</TABLE>
The following is a summary of options outstanding and exercisable at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Number Weighted Average Number
Range of Outstanding Weighted Average Remaining Exercisable Weighted Average
ExercisePrices At 12/31/99 Exercise Price Contractual Life At 12/31/99 Exercise Price
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.75
-
$12.81 528,900 $ 9.77 3.9 218,425 $ 5.50
$12.82
-
$15.13 384,987 14.86 5.7 201,280 14.87
$15.25
-
$15.56 394,946 15.51 5.0 89,616 15.51
$15.63
-
$19.75 370,844 18.32 6.3 176,682 18.06
$20.56
-
$31.50 162,350 23.64 6.8 104,176 23.49
--------- -------
1,842,027 $15.01 5.3 790,179 $14.20
========= =======
</TABLE>
The Company accounts for stock options at intrinsic value with disclosure of
the effects of fair value accounting on net income and earnings per share on a
pro forma basis. Had compensation costs for the stock option plans been
determined using the fair value method, the Company's pro forma net loss,
basic and diluted loss per share would have been $0.5 million, $.07 and $.07
respectively for the fiscal year ended December 31, 1999. The Company's pro
forma net income, basic and diluted earnings per share would have been $7.0
million, $.91 and $.89 respectively for the fiscal year ended December 31,
1998 and $3.9 million, $.49 and $.47, respectively for the fiscal year ended
December 31, 1997 Pro forma net income and earnings per share have not been
calculated for options granted prior to January 1, 1995. Pro forma
compensation cost may not be representative of that to be expected in future
years.
The weighted average fair values of all options granted in 1997, 1998 and
1999 were $9.79, $7.22 and $7.65, respectively. The values were estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997, 1998 and 1999,
respectively: risk free interest rate of 6.3%, 5.7% and 5.1%, expected
dividend yields of zero for all periods, expected option lives of 5 years for
all options granted in 1997 and 1998 and 4 years for options granted in 1999,
and expected volatility of 69%, 66% and 64%.
F-10
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
b) Shareholder Rights Plan
In January 1996, the Company adopted a Shareholder Rights Plan and declared
a dividend distribution of one right for each outstanding share of the
Company's common stock to stockholders of record on January 19, 1996 and
authorized the issuance of one right for each share of the Company's common
stock issued between January 19, 1996 and the date on which the right becomes
separable from the common stock. Each right entitles the shareholders to buy
from the Company 1/100 of a share of Series A Junior Participating Preferred
Stock, $.10 par value, at a purchase price of $75 per right. The rights will
be exercisable or separable from the common stock until ten business days
after a party acquires beneficial ownership of 20% or more of the Company's
common stock or announces a tender offer for at least 20% of its common shares
outstanding.
The rights are subject to adjustment and may be redeemed by the Company at a
price of $0.01 per right at any time until the tenth day following the point
at which they become exercisable. In the event that the Company is acquired in
a merger or other business combination transaction, each right, other than
those held by the acquiring party, will entitle its holders to purchase an
amount of shares of the Company's common stock which equals the exercise price
of the rights divided by one-half of the current market price of the common
stock. The rights will expire, unless earlier redeemed or exchanged, on
January 19, 2006, or earlier in certain circumstances.
4) Income Taxes
The Company accounts for income taxes in accordance with SFAS No 109,
"Accounting for Income Taxes." Provisions for income taxes recognize the tax
effect of all revenue and expense transactions as well as any changes during
the period in deferred tax assets and liabilities. The effects of changes in
tax rates and laws on deferred tax assets and liabilities are reflected in net
income in the period in which such changes are enacted.
The components of domestic and foreign income before the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1998 1999
----------- ------------ -----------
<S> <C> <C> <C>
Domestic............................. $ 7,531,000 $ 9,336,000 $ 527,000
Foreign.............................. 2,210,000 4,440,000 3,401,000
----------- ------------ -----------
Total.............................. $ 9,741,000 $ 13,776,000 $ 3,928,000
=========== ============ ===========
</TABLE>
The provision for federal, state and foreign income taxes consists of the
following:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------------- --------------------------------- -------------------------------------
Federal State Foreign Federal State Foreign Federal State Foreign
----------- --------- --------- ----------- --------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current......... $ 2,903,000 $ 862,000 $ 929,000 $ 2,449,000 $ 247,000 $ 1,680,000 $ (1,567,000) $ (229,000) $ 1,070,000
Deferred/(Prepaid).. (1,052,000) (312,000) -- 20,000 12,000 -- 1,706,000 277,000 --
----------- --------- --------- ----------- --------- ----------- ------------ ---------- -----------
$ 1,851,000 $ 550,000 $ 929,000 $ 2,469,000 $ 259,000 $ 1,680,000 $ 139,000 $ 48,000 $ 1,070,000
=========== ========= ========= =========== ========= =========== ============ ========== ===========
</TABLE>
Significant items making up net deferred tax assets as of December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1999
----------- -----------
<S> <C> <C>
Reserves for inventories......................... $ 1,410,000 $ 531,000
Reserves for accounts receivable................. 1,569,000 430,000
Reserves for warranty............................ 790,000 431,000
Other reserves and accruals...................... 3,068,000 3,462,000
----------- -----------
Net deferred tax assets........................ $ 6,837,000 $ 4,854,000
=========== ===========
</TABLE>
F-11
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amount computed by applying the federal statutory income tax rate of 34%
to income before provision for income taxes differs from the Company's
provision for income taxes due to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Provision at federal statutory
rate............................ $ 3,312,000 $ 4,684,000 $ 1,336,000
State taxes, net of federal
benefit......................... 479,000 171,000 31,000
Foreign operating losses not
(benefited)..................... 135,000 138,000 (262,000)
Tax-exempt interest benefit...... (392,000) (436,000) (304,000)
Foreign sales corporation
benefit......................... (551,000) -- (128,000)
Other, net....................... 347,000 (149,000) 584,000
----------- ----------- -----------
$ 3,330,000 $ 4,408,000 $ 1,257,000
=========== =========== ===========
</TABLE>
5) Commitments
a) Royalty Agreement
The Company is a party to a licensing agreement in which it has acquired the
rights to various touch screen products and technologies. The licensing
agreement provides for the payment of royalties based on annual product sales
and sublicensing revenue and includes minimum royalty payment provisions. The
agreement will be in effect until the expiration of the last-to-expire patent
licensed under this agreement, which is in 2005.
b) Leased Facilities
The Company conducts its operations primarily in leased facilities under
operating lease arrangements expiring on various dates through September 2006.
Total rent expense under all leases for the years ended December 31, 1997,
1998 and 1999 was approximately $1,889,000, $1,543,000 and $2,224,000,
respectively.
Future minimum lease payments for all noncancelable leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending Amount
- ------------------ -----------
<S> <C>
2000................................................................ $ 1,655,000
2001................................................................ 1,505,000
2002................................................................ 1,378,000
2003................................................................ 708,000
2004................................................................ 398,000
2005 and thereafter................................................. 620,000
-----------
Total............................................................. $ 6,264,000
===========
</TABLE>
c) Post-retirement Benefits
The Company does not offer any post-retirement or post-employment benefits
to its employees.
6) Segment Information
Effective January 1, 1998, the Company adopted SFAS No 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No 131
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders It also establishes
F-12
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
standards for related disclosures about products and services, geographic
areas, and major customers. 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.
Geographic area information for the years ended December 31, 1997, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
United Kingdom
of Other
Domestic Great Britain International Consolidated
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31,
1997
Net sales............. $ 74,555,000 $ 35,011,000 $ 18,915,000 $ 128,481,000
Income (loss) before
provision for income
taxes................ 7,531,000 (211,000) 2,421,000 9,741,000
Identifiable assets... 71,649,000 16,235,000 6,953,000 94,837,000
Year Ended December 31,
1998
Net sales............. $ 75,511,000 $ 50,108,000 $ 18,751,000 $ 144,370,000
Income before
provision for income
taxes................ 9,336,000 4,119,000 321,000 13,776,000
Identifiable assets... 78,065,000 14,984,000 11,296,000 104,345,000
Year Ended December 31,
1999
Net sales............. $ 84,544,000 $ 44,617,000 $ 28,330,000 $ 157,491,000
Income before
provision for income
taxes................ 527,000 909,000 2,492,000 3,928,000
Identifiable assets... 63,786,000 15,468,000 17,850,000 97,104,000
</TABLE>
Intercompany transfers to the Company's foreign subsidiaries are transacted
at prices intended to allow the subsidiaries' earnings to be comparable to
unaffiliated distributors. Sales to unaffiliated customers outside the United
States, including U.S export sales, were approximately $57,409,000 in 1997,
$71,351,000 in 1998, and $75,952,000 in 1999, which represented 45%, 49% and
48% of net sales, respectively.
No single customer represented more than 10% of total sales during the years
ended December 31, 1998 or 1999.
7) Retirement Savings Plan
The Company has a 401(k) employee savings plan established in 1993 covering
substantially all employees. Matching company contributions are at the
discretion of the Board of Directors. Effective in 1998, the Board authorized
matching contributions up to $900 of participants' contributions. Company
contributions and other expenses of the Plan amounted to $156,000 in 1997,
$306,000 in 1998 and $306,000 in 1999.
8) Legal Proceedings
The Company had been 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 noncompetition provisions
and other terms of a distribution agreement between the Company and Nissha.
In January 1997, the Company was informed that while it had won the case
based on the merits of its claims, 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 was required to pay a portion of Nissha's
fees and costs related to the
F-13
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
arbitration, in the amount of $595,000. The Company expensed these fees and
costs awarded to Nissha as a part of its second quarter 1997 financial
results. This payment completed the Company's involvement in the matter.
The Company is 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, that the Company had discriminated against her 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 a related
misrepresentation claim. While the matter continues under the appeals process,
the Company has established a reserve for the full amount of the initial jury
judgement, as well as associated legal fees, in the amount of $3,303,000, of
which approximately $2,900,000 remained in the reserve at December 31, 1999.
The Company continues to believe that the claims are without merit but no
assurances can be given as to the outcome of this legal matter during the
appeal process.
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the Company. The Company has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial position or results of operations of the Company.
9) Non-recurring Charge
During the fourth quarter of 1999, the Company committed to a plan to
dispose of its Factura kiosk business. As a result, the Company recorded a
pre-tax non-recurring charge of $1,950,000 in the fourth quarter of 1999. On
January 18, 2000, the Company completed the sale of certain of the assets of
the Factura division to Factura Corporation, a new company partially owned by
former management of the division. As a result of this transaction, the
Company received cash and promissory notes in the approximate amount of
$400,000 and will receive certain lease payments over a 5-year period. The
Company may also receive additional payments based upon the buyer achieving
certain specified revenue levels over the next five years.
The non-recurring charge includes (i) $43,000 associated with personnel
reductions of approximately 12 positions at the Factura division prior to the
sale, (ii) $417,000 associated with estimated lease costs for the Factura
facility subsequent to the sale date (net of estimated sublease income), (iii)
$210,000 associated with legal and other exit costs, and (iv) $1,280,000
associated with a loss on the sale of the non-cash assets of the Factura
division. No amounts had been paid as of December 31, 1999.
Included in the consolidated results of operations for 1997, 1998 and 1999
are Factura sales and operating income, respectively, of $7.7 million and
$80,000 in 1997, and Factura sales and operating losses, respectively, of $6.9
million and $856,000 in 1998 and $4.4 million and $1.5 million in 1999. The
loss on the sale consists primarily of the writedown to fair value of certain
fixed assets and goodwill.
