ITEM 1. BUSINESS
(a) General Development of Business - ------------------------------------ X-Rite, Incorporated ("X-Rite" or the "Company") was organized as a Michigan corporation in 1958. The business currently conducted by the Company is largely an outgrowth of the Company's x-ray marking and identification system introduced in 1961. The Company's silver recovery equipment, introduced in 1968, and its first quality control instruments, introduced in 1975, were developed to meet the needs of film processors; a customer class known to the Company from its sales of radio-opaque x-ray marking tape.
The Company has expanded its product offerings by concentrating on its instrument technologies and developing expertise in the fields of light and color measurement. Pursuant to that strategy, X-Rite has successfully developed and marketed numerous quality control instruments, software and accessories.
The Company made its initial public offering of common stock during 1986. Proceeds from that public offering were used to finance the construction of a new building for office, manufacturing and warehouse needs, purchase new production and laboratory equipment, retire debt and provide working capital.
X-Rite has grown through internal expansion and through acquisitions. In 1993 the Company established two foreign sales and service subsidiaries; X-Rite GmbH, Cologne, Germany and X-Rite Asia-Pacific Limited, Hong Kong. In 1994 the Company purchased a foreign sales and service subsidiary, X-Rite Limited, Congleton, Cheshire, England, and acquired certain assets of Colorgen, Inc. ("Colorgen"), a Massachusetts-based manufacturer of retail point-of-purchase paint matching systems. In 1995 the Company acquired all of the outstanding stock of Labsphere, Inc. ("Labsphere") of North Sutton, New Hampshire. Labsphere was founded in 1981 and is a leading manufacturer of light measurement and light source integrating systems and instrumentation. In 1997, the Company acquired substantially all the assets of Light Source Computer Images, Inc. ("Light Source"). Light Source is a California-based producer of scanning, imaging and print optimization software. In 1998, the Company established a French subsidiary, X-Rite Mediterranee SARL, which acquired the branch of an X-Rite dealer located near Paris.
(b) Financial Information About Operating Segments - --------------------------------------------------- For purposes of the consolidated financial statements included as part of this report, all operations of the Company are classified in one operating segment: quality control instruments and accessories.
(c) Narrative Description of Business - --------------------------------------
Principal Products The Company primarily manufactures and sells proprietary quality control instruments which utilize advanced electronics and optics technologies. The principal types of products produced include:
Densitometers X-Rite's first densitometer was introduced in 1975. A densitometer is an instrument that measures optical or photographic density, compares that measurement to a reference standard, and signals the result to the operator of the instrument. There are two types of densitometers; transmission densitometer and reflection densitometer.
A transmission densitometer measures the amount of light that is transmitted through film. Some models are designed for use in controlling variables in the processing of x-ray film in medical and non-destructive testing applications. Other models are designed to be used to control process variables in the production of photo-transparencies, such as photographic film and microfilm. Reflection densitometers measure the amount of incident light that is reflected from a surface, such as ink on paper.
X-Rite introduced its spectrodensitometer in 1990 which combines the function of a densitometer with the functions of a colorimeter and a spectrophotometer (see following paragraphs) to provide measurements for monitoring and controlling color reproduction. Also introduced in 1990 was the scanning densitometer, which is used for controlling the color of printed inks in graphic arts applications.
In 1994 the Company began delivering densitometer-based products for digital imaging applications. Products which calibrate image setters, raster image processors and digital printers were the initial entrants into the market for use in desktop publishing and computer-based printing activities.
In 1998 X-Rite launched its 500 series spectrodensitometer which is the only hand-held densitometer equipped with a spectral engine. Spectral engines are the most accurate type of measurement engines available and offer precise, repeatable and reliable measurements for pressroom quality control.
Sensitometers Sensitometers have been manufactured by X-Rite since 1975. This instrument is used to expose various types of photographic film in a very precise manner for comparison to a reference standard. The exposed film is processed and then "read" with a densitometer to determine the extent of variation from the standard.
Colorimeters In 1989 the Company introduced its first colorimeter. Colorimeters measure light much like the human eye using red, green and blue receptors and are used to measure printed colors on packages, labels, textiles and other materials where a product's appearance is critical for buyer acceptance. In 1990 X-Rite added the spectrocolorimeter which is a combination instrument that performs colorimeter functions by applying spectrophotometric techniques and principles (see next paragraph), thereby greatly improving the accuracy and reliability of the instrument.
Spectrophotometers and Accessories The spectrophotometer, introduced in 1990, is related to the colorimeter; however, it measures light at many points over the entire visible spectrum, generally with the high degree of accuracy required in laboratory measurements. Spectrophotometers are used in color formulation for materials such as plastics, paints, inks, ceramics and metals.
In 1991 the Company introduced a multi-angle spectrophotometer which is used to measure the color of metallic finishes. This instrument is useful for controlling the color consistency of automotive paints and other metallic and pearlescent coatings. In 1992 the Company introduced a spherical spectrophotometer which measures the color of textured surfaces and is used in the textile, paint and plastics industries.
During 1993 and 1994, X-Rite introduced a group of color formulation and quality control software packages designed for use with its spectrophotometer products. This software is sold separately or is combined with a computer and an instrument and sold as a turn-key system. Marketing efforts with respect to this family of related products are being directed at packaging material printers, textile, plastic, paint, ink and coatings manufacturers.
In 1994 and 1995, X-Rite introduced products developed for desktop graphics professionals. One of the instruments in this product category is a hand- held spectrophotometer which captures color from almost any item and sends it to a personal computer. Once there, the color can be used in a variety of graphic design applications, previewed and prepared for output, and organized into a custom electronic color library; colors can also be transmitted to other personal computers anywhere in the world using X-Rite's ColorMail software.
Another 1995 introduction was the auto-tracking spectrophotometer. This instrument is used in the graphic arts industry to help control hard to match colors such as pastels, reflex blue, dark reds and colors used in corporate logo standards.
The 1995 acquisition of Labsphere expanded the Company's product lines to include standard accessories which are compatible with a majority of commercially available spectrophotometers worldwide. These accessories extend a spectrophotometer's capabilities and enhance its performance.
Point-of-Purchase Paint Matching Systems In 1993 the Company introduced computerized point-of-purchase paint matching systems for use by paint stores, hardware stores, mass merchants and home improvement centers. After successfully establishing its own line of products, the Company acquired certain assets of Colorgen in 1994. Colorgen had a significant share of the U.S. point-of-purchase paint matching market. With that acquisition, X-Rite has established a significant market presence in the retail point-of-purchase architectural paint matching business.
Integrating Spheres and Integrating Sphere Systems With the acquisition of Labsphere, X-Rite added integrating spheres and integrating sphere systems to its product lines. Applications for these instruments include testing incandescent and fluorescent lamp output, calibration of remote sensors, laser power measurement, and reflectance and transmittance light measurement.
Reflectance Materials and Coatings Labsphere is also an OEM supplier of proprietary reflectance materials and coating services. These materials and services are used in such products as photographic processing equipment, check scanning systems, x-ray film analysis, backlight illuminators and surface profiling equipment.
Other Products For many years, X-Rite has also manufactured silver recovery equipment and radio-opaque marking tape. Collectively, these other products represent less than five percent of the Company's consolidated net sales.
Sales of the Company's products are made by its own sales personnel and through independent manufacturer's representatives. Certain products not sold directly to end users are distributed in the U.S. through a network of fifteen hundred independent dealers and outside the U.S. through four hundred independent dealers in fifty countries. Independent dealers are managed and serviced by the Company's sales staff and by independent sales representatives.
Raw Materials With very few exceptions, raw materials and components necessary for manufacturing products and providing services are generally available from several sources. Subject to vendor readiness with the year 2000 (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations), the Company does not foresee any unavailability of materials or components which would have a material adverse effect on its overall business in the near term.
