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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26240
ALIGN-RITE INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
CALIFORNIA 95-4528353
(State of other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
Organization)
</TABLE>
2428 ONTARIO STREET, BURBANK, CA 91504
(Address of principal executive officer) (Zip Code)
Registrant's telephone number, including area code: (818) 843-7220
<TABLE>
<S> <C>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE
ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE
ACT: Common Stock, $.01 par value
</TABLE>
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 May 31, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $47,521,889 based upon the
average bid and ask prices of the Common Stock as reported on the Nasdaq
National Market on such date. Shares of Common Stock held by officers, directors
and holders of more than ten percent of the outstanding Common Stock have been
excluded from this calculation because such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of May 31, 1996, the Registrant had outstanding 4,367,405 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement, which will be
filed with the Securities and Exchange Commission within 120 days after March
31, 1996 are incorporated by reference under Part III.
This Report on Form 10-K includes 71 pages with the Index to Exhibits
located on pages 36 to 37.
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION
PART I
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PAGE NO.
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1. Business........................................................................... 2
2. Properties......................................................................... 5
3. Legal Proceedings.................................................................. 6
4. Submission of Matters to a Vote of Security Holders................................ 6
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters.......... 7
6. Selected Financial Data............................................................ 8
7. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations.........................................................................
8. Financial Statements and Supplementary Data........................................ 14
9. Changes in and Disagreements with Auditors on Accounting and Financial 31
Disclosure.........................................................................
PART III
10. Directors and Executive Officers of the Registrant................................. 32
11. Executive Compensation and Related Matters......................................... 32
12. Security Ownership of Certain Beneficial Owners and Management..................... 32
13. Certain Relationships and Related Transactions..................................... 32
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 33
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ITEM 1. BUSINESS
GENERAL
The business structure is comprised of Align-Rite International, Inc.
("ARII"), a California corporation, incorporated on April 27, 1995, and its
wholly-owned subsidiaries Align-Rite International Limited ("ARI"), Align-Rite
Corporation ("ARC"), and Align-Rite Limited ("ARL"). ARII and its subsidiaries
are collectively referred to herein as the "Company". All significant
intercompany accounts and transactions have been eliminated.
The principal activity of ARII and ARI is that of holding companies into
which their respective subsidiaries are consolidated. On July 21, 1995 the
Company completed an initial public offering of Common Stock, as part of which
all of the outstanding Ordinary Shares of ARI were exchanged for the Common
Stock of ARII. The Company manufactures quality photomasks in the United States
and Europe. Photomasks are required for the manufacture of virtually all
integrated circuits, which are essential components in consumer and industrial
electronic products. Photomasks are precision photographic quartz or glass
plates containing microscopic images of integrated circuits. The Company images
integrated circuit patterns onto photomasks using electron beam and optical
micro-lithography methods at its manufacturing facilities in Burbank, California
and Bridgend, Wales. The Company anticipates it will begin using laser beam
photomask imaging technology during fiscal year 1997.
The Company's principle executive offices are located at 2428 Ontario
Street, Burbank, California, 91504. The Company's telephone number is (818)
843-7220.
INDUSTRY OVERVIEW
Photomasks are a key element in the manufacture of semiconductors.
Photomasks are used as master images to transfer integrated circuit patterns
onto semiconductor wafers during the fabrication of integrated circuits and, to
a lesser extent, other types of electronic components, such as thin-film
magnetic recording heads, advanced printed circuit boards, and flat panel
displays. Each circuit design normally consists of a series of eight to
twenty-five separate circuit patterns, each of which is imaged onto a separate
photomask. The completed series of photomasks are then used to successively
image each separate circuit pattern onto a single semiconductor wafer.
Photomasks are primarily manufactured by independent manufacturers, with
some production by captive manufacturers. Captive manufacturers are considered
the internal photomask manufacturing operations of semiconductor businesses
which produce photomasks almost exclusively for their own use in the fabrication
of integrated circuits. Since 1987, there has been an industry trend to divest
or close captive photomask operations of semiconductor manufacturers in the
United States and Europe. The Company believes this trend is attributable to (i)
substantial ongoing capital investment requirements, (ii) significant operating
and maintenance costs, (iii) the presence of reliable, independent manufacturers
of photomasks in the United States and Europe and (iv) a trend by semiconductor
manufacturers to focus on the core components of their businesses. As a result,
the Company believes that the share of the market served by independent
manufacturers of photomasks has successively increased each year since 1987.
The purchasers of photomasks consist primarily of semiconductor
manufacturers and integrated circuit design businesses in the United States,
Europe and the Pacific Rim. The semiconductor industry has experienced rapid
growth in recent years primarily due to increased applications for integrated
circuits such as cellular telephones, pagers, automotive control systems,
medical products, computers and printers, electronically controlled industrial
equipment, satellites, security systems and consumer appliances. The Company
estimates that total photomask production in the United States and Europe
exceeded $425 million in 1995 with continued expansion into 1996.
The number of significant independent photomask manufacturers (companies
with estimated annual photomask sales in excess of $5.0 million) in the United
States and Europe has decreased from ten in 1987 to four (including the Company)
in 1996 as a result of industry consolidation and closing of operations. The
Company believes that this reduction was primarily due to competitive pressures
on photomask manufacturers
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during this period and that further significant industry consolidation is
unlikely. These competitive pressures were the result of the implementation of
sophisticated software programs used to reduce errors in integrated circuit
design, which had the effect of reducing the number of photomask iterations
normally required to create a working integrated circuit, as well as shortening
photomask delivery cycles. The shortened photomask delivery cycles also reduced
the need for backup photomask sets.
The Company believes that, beginning in 1993, independent manufacturers of
photomasks experienced increased demand as a result of three principal factors;
(i) the increase in semiconductor design activity for standard products; (ii)
the increased complexity of integrated circuits which require more photomasks
per integrated circuit design; and (iii) growing demand for application specific
integrated circuits ("ASICs"), each of which requires a separate set of
photomasks.
SALES AND MARKETING
The Company continues to develop long-term customer relationships primarily
with semiconductor manufacturers and other electronics companies whose annual
independent photomask expenditures range from $250,000 to $8,000,000. An
important market segment for the Company is ASIC manufacturers, as they
typically require a higher volume of photomasks and use integrated circuit
pattern sizes which are now, and are expected to remain for several years,
within the Company's current technological capabilities. In addition, the
Company focuses its marketing efforts on analog, linear and mixed signal
integrated circuit manufacturers, as well as manufacturers of other electronic
components such as thin film magnetic recording heads and advanced printed
circuit boards. The Company believes these segments, which require a substantial
volume of photomasks, represent growing markets within the electronics industry.
The Company targets various aspects of customer businesses including second
sourcing opportunities. Second sourcing is the standard practice in the
semiconductor industry of maintaining at least two sources for critical
materials used in the manufacturing process, including photomasks. Initially,
the Company seeks to become a qualified supplier. After demonstrating its
reliability, the Company then pursues a greater percentage of the customer's
business.
The Company also targets corporate outsourcing opportunities. These
opportunities are presented by: (i) semiconductor manufacturers which operate
captive photomask manufacturing operations and which outsource a portion of
their photomask requirements in order to have a reliable second source of
supplies, (ii) captive manufacturers which outsource during peak demand periods
rather than invest in additional manufacturing capacity; and (iii) semiconductor
manufacturers concentrating on the core components of their business which have
closed or reduced the scale of their internal photomask manufacturing
operations.
The Company has taken advantage of increased opportunities to sell optical
photomasks as the number of independent competitors serving this market segment
has declined. While the overall size of the market for optical photomasks has
declined over a number of years and is expected to continue to decline, the
Company experienced an increase in sales of optical photomasks in 1996. The
Company believes that this market segment will continue to present substantial
sales opportunities for the next several years.
The Company conducts its sales and marketing activities at its facilities
in Burbank, California and Bridgend, Wales. The Company maintains sales and
technical service centers in California, Colorado, Connecticut, France, The
Netherlands and Switzerland. The Company may expand its international presence
by opening additional sales and technical service centers in other strategic
international locations.
See Note 13 of Notes to Consolidated Financial Statements for a summary of
net sales to the Company's largest customers.
STRATEGIC ALLIANCE PARTNERS
The Company has formed strategic alliances with Harris Advanced Imaging
Group, a captive photomask manufacturer located in Florida, and Innova, Inc. a
photomask manufacturer in Hinchu, Taiwan. These alliances allow each partner to
(i) exploit economies of scale for raw material purchases through the use of
collective bargaining with photomask raw material suppliers, (ii) provide
additional manufacturing resources
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by allowing for mutual use of each other's photomask-making services, (iii)
share process technology and (iv), in the case of Innova, Inc., enter into a new
market, the Pacific Rim.
PRODUCTS AND MANUFACTURING PROCESS
Photomasks are manufactured by the Company in accordance with the
integrated circuit design patterns provided on a confidential basis by its
customers. These proprietary circuit design patterns are typically developed
using sophisticated computer aided design systems. The final design of each
integrated circuit results in a series or set of precise individual circuit
patterns to be imaged onto a series of typically eight to twenty-five separate
photomasks. The series or set of patterned photomasks replicates the customer's
integrated circuit design. The photomasks are then used to successively image a
unique pattern from each photomask in the set onto a semiconductor wafer. This
imaging is typically accomplished on a wafer imaging system by transferring
light throughout the photomask onto a micron-thick photosensitive polymer or
"photoresist" that is spread over the surface of the semiconductor wafer.
Chemicals are then used to wash away either the light-exposed or the unexposed
areas of the photoresist on the wafer depending upon the needs of the
semiconductor manufacturer. The imaged integrated circuit pattern on the
photoresist is then transferred to the surface of the wafer by a chemical
etching process.
ELECTRON BEAM IMAGING
The Company currently images photomasks using electron beam and optical
micro-lithography methods. When utilizing the electron beam photomask imaging
process, the photomask patterns are produced from the customer's integrated
circuit design data following the conversion of this data into compatible
electron beam system language. The electron beam photomask imaging system uses a
single electron beam scanning system to write the integrated circuit pattern
onto the photomask in an environmentally controlled vacuum chamber. The electron
beam photomask imaging process makes it possible to achieve extremely small
patterns, finer line resolution, and precise pattern size and pattern placement
tolerances. The demand for photomasks using electron beam technology has
increased as integrated circuits have evolved and require higher pattern
complexity and smaller pattern sizes. The Company currently operates five
electron beam photomask imaging systems, three in the United States and two in
the United Kingdom. A sixth system has been acquired and is being installed in
the United States. The Company anticipates that this system will be operational
by July 1996.
The Company recently announced a $10 million expansion plan to increase
European capacity. The expansion of its European photomask manufacturing
capabilities, when completed, should increase the Company's European capacity by
more than 40%. The $10 million expansion will include the installation of a
state-of-the-art manufacturing and inspection system and cleanroom facility.
OPTICAL IMAGING
In the optical photomask imaging process, magnetic tapes containing the
integrated circuit design patterns are used to "drive" a micro-lithographic
imaging system, known as a pattern generator, which "writes" the pattern onto a
reticle using a columnated mercury exposure system. The reticle is typically a
single image of the integrated circuit pattern five times larger than the actual
size of the finished circuit. The reticle image is then photographically reduced
to the final size of the circuit and printed as many as several hundred times on
a master photomask by an optical photo-repeater. The master photomask may be
used to project the circuit patterns onto semiconductor wafers or may be used to
make reprints which are used to contact print the circuit patterns onto the
wafer. Photomasks manufactured using optical processes are typically less
expensive but are also less precise and have lower resolution than electron beam
imaged photomasks. The Company has a number of pattern generators and
photo-repeaters at each of its manufacturing facilities.
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LASER BEAM IMAGING
In addition to electron beam and optical micro-lithography photomask
manufacturing methods, the Company is entering the laser beam photomask imaging
technology arena. Laser beam photomask imaging systems typically utilize eight
laser beams which simultaneously image the circuit design patterns onto a
photomask. The primary benefit of these systems is shorter imaging and
processing times, and it requires a less complex chemical process as compared to
electron beam photomask imaging systems. Laser beam photomask imaging systems
permit photomask manufacturers to address a segment of the market that
frequently require response times of approximately twenty-four hours or less
between order placement and shipment of the finished photomasks. The Company is
currently awaiting the delivery of its first laser beam photomask imaging system
which is anticipated to be operational by the end of the second quarter of
fiscal year 1997.
MATERIALS AND SUPPLIES
The raw materials utilized by the Company include photoblanks, which are
high precision quartz or glass plates, pellicles, which are transparent
cellulose membranes that protect the surface of the photomask, and electronic
grade chemicals which are used during the manufacturing process.
The Company does not currently have long-term supply agreements with any of
its raw material suppliers. As a relatively small number of quality quartz or
glass producers exist, there can be no assurance that the Company will not
experience difficulties in the future in obtaining the timely or necessary
supply of raw materials. Any difficulty or delay in obtaining an adequate supply
of raw materials or any significant increase in the price of raw materials could
have a material adverse effect on the Company's operations. In addition,
fluctuations in foreign currency exchange rates could have a material adverse
effect on the price of raw materials purchased outside of the United States.
COMPETITION
The photomask industry is highly competitive. In the United States, the
Company competes primarily with E.I. duPont de Nemours and Co., Inc. ("DuPont"),
and Photronics, Inc. and with other significantly smaller independent
manufacturers. In Europe, the Company primarily competes with Compugraphics
International Limited, DuPont, and Photronics, Inc., who recently acquired two
relatively small European operations. The Company also competes with certain
semiconductor companies who manufacture photomasks primarily for their own
internal needs.
The Company's ability to compete primarily depends upon its technical
capabilities, the capacity of its manufacturing facilities, the consistency of
product quality, product pricing and the timeliness of product delivery. The
Company also believes that its proximity to customers is an important
competitive factor in certain market segments.
EMPLOYEES
As of March 31, 1996, the Company employed approximately 220 people on a
full time basis. None of the Company's employees are currently representated by
a labor union or other labor organization. The Company believes that its
employee relations are good.
ITEM 2. PROPERTIES
The Company's main executive, administrative and manufacturing offices are
located in a 33,000 square foot facility in Burbank, California under several
leases, all of which expire in the year 2000. The Company maintains the right to
renew these leases for additional five year terms. In addition, the Company
currently operates its foreign operations from an 18,000 square foot facility
located in Bridgend, Wales under a lease which expires in 2006.
The Company also has approximately 10,000 square feet of office space under
various leases and rental agreements in multiple locations throughout the United
States and Europe in support of its sales force and technical support staff.
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The Company believes that its existing and planned facility additions are
adequate for its current and short term manufacturing needs. The Company also
believes additional space would be readily available at commercially reasonable
terms, should the Company find a need to expand its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings the adverse
outcome of which would have a material effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
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James L. Mac Donald.................................. 49 Chairman of the Board, President and
Chief Executive Officer
Jeffery R. Lee....................................... 51 Executive Vice President, Chief
Operating Officer and Director
Petar N. Katurich.................................... 33 Chief Financial Officer, Secretary
and Director
</TABLE>
JAMES L. MAC DONALD founded the Company in 1970 and since then has served
as its Chairman of the Board, President and Chief Executive Officer. Mr. Mac
Donald is a Director of the British American Chamber of Commerce and a Fellow of
the Institute of Directors.
JEFFERY R. LEE is Executive Vice President and Chief Operating Officer and
has been employed by the Company since 1980. Mr. Lee manages the United Kingdom
operations of the Company. From 1976 to 1989, Mr. Lee was General Manager of
Transmask, an independent photomask manufacturing company. Mr. Lee is a Fellow
of the Institute of Directors.
PETAR N. KATURICH has served as Chief Financial Officer of the Company
since October 1992. From 1991 to 1992, Mr. Katurich was employed by a division
of Cooke Media Group. From 1985 to 1990, Mr. Katurich was employed at Coopers &
Lybrand L.L.P. Mr. Katurich is a Certified Public Accountant.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the trading symbol "MASK". The Company's Common Stock began trading on July 21,
1995 upon completion of an initial public offering of the Company's Common
Stock. The range of daily closing prices on a per share basis for the Company's
Common Stock from July 21, 1995 to March 31, 1996 was:
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YEAR ENDED MARCH 31, 1996: HIGH LOW
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Fourth quarter........................................ $11.125 $ 8.25
Third quarter......................................... $ 14.00 $ 10.75
Second quarter........................................ $ 18.00 $13.875
First quarter......................................... -- --
</TABLE>
The reported closing sales price of the Company's Common Stock on the
Nasdaq National Market on March 29, 1996 was $10.375. As of March 31, 1996 there
were 73 holders of record of the Company's Common Stock.
The Company has authorized Common Stock of $.01 par value and had 4,346,415
shares outstanding as of March 31, 1996.
The Company has not issued any Preferred Stock. The Company has elected not
to pay any cash dividends on its Common Stock as the Company currently intends
to retain its earnings to fund the development and growth of its business. The
Company, at this time, does not anticipate declaring or paying any cash
dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data set forth below at March
31, 1996 and 1995 and for each of the three years in the period ended March 31,
1996, are derived from the audited financial statements of the Company included
herein. The selected consolidated financial data as of March 31, 1994 and for
the year ended March 31, 1993 are derived from the audited consolidated
financial statements of the Company which are not included herein. The selected
consolidated financial data as of March 31, 1993, 1992 and for the year ended
March 31, 1992 have been derived from Align-Rite International Limited's
financial statements audited in accordance with United Kingdom generally
accepted accounting principles. The conversion of such financial statements to
United States generally accepted accounting principles and into United States
dollars is, however, unaudited. The information set forth below should be read
in conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
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FISCAL YEARS ENDED MARCH 31,
IN (000'S), EXCEPT PER SHARE DATA
-----------------------------------------------
1996 1995 1994 1993 1992
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales........................................ $33,290 $25,404 $20,217 $16,064 $14,928
Cost of sales.................................... 20,689 15,887 13,833 11,655 10,889
------- ------- ------- ------- -------
Gross profit................................... 12,601 9,517 6,384 4,409 4,039
Selling, general and administrative
expenses(1).................................... 5,571 4,515 3,407 3,373 3,138
------- ------- ------- ------- -------
Income from operations......................... 7,030 5,002 2,977 1,036 901
Interest (income) expense........................ (345) 151 339 406 639
Other expense (income)........................... 20 49 (44) -- (8)
------- ------- ------- ------- -------
Income before income tax provision, minority
interest, cumulative effect of change in
accounting principle and extraordinary
item........................................ 7,355 4,802 2,682 630 270
Income tax provision............................. 2,219 1,216 1,229 517 319
Minority interest................................ 172 162 158 157 5
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Income (loss) before cumulative effect of
change in accounting principle and
extraordinary item.......................... 4,964 3,424 1,295 (44) (54)
Cumulative effect of change in accounting for
income taxes(2)................................ -- -- 434 -- --
------- ------- ------- ------- -------
Income (loss) before extraordinary item........ 4,964 3,424 1,729 (44) (54)
Extraordinary item -- tax benefit resulting from
utilization of operating loss carryforwards.... -- -- -- 371 233
------- ------- ------- ------- -------
Net income....................................... $ 4,964 $ 3,424 $ 1,729 $ 327 $ 179
======= ======= ======= ======= =======
Per share information:(3)
Income (loss) before cumulative effect of
change in accounting for income taxes and
extraordinary
item........................................ $ 1.20 $ 1.01 $ 0.51 $ (0.02) $ (0.02)
Cumulative effect of accounting change......... -- -- 0.17 -- --
Extraordinary item............................. -- -- -- 0.15 0.09
------- ------- ------- ------- -------
Net income..................................... $ 1.20 $ 1.01 $ 0.68 $ 0.13 $ 0.07
======= ======= ======= ======= =======
Weighted average shares outstanding.............. 4,143 3,477 2,534 2,496 2,496
======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $12,707 $ 3,861 $ 2,981 $ 1,676 $ 1,561
Working capital.................................. 17,254 3,849 3,031 395 (782)
Property and equipment, net...................... 8,517 6,506 4,349 5,238 5,405
Total assets..................................... 30,422 17,261 12,452 10,085 9,983
Long-term debt, less current portion............. -- 1,905 2,752 3,168 4,584
Total shareholders' equity....................... 25,285 5,977 2,376 634 79
</TABLE>
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(1) Includes a nondeductible expense of $264,000 recorded in connection with the
grant of 211,250 options in August 1994.
(2) The Company adopted SFAS No. 109 "Accounting for Income Taxes," effective
April 1, 1993. See Note 2 of Notes to Consolidated Financial Statements.
(3) See Note 2 of Notes to Consolidated Financial Statements describing the
calculation of per share information. ARI has never declared or paid cash
dividends on its Ordinary Shares.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company was incorporated on April 27, 1995. Immediately prior to the
initial public offering on July 21, 1995, the Company exchanged shares of its
Common Stock for all of the outstanding capital stock of ARI, and consequently,
became the holding company of ARI. Historical financial information and
comparisons for the fiscal years ended March 31, 1995 and 1994 relate to the
historical financial data of Align-Rite International, Plc. All references in
this section to 1996, 1995 and 1994 relate to the fiscal years ended March 31,
1996, 1995 and 1994, respectively.
