<PAGE>
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 3, 1999
-----------------------
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 May 1, 1999 was 21,200,304 shares.
Exhibit Index on page 14.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 3, January 2,
1999 1999
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,443,000 $ 1,536,000
Short-term investments 19,099,000 19,268,000
Accounts receivable, less allowances of
$854,000 in 1999 and $798,000 in 1998 17,682,000 19,589,000
Inventories 16,192,000 15,871,000
Deferred tax assets 1,641,000 1,495,000
Prepaid expenses and other current assets 2,323,000 980,000
----------- -----------
Total current assets 58,380,000 58,739,000
PROPERTY AND EQUIPMENT, at cost 38,953,000 37,337,000
Less accumulated depreciation (20,378,000) (19,553,000)
----------- -----------
18,575,000 17,784,000
OTHER ASSETS:
Costs in excess of net assets acquired 8,409,000 8,572,000
Cash value of life insurance 6,463,000 3,091,000
Other noncurrent assets 7,293,000 7,258,000
----------- -----------
22,165,000 18,921,000
----------- -----------
$99,120,000 $95,444,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--Continued
April 3, January 2,
1999 1999
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 2,078,000 $ 1,772,000
Accrued liabilities--
Payroll and employee benefits 1,670,000 1,618,000
Income taxes 1,558,000 309,000
Other accrued liabilities 1,218,000 1,626,000
----------- -----------
Total current liabilities 6,524,000 5,325,000
VALUE OF SHARES SUBJECT
TO REDEMPTION AGREEMENTS 45,400,000 45,400,000
SHAREHOLDERS' INVESTMENT:
Common stock 1,665,000 1,664,000
Additional paid-in capital 8,205,000 8,143,000
Retained earnings 42,253,000 39,793,000
Shares in escrow (4,800,000) (4,794,000)
Accumulated other comprehensive loss (127,000) (87,000)
----------- -----------
47,196,000 44,719,000
----------- -----------
$99,120,000 $95,444,000
=========== ===========
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
April 3, April 4,
1999 1998
----------- -----------
Net sales $23,688,000 $23,637,000
Cost of sales 7,833,000 8,021,000
----------- -----------
Gross profit 15,855,000 15,616,000
Operating expenses:
Selling & marketing 4,911,000 5,090,000
Engineering, general & administrative 4,385,000 3,807,000
Research & development 2,183,000 2,111,000
----------- -----------
11,479,000 11,008,000
----------- -----------
Operating income 4,376,000 4,608,000
Other income 231,000 104,000
----------- -----------
Income before income taxes 4,607,000 4,712,000
Income taxes 1,624,000 1,602,000
----------- -----------
NET INCOME $ 2,983,000 $ 3,110,000
=========== ===========
Earnings per share:
Basic $.14 $.15
==== ====
Diluted $.14 $.15
==== ====
Cash dividends per share $.025 $.025
===== =====
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 3, April 4,
1999 1998
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 5,625,000 $3,483,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 11,150,000 2,250,000
Proceeds from maturities of investments 355,000 400,000
Purchases of investments (11,338,000) (1,750,000)
Capital expenditures (1,732,000) (613,000)
Purchases of other assets (347,000) (352,000)
Increase in cash value of life insurance (3,372,000) (3,009,000)
Other investing activities 56,000 45,000
----------- ----------
Net cash and cash equivalents
used for investing activities (5,228,000) (3,029,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (529,000) (529,000)
Issuance of common stock 63,000 88,000
----------- ----------
Net cash and cash equivalents
used for financing activities (466,000) (441,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (24,000) 84,000
----------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (93,000) 97,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,536,000 2,808,000
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 1,443,000 $2,905,000
=========== ==========
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 1998 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 3, 1999
and the results of its operations and its cash flows for the three month
periods ended April 3, 1999 and April 4, 1998. All such adjustments are of
a normal and recurring nature.
NOTE 2--INVENTORIES
Inventories consisted of the following:
April 3, January 2,
1999 1999
----------- -----------
Raw materials $ 6,967,000 $ 6,575,000
Work in process 5,623,000 5,623,000
Finished goods 3,602,000 3,673,000
----------- -----------
$16,192,000 $15,871,000
=========== ===========
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 3--EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding in each quarter.
Diluted EPS is computed by dividing net income by the weighted-average
number of common shares outstanding plus all shares that would have been
outstanding if every potentially dilutive common share had been issued.
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 3, April 4,
1999 1998
---------- ----------
Numerators:
Net income numerators for
both basic and diluted EPS $2,983,000 $3,110,000
========== ==========
Denominators:
Denominators for basic EPS; weighted
average common shares outstanding 20,929,523 20,909,348
Potentially dilutive shares-
Shares subject to redemption agreements 911,201 -
Stock options 11,229 102,906
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Denominators for diluted EPS 21,851,953 21,012,254
========== ==========
During the first quarter of 1999, certain shares subject to redemption
agreements (see Note 5) were considered dilutive. 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 902,100 and $7.03 - $19.25
in 1999, and 446,000 and $14.50 - $19.25 in 1998.
