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 1, 2000
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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 July 31, 2000 was 21,313,913 shares.
Exhibit Index on page 16.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 1, January 1,
2000 2000
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,484,000 $ 6,898,000
Short-term investments 22,450,000 22,129,000
Accounts receivable, less allowances of
$1,113,000 in 2000 and $1,110,000 in 1999 17,665,000 20,249,000
Inventories 15,125,000 15,410,000
Deferred taxes 1,674,000 1,642,000
Prepaid expenses and other current assets 2,016,000 1,565,000
----------- -----------
Total current assets 69,414,000 67,893,000
PROPERTY AND EQUIPMENT, at cost 46,181,000 44,406,000
Less accumulated depreciation (24,836,000) (23,351,000)
----------- -----------
21,345,000 21,055,000
OTHER ASSETS:
Costs in excess of net assets acquired 7,759,000 8,036,000
Cash surrender values - Founders policies 10,103,000 6,616,000
Other noncurrent assets 4,348,000 4,219,000
----------- -----------
22,210,000 18,871,000
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$112,969,000 $107,819,000
============ ============
See accompanying notes to condensed consolidated financial statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--Continued
July 1, January 1,
2000 2000
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 2,403,000 $ 2,277,000
Accrued liabilities--
Payroll and employee benefits 1,899,000 2,043,000
Income taxes - 325,000
Other accrued liabilities 1,986,000 2,352,000
----------- -----------
Total current liabilities 6,288,000 6,997,000
TEMPORARY SHAREHOLDERS' INVESTMENT:
Value of shares subject to redemption
agreements; 4,540,000 shares issued
and outstanding in 2000 and 1999 45,400,000 45,400,000
PERMANENT SHAREHOLDERS' INVESTMENT:
Common stock, $.10 par value, 50,000,000
shares authorized; 16,743,703 and
16,700,896 shares issued and outstanding
in 2000 and 1999 respectively, 1,674,000 1,670,000
Additional paid-in capital 8,647,000 8,439,000
Retained earnings 57,469,000 51,347,000
Shares in escrow (4,832,000) (4,820,000)
Accumulated other comprehensive loss (1,677,000) (1,214,000)
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61,281,000 55,422,000
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$112,969,000 $107,819,000
============ ============
See accompanying notes to condensed consolidated financial statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net sales $26,232,000 $24,331,000 $52,366,000 $48,019,000
Cost of sales 9,476,000 8,224,000 18,487,000 16,057,000
----------- ----------- ----------- -----------
Gross profit 16,756,000 16,107,000 33,879,000 31,962,000
Operating expenses:
Selling & marketing 5,700,000 5,021,000 11,022,000 9,932,000
General & administrative 3,165,000 3,415,000 6,935,000 7,218,000
Research, development &
engineering 2,676,000 2,715,000 5,448,000 5,480,000
----------- ----------- ----------- -----------
11,541,000 11,151,000 23,405,000 22,630,000
----------- ----------- ----------- -----------
Operating income 5,215,000 4,956,000 10,474,000 9,332,000
Other income 369,000 181,000 602,000 412,000
----------- ----------- ----------- -----------
Income before
income taxes 5,584,000 5,137,000 11,076,000 9,744,000
Income taxes 1,968,000 1,811,000 3,904,000 3,435,000
----------- ----------- ----------- -----------
NET INCOME $ 3,616,000 $ 3,326,000 $ 7,172,000 $ 6,309,000
=========== =========== =========== ===========
Earnings per share:
Basic $.17 $.16 $.34 $.30
==== ==== ==== ====
Diluted $.17 $.15 $.34 $.29
==== ==== ==== ====
Cash dividends per share $.025 $.025 $.050 $.050
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
July 1, July 3,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES $12,011,000 $9,336,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 2,000,000 19,875,000
Proceeds from maturities of investments 1,196,000 1,098,000
Purchases of investments (3,542,000) (13,133,000)
Capital expenditures (2,156,000) (3,259,000)
Purchases of other assets (813,000) (705,000)
Increase in cash value of life insurance (3,487,000) (3,498,000)
Other investing activities 40,000 56,000
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Net cash and cash equivalents provided
by (used for) investing activities (6,762,000) 434,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,063,000) (1,060,000)
Issuance of common stock 212,000 118,000
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Net cash and cash equivalents
used for financing activities (851,000) (942,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (812,000) (514,000)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 3,586,000 8,314,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 6,898,000 1,536,000
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CASH AND CASH EQUIVALENTS AT END OF QUARTER $10,484,000 $9,850,000
========== ==========
See accompanying notes to condensed consolidated financial statements.
