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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 July 4, 1998
---------------------
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
---------------
X-RITE, INCORPORATED
- ------------------------------------------------------------------------
(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 July 31, 1998 was 21,171,438 shares.
Exhibit Index on page 15.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 4, January 3,
1998 1998
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,277,000 $ 2,808,000
Short-term investments 11,317,000 10,555,000
Accounts receivable, less allowances of
$736,000 in 1998 and $567,000 in 1997 19,874,000 20,833,000
Inventories 15,988,000 15,000,000
Deferred tax assets 1,189,000 1,189,000
Prepaid expenses and other current assets 878,000 1,848,000
----------- -----------
Total current assets 53,523,000 52,233,000
PROPERTY AND EQUIPMENT, at cost 34,693,000 33,456,000
Less accumulated depreciation (17,689,000) (16,043,000)
----------- -----------
17,004,000 17,413,000
OTHER ASSETS:
Costs in excess of net assets acquired 14,951,000 15,539,000
Other noncurrent assets 9,874,000 7,283,000
----------- -----------
24,825,000 22,822,000
----------- -----------
$95,352,000 $92,468,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--Continued
July 4, January 3,
1998 1998
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 1,360,000 $ 1,604,000
Accrued liabilities--
Payroll and employee benefits 1,115,000 1,403,000
Income taxes - 249,000
Other accrued liabilities 1,622,000 2,454,000
----------- -----------
Total current liabilities 4,097,000 5,710,000
DEFERRED INCOME TAXES 678,000 678,000
VALUE OF SHARES SUBJECT TO
REDEMPTION AGREEMENTS 54,994,000 -
SHAREHOLDERS' INVESTMENT:
Common stock 1,663,000 2,115,000
Additional paid-in capital 8,025,000 7,876,000
Retained earnings 30,842,000 79,969,000
Shares in escrow (4,781,000) (3,449,000)
Cumulative translation adjustment (166,000) (431,000)
----------- -----------
35,583,000 86,080,000
----------- -----------
$95,352,000 $92,468,000
=========== ===========
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 Six Months Ended
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $24,286,000 $23,986,000 $47,923,000 $47,066,000
Cost of sales 8,200,000 8,367,000 16,221,000 16,500,000
----------- ----------- ----------- -----------
Gross profit 16,086,000 15,619,000 31,702,000 30,566,000
Operating expenses:
Selling & marketing 5,042,000 4,091,000 10,132,000 8,098,000
Engineering, general
& administrative 4,078,000 3,050,000 7,885,000 6,091,000
Research & development 1,983,000 1,497,000 4,094,000 3,055,000
----------- ----------- ----------- -----------
11,103,000 8,638,000 22,111,000 17,244,000
----------- ----------- ----------- -----------
Operating income 4,983,000 6,981,000 9,591,000 13,322,000
Other income 91,000 42,000 195,000 135,000
----------- ----------- ----------- -----------
Income before
income taxes 5,074,000 7,023,000 9,786,000 13,457,000
Income taxes 1,725,000 2,387,000 3,327,000 4,575,000
----------- ----------- ----------- -----------
NET INCOME $ 3,349,000 $ 4,636,000 $ 6,459,000 $ 8,882,000
=========== =========== =========== ===========
Earnings per share:
Basic $.16 $.22 $.31 $.42
==== ==== ==== ====
Diluted $.16 $.22 $.31 $.42
==== ==== ==== ====
Cash dividends per share $.025 $.025 $.050 $.050
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
July 4, July 5,
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES $8,444,000 $8,226,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 2,050,000 9,223,000
Proceeds from maturities of investments 1,880,000 920,000
Purchases of investments (4,697,000) (2,903,000)
Capital expenditures (1,315,000) (1,700,000)
Acquisitions, less cash acquired (382,000) (6,960,000)
Deposit to escrow fund in connection
with Light Source acquisition - (4,638,000)
Purchases of other assets (710,000) (633,000)
Initial investment in cash value of
founders life insurance policies (3,009,000) -
Increase in cash value of founders
life insurance policies (30,000) -
Other investing activities 55,000 26,000
---------- ----------
Net cash and cash equivalents
used for investing activities (6,158,000) (6,665,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,058,000) (1,055,000)
Issuance of common stock 151,000 535,000
---------- ----------
Net cash and cash equivalents
used for financing activities (907,000) (520,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 90,000 (11,000)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,469,000 1,030,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,808,000 1,587,000
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $4,277,000 $2,617,000
========== ==========
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 July 4, 1998 and
the results of its operations and its cash flows for the three and six
month periods ended July 4, 1998 and July 5, 1997. All such adjustments
are of a normal and recurring nature.
NOTE 2--INVENTORIES
Inventories consisted of the following:
July 4, January 3,
1997 1998
------------ -----------
Raw materials $ 7,331,000 $ 5,083,000
Work in process 4,095,000 3,081,000
Finished goods 4,562,000 6,836,000
----------- -----------
$15,988,000 $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 Six Months Ended
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Numerators:
Net income numerators
for both basic and
diluted EPS $3,349,000 $4,636,000 $6,459,000 $8,882,000
========== ========== ========== ==========
Denominators:
Denominators for basic
EPS; weighted average
common shares
outstanding 20,908,764 21,123,678 20,909,056 21,104,492
Potentially dilutive
shares resulting from
stock options 77,619 153,991 90,263 140,134
---------- ---------- ---------- ----------
Denominators for
diluted EPS 20,986,383 21,277,669 20,999,319 21,244,626
========== ========== ========== ==========
Certain exercisable stock options were not included in the calculation of
diluted EPS because option prices were greater than the average market
prices for the periods presented. The number of stock options not included
in the calculation of diluted EPS and the range of exercise prices was
525,000 and $14.50 - $19.50 in 1998, and 251,000 and $17.38 - $19.50 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 $3,482,000 and $6,724,000 for the three and six month periods
ended July 4, 1998; and approximately $4,654,000 and $8,747,000 for the
three and six month periods ended July 3, 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 July 4, 1998, the
escrow fund held 257,064 shares of X-Rite common stock at a cost of
$4,769,000, plus $12,000 in dividends received. 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 average closing price for the ninety trading days preceding the later
death of the founder and his spouse. The discounted price may not be less
than $10 per share or more than $25 per share.
