1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997, 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. 0-10235 GENTEX CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 38-2030505 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 600 N. CENTENNIAL, ZEELAND, MICHIGAN 49464 (Address of principal executive offices) (Zip Code) (616) 772-1800 (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 ------- ------- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ------- ------- APPLICABLE ONLY TO CORPORATE USERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Class at October 13, 1997 ----- ------------------- Common Stock, $0.06 Par Value 35,258,240 Exhibit Index located at page 10 Page 1 of 13
2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS At September 30, 1997 and December 31, 1996 <TABLE> <CAPTION> ASSETS September 30, 1997 December 31, 1996 ------------------ ----------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 16,399,294 $ 16,730,356 Short term investments 11,189,252 31,803,621 Accounts receivable, net 23,738,128 17,015,174 Inventories 8,495,321 6,180,422 Prepaid expenses and other 1,193,953 966,287 ------------ ------------ Total current assets 61,015,948 72,695,860 PLANT AND EQUIPMENT - NET 39,124,472 31,574,547 OTHER ASSETS Long-term investments 73,412,133 33,945,446 Patents and other assets, net 2,222,076 2,162,567 ------------ ------------ Total other assets 75,634,209 36,108,013 ------------ ------------ Total assets $175,774,629 $140,378,420 ============ ============ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES Accounts payable $ 8,593,273 $ 5,794,832 Accrued liabilities 5,195,306 5,566,085 ------------ ------------ Total current liabilities 13,788,579 11,360,917 DEFERRED INCOME TAXES 2,203,096 1,213,862 SHAREHOLDERS' INVESTMENT Common stock 2,115,494 2,084,957 Additional paid-in capital 51,608,727 44,963,895 Other shareholders' equity 106,058,733 80,754,789 ------------ ------------ Total shareholders' investment 159,782,954 127,803,641 ------------ ------------ Total liabilities and shareholders' investment $175,774,629 $140,378,420 ============ ============ </TABLE> See accompanying notes to condensed consolidated financial statements. -2-
3 GENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 --------------------------- --------------------------- 1997 1996 1997 1996 ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> NET SALES $46,968,427 $36,797,757 $133,743,883 $111,378,551 COST OF GOODS SOLD 30,264,933 23,748,882 86,503,617 70,307,979 --------------------------- --------------------------- Gross profit 16,703,494 13,048,875 47,240,266 41,070,572 OPERATING EXPENSES: Research and development 2,406,153 1,941,823 6,890,365 5,576,755 Selling, general & administrative 2,587,579 2,655,266 8,057,107 9,025,277 Patent Settlement 0 0 0 4,000,000 --------------------------- --------------------------- Total operating expenses 4,993,732 4,597,089 14,947,472 18,602,032 --------------------------- --------------------------- Income from operations 11,709,762 8,451,786 32,292,794 22,468,540 OTHER INCOME (EXPENSE) Interest, net 1,045,992 855,951 3,018,292 2,439,932 Other 85,394 73,432 322,187 90,631 --------------------------- --------------------------- Total other income 1,131,386 929,383 3,340,479 2,530,563 --------------------------- --------------------------- Income before provision for federal income taxes 12,841,148 9,381,169 35,633,273 24,999,103 PROVISION FOR FEDERAL INCOME TAXES 4,174,000 3,048,000 11,581,000 8,096,000 --------------------------- --------------------------- NET INCOME $ 8,667,148 $ 6,333,169 $ 24,052,273 $ 16,903,103 =========================== =========================== EARNINGS PER SHARE $0.24 $0.18 $0.67 $0.48 WEIGHTED DAILY AVERAGE OF COMMON STOCK OUTSTANDING 36,083,936 35,772,083 35,887,713 35,425,510 </TABLE> See accompanying notes to condensed consolidated financial statements. -3-
4 GENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 <TABLE> <CAPTION> 1997 1996 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $24,052,273 $16,903,103 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 4,334,341 3,071,615 Loss (Gain) on disposal of equipment 12,011 (81) Deferred income taxes (76,590) 1,338,610 Amortization of deferred compensation 428,904 387,786 Change in assets and liabilities: Accounts receivable, net (6,722,954) (3,910,047) Inventories (2,314,899) (713,898) Prepaid expenses and other (8,299) 28,942 Accounts payable 2,798,441 2,331,119 Accrued liabilities (370,779) (3,372,560) ----------- ----------- Net cash provided by operating activities 22,132,449 16,064,589 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in