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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 April 4, 1998
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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
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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 May 1, 1998 was 21,165,828 shares.
Exhibit Index on page 13.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 4, January 3,
1998 1998
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,905,000 $ 2,808,000
Short-term investments 9,652,000 10,555,000
Accounts receivable, less allowances of
$545,000 in 1998 and $567,000 in 1997 20,639,000 20,833,000
Inventories 15,590,000 15,000,000
Deferred tax assets 1,189,000 1,189,000
Prepaid expenses and other current assets 1,851,000 1,848,000
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Total current assets 51,826,000 52,233,000
PROPERTY AND EQUIPMENT, at cost 33,985,000 33,456,000
Less accumulated depreciation (16,870,000) (16,043,000)
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17,115,000 17,413,000
OTHER ASSETS:
Costs in excess of net assets acquired 15,245,000 15,539,000
Other noncurrent assets 10,062,000 7,283,000
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25,307,000 22,822,000
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$94,248,000 $92,468,000
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See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--Continued
April 4, January 3,
1998 1998
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 1,721,000 $ 1,604,000
Accrued liabilities--
Payroll and employee benefits 800,000 1,403,000
Income taxes 1,671,000 249,000
Other accrued liabilities 1,817,000 2,454,000
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Total current liabilities 6,009,000 5,710,000
DEFERRED INCOME TAXES 678,000 678,000
SHARES SUBJECT TO REDEMPTION AGREEMENTS 66,913,000 -
SHAREHOLDERS' INVESTMENT:
Common stock 1,662,000 2,115,000
Additional paid-in capital 7,963,000 7,876,000
Retained earnings 16,091,000 79,969,000
Shares in escrow (4,769,000) (3,449,000)
Cumulative translation adjustment (299,000) (431,000)
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20,648,000 86,080,000
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$94,248,000 $92,468,000
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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
April 4, April 5,
1998 1997
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Net sales $23,637,000 $23,080,000
Cost of sales 8,021,000 8,133,000
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Gross profit 15,616,000 14,947,000
Operating expenses:
Selling & marketing 5,090,000 4,007,000
Engineering, general & administrative 3,807,000 3,041,000
Research & development 2,111,000 1,558,000
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11,008,000 8,606,000
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Operating income 4,608,000 6,341,000
Other income 104,000 93,000
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Income before income taxes 4,712,000 6,434,000
Income taxes 1,602,000 2,188,000
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NET INCOME $ 3,110,000 $ 4,246,000
=========== ===========
Earnings per share:
Basic $.15 $.20
==== ====
Diluted $.15 $.20
==== ====
Cash dividends per share $.025 $.025
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See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
April 4, April 5,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES $3,483,000 $6,834,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 2,250,000 1,000,000
Proceeds from maturities of investments 400,000 220,000
Purchases of investments (1,750,000) (1,954,000)
Capital expenditures (613,000) (783,000)
Purchases of other assets (352,000) (316,000)
Initial investment in cash value of
founders life insurance policies (3,009,000) -
Other investing activities 45,000 12,000
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Net cash and cash equivalents
used for investing activities (3,029,000) (1,821,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (529,000) (527,000)
Issuance of common stock 88,000 425,000
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Net cash and cash equivalents
used for financing activities (441,000) (102,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 84,000 (14,000)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 97,000 4,897,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,808,000 1,587,000
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CASH AND CASH EQUIVALENTS AT END OF QUARTER $2,905,000 $6,484,000
========== ==========
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 1997 annual report on Form 10-K.
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 April 4, 1998
and the results of its operations and its cash flows for the three month
periods ended April 4, 1998 and April 5, 1997. All such adjustments are of
a normal and recurring nature.
NOTE 2--INVENTORIES
Inventories consisted of the following:
April 4, January 3,
1998 1998
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Raw materials $ 6,775,000 $ 5,083,000
Work in process 4,147,000 3,081,000
Finished goods 4,668,000 6,836,000
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$15,590,000 $15,000,000
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 3--EARNINGS PER SHARE
Effective January 3, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". This statement
establishes standards for computing and presenting "basic" and "diluted"
earnings per share ("EPS"). Basic EPS excludes the dilutive effect of
common shares that could potentially be issued (i.e., stock options in the
case of X-Rite) and is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed by dividing net income by the weighted average number of shares
outstanding plus all shares that could potentially be issued. All prior
period EPS data has been restated to conform to this statement.