OVERVIEW
The Company has experienced increases in sales of both electron beam and
optical photomasks over each of the last three years. The increase in net sales
of electron beam photomasks was primarily attributable to the growing demand of
its customers and an increase in the number of electron beam photomask imaging
systems operated by the Company to accommodate the increased demand for electron
beam photomasks. The growth in sales of electron beam photomasks has exceeded,
and the Company believes will continue to exceed, the growth in its sales of
optical photomasks. Sales of electron beam photomasks have represented the
majority of net sales in each of the Company's last three fiscal years. The
overall size of the market for optical photomasks has declined over a number of
years, and is expected to continue to decline. The Company's sales of optical
photomasks have represented a minority portion of net sales but have increased
in each of the last three years. The increasing sales in a declining market has
been attributable, in part, to the continued marketing efforts put forth by the
Company. The Company's current plans are to continue to serve the optical
photomask market.
The Company's net sales of its United States operations increased from
$14.9 million in 1994 to $22.9 million in 1996 and net sales of its United
Kingdom operations increased from $5.4 million in 1994 to $10.4 million in 1996.
During the same periods, the income before provision for income taxes, minority
interest and cumulative effect of accounting change of its United States
operations increased from $2.3 million to $4.5 million and the income before
provision for income taxes, minority interest and cumulative effect of
accounting change of its United Kingdom operations increased from $0.7 million
to $2.5 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Operations as a percentage of net
sales for the periods indicated:
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH
31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of sales....................................................... 62.1 62.5 68.4
----- ----- -----
Gross profit........................................................ 37.9 37.5 31.6
Selling, general & administrative expenses.......................... 16.7 17.8 16.9
----- ----- -----
Income from operations.............................................. 21.2 19.7 14.7
Interest (income) expense........................................... (1.0) 0.6 1.7
Other expense and minority interest................................. 0.5 0.8 0.5
----- ----- -----
Income before provision for income taxes............................ 21.6 18.3 12.5
Provision for income taxes(1)....................................... 6.6 4.8 3.9
----- ----- -----
Net income.......................................................... 14.9% 13.5% 8.6%
===== ===== =====
</TABLE>
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(1) Includes the cumulative effect of a change in accounting for income taxes
from the adoption of SFAS No. 109 in 1994 of $434,496.
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1996 Compared with 1995
Net Sales. Net sales were $33.3 million during 1996, an increase of 31.1%
compared to net sales of $25.4 million during 1995. The rapid growth in the
semiconductor sector has increased the demand for photomasks. The Company has
benefitted from a steady increase in orders for both electron beam and optical
photomasks from existing customers as well as attracting new customers. The
increase in net sales is attributable to increased orders at both the United
States and United Kingdom facilities.
Net sales of the United States operations were $22.9 million or 36.3%
higher compared to prior year net sales of $16.8 million, while net sales of the
United Kingdom operations were $10.4 million or 20.9% higher compared to prior
year net sales of $8.6 million.
Gross Profit. Gross profit increased to $12.6 million during 1996, an
increase of 32.6%, as compared to $9.5 million during 1995. As a percentage of
net sales, gross profit increased slightly to 37.9% in 1996, compared to 37.5%
in 1995. The slight increase was attributable to better utilization of assets,
product mix and, to a lesser extent, economies of scale.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5.6 million during 1996, an increase of
24.4% compared to $4.5 million in 1995. As a percentage of net sales, selling,
general, and administrative expenses were 16.7% in 1996 compared to 17.8% in
1995. Compensation expense of $264,000 was recorded in connection with the grant
of options in 1995 which did not recur in 1996. Absent the compensation expense
recorded as a result of the grant of options, selling, general and
administrative expenses would have remained constant as a percentage of sales of
16.7% in 1995.
Interest Expense. Interest expense decreased to $113,000 in 1996 compared
to $338,000 in 1995. The decrease is attributable to the repayment of debt out
of the proceeds from the Company's initial public offering in July 1995.
Interest Income. Interest income increased to $458,000 in 1996 compared to
$187,000 in 1995. The increase is attributable to higher cash balances on
deposit as a result of the net proceeds of $13.6 million from the Company's
initial public offering in July 1995.
Provision for Income Taxes. The effective income tax rate increased to
30.2% in 1996 from 25.3% in 1995. The increase in the effective income tax rate
is attributable to a benefit from net operating loss carryforwards utilized
during 1995, which were not available to the Company in 1996, and a decrease in
the tax valuation allowance in 1995 due to the improved operating performance in
the United Kingdom.
1995 Compared with 1994
Net Sales. Net sales were $25.4 million during 1995, an increase of 25.7%
compared to net sales of $20.2 million during 1994. Net sales increased
primarily due to an increased volume of orders for electron beam and optical
photomasks from existing customers and, to a lesser extent, orders from new
customers. Foreign sales increased 60.1% or $3.2 million compared to 1994, while
domestic sales increased 13.0% or $2.0 million compared to 1994. The increase in
foreign sales was primarily a result of 1995 being the first full fiscal year of
operation of an electron beam photomask imaging system in the Company's
Bridgend, Wales facility.
Gross Profit. Gross profit increased to $9.5 million during 1995, an
increase of 48.4% compared to $6.4 million during 1994. Gross profit as a
percentage of net sales increased to 37.5% in 1995 compared to 31.6% in 1994.
The increase was primarily due to sales volume increases and increased capacity
which resulted in fewer instances where capacity limitations made it difficult
to address fluctuations in the level of customer orders on a day to day basis.
In 1995, subcontracting costs were $391,000 as compared to $698,000 in 1994 due
to increased capacity. In 1995, the Company also experienced lower overall
photoblank costs due to improved manufacturing yields and volume discounts with
significant suppliers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.5 million during 1995, an increase of
32.4% compared to $3.4 million in 1994. The increase was primarily due to an
increase in variable costs associated with higher sales levels as well as the
hiring of additional employees, including a Director of International Business
Development and a Director of Technology. In
10
<PAGE> 12
addition, a nondeductible compensation expense of $264,000 was recorded in
connection with the grant of options in August 1994 with exercise prices at less
than fair market value at the date of grant. As a percentage of net sales,
selling, general and administrative expenses increased to 17.8% in 1995 compared
to 16.9% in 1994. Absent the compensation expense recorded as a result of the
grant of options, selling, general and administrative expenses would have
decreased as a percentage of net sales to 16.7% in 1995.
Interest Expense. Interest expense decreased to $338,000 in 1995 compared
to $386,000 in 1994. The decrease reflects a reduction in the level of
outstanding indebtedness to a United States bank and to certain Institutional
Shareholders partially offset by higher interest rates, and a rescheduling in
January 1994 of capital lease debt in the United Kingdom.
Provision for Income Taxes. The effective income tax rate decreased to
25.3% in 1995 from 45.8% in 1994. The decrease was primarily due to the
utilization of net operating loss carryforwards to offset higher income of the
United Kingdom operations as a percentage of the Company's consolidated income,
and a decrease in the tax valuation allowance resulting from improved operating
performance in the United Kingdom operations. At March 31, 1995, the Company had
approximately $439,000 of foreign operating loss carryforwards with no
expiration date. The extent to which the Company is able to utilize foreign net
operating loss carryforwards and other deductible temporary differences could
materially impact the Company's effective income tax rate in the future.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased $8.8 million to $12.7
million at March 31, 1996, an increase of 225.6% compared to $3.9 million at
March 31, 1995. The increase was primarily a result of net proceeds of $13.6
million received from the Company's initial public offering. This increase was
partially offset by capital expenditures of $3.9 million.
Net cash provided by operating activities was $3.6 million in 1996,
compared to $5.0 million in 1995. Operating cash flows in 1996 reflect higher
net income and higher non cash charges related to depreciation offset by
increases in accounts receivable and inventories and a reduction in accounts
payable balances.
Accounts receivable increased approximately 28.3% from $4.6 million at the
end of 1995, to $5.9 million at the end of 1996. The primary factor contributing
to the increase in accounts receivable was the 31.1% growth in net sales. During
1996, inventories increased by approximately 50.0% to $1.8 million at the end of
1996, compared to $1.2 million at the end of 1995. The higher levels of
inventory were on hand to support the 1996 sales growth and the expected
continued increases in sales demand for these products in 1997. Accounts payable
decreased 17.6% from $3.4 million at the end of 1995 to $2.8 million at the end
of 1996. The reduction in accounts payable was to take advantage of cash
discounts and to strengthen the Company's position with suppliers.
In 1996, cash used in investing activities totaled $3.8 million compared to
$3.4 million in 1995. The Company's capital expenditures during 1996 were
primarily for equipment which will support and complement new process
development and higher end products. In March 1996, the Company announced a $10
million expansion plan to increase European capacity. The Company intends to
increase its capacity in Europe by more than 40% with the installation of
state-of-the-art manufacturing equipment, inspection systems, and cleanroom
facilities which include an Orbot Photomask Inspection System, Etec Core 2564
Laserbeam Lithography System, and a Nikon 6i Metrology System along with
additional manufacturing and inspection cleanrooms. There can be no assurance as
to when, or if the expansion will occur or as to its future success. The Company
expects to finance its planned 1997 capital additions both in the United States
and Europe with existing cash and cash equivalent balances together with cash
generated by its operations.
In 1996, financing activities provided cash totaling $9.0 million as
compared to $786,000 being used in 1995. In 1996, cash from financing activities
was provided by the sale of 1.3 million shares of the Company's Common Stock in
the Company's initial public offering, which provided net proceeds of $13.6
million. The proceeds from the Company's initial public offering were used in
part to pay down debt, obligations under
11
<PAGE> 13
capital leases and the redemption of preferred stock in the amounts of $1.7
million, $1.9 million and $832,000, respectively.
Management believes that funds generated from operations together with its
cash and cash equivalents will be sufficient to meet its normal operating
requirements during the coming year. If these funds prove to be insufficient, or
if new opportunities require the Company to supplement its financial resources,
the Company may use established credit lines with its corporate banker to seek
additional financing or pursue other sources of financing; however, there can be
no assurance other sources of financing will be available at commercially viable
terms, if at all.
Foreign Operations and Inflation
Foreign operations are subject to certain risks inherent to conducting
business abroad, including price and currency exchange controls, fluctuation in
the relative value of currencies and restrictive governmental actions. Changes
in the relative value of currencies occur from time to time and may, in certain
instances, have a material effect on the Company's results of operations. The
Company does not hedge foreign currency risks, and the effects of these risks
are difficult to predict. The risks associated with foreign operations have not,
to date, had a material adverse impact on the Company's liquidity and results of
operations. There can, however, be no assurance that such risks will not have a
material adverse impact on the Company's liquidity and results of operations in
the future. See Note 14 of Notes to Consolidated Financial Statements for
geographical financial data concerning the Company's operations.
The effects of inflation are experienced by the Company through increases
in the cost of labor, services and raw materials. In general, these costs have
been anticipated by periodic increases in the prices of its products. The
Company does not believe, however, that inflation has had a material effect on
the results of operations in the past. There can be no assurance that the
Company's results will not be materially affected by inflation in the future.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 on accounting for
the impairment of long lived assets. SFAS No. 121 requires the Company to review
the carrying amounts of its long lived assets and certain identifiable
intangible assets for impairment. If it is determined the carrying amounts of
the assets is not recoverable, the Company is required to recognize an
impairment loss. The accounting standard will be implemented in the first
quarter of the fiscal year ending March 31, 1997 and is not expected to
materially impact the Company's financial position or results of operations.
During October 1995, the FASB issued SFAS No. 123 on accounting for stock
based employee compensation plans which must be implemented for fiscal years
beginning on or after December 15, 1995. The Company will elect the disclosure
only alternative of SFAS No. 123 beginning with its annual financial statements
for the year ending March 31, 1997.
FORWARD LOOKING STATEMENTS
The preceding "Business" section and this "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" section contain
various "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, which represent the Company's reasonable
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results and financial position to
differ materially, including the following: the Company's ability to manufacture
photomasks using laser beam imaging technology by the second quarter of 1997;
the Company's belief that the new electron beam imaging system to be installed
at its Burbank, California facility will be fully operational by July 1996; the
Company's belief that total photomask production in the United States and Europe
will continue to expand in 1996; the Company's belief that outsourcing of
photomask manufacturing will continue in the future; the Company's belief that
the sales of electron beam photomasks will continue to exceed the
12
<PAGE> 14
sales of optical photomasks; the Company's belief that the optical photomask
market will continue to decline yet will continue to present substantial sales
opportunities for the next several years; the Company's potential expansion in
certain international markets and any corresponding increase in manufacturing
capacity; the Company's expectation that its capital expenditures for the next
fiscal year will total approximately $10.0 million and will be principally used
to purchase capacity enhancing manufacturing equipment; and the Company's
expectation that it will be able to finance such capital expenditures and any
other expansion with existing funds and funds generated from operations.
The Company cautions that the above statements are further qualified by
important factors that could cause the Company's actual operating results to
differ materially from those in the forward looking statements, including,
without limitation, the following: a change in economic conditions in the
Company's markets which could adversely affect the level of demand for the
Company's products; failure of the Company to anticipate, respond to or utilize
changing technologies used in the production of photomasks; greater than
anticipated competition; manufacturing difficulties or capacity limitations;
shortage of raw materials; delays in the delivery of recently purchased
manufacturing equipment to the Company; greater than anticipated capital
investment requirements; and currency fluctuations or changes in political
conditions with respect to the Company's foreign operations.
13
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... 14
Financial Statements:
Consolidated Balance Sheets at March 31, 1996 and 1995........................... 15
For the years ended March 31, 1996, 1995 and 1994:
Consolidated Statements of Operations............................................ 16
Consolidated Statements of Shareholders' Equity.................................. 17
Consolidated Statements of Cash Flows............................................ 18
Notes to Consolidated Financial Statements............................................ 19
Supporting Financial Statement Schedule Covered by the Foregoing Report of Independent
Accountants:
Schedule II. Valuation and Qualifying Accounts...................................... 29
</TABLE>
Schedules other than those listed above have been omitted since they are
not required, are not applicable, or the required information is shown in the
financial statements or related notes.
14
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Align-Rite International, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Align-Rite International, Inc. and subsidiaries (the
"Company") listed in the index on page 13 of this Form 10-K. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 consolidated financial position of the Company as
of March 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended March 31, 1996,
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for income taxes effective April 1, 1993.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
May 28, 1996
15
<PAGE> 17
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $12,706,957 $ 3,861,116
Accounts receivable, less allowance for doubtful accounts of
$152,633 and $58,105 in 1996 and 1995, respectively.......... 5,940,248 4,616,287
Inventories..................................................... 1,816,233 1,231,048
Prepaid and other current assets................................ 1,128,289 457,676
Deferred taxes.................................................. 301,000 582,000
----------- -----------
Total current assets.................................... 21,892,727 10,748,127
Property and equipment, net....................................... 8,517,052 6,506,114
Other assets...................................................... 11,813 6,313
----------- -----------
Total assets............................................ $30,421,592 $17,260,554
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt including loans from
institutional shareholders of $733,382 in 1995............... $ -- $ 1,306,396
Current portion of capital lease obligations.................... -- 558,900
Trade accounts payable.......................................... 2,770,389 3,353,162
Taxes payable................................................... 105,309 --
Accrued expenses and other liabilities.......................... 1,762,828 1,680,938
----------- -----------
Total current liabilities............................... 4,638,526 6,899,396
Long-term debt, net of current portion............................ -- 394,875
Capital lease obligations, net of current portion................. -- 1,510,494
Deferred taxes.................................................... 408,000 520,000
Other liabilities................................................. 90,507 367,369
Minority interest, including mandatorily redeemable preferred
stock........................................................... -- 1,591,760
Commitments and contingencies
Shareholders' equity:
Preferred stock -- Series A 10 pence ("p") par value (approx. 15
cents) Authorized 516,205 shares; Issued 161,265 at March 31,
1995......................................................... -- 23,568
Preferred stock -- Series B 10 p par value:
Authorized -- 1,283,795 shares Issued at March 31, 1995...... -- 149,298
Ordinary shares 1p (approx. 1.5 cents) par value:
Authorized -- 17,000,000 shares; Issued 1,126,600 shares at
March 31, 1995............................................... -- 16,407
Common stock -- $.01 par value
Authorized -- 35,000,000 shares; Issued 4,346,415 shares at
March 31, 1996 43,464 --
Additional paid-in-capital...................................... 17,828,915 3,285,122
Retained earnings............................................... 7,368,921 2,404,657
Foreign currency translation adjustment......................... 43,259 97,608
----------- -----------
Total shareholders' equity.............................. 25,284,559 5,976,660
----------- -----------
Total liabilities and shareholders' equity.............. $30,421,592 $17,260,554
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 18
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $33,289,982 $25,404,027 $20,216,705
Cost of sales....................................... 20,688,947 15,886,719 13,832,920
----------- ----------- -----------
Gross profit.............................. 12,601,035 9,517,308 6,383,785
Selling, general and administrative expenses........ 5,570,853 4,514,565 3,406,809
----------- ----------- -----------
Income from operations.................... 7,030,182 5,002,743 2,976,976
Interest expense.................................... 113,126 338,432 386,128
Interest income..................................... (458,322) (186,798) (47,239)
Other expense (income).............................. 20,426 48,741 (43,636)
----------- ----------- -----------
Income before provision for income taxes, minority
interest and cumulative effect of change in
accounting principle........................... 7,354,952 4,802,368 2,681,723
Income tax provision................................ 2,219,088 1,216,000 1,229,000
Minority interest................................... 171,600 162,799 158,089
----------- ----------- -----------
Income before cumulative effect of change in
accounting for income taxes.................... 4,964,264 3,423,569 1,294,634
Cumulative effect of change in accounting for income
taxes............................................. -- -- 434,496
----------- ----------- -----------
Net income.......................................... $ 4,964,264 $ 3,423,569 $ 1,729,130
=========== =========== ===========
Per share information:
Income before cumulative effect of change in
accounting for income taxes.................... $ 1.20 $ 1.01 $ .51
Cumulative effect of change in accounting for
income taxes................................... -- -- .17
----------- ----------- -----------
Net income........................................ $ 1.20 $ 1.01 $ .68
=========== =========== ===========
Weighted average shares outstanding................. 4,143,194 3,476,566 2,534,373
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 19
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK ORDINARY SHARES COMMON STOCK
------------------ --------------------- -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------- ---------- -------- ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993............ 161,265 $23,568 1,014,077 $149,298 1,122,500 $16,342 -- $ --
Net income......................... -- -- -- -- -- -- -- --
Exercise of stock options.......... -- -- -- -- 100 2 -- --
Translation adjustments............ -- -- -- -- -- -- -- --
-------- ------- ---------- -------- ---------- ------- --------- -------
Balance at March 31, 1994............ 161,265 23,568 1,014,077 149,298 1,122,600 16,344 -- --
Net income......................... -- -- -- -- -- -- -- --
Exercise of stock options.......... -- -- -- -- 4,000 63 -- --
Compensation related to stock
options granted.................. -- -- -- -- -- -- -- --
Translation adjustments............ -- -- -- -- -- -- -- --
-------- ------- ---------- -------- ---------- ------- --------- -------
Balance at March 31, 1995............ 161,265 23,568 1,014,077 149,298 1,126,600 16,407 -- --
Shares issued in exchange for
Preferred Stock and Ordinary
Shares............................. (161,265) (23,568) (1,014,077) (149,298) (1,126,600) (16,407) 2,312,315 23,123
Initial public offering, net....... -- -- -- -- -- -- 1,300,000 13,000
Warrants exercised................. -- -- -- -- -- -- 706,600 7,066
Net income......................... -- -- -- -- -- -- -- --
Exercise of stock options.......... -- -- -- -- -- -- 27,500 275
Redemption of mandatorily
redeemable Preferred Stock....... -- -- -- -- -- -- -- --
Translation adjustments............ -- -- -- -- -- -- -- --
-------- ------- ---------- -------- ---------- ------- --------- -------
Balance at March 31, 1996............ -- $ -- -- $ -- -- $ -- 4,346,415 $43,464
======== ======= ========= ======== ========= ======= ======== =======
<CAPTION>
FOREIGN
ADDITIONAL RETAINED CURRENCY TOTAL
PAID-IN EARNINGS TRANSLATION SHAREHOLDERS
CAPITAL (DEFICIT) ADJUSTMENT EQUITY
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993............ $ 3,017,321 $(2,748,042) $175,937 $ 634,424
Net income......................... -- 1,729,130 -- 1,729,130
Exercise of stock options.......... 74 -- -- 76
Translation adjustments............ -- -- 12,850 12,850
----------- ----------- ------------ -------------
Balance at March 31, 1994............ 3,017,395 (1,018,912) 188,787 2,376,480
Net income......................... -- 3,423,569 -- 3,423,569
Exercise of stock options.......... 3,727 -- -- 3,790
Compensation related to stock
options granted.................. 264,000 -- -- 264,000
Translation adjustments............ -- -- (91,179) (91,179)
----------- ----------- ------------ -------------
Balance at March 31, 1995............ 3,285,122 2,404,657 97,608 5,976,660
Shares issued in exchange for
Preferred Stock and Ordinary
Shares............................. 166,150 -- -- --
Initial public offering, net....... 13,585,708 -- -- 13,598,708
Warrants exercised................. (7,066) -- -- --
Net income......................... -- 4,964,264 -- 4,964,264
Exercise of stock options.......... 39,183 -- -- 39,458
Redemption of mandatorily
redeemable Preferred Stock....... 759,818 -- -- 759,818
Translation adjustments............ -- -- (54,349) (54,349)
----------- ----------- ------------ -------------
Balance at March 31, 1996............ $17,828,915 $ 7,368,921 $ 43,259 $25,284,559
========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 20
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 4,964,264 $ 3,423,569 $ 1,729,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 1,700,519 1,368,006 1,456,431
Deferred tax provision........................... 169,000 (312,000) 250,000
Bad debt expense................................. 95,000 (44,992) 33,625
Gain on sale of property and equipment........... (51,515) -- --
Compensation related to stock options granted.... -- 264,000 --
Minority interests............................... 171,600 162,799 158,089
Decrease (increase) in:
Accounts receivable trade and other.............. (1,532,119) (692,394) (1,547,715)
Inventories...................................... (623,195) (208,596) (240,425)
Prepaids and other assets........................ (671,957) (287,657) 9,416
(Decrease) increase in:
Trade accounts payable........................... (533,277) 892,268 468,075
Accrued expenses and other liabilities........... (49,186) 479,496 231,498
---------- ---------- ----------
Net cash provided by operating activities... 3,639,134 5,044,499 2,548,124
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment.................. (3,911,111) (3,375,877) (591,658)
Proceeds from the sale of property, plant and
equipment........................................ 106,503 -- --
---------- ---------- ----------
Net cash used in investing activities....... (3,804,608) (3,375,877) (591,658)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from initial public offering........... 13,598,708 -- --
Proceeds from borrowings............................ -- 656,100 142,740
Principal payments on borrowings (notes)............ (1,668,530) (768,311) (789,376)
Stock options exercised............................. 39,458 3,790 76
Repayment of (obligation under) capital leases...... (1,949,957) (528,068) 145,613
Payment of preferred dividend by subsidiary......... (171,600) (150,000) (148,000)
Redemption of preferred stock....................... (831,942) -- --
---------- ---------- ----------
Net cash provided by, (used in) financing
activities................................ 9,016,137 (786,489) (648,947)
---------- ---------- ----------
Effect of exchange rate on cash..................... (4,820) (2,249) (1,985)
---------- ---------- ----------
Net increase in cash.................................. 8,845,841 879,884 1,305,534
Cash and cash equivalents, beginning of year.......... 3,861,116 2,981,232 1,675,698
---------- ---------- ----------
Cash and cash equivalents, end of year................ $12,706,957 $ 3,861,116 $ 2,981,232
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................ $ 166,494 $ 229,129 $ 175,111
Income taxes........................................ $ 2,120,655 $ 1,455,000 $ 611,549
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 21
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF CONSOLIDATION:
The Consolidated Financial Statements include the accounts of Align-Rite
International, Inc. ("ARII"), a California corporation, incorporated on April
27, 1995, and its wholly-owned subsidiaries, Align-Rite International Limited
("ARI"), Align-Rite Corporation ("ARC"), and Align-Rite Limited ("ARL"). ARII
and its subsidiaries are collectively referred to as the "Company". All
significant intercompany accounts and transactions have been eliminated.