short-term investments 20,614,369 4,419,367 Plant and equipment additions (11,752,682) (13,103,753) Proceeds from sale of plant and equipment 1,500 627 Increase in long-term investments (37,048,239) (6,967,622) Increase in other assets (215,703) (206,870) ----------- ----------- Net cash used for investing activities (28,400,755) (15,858,251) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock and tax benefit of stock plan transactions 5,937,244 7,524,282 ----------- ----------- Net cash provided by financing activities 5,937,244 7,524,282 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (331,062) 7,730,620 CASH AND CASH EQUIVALENTS, beginning of period 16,730,356 14,115,041 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $16,399,294 $21,845,661 =========== =========== </TABLE> See accompanying notes to condensed consolidated financial statements -4-
5 GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) The condensed consolidated financial statements included herein have been prepared by the Registrant, 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 Registrant 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 financial statements and notes thereto included in the Registrant's 1996 annual report on Form 10-K. (2) In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only a normal and recurring nature, necessary to present fairly the financial position of the Registrant as of September 30, 1997, and December 31, 1996, and the results of operations and cash flows for the interim periods presented. (3) Inventories consisted of the following at the respective quarter ends: <TABLE> <CAPTION> September 30, 1997 December 31, 1996 ------------------ ----------------- <S> <C> <C> Raw materials $5,520,455 $3,860,534 Work-in-process 433,767 348,336 Finished goods 2,541,099 1,971,552 ---------- ---------- $8,495,321 $6,180,422 ========== ========== </TABLE> -5-
6 GENTEX CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: THIRD QUARTER 1997 VERSUS THIRD QUARTER 1996 Net Sales. Net sales for the third quarter of 1997 increased by approximately $10,171,000, or 28%, when compared with the third quarter last year. Net sales of the Company's automotive mirrors increased by 33% as automatic mirror unit shipments increased by 32% from approximately 740,000 in the third quarter of 1996 to 975,000 in the current quarter. This increase reflected increased penetration on domestic and foreign 1998 model year vehicles for interior and exterior electrochromic Night Vision Safety(TM) (NVS(R)) Mirrors. Mirror unit shipments to automotive customers outside North America increased by 35% compared with the third quarter in 1996, primarily due to increased shipments of exterior aspheric mirrors for Mercedes-Benz and new interior mirror programs. Shipments to customers in North America increased by 30%, primarily due to new light truck/SUV interior and exterior mirror programs. Net sales of the Company's fire protection products decreased 4%, primarily due to a later-than-expected introduction of a new horn/strobe signal product. Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased from 65% in the third quarter of 1996 to 64% for the comparable period in 1997. This decreased percentage primarily reflected fixed overhead costs spread over higher sales volume, despite automotive customer price reductions and lower glass yields on new products. Operating Expenses. Research and development expenses increased approximately $464,000, but remained at approximately 5% of net sales, when compared with the same quarter last year, primarily reflecting additional staffing for new product development, including aspheric exterior mirrors, thin glass exterior mirrors, and mirrors with other electronic features. Selling, general and administrative expenses decreased approximately $68,000, and decreased from 7% to 6% of net sales, when compared with the third quarter of 1996. This decreased expense primarily reflected a decline in sales commission expense in Europe and decreased advertising expense. Other Income - Net. Investment income increased by approximately $190,000 when compared with the third quarter of 1996, primarily due to higher investable fund balances. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996 Net Sales. Net sales for the nine months ended September 30, 1997, increased by approximately $22,365,000, or 20%, when compared with the same period last year. Automatic mirror unit shipments increased from approximately 2,271,000 in the first nine months of 1996 to 2,735,000 in the first nine months of 1997. This increase reflected increased penetration on domestic and foreign 1997 and 1998 model year vehicles for interior and exterior electrochromic Night Vision Safety(TM) (NVS(R)) Mirrors. Mirror unit shipments to automotive customers outside North America increased by 54% compared with the first nine months of 1996, primarily due to increased shipments of exterior aspheric mirrors for Mercedes-Benz and new interior mirror programs. Shipments to customers in North America increased by 8%, primarily due to increased shipments of exterior mirrors. Net sales of the Company's fire protection products increased 4%, primarily due to increased sales of the Company's audible signals, strobes and AC/DC smoke detectors. -6-