NOTE 4--COMPREHENSIVE INCOME
Comprehensive income consisted of net income and foreign currency
translation adjustments, and was $2,943,000 for the quarter ended
April 3, 1999 and $3,242,000 for the quarter ended April 4, 1998.
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 5--VALUE OF SHARES SUBJECT TO REDEMPTION AGREEMENTS
In January of 1998 the Company entered into agreements with its founding
shareholders for the future repurchase of 4.54 million shares, or 21.4
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. The closing price of the Company's
common stock on the day the agreements were announced was $18.75.
The shares subject to the agreements have been reclassified on the
April 3, 1999 balance sheet to a temporary equity account entitled "Value
of Shares Subject to Redemption Agreements." The reclassification of
$45,400,000 was determined by multiplying the applicable shares by the
minimum redemption price of $10, since the average closing price of the
Company's common stock, after applying the 10 percent discount, for the
ninety trading days preceding April 3, 1999 was less than $10.
NOTE 6--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 during twelve month periods that end in
July 1998, 1999 and 2000. The Company established an escrow fund 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 3, 1999, the escrow fund held
257,064 shares of X-Rite common stock at a cost of $4,769,000, plus $31,000
in dividends received. Accordingly, that portion of the escrow fund is
presented in the accompanying balance sheet as a reduction to shareholders'
investment. This contractual agreement remains in effect until July of
2000.
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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 1999 totaled
$5.6 million. The primary source of cash was net income earned during the
period. Included in net income were certain accounting charges that did
not require the use of cash. The largest non-cash accounting charges,
which totaled $1.2 million, were depreciation and amortization.
Following short-term investment transactions, the most significant
investing activity during the first three months of 1999 was the payment of
life insurance premiums in connection with agreements the Company entered
into with its founding shareholders for the future redemption of 4.54
million shares, or 21.4 percent, of the Company's outstanding stock. The
stock redemptions will occur following the later of the death of each
founder and his spouse. The cost of the redemption agreements will be
funded by proceeds from life insurance policies the Company has purchased
on the lives of certain of these individuals. Of the $4.3 million of
premiums paid in the first quarter, approximately $3.4 million represented
cash surrender value and has been recorded as a noncurrent asset on the
Company's balance sheet.
Capital expenditures in the first three months of 1999 totaled $1.7 million
and consisted mainly of building improvements, machinery and equipment.
X-Rite currently anticipates capital expenditures for the remainder of 1999
will be approximately $2.3 million and will consist principally of building
improvements, machinery, equipment, and computer hardware and software.
Dividends of $529,000 were paid during the first quarter which is equal to
an annual rate of 10 cents per share. The Board of Directors intends to
continue paying dividends at this rate in the foreseeable future.
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, life
insurance premiums, 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.
RESULTS OF OPERATIONS
Net Sales:
First quarter 1999 consolidated net sales of $23.7 million were
approximately the same as sales in the same quarter a year ago.
International sales as a percentage of total sales were slightly higher
compared to first quarter 1998.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Cost of Sales and Gross Profit:
Gross profit as a percentage of sales was 66.9% for the first quarter of
1999, compared to 66.1% for the first quarter of 1998. The increase was
due to a favorable change in product sales mix.
Operating Expenses:
Selling and marketing expenses decreased 3.5% in the first quarter of 1999
compared to the same period in 1998. The Company has continued to finance
its sales and marketing efforts at levels comparable to 1998 in order to
develop long-term international growth opportunities.
First quarter engineering, general and administrative ("EG&A") expenses
increased 15.2% compared to the same quarter in the prior year. The
increase was due primarily to the addition of a sales office in France and
expansion of the Company's Hong Kong and U.K. offices.
Research and development expenses in the first quarter increased 3.4%
compared with the same period in 1998. Research activities have been
funded at levels comparable to the prior year when the Company made a
conscious decision to step up efforts aimed at expediting new product
introductions.
Other Income:
Other income consisted mainly of interest earnings from invested funds.
First quarter interest income was higher due to an increase in funds
available for investment.
Net Income:
The Company recorded net income of $3.0 million for the first three months
of 1999 compared to $3.1 million in the same period of 1998. On a per
share basis, first quarter net income was $.14 in 1999 and $.15 in 1998.
The average number of common and common equivalent shares outstanding was
not significantly different between the periods.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition, continued
YEAR 2000 READINESS DISCLOSURE
X-Rite is actively engaged in taking steps to insure that information
technology ("IT") systems, products, embedded technology and material third
parties are all prepared to process date-related information in the Year
2000 ("Y2K"). X-Rite's senior management has assembled a project team to
address Y2K issues at the Company's world headquarters and at all
subsidiary locations. The Y2K project team is seeking to complete
readiness assessment, and development and testing of remediation solutions
by July 31, 1999. Final implementation of those solutions and the
essential elements of a Y2K contingency plan are scheduled to be completed
during the third quarter of 1999.