The principal activity of ARII and ARI is that of holding companies into
which their respective subsidiaries are consolidated. ARC and ARL manufacture
and market quality photomasks in the United States and Europe. Photomasks, which
are precision photographic quartz or glass plates, contain microscopic images of
integrated circuits. These are used primarily by semiconductor manufacturers as
master images to transfer circuit patterns onto silicon wafers during the
fabrication of integrated circuits.
During fiscal year 1996 the Company underwent an initial public offering of
Common Stock, as part of which all of the outstanding Ordinary Shares of ARI
were exchanged for the Common Stock of ARII.
The Company maintains a policy and practice of restricting ARC from paying
dividends or making certain other distributions in order to minimize tax
consequences resulting from its current corporate structure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
Inventories
Inventories consist primarily of raw materials and are valued at the lower
of cost or market. Cost is determined on a first-in, first-out basis. On a
monthly basis, the Company reduces inventory for individual items identified as
obsolete, stale, slow moving or non-salable.
The Company purchases a majority of its raw materials from a foreign
supplier. Fluctuations in foreign currency exchange rates could have a material
adverse effect on the price of raw materials manufactured outside of the United
States. The Company does not hedge foreign currency risks.
Property And Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method based upon
the estimated useful lives of the assets, ranging from three to ten years.
Useful lives are evaluated regularly by management in order to determine
recoverability in light of current technological conditions. Leasehold
improvements are amortized over the shorter of the life of the lease or the
improvement. Maintenance and repairs are charged to expense as incurred while
renewals and improvements are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation or amortization with any resulting gain or loss
included in the Statement of Operations.
Income Taxes
Effective April 1, 1993, the Company changed its method of accounting for
income taxes by adopting Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and the tax bases of assets
20
<PAGE> 22
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. As permitted, the cumulative effect of this
change has been reported in the Company's 1994 Consolidated Statement of
Operations.
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 reported amounts of assets and liabilities at the
date of the Consolidated Financial Statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
The Company recognizes revenue when the title to goods passes to the
customer, generally upon shipment. The Company provides an accrual for estimated
volume discounts for certain customers at the time of shipment and adjusts this
accrual as needed based upon actual results.
Per Share Information
Net income per share of Common Stock for the year ended March 31, 1996 and
1994 is computed on the basis of the weighted average shares of Common Stock
outstanding plus common equivalent shares arising from the effect of dilutive
stock options and warrants using the treasury stock method.
Net income per share for the fiscal years ended March 31, 1995 and 1994 has
been computed in accordance with Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 83. The SAB requires that common stock issued by
the Company in the twelve months immediately preceding a public offering plus
the number of common equivalent shares which became issuable during the same
period pursuant to the grant of stock options at prices substantially less than
the initial public offering price be included in the calculation of common stock
and common stock equivalent shares as if they were outstanding for all periods
presented. Per share information, for other than shares described above, is
based upon the weighted average number of Ordinary Shares outstanding and
dilutive ordinary equivalent shares. Ordinary equivalent shares include Ordinary
Shares issuable upon the conversion of the Preferred Stock Series A and B for
all periods presented.
For the year ended March 31, 1995, the weighted average shares outstanding
is based upon the modified treasury stock method. This method assumes that the
Company could repurchase up to a maximum of 20% of the shares outstanding from
the proceeds received from the exercise of share options and warrants. The
remaining proceeds are presumed to be used to reduce existing debt, which would
have the effect of reducing interest expense. For the year ended March 31, 1995,
net income used for purposes of computing earnings per share increased $89,177
or $.03 per share, as a result of a reduction of assumed interest expense, net
of tax effect.
Foreign Currency Translations
The functional currency of ARI and ARL is the British pound. The
accompanying financial statements include transactions and balances for these
entities translated into U.S. dollar amounts in conformity with SFAS No. 52.
This Statement requires the translation of assets and liabilities at the
exchange rate prevailing on the balance sheet date and income and expense
accounts at the weighted average rate in effect during the fiscal year. The
aggregate effect of translating the financial statements of ARI and ARL is
included as a separate component of shareholders' equity. Such translations
should not be construed as representations that the U.S. dollar amounts could be
converted into British pounds at these or any other rates. The Company has
included in operating income all foreign exchange gains and losses arising from
foreign currency transactions.
21
<PAGE> 23
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year classifications.
3. INVENTORIES:
A summary of inventories, by component, at March 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,672,997 $1,122,851
Work-in-process............................................. 21,692 25,530
Supplies.................................................... 121,544 82,667
---------- ----------
$1,816,233 $1,231,048
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Plant and machinery (including amounts under capital
leases of $4,689,762 in 1995)......................... $ 18,027,371 $ 16,573,994
Leasehold improvements.................................. 1,145,813 1,090,679
Furniture and fixtures (including amounts under capital
leases of $121,289 in 1995)........................... 2,521,104 1,233,785
------------ ------------
21,694,288 18,898,458
Less, accumulated depreciation and amortization
(including amounts under capital leases of $4,649,387
in 1995).............................................. (14,732,284) (13,552,106)
------------ ------------
6,962,004 5,346,352
Construction in progress................................ 1,555,048 1,159,762
------------ ------------
Total................................................. $ 8,517,052 $ 6,506,114
============ ============
</TABLE>
At March 31, 1996 and 1995, the Company had $7,527,109 and $7,739,888,
respectively, of fully depreciated assets still in use.
Amortization expense related to capital leases totaled $77,997, $344,985
and $383,080 for the years ended March 31, 1996, 1995 and 1994, respectively.
Construction in progress in 1996 and 1995 relates to laser and electron
beam photomask imaging systems and related clean rooms which were placed in
service in June 1996 and April 1995.
Capital leases consisted of deferred equipment lease rental payments
accounted for as a capital lease. Lease payments were due quarterly and were
payable to Mid Glamorgan Enterprise Company Limited, an affiliate of the County
of Mid Glamorgan, Wales ("MGE"). The amount of quarterly lease payments varied
according to interest rates. These capital leases were paid in full during the
current year with the proceeds from the Company's initial public offering.
22
<PAGE> 24
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt at March 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Bank note payable................................... $ -- $ 441,389
Loan from institutional shareholders................ -- 733,382
Bank loan........................................... -- 526,500
-------- --------
-- 1,701,271
Less current portion................................ -- 1,306,396
-------- --------
Long-term debt...................................... $ -- $ 394,875
======== ========
</TABLE>
ARC's borrowing under the bank note payable bore interest at 1% above the
bank's prime rate (9% at March 31, 1995). Interest expense on the note was
$15,899, $57,747 and $73,957 in 1996, 1995 and 1994, respectively. The bank note
payable was paid in full in 1996.
The loan from institutional shareholders bore interest at 12% per annum
until September 30, 1991, thereafter the compound rate was increased by 1% on
October 1 in each year during which the loan remained outstanding, with such
interest payable semi-annually in arrears on September 30 and March 31 of each
year. The interest rate was 16% at March 31, 1995 and 17% through the date the
loan was retired. These institutional shareholders were holders of Ordinary
Shares, Preferred Stock and warrants of the Company prior to the initial public
offering. The institutional shareholder loan was paid in full in 1996.
The bank loan originated in October 1994. Interest payments were required
for the first year of the loan, with principal payments beginning in October
1995 in 24 monthly payments of L13,542 ($21,938 at March 31, 1995) plus
interest. Interest was at a rate of 2.5% plus the bank base rate (6.75% at March
31, 1995) or 6.5% whichever was higher. The bank loan was paid in full in 1996.
ARC entered into an agreement with a bank to obtain a $1,000,000 line of
credit effective March 31, 1994 at an annual interest rate of 1% above the
bank's prime rate, which was to expire on May 31, 1996. On March 28, 1996 this
line of credit was cancelled and replaced with a $5,000,000 line of credit at a
variable interest rate, equal to the bank's reference rate, per annum, expiring
on June 30, 1997.
The line of credit is guaranteed by ARII and ARI and is collateralized by
ARC's assets. The line of credit has certain restrictions and requirements
relating to, among other things: prohibition of dividend declarations or
payments, prohibition of the repurchase of the Company's Common Stock,
maintenance of properties and insurance, the maintenance of certain financial
ratios, and the limitations on additional borrowings, additional loans, liens
and encumbrances assumed, and the transfer of assets. There were no borrowings
on this line of credit at March 31, 1996.
Additionally, ARII entered into an agreement with the bank to obtain a
$2,500,000 line of credit effective March 28, 1996 at a variable interest rate
equal to the bank's reference rate, per annum, expiring June 30, 1997. This
agreement contains similar restrictive covenants to those described in the ARC
line of credit agreement above. There were no borrowings on this line of credit
at March 31, 1996.
23
<PAGE> 25
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES:
The following is a summary of United States and foreign income before
provision for income taxes, minority interest and cumulative effect of
accounting change, the components of the provisions for income taxes and
deferred income taxes and a reconciliation of the United States statutory income
tax rate to the effective tax rate:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income before provision for income taxes,
minority interest and cumulative effect of
change in accounting principle:
United States.............................. $4,929,552 $3,330,563 $2,300,432
Foreign.................................... 2,425,400 1,471,805 381,291
---------- ---------- ----------
Total.............................. $7,354,952 $4,802,368 $2,681,723
========= ========= =========
Provision for income taxes:
Current
Federal................................. $1,576,009 $1,213,000 $ 541,000
State................................... 457,000 314,000 73,000
Foreign................................. 17,079 -- --
---------- ---------- ----------
2,050,088 1,527,000 614,000
Deferred
Federal................................. (103,000) (82,000) 240,000
State................................... 25,000 (64,000) 98,000
Foreign................................. 247,000 (165,000) 277,000
---------- ---------- ----------
169,000 (311,000) 615,000
---------- ---------- ----------
Total.............................. $2,219,088 $1,216,000 $1,229,000
========= ========= =========
</TABLE>
Effective income tax rate:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Federal statutory rate............................ 34.0% 35.0% 35.0%
State taxes, net of federal benefit............... 4.3% 3.4% 4.1%
Benefit of operating loss carryforwards........... -- (6.3)% --
Change in deferred tax valuation allowance........ (6.2)% (3.9)% 7.2%
Other............................................. (1.9)% (2.9)% (0.5)%
----- ---- ----
Total........................................ 30.2% 25.3% 45.8%
===== ==== ====
</TABLE>
24
<PAGE> 26
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of temporary differences which give rise to the Company's
net deferred taxes at March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Capital leases..................................... $ -- $ 627,000
Net operating losses............................... 136,000 145,000
Other.............................................. 343,000 291,000
---------- -----------
479,000 1,063,000
Valuation allowance................................ (26,000) (481,000)
---------- -----------
Deferred tax assets........................... 453,000 582,000
Deferred tax liabilities:
Depreciation and amortization...................... (540,000) (516,000)
Other.............................................. (20,000) (4,000)
---------- -----------
Deferred tax liabilities...................... (560,000) (520,000)
---------- -----------
Net deferred taxes................................. $ (107,000) $ 62,000
========== ===========
</TABLE>
The valuation allowance of $26,000 and $481,000 were provided at March 31,
1996 and 1995, respectively, based primarily on carryforward amounts which may
not be utilized by the foreign entity relating to capital leases and net
operating loss carryforwards. The reduction of the valuation allowance in the
year ended March 31, 1996 was due to higher than anticipated foreign taxable
income and management's estimate of the amounts expected to be utilized in the
future.
Realization of the deferred tax asset relating to net operating loss
carryforwards is dependent on generating sufficient taxable income at ARI.
Although realization is not assured, management believes it is more likely than
not that this deferred tax asset will be realized. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
For federal income tax purposes in 1994, the Company utilized its remaining
net operating loss carryforwards originating in prior years to offset taxable
income of $160,000. In addition, in 1994, the Company used an investment tax
credit carryforward for federal tax purposes of $324,000 which was recorded
under the flow-through method of accounting as a reduction of the current
provision for federal income taxes.
For state franchise tax purposes in 1994, the Company utilized its
remaining net operating loss carryforwards originating in prior years to offset
taxable income of $1,315,000.
For foreign tax purposes in 1995 and 1994, the Company utilized net
operating loss carryforwards originating in prior years to offset taxable income
of $957,000 and $819,000, respectively. At March 31, 1996 and 1995, the Company
had approximately $413,000 and $439,000, respectively, of foreign operating loss
carryforwards with no expiration date.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain equipment under noncancelable
operating leases expiring through March 2006. The facility leases require the
Company to maintain and repair the leased premises and pay its pro rata share of
increases in real property taxes over the base year. All leases provide for
renewal options and are subject to consumer price index adjustments at various
times during the lease or renewal periods.
25
<PAGE> 27
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments related to noncancelable operating leases at
March 31, 1996 are summarized below:
<TABLE>
<CAPTION>
YEARS ENDING OPERATING
MARCH 31, LEASES
------------------------------------------------- ----------
<S> <C>
1997.......................................... $ 396,104
1998.......................................... 369,909
1999.......................................... 337,964
2000.......................................... 337,964
2001.......................................... 146,618
Thereafter....................................... 702,090
----------
$2,290,648
=========
</TABLE>
Rent expense for the years ended March 31, 1996, 1995 and 1994 was
$535,759, $385,355 and $370,721, respectively.
8. RETIREMENT PLANS:
Effective October 1, 1994, ARC established a qualified 401(k) Profit
Sharing Plan (the "Plan") available to all employees who meet the Plan's
eligibility requirements. Employees can elect to contribute from 1% to 15% of
their earnings to the Plan. This Plan, which is a defined contribution plan,
provides that ARC will, at its discretion, provide contributions to the Plan on
a periodic basis. Additionally, the employer will match 25% up to 6% of the
employees contribution, which amounts vest over five years. Terminations and
forfeitures from the Plan are used to reduce the employer's contribution. ARC
made contributions to the Plan of $45,115 and $22,920 in 1996 and 1995,
respectively.
In the United Kingdom, two defined contribution plans exist: the Standard
Life Pension Scheme and the Standard Life Executive Pension Scheme (the
"Plans"). The Plans are Inland Revenue approved plans. ARL contributes a
mandatory 4% of the employees current salary for all member employees and
contributes a mandatory 8% for one employee in regards to the Executive Scheme.
Membership in the Plans is subject to a qualifying period to be specified for
each individual. Employer contributions to the Plans in 1996, 1995 and 1994 were
$18,554, $16,205 and $12,521, respectively.
9. PREFERRED STOCK -- SERIES A AND B
The outstanding shares of Preferred Stock -- Series A and Series B were
converted into 104,000 and 1,081,746 shares of Common Stock of the Company,
respectively, in conjunction with the Company's initial public offering in July
1995.
10. STOCK OPTION PLANS AND WARRANTS:
ARI adopted an Employee Share Option Scheme in 1987 (the "1987 Plan"), in
which share options were granted to executives and key employees to purchase
ARI's Ordinary Shares. After giving effect to the Company's initial public
offering, 354,625 options were outstanding and exercisable. Upon exercise these
shares are exchangeable on a one for one basis with the Common Stock of the
Company. No future grants of options under the 1987 Plan will be made. Options
granted prior to August 31, 1994 expire ten years from the date of grant.
Options granted on or after August 31, 1994 expire five years from the date of
grant. Options will automatically expire thirty days after termination of
employment.
In April 1995, the Company and its shareholders adopted a Stock Option Plan
(the "1995 Plan"). Under the 1995 Plan awards of any combination of incentive
stock options, nonqualified stock options, restricted
26
<PAGE> 28
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock, stock appreciation rights and performance shares may be granted to
executives and key employees to purchase 415,000 shares of the Company's Common
Stock.
Incentive stock options shall be no less than 100% of the fair market value
of the Company's Common Stock on the date of grant (110% if granted to an
employee who owns 10% or more of the Common Stock). No incentive stock option
may be granted to anyone other than a full-time employee of the Company. Options
expire ten years after the date of grant and options automatically expire thirty
days after termination of employment.
The following table sets forth information relating to stock option plans
during the years ended March 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE PER SHARE
-------------------- ----------------
<S> <C> <C>
Outstanding, April 1, 1993.............. 179,575 L.50 - L 1.72
Granted............................... 3,500 .50
Exercised............................. (100) .50
Canceled/expired...................... (29,500) .50 - 1.00
----------
Outstanding, April 1, 1994.............. 153,475 .50 - 1.72
Granted............................... 211,250 .80
Exercised............................. (4,000) .50
Canceled/expired...................... (6,100) .50
----------
Outstanding, April 1, 1995.............. 354,625 .50 - 1.72
Exercised............................. (27,500) .50 - 1.72
Granted............................... 273,396 $ 2.59 - $12.00
----------
Outstanding, March 31, 1996............. 600,521 $ .76 - $12.00
Exercisable........................... 489,125 $ .76 - $12.00
</TABLE>
Options issued in connection with the 1987 Plan and 1995 Plan were at
exercise prices denominated in British pounds and U.S. dollars, respectively.
The price per share for options issued prior to April 1, 1995, in terms of U.S.
dollars, using the March 31, 1996 exchange rate, ranged from $.76 to $2.63.
On July 25, 1995, the Company granted 111,396 options at an exercise price
of $3.32 per share to the Chairman and Chief Executive Officer which vest at a
rate of 10% per year except the last installment which vests 60 days prior to
the tenth anniversary of the grant. Additionally any unvested options will
automatically vest in the event of death, disability, termination without cause,
or if a change-in-control occurs. The difference between the option price and
the fair market value of the Common Stock at the date of grant, $1,106,162, will
be charged to operations at a rate of 10% per year.
In August 1994, the Company granted options for 211,250 Ordinary Shares,
exercisable at L0.80 ($1.25 at March 31, 1995) per share. Compensation expense
of $264,000 was recorded for the year ended March 31, 1995, based upon the
difference between the fair market value of the shares on the date of grant, as
determined by the Board of Directors using assumptions obtained from an
independent appraisal, and the exercise price.
In conjunction with the Company's initial public offering, 790,116 shares
of Common Stock less 83,516 shares surrendered for cancellation, were issued
upon a net issuance or cashless exercise of 978,415 warrants. Additionally,
115,000 warrants were exchanged for stock options, on a one for one basis, under
the 1995 Plan. No warrants were outstanding as of March 31, 1996.
The Company has reserved 742,125 shares of Common Stock for issuance upon
the exercise of these options.
27
<PAGE> 29
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE STOCK PURCHASE PLAN
During fiscal year 1996 the Company adopted an Employee Stock Purchase
Plan, (the "Plan"), which enables substantially all employees to purchase shares
of Common Stock on annual offering dates at a purchase price of 85% of the fair
market value of the shares on the grant date or, if lower, 85% of the fair
market value of the shares on the exercise date. A maximum of 75,000 shares are
authorized for subscription.
12. MINORITY INTERESTS:
On March 24, 1992, ARL issued 800,000 redeemable preferred shares (the
"Preferred Shares") with a nominal value of L1 each ($1.73 at March 24, 1992) in
satisfaction of debt owed by ARL to MGE.