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996 (CONT.) Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased from 63% in the first nine months of 1996 to 65% for the comparable period in 1997. This increased percentage primarily reflected automotive customer price reductions not fully offset by productivity improvements, relatively low yields on the Company's new aspheric and convex exterior mirrors, production support start-up expenses for the new 1998 model year mirror programs, and temporary under-utilization of the Company's State Street automotive products manufacturing facility. Operating Expenses. For the nine months ended September 30, 1997, research and development expenses increased approximately $1,314,000, but remained at 5% of net sales, when compared with the same period last year, primarily reflecting additional staffing for new product development, including aspheric exterior mirrors, thin glass exterior mirrors, and mirrors with other electronic features. Selling, general and administrative expenses decreased approximately $968,000, and decreased from 8% to 6% of net sales, when compared with the first nine months of 1996. This decreased expense primarily reflected a reduction in patent litigation accruals of $1,440,000, as a result of the patent litigation settlement in 1996, partially offset by increased Michigan Single Business tax expense due to increased profitability. During the first quarter in 1996, the Company recorded a one-time charge of $4,000,000 in connection with the settlement of its patent litigation with Donnelly Corporation. Other Income - Net. Investment income for the nine months ended September 30, 1997, increased by approximately $578,000 as compared to the first nine months of 1996, primarily due to higher investable fund balances. FINANCIAL CONDITION: Management considers the Company's working capital and long-term investments totaling approximately $120,640,000 at September 30, 1997, together with internally generated cash flow and an unsecured $5,000,000 line of credit from a bank, to be sufficient to cover anticipated cash needs for the foreseeable future. TRENDS AND DEVELOPMENTS: In addition to price reductions over the life of its long-term contracts, the Company continues to experience pricing pressures from its automotive customers, which have affected, and which will continue to affect, its margins to the extent that the Company is unable to offset the price reductions with productivity improvements, engineering and purchasing cost reductions, and increases in unit sales volume. In addition, the Company continues to experience some pressure for raw material cost increases. The Company is making volume shipments of its new aspheric and convex exterior mirrors; therefore, margins will be adversely affected to the extent that the Company is unable to improve glass yields to target levels. Due to the Company's relatively small number of large automotive customers, the Company's quarterly operating results are affected by the levels and timing of customer releases, which can significantly vary due to automotive industry sales and production levels, strikes at customer plants and plant vacation shutdowns. The Company currently supplies NVS(R) Mirrors to BMW, Chrysler Corporation, Ford Motor Company and General Motors Corporation under long-term contracts. The General Motors contract is in effect through the 1998 model year, and the contracts with BMW are in effect for the four-year period ending March 31, 1999. The term of the Ford contract is through December 1999, and the Chrysler contract runs through the 1999 Model Year. During February 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standard (FAS) No. 128 "Earnings Per Share." This standard is effective for periods ending after December 15, 1997. The Company will adopt FAS No. 128 in its fourth quarter for the year ending December 31, 1997. The Company does not expect the impact of FAS No. 128 to materially affect the financial statements. -7-