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS for each period presented in the
accompanying financial statements:
Three Months Ended
April 4, April 5,
1998 1997
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Numerators:
Net income numerators for
both basic and diluted EPS $3,110,000 $4,246,000
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Denominators:
Denominators for basic EPS;
weighted average common
shares outstanding 20,909,348 21,085,306
Potentially dilutive shares
resulting from stock options 102,906 126,278
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Denominators for diluted EPS 21,012,254 21,211,584
========== ==========
Certain exercisable stock options were not included in the computation of
diluted EPS because the option prices were greater than the average market
prices in each quarter. The number of stock options not included in the
computation of diluted EPS and the range of exercise prices was 446,000 and
$14.50 - $19.25 in 1998, and 252,000 and $17.38 - $19.25 in 1997.
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 4--COMPREHENSIVE INCOME
In June of 1997, Statement of Financial Accounting Standards No. 128,
"Reporting Comprehensive Income," was issued. This statement requires the
disclosure of comprehensive income, which, for X-Rite, includes net income
and foreign currency translation adjustments. Comprehensive income was
approximately $3,242,000 for the quarter ended April 4, 1998 and $4,093,000
for the quarter ended April 5, 1997.
NOTE 5--SHARES IN ESCROW
During 1997, the Company acquired substantially all the assets of Light
Source Computer Images, Inc. The asset purchase agreement provides for
future contingent consideration if net sales of certain products reaches or
exceeds agreed upon sales goals. The Company established an escrow fund
which is equal to the maximum contingent cash consideration that could be
earned by the sellers. The investment of escrow funds must be made in
accordance with the terms of an escrow agreement, which allows for certain
money market securities or X-Rite common stock. On April 4, 1998, the
escrow fund held 257,064 shares of X-Rite common stock at a cost of
$4,769,000. Accordingly, that portion of the escrow fund is presented in
the accompanying balance sheet as a reduction to shareholders' investment
NOTE 6--FOUNDERS STOCK REPURCHASE AGREEMENTS
On January 21, 1998 the Company announced that it had entered into
agreements with its founding shareholders for the future repurchase of 4.54
million shares or 21.5 percent of the Company's outstanding stock. The
stock purchases will occur following the later of the death of each founder
and his spouse. The cost of the repurchase agreements will be funded by
proceeds from life insurance policies the Company has purchased on the
lives of certain of these individuals. The price the Company will pay the
founders' estates for these shares will reflect a 10 percent discount from
the market price, although the discounted price may not be less than $10
per share or more than $25 per share.
The shares subject to the agreements have been reclassified on the April 4,
1998 balance sheet to a temporary equity account entitled "Shares Subject
to Redemption Agreements." The reclassification of $66,913,000 was
determined by multiplying the applicable shares by the average closing
price of the Company's common stock for the ninety trading days preceding
April 4, 1998.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities in the first quarter of 1998 totaled
$3,483,000. The primary source of cash was net income earned during the
period.
The most significant investing activity during the quarter was the purchase
of insurance policies on the lives of certain X-Rite founding shareholders
and their spouses. On January 21, 1998, the Company announced it had
entered into agreements with its founding shareholders for the future
repurchase of 4.54 million shares, or 21.5 percent of the Company's
outstanding stock. The stock purchases will occur following the later of
the death of each founder and his spouse. The cost of the repurchase
agreements will be funded by proceeds from the life insurance policies. The
total face value of the policies is $160 million. The price the Company
will pay the founders' estates for these shares will reflect a 10 percent
discount from the market price, although the discounted price may not be
less than $10 per share or more than $25 per share.
If all the stock is purchased from the founders' estates at the maximum
price of $25 per share, the aggregate stock purchases will total $113.5
million. The company anticipates that certain stock purchases will not
coincide with the receipt of insurance proceeds; therefore, borrowed funds
will be needed from time to time to finance the Company's purchase
obligations. Insurance was purchased at the $160 million level in order to
cover both the maximum aggregate purchase price and anticipated borrowing
costs. Life insurance premiums will total $4.3 million each year while all
the policies remain in effect. Of the $4.3 million paid in the first
quarter, approximately $3 million represents cash surrender value and has
been recorded as an other long-term asset on the Company's balance sheet.