Patents and Trademarks The Company owns 22 U.S. patents and 8 foreign patents which are significant for products it manufactures. The Company currently has 7 U.S. and 24 foreign patent applications on file. While the Company follows a policy of obtaining patent protection for its products, it does not believe that the loss of any existing patent, or failure to obtain any new patents, would have a material adverse impact on its competitive position.
Seasonality The Company's business is generally not subject to seasonal variations that would impact sales, production or net income.
Significant Customers No single customer accounted for more than 10% of total net sales in 1998, 1997 or 1996. The Company does not believe that the loss of any single customer would have a material adverse effect on the Company.
Backlog The Company's backlog of scheduled but unshipped orders was $5.8 million at March 1, 1999 and $7.1 million at March 2, 1998. The March 1, 1999 backlog is expected to be filled during the current fiscal year.
Competition The Company has few competitors producing competing medical and photographic instruments and believes its share in that market is substantial.
There are nine firms producing competing products in the graphic arts/digital imaging categories; GretagMacBeth, Tobias Associates, Graphics Microsystems, Inc., Ihara Electronic Industries Co., Ltd., Viptronic GmbH, Techkon Elektronik GmbH, Color Savvy Systems Limited, Cofomegra, and Minolta Corporation.
There are five major manufacturers of competing products in the color and appearance market; Datacolor, Int., Minolta Corporation, GretagMacBeth, Hunter Associates Laboratory, Inc. and BYK-Gardner.
The primary basis of competition for all the Company's products is quality, design and service. The Company believes that superior quality and features are competitive advantages for its products.
Research and Development During 1998, 1997 and 1996, respectively, the Company spent $8,135,000, $6,380,000 and $5,324,000 on research and development. X-Rite has no customer-sponsored research and development activities.
Human Resources As of March 1, 1999, the Company employed 662 persons; 591 in its U.S. operations and 71 in its foreign subsidiaries. The Company believes that its relations with employees are excellent.
(d) Financial Information About Foreign and Domestic Operations - ---------------------------------------------------------------- See Note 1 to the consolidated financial statements contained in Part II, Item 8 of this report.
ITEM 2.
ITEM 2. PROPERTIES
Listed below are the principal properties owned or leased by X-Rite as of March 1, 1999: Owned Location Principal Uses or Leased ------------------------- --------------------------- --------- Grandville, MI Manufacturing, R&D, sales, Owned customer service, warehouse and administration
North Sutton, NH Manufacturing, R&D, sales, Owned customer service, warehouse and administration
Littleton, MA Customer service, R&D, and Leased sales
San Rafael, CA Customer service, R&D Leased
Poynton, England Sales and customer service Leased
Cologne, Germany Sales and customer service Leased
Quarry Bay, Hong Kong Sales and customer service Leased
Brno, Czech Republic Sales Leased
MASSY, France Sales and customer service Leased
Tokyo, Japan Sales Leased
Collectively, X-Rite and its subsidiaries own approximately 250,000 square feet of space and lease approximately 41,000 square feet. Management considers all the Company's properties and equipment to be well maintained, in excellent operating condition, and suitable and adequate for their intended purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently engaged in any material litigation within the meaning of Regulation S-K.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, ages and positions of all of the Company's executive officers. Officers are elected annually by the Board of Directors at the first meeting of the Board following the Annual Meeting of Shareholders.
Position Name Age Position Held Since - -------------------- ----- --------------------------- ---------- Ted Thompson 69 Chief Executive Officer 1976 Richard E. Cook 53 President and Chief 1998 (1) Operating Officer Bernard J. Berg 55 Vice President, Engineering 1983 Duane F. Kluting 49 Vice President, Chief Financial Officer 1992 Jeffrey L. Smolinski 37 Vice President, Operations 1994 (2) Joan Mariani Andrew 40 Vice President, Sales & Marketing 1995 (3)
(1) Prior to joining X-Rite, Mr. Cook was the President and Chief Operating Officer of Cascade Engineering, a developer of plastic mold injection technology. Mr. Cook held that position for more than five years.
(2) Mr. Smolinski previously worked for La-Z-Boy Chair Company as Director of Engineering from 1993 to 1994, Director of Operations from 1991 to 1993, and Director of Advanced Technologies from 1988 to 1991.
(3) Before joining X-Rite, Ms. Andrew was Vice President, Sales and Marketing for Bell & Howell's Document Management Products Company from 1992 to 1995, Vice President-Marketing and New Business Development from 1991 to 1992, and General Manager, Scanners from 1989 to 1991.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded over the counter on The Nasdaq Stock Market under the symbol XRIT. As of March 1, 1999, there were approximately 1,500 shareholders of record. Ranges of high and low sales prices reported by The Nasdaq Stock Market for the past two fiscal years appear in the following table. Dividends High Low Per Share ------ ------ --------- Year Ended January 2, 1999: Fourth Quarter $10.13 $ 6.53 $.025 Third Quarter 13.88 8.38 .025 Second Quarter 14.38 12.13 .025 First Quarter 19.00 12.50 .025 Year Ended January 3, 1998: Fourth Quarter 20.63 17.25 .025 Third Quarter 22.38 17.75 .025 Second Quarter 19.63 14.25 .025 First Quarter 18.00 13.75 .025
The Board of Directors intends to continue paying dividends at the current quarterly rate of 2.5 cents per share in the foreseeable future, and retain the balance of the Company's earnings for use in the expansion of its businesses.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Quarterly financial data are summarized as follows:
(in thousands except per share data) Diluted Earnings Operating Net (Loss) Net Gross Income Income Per Quarter Sales Profit (Loss) (Loss) Share - --------------------------- ------- ------- --------- ------- -------- 1998: First $23,637 $15,616 $ 4,608 $3,110 $.15 Second 24,286 16,086 4,983 3,349 .16 Third 21,461 13,985 2,283 1,503 .07 Fourth 25,427 16,545 5,087 3,251 .15 ------- ------- ------- ------ ---- Totals before write-down of digital imaging assets 94,811 62,232 16,961 11,213 .53
Write-down of digital imaging assets - - (6,694) (4,351) (.21) ------- ------- ------- ------ ---- $94,811 $62,232 $10,267 $6,862 $.32 ======= ======= ======= ====== ====
1997: First $23,080 $14,947 $ 6,341 $ 4,246 $.20 Second 23,986 15,619 6,981 4,636 .22 Third 24,861 16,314 6,974 4,653 .22 Fourth 25,064 17,178 6,749 4,487 .21 ------- ------- ------- ------- ---- $96,991 $64,058 $27,045 $18,022 $.85 ======= ======= ======= ======= ====
Selected financial data for the five years ended January 2, 1999 are summarized as follows:
(in thousands except per share data) 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Net sales $94,811 $96,991 $84,394 $72,634 $59,475 Net income 6,862 18,022 15,381 9,871 12,646 Net income per share: Basic .33 .85 .73 .47 .60 Diluted .32 .85 .73 .47 .60 Dividends per share .10 .10 .10 .10 .08
Total assets 95,444 92,468 78,951 63,507 54,558 Long-term debt at year end -0- -0- -0- -0- -0-
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
X-Rite has a strong financial position, excellent liquidity and is virtually debt-free. Since 1987, the Company has been able to fund its operating, investing and financing activities from operating cash flows and existing cash reserves. On January 2, 1999 the Company had cash and short- term investments totaling $20.8 million and an unused line of credit of $20 million. Working capital on January 2, 1999 was $53.4 million and the ratio of current assets to current liabilities was 11:1.
Cash provided by operating activities in 1998 was $17.9 million. The primary source of cash was net income. Included in net income were certain accounting charges that did not require the use of cash. The most significant non-cash accounting charges, which totaled $12.5 million, were depreciation, amortization and the write-down of digital imaging assets.
Capital expenditures of $4.2 million in 1998 were made primarily for machinery, equipment, building improvements, and computer hardware and software. The Company expects capital expenditures in 1999 to total approximately $4 million and consist mainly of machinery, equipment, building improvements, and computer hardware and software.
