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 March 31, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-14800
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X-RITE, INCORPORATED
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(Exact name of registrant as specified in its charter)
Michigan 38-1737300
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3100 44th Street, SW, Grandville, Michigan 49418
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(Address of principal executive offices) (Zip Code)
(616) 534-7663
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
The number of shares outstanding of registrant's common stock, par value $.10
per share, at May 1, 2001 was 21,400,765 shares.
Exhibit Index on page 15.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 30,
2001 2000
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $16,770 $18,595
Short-term investments 8,065 12,469
Accounts receivable, less allowances of
$1,450 in 2001 and $1,149 in 2000 17,546 19,463
Inventories 15,545 15,800
Deferred taxes 5,339 6,503
Prepaid expenses and other current assets 4,433 1,427
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Total current assets 67,698 74,257
PROPERTY AND EQUIPMENT, at cost 47,709 46,912
Less accumulated depreciation (25,942) (25,046)
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21,767 21,866
OTHER ASSETS:
Costs in excess of net assets acquired 10,297 10,604
Cash surrender values - Founders policies 13,063 9,918
Other noncurrent assets 9,008 9,038
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32,368 29,560
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$121,833 $125,683
======== ========
See accompanying notes to condensed consolidated financial statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--Continued
(in thousands)
March 31, December 30,
2001 2000
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 2,795 $ 2,456
Accrued liabilities--
Payroll and employee benefits 2,068 2,603
Income taxes - 5,063
Other accrued liabilities 1,941 2,423
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Total current liabilities 6,804 12,545
TEMPORARY SHAREHOLDERS' INVESTMENT:
Value of shares subject to redemption
agreements 45,400 45,400
PERMANENT SHAREHOLDERS' INVESTMENT:
Common stock 1,685 1,680
Additional paid-in capital 6,333 5,993
Retained earnings 63,535 61,639
Accumulated other comprehensive loss (1,924) (1,574)
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69,629 67,738
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$121,833 $125,683
======== ========
See accompanying notes to condensed consolidated financial statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
March 31, April 1,
2001 2000
---------- ----------
Net sales $25,360 $26,134
Cost of sales 9,097 9,011
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Gross profit 16,263 17,123
Operating expenses:
Selling & marketing 5,914 5,322
General & administrative 3,333 3,770
Research, development & engineering 4,172 2,772
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13,419 11,864
------ ------
Operating income 2,844 5,259
Other income 373 233
------ ------
Income before income taxes 3,217 5,492
Income taxes 788 1,936
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NET INCOME $2,429 $3,556
====== ======
Earnings per share:
Basic $.11 $.17
==== ====
Diluted $.11 $.17
==== ====
Cash dividends per share $.025 $.025
===== =====
See accompanying notes to condensed consolidated financial statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended
March 31, April 1,
2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES $ (1,229) $ 7,093
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 5,500 2,000
Proceeds from maturities of investments - 211
Purchases of investments (1,205) (1,250)
Capital expenditures (906) (713)
Purchases of other assets (391) (385)
Increase in cash value of life insurance (3,145) (3,477)
Other investing activities 18 18
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Net cash and cash equivalents
used for investing activities (129) (3,596)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (533) (531)
Issuance of common stock 345 146
------- -------
Net cash and cash equivalents
used for financing activities (188) (385)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (279) (775)
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,825) 2,337
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 18,595 6,898
------ ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $16,770 $9,235
======= ======
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 2000 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 March 31, 2001 and the results of its
operations and its cash flows for the three month periods ended March 31, 2001
and April 1, 2000. All such adjustments are of a normal and recurring nature.