F-14
<PAGE>
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10) Quarterly Results (Unaudited)
Financial results by quarter for 1998 and 1999 are summarized below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales.............................. $ 35,727 $ 37,125 $ 34,948 $ 36,570
Gross Profit........................... 13,043 14,336 13,595 14,446 (a)
Net Income............................. 2,270 2,259 2,341 2,498
Diluted Earnings Per Share............. $ 0.28 $ 0.28 $ 0.30 $ 0.33
<CAPTION>
1999
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales.............................. $ 36,728 $ 41,044 $ 38,552 $ 41,167
Gross Profit........................... 13,638 14,832 13,502 11,196
Net Income (Loss)...................... (277) 2,097 2,167 (1,316)
Diluted Earnings (Loss) Per Share...... $ (0.04) $ 0.30 $ 0.31 $ (0.20)
</TABLE>
- --------
(a) Certain reclassifications have been made to the quarterly 1998 consolidated
statements of operations to conform to the full year 1998 presentation.
F-15
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The sections entitled "Nomination and Election of Directors", "Executive
Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" contained in the registrant's Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission by April 30, 2000, are incorporated herein by reference.
Item 11. Executive Compensation
The section entitled "Executive Compensation" contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission by April 30, 2000, is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Officers, Directors and
Principal Stockholders" contained in the Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission by April 30, 2000, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as a part of this Report:
(a)(1) Index to Consolidated Financial Statements
The following consolidated financial statements of MicroTouch Systems, Inc.
and subsidiaries are included pursuant to Item 8:
<TABLE>
<CAPTION>
Page in
Form 10K
--------
<S> <C>
Report of Independent Public Accountants............................. F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999......... F-2
Consolidated Statements of Operations and Comprehensive Income for
each of the three years in the period ended December 31, 1999....... F-3
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1999......................... F-4
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1999.................................. F-5
Notes to Consolidated Financial Statements........................... F-6
</TABLE>
II-1
<PAGE>
(a)(2) Index to Consolidated Financial Statement Schedules
The following consolidated financial statement schedules of MicroTouch
Systems, Inc. and subsidiaries are included pursuant to Item 8:
Schedule II Valuation and Qualifying Accounts for each of the three years
in the period ended December 31, 1999
Schedules not listed above have been omitted because they are not
applicable, not required or the information required to be set forth therein
is included in the consolidated financial statements or notes thereto.
(b) The Company filed no current reports on Form 8-K during the quarter
ended December 31, 1999.
(c) Exhibits
<TABLE>
<C> <S>
3.1 Restated Articles of Organization, as amended to date (5)
3.2 Amended and Restated By-laws (1)
4.1 Shareholder Rights Agreement (5)
10.1 1992 Equity Incentive Plan (1) (4)
10.7 Lease Agreement between the Company and Griffin Brook Park Associates
Joint Venture dated November 6, 1992 (2)
10.9 Money Market Note dated August 29, 1994 (3)
10.10 Purchase Agreement between the Company and Griffin Brook Two
Associates Joint Venture dated August 2, 1995 (5)
10.11 1994 Directors Stock Option Plan (4) (5)
10.12 1995 Employee Stock Purchase Plan (4) (5)
10.13 1998 Employee and Consultant Non-Qualified Stock Option Plan (6)
10.14 Letter Agreement with Barclays Bank PLC dated April 7, 1998. (6)
10.15 Letter Agreement with Fleet National Bank dated October 20, 1999.
Filed herewith.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants. Filed herewith.
24 Power of Attorney (included on signature page).
27 Financial Data Schedule. Filed herewith.
</TABLE>
- --------
(1) Filed as an exhibit to a Registration Statement on Form S-1 filed on June
26, 1992 (Registration No 33-47874) and incorporated herein by reference.
(2) Filed as an exhibit to the Annual Report on Form 10-K filed for the year
ended December 31, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Form 10-Q filed for the quarter ended September 30,
1994 and incorporated herein by reference.
(4) Indicates management contracts or compensatory plans in which the
executive officers or directors of the Company participate.
(5) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
ended December 31, 1998 and incorporated herein by reference.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ D. Westervelt Davis
By: _________________________________
D. Westervelt Davis
President, Chief Executive
Officer and Director
February 28, 2000
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Geoffrey P Clear and William T Whelan, and each
of them his true and lawful attorneys-in-fact and agents, each acting alone,
with full powers of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10K, including amendments, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, and hereby
ratifies and confirms all his said attorneys-in-fact and agents, each acting
alone, or his substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James D. Logan Chairman of the Board of February 28, 2000
______________________________________ Directors
James D. Logan
/s/ D. Westervelt Davis President, Chief Executive February 28, 2000
______________________________________ Officer and Director
D. Westervelt Davis
/s/ Geoffrey P. Clear Vice President, Finance February 28, 2000
______________________________________ and Administration, Chief
Geoffrey P. Clear Financial Officer and
Treasurer
/s/ Edward J. Stewart III Director February 28, 2000
______________________________________
Edward J. Stewart III
/s/ Frank Manning Director February 28, 2000
______________________________________
Frank Manning
/s/ Peter Brumme Director February 28, 2000
______________________________________
Peter Brumme
</TABLE>
II-3
<PAGE>
SCHEDULE II
MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Cost and Charged to Returns/ End of
of Period Expense Sales Write-offs(a) Period
---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts and Sales
Returns
Year Ended December 31,
1997................... $ 3,940 $ 127 $ 1,249 $ (147) $ 5,169
Year Ended December 31,
1998................... $ 5,169 $ 529 $ 305 $ (1,048) $ 4,955
Year Ended December 31,
1999................... $ 4,955 $ 427 $ 165 $ (3,846) $ 1,701
</TABLE>
- --------
(a) Effective January 1, 1997, the Company changed its accounting procedures to
allow the value of product returns to be offset as a credit directly to
sales, rather than charged against the sales return allowance. The actual
value of product returns was $4.5 million, $4.9 million and $5.6 million
for 1997, 1998 and 1999, respectively.
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Restated Articles of Organization as amended to date.(5)
3.2 Amended and Restated By-laws.(1)
4.1 Shareholder Rights Agreement.(5)
10.1 1992 Equity Incentive Plan.(1)(4)
10.5 License Agreement between the Company, Peptek, Inc and Mr. Jim Zeeger
dated July 1, 1988.(1)
10.7 Lease Agreement between the Company and Griffin Brook Park Associates
Joint Venture dated November 6, 1992.(2)
10.9 Money Market Note dated August 29, 1994.(3)
10.10 Purchase and Sale Agreement between the Company and Griffin Brook Two
Associates Joint Venture dated August 2, 1995.(5)
10.11 1994 Directors Stock Option Plan.(4)(5)
10.12 1995 Employee Stock Purchase Plan.(4)(5)
10.13 1998 Employee and Consultant Non-Qualified Stock Option Plan.(6)
10.14 Letter Agreement with Barclays Bank PLC dated April 7, 1998.(6)
10.15 Letter Agreement with Fleet National Bank dated October 20, 1999. Filed
herewith.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants filed herewith. Filed
herewith.
24 Power of Attorney (included on signature page).
27 Financial Data Schedule. Filed herewith.
</TABLE>
- --------
(1) Filed as an exhibit to a Registration Statement on Form S-1 filed on June
26, 1992 (Registration No. 33-47874) and incorporated herein by reference.
(2) Filed as an exhibit to the Annual Report on Form 10-K filed for the year
ended December 31, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Form 10-Q filed for the quarter ended September 30,
1994 and incorporated herein by reference.
(4) Indicates management contracts or compensatory plans in which the
executive officers or directors of the Company participate.
(5) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
ended December 31, 1998 and incorporated herein by reference.
<PAGE>
Exhibit 10.15
MICROTOUCH SYSTEMS, INC.
300 Griffin Brook Park Drive
Methuen, MA 01844
October 20, 1999
Fleet National Bank
One Federal Street
Boston, MA 02110
Gentlemen:
This letter agreement will set forth certain understandings between
MicroTouch Systems, Inc., a Massachusetts corporation (the "Borrower") and Fleet
National Bank (the "Bank") with respect to discretionary Demand Loans
(hereinafter defined) which may be made by the Bank to the Borrower and with
respect to letters of credit which may hereafter be issued by the Bank for the
account of the Borrower. In consideration of the mutual promises contained
herein and in the other documents referred to below, and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows:
I. AMOUNTS AND TERMS
-----------------
1.1. Demand Loans; Demand Note. Subject to the terms and conditions
-------------------------
hereinafter set forth, the Bank may, in the Bank's discretion, make loans
("Demand Loans") to the Borrower, in such amounts as the Borrower may request,
on any Business Day prior to the first to occur of (i) the Expiration Date, or
(ii) the date of any demand for payment under the Demand Note, or (iii) the
earlier termination of the within-described financing arrangements for Demand
Loans pursuant to (S)5.2 or (S)6.6; provided, however, that the Dollar
Equivalent of the aggregate principal amount of Demand Loans outstanding shall
at no time exceed the Maximum Demand Loan Amount (hereinafter defined). Within
such limit, and subject to the terms and conditions hereof, the Borrower may
obtain Demand Loans, repay Demand Loans and obtain Demand Loans again on one or
more occasions. Subject to the terms of this letter agreement, Demand Loans may
be Floating Rate Demand Loans, LIBOR Demand Loans or Alternate Currency Demand
Loans, as the Borrower may elect in the manner hereinafter provided. The
Borrower may elect a Floating Rate of interest only with respect to Dollar-
Denominated Loans. Floating Rate Demand Loans may be requested by the Borrower
giving to the Bank a written notice (a "Floating Rate Borrowing Notice") stating
that a Floating Rate Demand Loan is requested, stating the amount of the
Floating Rate Demand Loan so requested and indicating the date on which such
Floating Rate Demand Loan is to be made. The Floating Rate Borrowing Notice must
be given to the Bank (a notice sent by telecopier and confirmed by telephone
being deemed sufficiently "given" for this purpose) no later than 10:00 A.M.
(Boston time) on the Business Day on which the Floating Rate Demand Loan is to
be made. LIBOR Demand Loans and Alternate Currency Demand Loans will require
such notice as is provided for in (S)1.3 below.
<PAGE>
The Demand Loans shall be evidenced by that certain $7,500,000 face
principal amount promissory note of even date herewith (the "Demand Note") made
by the Borrower and payable to the order of the Bank. The Borrower hereby
irrevocably authorizes the Bank to make or cause to be made, on a schedule
attached to the Demand Note or on the books of the Bank, at or following the
time of making each Demand Loan and of receiving any payment of principal, an
appropriate notation reflecting such transaction and the then aggregate unpaid
principal balance of the Demand Loans. The amount so noted shall constitute
presumptive evidence as to the amount owed by the Borrower with respect to
principal of the Demand Loans. Failure of the Bank to make any such notation
shall not, however, affect any obligation of the Borrower or any right of the
Bank hereunder or under the Demand Note. All payments of interest, principal and
any other sum payable hereunder and/or under the Demand Note shall be made to
the Bank, in lawful money of the United States in immediately available funds,
at its office at One Federal Street, Boston, MA 02110 or to such other address
as the Bank may from time to time direct; provided that the principal of, and
interest on, any Alternate Currency Demand Loan shall be paid in the applicable
Alternate Currency in immediately available funds and will be paid to such
office as the Bank may from time to time designate in writing for this purpose.
All payments received by the Bank after 2:00 p.m. on any day shall be deemed
received as of the next succeeding Business Day. All monies received by the Bank
shall be applied first to fees, charges, costs and expenses payable to the Bank
under this letter agreement, the Demand Note and/or any of the other Loan
Documents, next to interest then accrued on account of any Demand Loans or
letter of credit reimbursement obligations and only thereafter to principal of
the Demand Loans and letter of credit reimbursement obligations. All interest
payable hereunder and/or under the Demand Note shall be calculated on the basis
of a 360-day year for the actual number of days elapsed.