During 1998, the Company announced it had entered into agreements 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 totaling $160 million 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 market price, although the discounted price may not be less than $10 per share or more than $25 per share.
At the maximum price, the aggregate stock purchases will total $113.5 million. The Company anticipates that certain stock purchases will not coincide with the receipt of insurance proceeds; therefore, borrowed funds will be needed from time to time to finance the Company's purchase obligations. Insurance was purchased at the $160 million level in order to cover both the maximum aggregate purchase price and anticipated borrowing costs. Life insurance premiums will total $4.3 million each year while all the policies remain in effect. Of the $4.3 million paid in 1998, approximately $3.1 million was classified as cash surrender value which is included with other noncurrent assets on the Company's balance sheet.
The Company made one business acquisition in 1998. A branch of an X-Rite dealer located near Paris, France was purchased in a cash transaction. This acquisition was part of the Company's long-term strategic plan to expand its European sales and marketing infrastructure.
Dividends of $2.1 million were paid at the annual rate of 10 cents per share, which is the rate the Board of Directors intends to continue paying 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.
The following table sets forth information derived from the Company's consolidated statements of income expressed as a percentage of net sales.
1998 1997 1996 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of sales 34.4 34.0 35.5 ----- ----- ----- Gross profit 65.6 66.0 64.5
Operating expenses: Selling & marketing 21.6 18.5 18.9 Engineering, general & administrative 17.6 13.1 12.3 Research & development 8.6 6.6 6.3 Write-down of digital imaging assets 7.0 - - ----- ----- ----- 54.8 38.2 37.5 ----- ----- ----- Operating income 10.8 27.8 27.0
Other income 0.4 0.3 0.5 ----- ----- ----- Income before income taxes 11.2 28.1 27.5
Income taxes 4.0 9.5 9.3 ----- ----- ----- Net income 7.2% 18.6% 18.2% ===== ===== =====
Net Sales
Net sales in 1998 declined 2.2% compared to 1997. The year-over-year decrease was attributable to weak sales to key customers in North America. Net sales in 1997 increased 14.9% compared to 1996 due to unit volume increases. Price increases had a nominal effect on sales levels in 1998 and 1997.
Gross Profit
The range of gross profit as a percentage of sales varied slightly during the three year period ended January 2, 1999. Gross profit percentages were 65.6%, 66.0% and 64.5% in 1998, 1997 and 1996, respectively. The variations were due to changes in product sales mix.
Selling and Marketing Expenses
In 1998 the Company increased the level of investment in sales and marketing in order to position itself for continued long-term sales growth. Emphasis was placed on building additional infrastructure in Europe and, to a lesser extent, Asia. Selling and marketing expenses increased in 1996 and 1997 in terms of actual costs incurred; however, as a percentage of sales 1996 and 1997 expenditures actually declined from preceding years.
Engineering, General and Administrative
The increase in engineering, general and administrative ("EG&A") expenses in 1998 over 1997 was due primarily to life insurance premium expense incurred in connection with the stock redemption program, higher legal fees, wage inflation for technical talent and costs attributable to the new office opened in France. EG&A expenses in 1997 were higher compared to 1996 due to the inclusion in 1997 of Light Source operating costs and Light Source goodwill amortization; no comparable expenses were incurred in 1996.
Research and Development
New product innovation has been an essential part of building X-Rite's strong financial position. The Company continued its commitment to research and development ("R&D") by increasing its investment in R&D in each of the last two years. In addition to new product development, R&D activities in 1998 included increased efforts to expedite new product introductions.
In addition to the R&D costs reported as operating expenses, there were costs incurred to develop new software products in each of the last three years that were not included with R&D expenses. Those costs were capitalized and the related amortization expense was included in cost of sales (see Note 2 to the accompanying financial statements). Software development costs capitalized totaled $1.2, $1.3 and $1.2 million in 1998, 1997 and 1996, respectively.
Write-Down of Digital Imaging Assets
The Company recognized a nonrecurring charge of $6,694,000 in the third quarter of 1998 for the write-down of certain digital imaging assets associated with the 1997 acquisition of Light Source Computer Images, Inc. (see Note 8 to the accompanying financial statements). Increased competition in the digital imaging business and a continued rapid decline in the demand for certain digital imaging instruments, software and technology were the primary factors that led the Company to reevaluate the markets Light Source sells into and the Light Source product lines, which then forced the recognition of this charge. Digital imaging markets have been changing rapidly and the demand for newer products at lower prices with enhanced performance has impacted the Company's ability to compete in certain of these markets. In addition, the Company has decided these assets would not be employed in a separate strategic business unit within the reorganized corporate structure that was announced during the third quarter. The Company will continue developing other digital imaging products for markets where it has more experience and greater name recognition.
Other Income
Other income in 1998, 1997 and 1996 consisted mainly of interest earned on funds invested in tax-exempt securities. Interest income in 1997 was less than 1996 due to a reduction in funds available to invest. In 1997, a substantial portion of the Company's short-term investments were used to acquire the assets of another company.
Income Taxes
The effective tax rate in 1998 was 35.8% compared to 34.0% in 1997 and 33.8% in 1996. The tax rates have been affected by higher state income taxes and lower federal tax benefits from the Company's foreign sales corporation.
Inflation
The Company has experienced the effects of inflation on its business through increases in the cost of services, employee compensation and fringe benefits. Although modest adjustments to selling prices have mitigated the effects of inflation, the Company continues to explore ways to improve productivity and reduce operating costs. The Company does not anticipate any significant adverse impact from inflation in the coming year.
Most of the Company's transactions are invoiced and paid in U.S. dollars.
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 remediation solutions and readiness testing by July 31, 1999, and complete the essential elements of Y2K contingency plans 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 95% of the Company's currently supported products have been assessed, remediated (if necessary) and tested. The remaining 5% 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.
