The Company purchased 1,120,000 shares at $10.00 per share or $11.2 million under the terms of the agreement in January 2002. This founder was not insured; therefore, as anticipated at the time the agreement was entered into, the Company funded this obligation with cash and short-term investments.
The remaining shares subject to the agreements have been classified on the balance sheet as temporary equity. The classification of $34.2 and $45.4 million for 2002 and 2001 respectively, was determined by multiplying the applicable shares by the minimum purchase 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 March 30, 2002 and December 29, 2001, respectively was less than $10.
In November of 2001, the Company’s Board of Directors adopted a Shareholder Protection Rights Plan(“Plan”), which was implemented in the first quarter of 2002. The Plan is designed to protect shareholders against unsolicited attempts to acquire control of the Company in a manner that does not offer a fair price to all shareholders.
Under the Plan, one purchase right automatically trades with each share of the Company’s common stock. Each Right entitles a shareholder to purchase 1/100 of a share of junior participating preferred stock at a price of $30.00, if any person or group attempts certain hostile takeover tactics toward the Company. Under certain hostile circumstances, each Right may entitle the holder to purchase the Company’s common stock at one-half its market value or to purchase the securities of any acquiring entity at one-half their market value. Rights are subject to redemption by the Company at $.005 per Right and, unless earlier redeemed, will expire in the first quarter of 2012. Rights beneficially owned by holders of 15 percent or more of the Company’s common stock, or their transferees and affiliates, automatically become void.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is management’s discussion and analysis of certain significant factors that affected the Company’s financial condition and earnings during the periods included in the condensed consolidated financial statements.
RESULTS OF OPERATIONS
Net Sales:
Sales in the first quarter of 2002 were $21.0 million a 17.4 percent decrease as compared to the first quarter of 2001. Revenues continue to be negatively impacted by reduced capital spending in the major industries the Company serves. The Labsphere and Graphic Arts product lines had the largest declines at 24.8 and 21.2 percent as compared to 2001. Color and Appearance product sales were 12.4 percent lower than 2001. Sales decreases were experienced in the Company’s principal geographic markets, with the largest decline in North America at 19.6 percent compared to 2001. Sales in the Asia Pacific and European markets declined 16.9 and 8.3 percent respectively compared to 2001. Sales from the Coherix and Optronik businesses had a nominal impact on consolidated sales.
Cost of Sales and Gross Profit:
Gross profit as a percentage of sales was 58.6 percent for the first quarter of 2002, compared to 64.1 percent for the first quarter of 2001. The decrease was attributable to lower production volumes against which to apply factory overhead.
Operating Expenses:
Selling and marketing expenses were $5.7 million for the first quarter of 2002, compared to $5.9 million for the same period in 2001, a decrease of 3.0 percent. The decrease was due to reductions in travel, and non strategic advertising and trade show expenditures as well as personnel realignment. Some of the aforementioned savings were re-deployed into increased new business marketing and the opening of offices in the Netherlands and Shanghai, China.
General and administrative expenses were $3.7 million for 2002, a 6.2 percent increase over 2001. The increase was due to costs associated with personnel additions and implementation of new strategic and operational initiatives.
Research, development and engineering (RD&E) expenses in the first quarter were $3.2 million, a 20.8 percent decrease over the first quarter of 2001. The primary drivers of these cost savings were lower personnel costs and a reduced usage of contract engineering services.
In September 2001, the Company announced a workforce reduction plan and recorded a $.9 million pretax charge. This charge represents costs associated with non voluntary termination benefits for approximately sixty positions worldwide. Benefit payments began during the fourth quarter of 2001. As of March 30, 2002 54 positions have been eliminated. The Company anticipates the balance of the restructuring will be complete by September 2002. The remaining unpaid benefits at March 30, 2002 of $.4 million have been included in accrued liabilities.
Other Income (Expense):
Other income (expense) consists of investment income and gains and losses from foreign exchange. The Company’s investment portfolio consists of short term tax exempt bonds, mutual funds and corporate securities. The decrease in income in 2002 is due to lower portfolio yields as well as a decrease in funds available for investment.
Income Taxes:
The provision for income taxes reflected effective tax rates of 22.0 and 24.5 percent for 2002 and 2001 respectively, compared to the U.S. statutory rate of 35 percent. Both years effective tax rates have benefited from the execution of certain international tax strategies. The Company anticipates that the effective rate should remain consistent with the first quarter for the remainder of 2002.