1.2. Repayment; Renewal. The Borrower shall repay in full all Demand Loans
------------------
and all interest thereon upon the first to occur of: (i) the Expiration Date, or
(ii) the date of any demand for payment (which demand may be made by the Bank at
any time in the Bank's discretion, whether or not any Default or Event of
Default shall have occurred), or (iii) an acceleration under (S)5.2(a) following
an Event of Default. In addition, and without limitation of the foregoing, if at
any time for any reason (including, without limitation, currency fluctuations)
the Dollar Equivalent of the aggregate principal amount of Demand Loans
outstanding exceeds the Maximum Demand Loan Amount, the Borrower will
immediately repay such Demand Loans (or arrange for the termination of such
letters of credit) as may be required so that the Dollar Equivalent of the
aggregate principal amount of Demand Loans outstanding does not exceed said
Maximum Demand Loan Amount. The Borrower may repay, at any time, without penalty
or premium, the whole or any portion of any Floating Rate Demand Loan; provided
that on the date of any such prepayment the Borrower pays all interest on such
Floating Rate Demand Loan (or portion thereof) so prepaid accrued to the date of
such prepayment. Subject to (S)1.6, the Borrower may prepay the whole or any
portion of any Fixed Rate Demand Loan; provided that (i) the Borrower gives the
Bank not less than two (2) Business Days' prior written notice of its intent so
to prepay any LIBOR Demand Loan and not less than three (3) Business Days' prior
written notice of its intent so to prepay any Alternate Currency Demand Loan,
(ii) the Borrower pays all interest on each Fixed Rate Demand Loan (or portion
thereof) so prepaid accrued to the
-2-
<PAGE>
date of such prepayment, (iii) any voluntary prepayment with respect to a Fixed
Rate Demand Loan shall be in a principal amount which is $500,000 or an integral
multiple of $100,000 in excess of $500,000 (or, as to any Alternate Currency
Demand Loan, the Dollar Equivalent thereof) (provided that, in any event, no
Fixed Rate Demand Loan will remain outstanding in a principal amount of less
than $500,000 or, as to any Alternate Currency Demand Loan, the Dollar
Equivalent thereof), and (iv) if the Borrower for any reason makes any
prepayment of a Fixed Rate Demand Loan prior to the last day of the Interest
Period applicable thereto, the Borrower shall forthwith pay all amounts owing to
the Bank pursuant to the provisions of (S)1.6 with respect to such Fixed Rate
Demand Loan.
The Bank may, at its sole discretion, renew the financing arrangements
described in this letter agreement by extending the Expiration Date in a writing
signed by the Bank and accepted by the Borrower. Neither the inclusion in this
letter agreement or elsewhere of covenants relating to periods of time after the
Expiration Date, nor any other provision hereof, nor any action (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of dealing on the part of the Bank will be deemed an extension of, or
agreement on the part of the Bank to extend, the Expiration Date.
1.3. Election of Interest Rate for Demand Loans. Except as otherwise
------------------------------------------
provided below in this (S)1.3, interest on the Demand Loans will be payable at a
fluctuating rate per annum (the "Floating Rate") which shall at all times be
equal to the Prime Rate as in effect from time to time, with a change in such
rate of interest to become effective on each day when a change in the Prime Rate
is effective. Subject to the conditions set forth herein, the Borrower may elect
that any Demand Loan to be made under (S)1.1 will be made as a LIBOR Demand
Loan. Such election shall be made by the Borrower giving to the Bank a written
notice received by the Bank within the time period and containing the
information described in the next following sentence (a "LIBOR Borrowing
Notice"). The LIBOR Borrowing Notice must be received by the Bank no later than
10:00 a.m. (Boston time) on that day which is two Business Days prior to the
date of the proposed borrowing, must state that a LIBOR Demand Loan is being
requested and state the amount of the LIBOR Demand Loan requested (which shall
be $500,000 or an integral multiple of $100,000 in excess of $500,000), must
specify the proposed commencement date of the relevant Interest Period, and must
specify the duration (one month, two months, three months or six months, as the
Borrower may select) of the relevant Interest Period. Notwithstanding anything
provided elsewhere in this letter agreement, the Borrower may not elect any
Interest Period with respect to a LIBOR Demand Loan if such Interest Period
would end after the Expiration Date. Any LIBOR Borrowing Notice shall, upon
receipt by the Bank, become irrevocable and binding on the Borrower, and the
Borrower shall, upon demand and receipt of a Bank Certificate with respect
thereto, forthwith indemnify the Bank against any loss or expense incurred by
the Bank as a result of any failure by the Borrower to obtain or maintain any
requested LIBOR Demand Loan, including, without limitation, any loss or expense
incurred by reason of the liquidation or redeployment of deposits or other funds
acquired by the Bank to fund or maintain such LIBOR Demand Loan. Each LIBOR
Demand Loan shall be due and payable in full (if not required to be repaid
earlier pursuant to the terms of this letter agreement) on the last day of the
Interest Period applicable thereto. The principal amount of each LIBOR Demand
Loan so repaid may be reborrowed as a new LIBOR Demand Loan to the extent and on
the terms
-3-
<PAGE>
and conditions contained in this letter agreement by delivery to the Bank of a
new LIBOR Borrowing Notice conforming to the requirements set forth above in
this (S)1.3 or may be reborrowed as an Alternate Currency Demand Loan pursuant
to the next following paragraph (and any LIBOR Demand Loan not repaid and not so
reborrowed as a new LIBOR Demand Loan or an Alternate Currency Rate Loan will be
deemed to have been reborrowed as a Floating Rate Demand Loan). Notwithstanding
any other provision of this letter agreement, the Bank need not make any LIBOR
Demand Loan at any time when there exists any Default or Event of Default.
Subject to the conditions set forth herein, the Borrower may elect that all
or any portion of any Demand Loan to be made under (S)1.1 will be made as an
Alternate Currency Demand Loan. Such election shall be made by the Borrower
giving to the Bank a written notice received by the Bank within the time period
and containing the information described in the next following sentence (an
"Alternate Currency Borrowing Notice"). The Alternate Currency Borrowing Notice
must be received by the Bank no later than 10:00 a.m. (Boston time) on that day
which is three Business Days prior to the date of the proposed borrowing, must
state that an Alternate Currency Demand Loan is being requested, must specify
the relevant Alternate Currency and the amount of the Alternate Currency Demand
Loan requested (which shall be the Dollar Equivalent of $500,000 or an integral
multiple of $100,000 in excess of $500,000), must specify the proposed
commencement date of the relevant Interest Period, and must specify the duration
(not less than two Business Days nor more than 180 calendar days, as the
Borrower may select) of the relevant Interest Period. Notwithstanding anything
provided elsewhere in this letter agreement, the Borrower may not elect any
Interest Period with respect to an Alternate Currency Demand Loan if such
Interest Period would end after the Expiration Date. Any Alternate Currency
Borrowing Notice shall, upon receipt by the Bank, become irrevocable and binding
on the Borrower, and the Borrower shall, upon demand and receipt of a Bank
Certificate with respect thereto, forthwith indemnify the Bank against any loss
or expense incurred by the Bank as a result of any failure by the Borrower to
obtain or maintain any requested Alternate Currency Demand Loan, including,
without limitation, any loss or expense incurred by reason of the liquidation or
redeployment of deposits or other funds acquired by the Bank to fund or maintain
such Alternate Currency Demand Loan. Each Alternate Currency Demand Loan shall
be due and payable in full (if not required to be repaid earlier pursuant to the
terms of this letter agreement) on the last day of the Interest Period
applicable thereto. The principal amount of each Alternate Currency Demand Loan
so repaid may be reborrowed as a new Alternate Currency Demand Loan to the
extent and on the terms and conditions contained in this letter agreement by
delivery to the Bank of a new Alternate Currency Borrowing Notice conforming to
the requirements set forth above in this (S)1.3 or may be reborrowed as a LIBOR
Demand Loan pursuant to the immediately preceding paragraph (and any Alternate
Currency Demand Loan not repaid and not so reborrowed as a new Alternate
Currency Demand Loan or as a LIBOR Demand Loan will be deemed to have been
reborrowed as a Floating Rate Demand Loan). Notwithstanding any other provision
of this letter agreement, the Bank need not make any Alternate Currency Demand
Loan at any time when there exists any Default or Event of Default.
In no event will more than three Interest Periods be in effect at any one
time. The Borrower acknowledges that the offering by the Bank of a Fixed Rate
for any Interest Period with respect to any Demand Loan will in no event detract
from the Bank's ability to demand
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<PAGE>
payment of such Demand Loan at any time, whether or not a Default or Event of
Default has occurred and whether or not at the end of such Interest Period.
1.4. Interest Payments. The Borrower will pay interest on the principal
-----------------
amount of the Demand Loans outstanding from time to time, from the date hereof
until payment of the Demand Loans and the Demand Note in full and the
termination of this letter agreement. Interest on Floating Rate Demand Loans
will be payable monthly in arrears on the first day of each month. Interest on
each Fixed Rate Demand Loan will be payable in arrears on each applicable
Interest Payment Date. In any event, interest on each Demand Loan shall also be
paid on the date of expiration or earlier termination of the within-described
facility for Demand Loans. Interest on Floating Rate Demand Loans shall be
payable at the Floating Rate. The rate of interest payable on any LIBOR Demand
Loan will be the LIBOR Interest Rate applicable thereto. The rate of interest
payable on any Alternate Currency Demand Loan will be the Alternate Currency
Interest Rate applicable thereto. Notwithstanding the foregoing, however, after
any Event of Default has occurred and for so long as same is continuing,
interest on the Demand Loans will accrue and be payable at a rate per annum
which at all times shall be equal to the sum of (i) four (4%) percent per annum
plus (ii) the Prime Rate in effect from time to time. All interest and fees
payable under this letter agreement and/or under the Demand Note will be
calculated on the basis of a 360-day year for the actual number of days elapsed.
1.5. Rate Determination Protection. In the event that:
-----------------------------
(i) the Bank shall determine that, by reason of circumstances
affecting the London interbank market or other applicable interbank market
or otherwise, adequate and reasonable methods do not exist for ascertaining
the LIBOR Interest Rate (or, as applicable, the Alternate Currency Interest
Rate) which would otherwise be applicable during any Interest Period, or
(ii) the Bank shall determine that any Alternate Currency is not
freely transferable and convertible into Dollars, or
(iii) the Bank shall determine that:
(A) the making or continuation of any LIBOR Demand Loan or any
Alternate Currency Demand Loan has been made impracticable or unlawful
by (1) the occurrence of any contingency that materially and adversely
affects the London interbank market or other applicable interbank
market or (2) compliance by the Bank with any applicable law or
governmental regulation, guideline or order or interpretation or
change thereof by any governmental authority charged with the
interpretation or administration thereof or with any request or
directive of any such governmental authority (whether or not having
the force of law); or
(B) reserved-adjusted LIBOR will not, in the reasonable
determination of the Bank, adequately and fairly reflect the cost to
the Bank of funding LIBOR Demand Loans for such Interest Period, or
reserve-adjusted IBOR will not, in the
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<PAGE>
reasonable determination of the Bank, adequately and fairly reflect
the cost to the Bank of funding Alternative Currency Demand Loans for
such Interest Period
then the Bank shall forthwith give notice of such determination (which
shall be conclusive and binding on the Borrower) to the Borrower. In such
event the obligations of the Bank to make LIBOR Demand Loans and/or
Alternate Currency Demand Loans, as applicable, shall be suspended until
the Bank determines that the circumstances giving rise to such suspension
no longer exist, whereupon the Bank shall notify the Borrower.