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 1999 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 1, 2000 and the results of its
operations and its cash flows for the three and six month periods ended July 1,
2000 and July 3, 1999. All such adjustments are of a normal and recurring
nature. Certain prior year information has been reclassified to conform to the
current year presentation.
NOTE 2--INVENTORIES
Inventories consisted of the following:
July 1, January 1,
2000 2000
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Raw materials $ 5,373,000 $ 6,351,000
Work in process 5,713,000 5,381,000
Finished goods 4,039,000 3,678,000
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$15,125,000 $15,410,000
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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 Six Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Numerators:
Net income numerators
for both basic and
diluted EPS $3,616,000 $3,326,000 $7,172,000 $6,309,000
========== ========== ========== ==========
Denominators:
Denominators for basic
EPS; weighted average
common shares
outstanding 21,026,639 20,943,240 21,011,741 20,936,382
Potentially
dilutive shares-
Shares subject to
redemption agreements - 1,155,876 8,890 1,033,539
Stock options 73,153 8,322 45,245 9,775
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Denominators for
diluted EPS 21,099,792 22,107,438 21,065,876 21,979,696
========== ========== ========== ==========
Certain shares subject to redemption agreements (see Note 5) were considered
dilutive. 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 967,500 and
$10.13 - $19.52 in 2000, and 904,400 and $7.03 - $19.50 in 1999.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 4--COMPREHENSIVE INCOME
Comprehensive income consisted of net income, foreign currency translation
adjustments and unrealized losses on short term investments. Comprehensive
income was $3,295,000 and $6,709,000 for the three and six month periods ended
July 1, 2000; and $2,885,000 and $5,828,000 for the three and six month periods
ended July 3, 1999.
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 21.3 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 shares subject to the agreements have been reclassified on the July 1, 2000
balance sheet to a temporary equity account. 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
July 1, 2000 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 July 1,
2000, the escrow fund held 257,064 shares of X-Rite common stock at a cost of
$4,769,000, plus $63,000 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 expired in July of 2000.
The net sales goals of certain products required for the payment of future
contingent consideration were not met during the periods outlined in the in the
asset purchase agreement, thereby releasing the Company from any additional
obligations with respect to the escrow fund.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash requirements during the first six months of 2000 were met
through cash generated from operations. Cash and cash equivalents increased $3.6
million since January 1, 2000 as a result of $12.0 million of cash generated
from operations. Net income was the largest component of cash provided by
operations. Included in net income were certain accounting charges that did not
require the use of cash. The largest non-cash accounting charges, which totaled
$2.7 million, were depreciation and amortization.
Following short-term investment transactions, the most significant investing
activity during the first six months of 2000 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 21.3
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 2000 approximately $3.5 million represented
cash surrender value and has been recorded as a noncurrent asset on the
Company's balance sheet.
Capital expenditures in the first six months of 2000 totaled $2.2 million and
consisted primarily of building improvements, machinery and equipment. The
Company currently anticipates capital expenditures for the remainder of 2000
will be approximately $2.3 million and will consist principally of building
improvements, machinery, equipment, and computer hardware and software.
Dividends of $1.1 million were paid during the first half of 2000 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 believes that X-Rite's current cash and investments, combined with
expected cash flows 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
RESULTS OF OPERATIONS
Net Sales:
X-Rite experienced increased sales for both the second quarter and year to date
as compared to 1999. Year to date sales were $52.4 million an increase of 9.1%,
while second quarter sales of $26.2 million is an increase of 7.8% as compared
to the second quarter of 1999. Sales have increased across most product lines on
a year to date basis. The Coatings, Printing and Labsphere units increased
18.8%, 12.4%, and 8.00% respectively. Imaging experienced a small drop in sales
of 3.5%. Geographically, all of the Company's primary regions posted sales
increases with Asia Pacific being the largest percentage gain at 18.2%. Sales in
Europe in increased 8.0% on a year to date basis despite the dampening effect
caused by a strong US dollar. Had foreign exchange rates remained stable from
year to year sales of the Company's European subsidiaries would have been
reported approximately 11% higher in 2000 as compared to 1999.
