<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . to . . . . . . . . . . .
Commission file number 0-26240
ALIGN-RITE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
California 95-4528353
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2428 Ontario St. Burbank, CA 91504
(Address of principal executive offices) (Zip Code)
(818) 843-7220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1997
Common Stock, $.01 par value 4,436,570 Shares
<PAGE> 2
ALIGN-RITE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1997 and March 31, 1997 3
Consolidated Statements of Operations
for the Three and Six Months ended September 30, 1997
and 1996 4
Consolidated Statements of Cash Flows
for the Six Months ended September 30, 1997
and 1996 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 8
PART II. FINANCIAL INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
</TABLE>
2
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
Align-Rite International, Inc.
Consolidated Balance Sheets
(Unaudited - 000's omitted)
<TABLE>
<CAPTION>
At Mar 31, At Sept 30,
Assets 1997 1997
--------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ 6,734 $ 6,601
Accounts receivable, net ........................ 6,120 6,841
Inventories ..................................... 2,180 2,730
Prepaid expenses and other current assets ....... 1,233 1,109
------- -------
Total current assets ........................ 16,267 17,281
Property and equipment, net ..................... 22,089 26,424
Other assets .................................... 425 1,025
------- -------
Total assets ................................ $38,781 $44,730
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable .......................... $3,670 $ 4,284
Accrued expenses and other liabilities .......... 1,543 3,457
Taxes payable ................................... 327 803
------- -------
Total current liabilities ................... 5,540 8,544
Deferred taxes ...................................... 1,398 1,398
Other liabilities ................................... 470 732
Shareholders' equity:
Common stock:
Authorized - 35,000 shares $.01 par value;
Issued and outstanding 4,437 shares and 4,416
shares at September 30, 1997 and March 31, 1997,
respectively .................................... 44 44
Additional paid-in capital .......................... 18,287 18,373
Retained earnings ................................... 12,694 15,633
Cumulative foreign currency translation adjustment .. 348 6
------- -------
Total shareholders' equity .................. 31,373 34,056
------- -------
Total liabilities and shareholders' equity .. $38,781 $44,730
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
Align-Rite International, Inc.
Consolidated Statements of Operations
For the Three and Six Months Ended September 30, 1997 and 1996
(Unaudited - 000's omitted, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -------------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ................................ $ 9,666 $11,424 $19,179 $22,040
Cost of sales ............................ 6,026 7,233 11,944 13,832
------- ------- ------- -------
Gross profit ............................. 3,640 4,190 7,235 8,208
Selling, general and administrative ...... 1,558 1,829 3,112 3,523
------- ------- ------- -------
Income from operations ................... 2,082 2,361 4,123 4,685
Interest income .......................... 80 29 202 45
------- ------- ------- -------
Income before provison for income taxes .. 2,162 2,390 4,325 4,730
Provison for income taxes ................ 787 899 1,610 1,791
------- ------- ------- -------
Net income ............................... $ 1,375 $ 1,491 $ 2,715 $ 2,939
======= ======= ======= =======
Per share information:
Shares used - per share computation ...... 4,809 4,872 4,805 4,853
Earnings per share .................... $ 0.29 $ 0.31 $ 0.57 $ 0.61
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
Align-Rite International, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 1997 and 1996
(Unaudited - 000's omitted)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income: ............................................... $ 2,715 $ 2,939
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 1,247 1,830
Allowance for doubtful accounts ....................... - 31
Compensation related to stock options granted ......... - 55
Changes in assets and liabilities:
Accounts receivable, net .............................. 292 (811)
Inventories ........................................... (646) (573)
Prepaid expenses and other assets ..................... (397) 227
Trade accounts payable ................................ 1,622 641
Accrued expenses and other liabilities ................ 142 2,748
-------- --------
Net cash provided by operating activities ........... 4,975 7,087
-------- --------
Cash flows from investing activities
Purchase of property and equipment .................... (7,693) (4,680)
Payments for business acquisition, net of cash received - (2,467)
-------- --------
Net cash used in investing activities ............... (7,693) (7,147)
-------- --------
Cash flows from financing activities:
Stock options exercised ........................... 45 31
-------- --------
Net cash provided by financing activities ....... 45 31
-------- --------
Effect of exchange rate changes on cash ................... 56 (104)
Net decrease in cash ...................................... (2,617) (133)
-------- --------
Cash and cash equivalents, beginning of year .............. 12,707 6,734
-------- --------
Cash and cash equivalents, end of year .................... $ 10,090 $ 6,601
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the six months ended September 30, for:
Income Taxes .......................................... $ 1,125 $ 1,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
Align-Rite International, Inc.