1.6. Prepayment of Fixed Rate Demand Loans. The following provisions of
-------------------------------------
this (S)1.6 shall be effective only with respect to Fixed Rate Demand Loans: If,
due to acceleration of the Demand Note or due to voluntary prepayment or
mandatory repayment or prepayment or due to any other reason, the Bank receives
payment of any principal of any Fixed Rate Demand Loan on any date prior to the
last day of the relevant Interest Period or if for any reason any Fixed Rate
Demand Loan is converted to a Floating Rate Demand Loan prior to the expiration
of the relevant Interest Period, the Borrower shall, upon demand and receipt of
a Bank Certificate from the Bank with respect thereto, pay forthwith to the Bank
a yield maintenance fee in an amount computed as follows: The current rate for
United States Treasury securities (bills on a discounted basis shall be
converted to a bond equivalent) with a maturity date closest to the last day of
the Interest Period applicable to the affected Fixed Rate Demand Loan shall be
subtracted from the "cost of funds" component (i.e., reserve-adjusted LIBOR or
----
reserve-adjusted IBOR, as applicable) of the fixed rate in effect at the
date of such prepayment or conversion. If the result is zero or a negative
number, there shall be no yield maintenance fee. If the result is a positive
number, then the resulting percentage shall be multiplied by the amount of the
principal balance being prepaid. The resulting amount shall be divided by 360
and multiplied by the number of days remaining in the relevant Interest Period.
Said amount shall be reduced to present value calculated by using the number of
days remaining in the relevant Interest Period and by using the above-referenced
United States Treasury securities rate as the discount rate. The resulting
amount shall be the yield maintenance fee due to the Bank upon prepayment or
conversion of the applicable Fixed Rate Demand Loan. Any acceleration of a Fixed
Rate Demand Loan due to an Event of Default will give rise to a yield
maintenance fee calculated with the respect to such Fixed Rate Demand Loan on
the date of such acceleration in the same manner as though the Borrower had
exercised a right of prepayment at that date, such yield maintenance fee being
due and payable at that date. Nothing contained herein will be deemed to prevent
the Bank from making demand for payment of the Demand Loans at any time, whether
or not a Default or Event of Default has occurred and whether or not at the end
of any Interest Period, even if such demand would require payment of a yield
maintenance fee.
1.7. Increased Costs; Capital Adequacy.
---------------------------------
(i) If the adoption, effectiveness or phase-in, after the date hereof,
of any applicable law, rule or regulation, or any change therein, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the
interpretation or administration thereof, or
-6-
<PAGE>
compliance by the Bank with any request or directive (whether or not having
the force of law) of any such authority, central bank or comparable agency:
(A) shall subject the Bank to any Imposition or other charge with
respect to any Fixed Rate Demand Loan or the Bank's agreement to make
Fixed Rate Demand Loans, or shall change the basis of taxation of
payments to the Bank of the principal of or interest on any Fixed Rate
Demand Loan or any other amounts due under this letter agreement in
respect of the Fixed Rate Demand Loans or the Bank's agreement to make
Fixed Rate Demand Loans (except for changes in the rate of tax on the
over-all net income of the Bank); or
(B) shall impose, modify or deem applicable any reserve, special
deposit, deposit insurance or similar requirement (including, without
limitation, any such requirement imposed by the Board of Governors of
the Federal Reserve System, but excluding, with respect to any Fixed
Rate Demand Loan, any such requirement already included in the
applicable Reserve Rate) against assets of, deposits with or for the
account of, or credit extended by, the Bank or shall impose on the
Bank or on the London interbank market or other applicable interbank
market any other condition affecting any Fixed Rate Demand Loans or
the Bank's agreement to make Fixed Rate Demand Loans
and the result of any of the foregoing is to increase the cost to the Bank
of making or maintaining any Fixed Rate Demand Loan or to reduce the amount
of any sum received or receivable by the Bank under this letter agreement
or under the Demand Note with respect to any Fixed Rate Demand Loan by an
amount deemed by the Bank to be material, then (A) the Bank shall promptly
after its determination of such occurrence deliver a Bank Certificate with
respect thereto to the Borrower; and (B) promptly upon demand by the Bank
and receipt of such Bank Certificate from the Bank with respect thereto,
the Borrower shall pay to the Bank such additional amount or amounts as the
Bank certifies to be necessary to compensate the Bank for such increased
cost or reduction in amount received or receivable.
(ii) If the Bank shall have determined that the adoption,
effectiveness or phase-in after the date hereof of any applicable law, rule
or regulation regarding capital requirements for banks or bank holding
companies, or any change therein after the date hereof, or any change after
the date hereof in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with
any request or directive of such entity regarding capital adequacy (whether
or not having the force of law) has or would have the effect of reducing
the return on the Bank's capital with respect to any Demand Loan (whether
or not then subject to any Fixed Rate) or any letter of credit and/or with
respect to the Bank's agreements hereunder to make Demand Loans and/or
issue letters of credit to a level below that which the Bank could have
achieved (taking into consideration the Bank's policies with respect to
capital adequacy immediately before such adoption, effectiveness, phase-in,
change or compliance and
-7-
<PAGE>
assuming that the Bank's capital was then fully utilized) by any amount
deemed by the Bank to be material: (A) the Bank shall promptly after its
determination of such occurrence deliver a Bank Certificate with respect
thereto to the Borrower; and (B) the Borrower shall pay to the Bank as an
additional fee from time to time on demand such amount as the Bank
certifies to be the amount that will compensate it for such reduction.
(iii) A Bank Certificate of the Bank claiming compensation under this
(S)1.7 shall be conclusive in the absence of manifest error. Such
certificate shall set forth the nature and date of the occurrence giving
rise to such compensation, the additional amount or amounts to be paid to
the Bank hereunder and the method by which such amounts are determined. In
determining any such amount, the Bank may use any reasonable averaging and
attribution methods.
(iv) No failure on the part of the Bank to demand compensation on any
one occasion shall constitute a waiver of its right to demand such
compensation on any other occasion and no failure on the part of the Bank
to deliver any Bank Certificate in a timely manner shall in any way reduce
any obligation of the Borrower to the Bank under this (S)1.7.
1.8. Illegality or Impossibility. Notwithstanding any other provision of
---------------------------
this letter agreement, if the introduction of or any change in or in the
interpretation or administration of any law or regulation applicable to the Bank
or the Bank's activities in the London interbank market or any other applicable
interbank market shall make it unlawful, or any central bank or other
governmental authority having jurisdiction over the Bank or the Bank's
activities in the London interbank market or any other applicable interbank
market shall assert that it is unlawful, or otherwise make it impossible, for
the Bank to perform its obligations hereunder to make LIBOR Demand Loans or
Alternate Currency Demand Loans, as the case may be, or to continue to fund or
maintain LIBOR Demand Loans or Alternate Currency Demand Loans, as the case may
be, then on notice thereof and demand therefor by the Bank to the Borrower, (i)
the obligation of the Bank to fund LIBOR Demand Loans and/or Alternate Currency
Demand Loans (as applicable) shall terminate and (ii) all affected LIBOR Demand
Loans and/or Alternate Currency Demand Loans (as applicable) shall be deemed to
have been converted into Floating Rate Demand Loans (with the Borrower to be
responsible for any amount payable under (S)1.6 as a consequence of such
conversion) at the last day on which such LIBOR Demand Loans and/or Alternate
Currency Demand Loans (as applicable) may legally remain outstanding. Except as
provided above in this (S)1.8, the Borrower will have no right to convert any
Fixed Rate Demand Loan to a Floating Rate Demand Loan prior to the end of the
Interest Period applicable to such Fixed Rate Demand Loan.
1.9. Advances and Payments. The proceeds of all Demand Loans shall be
---------------------
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank, except that each Alternate Currency Demand Loan will be credited
to an account established by the Borrower in a country in which the relevant
Alternate Currency is legal tender. The proceeds of each Demand Loan will be
used by the Borrower for general corporate purposes, including providing
liquidity for working capital and funding costs of capital expenditures.
Further, to the
-8-
<PAGE>
extent and under the conditions set forth in (S)1.10 below, availability for
Demand Loans may be used to obtain letters of credit.
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums due, from
time to time, under this letter agreement and/or the Demand Note and/or with
respect to any letter of credit; and will thereafter notify the Borrower of the
amount so charged. The failure of the Bank so to charge any account or to give
any such notice shall not affect the obligation of the Borrower to pay interest,
principal or other sums as provided herein or in the Demand Note or with respect
to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under the Demand
Note or with respect to any letter of credit shall be stated to be due on a day
which is not a Business Day, such payment may be made on the next succeeding
Business Day, and interest payable on each such date shall include the amount
thereof which shall accrue during the period of such extension of time. All
payments by the Borrower hereunder and/or in respect of the Demand Note and/or
with respect to any letter of credit shall be made net of any Impositions or
taxes and without deduction, set-off or counterclaim, notwithstanding any claim
which the Borrower may now or at any time hereafter have against the Bank.
Without limitation of the foregoing, with respect to Alternate Currency Demand
Loans, the Borrower will hold the Bank harmless on an after-tax basis for all
costs or losses to it of complying with any liquidity, monetary control or
prudential requirements of the Bank of England or other central bank existing
from time to time.
1.10. Letters of Credit. At the Borrower's request, the Bank may, from time
-----------------
to time, in its sole discretion issue one or more Dollar-denominated letters of
credit for the account of the Borrower; provided that at the time of such
issuance and after giving effect thereto (A) the total Letter of Credit
Liabilities will not exceed $4,000,000 and (B) the Dollar Equivalent of the
Aggregate Bank Liabilities will in no event exceed $7,500,000. Any such letter
of credit will be issued for such fee and upon such terms and conditions as may
be agreed to by the Bank and the Borrower at the time of issuance. The Borrower
hereby authorizes the Bank, without further request from the Borrower, to cause
the Borrower's liability to the Bank for reimbursement of funds drawn under any
such letter of credit to be repaid from the proceeds of a Floating Rate Demand
Loan to be made hereunder. The Borrower hereby irrevocably requests that such
Floating Rate Demand Loans be made.
1.11. Conditions to Advance. Prior to the making of the initial Demand Loan
---------------------
or the issuance of any letter of credit hereunder, the Borrower shall deliver to
the Bank duly executed copies of this letter agreement, the Demand Note and the
documents and other items listed on the Closing Agenda delivered herewith by the
Bank to the Borrower, all of which, as well as all legal matters incident to the
transactions contemplated hereby, shall be satisfactory in form and substance to
the Bank and its counsel.
Without limiting the foregoing, any Demand Loan or letter of credit
issuance (including the initial Demand Loan or letter of credit issuance) is
subject to the further conditions precedent
-9-
<PAGE>
that on the date on which such Demand Loan is made or such letter of credit is
issued (and after giving effect thereto):
(a) All statements, representations and warranties of the Borrower made in
this letter agreement shall continue to be correct in all material respects as
of the date of such Demand Loan or the date of issuance of such letter of
credit, as the case may be.
(b) All covenants and agreements of the Borrower contained herein shall
have been complied with in all material respects on and as of the date of such
Demand Loan or the date of issuance of such letter of credit, as the case may
be.
(c) No event which constitutes, or which with notice or lapse of time or
both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
Each request by the Borrower for any Demand Loan or for the issuance of any
letter of credit, and each acceptance by the Borrower of the proceeds of any
Demand Loan or delivery of a letter of credit, will be deemed a representation
and warranty by the Borrower that at the date of such Demand Loan or the date of
issuance of such letter of credit, as the case may be, and after giving effect
thereto all of the conditions set forth in the foregoing clauses (a)-(d) of this
(S)1.11 will be satisfied.