For the years ended March 31, 1996, 1995 and 1994, the subsidiary recorded
deemed preferred dividends of L109,831, L97,183 and L98,462, respectively
($171,600, $150,000 and $148,000), which have been reflected in the Statements
of Operations as minority interest. On March 27, 1996 the Preferred Shares were
redeemed for L545,000 ($831,942) resulting in an increase in additional
paid-in-capital totaling $759,818 which represents the difference between the
recorded value of the Preferred Shares and the redemption price.
13. CONCENTRATION OF CREDIT RISK:
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable.
The Company maintains cash and cash equivalents with various domestic and
foreign financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. From time to time, United States
cash balances may exceed Federal Deposit Insurance Corporation insurance limits.
No such deposit insurance is provided for deposits with foreign institutions.
The Company's customers are concentrated in the United States and Europe,
primarily within the high technology industry. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information and, to date, such losses
have been within management's expectations. During the years ended March 31,
1996, 1995 and 1994, net sales, as a percentage of Consolidated Net Sales, of
its largest customers is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Customer A............... $4,175,000 12.5% $2,729,000 10.7% $2,914,000 14.4%
Customer B............... 3,044,000 9.1% $3,261,000 12.8% -- --
Customer C............... 3,377,000 10.1% $2,939,000 11.6% -- --
----- ----- -----
31.7% 35.1% 14.4%
========== ========== ==========
</TABLE>
28
<PAGE> 30
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. GEOGRAPHICAL DATA:
The following tables set forth the amount of net sales, income before
provision for income taxes, minority interest and cumulative effect of
accounting change and identifiable assets by geographical area for 1996, 1995
and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States............................. $22,874,860 $16,788,215 $14,850,500
United Kingdom(1)......................... 10,415,122 8,615,812 5,366,205
----------- ----------- -----------
Total............................. $33,289,982 $25,404,027 $20,216,705
========== ========== ==========
Income before provision for income taxes,
minority interest and cumulative effect of
accounting change:
United States............................. $ 4,487,129 $ 3,176,473 $ 2,298,975
United Kingdom............................ 2,522,627 1,777,529 721,637
----------- ----------- -----------
7,009,756 4,954,002 3,020,612
Interest income (expense), net............ 345,196 (151,634) (338,889)
----------- ----------- -----------
Total............................. $ 7,354,952 $ 4,802,368 $ 2,681,723
========== ========== ==========
Identifiable assets:
United States............................. $23,095,001 $10,697,665 $ 8,342,426
United Kingdom............................ 7,326,591 6,562,889 4,109,367
----------- ----------- -----------
Total............................. $30,421,592 $17,260,554 $12,451,793
========== ========== ==========
</TABLE>
(1) United Kingdom net sales include export sales to France of
approximately $4,604,393, $3,840,000 and $2,020,000 for the years ended
March 31, 1996, 1995 and 1994, respectively.
29
<PAGE> 31
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT COSTS CREDITED TO DEDUCTIONS BALANCE AT
BEGINNING AND OTHER FROM END OF
OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD
---------- -------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1996
Allowance for doubtful receivables... $ 58,105 $ 94,528 -- -- $ 152,633
Deferred tax asset valuation
allowance......................... $ 481,000 -- -- $455,000 $ 26,000
YEAR ENDED MARCH 31, 1995
Allowance for doubtful receivables... $ 103,097 -- -- $ 44,992 $ 58,105
Deferred tax asset valuation
allowance......................... $1,014,000 -- -- $533,000 $ 481,000
YEAR ENDED MARCH 31, 1994
Allowance for doubtful receivables... $ 69,472 $ 33,625 -- -- $ 103,097
Deferred tax asset valuation
allowance......................... $ 742,000 $272,000 -- -- $1,014,000
</TABLE>
30
<PAGE> 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
31
<PAGE> 33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1996 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Election of Directors." In addition,
information regarding executive officers of the Company is set forth under the
caption "Executive Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS
Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1996 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Executive Compensation and Other Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1996 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Security Ownership of Principal Shareholders
and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1996 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Executive Compensation and Other Information"
and "Certain Transactions."
32
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
1. FINANCIAL STATEMENTS
Financial Statements of the Registrant are listed in the index to
Consolidated Financial Statements and filed under Item 8, "Financial Statements
and Supplementary Data," included elsewhere in the Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule of the Registrant is listed in the index to
Consolidated Financial Statements and filed under Item 8, "Financial Statements
and Supplementary Data," included elsewhere in this Form 10-K.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
3.1 Articles of Incorporation of the Company, previously filed as Exhibit 3.1 to
Registration Statement No. 33-91978, on Form S-1, which is incorporated herein
by reference.
3.2 Form of Amended and Restated Articles of Incorporation of the Company filed as
Exhibit 3.2 to Registration Statement No. 33-91978, on Form S-1, which is
incorporated herein by reference.
3.3 Bylaws of the Company filed as Exhibit 3.3 to Registration Statement No.
33-91978, on Form S-1, which is incorporated herein by reference.
10.1 Forms of Indemnity Agreement between the Company and each of its executive
officers and directors filed as Exhibit 10.1 to Registration Statement No.
33-91978, on Form S-1, which is incorporated herein by reference.
10.2 Align-Rite International, Inc. Stock Option Plan filed as Exhibit 10.2 to
Registration Statement No. 33-91978, on Form S-1, which is incorporated herein
by reference.
10.3 Letter of Advice of Borrowing Terms dated April 20, 1995, between National
Westminster Bank and ARL, Letter of Credit dated September 15, 1994 between
National Westminster Bank and ARL and Mortgage Debenture dated February 10, 1992
between National Westminster Bank and ARL filed as Exhibit 10.4 to Registration
Statement No. 33-91978, on Form S-1, which is incorporated herein by reference.
10.4 Lease dated January 18, 1980 between Walton Emmick and Form of Lease between ARC
and Denise McLaughlan, Sharyn Schrick, and Sandra Bowman, for ARC's corporate
headquarters located at 2428 Ontario Street, Burbank, California filed as
Exhibit 10.5 to Registration Statement No. 33-91978 on Form S-1, which is
incorporated herein by reference.
10.5 Lease dated April 12, 1995 between Shire Family Trusts and ARC, for part of
ARC's corporate headquarters located at 2504 Ontario Street, Burbank, California
filed as Exhibit 10.6 to Registration Statement No. 33-91978 on Form S-1, which
is incorporated herein by reference.
10.6 Agreement dated May 30, 1984 between MGC and ARL under Lease dated May 30, 1984
between MGC and ARL and Agreement relating to the Leasehold Property dated March
24, 1992, for headquarters located at 1 Technology Drive, Bridgend, Wales, U.K.
filed as Exhibit 10.7 to Registration Statement No. 33-91978 on Form S-1, which
is incorporated herein by reference.
10.7 Master Equipment Sub-Lease Agreement dated May 30, 1984 between MGC and ARL,
Agreement dated March 24, 1992 between MGC, ARL and ARI and Lease Payment
Restructuring Agreement dated January 27, 1994 between MGC, ARL and ARI filed as
Exhibit 10.8 to Registration Statement No. 33-91978 on Form S-1, which is
incorporated herein by reference.
10.8 Shareholders Agreement dated May 30, 1984 between MGC, the several persons
listed on Schedule 1 attached thereto and ARC and Supplemental Shareholders
Agreement dated March 26, 1986 between MGC and ARI filed as Exhibit 10.9 to
Registration Statement No. 33-91978 on Form S-1, which is incorporated herein by
reference.
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.9 Form of Debenture dated March 16, 1988 between ARI and each of WGTC Nominees
Limited, Prutec Limited, F&C Enterprise Trust PLC, H&Q Ventures IV, H&Q Ventures
International IV and Hamquist, (the "Loan Parties") and Form of Deed of
Amendment dated December 24, 1990 between ARI and each of the Loan Parties, with
a Schedule attached hereto listing debenture amounts for each of the Loan
Parties filed as Exhibit 10.10 to Registration Statement No. 33-91978 on Form
S-1, which is incorporated herein by reference.
10.10 Letters dated October 12, 1993 and October 18, 1994 from the Secretary of State
for Wales ("Wales") to ARL for Grants to ARL, Notification Letter dated April
21, 1995 from Coopers & Lybrand L.L.P. to Wales and Consent Letter dated April
24, 1995 from Wales to ARL filed as Exhibit 10.11 to Registration Statement No.
33-91978 on Form S-1, which is incorporated herein by reference.
10.11 Employment Agreement dated March 31, 1995 between James L. Mac Donald and the
Company filed as Exhibit 10.12 to Registration Statement No. 33-91978 on Form
S-1, which is incorporated herein by reference.
10.12 Employment Agreement dated March 31, 1995 between Jeffery R. Lee and the Company
filed as Exhibit 10.13 to Registration Statement No. 33-91978 on Form S-1, which
is incorporated herein by reference.
10.13 The Rules and Ancillary Documentation for Align-Rite International, Plc Employee
Share Option Scheme, as amended, filed as Exhibit 10.14 to Registration
Statement No. 33-91978, on Form S-1, which is incorporated herein by reference.
10.14 Strategic Relationship Agreement, dated April 1, 1993, among Harris and ARI, ARC
and ARL filed as Exhibit 10.15 to Registration Statement No. 33-91978, on Form
S-1, which is incorporated herein by reference.
10.15 ETEC Core System Purchase Agreement between Etec Systems, Inc. and filed as
Exhibit 10.16 to Registration Statement No. 33-91978, on Form S-1, which is
incorporated herein by reference.
10.16 Align-Rite International, Inc. Employee Stock Purchase Plan filed as Exhibit
10.1 to Registration Statement No. 33-00232 on Form S-8, which is incorporated
herein by reference.
10.17 Line of Credit Agreement dated March 28, 1996 between Sanwa Bank California and
ARC.
10.18 Line of Credit Agreement dated March 28, 1996 between Sanwa Bank California and
ARII.
11 Statement re: Computation of Earnings Per Share
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule
</TABLE>
34
<PAGE> 36
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.
ALIGN-RITE INTERNATIONAL, INC.
Date: June 28, 1996
By /s/ James L. Mac Donald
-----------------------------------
James L. Mac Donald
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ James L. Mac Donald Date: June 28, 1996
- - - -----------------------------------------------
James L. Mac Donald
Chairman of the Board, President and Chief
Executive Officer
/s/ Jeffery R. Lee Date: June 28, 1996
- - - -----------------------------------------------
Jeffery R. Lee
Executive Vice President, Chief Operating
Officer and Director
/s/ Petar N. Katurich Date: June 28, 1996
- - - -----------------------------------------------
Petar N. Katurich
Chief Financial Officer, Secretary and Director
/s/ Dr. Andrew C. Wang Date: June 28, 1996
- - - -----------------------------------------------
Dr. Andrew C. Wang
Director
/s/ Alan G. Duncan Date: June 28, 1996
- - - -----------------------------------------------
Alan G. Duncan
Director
</TABLE>
35
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
------- ----------------------------------------------------------------------- --------
<C> <S> <C>
3.1 Articles of Incorporation of the Company, previously filed as Exhibit *
3.1 to Registration Statement No. 33-91978, on Form S-1, which is
incorporated herein by reference.
3.2 Form of Amended and Restated Articles of Incorporation of the Company *
filed as Exhibit 3.2 to Registration Statement No. 33-91978, on Form
S-1, which is incorporated herein by reference.
3.3 Bylaws of the Company filed as Exhibit 3.3 to Registration Statement *
No. 33-91978, on Form S-1, which is incorporated herein by reference.
10.1 Forms of Indemnity Agreement between the Company and each of its *
executive officers and directors filed as Exhibit 10.1 to Registration
Statement No. 33-91978, on Form S-1, which is incorporated herein by
reference.
10.2 Align-Rite International, Inc. Stock Option Plan filed as Exhibit 10.2 *
to Registration Statement No. 33-91978, on Form S-1, which is
incorporated herein by reference.
10.3 Letter of Advice of Borrowing Terms dated April 20, 1995, between *
National Westminster Bank and ARL, Letter of Credit dated September 15,
1994 between National Westminster Bank and ARL and Mortgage Debenture
dated February 10, 1992 between National Westminster Bank and ARL filed
as Exhibit 10.4 to Registration Statement No. 33-91978, on Form S-1,
which is incorporated herein by reference.
10.4 Lease dated January 18, 1980 between Walton Emmick and Form of Lease *
between ARC and Denise McLaughlan, Sharyn Schrick, and Sandra Bowman,
for ARC's corporate headquarters located at 2428 Ontario Street,
Burbank, California filed as Exhibit 10.5 to Registration Statement No.
33-91978 on Form S-1, which is incorporated herein by reference.
10.5 Lease dated April 12, 1995 between Shire Family Trusts and ARC, for *
part of ARC's corporate headquarters located at 2504 Ontario Street,
Burbank, California filed as Exhibit 10.6 to Registration Statement No.
33-91978 on Form S-1, which is incorporated herein by reference.
10.6 Agreement dated May 30, 1984 between MGC and ARL under Lease dated May *
30, 1984 between MGC and ARL and Agreement relating to the Leasehold
Property dated March 24, 1992, for headquarters located at 1 Technology
Drive, Bridgend, Wales, U.K. filed as Exhibit 10.7 to Registration
Statement No. 33-91978 on Form S-1, which is incorporated herein by
reference.
10.7 Master Equipment Sub-Lease Agreement dated May 30, 1984 between MGC and *
ARL, Agreement dated March 24, 1992 between MGC, ARL and ARI and Lease
Payment Restructuring Agreement dated January 27, 1994 between MGC, ARL
and ARI filed as Exhibit 10.8 to Registration Statement No. 33-91978 on
Form S-1, which is incorporated herein by reference.
10.8 Shareholders Agreement dated May 30, 1984 between MGC, the several *
persons listed on Schedule 1 attached thereto and ARC and Supplemental
Shareholders Agreement dated March 26, 1986 between MGC and ARI filed
as Exhibit 10.9 to Registration Statement No. 33-91978 on Form S-1,
which is incorporated herein by reference.
10.9 Form of Debenture dated March 16, 1988 between ARI and each of WGTC *
Nominees Limited, Prutec Limited, F&C Enterprise Trust PLC, H&Q
Ventures IV, H&Q Ventures International IV and Hamquist, (the "Loan
Parties") and Form of Deed of Amendment dated December 24, 1990 between
ARI and each of the Loan Parties, with a Schedule attached hereto
listing debenture amounts for each of the Loan Parties filed as Exhibit
10.10 to Registration Statement No. 33-91978 on Form S-1, which is
incorporated herein by reference.
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
------- ----------------------------------------------------------------------- --------
<C> <S> <C>
10.10 Letters dated October 12, 1993 and October 18, 1994 from the Secretary *
of State for Wales ("Wales") to ARL for Grants to ARL, Notification
Letter dated April 21, 1995 from Coopers & Lybrand L.L.P. to Wales and
Consent Letter dated April 24, 1995 from Wales to ARL filed as Exhibit
10.11 to Registration Statement No. 33-91978 on Form S-1, which is
incorporated herein by reference.
10.11 Employment Agreement dated March 31, 1995 between James L. Mac Donald *
and the Company filed as Exhibit 10.12 to Registration Statement No.
33-91978 on Form S-1, which is incorporated herein by reference.
10.12 Employment Agreement dated March 31, 1995 between Jeffery R. Lee and *
the Company filed as Exhibit 10.13 to Registration Statement No.
33-91978 on Form S-1, which is incorporated herein by reference.
10.13 The Rules and Ancillary Documentation for Align-Rite International, Plc *
Employee Share Option Scheme, as amended, filed as Exhibit 10.14 to
Registration Statement No. 33-91978, on Form S-1, which is incorporated
herein by reference.
10.14 Strategic Relationship Agreement, dated April 1, 1993, among Harris and *
ARI, ARC and ARL filed as Exhibit 10.15 to Registration Statement No.
33-91978, on Form S-1, which is incorporated herein by reference.
10.15 ETEC Core System Purchase Agreement between Etec Systems, Inc. and *
filed as Exhibit 10.16 to Registration Statement No. 33-91978, on Form
S-1, which is incorporated herein by reference.
10.16 Align-Rite International, Inc. Employee Stock Purchase Plan filed as *
Exhibit 10.1 to Registration Statement No. 33-00232 on Form S-8, which
is incoporated herein by reference.
10.17 Line of Credit Agreement dated March 28, 1996 between Sanwa Bank 38
California and ARC.
10.18 Line of Credit Agreement dated March 28, 1996 between Sanwa Bank 53
California and ARII.
11 Statement re: Computation of Earnings Per Share 68
21 Subsidiaries of Registrant 69
23 Consent of Coopers & Lybrand, L.L.P. 70
27 Financial Data Schedule 71
</TABLE>
- - - ---------------
* Previously filed
37
<PAGE> 1
Exhibit 10.17
SANWA
BANK
CALIFORNIA
LINE OF CREDIT AGREEMENT
This Line of Credit Agreement ("Agreement") is made and entered into this 28th
day of March 1996 by and between SANWA BANK CALIFORNIA (the "Bank") and
ALIGN-RITE CORPORATION (the "Borrower").
SECTION I
DEFINITIONS
1.01. CERTAIN DEFINED TERMS. Unless elsewhere defined in this Agreement
the following terms shall have the following meanings (such meanings to be
generally applicable to the singular and plural forms of the terms defined):
A. "ADVANCE" shall mean an advance to the Borrower under any line of
credit facility or similar facility provided for in Section II of this
Agreement which provides for draws by the Borrower against an established
credit line.
B. "BUSINESS DAY" shall mean a day, other than a Saturday or Sunday, on
which commercial banks are open for business in California.
C. "COLLATERAL" shall mean any personal or real property in which the
Bank may be granted a lien or security interest to secure payment of the
Obligations.
D. "DEBT" shall mean all liabilities of the Borrower less Subordinated
Debt.
E. "EFFECTIVE TANGIBLE NET WORTH" shall mean the Borrower's stated net
worth plus Subordinated Debt but less all intangible assets of the
Borrower (i.e., goodwill, trademarks, patents, copyrights, organization
expense and similar intangible items).
F. "ENVIRONMENTAL CLAIMS" shall mean all claims, however asserted, by
any governmental authority or other person alleging potential liability
or responsibility for violation of any Environmental Law or for release
or injury to the environment or threat to public health, personal injury
(including sickness, disease or death), property damage, natural
resources damage, or otherwise alleging liability or responsibility for
damages (punitive or otherwise), cleanup, removal, remedial or response
costs, restitution. civil or criminal penalties, injunctive relief, or
other type of relief, resulting from or based upon (i) the presence,
placement, discharge, emission or release (including intentional and
unintentional, negligent and non-negligent, sudden or non-sudden,
accidental or non-accidental placement, spills, leaks, discharges,
emissions or releases) of any Hazardous Materials at, in, or from
property owned, operated or controlled by the Borrower, or (ii) any
other circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law.
G. "ENVIRONMENTAL LAWS" shall mean all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
governmental authorities, in each case relating to environmental, health,
safety and land use matters; including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean
Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste
Disposal Act, the Federal Resource Conservation and Recovery Act, the
Toxic Substances Control Act, the Emergency Planning and Community
Right-to-Know Act, the California Hazardous Waste Control Law, the
California Solid Waste Management, Resource, Recovery and Recycling
Act, the California Water Code and the California Health and Safety Code.
H. " ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, including (unless the context
otherwise requires) any rules or regulations promulgated thereunder.
I. "EVENT OF DEFAULT" shall have the meaning set forth in the section
herein entitled "Events of Default".
J. "HAZARDOUS MATERIALS" shall mean all those substances which are
regulated by, or which may form the basis of liability under any
Environmental Law, including all substances identified under any
Environmental Law as a pollutant contaminant, hazardous waste, hazardous
constituent, special waste, hazardous substance, hazardous material, or
toxic substance, or petroleum or petroleum derived substance or waste.
K. "INDEBTEDNESS" shall mean, with respect to the Borrower, (i) all
indebtedness for borrowed money or for the deferred purchase price of
property or services in respect of which the Borrower is liable,
contingently or otherwise, as obligor, guarantor or otherwise, or in
respect of which the Borrower otherwise assures a creditor against loss
and (ii) obligations under leases which shall have been or should be, in
accordance with generally accepted accounting principles, reported as
capital leases in respect of which the Borrower is liable, contingently
or otherwise, or in respect of which the Borrower otherwise assures a
creditor against loss.
L. "LIBOR RATE" shall mean an interest rate determined by the Bank's
Treasury Desk as being the arithmetic mean (rounded upwards, if
necessary, to the nearest whole multiple of one-sixteenth of one percent
(1/16%)) of the U.S. dollar London Interbank Offered Rates for the
relevant period appearing on page 3750 (or such other page as may replace
3750) of the Telerate screen at or about 11:00 a.m. (London time) on
the second Business Day prior to the first day of the relevant interest
period (adjusted for any and all assessments, surcharges and reserve
requirements).
M. "OBLIGATIONS" shall mean all amounts owing by the Borrower to the
Bank pursuant to this Agreement including, but not limited to, the unpaid
principal amount of Advances.