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 repeated 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant's market risk sensitive instruments do not subject the Registrant to material market risk exposures.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following report, financial statements and notes are included with this report:
Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Investment Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
Report of Independent Public Accountants
To the Shareholders of X-Rite, Incorporated:
We have audited the accompanying consolidated balance sheets of X-Rite, Incorporated (a Michigan corporation) and subsidiaries as of January 2, 1999 and January 3, 1998, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended January 2, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of X-Rite, Incorporated and subsidiaries as of January 2, 1999 and January 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Grand Rapids, Michigan, January 27, 1999
X-RITE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, January 3, 1999 1998 ----------- ----------- ASSETS
CURRENT ASSETS: Cash and cash equivalents $ 1,536,000 $ 2,808,000 Short-term investments 19,268,000 10,555,000 Accounts receivable, less allowances of $798,000 in 1998 and $567,000 in 1997 19,589,000 20,833,000 Inventories 15,871,000 15,000,000 Deferred tax assets 1,495,000 1,189,000 Prepaid expenses and other current assets 980,000 1,848,000 ----------- ----------- Total current assets 58,739,000 52,233,000
PLANT AND EQUIPMENT: Land 1,963,000 1,980,000 Buildings and improvements 9,822,000 8,732,000 Machinery and equipment 12,507,000 11,362,000 Furniture and office equipment 11,737,000 10,076,000 Construction in progress 1,308,000 1,306,000 ----------- ----------- 37,337,000 33,456,000 Less accumulated depreciation (19,553,000) (16,043,000) ----------- ----------- 17,784,000 17,413,000
OTHER ASSETS: Costs in excess of net assets acquired 8,572,000 15,539,000 Other noncurrent assets 10,349,000 7,283,000 ----------- ----------- 18,921,000 22,822,000 ----------- -----------
$95,444,000 $92,468,000 =========== ===========
The accompanying notes are an integral part of these statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--Continued
January 2, January 3, 1999 1998 ----------- ----------- LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES: Accounts payable $ 1,772,000 $ 1,604,000 Accrued liabilities-- Payroll and employee benefits 1,618,000 1,403,000 Income taxes 309,000 249,000 Other 1,626,000 2,454,000 ----------- ----------- Total current liabilities 5,325,000 5,710,000
DEFERRED INCOME TAXES - 678,000
VALUE OF SHARES SUBJECT TO REDEMPTION AGREEMENTS; 4,540,000 shares issued and outstanding in 1998 45,400,000 -
SHAREHOLDERS' INVESTMENT: Preferred stock, $.10 par value, 5,000,000 shares authorized; none issued - - Common stock, $.10 par value, 50,000,000 shares authorized; 16,638,179 and 21,149,381 shares issued and outstanding in 1998 (not subject to redemption agreements) and 1997, respectively 1,664,000 2,115,000 Additional paid-in capital 8,143,000 7,876,000 Retained earnings 39,793,000 79,969,000 Shares in escrow; 257,064 in 1998 and 184,300 in 1997 (4,794,000) (3,449,000) Accumulated other comprehensive loss (87,000) (431,000) ----------- ----------- 44,719,000 86,080,000 ----------- -----------
$95,444,000 $92,468,000 =========== ===========
The accompanying notes are an integral part of these statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the year ended --------------------------------------- January 2, January 3, December 31, 1999 1998 1996 ----------- ----------- ----------- Net sales $94,811,000 $96,991,000 $84,394,000 Cost of sales 32,579,000 32,933,000 29,973,000 ----------- ----------- ----------- Gross profit 62,232,000 64,058,000 54,421,000
Operating expenses: Selling & marketing 20,478,000 17,969,000 15,897,000 Engineering, general & administrative 16,658,000 12,664,000 10,414,000 Research & development 8,135,000 6,380,000 5,324,000 Write-down of digital imaging assets 6,694,000 - - ----------- ----------- ----------- 51,965,000 37,013,000 31,635,000 ----------- ----------- ----------- Operating income 10,267,000 27,045,000 22,786,000
Other income 425,000 267,000 447,000 ----------- ----------- ----------- Income before income taxes 10,692,000 27,312,000 23,233,000
Income taxes 3,830,000 9,290,000 7,852,000 ----------- ----------- -----------
NET INCOME $ 6,862,000 $18,022,000 $15,381,000 =========== =========== ===========
Earnings per share:
Basic $.33 $.85 $.73 ==== ==== ==== Diluted $.32 $.85 $.73 ==== ==== ====
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND OTHER INFORMATION
X-Rite, Incorporated and its wholly-owned subsidiaries (individually "X-Rite" and with its subsidiaries the "Company") are engaged in the development, manufacture and sale of technically sophisticated instrumentation and user-friendly software solutions for a wide variety of color-critical applications, including corporate branding, medical diagnostics, consumer products and on-line commerce. Principal markets for the Company's products include the paint, plastic, textile, packaging, photographic, graphic arts and medical industries, in addition to commercial and research laboratories. Based on the nature of its products, the Company considers its business to be a single operating segment.
Products are sold worldwide through the Company's own sales personnel and through independent sales representatives. The Company is headquartered in Grandville, Michigan and has other domestic operations in New Hampshire, Massachusetts and California. In addition, the Company has locations in Germany, England, Hong Kong, Czech Republic, France and Japan. All manufacturing is done in the United States. Total assets employed by the Company's foreign subsidiaries are less than 10% of consolidated assets.
Geographic sales information is as follows:
1998 1997 1996 ----------- ----------- ----------- Domestic sales: U.S. operations $62,875,000 $65,180,000 $55,711,000 International sales: U.S. operations' export sales to unaffiliated customers 14,628,000 22,010,000 20,901,000 Foreign subsidiary sales 17,308,000 9,801,000 7,782,000 ----------- ----------- ----------- 31,936,000 31,811,000 28,683,000 ----------- ----------- ----------- $94,811,000 $96,991,000 $84,394,000 =========== =========== ===========
No single customer accounted for more than 10% of total net sales in 1998, 1997 or 1996.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of X-Rite, Incorporated and its wholly-owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Effective January 1, 1997, the Company adopted a 4-4-5 quarterly accounting cycle to accommodate manufacturing schedules that were developed to improve customer service. Accordingly, 1998 ended on January 2, 1999 and 1997 ended on January 3, 1998, whereas 1996 ended on December 31. The Company's 1998 and 1997 results from operations would have been approximately the same if the years had ended on December 31 rather than on January 2, 1999 and January 3, 1998.
Cash and Cash Equivalents: The Company considers all highly liquid financial instruments with maturities of three months or less when purchased to be cash equivalents.
Short-Term Investments: Short-term investments consist primarily of municipal bonds and tax-exempt industrial revenue bonds. All of the Company's short-term investments are stated at the amortized cost, which approximates market, and are classified as available for sale. Short-term investments at January 2, 1999 include securities with original maturities of greater than three months and remaining maturities of less than one year.
Inventories: Inventories are stated at the lower of cost, determined on a first-in first-out basis, or market. Components of inventories are summarized as follows:
January 2, January 3, 1999 1998 ----------- ----------- Raw materials $ 6,575,000 $ 5,083,000 Work in process 5,623,000 3,081,000 Finished goods 3,673,000 6,836,000 ----------- ----------- $15,871,000 $15,000,000 =========== ===========
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Plant, Equipment and Depreciation: Plant and equipment are stated at cost and include expenditures for major renewals and betterments. Maintenance and repairs that do not extend the lives of the respective assets are charged to expense as incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives of the related assets. Estimated depreciable lives are as follows: buildings and improvements, 5 to 40 years; machinery and equipment, 3 to 10 years; and furniture and office equipment, 3 to 10 years.
Software Development Costs: Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility is achieved. After technological feasibility is achieved, any additional development costs are capitalized and amortized using the straight-line method over a three-year period.
The Company capitalized $1,248,000, $1,344,000 and $1,151,000 of software development costs during 1998, 1997 and 1996, respectively. Amortization expense was $1,107,000, $992,000 and $731,000 in 1998, 1997 and 1996, respectively. The net capitalized software development costs included in other assets were $2,076,000 and $1,935,000 as of January 2, 1999 and January 3, 1998, respectively.
Costs in Excess of Net Assets Acquired and Other Long-Lived Assets: Costs in excess of net assets acquired resulted primarily from the 1995 acquisition of Labsphere, Inc. and the 1997 acquisition of the assets of Light Source Computer Images, Inc. (see Note 8). The costs associated with the Labsphere acquisition are being amortized using the straight-line method over twenty years. The costs resulting from the Light Source acquisition were written off in 1998 (see Note 8). Accumulated amortization of excess acquisition costs was $2,254,000 and $2,014,000 at January 2, 1999 and January 3, 1998, respectively.
The Company evaluates the recoverability of its long-lived assets by determining whether unamortized balances can be recovered through undiscounted future operating cash flows over the remaining lives of the assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 121. If the sum of the expected future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value. The estimated fair value is determined by discounting the expected future cash flows at a rate that would be required for a similar investment with like risks.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Income Taxes: The provision for income taxes is based on earnings reported in the financial statements. Deferred income taxes are recognized for all temporary differences between tax and financial reporting.
Revenue Recognition: Revenue is recognized when a product is shipped or a service is performed.
Advertising Costs: Advertising costs are charged to operations in the period incurred and totaled $2,389,000, $2,053,000 and $1,806,000 in 1998, 1997 and 1996, respectively.