Capital expenditures in the first three months of 1998 totaled $613,000 and
consisted mainly of machinery and equipment. X-Rite currently anticipates
capital expenditures for the remainder of 1998 will be approximately
$2,500,000 and will consist principally of machinery and equipment.
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, expected
founders' stock repurchase obligations, capital expenditures and dividends
for the remainder of 1998. In the event more funds are required,
additional short or long-term borrowing arrangements are the most likely
alternatives for meeting liquidity and capital resource needs.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
RESULTS OF OPERATIONS
Net Sales:
First quarter 1998 consolidated net sales of $23,637,000 were 2.4% higher
than sales of $23,080,000 in the same quarter a year ago. The improvement
in sales was due to unit volume increases rather than price increases.
Cost of Sales and Gross Profit:
Gross profit as a percentage of sales was 66.1% for the first quarter of
1998, compared to 64.8% for the first quarter of 1997. The increase was
due to a favorable change in product sales mix.
Operating Expenses:
Selling and marketing expenses increased 27.0% in the first quarter of 1998
compared to the same period in 1997. The Company will continue to ramp up
its sales and marketing efforts throughout 1998 in order to develop
long-term international growth opportunities.
First quarter engineering, general and administrative ("EG&A") expenses
increased 25.2% compared to the same quarter in the prior year. The
increase was due primarily to founders life insurance premium expense and
amortization of goodwill related to the acquisition of the assets of Light
Source Computer Images, Inc. in May of 1997.
Research and development expenses in the first quarter increased 35.5%
compared with the same period in 1997. X-Rite will continue stepping up
its research activities in 1998 in order to expedite new product
introductions.
Other Income:
Other income consisted mainly of interest earnings from invested funds.
First quarter interest income was not significantly different from the
comparable period in 1997.
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Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition, continued
RESULTS OF OPERATIONS, continued
Net Income:
The Company recorded net income of $3,110,000 for the three months ended
April 4, 1998 compared to $4,246,000 in the same period of 1997. On a per
share basis, first quarter net income was $.15 in 1998 and $.20 in 1997.
The average number of common and common equivalent shares outstanding was
not significantly different between the periods.
YEAR 2000
The Company's year 2000 ("Y2K") compliance plans are proceeding as
expected. The Company anticipates that its business systems will be Y2K
compliant and its product applications will have conversion solutions by
the end of 1998. The cost of completing Y2K compliance will not be
material to the Company's financial condition or results of operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on Page 13 of this Form 10-Q report.
(b) A report on Form 8-K was filed by the Registrant on
January 21, 1998 to report agreements entered into with the
Registrant's founding shareholders to repurchase 4.54 million
shares of outstanding stock (see Note 6 to the accompanying
financial statements).
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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
May 18, 1998 /s/ Ted Thompson
----------------------
Ted Thompson
Chairman, President and
Chief Executive Officer
May 18, 1998 /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 and restated January 20, 1998 (filed as
exhibit to Form 10-K for the year ended January 3, 1998
(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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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> APR-04-1998
<CASH> 2,905,000
<SECURITIES> 9,652,000
<RECEIVABLES> 21,184,000
<ALLOWANCES> 545,000
<INVENTORY> 15,590,000
<CURRENT-ASSETS> 51,826,000
<PP&E> 33,985,000
<DEPRECIATION> 16,870,000
<TOTAL-ASSETS> 94,248,000
<CURRENT-LIABILITIES> 6,009,000
<BONDS> 0
0
0
<COMMON> 1,662,000
<OTHER-SE> 85,899,000
<TOTAL-LIABILITY-AND-EQUITY> 94,248,000
<SALES> 23,637,000
<TOTAL-REVENUES> 23,637,000
<CGS> 8,021,000
<TOTAL-COSTS> 8,021,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 46,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,712,000
<INCOME-TAX> 1,602,000
<INCOME-CONTINUING> 3,110,000
<DISCONTINUED> 0
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