II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1. Representations and Warranties. In order to induce the Bank to enter
------------------------------
into this letter agreement and to make Demand Loans hereunder and/or issue
letters of credit hereunder, the Borrower warrants and represents to the Bank as
follows:
(a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts. The Borrower
has full corporate power to own its property and conduct its business as now
conducted and to enter into and perform this letter agreement and the other Loan
Documents. The Borrower is duly qualified to do business and is in good standing
in each other jurisdiction in which the Borrower maintains any facility, sales
office, warehouse or other location, and in each other jurisdiction where the
failure so to qualify could (singly or in the aggregate with all other such
failures) have a material adverse effect on the financial condition, business or
prospects of the Borrower, all such jurisdictions being listed on item 2.1(a) of
the attached Disclosure Schedule. At the date hereof, the Borrower has no
Subsidiaries, except as shown on said item 2.1(a) of the attached Disclosure
Schedule. The Borrower is not a member of any partnership or joint venture.
-10-
<PAGE>
(b) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents have been duly authorized by all
necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filing, registration,
consent or approval under, any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award presently in effect
having applicability to the Borrower;
(ii) violate any provision of the charter or by-laws of the Borrower,
or result in a breach of or constitute a default or require any waiver or
consent under any indenture or loan or credit agreement or any other
material agreement, lease or instrument to which the Borrower is a party or
by which the Borrower or any of its properties may be bound or affected or
require any other consent of any Person; or
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the Bank),
upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
(c) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(d) Except as described on item 2.1(d) of the attached Disclosure Schedule,
there are no actions, suits, proceedings or investigations pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which could hinder or
prevent the consummation of the transactions contemplated hereby or call into
question the validity of this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower or any Subsidiary.
(e) The Borrower is not in violation of any term of its charter or by-laws
as now in effect. Neither the Borrower nor any Subsidiary of the Borrower is in
material violation of any term of any mortgage, indenture or judgment, decree or
order, or any other instrument, contract or agreement to which it is a party or
by which any of its property is bound.
(f) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, state and local tax returns, reports and estimates required
to be filed by the Borrower and/or by any such Subsidiary. All such filed
returns, reports and estimates are proper and accurate and the Borrower or the
relevant Subsidiary has paid all taxes, assessments, impositions, fees and other
governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.
-11-
<PAGE>
(g) The Borrower is in compliance with (and each Subsidiary of the Borrower
is in compliance with) all requirements of law, federal, state and local, and
all requirements of all governmental bodies or agencies having jurisdiction over
it, the conduct of its business, the use of its properties and assets, and all
premises occupied by it, failure to comply with any of which could (singly or in
the aggregate with all other such failures) have a material adverse effect upon
the assets, business, financial condition or prospects of the Borrower or any
such Subsidiary. Without limiting the foregoing, the Borrower has all the
franchises, licenses, leases, permits, certificates and authorizations needed
for the conduct of its business and the use of its properties and all premises
occupied by it, as now conducted, owned and used.
(h) The audited financial statements of the Borrower as at December 31,
1998 and the management-generated statements of the Borrower as at June 30,
1999, each heretofore delivered to the Bank, are complete and accurate and
fairly present the financial condition of the Borrower as at the respective
dates thereof and for the periods covered thereby, except that the management-
generated statements do not have footnotes and thus do not present the
information which would normally be contained in footnotes to financial
statements. Neither the Borrower nor any of the Borrower's Subsidiaries has any
liability, contingent or otherwise, not disclosed in the aforesaid financial
statements or in any notes thereto that could materially affect the financial
condition of the Borrower. Since December 31, 1998, there has been no material
adverse development in the business, condition or prospects of the Borrower, and
the Borrower has not entered into any transaction other than in the ordinary
course.
(i) The principal place of business and chief executive offices of the
Borrower are located at 300 Griffin Brook Park Drive, Methuen, MA 01844.
(j) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises now being used to
conduct its business. To the best of the Borrower's knowledge, the conduct of
the Borrower's business as now operated does not conflict with valid patents,
licenses, copyrights, trademarks, trade names or franchises of others in any
manner that could materially adversely affect the business, prospects, assets or
condition, financial or otherwise, of the Borrower.
(k) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.
(l) The Borrower is not a party to any contract or agreement which now has
or, as far as can be foreseen by the Borrower at the date hereof, may have a
material adverse effect on the financial condition, business, prospects or
properties of the Borrower, to the best of the Borrower's knowledge.
(m) The Borrower has taken actions to understand the nature and extent of
the work required to make its systems, products and infrastructure Year 2000
compliant. The Borrower
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<PAGE>
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 Borrower's
infrastructure have been inventoried and assessed for Year 2000 compliance. To
the extent necessary to address material Year 2000 issues, the Borrower has
installed current releases or upgrades from software vendors. The Borrower has
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. Based on available information, including assurances from
software vendors that their products are compliant, the Borrower 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.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
------------------------------------------------
Without limitation of any other covenants and agreements contained in this
letter agreement or elsewhere, the Borrower agrees that so long as the financing
arrangements contemplated hereby are in effect or any Demand Loan or any of the
other Obligations shall be outstanding or any letter of credit issued hereunder
shall be outstanding:
3.1. Legal Existence; Qualification; Compliance. The Borrower will maintain
------------------------------------------
(and will cause each Subsidiary of the Borrower to maintain) its corporate
existence and good standing in the jurisdiction of its incorporation. The
Borrower will qualify to do business and will remain qualified and in good
standing (and the Borrower will cause each Subsidiary of the Borrower to qualify
and remain qualified and in good standing) in each other jurisdiction where the
Borrower or such Subsidiary, as the case may be, maintains any plant, sales
office, warehouse or other facility and in each other jurisdiction in which the
failure so to qualify could (singly or in the aggregate with all other such
failures) have a material adverse effect on the financial condition, business or
prospects of the Borrower or any such Subsidiary. The Borrower will comply with
(and will cause each Subsidiary of the Borrower to comply with) its charter
documents and by-laws. The Borrower will comply with (and will cause each
Subsidiary of the Borrower to comply with) all applicable laws, rules and
regulations (including, without limitation, ERISA and those relating to
environmental protection) other than (i) laws, rules or regulations the validity
or applicability of which the Borrower or such Subsidiary shall be contesting in
good faith by proceedings which serve as a matter of law to stay the enforcement
thereof and (ii) those laws, rules and regulations the failure to comply with
any of which could not (singly or in the aggregate) have a material adverse
effect on the financial condition, business or prospects of the Borrower or any
such Subsidiary.
3.2. Maintenance of Property; Insurance. The Borrower will maintain and
----------------------------------
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets in good working order and condition, making
all necessary repairs thereto and replacements thereof. The Borrower will
maintain, with financially sound and reputable insurers, insurance with respect
to its property and business against such liabilities, casualties and
contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to
-13-
<PAGE>
time and in any event all such insurance as may from time to time be customary
for companies conducting a business similar to that of the Borrower in similar
locales.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge (and
----------------------------
will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments, charges
or levies relating to real and personal property, franchises, income,
unemployment, old age benefits, withholding, or sales or use, prior to the date
on which penalties would attach thereto, and all lawful claims (whether for any
of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon
any property of the Borrower or any such Subsidiary, except any of the foregoing
which is being contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its Subsidiaries to pay, in a timely manner, all
lease obligations, all material trade debt, purchase money obligations,
equipment lease obligations and all of its other material Indebtedness. The
Borrower will perform and fulfill all material covenants and agreements under
any leases of real estate, agreements relating to purchase money debt, equipment
leases and other material contracts. The Borrower will maintain in full force
and effect, and comply with the terms and conditions of, all permits,
permissions and licenses necessary or desirable for its business.
3.4. Accounts. The Borrower will maintain its principal depository and
--------
operating accounts with the Bank.
3.5. Reporting Requirements. The Borrower will furnish to the Bank:
----------------------
(i) Within 90 days after the end of each fiscal year of the Borrower,
a copy of the annual audit report for such fiscal year for the Borrower,
including therein consolidated and consolidating balance sheets of the
Borrower and Subsidiaries as at the end of such fiscal year and related
consolidated and consolidating statements of income, stockholders' equity
and cash flow for the fiscal year then ended. The annual consolidated
financial statements shall be certified by independent public accountants
selected by the Borrower and reasonably acceptable to the Bank, such
certification to be in such form as is generally recognized as
"unqualified".
(ii) Within 45 days after the end of each fiscal quarter of the
Borrower, consolidated and consolidating balance sheets of the Borrower and
its Subsidiaries and related consolidated and consolidating statements of
income and cash flow, unaudited but complete and accurate and prepared in
accordance with generally accepted accounting principles consistently
applied fairly presenting the financial condition of the Borrower as at the
dates thereof and for the periods covered thereby (except that such
quarterly statements need not contain footnotes) and certified as accurate
(subject to normal year-end audit adjustments, which shall not be material)
by the chief financial officer of the Borrower, such balance sheets to be
as at the end of each such fiscal quarter and such
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<PAGE>
statements of income to be for such fiscal quarter and such statements of
cash flow to be for the fiscal year to date.
(iii) As soon as possible and in any event within five days of the
occurrence of any Event of Default or any event which, with the giving of
notice or passage of time or both, would constitute an Event of Default,
the statement of the Borrower setting forth details of each such Event of
Default or event and the action which the Borrower proposes to take with
respect thereto.
(iv) Promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
to which the Borrower or any Subsidiary of the Borrower is a party.
(v) Promptly upon filing any registration statement or listing
application (or any supplement or amendment to any registration statement
or listing application) with the Securities and Exchange Commission ("SEC")
or any successor agency or with any stock exchange or with the National
Association of Securities Dealers quotations system, a copy of same.
(vi) A copy of each periodic or current report filed with the SEC or
any successor agency and each annual report, proxy statement and other
communication sent to shareholders or other securityholders generally or
disseminated to the public, such copy to be provided to the Bank promptly
upon such filing with the SEC or such communication with shareholders or
securityholders or such public dissemination, as the case may be.
(vii) Promptly upon request, such other information respecting the
financial condition, operations, receivables, inventory, machinery or
equipment of the Borrower or any Subsidiary as the Bank may from time to
time reasonably request.
3.6. Books and Records. The Borrower will maintain (and will cause each of
-----------------
its Subsidiaries to maintain) complete and accurate books, records and accounts
which will at all times accurately and fairly reflect all of its transactions in
accordance with generally accepted accounting principles consistently applied.
The Borrower will, at any reasonable time and from time to time upon reasonable
notice and during normal business hours (and at any time and without any
necessity for notice following the occurrence of an Event of Default), permit
the Bank, and any agents or representatives thereof, to examine and make copies
of and take abstracts from the records and books of account of, and visit the
properties of the Borrower and any of its Subsidiaries, and to discuss its
affairs, finances and accounts with its officers, directors and/or independent
accountants, all of whom are hereby authorized and directed to cooperate with
the Bank in carrying out the intent of this (S)3.6; provided that any
examination or audit made by the Bank pursuant to this (S)3.6 will be at the
Bank's sole cost and expense. Each financial statement of the Borrower hereafter
delivered pursuant to this letter agreement will be complete
-15-
<PAGE>
and accurate and will fairly present the financial condition of the Borrower as
at the date thereof and for the periods covered thereby.
IV. NEGATIVE COVENANTS
------------------
Without limitation of any other covenants and agreements contained in this
letter agreement or elsewhere, the Borrower agrees that so long as the financing
arrangements contemplated hereby are in effect or any Demand Loan or any of the
other Obligations shall be outstanding or any letter of credit issued hereunder
shall be outstanding:
4.1. Change of Address, etc. The Borrower will not change its name or legal
-----------------------
structure, nor will the Borrower move its chief executive offices or principal
place of business from the address described in (S)2.1(j) above, without, in
each instance, giving the Bank prompt written notice thereof. The Borrower will
not change its fiscal year or methods of financial reporting without, in each
instance, giving the Bank prompt written notice thereof.