Per Share Data: Basic earnings per share ("EPS") is computed by dividing net income by the weighted-average number of common shares outstanding in each year. 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 of the last three years:
1998 1997 1996 ---------- ----------- ----------- Numerators: Net income numerators for both basic and diluted EPS $6,862,000 $18,022,000 $15,381,000 ========== =========== =========== Denominators: Denominators for basic EPS- Weighted-average common shares outstanding 20,913,400 21,122,347 21,031,534 Potentially dilutive shares- Shares subject to redemption agreements 159,522 - - Stock options 58,630 166,204 163,933 ---------- ---------- ---------- Denominators for diluted EPS 21,131,552 21,288,551 21,195,467 ========== ========== ==========
During the fourth quarter of 1998, certain shares subject to redemption agreements (see Note 7) were considered dilutive.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Per Share Data, continued: Certain exercisable stock options were not included in the calculations of diluted EPS because option prices were greater than average market prices for the periods presented. The number of stock options outstanding at the end of each year presented not included in the calculation of diluted EPS and the ranges of exercise prices were 583,000 and $14.50 - $19.50 in 1998, 98,500 and $18.38 - $19.50 in 1997, and 158,500 and $18.00 - $19.50 in 1996.
Foreign Currency Translation: Foreign currency balance sheet accounts are translated into United States dollars at the exchange rate in effect at year end. Income statement accounts are translated at the average rate of exchange in effect during the year. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in the statements of shareholders' investment.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates; however, management believes that any subsequent revisions to estimates used would not have a material effect on the financial condition or results of operations of the Company.
NOTE 3--COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting of comprehensive income and its components. Comprehensive income consisted of net income and foreign currency translation adjustments, which are presented in the accompanying statements of shareholders' investment. Comprehensive income totaled $7,206,000, $17,703,000 and $15,270,000 in 1998, 1997 and 1996, respectively.
NOTE 4--REVOLVING CREDIT AGREEMENT
The Company maintains a revolving line of credit agreement with a bank which provides for maximum borrowings of $20,000,000 with interest at 1.5% over the "Effective Federal Funds Rate" (4.8% at January 2, 1999). The borrowings are unsecured and no compensating balances are required by the agreement. There were no significant borrowings under this agreement during 1998, 1997 or 1996.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--INCOME TAXES
The provision for income taxes consisted of the following:
1998 1997 1996 ---------- ---------- ---------- Current- Federal $6,111,000 $8,689,000 $8,126,000 State 220,000 259,000 241,000 Foreign 128,000 155,000 2,000 ---------- ---------- ---------- 6,459,000 9,103,000 8,369,000 Deferred- Federal (2,629,000) 187,000 (517,000) ---------- ---------- ---------- $3,830,000 $9,290,000 $7,852,000 ========== ========== ==========
The provisions for income taxes reflected effective tax rates of 35.8%, 34.0% and 33.8% in 1998, 1997 and 1996, respectively, compared to the U.S. statutory rate of 35%. The Company's effective tax rates were impacted by state income taxes, goodwill amortization and benefits from a foreign sales corporation.
Major components of the Company's deferred tax assets and liabilities are as follows: January 2, January 3, 1999 1998 ---------- ---------- Assets: Inventory reserves $1,076,000 $ 808,000 Accounts receivable reserves - 210,000 Amortization of intangible assets 2,554,000 - Financial accruals and reserves not currently deductible 563,000 522,000 ---------- ---------- $4,193,000 $1,540,000 ========== ========== Liabilities: Depreciation $ 197,000 $ 310,000 Software development costs 727,000 678,000 Other 129,000 41,000 ---------- ---------- $1,053,000 $1,029,000 ========== ==========
Cash expended for income taxes was $5,733,000, $9,733,000 and $8,459,000 in 1998, 1997 and 1996, respectively.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--EMPLOYEE BENEFIT AND STOCK PLANS
The Company maintains 401(k) retirement savings plans for the benefit of substantially all full-time U.S. employees. Participant contributions are matched by the Company based on applicable matching formulas. The Company's matching expense for the plans was $473,000, $336,000 and $278,000 in 1998, 1997 and 1996, respectively.
The Company may sell up to 1,000,000 shares of common stock to its employees under an employee stock purchase plan. Eligible employees who participate purchase shares quarterly at 85% of the market price on the date purchased. During 1998, 1997 and 1996, employees purchased 21,798, 17,201 and 12,923 shares, respectively. The weighted average fair value of shares purchased in 1998 was $13.01. At January 2, 1999, 873,621 shares were available for future purchases.
The Company has two stock option plans covering 2,800,000 shares of common stock. These plans permit options to be granted to key employees and the Company's Board of Directors. Options are granted at market price on the date of grant and are exercisable based on vesting schedules determined at the time of grant. No options are exercisable after ten years from the date of grant. At January 2, 1999, 1,815,093 shares were available for future granting. A summary of shares subject to options follows:
1998 1997 1996 ------------------ ---------------- ---------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Prices Shares Prices Shares Prices --------- -------- ------- -------- ------- -------- Outstanding at beginning of year 890,100 $14.33 723,300 $13.30 578,500 $12.07 Granted 221,500 15.10 259,500 15.90 197,000 16.17 Exercised (7,000) 4.06 (61,700) 8.08 (36,196) 7.05 Canceled (11,500) 14.93 (31,000) 15.98 (16,004) 18.43 --------- ------- ------- Outstanding at end of year 1,093,100 14.54 890,100 14.33 723,300 13.30 ========= ======= ======= Exercisable at end of year 943,100 14.25 735,600 14.09 606,300 12.90 ======= ======= ======= Weighted average fair value of options granted $6.23 $6.40 $6.56 ===== ===== =====
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--EMPLOYEE BENEFIT AND STOCK PLANS, continued
A summary of stock options outstanding at January 2, 1999 follows:
Outstanding Exercisable --------------------------------- ----------------- Weighted Weighted Average Weighted Average Remaining Average Exercise Contractual Exercise Price Ranges Shares Price Life (Years) Shares Price --------------- --------- -------- ------------ ------- -------- $ 2.47 - $ 7.03 76,000 $ 5.92 2.6 76,000 $ 5.92 10.13 - 12.00 219,100 11.12 4.9 219,100 11.12 13.00 - 15.00 288,000 13.97 8.5 229,000 14.11 15.63 - 19.52 510,000 17.63 7.6 419,000 17.48 --------- ------- 1,093,100 14.54 6.9 943,100 14.25 ========= =======
The Company accounts for its employee stock purchase plan and its stock option plans under APB Opinion 25; therefore, no compensation costs are recognized when employees purchase stock or when stock options are authorized, granted or exercised. If compensation costs had been computed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share (basic and diluted) would have been reduced by approximately $924,000 and $.04 in 1998, $1,109,000 and $.05 in 1997, and $860,000 and $.04 in 1996.
For purposes of computing compensation costs of stock options granted, the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted- average assumptions: 1998 1997 1996 ----------- ----------- ----------- Dividend yield .6% .5% .5% Volatility 40% 35% 36% Risk-free interest rates 5.5% - 5.6% 5.8% - 6.8% 6.2% - 6.7% Expected term of options 5 years 5 years 5 years
Black-Scholes is a widely accepted stock option pricing model, however, the ultimate value of stock options granted will be determined by the actual lives of options granted and future price levels of the Company's common stock.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--EMPLOYEE BENEFIT AND STOCK PLANS, continued
The Company also has a restricted stock plan covering 400,000 shares of common stock. Shares awarded under this plan entitle the shareholder to all rights of common stock ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period. The restriction period is determined by a committee, appointed by the Board of Directors, but in no event shall have a duration period in excess of ten years. No shares were awarded in 1998, 1997 or 1996. At January 2, 1999, there were 345,200 shares available for future awards.
NOTE 7--FOUNDERS STOCK REDEMPTION AGREEMENTS
During 1998, the Company entered into agreements 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. 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 January 2, 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 January 2, 1999 was less than $10.
NOTE 8--ACQUISITION & WRITE-DOWN OF DIGITAL IMAGING ASSETS
In May of 1997 the Company acquired substantially all the assets of Light Source Computer Images, Inc. ("Light Source") for $6,955,000 in cash. Light Source is a California-based producer of scanning, imaging and print optimization software. The acquisition was accounted for under the purchase method of accounting and was funded by proceeds from sales of short-term investments.