NOTE 2--SHORT TERM INVESTMENTS
The Company classifies all of its short-term investments as available for sale
securities. Such short term investments consist primarily of United States
federal agency securities, state and municipal securities, mutual funds,
corporate bonds and preferred stocks which are stated at market value, with
unrealized gains and losses on such securities reflected net of tax, as other
comprehensive income (loss) in shareholders' equity. Realized gains and losses
are included in earnings and are derived using the specific identification
method for determining the cost of the securities. It is the Company's intent to
maintain a liquid portfolio to take advantage of investment opportunities;
therefore all securities are considered to be available-for-sale and are
classified as current assets. The carrying amount of the Company's investments
is shown in the table below:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 2--SHORT TERM INVESTMENTS--continued
March 31, 2001 December 30, 2000
Market Market
Cost Value Cost Value
-----------------------------------
(in thousands)
Investments
U.S. federal agency
obligations $1,000 $1,000 $1,000 $ 979
State and municipal
securities 3,322 3,321 7,616 7,615
Mutual funds 1,530 1,183 1,530 1,361
Corporate bonds 1,680 1,645 1,680 1,611
Preferred stocks 1,117 916 1,117 903
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8,649 8,065 12,943 12,469
Allowance for
unrealized losses (584) - (474) -
----------------------------------
Total $8,065 $8,065 $12,469 $12,469
===================================
Maturities of short-term investments at March 31,2001 were as follows:
Market
Cost Value
========================
Due within one year $ 567 $ 565
Due after one year through
five years 160 161
Due after five years 5,275 5,240
No set maturity 2,647 2,099
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$8,649 $8,065
=======================
NOTE 3--INVENTORIES
Inventories consisted of the following:
(in thousands)
March 31, December 30,
2001 2000
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Raw materials $ 6,591 $ 7,024
Work in process 4,369 4,903
Finished goods 5,585 3,873
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$15,545 $15,800
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X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 4--INVESTMENTS CARRIED AT COST
Included in other noncurrent assets in 2001 and 2000 respectively, is $4.6
million related to investments made by the Company's strategic venture capital
group, XR Ventures, LLC. The Company funds acquisitions made by XR Ventures, LLC
and in exchange receives its investment back in full before any distributions
are made. Each individual investment represents less than 20% of the outstanding
voting common stock of the respective investee. Because the Company is unable to
exercise significant influence over the operating and financial policies of each
respective investee, the investments have been recorded at cost. The Company
periodically evaluates the carrying value of each investment to determine
whether a decline in fair value below the respective cost has occurred. If the
decline is determined to be other than temporary, the carrying value is adjusted
to the then current fair value as the new cost basis and a loss is recognized.
No such write downs occurred in 2001 or 2000.
NOTE 5--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
March 31, April 1,
(in thousands, except for share and 2001 2000
per share data) ---------- ----------
Numerators:
Net income numerators for
both basic and diluted EPS $2,429 $3,556
========== ==========
Denominators:
Denominators for basic EPS; weighted
average common shares outstanding 21,361,835 20,996,842
Potentially dilutive shares-
Shares subject to redemption agreements 298,589 17,780
Stock options 32,586 17,337
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Denominators for diluted EPS 21,693,010 21,031,959
========== ===========
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 1,065,800 and
$10.12 - $19.50 in 2001, and 985,500 and $7.03 - $19.52 in 2000.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
NOTE 6--COMPREHENSIVE INCOME
Comprehensive income consisted of net income, foreign currency translation
adjustments and unrealized loss on short-term investments. Comprehensive income
was $2,079,000 for the quarter ended March 31, 2001 and $3,414,000 for the
quarter ended April 1, 2000.
NOTE 7--VALUE OF SHARES SUBJECT TO REDEMPTION AGREEMENTS
During 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 balance sheet
to a temporary equity account. The reclassification of $45.4 million 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 March
31, 2001 was less than $10.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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.
Net Sales:
Sales in the first quarter of 2001 were $25.4 million a 3.0 percent decrease as
compared to the first quarter of 2000. Lower demand in the coatings industry, as
well as the slowing economy in North America were the primary causes of this
decrease. Increases were recorded in the printing, imaging and Labsphere units.
The Company also posted increases in Europe and Asia. Sales from the Coherix and
Optronik businesses which were acquired after April 2000 (see Acquisitions and
Investments) had a nominal impact on consolidated sales in 2001.
Cost of Sales and Gross Profit:
Gross profit as a percentage of sales was 64.1 percent for the first quarter of
2001, compared to 65.5 percent for the first quarter of 2000. The decrease was
primarily attributable to lower foreign currency exchange rates and decreased
sales volumes.
Operating Expenses:
Selling and marketing expenses for the quarter were $5.9 million, an 11.1
percent increase over the first quarter of 2000. This increase was due to
expanded sales and marketing efforts outside of North America, new products
marketing and costs associated with the Coherix and Optronik businesses.