Net Income:
The Company recorded a net loss of $.3 million for the first three months of 2002 compared to a net income of $2.4 million in the same period of 2001. On a per share basis, first quarter net loss was $ .01 in 2002, compared to $.11 per share net income in 2001. The average number of common shares outstanding was lower in 2002 due to common stock repurchases. Common stock equivalent calculations were not presented for 2002 due to the anti-dilutive effect they have on earnings per share calculations when there is a net loss.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - continued
FINANCIAL CONDITION AND LIQUIDITY
At March 30, 2002 the Company had cash and cash equivalents of $8.2 million. Cash flow provided by operating activities in the first quarter of 2002 totaled $.4 million. Reduced working capital investment, principally inventory and accounts payable were the largest source of cash from operations. Certain expenses included in net income did not require the use of cash. The most significant non-cash expenses in the first quarter of 2002 were depreciation and amortization which totaled $1.5 million, compared to $1.4 million for the same period in 2001.
The most significant investing activities during the first three months of 2002 was the disposition of $10.7 million of short term investments. The proceeds from these sales were used to repurchase shares of outstanding stock under the Company’s founder’s stock redemption program. The Company paid $3.0 million of life insurance premiums in connection with the same founders share redemption program. In addition, XR Ventures LLC, the Company’s strategic venture capital group made $1.2 million of investments during the first quarter of 2002.
During 1998, the Company entered into agreements with its founding shareholders for the future purchase of 4.5 million shares, or 21.3 percent of the Company’s outstanding stock at December 29, 2001. The stock purchases will occur following the later of the death of each founder and his spouse. The price the Company will pay the founders’ estates for these shares reflects a 10 percent discount from the market price, although the discounted price may not be less than $10 per share (a total of $45.4 million) or more than $25 per share (a total of $113.5 million).
The Company purchased 1,120,000 shares at $10.00 per share or $11.2 million under the terms of the agreement in January 2002. This founder was not insured; therefore, as anticipated at the time the agreement was entered into, the Company funded this obligation with cash and short-term investments. At March 30, 2002 there were 3.2 million shares founders shares remaining under the agreement, or 15.8 percent of the Company’s outstanding stock.
Capital expenditures in the first three months of 2002 totaled $.8 million and consisted mainly of building improvements and machinery and equipment. The Company currently expects capital expenditures for the remainder of 2002 will be approximately $1.7 million and will consist principally of building improvements, machinery, equipment, and computer hardware and software.
Dividends of $.5 million were paid during the first quarter of 2002 which is equal to an annual rate of $.10 cents per share. The Board of Directors intends to continue paying dividends at this rate for 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 remainder of this year, and the foreseeable future beyond 2002. 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.
FORWARD-LOOKING STATEMENTS:
This discussion and analysis of financial condition and results of operations, as well as other sections of our Form 10-Q, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the industries it serves, the economy, and about the Company itself. Words such as “anticipates,” “believes, ” “estimates,” “expects,” “likely,” “plans,” “projects,” “should,” variations of such words and similar expressions are intended to identify such forward looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Furthermore, X-Rite, Incorporated undertakes no obligation to update, amend or clarify forward looking statements, whether as a result of new information, future events or otherwise. Forward looking statements include, but are not limited to, statements concerning liquidity, capital resource needs, tax rates, dividends and potential new markets.
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.
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.
| May 14, 2002 | X-RITE, INCORPORATED
/s/ Richard E. Cook
Richard E. Cook
Chief Executive Officer
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| May 14, 2002 | /s/ Duane F. Kluting
Duane F. Kluting
Vice President and
Chief Financial Officer |
EXHIBIT INDEX
| 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) |
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| 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) |
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| 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) |
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| 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) |
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| 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) |
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| 3(f) | Bylaws, as amended and restated November 18, 1999 (filed as exhibit to Form 10-K for the year ended January 1, 1999 (Commission File No. 0-14800) and incorporated herein by reference) |
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| 4(a) | 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) |
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| 4(b) | Shareholder Protection Rights Agreement, dated as of March 29, 2002, including as Exhibit A the form of Rights Certificate and of Election to Exercise, and as Exhibit B the form of Certificate of Adoption of Resolution Designating and Prescribing Rights, Preferences and Limitations of Junior Participating Preferred Stock of the Company. (filed as exhibit to Form 10-K for the year ended December 29, 2001 (Commission file No. 0-14800) and incorporated herein by reference |
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| 99 | Notice of press release dated January 19, 2001 announcing that X-Rite, Incorporated will conduct a live audio web cast of its fourth quarter conference call on January 31, 2001 (filed as exhibit to Form 8-K (Commission File No. 0-14800) and incorporated herein by reference) |