X-RITE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--ACQUISITION & WRITE-DOWN OF DIGITAL IMAGING ASSETS, continued
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 has paid $4,638,000 in cash into an escrow fund which is equal to the maximum contingent cash consideration that could be earned by the sellers if such sales goals are realized. The escrow fund payment is not included in the acquisition price stated in the preceding paragraph. If any contingent payments are made, those amounts will be accounted for as additional costs of the acquired assets and amortized over the remaining lives of the assets. As of January 2, 1999, no additional consideration had been paid from the escrow fund.
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 January 2, 1999, the escrow fund held 257,064 shares of X-Rite common stock at a cost of $4,769,000, plus $25,000 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.
During the third quarter of 1998, increased competition in the digital imaging business and a continued rapid decline in the demand for certain digital imaging instruments, software and technology led the Company to reevaluate its digital imaging markets and product lines, which forced the recognition of an asset impairment loss. The non-cash, pre-tax write down of $6,694,000 ($4,351,000 after tax) consisted of $6,294,000 in goodwill, and $400,000 in fixed assets and other capitalized start-up costs associated with the 1997 Light Source asset acquisition.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors
Information relating to directors appearing under the caption "Election of Directors" in the definitive Proxy Statement for the 1999 Annual Meeting of shareholders and filed with the Commission is incorporated herein by reference.
(b) Officers
Information relating to executive officers is included in this report in the last section of Part I under the caption "Executive Officers of the Registrant."
(c) Compliance With Section 16(a)
Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 appearing under the caption "Compliance With Reporting Requirements" in the definitive Proxy Statement for the 1999 Annual meeting of Shareholders and filed with the Commission is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation" contained in the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders and filed with the Commission is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the captioned "Securities Ownership of Management" contained in the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders and filed with the Commission is hereby incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
Part IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements, all of which are set forth in Item 8, are filed as a part of this report:
Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Investment Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(b) No reports on Form 8-K were filed for the 3-month period ended January 2, 1999.
(c) See Exhibit Index located on page 37.
(d) All other schedules required by Form 10-K Annual Report have been omitted because they were inapplicable, included in the notes to the consolidated financial statements, or otherwise not required under the instructions contained in Regulation S-X.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 25, 1999 /s/ Ted Thompson ---------------------------------- Ted Thompson, Chairman and Chief Executive Officer
March 25, 1999 /s/ Duane Kluting ---------------------------------- Duane Kluting, Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below on this 17th day of March, 1999, by the following persons on behalf of the Registrant and in the capacities indicated.
Each director of the Registrant whose signature appears below, hereby appoints Ted Thompson and Duane Kluting, and each of them individually as his attorney-in-fact to sign in his name and on his behalf as a Director of the Registrant, and to file with the Commission any and all amendments to this report on Form 10-K to the same extent and with the same effect as if done personally.
/s/ Ted Thompson /s/ Peter M. Banks - ---------------------------------- ---------------------------------- Ted Thompson, Director Dr. Peter M. Banks, Director
/s/ Stanley W. Cheff /s/ Richard E. Cook - ---------------------------------- ---------------------------------- Stanley W. Cheff, Director Richard E. Cook, Director
/s/ James A. Knister - ---------------------------------- ---------------------------------- Dr. Marvin G. DeVries, Director James A. Knister, Director
/s/ Ronald A. VandenBerg - ---------------------------------- ---------------------------------- Rufus S. Teesdale, Director Ronald A. VandenBerg, Director
/s/ Charles Van Namen - ---------------------------------- Charles Van Namen, Director
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)
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 as filed with the Michigan Department of Consumer & Industry Services
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)
EXHIBIT INDEX - --------------------------------------------------------------------------
*10(d) Employment Agreement dated April 17,1998 between the registrant and Richard E. Cook
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)
21 Subsidiaries of the registrant
23 Consent of independent accountants
27 Financial Data Schedule
Exhibit 3(d)
_________________________________________________________________________ | | | MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU | |_________________________________________________________________________| |Date Received| | (FOR BUREAU USE ONLY) | | | | FILED | | DEC 21 1998 | | DEC 28 1998 | |_____________|__________| Administrator | | | | MI DEPARTMENT OF CONSUMER & INDUSTRY SERVICES | | | |CORPORATION SECURITIES & LAND DEVELOPMENT BUREAU| | | | | |_____________|__________|_________________ 12/21/1998 CSALKELD | | Name J. Terry Moran | Trans 01048597 | | Varnum, Riddering, Schmidt & Howlett LLP | 091366 | |__________________________________________| 273318 | | Address | Total $10.00 | | P.O. Box 352 | Crps Org & Filing & LLB art | |__________________________________________| | | City State Zip | EFFECTIVE DATE: | | Grand Rapids, Michigan 49501-0352 | | |__________________________________________|______________________________| DOCUMENT WILL BE RETURNED TO NAME AND ADDRESS INDICATED ABOVE
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION For use by Domestic Corporations (Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the undersigned corporation executes the following Certificate:
_________________________________________________________________________ | | | 1. The present name of the corporation is: X-RITE, INCORPORATED | | | | | | 2. The identification number assigned by the Bureau is: 091-366 | | | | | | 3. The location of its registered office is: | | | | 3100 44th Street, S.W. Grandville, Michigan 49428 | | (Street Address) (City) (Zip Code) | | | |_________________________________________________________________________|
_________________________________________________________________________ | | | 4. Subsections B and C of Article IV of the Articles of Incorporation | | are hereby amended to read as follows: | | | | ARTICLE IV. | | | | B. Size of Board. The Board of Directors shall consist of at least | | six, but not more than nine members and the specific number of | | directors to be elected or appointed within such limits shall be as | | determined by the Board of Directors from time to time. | | | | | | C. Classification of Board. Directors shall be divided into three | | classes and each class shall be as nearly equal in number as possible | | to the other classes. At each annual meeting of shareholders, directors| | shall be elected to serve for a term which expires at the third annual | | meeting of the shareholders following the meeting of shareholders at | | which the director is elected, or for such shorter term where necessary | | to balance the number of directors in each of the three classes of | | directors. | |_________________________________________________________________________|
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE BOTH.
a.___ The foregoing amendment to the Articles of Incorporation was duly adopted on the ____ day of ___________, 1998, in accordance with the provisions of the Act by the unanimous consent of the incorporator(s) before the first meeting of the Board of Directors or Trustees.
Signed this ___day of________, 1998.
________________________________ (Signature)
b._X_ The foregoing amendment to the Articles of Incorporation was duly adopted on the 20th day of May, 1998. The amendment: (check one of the following)
_X_ was duly adopted in accordance with Section 611(2) of the Act by the vote of the shareholders if a profit corporation, or by the vote of the shareholders or members if a nonprofit corporation, or by the vote of directors if a nonprofit corporation organized on a non-stock directorship basis. The necessary votes were cast in favor of the amendment.
___ was duly adopted by the written consent of all the directors pursuant to Section 525 of the Act and the corporation is a nonprofit corporation organized on a non-stock directorship basis.
___ was duly adopted by the written consent of the shareholders or members having not less than the minimum number of votes required by statute in accordance with Section 407(1) and (2) of the Act if a nonprofit corporation, and Section 407(1) of the Act if a profit corporation. Written notice to shareholders who have not consented in writing has been given. (Note: Written consent by less than all of the shareholders or members is permitted only if such provision appears in the Articles of Incorporation.)
___ was duly adopted by the written consent of all the shareholders or members entitled to vote in accordance with Section 407(3) of the Act if a non-profit corporation, and Section 407(2) of the Act if a profit corporation.
Signed this ___31st___ day of November, 1998
By _____/s/Ted Thompson__________________________ Ted Thompson, Chairman and CEO
Exhibit 10(d)
EMPLOYMENT AGREEMENT
THIS IS AN AGREEMENT dated April 17, 1998 ("Agreement"), between X-RITE, INCORPORATED, 3100 44th Street, SW, Grandville, Michigan 49418 ("X-Rite"), and RICHARD E. COOK of 1207 Sorrento Court, Holland, Michigan 49423 ("Executive").