General and administrative expenses decreased 11.6 percent as compared to the
first quarter of 2000. A reduction in outside services and non income based
taxes were the principal reasons for the decline.
Research, development and engineering (RD&E) expenses in the first quarter were
$4.2 million, a 50.5 percent increase over the first quarter of 2000. This
increase was attributable to costs related to the RD&E functions at the Coherix
and Optronik businesses, as well as an increase in new product development
activities.
Other Income:
Other income consists of investment income and gains and losses from foreign
exchange.
Income Taxes:
The provision for income taxes reflected effective tax rates of 24.5 and 35.3
percent for 2001 and 2000 respectively, compared to the U.S. statutory rate of
35 percent. The 2001 rate benefited from the execution of certain international
tax strategies. The Company anticipates that the effective rate will remain
consistent with the first quarter for the remainder of 2001.
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition, continued
Net Income:
The Company recorded net income of $2.4 million for the first three months of
2001 compared to $3.6 million in the same period of 2000, a decrease of 33.3
percent. On a per share basis, first quarter net income was $.11 in 2001 and
$.17 in 2000.
The average number of common and common equivalent shares outstanding was higher
in 2001 due to a lower average market price during the quarter for the Company'
s stock, which increased the dilutive effect of the common stock equivalents and
the release into the market of shares of common stock previously held in escrow.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2001 the Company had cash and cash equivalents of $16.8 million.
Cash used by operating activities in the first quarter of 2001 totaled $1.2
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 $1.5
million, were depreciation and amortization.
The most significant investing activity during the first three months of 2001
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 the first quarter,
approximately $3.1 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 2001 totaled $.9 million and
consisted mainly of building improvements and machinery and equipment. X-Rite
currently anticipates capital expenditures for the remainder of 2001 will be
approximately $4.0 million and will consist principally of building
improvements, machinery, equipment, and computer hardware and software.
Dividends of $533,000 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 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 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 Results
of Operations and Financial Condition, continued
ACQUISITIONS AND INVESTMENTS
In 2000, the Company purchased substantially all of the assets of Optronik GmbH.
Based in Berlin, Germany, Optronik is a leading provider of color and light
measurement instrumentation and software. Focused primarily on on-line color and
light measurement for web based processes, its non-contact measurement
technologies are an extension of X-Rite's current capabilities. The Berlin
location gives X-Rite its first research, development and manufacturing
capabilities in Europe.
Also during 2000 the Company purchased substantially all of the assets of the
HoloVision Products Group of Veridian-ERIM International. These assets were
purchased by a newly formed subsidiary of X-Rite named Coherix Corporation
(formerly known as HoloVision Acquisition Company). The products of Coherix use
tunable laser technology to accurately map the surface of physical objects for a
variety of industrial applications. Currently the technology is used to provide
noncontact measurement applications requiring a three dimensional perspective.
The measurement of shape complements the traditional X-Rite technologies of
color and light measurement. The ability to provide high resolution, non
contact, spatial measurement will elevate X-Rite's exposure to many dynamic
markets, such as electronic components, micromachines, telecommunications and
biomedicine. Coherix is located in Ann Arbor, Michigan, but will also be
conducting research, development and manufacturing at the X-Rite headquarters in
Grandville, Michigan.
XR Ventures, LLC is a strategic venture capital group formed in 2000 and
majority owned by X-Rite. Its mission is to direct and manage X-Rite's holdings
in start up companies in high technology fields. General partners in the group
include Dr. Peter M. Banks and Mr. James A. Knister. Both have had extensive
careers as executives in technology companies. In addition to their roles with
XR Ventures, both serve on the Board of Directors of X-Rite, Incorporated. The
venture group seeks out, but is not restricted to companies with technologies
that are directly related to current X-Rite technologies, or technologies that
we are interested in pursuing including biosensors, micro mechanical systems,
telecommunication components and information technologies. At March 31, 2001 and
December 30, 2000 respectively, the fund held minority positions in seven
companies, with a total investment of approximately $4.6 million.
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
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition, continued
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 15 of this Form 10-Q report.
(b) 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)
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, 2001 /s/ Rich Cook
Rich Cook
President, and Chief
Executive Officer
May 14, 2001 /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)
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)