N. "PERMITTED LIENS" shall mean: (i) liens and security interests
securing indebtedness owed by the Borrower to the Bank, (ii) liens for
taxes, assessments or similar charges either not yet due or being
contested in good faith, provided proper reserves are maintained therefor
in accordance with generally accepted accounting procedure; (iii) liens
of materialmen, mechanics, warehousemen, or carriers or other like liens
arising in the ordinary course of business and securing obligations which
are not yet delinquent: (iv) purchase money liens or purchase money
security interests upon or in any property acquired or held by the
Borrower in the ordinary course of business to secure Indebtedness
outstanding on the date hereof or permitted to be incurred pursuant to
this Agreement: (v) liens and security interests which, as of the date
hereof, have been disclosed to and approved by the Bank in writing; and
(vi) those liens and security interests which in the aggregate constitute
an immaterial and insignificant monetary amount with respect to the net
value of the Borrower's assets.
(1)
<PAGE> 2
O. "REFERENCE RATE" shall mean an index for a variable interest rate
which is quoted, published or announced from time to time by the Bank as
its reference rate and as to which loans may be made by the Bank at,
below or above such reference rate.
P. "SUBORDINATED DEBT" shall mean such liabilities of the Borrower
which have been subordinated to those owed to the Bank in a manner
acceptable to the Bank.
1.02. ACCOUNTING TERMS. All references to financial statements, assets,
liabilities, and similar accounting items not specifically defined herein shall
mean such financial statements or such items prepared or determined in
accordance with generally accepted accounting principles consistently applied
and, except where otherwise specified, all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
1.03. OTHER TERMS. Other terms not otherwise defined shall have the
meanings attributed to such terms in the California Uniform Commercial Code.
SECTION II
CREDIT FACILITIES
2.01. COMMITMENT TO LEND. Subject to the terms and conditions of this
Agreement and so long as no Event of Default occurs, the Bank agrees to extend
to the Borrower the credit accommodations that follow.
2.02. LINE OF CREDIT FACILITY. The Bank agrees to make loans and Advances
to the Borrower, upon the Borrower's request therefor made prior to the
Expiration Date (as defined below in this Section 2.02), up to a total
principal amount from time to time outstanding of not more than $5,000,000.00.
Within the foregoing limits, the Borrower may borrow, partially or wholly
prepay, and reborrow under this Line of Credit facility.
A. PURPOSE. Advances made under this Line of Credit shall be used for
working capital purposes.
B. INTEREST RATE. Except with respect to "Fixed Rate Advances" as
provided below, interest shall accrue on the outstanding principal
balance of Advances under this Line of Credit at a variable rate equal to
the Bank's Reference Rate, per annum, as it may change from time to time.
(Such rate is referred to in this Section 2.02 as the "Variable Rate".)
The Variable Rate shall be adjusted concurrently with any change in the
Reference Rate. Interest shall be calculated on the basis of 360 days
per year but charged on the actual number of days elapsed.
C. ALTERNATIVE FIXED RATE LIBOR PRICING. In addition to Advances based
upon the Variable Rate ("Variable Rate Advances"), at the Borrower's
election, the Bank hereby agrees to make Advances to the Borrower under
this Line of Credit at a fixed rate (each a "Fixed Rate Advance") which
shall be approximately equivalent to 1.50% per annum in excess of the
LIBOR Rate (the "Fixed Rate"). Such Advances shall be in the minimum
amount of $ 100,000.00 and in $100,000.00 increments thereafter and for
such period of time (each an "Interest Period") for which the Bank may
quote and offer such Fixed Rate, provided that the Interest Period shall
be for a minimum of at least 30 days and for a maximum of not more than
473 days and provided further that any Interest Period shall not extend
beyond the Expiration Date (as defined below) of this facility. Interest
on any Fixed Rate Advance shall be computed on the basis of 360 days per
year but charged on the actual number of days elapsed.
(i) NOTICE OF ELECTION TO ADJUST INTEREST RATE. Upon telephonic notice
which shall be received by the Bank at or before 2:00 p.m. (California
time) on a Business Day, the Borrower may elect:
(a) That interest on a Variable Rate Advance shall be adjusted to accrue
at a Fixed Rate; provided, however, that such notice shall be received by
the Bank no later than two Business Days prior to the day (which shall be
a Business Day) on which the Borrower requests that interest be adjusted
to accrue at the Fixed Rate.
(b) That interest on a Fixed Rate Advance shall continue to accrue at a
newly quoted Fixed Rate or shall be adjusted to commence to accrue at the
Variable Rate, provided however, that such notice shall be received by
the Bank no later than two Business Days prior to the last day of the
Interest Period pertaining to such Fixed Rate Advance. If the Bank shall
not have received notice as prescribed herein of the Borrower's election
that interest on any Fixed Rate Advance shall continue to accrue at the
Fixed Rate, the Borrowers shall be deemed to have elected that interest
thereon shall be adjusted to accrue at the Variable Rate upon the
expiration of the Interest Period pertaining to such Advance.
(ii) PROHIBITION AGAINST PREPAYMENT OF FIXED RATE ADVANCES.
NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE AGREEMENT, NO PREPAYMENT
SHALL BE MADE ON ANY FIXED RATE ADVANCE EXCEPT ON A DAY WHICH IS THE LAST
DAY OF THE INTEREST PERIOD PERTAINING THERETO. IF THE WHOLE OR ANY PART
OF ANY FIXED RATE ADVANCE IS PREPAID BY REASON OF ACCELERATION OR
OTHERWISE, THE BORROWER SHALL, UPON THE BANK'S REQUEST, PROMPTLY PAY TO
AND INDEMNIFY THE BANK FOR ALL COSTS AND ANY LOSS (INCLUDING INTEREST)
ACTUALLY INCURRED BY THE BANK AND ANY LOSS (INCLUDING LOSS OF PROFIT
RESULTING FROM THE RE-EMPLOYMENT OF FUNDS) SUSTAINED BY THE BANK AS A
CONSEQUENCE OF SUCH PREPAYMENT.
(iii) INDEMNIFICATION FOR FIXED RATE COSTS. During any period of
time in which interest on any Advance is accruing on the basis of a Fixed
Rate, the Borrower shall, upon the Bank's request, promptly pay to and
reimburse the Bank for all costs incurred and payments made by the Bank
by reason of any future assessment, reserve, deposit or similar
requirements or any surcharge, tax or fee imposed upon the Bank or as a
result of the Bank's compliance with any directive or requirement of any
regulatory authority pertaining or relating to funds used by the Bank in
quoting and determining the Fixed Rate.
(iv) INVOLUNTARY CONVERSION FROM FIXED RATE TO VARIABLE RATE. In the
event that the Bank shall at any time determine that the accrual of
interest on the basis of the Fixed Rate (a) is infeasible because the
Bank is unable to determine the Fixed Rate due to the unavailability of
U.S. dollar deposits, contracts or certificates of deposit in an amount
approximately equal to the amount of the relevant Advance and for a
period of time approximately equal to the relevant Interest Period; or
(b) is or has become unlawful or infeasible by reason of the Bank's
compliance with any new law, rule, regulation, guideline or order, or any
new interpretation of any present law, rule, regulation, guideline or
order, then the Bank shall give to the Borrower telephonic notice thereof
(confirmed in writing) setting forth in reasonable detail the factors
underlying its determination, in which event any Fixed Rate Advance shall
be deemed to be a Variable Rate Advance and interest shall thereupon
immediately accrue at the Variable Rate.
(2)
<PAGE> 3
D. PAYMENT OF INTEREST.
(i) VARIABLE RATE ADVANCES. The Borrower hereby promises and
agrees to pay interest on all Variable Rate Advances monthly on the
last day of each month, commencing on April 30, 1996.
(ii) FIXED RATE ADVANCES. The Borrower hereby promises and agrees
to pay the Bank interest on any Fixed Rate Advance With an Interest
Period of 90 days or less on the last day of the relevant Interest
Period. The Borrower further promises and agrees to pay the Bank
interest on any Fixed Rate Advance with an Interest Period in excess
of 90 days on a quarterly basis (i.e. on the last day of each 90-day
period occurring in such Interest Period) and on the last day of the
relevant Interest Period.
If interest is not paid as and when it is due, the amount of such unpaid
interest shall bear interest until paid in full, at a rate of interest
equal to the Variable Rate.
E. REPAYMENT OF PRINCIPAL. Unless sooner due in accordance with the
terms of this Agreement, the Borrower hereby promises and agrees to repay
outstanding Advances as follows:
(i) FIXED RATE ADVANCES. Unless adjusted at the end of the relevant
Interest Period as provided above, the principal amount of each Fixed
Rate Advance, shall be due and payable to the Bank on the last day of
the Interest Period pertaining to such Fixed Rate Advance,
(ii) VARIABLE RATE ADVANCES. On June 30, 1997 the full aggregate
unpaid principal balance of all Advances then outstanding, together
with all accrued and unpaid interest thereon shall be due and payable
to the Bank.
Any payment received by the Bank shall, at the Bank's option, first be
applied to pay any late fees or other fees then due and unpaid, and then
to interest then due and unpaid and the remainder thereof (if any) shall
be applied to reduce principal.
F. LATE FEE. If any regularly scheduled payment of principal and/or
interest (exclusive of the final payment upon maturity), or any portion
thereof, under this Line of Credit is not paid within ten (10) calendar
days after it is due, a late payment charge equal to five percent (5%) of
such past due payment may be assessed and shall be immediately payable.
G. MAKING LINE ADVANCES/NOTICE OF BORROWING. Each Advance made
hereunder shall be conclusively deemed to have been made at the request
of and for the benefit of the Borrower (i) when credited to any deposit
account of the Borrower maintained with the Bank or (ii) when paid in
accordance with the Borrower's written instructions. Subject to any
other requirements set forth in this Agreement, Advances shall be made by
the Bank upon telephonic or written notice received from the Borrower in
form acceptable to the Bank, which notice shall be received by the Bank
at or before 2:00 p.m. (California time) on a Business Day. The Borrower
may borrow under the Line of Credit by requesting either:
(i) A VARIABLE RATE ADVANCE. A Variable Rate Advance may be made on
the Business Day notice is received by the Bank; provided however,
that if the Bank shall not have received notice at or before 2:00
p.m. (California time) on the day such Advance is requested to be
made, such Variable Rate Advance may be made, at the Bank's option,
on the next Business Day.
(ii) A FIXED RATE ADVANCE. The Borrower may elect that an Advance be
made as a Fixed Rate Advance by requesting the Bank to provide a
quote as to the rate which would apply for a designated Interest
Period and concurrently with receiving such quote, giving the Bank
irrevocable notice of the Borrower's acceptance of the rate quoted
provided such notice shall be given to the Bank not later than 10:00
a.m. (California time) on a date (which shall be a Business Day) at
least two days prior to the first day of the requested Interest
Period.
H. EXPIRATION OF THE LINE OF CREDIT FACILITY. Unless earlier
terminated in accordance with the terms of this Agreement, the Bank's
commitment to make Advances to the Borrower hereunder shall automatically
expire on June 30, 1997 (the "Expiration Date"), and the Bank shall be
under no further obligation to advance any monies thereafter.
I. LINE ACCOUNT. The Bank shall maintain on its books a record of
account in which the Bank shall make entries for each Advance and such
other debits and credits as shall be appropriate in connection with the
Line of Credit facility (the "Line Account"). The Bank shall provide the
Borrower with a monthly statement of the Borrower's Line Account, which
statement shall be considered to be correct and conclusively binding on
the Borrower unless the Bank is notified by the Borrower to the contrary
within thirty (30) days after the Borrower's receipt of any such
statement which is deemed to be incorrect.
J. AMOUNTS PAYABLE ON DEMAND. If the Borrower fails to pay on demand
any amount so payable under this Agreement, the Bank may, at its option
and without any obligation to do so and without waiving any default
occasioned by the Borrower's failure to pay such amount, create an
Advance in an amount equal to the amount so payable, which Advance shall
thereafter bear interest as provided under this Line of Credit facility.
In addition, the Borrower hereby authorizes the Bank, if and to the
extent payment owed to the Bank under this Line of Credit facility is not
made when due, to charge, from time to time, against any or all of the
deposit accounts maintained by the Borrower with the Bank any amount so
due.
SECTION III
CONDITIONS PRECEDENT
3.01. CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT AND/OR FIRST
ADVANCE. The obligation of the Bank to make the initial extension of credit
and/or the first Advance hereunder is subject to the conditions precedent that
the Bank shall have received before the date of such extension of credit and/or
the first Advance all of the following, in form and substance satisfactory to
the Bank:
A. AUTHORITY TO BORROW. Evidence relating to the duly given approval
and authorization of the execution, delivery and performance of this
Agreement, all other documents, instruments and agreements required under
this Agreement and all other actions to be taken by the Borrower
hereunder or thereunder,
B. GUARANTORS. Continuing guaranties in favor of the Bank, in form and
substance satisfactory to the Bank, executed by Align-Rite International,
Inc. and Align-Rite International Limited (each a "Guarantor"), together
with evidence that the execution, delivery and performance of the
Guaranties by each Guarantor has been duly authorized.
C. LOAN FEES. Evidence that any required loan fees and expenses as set
forth above with respect to each credit facility have been paid or
provided for by the Borrower.
(3)
<PAGE> 4
D. AUDIT. The opportunity to conduct an audit of the Borrower's books,
records and operations and the Bank shall be satisfied as to the
condition thereof.
E. MISCELLANEOUS DOCUMENTS. Such other documents, instruments,
agreements and opinions as are necessary, or as the Bank may reasonably
require, to consummate the transactions contemplated under this
Agreement, all fully executed.
3.02. CONDITIONS PRECEDENT TO ALL EXTENSIONS of CREDIT AND/OR ADVANCES.
The obligation of the Bank to make any extensions of credit and/or each Advance
to or on account of the Borrower (including the initial extension of credit
and/or the first Advance) shall be subject to the further conditions precedent
that, as of the date of each extension of credit or Advance and after the
making of such extension of credit or Advance:
A. REPRESENTATIONS AND WARRANTIES. The representations and warranties
set forth in the Section entitled "Representations and Warranties" herein
and in any other document, instrument, agreement or certificate delivered
to the Bank hereunder are true and correct.
B. EVENT OF DEFAULT. No event has occurred and is continuing which
constitutes, or, with the lapse of time or giving of notice or both,
would constitute an Event of Default.
C. SUBSEQUENT APPROVALS, ETC. The Bank shall have received such
supplemental approvals, opinions or documents as the Bank may reasonably
request.
3.03. REAFFIRMATION OF STATEMENTS. For the purposes hereof, the
Borrower's acceptance of the proceeds of any extension of credit and the
Borrower's execution of any document or instrument evidencing or creating any
Obligation hereunder shall each be deemed to constitute the Borrower's
representation and warranty that the statements set forth above in this Section
are true and correct.
SECTION IV
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to the
Bank, which representations and warranties are continuing:
4.01. STATUS. The Borrower is a corporation duly organized and validly
existing under the laws of the State of Nevada and is properly licensed,
qualified to do business and in good standing in, and. where necessary to
maintain the Borrower's rights and privileges, has complied with the fictitious
name statute of every jurisdiction in which the Borrower is doing business.
4.02. AUTHORITY. The execution, delivery and performance by the Borrower
of this Agreement and any instrument, document or agreement required hereunder
have been duly authorized and do not and will not: (i) violate any provision of
any law, rule, regulation, writ, judgment or injunction presently in effect
affecting the Borrower; (ii) require any consent or approval of the
stockholders of the Borrower or violate any provision of the articles of
incorporation or by-laws of the Borrower: or (iii) result in a breach of or
constitute a default under any material agreement to which the Borrower is a
party or by which it or its properties may be bound or affected.
4.03. LEGAL EFFECT. This Agreement constitutes, and any document
instrument or agreement required hereunder when delivered will constitute,
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms.
4.04. FICTITIOUS TRADE STYLES. The Borrower currently uses no fictitious
trade styles in connection with its business operations. The Borrower shall
notify the Bank within thirty (30) days of the use of any fictitious trade
style at any future date, indicating the trade style and state(s) of its use.
4.05. FINANCIAL STATEMENTS. All financial statements, information and
other data which may have been and which may hereafter be submitted by the
Borrower to the Bank are true, accurate and correct and have been and will be
prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent the Borrower's financial
condition and, as applicable, the other information disclosed therein. Since
the most recent submission of any such financial statement, information or
other data to the Bank, the Borrower represents and warrants that no material
adverse change in the Borrower's financial condition or operations has occurred
which has not been fully disclosed to the Bank in writing.
4.06. LITIGATION. Except as have been disclosed to the Bank in writing,
there are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or the Borrower's
properties before any court or administrative agency which, if determined
adversely to the Borrower, would have a material adverse effect on the
Borrower's financial condition or operations.
4.07. TITLE TO ASSETS. The Borrower has good and marketable title to all
of its assets and the same are not subject to any security interest,
encumbrance, lien or claim of any third person except for Permitted Liens.
4.08. ERISA. If the Borrower has a pension, profit sharing or retirement
plan subject to ERISA, such plan has been and will continue to be funded in
accordance with its terms and otherwise complies with and continues to comply
with the requirements of ERISA.
4.09. TAXES. The Borrower has filed all tax returns required to be filed
and paid all taxes shown thereon to be due, including interest and penalties.
other than taxes which are currently payable without penalty or interest or
those which are being duly contested in good faith.
4.10. ENVIRONMENTAL COMPLIANCE. The operations of the Borrower comply,
and during the term of this Agreement will at all times comply, in all respects
with all Environmental Laws; the Borrower has obtained licenses, permits,
authorizations and registrations required under any Environmental Law
("Environmental Permits") and necessary for its ordinary operations. all such
Environmental Permits are in good standing, and the Borrower is in compliance
with all material terms and conditions of such Environmental Permits; neither
the Borrower nor any of its present properties or operations are subject to any
outstanding written order from or agreement with any governmental authority nor
subject to any judicial or docketed administrative proceeding, respecting any
Environmental Law, Environmental Claim or Hazardous Material: there are no
Hazardous Materials or other conditions or circumstances existing, or arising
from operations prior to the date of this Agreement, with respect to any
property of the Borrower that would reasonably be expected to give rise to
Environmental Claims; provided however, that with respect to property leased
from an unrelated third party, the foregoing representation is made to the best
knowledge of the Borrower. In addition. (i) the Borrower does not have or
maintain any underground storage tanks which are not properly registered or
permitted under applicable Environmental Laws or which are leaking or disposing
of Hazardous Materials off-site, and (ii) the Borrower has notified all of its
employees of the existence, if any, of any health hazard arising from the
conditions of their employment and have met all notification requirements under
Title III of CERCLA and all other Environmental Laws.
(4)
<PAGE> 5
SECTION V
COVENANTS
The Borrower covenants and agrees that, during the term of this Agreement, and
so long thereafter as the Borrower is indebted to the Bank under this
Agreement, the Borrower shall, unless the Bank otherwise consents in writing:
5.01. PRESERVATION OF EXISTENCE. COMPLIANCE WITH APPLICABLE LAWS.
Maintain and preserve its existence and all rights and privileges now enjoyed;
not liquidate or dissolve, merge or consolidate with or into, or acquire any
other business organization; and conduct its business in accordance with all
applicable laws, rules and regulations.
5.02. MAINTENANCE OF INSURANCE. Maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower operates and maintain such other insurance and coverages as may be
required by the Bank. All such insurance shall be in form and amount and with
companies satisfactory to the Bank. With respect to insurance covering
properties in which the Bank maintains a security interest or lien, such
insurance shall be in an amount not less than the full replacement value
thereof, at the Bank's request, shall name the Bank as loss payee pursuant to a
loss payable endorsement satisfactory to the Bank and shall not be altered or
canceled except upon ten (10) days' prior written notice to the Bank. Upon the
Bank's request the Borrower shall furnish the Bank with the original policy or
binder of all such insurance.
5.03. MAINTENANCE OF PROPERTIES. The Borrower shall maintain and preserve
all its properties in good working order and condition in accordance with the
general practice of other businesses of similar character and size, ordinary
wear and tear excepted.
5.04. PAYMENT OF OBLIGATIONS AND TAXES. Make timely payment of all
assessments and taxes and all of its liabilities and obligations including, but
not limited to, trade payables, unless the same are being contested in good
faith by appropriate proceedings with the appropriate court or regulatory
agency. For purposes hereof, the Borrower's issuance of a check, draft or
similar instrument without delivery to the intended payee shall not constitute
payment.
5.05. INSPECTION RIGHTS. At any reasonable time and from time to time
permit the Bank or any representative thereof to examine and make copies of the
records and visit the properties of the Borrower and to discuss the business
and operations of the Borrower with any employee or representative thereof. If
the Borrower now or at any time hereafter maintains any records (including, but
not limited to, computer generated records and computer programs for the
generation of such records) in the possession of a third party, the Borrower
hereby agrees to notify such third party to permit the Bank free access to such
records at ail reasonable times and to provide the Bank with copies of any
records it may request, all at the Borrower's expense, the amount of which
shall be payable immediately upon demand.
5.06. REPORTING REQUIREMENTS. Deliver or cause to be delivered to the
Bank in form and detail satisfactory to the Bank:
A. ANNUAL STATEMENTS. Not later than 90 days after the end of each of
the Borrower's fiscal years, a copy of the annual financial report of the
Borrower for such year, which report shall be an audited statement by a
CPA firm acceptable to the Bank with an unqualified opinion.
B. INTERIM STATEMENTS. Not later than 45 days after the end of each
FISCAL quarter, the Borrower's financial statement as of the end of such
fiscal quarter.
C. OTHER INFORMATION. Promptly upon the Bank's request, such other
information pertaining to the Borrower or any Guarantor as the Bank may
reasonably request.