IN CONSIDERATION OF THE MUTUAL PROMISES CONTAINED HEREIN, THE PARTIES AGREE:
1. Employment. X-Rite hereby employs Executive, and Executive hereby accepts employment, on the terms and subject to the conditions set forth herein.
2. Term of Agreement. The term of this Agreement shall commence as of the date set forth above, for an initial term commencing June 2, 1998, and extending through May 31, 2001. After expiration of the initial term, Executive's employment shall be annually renewed under the terms of Paragraph 6 of this Agreement, unless and until terminated pursuant to Paragraph 7 of this Agreement.
3. Compensation. During Executive's employment under this Agreement, Executive shall be paid an annual salary, annual bonuses, and other fringe benefits, as determined from time to time by the Board of Directors of X-Rite or a committee thereof, subject to the following:
a. Salary. During 1998, Executive's salary hereunder shall be $250,000 on an annualized basis. Salary shall be paid periodically in accordance with X-Rite's normal payroll practices.
b. Bonus. Executive will be entitled to participate in any bonus or other incentive compensation program now or hereafter applicable to X-Rite's executives; provided, however, that Executive's bonus for fiscal 1998 shall be $58,333.
c. Insurance and Other Fringe Benefits. Executive shall be offered such insurance and other fringe benefits including, but not limited to, medical, dental, long term disability, group life insurance, and accidental death and dismemberment insurance, employee stock purchase plan, and 401(k) retirement plan pursuant to X-Rite's plans and policies in effect from time to time for its executives.
d. Vacation. Executive will be entitled to four weeks vacation and will remain at that level until his X-Rite service entitles him to additional vacation under X-Rite's normal vacation policy.
e. Leased Car Program. During Executive's employment under this Agreement, Executive will be provided an automobile consistent with X-Rite's executive automobile program.
f. Stock Options. Executive will be entitled to participate in any stock option incentive program now or hereafter applicable to X-Rite's executives; provided, however, that Executive's stock options for fiscal 1998 shall be for 7,500 shares at a strike price based upon the closing price for the Company's common stock on the day before the commencement of the initial term of this Agreement.
g. Deferred Compensation. Executive and X-Rite shall enter into a Rabbi Trust or equivalent deferred compensation arrangement.
4. Duties. Executive shall be employed as President and Chief Operating Officer of X-Rite, with duties and responsibilities consistent with that office. During the period of his employment by X-Rite, Executive shall devote substantially his entire business time and energy to the business and affairs of X-Rite and will use his best efforts to perform his duties as an executive of X-Rite. During the period of Executive's employment pursuant to this Agreement, Executive shall not be required to relocate or to spend any substantial amount of time outside of the area of Western Michigan, except for business travel obligations.
5. Loyalty and Confidentiality. Executive agrees that during his employment pursuant to this Agreement he will not, without the prior approval of the Board of Directors of X-Rite, either for himself or on behalf of any other person, firm or corporation, directly or indirectly divert or attempt to divert from X-Rite any business opportunity or business whatsoever, or attempt to negatively influence any X-Rite customers or potential X-Rite customers with whom Executive may have dealings. Executive shall forever hold in strictest confidence and shall not use or disclose any confidential information, technique, process, development, or experimental work, trade secret, customer lists, or other secret and confidential matter relating to the products, services, sales, employees, or business of X-Rite, except as such disclosure or use may be required in connection with Executive's work for X-Rite. Upon termination of his employment with X-Rite, Executive shall deliver to X-Rite any and all materials relating to X-Rite's business including, without limitation, all customer lists, keys, financial information, business notes, business plans, credit cards, memoranda, specifications, and documents. Executive shall not retain any photocopies or other facsimiles of such materials.
6. Renewal. At the end of the initial period of employment provided in Paragraph 2 of this Agreement, such period of employment shall be automatically extended for regular periods of one year each (commencing at the end of the previous period whether it be the initial period or one of the one-year extension periods) unless either
X-Rite or Executive shall notify the other in writing no later than ninety (90) days prior to the end of the period then current (whether it is the initial period or one of the extension periods) that it or he does not choose to extend this period of employment.
7. Termination. Notwithstanding the terms of Paragraphs 2 and 6 of this Agreement, Executive's employment may be terminated as follows:
a. Death. If Executive, while in the employ of X-Rite, shall die prior to the expiration of the term of employment, this Agreement shall terminate upon Executive's death, which for purposes of this Agreement shall be deemed to have occurred on the last day of the month in which his death occurs.
b. Disability. If Executive shall be unable to substantially perform his duties for a period of nine (9) successive months by reason of illness or other similar incapacity or disability, this Agreement may be terminated as of the end of any calendar month following such nine months by X-Rite, based upon a determination that Executive is disabled and by notice in writing to that effect to Executive. Any determination as to whether Executive is disabled shall be made by a licensed physician selected by agreement of X-Rite and Executive or, if they cannot agree upon a physician, then by a majority of a panel of three (3) licensed physicians, one selected by X-Rite, one selected by Executive, and the third selected by the first two.
c. Termination for Cause. X-Rite shall have the right to terminate Executive's employment for "Cause." For purposes of this agreement, "Cause" shall be limited to:
(i) failure by Executive to substantially perform assigned duties consistent with Paragraph 4 above (other than any failure resulting from an illness or other similar incapacity or disability), or to comply with policies applicable to all executives, after a demand for substantial performance or compliance is made to Executive which specifically identifies the manner in which it is alleged that Executive has not substantially performed or complied;
(ii) engaging by Executive in misconduct which is materially injurious to X-Rite, monetarily or otherwise; or
(iii) engaging by Executive in conduct involving dishonesty or fraud or his conviction of a crime involving moral turpitude.
d. Termination by Executive for Good Reason. Executive shall have the right to terminate his employment with X-Rite for "Good Reason" by providing written notice of the termination to X-Rite within thirty (30) days of the occurrence of any of the following. For purposes of the Agreement, "Good Reason" shall mean:
(i) without Executive's express written consent, the assignment to Executive of duties materially inconsistent with Executive's position, duties, responsibilities and status with X-Rite;
(ii) a reduction by X-Rite in Executive's monthly salary as in effect on the date of this Agreement or as the same may be increased from time to time;
(iii) the failure by X-Rite to continue in effect any benefit or compensation plan, life insurance plan, health and accident plan, or disability plan in which Executive is participating (or plans providing Executive with substantially similar benefits), the taking of any action by X-Rite which would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such plans, or deprive Executive of any material fringe benefit enjoyed by Executive, or the failure by X-Rite to provide Executive with the number of paid vacation days to which Executive is then entitled on the basis of years of service with X-Rite in accordance with X-Rite's normal vacation policy in effect on the date of this Agreement; provided, however, that X-Rite may do any of the foregoing in connection with any action that affects all executives in substantially the same manner.
(iv) the failure of X-Rite to obtain the agreement of any successor to assume and perform this Agreement as contemplated in Paragraph 11 hereof; or
(v) a material breach by X-Rite of its obligations under this Agreement.
e. Termination by Notice. X-Rite and Executive shall each have the right to terminate their employment relationship for reasons other than those provided above in this Paragraph 7 by giving written notice to the other party specifying the date of termination.