4.2. Hazardous Waste. Except as provided below, the Borrower will not
---------------
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any known release or known
threat of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Borrower or any Subsidiary of the Borrower,
and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries, in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements of applicable federal, state and local law relating to such
use, storage or transportation, follows the protective and safety procedures
that a prudent businessperson conducting a business the same as or similar to
that of the Borrower or such Subsidiary (as the case may be) would follow, and
disposes of such materials (not consumed in the ordinary course) only through
licensed providers of hazardous waste removal services.
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<PAGE>
4.3. No Margin Stock. No proceeds of any Demand Loan shall be used directly
---------------
or indirectly to purchase or carry any margin security.
V. DEFAULT AND REMEDIES
--------------------
5.1. Events of Default. Without derogating in any way from the demand
-----------------
nature of the Demand Loans, the occurrence of any one of the following events
shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or
interest on the Demand Note on or before the date when due; or the Borrower
shall fail to pay when due any amount owed to the Bank in respect of any letter
of credit now or hereafter issued by the Bank; or
(b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made or
any representation or warranty made by the Borrower in connection with any
Demand Loan or letter of credit shall at any time prove to have been incorrect
in any material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of (S)(S)3.1, 3.3 or 3.5 or Article IV; or
(d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
(e) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(f) Any default shall exist and remain unwaived or uncured with respect to
any Subordinated Debt of the Borrower or with respect to any instrument
evidencing, guaranteeing or otherwise relating to any such Subordinated Debt, or
any such Subordinated Debt shall not have been paid when due, whether by
acceleration or otherwise, or shall have been declared to be due and payable
prior to its stated maturity, or any event or circumstance shall occur which
permits, or with the lapse of time or the giving of notice or both would permit,
the acceleration of the maturity of any Subordinated Debt by the holder or
holders thereof; or
(g) Any default shall exist and remain unwaived or uncured with respect to
any other Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $100,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $100,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any
- 17 -
<PAGE>
event or circumstance shall occur which permits, or with the lapse of time or
the giving of notice or both would permit, the acceleration of the maturity of
any such Indebtedness by the holder of holders thereof; or
(h) The Borrower shall be dissolved, or the Borrower or any Subsidiary of
the Borrower shall become insolvent or bankrupt or shall cease paying its debts
as they mature or shall make an assignment for the benefit of creditors, or a
trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof);
or
(i) Any execution or similar process shall be issued or levied against any
of the property of the Borrower or any Subsidiary and such attachment, execution
or similar process shall not be paid, stayed, released, vacated or fully bonded
within 10 days after its issue or levy or any trustee process shall be levied
against any account maintained by the Borrower with the Bank; or
(j) Any final uninsured judgment in excess of $5,000,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction; or
(k) The Borrower or any Subsidiary of the Borrower shall fail to meet its
minimum funding requirements under ERISA with respect to any employee benefit
plan (or other class of benefit which the PBGC has elected to insure) or any
such plan shall be the subject of termination proceedings (whether voluntary or
involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(l) There shall occur any other material adverse change in the condition
(financial or otherwise), operations, properties, assets, liabilities or
earnings of the Borrower.
5.2. Rights and Remedies on Default. Without derogating in any way from the
------------------------------
demand nature of the Demand Loans, during the existence of any Event of Default,
in addition to any other rights and remedies available to the Bank hereunder or
otherwise, the Bank may exercise any one or more of the following rights and
remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amount of each of the Demand Loans
then outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
- 18 -
<PAGE>
(b) Terminate the Demand Loan financing arrangements provided for by this
letter agreement.
(c) Exercise all rights and remedies hereunder, under the Demand Note and
under each and any other agreement with the Bank; and exercise all other rights
and remedies which the Bank may have under applicable law.
The Borrower expressly acknowledges and agrees that the Demand Loans are
demand obligations and that the Bank may demand payment of same (in which case
same shall become immediately due and payable) at any time in the Bank's
discretion, whether or not any Default or Event of Default then exists and
whether or not at the end of any applicable Interest Period.
5.3. Set-off. In addition to any rights now or hereafter granted under
-------
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default or upon any demand under the Demand Note, the
Bank is hereby authorized at any time or from time to time, without presentment,
any further demand, protest or other notice of any kind to the Borrower or to
any other Person, all of which are hereby expressly waived, to set off and to
appropriate and apply any and all deposits and any other Indebtedness at any
time held or owing by the Bank or any affiliate thereof to or for the credit or
the account of the Borrower against and on account of the obligations and
liabilities of the Borrower to the Bank under this letter agreement or
otherwise, irrespective of whether or not the Bank shall have made any demand
hereunder and although said obligations, liabilities or claims, or any of them,
may then be contingent or unmatured and without regard for the availability or
adequacy of other collateral. As further security for the Obligations, the
Borrower also grants to the Bank a security interest with respect to all its
deposits and all securities or other property in the possession of the Bank or
any affiliate of the Bank from time to time, and, upon the occurrence of any
Event of Default, the Bank may exercise all rights and remedies of a secured
party under the Uniform Commercial Code. ANY AND ALL RIGHTS TO REQUIRE THE BANK
TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH
SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHT OF
SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.
5.4. Letters of Credit. Without limitation of any other right or remedy of
-----------------
the Bank, (i) if an Event of Default shall have occurred and the Bank shall have
accelerated the Demand Loans, or (ii) if the Bank shall demand payment under the
Demand Note, or (iii) if this letter agreement and/or the Demand Loan financing
arrangements described herein shall have expired or shall have been earlier
terminated by either the Bank or the Borrower for any reason, the Borrower will
forthwith deposit with the Bank in cash a sum equal to the total of all then
undrawn amounts of all outstanding letters of credit issued by the Bank for the
account of the Borrower.
- 19 -
<PAGE>
VI. MISCELLANEOUS
-------------
6.1. Costs and Expenses. The Borrower agrees to pay on demand all costs and
------------------
expenses (including, without limitation, reasonable legal fees) of the Bank in
connection with the preparation, execution and delivery of this letter
agreement, the Demand Note and all other instruments and documents to be
delivered in connection with any Demand Loan or any letter of credit issued
hereunder and any amendments or modifications of any of the foregoing, as well
as the costs and expenses (including, without limitation, the reasonable fees
and expenses of legal counsel) incurred by the Bank in connection with
preserving, enforcing or exercising, upon default, any rights or remedies under
this letter agreement, the Demand Note and all other instruments and documents
delivered or to be delivered hereunder or in connection herewith, all whether or
not legal action is instituted. In addition, the Borrower shall be obligated to
pay any and all stamp and other taxes payable or determined to be payable in
connection with the execution and delivery of this letter agreement, the Demand
Note and all other instruments and documents to be delivered in connection with
any Obligation. Any fees, expenses or other charges which the Bank is entitled
to receive from the Borrower under this Section shall bear interest from the
date of any demand therefor until the date when paid at a rate per annum equal
to the sum of (i) four (4%) percent plus (ii) the Floating Rate (but in no event
----
in excess of the maximum rate permitted by then applicable law).
6.2. Service Fee. With respect to the within arrangements for Demand Loans,
-----------
the Borrower is paying to the Bank, at the time of execution and delivery of
this letter agreement, a non-refundable service fee of $7,500. The fee described
in this Section is in addition to any balances and fees required by the Bank or
any of its affiliates in connection with any other services now or hereafter
made available to the Borrower.
6.3. Other Agreements. The provisions of this letter agreement are not in
----------------
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or in any such other agreement.
6.4. Governing Law. This letter agreement and the Demand Note shall be
-------------
governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.5. Addresses for Notices, etc. Except as otherwise provided herein, all
--------------------------
notices, requests, demands and other communications provided for hereunder shall
be in writing and shall be mailed or delivered to the applicable party at the
address indicated below:
- 20 -
<PAGE>
If to the Borrower:
MicroTouch Systems, Inc.
501 Griffin Brook Park Drive
Methuen, MA 01844
Attention: Kathleen Keeffe, Treasury
Telephone: (978) 659-9244
Fax: (978) 659-9150
If to the Bank:
Fleet National Bank
High Technology Division
Mail Stop: MA OF D07A
One Federal Street
Boston, MA 02110
Attention: Irina V. Case, Vice President
Telephone: (617) 346-0055
Fax: (617) 346-0151
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid. If any
such notice, request, demand or other communication is hand-delivered, same
shall be effective upon receipted delivery.
6.6. Binding Effect; Assignment; Termination. This letter agreement shall
---------------------------------------
be binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns. The Borrower may not assign this letter agreement or any rights
hereunder without the express written consent of the Bank. The Bank may, in
accordance with applicable law, from time to time assign or grant participations
in this letter agreement, the Demand Loans, the Demand Note and/or the letters
of credit issued hereunder. Without limitation of the foregoing generality:
(i) The Bank may at any time pledge all or any portion of its
rights under the Loan Documents (including any portion of the Demand
Note) to any of the 12 Federal Reserve Banks organized under Section 4
of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or
the enforcement thereof shall release the Bank from its obligations
under any of the Loan Documents.
(ii) The Bank shall have the unrestricted right at any time and
from time to time, and without the consent of or notice to the
Borrower, to grant to one or more banks or other financial
institutions (each, a "Participant") participating
- 21 -
<PAGE>
interests in the Bank's obligation to lend hereunder and/or any or all
of the Demand Loans held by the Bank hereunder. In the event of any
such grant by the Bank of a participating interest to a Participant,
whether or not upon notice to the Borrower, the Bank shall remain
responsible for the performance of its obligations hereunder and the
Borrower shall continue to deal solely and directly with the Bank in
connection with the Bank's rights and obligations hereunder. The Bank
may furnish any information concerning the Borrower in its possession
from time to time to prospective assignees and Participants; provided
that the Bank shall require any such prospective assignee or
Participant to agree in writing to maintain the confidentiality of
such information to the same extent as the Bank would be required to
maintain such confidentiality.
The Borrower may terminate this letter agreement and the financing
arrangements made herein by giving written notice of such termination to the
Bank; provided that no such termination will release or waive any of the Bank's
rights or remedies or any of the Borrower's obligations under this letter
agreement or any of the other Loan Documents unless and until the Borrower has
paid in full the Demand Loans and all interest thereon and all fees and charges
payable in connection therewith and all letters of credit issued hereunder have
been terminated.
6.7. Consent to Jurisdiction. The Borrower irrevocably submits to the
-----------------------
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the Demand
Note. The Borrower irrevocably waives, to the fullest extent permitted by law,
any objection which it may now or hereafter have to the laying of venue of any
such suit, action or proceeding brought in such a court and any claim that any
such suit, action or proceeding has been brought in an inconvenient forum. The
Borrower agrees that final judgment in any such suit, action or proceeding
brought in such a court shall be enforced in any court of proper jurisdiction by
a suit upon such judgment, provided that service of process in such action, suit
or proceeding shall have been effected upon the Borrower in one of the manners
specified in the following paragraph of this (S)6.7 or as otherwise permitted by
law.
The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this (S)6.7
either (i) by mailing a copy thereof by registered or certified mail, postage
prepaid, return receipt requested, to it at its address set forth in (S)6.5 (as
such address may be changed from time to time pursuant to said (S)6.5) or (ii)
by serving a copy thereof upon it at its address set forth in (S)6.5 (as such
address may be changed from time to time pursuant to said (S)6.5).
6.8. Severability. In the event that any provision of this letter agreement
------------
or the application thereof to any Person, property or circumstances shall be
held to any extent to be invalid or unenforceable, the remainder of this letter
agreement, and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid and
unenforceable, shall not be affected thereby, and each provision of this letter
agreement shall be valid and enforced to the fullest extent permitted by law.