5.07. GENERAL PLEDGE OF PROPERTY IN POSSESSION OF BANK. To secure payment
of all of the Borrower's Obligations under this Agreement and performance of
all of the terms, covenants and agreements contained herein, the Borrower
hereby grants to the Bank a security interest in and to all monies, and
property of the Borrower now or hereafter in the possession of the Bank or the
Bank's agents, or any one of them, including, but not limited to, all deposit
accounts, certificates of deposit, stocks, bonds, indentures, warrants, options
and other negotiable and nonnegotiable securities and instruments, together
with all stock rights, rights to subscribe, liquidating dividends, cash
dividends, payments, dividends paid in stock, new securities or other property
to which the Borrower may become entitled to receive on account of such
property.
5.08. PAYMENT OF DIVIDENDS. The Borrower shall not declare or pay any
dividends on any class of its stock now or hereafter outstanding except
dividends payable solely in the corporation's capital stock.
5.09. REDEMPTION OR REPURCHASE OF STOCK. The Borrower shall not redeem or
repurchase any class of its corporate stock now or hereafter outstanding.
5.10. ADDITIONAL INDEBTEDNESS. Not, after the date hereof, create, incur
or assume, directly or indirectly, any liability or indebtedness other than (i)
indebtedness owed or to be owed to the Bank or (ii) indebtedness to trade
creditors incurred in the ordinary course of the Borrower's business.
5.11. LOANS. Not make any loans or advances or extend credit to any third
person, including, but not limited to, directors, officers, shareholders,
partners, employees, affiliated entities or subsidiaries of the Borrower,
except for credit extended in the ordinary course of the Borrower's business as
presently conducted and except loans made as inter-company advances to
affiliates for repayment of debt owed to the Bank.
5.12. LIENS AND ENCUMBRANCES. Not create, assume or permit to exist any
security interest, encumbrance, mortgage, deed of trust or other lien
(including, but not limited to, a lien of attachment, judgment or execution)
affecting any of the Borrower's properties, or execute or allow to be filed any
financing statement or continuation thereof affecting any such properties,
except for Permitted Liens or as otherwise provided in this Agreement.
5.13. TRANSFER ASSETS. Not sell, contract for sale, transfer, convey,
assign, lease or sublet any assets of the Borrower except in the ordinary
course of business as presently conducted by the Borrower, and then, only for
full, fair and reasonable consideration.
5.14. CHANGE IN THE NATURE OF BUSINESS. Not make any material change in
the Borrower's financial structure or in the nature of the Borrower's business
as existing or conducted as of the date of this Agreement.
5.15. FINANCIAL CONDITION. Maintain at all times:
A. NET WORTH. A minimum Effective Tangible Net Worth of not less than
$7,000,000.00 plus 50% of net income after taxes earned after June 30,
1995.
B. DEBT TO NET WORTH RATIO. A Debt to Effective Tangible Net Worth
ratio of not more than 1.00 to 1.00.
C. CURRENT RATIO. A ratio of current assets to current liabilities of
not less than 1.25 to 1.00.
(5)
<PAGE> 6
D. PROFITABILITY. The Borrower shall maintain net income after taxes
of not less than $1,500,000.00 on an annual basis and not less than
$750,000.00 on a semi-annual basis.
E. DEBT SERVICE COVERAGE RATIO. A minimum debt service coverage ratio
of not less than 2.00 to 1.00 wherein debt service coverage ratio is
defined as net income plus depreciation divided by the current portion of
long term debt. The current portion of long term debt shall also include
20% utilization of the Borrower's line of credit.
5.16. ENVIRONMENTAL COMPLIANCE. The Borrower shall:
A. Conduct the Borrower's operations and keep and maintain all of its
properties in compliance with all Environmental Laws.
B. Give prompt written notice to the Bank, but in no event later than
10 days after becoming aware, of the following: (i) any enforcement,
cleanup, removal or other governmental or regulatory actions instituted,
completed or threatened against the Borrower or any of its affiliates or
any of its respective properties pursuant to any applicable Environmental
Laws, (ii) all other Environmental Claims, and (iii) any environmental or
similar condition on any real property adjoining or in the vicinity of
the property of the Borrower or its affiliates that could reasonably be
anticipated to cause such property or any part thereof to be subject to
any restrictions on the ownership, occupancy, transferability or use of
such property under any Environmental Laws.
C. Upon the written request of the Bank, the Borrower shall submit to
the Bank, at its sole cost and expense, at reasonable intervals, a report
providing an update of the status of any environmental, health or safety
compliance, hazard or liability issue identified in any notice required
pursuant to this Section.
D. At all times indemnify and hold harmless the Bank from and against
any and all liability arising out of any Environmental Claims.
5.17. NOTICE. Give the Bank prompt written notice of any and all (i)
Events of Default; and (ii) other matters which have resulted in, or might
result in a material adverse change in the financial condition or business
operations of the Borrower.
SECTION VI
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event of
default under this Agreement:
6.01. NON-PAYMENT. The Borrower shall fail to pay any Obligations within
10 days of when due,
6.02. PERFORMANCE UNDER THIS AND OTHER AGREEMENTS. The Borrower shall
fail in any material respect to perform or observe any term, covenant or
agreement contained in this Agreement or in any document, instrument or
agreement evidencing or relating to any indebtedness of the Borrower (whether
owed to the Bank or third persons), and any such failure (exclusive of the
payment of money to the Bank under this Agreement or under any other document,
instrument or agreement, which failure shall constitute and be an immediate
Event of Default if not paid when due or when demanded to be due) shall
continue for more than 30 days after written notice from the Bank to the
Borrower of the existence and character of such Event of Default.
6.03. REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS. Any
representation or warranty made by the Borrower under or in connection with
this Agreement or any financial statement given by the Borrower or any
Guarantor shall prove to have been incorrect in any material respect when made
or given or when deemed to have been made or given.
6.04. INSOLVENCY. The Borrower or any Guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an assignment
for the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties or assets; (iii) file a voluntary petition
in bankruptcy or seeking reorganization or to effect a plan or other
arrangement with creditors: (iv) file an answer admitting the material
allegations of an involuntary petition relating to bankruptcy or reorganization
or join in any such petition: (v) become or be adjudicated a bankrupt; (vi)
apply for or consent to the appointment of, or consent that an order be made,
appointing any receiver, custodian or trustee for itself or any of its
properties, assets or businesses: or (vii) any receiver, custodian or trustee
shall have been appointed for all or a substantial pan of its properties,
assets or businesses and shall not be discharged within 30 days after the date
of such appointment.
6.05. EXECUTION. Any writ of execution or attachment or any judgment lien
shall be issued against any property of the Borrower and shall not be
discharged or bonded against or released within 30 days after the issuance or
attachment of such writ or lien.
6.06. DEFAULT OF AFFILIATE. An event of default shall occur under any
credit agreement between the Bank and Align-Rite International, Inc.
6.07. REVOCATION OR LIMITATION OF GUARANTY. Any Guaranty shall be revoked
or limited or its enforceability or validity shall be contested by any
Guarantor, by operation of law, legal proceeding or otherwise or any Guarantor
who is a natural person shall die.
6.08. SUSPENSION. The Borrower shall voluntarily suspend the transaction
of business or allow to be suspended, terminated, revoked or expired any
permit, license or approval of any governmental body necessary to conduct the
Borrower's business as now conducted.
6.09. CHANGE IN OWNERSHIP. There shall occur a sale, transfer,
disposition or encumbrance (whether voluntary or involuntary), or an agreement
shall be entered into to do so, with respect to more than 10% of the issued and
outstanding capital stock of the Borrower.
SECTION VII
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole
election, without demand and upon only such notice as may be required by law:
7.01. ACCELERATION. Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or under any other document,
instrument or agreement immediately due and payable, whether or not otherwise
due and payable.
7.02. CEASE EXTENDING CREDIT. Cease making Advances or otherwise
extending credit to or for the account of the Borrower under this Agreement or
under any other agreement now existing or hereafter entered into between the
Borrower and the Bank.
(6)
<PAGE> 7
7.03. TERMINATION. Terminate this Agreement as to any future obligation
of the Bank without affecting the Borrower's obligations to the Bank or the
Bank's rights and remedies under this Agreement or under any other document.
instrument or agreement.
7.04. NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other remedies
as may be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Borrower and the Bank, or otherwise.
SECTION VIII
MISCELLANEOUS PROVISIONS
8.01. DEFAULT INTEREST RATE. If an Event of Default has occurred and is
continuing, the Bank, at its option, may require the Borrower to pay to the
Bank interest on any Indebtedness or amount payable under this Agreement at a
rate which is 3% in excess of the rate or rates otherwise then in effect under
this Agreement.
8.02. RELIANCE. Each warranty, representation, covenant and agreement
contained in this Agreement shall be conclusively presumed to have been relied
upon by the Bank regardless of any investigation made or information possessed
by the Bank and shall be cumulative and in addition to any other warranties,
representations, covenants or agreements which the Borrower shall now or
hereafter give, or cause to be given, to the Bank.
8.03. DISPUTE RESOLUTION.
A. DISPUTES. It is understood and agreed that, upon the request of any
party to this Agreement, any dispute, claim or controversy of any kind,
whether in contract or in tort, statutory or common law, legal or
equitable, now existing or hereinafter arising between the parties in any
way arising out of, pertaining to or in connection with: (i) this
Agreement, or any related agreements, documents or instruments, (ii) all
past and present loans, credits, accounts, deposit accounts (whether
demand deposits or time deposits), safe deposit boxes, safekeeping
agreements, guarantees, letters of credit goods or services, or other
transactions, contracts or agreements of any kind, (iii) any incidents,
omissions, acts, practices, or occurrences causing injury to any party
whereby another party or its agents, employees or representatives may be
liable, in whole or in part, or (iv) any aspect of the past or present
relationships of the parties, shall be resolved through a two-step
dispute resolution process administered by the Judicial Arbitration &
Mediation Services, Inc. ("JAMS") as follows:
B. STEP I - MEDIATION. At the request of any party to the dispute,
claim or controversy, the matter shall be referred to the nearest office
of JAMS for mediation, which is an informal, non-binding conference or
conferences between the parties in which a retired judge or justice from
the JAMS panel will seek to guide the parties to a resolution of the
case.
C. STEP II - ARBITRATION (CONTRACTS NOT SECURED BY REAL PROPERTY).
Should any dispute, claim or controversy remain unresolved at the
conclusion of the Step I Mediation Phase, then (subject to the
restriction at the end of this subparagraph) all such remaining matters
shall be resolved by final and binding arbitration before a different
judicial panelist unless the parties shall agree to have the mediator
panelist act as arbitrator. The hearing shall be conducted at a location
determined by the arbitrator in Los Angeles, California (or such other
city as may be agreed upon by the parties) and shall be administered by
and in accordance with the then existing Rules of Practice and Procedure
of JAMS and judgement upon any award rendered by the arbitrator may be
entered by any State or Federal Court having jurisdiction thereof. The
arbitrator shall determine which is the prevailing party and shall
include in the award that party's reasonable attorneys' fees and costs.
This subparagraph shall apply only if, at the time of the submission of
the matter to JAMS, the dispute or issues involved do not arise out of
any transaction which is secured by real property collateral or, if so
secured, all parties consent to such submission.
As soon as practicable after selection of the arbitrator, the arbitrator,
or the arbitrator's designated representative, shall determine a
reasonable estimate of anticipated fees and costs of the arbitrator, and
render a statement to each party setting forth that party's pro-rata
share of said fees and costs. Thereafter, each party shall, within 10
days of receipt of said statement deposit said sum with the arbitrator.
Failure of any party to make such a deposit shall result in a forfeiture
by the non-depositing party of the right to prosecute or defend the claim
which is the subject of the arbitration, but shall not otherwise serve to
abate, stay or suspend the arbitration proceedings.
D. STEP II - TRIAL BY COURT REFERENCE (CONTRACTS SECURED BY REAL
PROPERTY). If the dispute, claim or controversy is not one required or
agreed to be submitted to arbitration, as provided in the above
subparagraph, and has not been resolved by Step I mediation, then any
remaining dispute, claim or controversy shall be submitted for
determination by a trial on Order of Reference conducted by a retired
judge or justice from the panel of JAMS appointed pursuant to the
provisions of Section 638(l) of the California Code of Civil Procedure,
or any amendment, addition or successor section thereto, to hear the case
and report a statement of decision thereon. The parties intend this
general reference agreement to be specifically enforceable in accordance
with said section. If the parties are unable to agree upon a member of
the JAMS panel to act as referee, then one shall be appointed by the
Presiding Judge of the county wherein the hearing is to be held. The
parties shall pay in advance, to the referee, the estimated reasonable
fees and costs of the reference, as may be specified in advance by the
referee. The parties shall initially share equally, by paying their
proportionate amount of the estimated fees and costs of he reference.
Failure of any party to make such a fee deposit shall result in a
forfeiture by the non-depositing party of the right to prosecute or
defend any cause of action which is the subject of the reference, but
shall not otherwise serve to abate, stay or suspend the reference
proceeding.
E. Provisional Remedies, Self Help and Foreclosure. No provision of,
or the exercise of any rights under any portion of this Dispute
Resolution provision, shall limit the right of any party to exercise self
help remedies such as set off, foreclosure against any real or personal
property collateral, or the obtaining of provisional or ancillary
remedies, such as injunctive relief or the appointment of a receiver,
from any court having jurisdiction before, during or after the pendency
of any arbitration. At the Bank's option, foreclosure under a deed of
trust or mortgage may be accomplished either by exercise of power of sale
under the deed of trust or mortgage, or by judicial foreclosure. The
institution and maintenance of an action for provisional remedies,
pursuit of provisional or ancillary remedies or exercise of self help
remedies shall not constitute a waiver of the right of any party to
submit the controversy or claim to arbitration.
8.04. WAIVER OF JURY. The Borrower and the Bank hereby expressly and
voluntarily waive any and all rights, whether arising under the California
constitution, any rules of the California Code of Civil Procedure, common law
or otherwise, to demand a trial by jury in any action, matter, claim or cause
of action whatsoever arising out of or in any way related to this Agreement or
any other agreement document or transaction contemplated hereby.
8.05. RESTRUCTURING EXPENSES. In the event the Bank and the Borrower
negotiate for, or enter into, any restructuring, modification or refinancing of
the Indebtedness under this Agreement for the purposes of remedying an Event of
Default, The Bank, may require the Borrower to reimburse all of the Bank's
costs and expenses incurred in connection therewith, including, but not limited
to reasonable attorneys' fees and the costs of any audit or appraisals required
by the Bank to be performed in connection with such restructuring, modification
or refinancing.
(7)
<PAGE> 8
8.06. ATTORNEYS' FEES. In the event of any suit, mediation, arbitration
or other action in relation to this Agreement or any document, instrument or
agreement executed with respect to, evidencing or securing the indebtedness
hereunder, the prevailing party, in addition to all other sums to which it may
be entitled, shall be entitled to reasonable attorneys' fees.
8.07. NOTICES. All notices, payments, requests, information and demands
which either party hereto may desire, or may be required to give or make to the
other party shall be given or made to such party by hand delivery or through
deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed to the address set forth below such party's signature to
this Agreement or to such other address as may be specified from time to time
in writing by either party to the other.
8.08. WAIVER. Neither the failure nor delay by the Bank in exercising any
right hereunder or under any document instrument or agreement mentioned herein
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right hereunder or under any document, instrument or agreement mentioned
herein preclude other or further exercise thereof or the exercise of any other
right; nor shall any waiver of any right or default hereunder or under any
other document, instrument or agreement mentioned herein constitute a waiver of
any other right or default or constitute a waiver of any other default of the
same or any other term or provision.
8.09. CONFLICTING PROVISIONS. To the extent that any of the terms or
provisions contained in this Agreement are inconsistent with those contained in
any other document, instrument or agreement executed pursuant hereto, the terms
and provisions contained herein shall control. Otherwise, such provisions
shall be considered cumulative.
8.10. BINDING EFFECT, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the Bank's prior
written consent. The Bank may sell, assign or grant participations in ail or
any portion of its rights and benefits hereunder. The Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to the Borrower and any guarantor.
8.11. JURISDICTION. This Agreement, any notes issued hereunder, and any
documents, instruments or agreements mentioned or referred to herein shall be
governed by and construed according to the laws of the State of California, to
the jurisdiction of whose courts the parties hereby submit.
8.12. HEADINGS. The headings set forth herein arc solely for the purpose
of identification and have no legal significance.
8.13. ENTIRE AGREEMENT. This Agreement and all documents, instruments and
agreements mentioned herein constitute the entire and complete understanding of
the parties with respect to the transactions contemplated hereunder. All
previous conversations, memoranda and writings between the parties or
pertaining to the transactions contemplated hereunder that are not incorporated
or referenced in this Agreement or in such documents, instruments and
agreements are superseded hereby.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as
of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ALIGN-RITE CORPORATION
By: /s/ DAN WILSON By:
------------------------------ --------------------------------
Dan Wilson, Authorized Officer James L. MacDonald Executive
Officer/President
Address:
Newport Beach Office (CBC) By: /s/ PETER KATURICH
4400 MacArthur Boulevard, Suite 200 --------------------------------
Newport Beach, CA 92660 Peter N. Katurich, Chief
Financial Officer/Secretary
Address:
2428 Ontario Street
Burbank, CA 91504
(8)
<PAGE> 1
Exhibit 10.18
SANWA
BANK
CALIFORNIA
LINE OF CREDIT AGREEMENT
This Line of Credit Agreement ("Agreement") is made and entered into this 28th
day of march 1996 by and between SANWA BANK CALIFORNIA (the "Bank") and
ALIGN-RITE INTERNATIONAL, INC. (the "Borrower").
SECTION I
DEFINITIONS
1.01. CERTAIN DEFINED TERMS. Unless elsewhere defined in this Agreement
the following terms shall have the following meanings (such meanings to be
generally applicable to the singular and plural forms of the terms defined):
A. "ADVANCE" shall mean an advance to the Borrower under any line of
credit facility or similar facility provided for in Section 11 of this
Agreement which provides for draws by the Borrower against an established
credit line.
B. "BUSINESS DAY" shall mean a day, other than a Saturday or Sunday, on
which commercial banks are open for business in California,
C. "COLLATERAL" shall mean any personal or real property in which the
Bank may be granted a lien or security interest to secure payment of the
Obligations.
D. "DEBT" shall mean all liabilities of the Borrower less Subordinated
Debt.
E. "EFFECTIVE TANGIBLE NET WORTH" shall mean the Borrower's stated net
worth plus Subordinated Debt but less all intangible assets of the
Borrower (i.e., goodwill, trademarks, patents, copyrights, organization
expense and similar intangible items).
F. "ENVIRONMENTAL CLAIMS" shall mean all claims, however asserted, by
any governmental authority or other person alleging potential liability
or responsibility for violation of any Environmental Law or for release
or injury to the environment or threat to public health, personal injury
(including sickness, disease or death), property damage, natural
resources damage, or otherwise alleging liability or responsibility for
damages (punitive or otherwise), cleanup, removal, remedial or response
costs, restitution, civil or criminal penalties, injunctive relief, or
other type of relief, resulting from or based upon (i) the presence,
placement, discharge, emission or release (including intentional and
unintentional, negligent and non-negligent, sudden or non-sudden,
accidental or non-accidental placement, spills, leaks, discharges,
emissions or releases) of any Hazardous Materials at, in, or from
property owned, operated or controlled by the Borrower, or (ii) any other
circumstances forming the basis of any violation, or alleged violation,
of any Environmental Law.
G. "ENVIRONMENTAL LAWS" shall mean all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
governmental authorities, in each case relating to environmental, health,
safety and land use matters; including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean
Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste
Disposal Act, the Federal Resource Conservation and Recovery Act, the
Toxic Substances Control Act, the Emergency Planning and Community
Right-to-Know Act, the California Hazardous Waste Control Law, the
California Solid Waste Management Resource, Recovery and Recycling Act,
the California Water Code and the California Health and Safety Code.
H. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, including (unless the context
otherwise requires) any rules or regulations promulgated thereunder.
I. "EVENT OF DEFAULT" shall have the meaning set forth in the section
herein entitled "Events of Default".
J. "Hazardous Materials" shall mean all those substances which are
regulated by, or which may form the basis of liability under any
Environmental Law, including all substances identified under any
Environmental Law as a pollutant Contaminant, hazardous waste, hazardous
constituent, special waste, hazardous substance, hazardous material, or
toxic substance, or petroleum or petroleum derived substance or waste.
K. "INDEBTEDNESS" shall mean, with respect to the Borrower, (i) all
indebtedness for borrowed money or for the deferred purchase price of
property or services in respect of which the Borrower is liable,
contingently or otherwise, as obligor, guarantor or otherwise, or in
respect of which the Borrower otherwise assures a creditor against loss
and (ii) obligations under leases which shall have been or should be, in
accordance with generally accepted accounting principles, reported as
capital leases in respect of which the Borrower is liable, contingently
or otherwise, or in respect of which the Borrower otherwise assures a
creditor against loss.
L. "LIBOR RATE" shall mean an interest rate determined by the Bank's
Treasury Desk as being the arithmetic mean (rounded upwards, if
necessary, to the nearest whole multiple of one-sixteenth of one percent
(1/16%)) of the U.S. dollar London Interbank Offered Rates for the
relevant period appearing on page 3750 (or such other page as may replace
3750) of the Telerate screen at or about 11:00 a.m. (London time) on the
second Business Day prior to the first day of the relevant interest
period (adjusted for any and all assessments, surcharges and reserve
requirements).
