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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File No. 0-14800
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X-RITE, INCORPORATED
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(Exact name of registrant as specified in its charter)
Michigan 38-1737300
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3100 44th Street, SW, Grandville, Michigan 49418
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(Address of principal executive offices) (Zip Code)
(616) 534-7663
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of registrant's common stock, par value
$.10 per share, at October 31, 1997 was 21,148,381 shares.
Exhibit Index on page 12.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 4, December 31,
1997 1996
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,847,000 $ 1,587,000
Short-term investments 7,931,000 10,196,000
Accounts receivable, less allowances of
$898,000 in 1997 and $738,000 in 1996 20,235,000 18,447,000
Inventories 13,847,000 15,019,000
Deferred tax assets 1,308,000 1,392,000
Prepaid expenses and other current assets 1,371,000 724,000
----------- -----------
Total current assets 46,539,000 47,365,000
PROPERTY AND EQUIPMENT, at cost 31,310,000 28,062,000
Less accumulated depreciation (14,450,000) (12,263,000)
----------- -----------
16,860,000 15,799,000
OTHER ASSETS:
Costs in excess of net assets acquired 15,834,000 9,522,000
Other noncurrent assets 10,643,000 6,265,000
----------- -----------
26,477,000 15,787,000
----------- -----------
$89,876,000 $78,951,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--Continued
October 4, December 31,
1997 1996
------------ -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 1,163,000 $ 2,161,000
Accrued liabilities--
Payroll and employee benefits 1,355,000 1,181,000
Income taxes - 105,000
Other accrued liabilities 1,362,000 1,848,000
----------- -----------
Total current liabilities 3,880,000 5,295,000
DEFERRED INCOME TAXES 588,000 694,000
SHAREHOLDERS' INVESTMENT:
Common stock 2,114,000 2,107,000
Additional paid-in capital 7,588,000 6,908,000
Retained earnings 76,011,000 64,059,000
Cumulative translation adjustment (305,000) (112,000)
----------- -----------
85,408,000 72,962,000
----------- -----------
$89,876,000 $78,951,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
October 4, September 30, October 4, September 30,
1997 1996 1997 1996
----------- ------------ ----------- ------------
Net sales $24,861,000 $21,358,000 $71,927,000 $61,881,000
Cost of sales 8,547,000 7,621,000 25,047,000 22,158,000
----------- ----------- ----------- -----------
Gross profit 16,314,000 13,737,000 46,880,000 39,723,000
Operating expenses:
Selling & marketing 4,614,000 3,638,000 12,712,000 10,575,000
Engineering, general
& administrative 3,179,000 2,818,000 9,270,000 8,546,000
Research & development 1,547,000 1,364,000 4,602,000 4,107,000
----------- ----------- ----------- -----------
9,340,000 7,820,000 26,584,000 23,228,000
----------- ----------- ----------- -----------
Operating income 6,974,000 5,917,000 20,296,000 16,495,000
Other income 77,000 118,000 212,000 284,000
----------- ----------- ----------- -----------
Income before
income taxes 7,051,000 6,035,000 20,508,000 16,779,000
Income taxes 2,398,000 2,021,000 6,973,000 5,621,000
----------- ----------- ----------- -----------
NET INCOME $ 4,653,000 $ 4,014,000 $13,535,000 $11,158,000
=========== =========== =========== ===========
Average number of common
and common equivalent
shares outstanding 21,332,000 21,196,000 21,274,000 21,188,000
========== ========== ========== ==========
Earnings per common and
common equivalent share $.22 $.19 $.64 $.53
==== ==== ==== ====
Cash dividends per share $.025 $.025 $.075 $.075
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
October 4, September 30,
1997 1996
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES $14,309,000 $11,198,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 9,223,000 1,600,000
Proceeds from maturities of investments 920,000 567,000
Purchases of investments (7,903,000) (7,379,000)
Capital expenditures (2,857,000) (2,443,000)
Acquisitions, less cash acquired (6,960,000) -
Purchases of other assets (5,590,000) (684,000)
Other investing activities 37,000 50,000
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Net cash and cash equivalents
used for investing activities (13,130,000) (8,289,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,583,000) (1,577,000)
Issuance of common stock 687,000 227,000
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Net cash and cash equivalents
used for financing activities (896,000) (1,350,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (23,000) 4,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 260,000 1,563,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,587,000 332,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 1,847,000 $ 1,895,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by X-Rite Incorporated ("X-Rite" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in X-Rite's 1996 annual report on Form 10-K.