- 22 -
<PAGE>
6.9. Replacement Note. Upon receipt of an affidavit of an officer of the
----------------
Bank as to the loss, theft, destruction or mutilation of the Demand Note or of
any other Loan Document which is not of public record and, in the case of any
such mutilation, upon surrender and cancellation of such Demand Note or other
Loan Document, the Borrower will issue, in lieu thereof, a replacement Demand
Note or other Loan Document in the same principal amount (as to the Demand Note)
and in any event of like tenor.
6.10. Usury. All agreements between the Borrower and the Bank are hereby
-----
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the Demand Note or otherwise, shall the
amount paid or agreed to be paid to the Bank for the use or the forbearance of
the Indebtedness represented by the Demand Note exceed the maximum permissible
under applicable law. In this regard, it is expressly agreed that it is the
intent of the Borrower and the Bank, in the execution, delivery and acceptance
of the Demand Note, to contract in strict compliance with the laws of The
Commonwealth of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of the Demand Note or any of the
other Loan Documents at the time such provision is to be performed or fulfilled
shall involve exceeding the limit of validity prescribed by applicable law, then
the obligation so to be performed or fulfilled shall be reduced automatically to
the limits of such validity, and if under any circumstances whatsoever the Bank
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Demand Note and not to the
payment of interest. The provisions of this (S)6.10 shall control every other
provision of this letter agreement and of the Demand Note.
6.11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
--------------------
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LETTER AGREEMENT, THE DEMAND NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR
ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK
TO ENTER INTO THIS LETTER AGREEMENT AND TO MAKE DEMAND LOANS AS CONTEMPLATED
HEREIN.
6.12. Judgment Currency. If, for the purpose of obtaining judgment in any
-----------------
court or obtaining an order enforcing a judgment, it becomes necessary to
convert any amount due under this letter agreement and/or the Demand Note in
Dollars or in any other currency (hereinafter in this (S)6.12 called the "first
currency") into any other currency (hereinafter in this (S)6.12 called the
"second currency"), then the conversion shall be made at the Bank's spot rate of
exchange for buying the first currency with the second currency prevailing at
the Bank's close of business on the Business Day next preceding the day on which
the judgment is given or (as the case may be) the order is made. In the event
that there is a difference between the rate of exchange on the basis of which
the amount of such judgment or order is determined and the rate of exchange
prevailing on the date of payment, then the rate of exchange prevailing on the
date of payment shall govern the amount owing hereunder, and the Borrower hereby
agrees to pay such additional
- 23 -
<PAGE>
amount as may be necessary to ensure that the amount paid on such date in the
second currency is the amount in such second currency which, when converted at
the Bank's spot rate of exchange for buying the first currency with the second
currency prevailing at the Bank's opening of business on the date of payment, is
the amount which was due under this letter agreement and/or the Demand Note in
the first currency before such judgment was obtained or made. Any amount due
from the Borrower to the Bank under the second sentence of this (S)6.12 will be
due as a separate debt of the Borrower to the Bank and shall not be affected by
judgment or order being obtained for any other sum due under or in respect of
this letter agreement and/or the Demand Note. The covenant contained in this
(S)6.12 shall survive the payment in full of all of the other obligations of the
Borrower under this letter agreement and/or the Demand Note.
VII. DEFINED TERMS
-------------
7.1. Definitions. In addition to terms defined elsewhere in this letter
-----------
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Aggregate Bank Liabilities" - At any time, the sum of (i) the principal
amount of all Demand Loans then outstanding, plus (ii) all then undrawn amounts
----
of letters of credit issued by the Bank for the account of the Borrower, plus
----
(iii) all amounts then drawn on any such letter of credit which at said date
shall not have been reimbursed to the Bank by the Borrower.
"Alternate Currency" - Pounds Sterling or Euros or any other currency which
is readily obtainable by the Bank in the London interbank market (or other
interbank market deemed appropriate by the Bank), is freely transferable and
readily convertible into Dollars and which the Bank may, in its discretion,
approve from time to time for the purposes of Demand Loans under this letter
agreement.
"Alternate Currency Demand Loan" - A Demand Loan which is made in an
Alternate Currency.
"Alternate Currency Interest Rate" - For any Interest Period, that rate of
interest per annum (rounded upward to the next 1/32nd of 1%) determined by the
Bank pursuant to the following formula:
IBOR
ACIR = --------- + 1.0
[1.0--RR]
Where ACIR = Alternate Currency Interest Rate
IBOR = See definition of IBOR
RR = Reserve Rate
The Alternate Currency Interest Rate will be adjusted during any Interest Period
to reflect any change in the Reserve Rate during such Interest Period.
- 24 -
<PAGE>
"Bank Certificate" - A certificate signed by an officer of the Bank setting
forth any additional amount required to be paid by the Borrower to the Bank
pursuant to (S)1.3, (S)1.6 or (S)1.7 of this letter agreement, which certificate
shall be submitted by the Bank to the Borrower in connection with each demand
made at any time by the Bank upon the Borrower with respect to any such
additional amount, and each such certificate shall, save for manifest error,
constitute presumptive evidence of the additional amount required to be paid by
the Borrower to the Bank upon each demand. A claim by the Bank for all or any
part of any additional amount required to be paid by the Borrower may be made
before and/or after the end of the Interest Period to which such claim relates
or during which such claim has arisen and before and/or after any payment
hereunder to which such claim relates. Each Bank Certificate shall set forth in
reasonable detail the basis for and the calculation of the claim to which it
relates.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national bank or other day on which banks in
Boston, Massachusetts are authorized or directed to close; provided, however,
that if (A) the applicable provision relates to a LIBOR Demand Loan, then the
term "Business Day" shall not include any day on which dealings are not carried
on in the London interbank market or on which banks are not open for business in
London, and (B) if the applicable provision relates to an Alternate Currency
Demand Loan, then the term "Business Day" shall not include any day on which
dealings are not carried on in that interbank market which is selected by the
Bank for the purpose of determining IBOR for such Alternate Currency Demand Loan
or on which banks are not open for business at the location of the relevant
interbank market.
"Default" - Any event or circumstance which, with the passage of time or
the giving of notice or both, could become an Event of Default under this letter
agreement.
"Demand Loans" - As defined in (S)1.1.
"Demand Note" - As defined in (S)1.1.
"Dollar-Denominated Loan" - Any Demand Loan which is borrowed in Dollars.
"Dollar Equivalent" - (i) As to any amount denominated in Dollars, the
amount of such Dollars, and (ii) as to any amount denominated in an Alternate
Currency, the equivalent amount in Dollars as determined by the Bank (such
determination to be conclusive absent manifest error) on the basis of the spot
rate for the purchase of Dollars with such Alternate Currency on the date of
such determination.
"Dollars" or "$" - United States Dollars.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
- 25 -
<PAGE>
"Eurocurrency Liabilities" - Has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor), as in effect from time to time, or in any successor regulation
relating to the liabilities described in said Regulation D.
"Event of Default" - As defined in (S)5.1.
"Expiration Date" - August 31, 2000, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Fixed Rate" - As applicable to any Demand Loan, a LIBOR Interest Rate or
an Alternate Currency Interest Rate.
"Fixed Rate Demand Loan" - Any Demand Loan which is a LIBOR Demand Loan or
an Alternate Currency Demand Loan.
"Floating Rate" - As defined in (S)1.3.
"Floating Rate Demand Loan" - Any Demand Loan which bears interest at a
rate calculated with reference to the Prime Rate.
"IBOR" - For any Interest Period with respect to an Alternate Currency
Demand Loan, that rate per annum (rounded upward, if necessary, to the nearest
1/32nd of 1%) determined by the Bank to be the rate at which deposits in the
relevant Alternate Currency are offered to the Bank by major banks in the
relevant interbank market selected by the Bank, for delivery on the first day of
the applicable Interest Period, at 10:00 a.m. local time three Business Days
prior to the first day of the applicable Interest Period for a term equal to the
term of the Alternate Currency Demand Loan requested for such Interest Period
and in an amount substantially equal to the principal amount of the relevant
Alternate Currency Demand Loan. The Bank shall give prompt notice to the
Borrower of IBOR as determined for each Alternate Currency Demand Loan and such
notice shall be conclusive and binding, absent manifest error.
"Impositions" - All present and future taxes, levies, duties, impositions,
deductions, charges and withholdings applicable to the Bank with respect to any
Fixed Rate Demand Loan, excluding, however, any taxes imposed directly on the
Bank's income and any franchise taxes imposed on it by the jurisdiction under
the laws of which the Bank is organized or any political subdivision thereof.
"Indebtedness" - All obligations of a Person, whether current or long-
term, senior or subordinated, which in accordance with generally accepted
accounting principles would be included as liabilities upon such Person's
balance sheet at the date as of which Indebtedness, is to be determined, and
shall also include guaranties, endorsements (other than for collection in the
ordinary course of business) or other arrangements whereby responsibility is
assumed for the obligations of others, whether by agreement to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or otherwise, to furnish funds through the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
- 26 -
<PAGE>
"Interest Payment Date(s)" - As to each Fixed Rate Demand Loan, the
Interest Payment Date will be the last day of the Interest Period applicable to
such Fixed Rate Demand Loan; provided that if the relevant Interest Period is
more than three months in duration, then there shall be two Interest Payment
Dates for such Interest Period, the first of which shall occur at the end of the
first three months of such Interest Period and the second of which shall occur
at the end of such Interest Period.
"Interest Period" - (A) As to each LIBOR Demand Loan, the period commencing
with the date of the making of such LIBOR Demand Loan and ending one month, two
months, three months or six months thereafter (as the Borrower may select in
accordance with (S)1.3); provided that (i) any such Interest Period which would
otherwise end on a day which is not a Business Day shall be extended to the next
succeeding Business Day unless such Business Day occurs in a new calendar month,
in which case such Interest Period shall end on the immediately preceding
Business Day, (ii) any such Interest Period which begins on a day for which
there is no numerically corresponding day in the calendar month during which
such Interest Period is to end shall end on the last Business Day of such
calendar month, and (iii) no Interest Period may be selected as to any LIBOR
Demand Loan which would end after the Expiration Date; and (B) as to each
Alternate Currency Demand Loan, the period commencing with the date of the
making of such Alternate Currency Demand Loan and ending on such date (not less
than two Business Days after the commencement of such period nor more than 180
calendar days after the commencement of such period, as the Borrower may select
in accordance with (S)1.3); provided that (i) any such Interest Period so
selected must end on a day which is a Business Day, and (ii) no such Interest
Period may be selected as to any Alternate Currency Demand Loan which would end
after the Expiration Date.
"Letter of Credit Liabilities" - As determined at any date, the sum of (i)
all then undrawn amounts of letter of credit which may be issued by the Bank for
the account of the Borrower plus (ii) all amounts then drawn on any such letter
of credit which at said date shall not have been reimbursed to the Bank by the
Borrower.