M. "OBLIGATIONS" shall mean all amounts owing by the Borrower to the
Bank pursuant to this Agreement including, but not limited to, the unpaid
principal amount of Advances.
N. "PERMITTED LIENS" shall mean: (i) liens and security interests
securing indebtedness owed by the Borrower to the Bank; (ii) liens for
taxes, assessments or similar charges either not yet due or being
contested in good faith, provided proper reserves are maintained therefor
in accordance with generally accepted accounting procedure; (iii) liens
of materialmen, mechanics, warehousemen, or carriers or other like liens
arising in the ordinary course of business and securing obligations which
are not yet delinquent; (iv) purchase money liens or purchase money
security interests upon or in any property acquired or held by the
Borrower in the ordinary course of business to secure Indebtedness
outstanding on the date hereof or permitted to be incurred pursuant to
this Agreement; (v) liens and security interests which, as of the date
hereof, have been disclosed to and approved by the Bank in writing; and
(vi) those liens and security interests which in the aggregate constitute
an immaterial and insignificant monetary amount with respect to the net
value of the Borrower's assets.
(1)
<PAGE> 2
O. "REFERENCE RATE" shall mean an index for a variable interest rate
which is quoted, published or announced from time to time by the Bank as
its reference rate and as to which loans may be made by the Bank at,
below or above such reference rate.
P. "SUBORDINATED DEBT" shall mean such liabilities of the Borrower
which have been subordinated to those owed to the Bank in a manner
acceptable to the Bank.
1.02. ACCOUNTING TERMS. All references to financial statements, assets,
liabilities, and similar accounting items not specifically defined herein shall
mean such financial statements or such items prepared or determined in
accordance with generally accepted accounting principles consistently applied
and, except where otherwise specified, all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
1.03. OTHER TERMS. Other terms not otherwise defined shall have the
meanings attributed to such terms in the California Uniform Commercial Code.
SECTION II
CREDIT FACILITIES
2.01. COMMITMENT TO LEND. Subject to the terms and conditions of this
Agreement and so long as no Event of Default occurs, the Bank agrees to extend
to the Borrower the credit accommodations that follow.
2.02. LINE OF CREDIT FACILITY. The Bank agrees to make loans and Advances
to the Borrower. upon the Borrower's request therefor made prior to the
Expiration Date (as defined below in this Section 2.02), up to a total
principal amount from time to time outstanding of not more than $2,500,000.00.
Within the foregoing limits, the Borrower may borrow, partially or wholly
prepay, and reborrow under this Line of Credit facility.
A. PURPOSE. Advances made under this Line of Credit shall be used for
acquisition purposes.
B. INTEREST RATE. Except with respect to "Fixed Rate Advances" as
provided below, interest shall accrue on the outstanding principal
balance of Advances under this Line of Credit at a variable rate equal to
the Bank's Reference Rate, per annum, as it may change from time to time.
(Such rate is referred to in this Section 2.02 as the "Variable Rate".)
The Variable Rate shall be adjusted concurrently with any change in the
Reference Rate. Interest shall be calculated on the basis of 360 days
per year but charged on the actual number of days elapsed.
C. ALTERNATIVE FIXED RATE LIBOR PRICING. In addition to Advances based
upon the Variable Rate ("Variable Rate Advances"), at the Borrower's
election, the Bank hereby agrees to make Advances to the Borrower under
this Line of Credit at a fixed rate (each a "Fixed Rate Advance") which
shall be approximately equivalent to 1.50% per annum in excess of the
LIBOR Rate (the "Fixed Rate"). Such Advances shall be in the minimum
amount of $100,000.00 and in $100,000.00 increments thereafter and for
such period of time (each an "Interest Period") for which the Bank may
quote and offer such Fixed Rate, provided that the Interest Period shall
be for a minimum of at least 30 days and for a maximum of not more than
473 days and provided further that any Interest Period shall not extend
beyond the Expiration Date (as defined below) of this facility. Interest
on any Fixed Rate Advance shall be computed on the basis of 360 days per
year but charged on the actual number of days elapsed.
(i) NOTICE OF ELECTION TO ADJUST INTEREST RATE. Upon telephonic notice
which shall be received by the Bank at or before 2:00 p.m. (California
time) on a Business Day, the Borrower may elect:
(a) That interest on a Variable Rate Advance shall be adjusted to
accrue at a Fixed Rate; provided, however, that such notice shall be
received by the Bank no later than two Business Days prior to the
day (which shall be a Business Day) on which the Borrower requests
that interest be adjusted to accrue at the Fixed Rate.
(b) That interest on a Fixed Rate Advance shall continue to accrue
at a newly quoted Fixed Rate or shall be adjusted to commence to
accrue at the Variable Rate; provided however, that such notice
shall be received by the Bank no later than two Business Days prior
to the last day of the Interest Period pertaining to such Fixed Rate
Advance. If the Bank shall not have received notice as prescribed
herein of the Borrower's election that interest on any Fixed Rate
Advance shall continue to accrue at the Fixed Rate, the Borrowers
shall be deemed to have elected that interest thereon shall be
adjusted to accrue at the Variable Rate upon the expiration of the
Interest Period pertaining to such Advance.
(ii) PROHIBITION AGAINST PREPAYMENT OF FIXED RATE ADVANCES.
NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE AGREEMENT, NO PREPAYMENT
SHALL BE MADE ON ANY FIXED RATE ADVANCE EXCEPT ON A DAY WHICH IS THE LAST
DAY OF THE INTEREST PERIOD PERTAINING THERETO. IF THE WHOLE OR ANY PART
OF ANY FIXED RATE ADVANCE IS PREPAID BY REASON OF ACCELERATION OR
OTHERWISE, THE BORROWER SHALL, UPON THE BANK'S REQUEST, PROMPTLY PAY TO
AND INDEMNIFY THE BANK FOR ALL COSTS AND ANY LOSS (INCLUDING INTEREST)
ACTUALLY INCURRED BY THE BANK AND ANY LOSS (INCLUDING LOSS OF PROFIT
RESULTING FROM THE RE-EMPLOYMENT OF FUNDS) SUSTAINED BY THE BANK AS A
CONSEQUENCE OF SUCH PREPAYMENT.
(iii) INDEMNIFICATION FOR FIXED RATE COSTS. During any period of
time in which interest on any Advance is accruing on the basis of a Fixed
Rate, the Borrower shall, upon the Bank's request. promptly pay to and
reimburse the Bank for all costs incurred and payments made by the Bank
by reason of any future assessment, reserve, deposit or similar
requirements or any surcharge, tax or fee imposed upon the Bank or as a
result of the Bank's compliance with any directive or requirement of any
regulatory authority pertaining or relating to funds used by the Bank in
quoting and determining the Fixed Rate.
(iv) INVOLUNTARY CONVERSION FROM FIXED RATE TO VARIABLE RATE. In the
event that the Bank shall at any time determine that the accrual of
interest on the basis of the Fixed Rate (a) is infeasible because the
Bank is unable to determine the Fixed Rate due to the unavailability of
U.S. dollar deposits, contracts or certificates of deposit in an amount
approximately equal to the amount of the relevant Advance and for a
period of time approximately equal to the relevant interest Period, or
(b) is or has become unlawful or infeasible by reason of the Bank's
compliance with any new law, rule, regulation, guideline or order, or any
new interpretation of any present law, rule, regulation, guideline or
order, then the Bank shall give to the Borrower telephonic notice thereof
(confirmed in writing) setting forth in reasonable detail the factors
underlying its determination, in which event any Fixed Rate Advance shall
be deemed to be a Variable Rate Advance and interest shall thereupon
immediately accrue at the Variable Rate.
(2)
<PAGE> 3
D. PAYMENT OF INTEREST.
(i) VARIABLE RATE ADVANCES. The Borrower hereby promises and
agrees to pay interest on all Variable Rate Advances monthly on the
last day of each month, commencing on April 30. 1996.
(ii) FIXED RATE ADVANCES. The Borrower hereby promises and agrees
to pay the Bank interest on any Fixed Rate Advance with an Interest
Period of 90 days or less on the last day of the relevant Interest
Period. The Borrower further promises and agrees to pay the Bank
interest on any Fixed Rate Advance with an Interest Period in excess
of 90 days on a quarterly basis (i.e. on the last day of each 90-day
period occurring in such Interest Period) and on the last day of the
relevant Interest Period.
If interest is not paid as and when it is due, the amount of such unpaid
interest shall bear interest, until paid in full, at a rate of interest
equal to the Variable Rate.
E. REPAYMENT OF PRINCIPAL. Unless sooner due in accordance with the
terms of this Agreement. the Borrower hereby promises and agrees to repay
outstanding Advances as follows:
(i) FIXED RATE ADVANCES. Unless adjusted at the end of the relevant
Interest Period as provided above, the principal amount of each Fixed
Rate Advance, shall be due and payable to the Bank on the last day of
the Interest Period pertaining to such Fixed Rate Advance.
(ii) VARIABLE RATE ADVANCES. On June 30, 1997 the full aggregate
unpaid principal balance of all Advances then outstanding, together
with all accrued and unpaid interest thereon shall be due and payable
to the Bank.
Any payment received by the Bank shall, at the Bank's option, first be
applied to pay any late fees or other fees then due and unpaid, and then
to interest then due and unpaid and the remainder thereof (if any) shall
be applied to reduce principal.
F. LATE FEE. If any regularly scheduled payment of principal and/or
interest (exclusive of the final payment upon maturity), or any portion
thereof, under this Line of Credit is not paid within ten (10) calendar
days after it is due, a late payment charge equal to five percent (5%) of
such past due payment may be assessed and shall be immediately payable.
G. MAKING LINE ADVANCES/NOTICE OF BORROWING. Each Advance made
hereunder shall be conclusively deemed to have been made at the request
of and for the benefit of the Borrower (i) when credited to any deposit
account of the Borrower maintained with the Bank or (ii) when paid in
accordance with the Borrower's written instructions. Subject to any
other requirements set forth in this Agreement, Advances shall be made by
the Bank upon telephonic or written notice received from the Borrower in
form acceptable to the Bank, which notice shall be received by the Bank
at or before 2:00 p.m. (California time) on a Business Day. The Borrower
may borrow under the Line of Credit by requesting either:
(i) A VARIABLE RATE ADVANCE. A Variable Rate Advance may be made
on the Business Day notice is received by the Bank, provided
however, that if the Bank shall not have received notice at or
before 2:00 p.m. (California time) on the day such Advance is
requested to be made, such Variable Rate Advance may be made, at the
Bank's option, on the next Business Day.
(ii) A FIXED RATE ADVANCE. The Borrower may elect that an Advance
be made as A Fixed Rate Advance by requesting the Bank to provide a
quote as to the rate which would apply for a designated Interest
Period and concurrently with receiving such quote, giving the Bank
irrevocable notice of the Borrower's acceptance of the rate quoted
provided such notice shall be given to the Bank not later than 10:00
a.m. (California time) on a date (which shall be a Business Day) at
least two days prior to the first day of the requested Interest
Period.
H. EXPIRATION OF THE LINE OF CREDIT FACILITY. Unless earlier
terminated in accordance with the terms of this Agreement the Bank's
commitment to make Advances to the Borrower hereunder shall automatically
expire on June 30, 1997 (the "Expiration Date"), and the Bank shall be
under no further obligation to advance any monies thereafter.
I. LINE ACCOUNT. The Bank shall maintain on its books a record of
account in which the Bank shall make entries for each Advance and such
other debits and credits as shall be appropriate in connection with the
Line of Credit facility (the "Line Account"). The Bank shall provide the
Borrower with a monthly statement of the Borrower's Line Account, which
statement shall be considered to be correct and conclusively binding on
the Borrower unless the Bank is notified by the Borrower to the contrary
within thirty (30) days after the Borrower's receipt of any such
statement which is deemed to be incorrect.
J. AMOUNTS PAYABLE ON DEMAND. If the Borrower fails to pay on demand
any amount so payable under this Agreement, the Bank may, at its option
and without any obligation to do so and without waiving any default
occasioned by the Borrower's failure to pay such amount, create an
Advance in an amount equal to the amount so payable, which Advance shall
thereafter bear interest as provided under this Line of Credit facility.
In addition, the Borrower hereby authorizes the Bank, if and to the
extent payment owed to the Bank under this Line of Credit facility is not
made when due, to charge, from time to time. against any or all of the
deposit accounts maintained by the Borrower with the Bank any amount so
due.
SECTION III
CONDITIONS PRECEDENT
3.01. CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT AND/OR FIRST
ADVANCE. The obligation of the Bank to make the initial extension of credit
and/or the first Advance hereunder is subject to the conditions precedent that
the Bank shall have received before the date of such extension of credit and/or
the first Advance all of the following, in form and substance satisfactory to
the Bank:
A. AUTHORITY TO BORROW. Evidence relating to the duly given approval
and authorization of the execution, delivery and performance of this
Agreement, all other documents, instruments and agreements required under
this Agreement and all other actions to be taken by the Borrower
hereunder or thereunder.
B. GUARANTORS. Continuing guaranties in favor of the Bank, in form and
substance satisfactory to the Bank, executed by Align-Rite Corporation
and Align-Rite International Limited (each a "Guarantor"), together with
evidence that the execution, delivery and performance of the Guaranties
by each Guarantor has been duly authorized.
C. LOAN FEES. Evidence that any required loan fees and expenses as set
forth above with respect to each credit facility have been paid or
provided for by the Borrower.
(3)
<PAGE> 4
D. AUDIT. The opportunity to conduct an audit of the Borrower's books,
records and operations and the Bank shall be satisfied as to the
condition thereof
E. MISCELLANEOUS DOCUMENTS. Such other documents, instruments,
agreements and opinions as are necessary, or as the Bank may reasonably
require, to consummate the transactions contemplated under this
Agreement, all fully executed.
3.02. CONDITIONS PRECEDENT TO ALL EXTENSIONS OF CREDIT AND/OR ADVANCES.
The obligation of the Bank to make any extensions of credit and/or each Advance
to or on account of the Borrower (including the initial extension of credit
and/or the first Advance) shall be subject to the further conditions precedent
that, as of the date of each extension of credit or Advance and after the
making of such extension of credit or Advance:
A. REPRESENTATIONS AND WARRANTIES. The representations and warranties
set forth in the Section entitled "Representations and Warranties" herein
and in any other document, instrument, agreement or certificate delivered
to the Bank hereunder are true and correct.
B. EVENT OF DEFAULT. No event has occurred and is continuing which
constitutes, or, with the lapse of time or giving of notice or both,
would constitute an Event of Default.
C. SUBSEQUENT APPROVALS, ETC. The Bank shall have received such
supplemental approvals, opinions or documents as the Bank may reasonably
request.
3.03. REAFFIRMATION OF STATEMENTS. For the purposes hereof, the
Borrower's acceptance of the proceeds of any extension of credit and the
Borrower's execution of any document or instrument evidencing or creating any
Obligation hereunder shall each be deemed to constitute the Borrower's
representation and warranty that the statements set forth above in this Section
are true and correct.
SECTION IV
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to the
Bank, which representations and warranties are continuing:
4.01. STATUS. The Borrower is a corporation duly organized and validly
existing under the laws of the State of California and is properly licensed,
qualified to do business and in good standing in, and, where necessary to
maintain the Borrower's rights and privileges, has complied with the fictitious
name statute of every jurisdiction in which the Borrower is doing business.
4.02. AUTHORITY. The execution, delivery and performance by the Borrower
of this Agreement and any instrument, document or agreement required hereunder
have been duly authorized and do not and will not: (i) violate any provision of
any law, rule, regulation, writ judgment or injunction presently in effect
affecting the Borrower; (ii) require any consent or approval of the
stockholders of the Borrower or violate any provision of the articles of
incorporation or by-laws of the Borrower; or (iii) result in a breach of or
constitute a default under any material agreement to which the Borrower is a
party or by which it or its properties may be bound or affected.
4.03. LEGAL EFFECT. This Agreement constitutes, and any document,
instrument or agreement required hereunder when delivered will constitute,
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms.
4.04. FICTITIOUS TRADE STYLES. The Borrower currently uses no fictitious
trade styles in connection with its business operations. The Borrower shall
notify the Bank within thirty (30) days of the use of any fictitious trade
style at any future date, indicating the trade style and state(s) of its use.
4.05. FINANCIAL STATEMENTS. All financial statements, information and
other data which may have been and which may hereafter be submitted by the
Borrower to the Bank are true, accurate and correct and have been and will be
prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent the Borrower's financial
condition and, as applicable, the other information disclosed therein. Since
the most recent submission of any such financial statement, information or
other data to the Bank, the Borrower represents and warrants that no material
adverse change in the Borrower's financial condition or operations has occurred
which has not been fully disclosed to the Bank in writing.
4.06. LITIGATION. Except as have been disclosed to the Bank in writing,
there are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or the Borrower's
properties before any court or administrative agency which, if determined
adversely to the Borrower, would have a material adverse effect on the
Borrower's financial condition or operations.
4.07. TITLE TO ASSETS. The Borrower has good and marketable title to all
of its assets and the same are not subject to any security interest,
encumbrance, lien or claim of any third person except for Permitted Liens.
4.08. ERISA. If the Borrower has a pension, profit sharing or retirement
plan subject to ERISA, such plan has been and will continue to be funded in
accordance with its terms and otherwise complies with and continues to comply
with the requirements of ERISA.
4.09. TAXES. The Borrower has filed all tax returns required to be filed
and paid all taxes shown thereon to be due, including interest and penalties,
other than taxes which are currently payable without penalty or interest or
those which are being duly contested in good faith.
4.10. ENVIRONMENTAL COMPLIANCE. The operations of the Borrower comply, and
during the term of this Agreement will at all times comply, in all respects
with all Environmental Laws, the Borrower has obtained licenses, permits,
authorizations and registrations required under any Environmental Law
("Environmental Permits") and necessary for its ordinary operations, all such
Environmental Permits arc in good standing, and the Borrower is in compliance
with all material terms and conditions of such Environmental Permits, neither
the Borrower nor any of its present properties or operations are subject to any
outstanding written order from or agreement with any governmental authority nor
subject to any judicial or docketed administrative proceeding, respecting any
Environmental Law, Environmental Claim or Hazardous Material; there are no
Hazardous Materials or other conditions or circumstances existing, or arising
from operations prior to the date of this Agreement, with respect to any
property of the Borrower that would reasonably be expected to give rise to
Environmental Claims; Provided however, that with respect to property leased
from an unrelated third party, the foregoing representation is made to the best
knowledge of the Borrower. In addition, (i) the Borrower does not have or
maintain any underground storage tanks which are not properly registered or
permitted under applicable Environmental Laws or which are leaking or disposing
of Hazardous Materials off-site, and (ii) the Borrower has notified all of its
employees of the existence, if any, of any health hazard arising from the
conditions of their employment and have met all notification requirements under
Title III of CERCLA and all other Environmental Laws.
(4)
<PAGE> 5
SECTION V
COVENANTS
The Borrower covenants and agrees that, during the term of this Agreement, and
so long thereafter as the Borrower is indebted to the Bank under this
Agreement, the Borrower shall, unless the Bank otherwise consents in writing:
5.01. PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS.
Maintain and preserve its existence and all rights and privileges now enjoyed;
not liquidate or dissolve, merge or consolidate with or into, or acquire any
other business organization; and conduct its business in accordance with all
applicable laws, rules and regulations.
5.02. MAINTENANCE OF INSURANCE. Maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower operates and maintain such other insurance and coverages as may be
required by the Bank. All such insurance shall be in form and amount and with
companies satisfactory to the Bank. With respect to insurance covering
properties in which the Bank maintains a security interest or lien, such
insurance shall be in an amount not less than the full replacement value
thereof, at the Bank's request, shall name the Bank as loss payee Pursuant to a
loss payable endorsement satisfactory to the Bank and shall not be altered or
canceled except upon ten (10) days' prior written notice to the Bank. Upon the
Bank's request, the Borrower shall furnish the Bank with the original policy or
binder of all such insurance.
5.03. MAINTENANCE OF PROPERTIES. The Borrower shall maintain and preserve
all its properties in good working order and condition in accordance with the
general practice of other businesses of similar character and size, ordinary
wear and tear excepted.
5.04. PAYMENT OF OBLIGATIONS AND TAXES. Make timely payment of all
assessments and taxes and all of its liabilities and obligations including, but
not limited to, trade payables, unless the same are being contested in good
faith by appropriate proceedings with the appropriate court or regulatory
agency. For purposes hereof, the Borrower's issuance of a check, draft of
similar instrument without delivery to the intended payee shall not constitute
payment.
5.05. INSPECTION RIGHTS. At any reasonable time and from time to time
permit the Bank or any representative thereof to examine and make copies of the
records and visit the properties of the Borrower and to discuss the business
and operations of the Borrower with any employee or representative thereof. If
the Borrower now or at any time hereafter maintains any records (including, but
not limited to, computer generated records and computer programs for the
generation of such records) in the possession of a third party, the Borrower
hereby agrees to notify such third party to permit the Bank free access to such
records at all reasonable times and to provide the Bank with copies of any
records it may request, all at the Borrower's expense, the amount of which
shall be payable immediately upon demand,
5.06. REPORTING REQUIREMENTS. Deliver or cause to be delivered to the
Bank in form and detail satisfactory to the Bank:
A. ANNUAL STATEMENTS. Not later than 90 days after the Borrower's
fiscal year end, the Borrower's annual consolidated financial statement
and Form 10K, which statement shall be audited by a CPA firm acceptable
to the Bank with an unqualified opinion.