Effective January 1, 1997, the Company adopted a 4-4-5 quarterly accounting
cycle to accommodate manufacturing schedules that were developed to improve
customer service. The first three quarters of 1997 ended on April 5,
July 5 and October 4, whereas the first three quarters of 1996 ended on
March 31, June 30 and September 30. The Company's 1997 quarter and
year-to-date results from operations would have been approximately the same
if the quarters had ended on March 31, June 30 and September 30, rather
than on April 5, July 5 and October 4.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of October 4, 1997,
the results of its operations for the three and nine month periods ended
October 4, 1997 and September 30, 1996, and its cash flows for the nine
month periods ended October 4, 1997 and September 30, 1996. All such
adjustments are of a normal and recurring nature.
NOTE 2--INVENTORIES
Inventories consisted of the following:
October 4, December 31,
1997 1996
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Raw materials $ 4,671,000 $ 4,963,000
Work in process 4,346,000 4,708,000
Finished goods 4,830,000 5,348,000
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$13,847,000 $15,019,000
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 3--EARNINGS PER SHARE
In March of 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share," was issued. This statement replaces "primary"
earnings per share ("EPS") with "basic" EPS. Basic EPS does not include
the dilutive effect of common shares that could potentially be issued
(i.e., stock options in the case of X-Rite). The Statement is effective
for financial statements issued after December 15, 1997. If the Company
had adopted this standard in 1997 there would have been no change in the
EPS reported. The Company does not believe the adoption of this
pronouncement will have a material effect on its financial statements.
NOTE 4--ACQUISITION
In May of 1997 the Company acquired substantially all the assets of Light
Source Computer Images, Inc. ("Light Source") for $6,955,000 in cash.
Light Source is a California-based producer of high-quality, easy-to-use
scanning, imaging and print optimization software. The acquisition has
been accounted for under the purchase method of accounting and was funded
by proceeds from sales of short-term investments.
The asset purchase agreement provides for future contingent consideration
if net sales of certain products reaches or exceeds agreed upon sales goals
during twelve month periods that end in July 1998, 1999 and 2000. The
Company has paid $4,638,000 in cash into an escrow fund which is equal to
the maximum contingent cash consideration that could be earned by the
sellers if such sales goals are realized. The escrow fund payment is not
included in the acquisition price stated in the preceding paragraph. If
any contingent payments are made, those amounts will be accounted for as
additional costs of the acquired assets and amortized over the remaining
lives of the assets.
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Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
RESULTS OF OPERATIONS
Net Sales:
Third quarter 1997 consolidated net sales were 16.4% higher than sales in
the same quarter a year ago. The year-over-year increase was due to higher
unit volume sales.
Consolidated net sales for the nine months ended October 4, 1997 increased
16.2% compared to the same period in 1996. This improvement in sales was
also due to unit volume increases.
Cost of Sales and Gross Profit:
Gross profit as a percentage of sales was 65.6% for the third quarter of
1997, compared to 64.3% for the third quarter of 1996. Year to date, gross
profit as a percentage of sales was 65.2% in 1997 and 64.2% in 1996. The
increase in gross profit margins was due to a favorable change in product
sales mix.
Operating Expenses:
Selling and marketing expenses in the third quarter were 26.8% higher
compared to the same quarter in the prior year, and as a percentage of
sales increased from 17.0% in 1996 to 18.6% in 1997. Year-to-date selling
and marketing expenses increased 20.2% compared to the same period in the
prior year, but as a percentage of sales increased only .6% The increases
resulted from stepped-up sales and marketing efforts and higher trade show
costs.
Engineering, general and administrative ("EG&A") expenses in the third
quarter and year to date were higher compared to the same periods in the
prior year. However, as a percentage of sales, third quarter EG&A expenses
declined from 13.2% in 1996 to 12.8% in 1997, and year-to-date declined
from 13.8% in 1996 to 12.9% in 1997. The relative declines were achieved
through ongoing cost containment efforts aimed at controlling
administrative costs.
Research and development spending remained steady, with year-over-year
increases being posted in the third quarter and year to date. As a
percentage of sales, research and development spending in the quarter and
year to date remained consistent compared to the same periods in the prior
year.
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Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition, continued
RESULTS OF OPERATIONS, continued
Other Income:
Other income consisted mainly of interest earnings from invested funds.
Interest income in the third quarter and year to date was less than
comparable periods in 1996 due to a reduction in funds available for
investment. Invested funds declined in 1997 due to the acquisition of
Light Source in the second quarter (see Note 4 to the accompanying
financial statements).
Net Income:
The Company recorded net income of $4,653,000 for the three months ended
October 4, 1997 compared to $4,014,000 in the same period of 1996. On a
per share basis, third quarter net income was $.22 in 1997 and $.19 in
1996. For the first nine months of 1997, net income was $13,535,000, or
$.64 per share, compared to $11,158,000, or $.53 per share in 1996. The
increases in third quarter and year-to-date earnings were due to higher
sales volume. The average number of common and common equivalent shares
outstanding was not significantly different between the periods.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities in the first nine months of 1997
totaled $14,309,000. Working capital at October 4, 1997 was $42,659,000
compared to $42,070,000 at December 31, 1996.