Company's State of Readiness:
X-Rite's Y2K project team has developed a plan to inventory, assess,
correct and test all technology that may be impacted by Y2K issues. The
four primary areas covered by the plan are as follows:
IT Systems-
Mainframe IT systems are substantially Y2K ready as a result of the
Company purchasing new hardware and software systems in 1995. All
essential network, desktop and communication systems have been
inventoried and assessed; remediation solutions for these systems are
readily available and are expected to be completed on schedule.
Products-
Remediation solutions are being limited to current products produced
or supported. Products that have reached the end of the support
period, or will reach the end of the support period by the year 2000,
have not been included in the assessment process. Approximately 98%
of the Company's currently supported products have been assessed,
remediated (if necessary) and tested. The remaining 2% of those
products are expected to be completed on schedule.
Physical Plant-
Embedded technology in facilities systems, machinery and equipment has
been inventoried and assessed. No significant Y2K readiness issues
have been identified and completion of all remediation and testing is
expected to be on schedule.
Third Parties-
The Company has sent questionnaires to its suppliers regarding Y2K
readiness and has followed up with second requests to nonrespondents.
Extra attention has been paid to suppliers that are considered
essential for preventing material interruptions in X-Rite's business
operations. Y2K readiness is also being discussed with certain
strategic customers. The assessment is ongoing and will continue
through the remainder of 1999.
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Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition, continued
YEAR 2000 READINESS DISCLOSURE, continued
Costs to Address the Company's Y2K Issues:
Based on costs incurred to date, the Company does not believe expenses
related to Y2K readiness will be material to the results of its operations,
financial position or cash flows. Although the Company purchased new
mainframe hardware and software in 1995, it did not accelerate the timing
of replacing these systems in order to accommodate Y2K readiness.
Risks of the Company's Y2K Issues:
The Company believes that it will complete the essential elements of its
Y2K project on schedule. However, due to the uncertain and unprecedented
nature of the Y2K problem, and the uncertainty of Y2K readiness of third
party suppliers and customers, the Company is not able to provide assurance
at this time that the consequences of Y2K interruptions will not have a
material impact on its results of operations, financial position or cash
flows.
Possible consequences of Y2K interruptions include, but are not limited to,
a temporary inability to manufacture or ship product; process transactions;
communicate with customers, suppliers, subsidiary locations and employees;
or conduct other similar corporate activities in a normal business
environment.
Company's Contingency Plans:
Contingency plans for Y2K-related interruptions are being developed and
will include, but will not be limited to, developing emergency backup and
recovery procedures, temporarily replacing electronic applications with
manual processes, identifying alternate suppliers, and increasing raw
material and finished goods inventories. All essential contingency plans
are expected to be completed during the third quarter of 1999.
The preceding Year 2000 Readiness Disclosure is based in part upon
information provided by certain of the Company's IT suppliers, third party
service providers and various other vendors without independent
verification by the Company.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
Statements in this filing that are not historical facts are forward-looking
statements, which involve risks and uncertainties that could affect the
Company's results of operations, financial position and cash flows. Actual
results may differ materially from those projected in the forward-looking
statements, due to a variety of factors, some of which may be beyond the
control of the Company. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of
this report.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on Page 14 of this Form 10-Q report.
(b) No reports on Form 8-K were filed for the 3-month period ended
April 3, 1999.
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 14, 1999 /s/ Ted Thompson
----------------------
Ted Thompson
Chairman, and Chief
Executive Officer
May 14, 1999 /s/ Duane F. Kluting
----------------------
Duane F. Kluting
Vice President and
Chief Financial Officer
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<PAGE>
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) Certificate of Amendment to Restated Articles of Incorporation
amending Article IV (filed as exhibit to Form 10-K for the year
ended January 2, 1999 (Commission File No. 0-14800) and
incorporated herein by reference)
3(e) 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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<PAGE>
EXHIBIT INDEX
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*10(d) Employment Agreement dated April 17,1998 between the registrant
and Richard E. Cook (filed as exhibit to Form 10-K for the year
ended January 2, 1999 (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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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 1,443,000
<SECURITIES> 19,099,000
<RECEIVABLES> 18,536,000
<ALLOWANCES> 854,000
<INVENTORY> 16,192,000
<CURRENT-ASSETS> 58,380,000
<PP&E> 38,953,000
<DEPRECIATION> 20,378,000
<TOTAL-ASSETS> 99,120,000
<CURRENT-LIABILITIES> 6,524,000
<BONDS> 0
0
0
<COMMON> 1,665,000
<OTHER-SE> 90,931,000
<TOTAL-LIABILITY-AND-EQUITY> 99,120,000
<SALES> 23,688,000
<TOTAL-REVENUES> 23,688,000
<CGS> 7,833,000
<TOTAL-COSTS> 7,833,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 62,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,607,000
<INCOME-TAX> 1,624,000
<INCOME-CONTINUING> 2,983,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,983,000
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