B. INTERIM STATEMENTS. Not later than 45 days after each of the
Borrower's fiscal quarters, the Borrower's consolidated financial
statement and Form 10Q as of the end of such period.
C. OTHER INFORMATION. Promptly upon the Bank's request, such other
information pertaining to the Borrower or any Guarantor as the Bank may
reasonably request.
5.07. GENERAL PLEDGE OF PROPERTY IN POSSESSION OF BANK. To secure payment
of all of the Borrower's Obligations under this Agreement and performance of
all of the terms, covenants and agreements contained herein, the Borrower
hereby grants to the Bank a security interest in and to all monies, and
property of the Borrower now or hereafter in the possession of the Bank or the
Bank's agents, or any one of them, including, but not limited to, all deposit
accounts, certificates of deposit, stocks, bonds, indentures, warrants, options
and other negotiable and non-negotiable securities and instruments, together
with all stock rights, rights to subscribe, liquidating dividends, cash
dividends, payments, dividends paid in stock, new securities or other property
to which the Borrower may become entitled to receive on account of such
property.
5.08. PAYMENT OF DIVIDENDS. The Borrower shall not declare or pay any
dividends on any class of its stock now or hereafter outstanding except
dividends payable solely in the corporation's capital stock.
5.09. REDEMPTION OR REPURCHASE OF STOCK. The Borrower shall not redeem or
repurchase any class of its corporate stock now or hereafter outstanding.
5.10. ADDITIONAL INDEBTEDNESS. Not, after the date hereof, create, incur
or assume, directly or indirectly, any liability or indebtedness other than (i)
indebtedness owed or to be owed to the Bank or (ii) indebtedness to trade
creditors incurred in the ordinary course of the Borrower's business.
5.11. LIENS AND ENCUMBRANCES. Not create, assume or permit to exist any
security interest, encumbrance, mortgage, deed of trust or other lien
(including, but not limited to, a lien of attachment, judgment or execution)
affecting any of the Borrower's properties, or execute or allow to be filed any
financing statement or continuation thereof affecting any such properties,
except for Permitted Liens or as otherwise provided in this Agreement.
5.12. TRANSFER ASSETS. Not sell, contract for sale, transfer, convey,
assign, lease or sublet any assets of the Borrower except in the ordinary
course of business as presently conducted by the Borrower, and then, only for
full, fair and reasonable consideration.
5.13. CHANGE IN THE NATURE OF BUSINESS. Not make any material change in
the Borrower's financial structure or in the nature of the Borrower's business
as existing or conducted as of the date of this Agreement.
5.14. FINANCIAL CONDITION. Maintain at all times:
A. NET WORTH. A minimum Effective Tangible Net Worth, on a
consolidated basis, of not less than $21,000,000.00 plus 50% of net
income after taxes earned after June 30, 1995.
B. DEBT TO NET WORTH RATIO. A maximum ratio of total liabilities to
Effective Tangible Net Worth of not more than 1.00 to 1.00 on a
consolidated basis.
C. CURRENT RATIO. A ratio of current assets to current liabilities of
not less than 1.50 to 1.00 on a consolidated basis.
D. PROFITABILITY. The Borrower shall maintain net consolidated income
after taxes of not less than $1,500,000.00 on an annual basis and not
less than $750,000.00 on a semi-annual basis.
(5)
<PAGE> 6
E. DEBT SERVICE COVERAGE RATIO. A minimum debt service coverage ratio
of not less than 2.00 to 1.00 on a consolidated basis where debt service
coverage is defined as net income plus depreciation divided by the
current portion of long term debt. The current portion of long term debt
shall also include 20% utilization of the Borrower's line of credit
facility under this Agreement and the line of credit facility extended to
Align-Rite Corporation by Bank.
5.15. Environmental Compliance. The Borrower shall:
A. Conduct the Borrower's operations and keep and maintain all of its
properties in compliance with all Environmental Laws.
B. Give prompt written notice to the Bank, but in no event later than
10 days after becoming aware, of the following: (i) any enforcement,
cleanup, removal or other governmental or regulatory actions instituted,
completed or threatened against the Borrower or any of its affiliates or
any of its respective properties pursuant to any applicable Environmental
Laws, (ii) all other Environmental Claims, and (iii) any environmental or
similar condition on any real property adjoining or in the vicinity of
the property of the Borrower or its affiliates that could reasonably be
anticipated to cause such property or any part thereof to be subject to
any restrictions on the ownership, occupancy, transferability or use of
such property under any Environmental Laws.
C. Upon the written request of the Bank, the Borrower shall submit to
the Bank, at its sole cost and expense, at reasonable intervals, a report
providing an update of the status of any environmental, health or safety
compliance, hazard or liability issue identified in any notice required
pursuant to this Section.
D. At all times indemnify and hold harmless the Bank from and against
any and all liability arising out of any Environmental Claims.
5.16. NOTICE. Give the Bank prompt written notice of any and all (i)
Events of Default; and (ii) other matters which have resulted in, or might
result in a material adverse change in the financial condition or business
operations of the Borrower.
SECTION VI
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event of
default under this Agreement:
6.01. NON-PAYMENT. The Borrower shall fail to pay any Obligations within
10 days of when due.
6.02. PERFORMANCE UNDER THIS AND OTHER AGREEMENTS. The Borrower shall
fail in any material respect to perform or observe any term, covenant or
agreement contained in this Agreement or in any document, instrument or
agreement evidencing or relating to any indebtedness of the Borrower (whether
owed to the Bank or third persons), and any such failure (exclusive of the
payment of money to the Bank under this Agreement or under any other document,
instrument or agreement, which failure shall constitute and be an immediate
Event of Default if not paid when due or when demanded to be due) shall
continue for more than 30 days after written notice from the Bank to the
Borrower of the existence and character of such Event of Default.
6.03. REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS. Any
representation or warranty made by the Borrower under or in connection with
this Agreement or any financial statement given by the Borrower or any
Guarantor shall prove to have been incorrect in any material respect when made
or given or when deemed to have been made or given.
6.04. INSOLVENCY. The Borrower or any Guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an assignment
for the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties or assets; (iii) file a voluntary petition
in bankruptcy or seeking reorganization or to effect a plan or other
arrangement with creditors; (iv) file an answer admitting the material
allegations of an involuntary petition relating to bankruptcy or reorganization
or join in any such petition; (v) become or be adjudicated a bankrupt; (vi)
apply for or consent to the appointment of, or consent that an order be made,
appointing any receiver, custodian or trustee for itself or any of its
properties, assets or businesses; or (vii) any receiver, custodian or trustee
shall have been appointed for all or a substantial part of its properties,
assets or businesses and shall not be discharged within 30 days after the date
of such appointment.
6.05. EXECUTION. Any writ of execution or attachment or any judgment lien
shall be issued against any property of the Borrower and shall not be
discharged or bonded against or released within 30 days after the issuance or
attachment of such writ or lien.
6.06. DEFAULT OF AFFILIATE. An event of default shall occur under any
credit agreement between the Bank and Align-Rite Corporation.
6.07. REVOCATION OR LIMITATION OF GUARANTY. Any Guaranty shall be revoked
or limited or its enforceability or validity shall be contested by any
Guarantor, by operation of law, legal proceeding or otherwise or any Guarantor
who is a natural person shall die.
6.08. SUSPENSION. The Borrower shall voluntarily suspend the transaction
of business or allow to be suspended, terminated. revoked or expired any permit
license or approval of any governmental body necessary to conduct the
Borrower's business as now conducted.
6.09. CHANGE IN OWNERSHIP. There shall occur a sale, transfer,
disposition or encumbrance (whether voluntary or involuntary), or an agreement
shall be entered into to do so, with respect to more than 10% of the issued and
outstanding capital stock of the Borrower.
SECTION VII
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole
election. without demand and upon only such notice as may be required by law:
7.01. ACCELERATION. Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or under any other document.
instrument or agreement, immediately due and payable, whether or not otherwise
due and payable.
7.02. CEASE EXTENDING CREDIT. Cease making Advances or otherwise
extending credit to or for the account of the Borrower under this Agreement or
under any other agreement now existing or hereafter entered into between the
Borrower and the Bank.
7.03. TERMINATION. Terminate this Agreement as to any future obligation
of the Bank without affecting the Borrower's obligations to the Bank or the
Bank's rights and remedies under this Agreement or under any other document
instrument or agreement.
(6)
<PAGE> 7
7.04. NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other remedies
as may be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Borrower and the Bank, or otherwise.
SECTION VIII
MISCELLANEOUS PROVISIONS
8.01. DEFAULT INTEREST RATE. If an Event of Default has occurred and is
continuing, the Bank, at its option, may require the Borrower to pay to the
Bank interest on any Indebtedness or amount payable under this Agreement at a
rate which is 3% in excess of the rate or rates otherwise then in effect under
this Agreement.
8.02. RELIANCE. Each warranty, representation, covenant and agreement
contained in this Agreement shall be conclusively presumed to have been relied
upon by tile Bank regardless of any investigation made or information possessed
by the Bank and shall be cumulative and in addition to any other warranties,
representations, covenants or agreements which the Borrower shall now or
hereafter give, or cause to be given, to the Bank.
8.03. DISPUTE RESOLUTION.
A. DISPUTES. It is understood and agreed that, upon the request of any
party to this Agreement, any dispute, claim or controversy of any kind,
whether in contract or in tort, statutory or common law, legal or
equitable, now existing or hereinafter arising between the parties in any
way arising out of, pertaining to or in connection with: (i) this
Agreement, or any related agreements, documents or instruments, (ii) all
past and present loans, credits, accounts, deposit accounts (whether
demand deposits or time deposits), safe deposit boxes, safekeeping
agreements, guarantees, letters of credit, goods or services, or other
transactions, contracts or agreements of any kind, (iii) any incidents,
omissions, acts, practices, or occurrences causing injury to any party
whereby another party or its agents, employees or representatives may be
liable, in whole or in part, or (iv) any aspect of the past or present
relationships of the parties, shall be resolved through a two-step
dispute resolution process administered by the Judicial Arbitration &
Mediation Services, Inc. ("JAMS") as follows:
B. STEP I - MEDIATION. At the request of any party to the dispute,
claim or controversy, the matter shall be referred to the nearest office
of JAMS for mediation, which is an informal, non-binding conference or
conferences between the parties in which a retired judge or justice from
the JAMS panel will seek to guide the parties to a resolution of the
case.
C. STEP II - ARBITRATION (CONTRACTS NOT SECURED BY REAL PROPERTY).
Should any dispute, claim or controversy remain unresolved at the
conclusion of the Step I Mediation Phase, then (subject to the
restriction at the end of this subparagraph) all such remaining matters
shall be resolved by final and binding arbitration before a different
judicial panelist, unless the parties shall agree to have the mediator
panelist act as arbitrator. The hearing shall be conducted at a location
determined by the arbitrator in Los Angeles, California (or such other
city as may be agreed upon by the parties) and shall be administered by
and in accordance with the then existing Rules of Practice and Procedure
of JAMS and judgement upon any award rendered by the arbitrator may be
entered by any State or Federal Court having jurisdiction thereof. The
arbitrator shall determine which is the prevailing party and shall
include in the award that party's reasonable attorneys' fees and costs.
This subparagraph shall apply only if, at the time of the submission of
the matter to JAMS, the dispute or issues involved do not arise out of
any transaction which is secured by real property collateral or, if so
secured, all parties consent to such submission.
As soon as practicable after selection of the arbitrator, the arbitrator,
or the arbitrator's designated representative, shall determine a
reasonable estimate of anticipated fees and costs of the arbitrator, and
render a statement to each party setting forth that party's pro-rata
share of said fees and costs. Thereafter, each party shall, within 10
days of receipt of said statement, deposit said sum with the arbitrator.
Failure of any party to make such a deposit shall result in a
forfeiture by the non-depositing party of the right to prosecute or
defend the claim which is the subject of the arbitration, but shall not
otherwise serve to abate, stay or suspend the arbitration proceedings.
D. STEP II - TRIAL BY COURT REFERENCE (CONTRACTS SECURED BY REAL
PROPERTY). If the dispute, claim or controversy is not one required or
agreed to be submitted to arbitration, as provided in the above
subparagraph, and has not been resolved by Step I mediation, then any
remaining dispute, claim or controversy shall be submitted for
determination by a trial on Order of Reference conducted by a retired
judge or justice from the panel of JAMS appointed pursuant to the
provisions of Section 638(l) of the California Code of Civil Procedure,
or any amendment, addition or successor section thereto, to hear the case
and report a statement of decision thereon. The parties intend this
general reference agreement to be specifically enforceable in accordance
with said section. If the parties are unable to agree upon a member of
the JAMS panel to act as referee, then one shall be appointed by the
Presiding Judge of the county wherein the hearing is to be held. The
parties shall pay in advance, to the referee, the estimated reasonable
fees and costs of the reference, as may be specified in advance by the
referee. The parties shall initially share equally, by paying their
proportionate amount of the estimated fees and costs of the reference.
Failure of any party to make such a fee deposit shall result in a
forfeiture by the non-depositing party of the right to prosecute or
defend any cause of action which is the subject of the reference, but
shall not otherwise serve to abate, stay or suspend the reference
proceeding.
E. PROVISIONAL REMEDIES. Self Help and Foreclosure. No provision of,
or the exercise of any rights under any portion of this Dispute
Resolution provision, shall limit the right of any party to exercise self
help remedies such as set off, foreclosure against any real or personal
property collateral, or the obtaining of provisional or ancillary
remedies, such as injunctive relief or the appointment of a receiver,
from any court having jurisdiction before, during or after the pendency
of any arbitration. At the Bank's option, foreclosure under a deed of
trust or mortgage may be accomplished either by exercise of power of sale
under the deed of trust or mortgage, or by judicial foreclosure. The
institution and maintenance of an action for provisional remedies,
pursuit of provisional or ancillary remedies or exercise of self help
remedies shall not constitute a waiver of the right of any party to
submit the controversy or claim to arbitration.
8.04. WAIVER OF JURY. The Borrower and the Bank hereby expressly and
voluntarily waive any and all rights, whether arising under the California
constitution, any rules of the California Code of Civil Procedure, common law
or otherwise, to demand a trial by jury in any action, matter, claim or cause
of action whatsoever arising out of or in any way related to this Agreement or
any other agreement, document or transaction contemplated hereby.
8.05. RESTRUCTURING EXPENSES. In the event the Bank and the Borrower
negotiate for, or enter into, any restructuring, modification or refinancing of
the Indebtedness under this Agreement for the purposes of remedying an Event of
Default. The Bank, may require the Borrower to reimburse all of the Bank's
costs and expenses incurred in connection therewith, including, but not limited
to reasonable attorneys' fees and the costs of any audit or appraisals required
by the Bank to be performed in connection with such restructuring, modification
or refinancing.
8.06. ATTORNEYS' FEES. In the event of any suit, mediation, arbitration
or other action in relation to this Agreement or any document, instrument or
agreement executed with respect to, evidencing or securing the indebtedness
hereunder, the prevailing party, in addition to all other sums to which it may
be entitled, shall
(7)
<PAGE> 8
be entitled to reasonable attorneys' fees,
8.07. NOTICES. All notices, payments, requests, information and demands
which either party hereto may desire, or may be required to give or make to the
other party shall be given or made to such party by hand delivery or through
deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed to the address set forth below such party's signature to
this Agreement or to such other address as may be specified from time to time
in writing by either party to the other.
8.08. WAIVER. Neither the failure nor delay by the Bank in exercising any
right hereunder or under any document, instrument or agreement mentioned herein
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right hereunder or under any document, instrument or agreement mentioned
herein preclude other or further exercise thereof or the exercise of any other
right; nor shall any waiver of any right or default hereunder or under any
other document, instrument or agreement mentioned herein constitute a waiver of
any other right or default or constitute a waiver of any other default of the
same or any other term or provision.
8.09. CONFLICTING PROVISIONS. To the extent that any of the terms or
provisions contained in this Agreement are inconsistent with those contained in
any other document instrument or agreement executed pursuant hereto, the terms
and provisions contained herein shall control. Otherwise, such provisions
shall be considered cumulative.
8.10. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the Bank's prior
written consent. The Bank may sell, assign or grant participations in all or
any portion of its rights and benefits hereunder. The Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to the Borrower and any guarantor.
8.11. JURISDICTION. This Agreement, any notes issued hereunder, and any
documents, instruments or agreements mentioned or referred to herein shall be
governed by and construed according to the laws of the State of California, to
the jurisdiction of whose courts the parties hereby submit.
8.12. HEADINGS. The headings set forth herein are solely for the purpose
of identification and have no legal significance.
8.13. ENTIRE AGREEMENT. This Agreement and all documents, instruments and
agreements mentioned herein constitute the entire and complete understanding of
the parties with respect to the transactions contemplated hereunder. All
previous conversations, memoranda and writings between the parties or
pertaining to the transactions contemplated hereunder that are not incorporated
or referenced in this Agreement or in such documents, instruments and
agreements are superseded hereby.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as
of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ALIGN-RITE CORPORATION
By: /s/ DAN WILSON By:
------------------------------ --------------------------------
Dan Wilson, Authorized Officer James L. MacDonald, Chief Executive
Officer/President
Address:
Newport Beach Office (CBC) By: /s/ PETER KATURICH
4400 MacArthur Boulevard, Suite 200 --------------------------------
Newport Beach, CA 92660 Peter N. Katurich, Chief
Financial Officer/Secretary
Address:
2428 Ontario Street
Burbank, CA 91504
(8)
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
ALIGN-RITE INTERNATIONAL, INC.
The computation of net income per share for the years ended March 31, 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PRIMARY
Net income........................................... $4,964,264 $3,423,569 $1,729,130
Reduction of interest expense, net of tax effect..... -- 89,177 --
---------- ---------- ----------
$4,964,264 $3,512,746 $1,729,130
========= ========= =========
Average common shares outstanding.................... 3,698,037 1,314,725 1,310,725
Conversion of preferred stock........................ -- 1,185,746 1,185,746
Ordinary equivalent shares issuable upon the exercise
of options and warrants currently outstanding to
purchase ordinary shares subject to 20% limitation
on assumed repurchase.............................. 445,157 976,095 37,902
---------- ---------- ----------
4,143,194 3,476,566 2,534,373
========= ========= =========
Net income per share................................. $ 1.20 $ 1.01 $ 0.68
========= ========= =========
FULLY DILUTED
Net income........................................... $4,964,264 $3,423,569 $1,729,130
========= ========= =========
Average common shares outstanding.................... 3,698,037 1,314,725 1,310,725
Conversion of preferred stock........................ -- 1,185,746 1,185,746
Ordinary equivalent shares issuable upon the exercise
of options and warrants currently outstanding to
purchase ordinary shares........................... 445,157 990,174 37,902
---------- ---------- ----------
4,143,194 3,490,645 2,534,373
========= ========= =========
Net income per share................................. $ 1.20 $ 0.98 $ 0.68
========= ========= =========
</TABLE>
68
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Align-Rite International, Inc. is incorporated in the State of California.
The following table, in which an indentation indicates a parent-subsidiary
relationship, shows the Company's subsidiaries as of March 31, 1996, the
percentage of their voting securities then owned by the Company or the
subsidiary's immediate parent, and the jurisdiction under which each subsidiary
is incorporated. These subsidiaries are included in the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
PERCENTAGE
OF VOTING
JURISDICTION SECURITIES OWNED
OF BY COMPANY
INCORPORATION OR SUBSIDIARY
--------------- ----------------
<S> <C> <C>
Align-Rite International Limited............................ United Kingdom 100
Align-Rite Limited........................................ United Kingdom 100
Align-Rite Corporation.................................... Nevada, USA. 100
</TABLE>
69
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Align-Rite International, Inc. on Form S-8's (File No.s 33-00232, 33-96400
and 33-96402) of our report dated May 28, 1996, on our audits of the
consolidated financial statements and financial statement schedule of Align-Rite
International, Inc. as of March 31, 1996 and 1995, and for each of the three
years in the period ended March 31, 1996, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P
Los Angeles, California
June 27, 1996
70
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1996
<PERIOD-END> MAR-31-1996 MAR-31-1996
<CASH> 12,706,957 12,706,957
<SECURITIES> 0 0
<RECEIVABLES> 6,092,881 6,092,881
<ALLOWANCES> 152,633 152,633
<INVENTORY> 1,816,233 1,816,233
<CURRENT-ASSETS> 21,892,727 21,892,727
<PP&E> 23,249,336 23,249,336
<DEPRECIATION> 14,732,284 14,732,284
<TOTAL-ASSETS> 30,421,592 30,421,592
<CURRENT-LIABILITIES> 4,638,526 4,638,526
<BONDS> 0 0
0 0
0 0
<COMMON> 43,464 43,464
<OTHER-SE> 25,241,095 25,241,095
<TOTAL-LIABILITY-AND-EQUITY> 30,421,592 30,421,592
<SALES> 8,985,000 33,289,982
<TOTAL-REVENUES> 8,985,000 33,289,982
<CGS> 5,338,000 20,688,947
<TOTAL-COSTS> 5,338,000 20,688,947
<OTHER-EXPENSES> 55,000 20,426
<LOSS-PROVISION> 0 95,000
<INTEREST-EXPENSE> 28,000 113,126
<INCOME-PRETAX> 2,137,000 7,354,952
<INCOME-TAX> 805,000 2,219,088
<INCOME-CONTINUING> 1,332,000 4,964,264
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,332,000 4,964,264
<EPS-PRIMARY> 0.28 1.20
<EPS-DILUTED> 0.28 1.20
</TABLE>