8. Severance Pay.
a. Severance Pay After Change In Control. If a change in control of X-Rite has occurred, Executive's employment may be terminated by written notice to X-Rite at any time within one (1) year after such change in control, and Executive shall be entitled to receive Severance Pay for the period specified in Subsection 8(e) below. For purposes of this Paragraph 8, a change in control of X-Rite shall mean a sale of all or substantially all of the assets of X-Rite, a merger or consolidation involving X-Rite where X-Rite is not the surviving corporation, or a majority of the directors then serving on the Board of Directors of X-Rite are not Continuing Directors. As used herein "Continuing
Directors" means directors who are serving at the date of the commencement of this Agreement and directors who are subsequently nominated by the affirmative vote of two-thirds of all directors then holding office.
b. Severance Pay After Termination By Notice or For "Good Reason." If Executive's employment shall be terminated by X-Rite by written notice under Subparagraph 7(e) of this Agreement or by the provision of ninety (90) days written notice of intent not to renew Executive's employment under Paragraph 6 of this Agreement, or if Executive's employment is terminated by Executive under Subparagraph 7(d) of this Agreement, Executive shall be entitled to receive Severance Pay for the period specified in Subsection 8(e) below.
c. Severance Pay After Termination For Cause. If Executive's employment shall be terminated on account of death, disability, or cause, or by the Executive by written notice under subparagraph 7(e), then X-Rite shall have no severance pay obligations to Executive under this Agreement.
d. Description of Severance Pay. Severance Pay shall be the following:
(i) monthly severance payments equal to Executive's monthly salary for the last full month immediately preceding his termination, plus one-twelfth (1/12) of Executive's bonus for the calendar year immediately preceding his termination;
(ii) maintenance by X-Rite in full force and effect for the continued benefit of Executive, of the hospital/medical insurance coverage under X-Rite's current group health insurance policy, or the coverage under any subsequent group insurance policy or plan as furnished to X-Rite's management personnel, or the equivalent of such benefit furnished directly to Executive for the entire time period required under COBRA;
e. Severance Payment. Severance Pay shall be payable for that number of whole months remaining between the effective date of termination of Executive's employment and the end of the thirty- sixth month after the date of this Agreement; provided, however, that the payment period shall never be less than twelve (12) months.
f. Mitigation of Severance Benefits. Executive shall not be required to mitigate the amount of any payments of severance benefits provided in this Paragraph 8 by seeking other employment or otherwise, nor shall the amount of any payment provided in this Paragraph 8 be reduced by any compensation earned by Executive as a result of his employment with another employer after termination, or otherwise.
9. Covenant Not to Compete. Executive agrees that during his employment pursuant to this Agreement and for a period of two (2) years thereafter, Executive shall not: (i) participate directly or indirectly, in the ownership, management, financing or control of any business which is, or is about to become, a competitor of X-Rite or its subsidiaries; (ii) provide consulting services or serve as an officer or director for any such business; or (iii) solicit, encourage or facilitate employees of X-Rite to terminate their employment with X-Rite in favor of any other employer. Executive is not prohibited by this Paragraph, however, from owning stock of any corporation whose shares are publicly traded so long as that ownership is in no case more than five percent (5%) of such shares of the corporation.
10. Executive Liability Insurance Coverage and Indemnification. Nothing in this Agreement shall deprive Executive, both during and subsequent to the termination of his employment pursuant to this Agreement, of the benefits of X-Rite's existing or hereafter obtained executive liability insurance coverage, subject to the terms and conditions of such coverage, nor of any right to indemnification under X-Rite's Articles of Incorporation and Bylaws or under any indemnification agreement between X-Rite and Executive, subject to the limitations on indemnification set forth therein.
11. Successors. X-Rite shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of X-Rite, by agreement in form and substance reasonably satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that X-Rite would be required to perform it if no such succession had taken place. Failure of X-Rite to obtain such agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle Executive to compensation from X-Rite in the same amount and on the same terms as Executive would be entitled hereunder if Executive terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. As used in this Agreement, "X-Rite" shall mean X-Rite and any successor to X-Rite's business and/or assets as aforesaid which executed and delivers the agreement provided for in this Paragraph 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.
12 Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his heirs and personal representatives. If Executive should die while any amount would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the beneficiary designated by Executive in a writing delivered to X-Rite, or if there be no such designated beneficiary, to his estate.
13. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to Executive at the address set forth on the first page of this Agreement, or to X-Rite at its principal executive offices to the attention of the Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
14. Modification or Waiver. No provisions of this Agreement may be amended, modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by Executive and such officer as may be specifically designated by the Board of Directors of X-Rite. No waiver by either party to this Agreement at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party, nor any compliance with any such condition or provision by the party not required to so perform, shall be deemed a waiver of similar or dissimilar provisions or conditions at that time or at any prior or subsequent time. Failure to insist upon strict compliance with any of the terms, covenants or conditions of this Agreement shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed waiver or relinquishment of such right or power at any other time.
15. Governing Law. This Agreement was entered into in the state of Michigan and shall be construed and interpreted in accordance with the laws of the state of Michigan as applied to contracts made and to be performed in the state of Michigan. Any action arising out of or to enforce this Agreement must be brought in courts in the state of Michigan. The parties consent to the jurisdiction of the courts in the state of Michigan and to service of process by registered mail, return receipt requested, or by any other manner provided by law.
16. Arbitration. Except for matters arising pursuant to Section 9 of this Agreement, any dispute between the parties with respect to this Agreement shall be resolved exclusively by arbitration in accordance with the rules for commercial arbitration promulgated by the American Arbitration Association. The arbitration shall be conducted in Grand Rapids, Michigan and the award shall be final and binding upon the parties and enforceable in any court of competent jurisdiction.
17. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
18. Miscellaneous. No agreements or representations, oral or otherwise, express or implied, with respect to the specific subject matter hereof have been made by either party which are not set forth expressly in this Agreement.
IN WITNESS WHEREOF, X-Rite has caused this Agreement to be executed by a duly authorized corporate officer and Executive has executed this Agreement as of the date and year first above written.
X-RITE, INCORPORATED
By /s/ Ted Thompson ----------------------------------- Ted Thompson, Chairman/CEO
/s/ Richard E. Cook ------------------------------------- Richard E. Cook, Executive
Exhibit 21
X-RITE, INCORPORATED LIST OF SUBSIDIARIES
1. X-Rite International, Inc., a Barbados Corporation, is a wholly owned subsidiary of X-Rite, Incorporated, being utilized as a foreign sales corporation.
2. X-Rite Holdings, Inc., a U.S. Corporation, is a wholly owned subsidiary of X-Rite, Incorporated, being utilized as a stockholder of certain foreign subsidiaries.
3. X-Rite GmbH, a German Corporation, is wholly owned by X-Rite, Incorporated and X-Rite Holdings, Inc., and being utilized as a sales and service office.
4. X-Rite Asia Pacific Limited, a Hong Kong Corporation, is wholly owned by X-Rite, Incorporated and X-Rite Holdings, Inc., and being utilized as a sales office.
5. X-Rite Ltd, a United Kingdom Corporation, is wholly owned by X-Rite, Incorporated and being utilized as a sales and service office.
6. X-Rite MA, Incorporated, a U.S. Corporation, is wholly owned by X-Rite, Incorporated and being utilized as a sales and service office.
7. OTP, Incorporated, a U.S. Corporation, is wholly owned by X-Rite, Incorporated and was used to execute a real estate transaction.
8. Labsphere, Inc., a U.S. Corporation, is wholly owned by X-Rite, Incorporated and is a manufacturer of light measurement systems and related proprietary materials.
9. Labsphere Ltd, a United Kingdom Corporation, is wholly owned by Labsphere, Incorporated and being utilized as a sales office.
10. Light Source Acquisition Company, is wholly by X-Rite, Incorporated and was utilized in 1997 to acquire substantially all the assets of Light Source Computer Images, Inc.
11. X-Rite Mediterranee SARL, a French Corporation, is wholly owned by X-Rite, Incorporated and X-Rite Holdings, Inc., and being utilized as a sales and service office.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our report dated January 27, 1999, included in this Form 10-K, into X-Rite, Incorporated's previously filed Registration Statement File Numbers 33-29288, 33-29290, 33-82258 and 33-82260.
/s/ Arthur Andersen LLP
Grand Rapids, Michigan, March 25, 1999.