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 6--FOUNDERS STOCK REPURCHASE AGREEMENTS, continued
The shares subject to the agreements have been reclassified on the July 4,
1998 balance sheet to a temporary equity account entitled "Value of Shares
Subject to Redemption Agreements." The reclassification of $54,994,000 was
determined by multiplying the applicable shares by the average closing
price of the Company's common stock, after applying the 10 percent
discount, for the ninety trading days preceding July 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 six months of 1998
totaled $8,444,000. The primary source of cash was net income earned
during the period.
The most significant investing activity during the first six months of 1998
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.
Year-to-date capital expenditures in 1998 totaled $1,315,000 and consisted
mainly of machinery and equipment. X-Rite currently anticipates capital
expenditures for the remainder of 1998 will be approximately $1,700,000 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 foreseeable future. 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:
Second quarter 1998 consolidated net sales were 1.3% higher than sales in
the same quarter a year ago. Consolidated net sales for the six months
ended July 4, 1998 increased 1.8% compared to the same period in 1997. The
year-over-year increases were due to slightly higher unit volume sales.
Cost of Sales and Gross Profit:
Gross profit as a percentage of sales was 66.2% for the second quarter of
1998, compared to 65.1% for the second quarter of 1997. Year to date,
gross profit as a percentage of sales was 66.2% in 1998 and 64.9% in 1997.
The increases in gross profit margins were due to favorable changes in
product sales mix.
Operating Expenses:
Second quarter selling and marketing expenses were 23.2% higher compared to
the same quarter in the prior year and year-to-date selling and marketing
expenses increased 25.1% compared to the same period in the prior year.
The increases resulted primarily from stepped-up sales and marketing
efforts in order to develop long-term international growth opportunities.
Compared to the same periods in the prior year, engineering, general and
administrative expenses in the second quarter were 33.7% higher and year to
date were 29.5% higher. The increases were 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 increased 32.4% in the second quarter and
34.0% year to date compared with the same periods in 1997. The Company has
expanded its research activities in 1998 in order to expedite new product
introductions.
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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 second quarter and year to date was higher than
comparable periods in 1997 due to an increase in funds available for
investment. Invested funds declined in 1997 due to the acquisition of
Light Source in the second quarter of that year.
Net Income:
The Company recorded net income of $3,349,000 for the three months ended
July 4, 1998 compared to $4,636,000 in the same period of 1997. On a per
share basis, second quarter net income was $.16 in 1998 and $.22 in 1997.
For the first six months of 1998, net income was $6,459,000, or $.31 per
share, compared to $8,882,000, or $.42 per share in 1997. The decreases in
second quarter and year-to-date earnings were due to higher operating
expenses. 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.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders on May 20, 1998, X-Rite's
shareholders voted on the following matters:
1. Election of the following directors to three year terms expiring in
2001:
Affirmative Votes Broker
Votes Withheld Non-votes
----------- -------- ---------
Dr. Peter M. Banks 17,924,663 265,351 -0-
Ted Thompson 18,103,385 86,629 -0-
Ronald A. VandenBerg 18,076,600 113,414 -0-
Company directors Rufus S. Teesdale, Charles VanNamen and Richard E.
Cook (whose terms expire in 2000); and Stanley W. Cheff, Dr. Marvin G.
DeVries and James A. Knister (whose terms expires in 1999) continued
as directors of the Company following the annual meeting.
2. A proposal to amend the X-Rite, Incorporated Articles of Incorporation
was carried and the amendment was approved with 18,012,469 shares
voting for, 94,495 shares voting against and 83,050 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on Page 15 of this Form 10-Q report.
(b) There were no reports on Form 8-K filed by the Registrant
during the quarter ended July 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
August 14, 1998 /s/ Ted Thompson
----------------------
Ted Thompson
Chairman and Chief
Executive Officer
August 14, 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 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)
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<PAGE> 16
EXHIBIT INDEX
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*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)
10(d) 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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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JUL-04-1998
<CASH> 4,277,000
<SECURITIES> 11,317,000
<RECEIVABLES> 20,610,000
<ALLOWANCES> 736,000
<INVENTORY> 15,988,000
<CURRENT-ASSETS> 53,523,000
<PP&E> 34,693,000
<DEPRECIATION> 17,689,000
<TOTAL-ASSETS> 95,352,000
<CURRENT-LIABILITIES> 4,097,000
<BONDS> 0
0
0
<COMMON> 1,663,000
<OTHER-SE> 88,914,000
<TOTAL-LIABILITY-AND-EQUITY> 95,352,000
<SALES> 47,923,000
<TOTAL-REVENUES> 47,923,000
<CGS> 16,221,000
<TOTAL-COSTS> 16,221,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 80,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,786,000
<INCOME-TAX> 3,327,000
<INCOME-CONTINUING> 6,459,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,459,000
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
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