Notes to Consolidated Financial Statements
Three and Six Months Ended September 30, 1997
(Unaudited)
Item 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"), Align-Rite Limited ("ARL"), Align-Rite
BV ("ARBV"), and Align-Rite GmbH ("ARGMBH"). ARII and its subsidiaries are
collectively referred to as the "Company". All significant intercompany accounts
and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, the accompanying
consolidated balance sheets and related interim consolidated statements of
operations and cash flows include all adjustments (consisting only of normal
recurring items) considered necessary for their fair presentation. 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, liabilities, revenues and expenses.
Actual results could differ from those estimates. The consolidated results of
operations for the period ended September 30, 1997 are not necessarily
indicative of results to be expected for the year ending March 31, 1998. The
information included in this Form 10-Q should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto as of
March 31, 1997 and 1996 and for the three years in the period ended March 31,
1997 as filed on Form 10-K.
The principal activity of ARII, ARI, and ARBV is that of holding companies into
which their respective subsidiaries are consolidated. ARC, ARL, and ARGMBH
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 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.
6
<PAGE> 7
Effective June 1, 1997, the Company's newly formed subsidiary, ARGMBH, completed
its first business acquisition. The Company purchased the photomask business
unit of TEMIC, a division of Daimler-Benz, located in Heilbronn, Germany. The
acquisition was accounted for using the purchase method of accounting. The
purchase price allocation is preliminary pending appraisals, evaluations, and
other studies regarding the fair value of the assets acquired and liabilities
assumed. The acquisition was not material to the financial position or results
of operations of the Company.
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.
7
<PAGE> 8
Item 2. Management's Discussions and Analysis of Results of Operations and
Financial Condition.
Net sales for the three and six months ended September 30, 1997, increased 18%
to $11,424,000 and 15% to $22,040,000, respectively, compared to $9,666,000 and
$19,179,000 in the same periods in the prior fiscal year. The increase in net
sales is attributable to increased demand for photomasks from the Company's
customers and the Company's acquisition in June 1997 of the photomask business
unit of TEMIC Telefunken Microelectronic GmbH ("TEMIC"), a division of
Daimler-Benz located in Heilbronn, Germany. Additionally, the increase resulted
from an overall increase in volume from both the Company's United Kingdom (U.K.)
and United States (U.S.) operations. United Kingdom net sales for the three and
six months ended September 30, 1997 increased 8% to $3,438,000 and 6% to
$6,892,000, respectively, compared with $3,182,000 and $6,485,000 in the same
periods in the prior fiscal year. United States net sales for the three and six
months ended September 30, 1997 increased 6% to $6,883,000 and 7% to $13,607,000
respectively, compared with $6,484,000 and $12,694,000 in the same periods in
the prior fiscal year. The new manufacturing site at TEMIC began operations
under the Company's control beginning June 1, 1997, and accounted for
approximately 10% of net sales for the second quarter.
Gross profit as a percentage of net sales for the three and six months ended
September 30, 1997 decreased slightly to 36.7% and 37.2%, respectively, compared
to 37.7% in the same periods in the prior fiscal year. The slight decrease in
gross profit as a percentage of net sales for the three and six months ended
September 30, 1997 is primarily attributable to an increase in depreciation
expense due to recent installations of equipment and the acquisition of the
photomask business unit of TEMIC which increased the Company's asset base.
Depreciation expense for the three and six months ended September 30, 1997
increased 54% to $943,000 and 47% to $1,830,000 respectively, compared to
$614,000 and $1,247,000 in the prior fiscal year. As the Company continues to
invest in capital equipment to keep pace with increased demand, the Company
anticipates that its gross profit will fluctuate slightly based on the timing of
equipment purchases and installations and related increases in depreciation
expense.