"LIBOR" - With respect to each Interest Period for a LIBOR Demand Loan,
that rate per annum (rounded upward, if necessary, to the nearest 1/32nd of one
percent) which represents the offered rate for deposits in U.S. Dollars, for a
period of time comparable to such Interest Period, which appears on the Telerate
page 3750 as of 11:00 a.m. (London time) on that day that is two (2) London
Banking Days preceding the first day of such Interest Period; provided, however,
that if the rate described above does not appear on the Telerate System on any
applicable interest determination date, LIBOR for such Interest Period shall be
the rate (rounded upwards as described above, if necessary) for deposits in
dollars for a
- 27 -
<PAGE>
period substantially equal to such Interest Period shown on the Reuters Page
"LIBO" (or such other page as may replace the LIBO Page on that service for the
purpose of displaying such rates), as of 11:00 a.m. (London Time), on that day
that is two (2) London Banking Days prior to the beginning of such Interest
Period. "London Banking Day" shall mean any date on which commercial banks are
open for business in London. If both the Telerate and Reuters systems are
unavailable, then LIBOR for any Interest Period will be determined on the basis
of the offered rates for deposits in U.S. Dollars for a period of time
comparable to such Interest Period which are offered by four major banks in the
London interbank market at approximately 11:00 a.m., London time, on that day
that is two (2) London Banking Days preceding the first day of such Interest
Period, as selected by the Bank. The principal London office of each of four
major London banks will be requested to provide a quotation of its U.S. Dollar
deposit offered rate. If at least two such quotations are provided, the rate for
that date will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for that date will be determined
on the basis of the rates quoted for loans in U.S. Dollars to leading European
banks for a period of time comparable to such Interest Period offered by major
banks in New York City at approximately 11:00 a.m., New York City time, on that
day that is two London Banking Days preceding the first day of such Interest
Period. In the event that the Bank is unable to obtain any such quotation as
provided above, it will be deemed that LIBOR for the proposed Interest Period
cannot be determined. The Bank shall give prompt notice to the Borrower of LIBOR
as determined for each LIBOR Demand Loan and such notice shall be deemed
conclusively correct, absent manifest error.
"LIBOR Interest Rate" - For any Interest Period, an interest rate per
annum, expressed as a percentage, determined by the Bank pursuant to the
following formula:
* LIR = LIBOR + 1.0
------------
[1.00 - RR]
Where LIR = LIBOR Interest Rate
LIBOR = See definition of LIBOR
RR = Reserve Rate
*LIR to be rounded upwards to the next higher 1/32nd of 1%.
The LIBOR Interest Rate will be adjusted during any Interest Period to reflect
any change in the Reserve Rate during such Interest Period.
"LIBOR Demand Loan" - Any Demand Loan which bears interest at a LIBOR
Interest Rate.
"Loan Documents" - Each of this letter agreement, the Demand Note and each
other instrument, document or agreement evidencing, securing, guaranteeing or
relating in any way to any of the Demand Loans or any of the letters of credit
issued hereunder, all whether now existing or hereafter arising or entered into.
"London" - The City of London, in England.
"Maximum Demand Loan Amount" - At any date as of which same is to be
determined, the amount by which (x) $7,500,000 exceeds (y) the sum of (i) all
then undrawn amounts of letters of credit issued by the Bank for the account of
the Borrower plus (ii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
- 28 -
<PAGE>
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
"Person" - An individual, corporation, limited liability company,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Prime Rate" - That variable rate of interest per annum designated by the
Bank, from time to time, as being its prime rate, it being understood that such
rate is merely a reference rate and does not necessarily represent the lowest or
best rate being charged to any customer.
"Reserve Rate" - The aggregate rate, expressed as a decimal, at which the
Bank would be required to maintain reserves under Regulation D of the Board of
Governors of the Federal Reserve System (or any successor or similar regulation
relating to such reserve requirements) against Eurocurrency Liabilities, as well
as any other reserve required of the Bank (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) with respect to
any Fixed Rate Demand Loans. In addition, and without limitation of the
foregoing, the Reserve Rate as to any Alternate Currency Interest Rate will be
deemed to take into account any amounts required to be held with respect to any
Alternate Currency Demand Loans in a non- interest-bearing deposit account with
the Bank of England or other central bank, any amounts which are required by the
Bank of England or other central bank to be maintained with respect to any
Alternate Currency Demand Loans as secured money with members of the London
Discount Market Association or other brokers, market makers or other
associations or financial institutions, and any other special deposits required
with respect to any Alternate Currency Demand Loans. Each LIBOR Interest Rate
and/or Alternate Currency Interest Rate, as applicable, shall be adjusted
automatically on and as of the effective date of any change in the relevant
Reserve Rate.
"Subordinated Debt" - Any Indebtedness of the Borrower which is expressly
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class. For all purposes of this letter agreement, the
amount in one currency which shall be equivalent on any
- 29 -
<PAGE>
particular date to a specified amount in another currency shall be that amount
(as conclusively ascertained by the Bank absent manifest error) in the first
currency which is or could be purchased by the Bank (in accordance with its
normal banking practices) with such specified amount of the second currency in
any interbank foreign currency deposits market selected by the Bank in good
faith for delivery on such date at the spot rate of exchange prevailing on such
date.
- 30 -
<PAGE>
This letter agreement is executed, as an instrument under seal, as of the
day and year first above written.
Very truly yours,
MICROTOUCH SYSTEMS, INC.
By
-------------------------
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By:
-------------------------------
Name:
Title:
- 31 -
<PAGE>
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(d) Litigation
<PAGE>
PROMISSORY NOTE
$7,500,000.00 Boston, Massachusetts
October 20, 1999
FOR VALUE RECEIVED, the undersigned MicroTouch Systems, Inc., a
Massachusetts corporation (the "Borrower") hereby promises to pay ON DEMAND to
the order of FLEET NATIONAL BANK (the "Bank") the principal amount of Seven
Million Five Hundred Thousand and 00/100 ($7,500,000.00) Dollars or such portion
thereof as may be advanced by the Bank pursuant to (S)1.1 of that certain letter
agreement of even date herewith between the Bank and the Borrower (the "Letter
Agreement") and remains outstanding from time to time hereunder ("Principal"),
with interest, at the rate hereinafter set forth, on the daily balance of all
unpaid Principal, from the date hereof until payment in full of all Principal
and interest hereunder. Payments in currency other than Dollars may be required
for Alternate Currency Demand Loans (as defined in the Letter Agreement).
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times (except as
described in the next sentence) be equal to the Prime Rate, as in effect from
time to time (but in no event in excess of the maximum rate permitted by then
applicable law), with a change in the aforesaid rate of interest to become
effective on the same day on which any change in the Prime Rate is effective;
provided, however, that if all or any portion of outstanding Principal is
represented by a Fixed Rate Demand Loan (as defined in the Letter Agreement) for
any Interest Period (as defined in the Letter Agreement), then interest for such
Interest Period on such Fixed Rate Demand Loan shall be payable at the
applicable Fixed Rate (determined as provided in the Letter Agreement) on each
Interest Payment Date (as defined in the Letter Agreement) applicable to such
Interest Period. After maturity or when any Event of Default (as defined in the
Letter Agreement) has occurred and is continuing, interest under this note will
accrue and be payable at a fluctuating rate per annum which at all times shall
be equal to the sum of (i) four (4%) percent per annum plus (ii) the Prime Rate
(but in no event in excess of the maximum rate permitted by then applicable
law). As used herein, "Prime Rate" means that variable rate of interest per
annum designated by the Bank from time to time as its prime rate, it being
understood that such rate is merely a reference rate and does not necessarily
represent the lowest or best rate being charged to any customer. If the entire
amount of any required Principal and/or interest is not paid within ten (10)
days after the same is due, the Borrower shall pay to the Bank a late fee equal
to five percent (5%) of the required payment.
All outstanding Principal and all interest accrued thereon shall be due and
payable in full on the first to occur of: (i) the making of any demand for
payment hereunder (which demand may be made by the Bank at any time whether or
not any Default (as defined in the Letter Agreement) or any Event of Default has
occurred), or (ii) an acceleration under (S)5.2 of the Letter Agreement or (iii)
August 31, 2000. The Borrower may at any time and from time to time
<PAGE>
prepay all or any portion of said Principal, without premium or penalty, but, as
to Fixed Rate Demand Loans, only at the times and in the manner, and with the
yield maintenance fee (if any), provided for in the Letter Agreement. Under
certain circumstances set forth in the Letter Agreement, prepayment of Principal
may be required.
Payments of both Principal and interest shall be made, in lawful money of
the United States in immediately available funds, at the office of the Bank
located at One Federal Street, Boston, Massachusetts 02110, or at such other
address as the Bank may from time to time designate; provided that principal of,
and interest on, any Alternate Currency Demand Loan will be made, in immediately
available funds, in the relevant Alternate Currency at such office as the Bank
shall designate for this purpose.
The undersigned Borrower irrevocably authorizes the Bank to make or cause
to be made, on a schedule attached to this note or on the books of the Bank, at
or following the time of making any Demand Loan (as defined in the Letter
Agreement) and of receiving any payment of Principal, an appropriate notation
reflecting such transaction and the then aggregate unpaid balance of Principal.
Failure of the Bank to make any such notation shall not, however, affect any
obligation of the Borrower hereunder or under the Letter Agreement. The unpaid
Principal amount of this note, as recorded by the Bank from time to time on such
schedule or on such books, shall constitute presumptive evidence of the
aggregate unpaid principal amount of the Demand Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to pay
all costs and expenses, including, without limitation, reasonable attorneys'
fees, incurred or paid by the Bank in enforcing this note and any collateral or
security therefor, all whether or not litigation is commenced.
This note is the Demand Note referred to in the Letter Agreement. This note
is subject to prepayment (with a yield maintenance fee consequent thereon in
certain cases, as more fully described in the Letter Agreement) as set forth in
the Letter Agreement. This note is payable ON DEMAND and may also be declared to
be due and payable upon the occurrence of an Event of Default, as provided in
the Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL
-2-
<PAGE>
INDUCEMENT FOR THE BANK TO ACCEPT THIS NOTE AND TO MAKE LOANS AS CONTEMPLATED IN
THE LETTER AGREEMENT.
Executed, as an instrument under seal, as of the day and year first above
written.
CORPORATE SEAL MICROTOUCH SYSTEMS, INC.
ATTEST:
____________________________ By:_________________________
Clerk Name:
Title:
-3-
<PAGE>
Exhibit 21
MICROTOUCH SYSTEMS, INC.
SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction
MicroTouch Systems, Ltd. United Kingdom of Britain
MicroTouch Systems, Pty., Ltd. Australia
MicroTouch Systems, Ltd. Hong Kong
MicroTouch Systems, Inc. Taiwan
MicroTouch Systems, KK Japan
MicroTouch Systems, SARL France
MicroTouch Systems, GMBH Germany
MicroTouch Systems, SRL Italy
MicroTouch Systems, SL Spain
MicroTouch Resistive Products, Inc. Texas, U.S.A.
MicroTouch Investments, Inc. Massachusetts, U.S.A.
MicroTouch FSC Saipan
MicroTouch Systems Singapore Pte. Ltd. Singapore
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we here by consent to the incorporation of
our report dated January 26, 2000, included in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8, File Nos.
33-94268, 33-94284, 333-65523, 333-36439.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 5,471 4,321
<SECURITIES> 32,191 15,566
<RECEIVABLES> 28,220 32,088
<ALLOWANCES> 4,955 1,701
<INVENTORY> 15,954 18,014
<CURRENT-ASSETS> 84,935 74,327
<PP&E> 28,339 36,027
<DEPRECIATION> 10,887 15,052
<TOTAL-ASSETS> 104,345 97,104
<CURRENT-LIABILITIES> 25,875 27,526
<BONDS> 0 0
0 0
0 0
<COMMON> 82 84
<OTHER-SE> 78,287 69,424
<TOTAL-LIABILITY-AND-EQUITY> 104,345 97,104
<SALES> 144,370 157,491
<TOTAL-REVENUES> 144,370 157,491
<CGS> 88,950 104,323
<TOTAL-COSTS> 88,950 104,323
<OTHER-EXPENSES> 42,653 47,186
<LOSS-PROVISION> 529 427
<INTEREST-EXPENSE> 135 0
<INCOME-PRETAX> 13,776 3,928
<INCOME-TAX> 4,408 1,257
<INCOME-CONTINUING> 9,368 2,671
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,368 2,671
<EPS-BASIC> 1.22 0.39
<EPS-DILUTED> 1.20 0.38
</TABLE>