8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) See Exhibit Index on Page 11. (b) No reports on Form 8-K were filed during the three months ended September 30, 1997. -8-
9 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. GENTEX CORPORATION Date 10/31/97 /s/ Fred T. Bauer ---------------- ------------------------------------------ Fred T. Bauer Chairman and Chief Executive Officer Date 10/31/97 /s/ Enoch C. Jen ---------------- ------------------------------------------ Enoch C. Jen Vice President-Finance, Principal Financial and Accounting Officer -9-
10 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- <S> <C> <C> 3(a) Registrant's Articles of Incorporation were filed in 1981 as Exhibit 2(a) to a Registration Statement on Form S-18 (Registration No. 2-74226C), an Amendment to those Articles was filed as Exhibit 3 to Registrant's Report on Form 10-Q in August of 1985, an additional Amendment to those Articles was filed as Exhibit 3(a)(i) to Registrant's Report on Form 10-Q in August of 1987, and an additional Amendment to those Articles was filed as Exhibit 3(a)(2) to Registrant's Report on Form 10-K dated March 10, 1992, all of which are hereby incorporated herein by reference. Amendment to Articles of Incorporation, adopted on May 9, 1996, was filed as Exhibit 3(a)(2) to Registrant's Report on Form 10-Q dated July 31, 1996, and the same is incorporated herein by reference. 3(b) Registrant's Bylaws as amended and restated August 18, 1995 were filed as Exhibit 3(b) to Registrant's Report on Form 10-Q dated November 1, 1995, and the same is incorporated herein by reference. 3(c) First Amendment to Registrant's Bylaws, effective August 25, 1997 12 4(a) A specimen form of certificate for the Registrant's common stock, par value $.06 per share, was filed as part of a Registration Statement on Form S-18 (Registration No. 2-74226C) as Exhibit 3(a), as amended by Amendment No. 3 to such Registration Statement, and the same is hereby incorporated herein by reference. 4(b) Shareholder Protection Rights Agreement, dated as of August 26, 1991, including as Exhibit A the form of Certificate of Adoption of Resolution Establishing Series of Shares of Junior Participating Preferred Stock of the Company, and as Exhibit B the form of Rights Certificate and of Election to Exercise, was filed as Exhibit 4(b) to Registrant's report on Form 8-K on August 20, 1991, and the same is hereby incorporated herein by reference. 4(b)(1) First Amendment to Shareholder Protection Rights Agreement, effective April 1, 1994, was filed as Exhibit 4(b)(1) to Registrant's report on Form 10-Q on April 29, 1994, and the same is hereby incorporated herein by reference. 4(b)(2) Second Amendment to Shareholder Protection Rights Agreement, effective November 8, 1996, was filed as Exhibit 4(b)(2) to Registrant's Report on Form 10-K, dated March 7, 1997, and the same is hereby incorporated herein by reference. 10(a)(1) A Lease dated August 15, 1981, was filed as part of a Registration Statement (Registration Number 2-74226C) as Exhibit 9(a)(1), and the same is hereby incorporated herein by reference. 10(a)(2) A First Amendment to Lease dated June 28, 1985, was filed as Exhibit 10(m) to Registrant's Report on Form 10-K dated March 18, 1986, and the same is hereby incorporated herein by reference. *10(b)(1) Gentex Corporation Qualified Stock Option Plan (as amended and restated, effective March 7, 1997), was filed as Exhibit 10(b)(1) to Registrant's Report on Form 10-K dated March 7, 1997, and the same is hereby incorporated herein by reference. </TABLE> -10-
11 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- <S> <C> <C> *10(b)(2) Gentex Corporation 1987 Incentive Stock Option Plan (as amended through May 24, 1989), was filed as Exhibit 10(g)(3) to Registrant's Report on Form 10-K dated March 1, 1990, and the same is hereby incorporated herein by reference. *10(b)(3) Gentex Corporation Restricted Stock Plan was filed as Exhibit 10(b)(3) to Registrant's Report on Form 10-K dated March 10, 1992, and the same is hereby incorporated herein by reference. *10(b)(4) Gentex Corporation Non-Employee Director Stock Option Plan (as amended and restated, effective March 7, 1997) was filed as Exhibit 10(b)(4) to Registrant's Report on Form 10-K dated March 7, 1997, and the same is incorporated herein in reference. 10(e) The form of Indemnity Agreement between Registrant and each of the Registrant's directors was filed as a part of a Registration Statement on Form S-2 (Registration No. 33-30353) as Exhibit 10(k) and the same is hereby incorporated herein by reference. 27 Financial Data Schedule </TABLE> ------------------------------- * Indicates a compensatory plan or arrangement. -11-