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1
SECURITIES & EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Act of
1934 (Fee required) for the fiscal year ended January 2, 1999, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) for the transition period from
_______________to _________________
Commission file number 0-14800
X-RITE, INCORPORATED
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(Exact name of registrant as specified in charter)
Michigan 38-1737300
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
3100 44th Street, SW, Grandville, MI 49418
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 534-7663
--------------
Securities registered pursuant to Section 12(b) of the Act: (none)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 per share
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 1, 1999, 21,186,587 shares of the registrant's common stock,
par value $.10 per share, were outstanding. The aggregate market value of
the common stock held by non-affiliates of the registrant (i.e., excluding
shares held by executive officers, directors and control persons as defined
in Rule 405, 17 CFR 230.405) on that date was $120,911,003 computed at the
closing price on that date.
Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III. Exhibit Index is
located at Page 37.
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
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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.
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(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.
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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.
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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.
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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.
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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. LEGAL PROCEEDINGS
The Company is not presently engaged in any material litigation within the
meaning of Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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.
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PART II
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.
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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-
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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.
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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.
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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.
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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.
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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.
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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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant's market risk sensitive instruments do not subject the
Registrant to material market risk exposures.
-16-
17
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
-17-
18
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
-18-
19
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.
-19-
20
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.
-20-
21
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.
-21-
22
X-RITE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Shares in Income Shareholders'
Stock Capital Earnings Escrow (Loss) Investment
---------- ---------- ----------- ----------- ------------- ------------
BALANCES,
JANUARY 1, 1996 $2,102,000 $6,388,000 $50,781,000 $ - $ (1,000) $59,270,000
Net income - - 15,381,000 - - 15,381,000
Cash dividends declared
of $.10 per share - - (2,103,000) - - (2,103,000)
Issuance of 45,619 shares
of common stock under
employee benefit plans 5,000 520,000 - - - 525,000
Translation adjustment - - - - (111,000) (111,000)
---------- ---------- ----------- ----------- --------- -----------
BALANCES,
DECEMBER 31, 1996 2,107,000 6,908,000 64,059,000 - (112,000) 72,962,000
Net income - - 18,022,000 - - 18,022,000
Cash dividends declared
of $.10 per share - - (2,112,000) - - (2,112,000)
Issuance of 84,556 shares
of common stock under
employee benefit plans 8,000 968,000 - - - 976,000
Purchase of 184,300 shares
by escrow fund - - - (3,449,000) - (3,449,000)
Translation adjustment - - - - (319,000) (319,000)
---------- ---------- ----------- ----------- --------- -----------
BALANCES,
JANUARY 3, 1998 2,115,000 7,876,000 79,969,000 (3,449,000) (431,000) 86,080,000
Net income - - 6,862,000 - - 6,862,000
Cash dividends declared
of $.10 per share - - (2,092,000) (25,000) - (2,117,000)
Issuance of 28,798 shares
of common stock under
employee benefit plans 3,000 267,000 - - - 270,000
Purchase of 72,764 shares
by escrow fund - - - (1,320,000) - (1,320,000)
Value of shares subject to
redemption agreements (454,000) - (44,946,000) - - (45,400,000)
Translation adjustment - - - - 344,000 344,000
---------- ---------- ----------- ----------- --------- -----------
BALANCES,
JANUARY 2, 1999 $1,664,000 $8,143,000 $39,793,000 $(4,794,000) $ (87,000) $44,719,000
========== ========== =========== =========== ========= ===========
The accompanying notes are an integral part of these statements.
-22-
23
X-RITE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended
---------------------------------------
January 2, January 3, December 31,
1999 1998 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,862,000 $18,022,000 $15,381,000
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 5,836,000 5,488,000 4,265,000
Provision for doubtful accounts 266,000 220,000 268,000
Deferred income taxes (2,629,000) 187,000 (517,000)
Write-down of digital imaging assets 6,694,000 - -
Other (15,000) 172,000 -
Changes in operating assets and liabilities
net of effects from acquisitions:
Accounts receivable 1,189,000 (2,944,000) (5,532,000)
Inventories (623,000) 2,000 (2,089,000)
Other current and noncurrent assets 892,000 (831,000) (70,000)
Accounts payable 163,000 (548,000) 661,000
Other accrued liabilities (693,000) 191,000 834,000
----------- ----------- -----------
Net cash provided by operating activities 17,942,000 19,959,000 13,201,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investments 2,030,000 2,042,000 667,000
Proceeds from sales of investments 5,323,000 9,223,000 1,600,000
Purchases of investments (16,056,000) (11,653,000) (8,406,000)
Capital expenditures (4,176,000) (4,288,000) (3,122,000)
Acquisitions, less cash acquired (382,000) (6,960,000) -
Deposit to escrow fund in connection
with Light Source acquisition - (4,638,000) -
Initial investment in founders' life insurance (3,091,000) - -
Purchases of other assets (1,279,000) (1,344,000) (1,151,000)
Other investing activities 113,000 40,000 44,000
----------- ----------- -----------
Net cash used for investing activities (17,518,000) (17,578,000) (10,368,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,117,000) (2,112,000) (2,103,000)
Issuance of common stock 270,000 976,000 525,000
----------- ----------- -----------
Net cash used for financing activities (1,847,000) (1,136,000) (1,578,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 151,000 (24,000) -
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,272,000) 1,221,000 1,255,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,808,000 1,587,000 332,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,536,000 $ 2,808,000 $ 1,587,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-23-
24
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.
-24-
25
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
=========== ===========
-25-
26
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.
-26-
27
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.
-27-
28
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.
-28-
29
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.
-29-
30
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
===== ===== =====
-30-
31
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.
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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.
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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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
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. 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. 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.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
Part IV
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.
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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
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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)
-37-
38
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
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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) |
| |
|_________________________________________________________________________|
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_________________________________________________________________________
| |
| 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. |
|_________________________________________________________________________|
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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
-41-
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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.
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43
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
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44
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:
-44-
45
(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
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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.
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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.
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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.
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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
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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.
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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.
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