Cost of Sales and Gross Profit:
Gross profit margins decreased between the periods being reported. In 2000,
gross profit margins were 63.9% for the for the quarter and 64.7% year to date,
compared to 66.2% for the quarter 66.6% year to date in 1999. The decreases are
primarily attributable to the impact of foreign exchange rates and to a lesser
extent product mix.
Operating Expenses:
Selling and marketing expenses increased 11.0% and 13.5% on a year to date and
quarterly basis respectively. These increases reflect the Company's continued
commitment to develop new markets and expand its geographic presence. These
initiatives include the development of specialized product managers and support
functions for the Company's various business units, as well as an expanded
physical presence in Asia and South America.
In year over year comparisons, general and administrative ("G&A") expenses were
lower in the second quarter and year to date. The decreases were caused by a
combination of factors, including operating efficiencies gained through facility
consolidation, positive effects of expenses in foreign currencies, and the 1999
expenses including costs associated with the addition of a sales office in
France.
Research, development and engineering costs decreased slightly in the second
quarter and year to date compared with the same periods in 1999. Facilities
consolidation and a more efficient use of engineering resources were the primary
factors behind this decrease.
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 1999 due to an increase in funds available for investment and more favorable
rate environment for many of the Company's investment instruments.
Net Income:
The Company recorded net income of $3,616,000 for the three months ended July 1,
2000 compared to $3,326,000 in the same period of 1999. On a per share basis,
second quarter net income, diluted, was $.17 in 2000 compared to $.15 in 1999.
For the first six months of 2000, net income was $7,172,000, or $.34 per share
diluted, compared to $6,309,000, or $.29 per share in 1999. The average number
of common and common equivalent shares outstanding was lower in 2000 due to a
decrease in the dilutive effect of shares subject to redemption.
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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders on May 15, 2000, X-Rite's shareholders
voted on the following matters:
1. Election of the following directors to three year terms expiring in 2003:
Affirmative Votes Broker
Votes Withheld Non-votes
----------- -------- ---------
Rufus S. Teesdale 17,555,894 154,122 -0-
Charles VanNamen 17,555,888 154,128 -0-
Richard E. Cook 17,605,463 104,553 -0-
Company directors Stanley W. Cheff and James A. Knister (whose terms
expire in 2002); and Dr. Peter M. Banks, Ted Thompson, and Ronald
A.VandenBerg (whose terms expire in 2001) continued as directors of the
Company following the annual meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on Page 16 of this Form 10-Q report.
(b) There were no reports on Form 8-K filed by the Registrant during
the quarter ended July 1, 2000.
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, 2000 /s/ Richard E. Cook
----------------------
Richard E. Cook
President and Chief
Executive Officer
August 14, 2000 /s/ Duane F. Kluting
----------------------
Duane F. Kluting
Vice President and
Chief Financial Officer
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)
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)
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)
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) 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)
*10(f) Form of X-Rite, Incorporated Founders Redemption Agreement entered
into between the registrant and certain person together with a list of
such persons (filed as exhibit to Form 10-Q for the quarter ended July
3,1999 (Commission File No. 0-14800) and incorporated herein by
reference)
*10(g) First amendment to X-Rite, Incorporated Founders Redemption Agreement
dated July 16, 1999 between the registrant and Ted Thompson (filed as
exhibit to Form 10-Q for the quarter ended July 3,1999 (Commission
File No. 0-14800) and incorporated herein by reference)
*10(h) Chairman's agreement dated July 16, 1999 between the registrant and Ted
Thompson (filed as exhibit to Form 10-Q for the quarter ended July
3,1999 (Commission File No. 0-14800) and incorporated herein by
reference)
*10(i) Employment arrangement effective upon a change in control entered into
between the registrant and certain persons with a list of such persons
(filed as exhibit to Form 10-K for the year ended January 1, 2000
(Commission File No. 0-14800) and incorporated herein by reference)
*10(j) Deferred compensation trust agreement dated November 23, 1999 entered
into between the registrant and Richard E. Cook (filed as exhibit to
Form 10-K for the year ended January 1, 2000 (Commission File No. 0-1
4800) and incorporated herein by reference)
27 Financial Data Schedule