The purchase of substantially all the assets of Light Source and the
funding of an escrow account related to that purchase was made with cash
and short-term investments on hand (see Note 4 to the accompanying
financial statements).
Capital expenditures in the first nine months of 1997 totaled $2,857,000
and consisted mainly of machinery and equipment. X-Rite currently
anticipates capital expenditures for the remainder of 1997 will be
approximately $1,000,000 and will consist principally of machinery,
equipment and building improvements.
Management expects that X-Rite's current liquidity, combined with cash flow
from future operations and the Company's $20 million revolving credit
agreement, will be sufficient to finance the Company's operations, capital
expenditures and dividends for the remainder of 1997 and 1998.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on Page 12 of this Form 10-Q report.
(b) There were no reports on Form 8-K filed by the Registrant
during the quarter ended October 4, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
X-RITE, INCORPORATED
November 17, 1997 /s/ Ted Thompson
----------------------
Ted Thompson
Chairman, President and
Chief Executive Officer
November 17, 1997 /s/ Duane F. Kluting
----------------------
Duane F. Kluting
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
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3(a) Restated Articles of Incorporation (filed as exhibit to Form
S-18 dated April 10, 1986 (Registration No. 33-3954C) and
incorporated herein by reference)
3(b) Certificate of Amendment to Restated Articles of Incorporation
adding Article IX (filed as exhibit to Form 10-Q for the quarter
ended June 30, 1987 (Commission File No. 0-14800) and
incorporated herein by reference)
3(c) Certificate of Amendment to Restated Articles of Incorporation
amending Article III (filed as exhibit to Form 10-K for the year
ended December 31, 1995 (Commission File No. 0-14800) and
incorporated herein by reference)
3(d) Bylaws, as amended through June 16, 1994 (filed as exhibit to
Form 10-K for the year ended December 31, 1994 (Commission File
No. 0-14800) and incorporated herein by reference)
3(e) First amendment to amended Bylaws amending Article IV (filed as
exhibit to Form 10-K for the year ended December 31, 1995
(Commission File No. 0-14800) and incorporated herein by
reference)
4 X-Rite, Incorporated common stock certificate specimen (filed
as exhibit to Form 10-Q for the quarter ended June 30, 1986
(Commission File No. 0-14800) and incorporated herein by
reference)
The following material contracts identified with "*" preceding the exhibit
number are agreements or compensation plans with or relating to executive
officers, directors or related parties.
*10(a) X-Rite, Incorporated Amended and Restated Outside Director Stock
Option Plan, effective as of September 17, 1996 (filed as exhibit
to Form 10-Q for the quarter ended September 30, 1996 (Commission
File No. 0-14800) and incorporated herein by reference)
*10(b) X-Rite, Incorporated Cash Bonus Conversion Plan (filed as
Appendix A to the definitive proxy statement dated April 8, 1996
relating to the Company's 1996 annual meeting (Commission File
No. 0-14800) and incorporated herein by reference)
*10(c) Form of Indemnity Contract entered into between the registrant
and members of the board of directors (filed as exhibit to
Form 10-Q for the quarter ended June 30, 1996 (Commission File
No. 0-14800) and incorporated herein by reference)
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EXHIBIT INDEX
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*10(d) Employment Resignation and Severance Agreement entered into
between the registrant and Bruce Jorgensen (filed as exhibit to
Form 10-Q for the quarter ended March 31, 1996 (Commission File
No. 0-14800) and incorporated herein by reference)
10(e) Asset Purchase Agreement entered into between Light Source
Acquisition Company and Light Source Computer Images, Inc.
including Escrow Agreement by and between Light Source
Acquisition Company and Light Source Computer Images, Inc. and
U.S. Trust Company of California, N.A. (filed as exhibit to
Form 8-K dated June 2, 1997 (Commission File No. 0-14800) and
incorporated herein by reference)
27 Financial Data Schedule
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> OCT-04-1997
<CASH> 1,847,000
<SECURITIES> 7,931,000
<RECEIVABLES> 21,133,000
<ALLOWANCES> 898,000
<INVENTORY> 13,847,000
<CURRENT-ASSETS> 46,539,000
<PP&E> 31,310,000
<DEPRECIATION> 14,450,000
<TOTAL-ASSETS> 89,876,000
<CURRENT-LIABILITIES> 3,880,000
<BONDS> 0
0
0
<COMMON> 2,114,000
<OTHER-SE> 83,294,000
<TOTAL-LIABILITY-AND-EQUITY> 89,876,000
<SALES> 71,927,000
<TOTAL-REVENUES> 71,927,000
<CGS> 25,047,000
<TOTAL-COSTS> 25,047,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 81,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,508,000
<INCOME-TAX> 6,973,000
<INCOME-CONTINUING> 13,535,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,535,000
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
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