Selling, general and administrative expenses include salaries of sales
personnel, marketing expense, general and administrative expense and product
distribution expense. Selling, general and administrative expenses for the three
and six months ended September 30, 1997 increased 18% to $1,826,000 and 14% to
$3,520,000, respectively, compared with $1,558,000 and $3,112,000 in the same
periods in the prior fiscal year. While the absolute dollars increased each
period, selling, general and administrative expenses as a percentage of net
sales remained consistent at 16% for both the three and six months ended
September 30, 1997, compared with 16% in the same periods in the prior year. The
overall increase in selling, general and administrative expenses is attributable
to the Company's purchase of the photomask business unit of TEMIC, which has a
ratio of selling, general and administrative expenses to net sales comparable to
that of the Company. The Company believes Selling, general and administrative as
a percentage of sales will remain consistent.
Interest income for the three and six months ended September 30, 1997 decreased
as compared to the same periods in the prior year due to the maintenance of
lower cash balances by the Company.
8
<PAGE> 9
For the three and six months ended September 30, 1997, the Company provided for
Federal and State income taxes at an estimated combined effective rate of
approximately 38%, compared to 37% in the same periods in the prior year. The
prior period rates were lower due to the use of net operating loss carryforwards
in the United Kingdom, which were fully used in 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $6,601,000 at September 30, 1997.
Net cash provided by operating activities amounted to $7,087,000 for the six
months ended September 30, 1997 compared to $4,975,000 for the same period in
the prior year. Additions to operating cash flows for the six months ended
September 30, 1997 reflect a higher net income, increased non-cash charges
related to increased depreciation and amortization expenses and increases in
accounts payable and accrued expenses which were partially offset by increases
in accounts receivable and inventory.
Accounts receivable increased $721,000 or 12% during the six months ended
September 30, 1997, due largely to a 15% increase in net sales. Inventory levels
increased 25% to $2,730,000 during the six months ended September 30, 1997,
primarily due to higher costs of raw material used on the Company's laser beam
photomask imaging system and the Company's strategy of maintaining different
types of photoblanks for purposes of servicing its diverse customer base.
For the six months ended September 30, 1997, cash used in investing activities
totaled $7,147,000 compared to $7,693,000 in the prior year. The Company's
capital expenditures during the six months ended September 30, 1997 in the
amount of $4,680,000 were primarily for the construction of cleanrooms and the
purchase of equipment which will support and complement new process development
and further enhance the Company's capabilities for higher end products. Included
in the investing activities for the six months ended September 30, 1997 was the
purchase of photomask business unit of TEMIC for a purchase price of $2,467,000.
In April 1997, the Company entered into a long term strategic alliance, supply
and cooperation agreement in connection with the purchase of the photomask
business unit of TEMIC. Additionally, under the terms of the agreement, the
Company leased the existing facility from TEMIC for a period of ten years with a
ten-year extension option.
In May 1997, the Company increased its existing lines of credit from $7.5
million to $10 million. No amounts have been drawn down on the lines of credit.
These lines of credit allow the Company to borrow at an interest rate of 1.5%
above LIBOR.
Management believes that funds generated from operations together with its cash
and cash equivalents will be sufficient to meet the Company's normal operating
requirements for the next 12 months. 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.
9
<PAGE> 10
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 adverse 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 effect on the Company's
financial position, results of operations and cash flows. There can, however, be
no assurance that such risks will not have a material adverse effect on the
Company's financial position, results of operations and cash flows in the
future.
The effects of inflation are experienced by the Company through increases in
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 its
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.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share". This statement requires dual presentation of
newly defined basic and diluted earnings per share on the face of the income
statement for any entities with complex capital structures. The accounting
standard is effective for fiscal years ending after December 15, 1997, including
interim periods. The impact of adopting SFAS No. 128 has not been determined on
the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130, which requires companies to adopt its provisions for fiscal years
ending after December 15, 1997, establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The impact of adopting SFAS No.
130 has not been determined by the Company.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131, which requires companies
to adopt its provisions for the fiscal years ending after December 15, 1997,
requires publiclyoheld companies to report financial and other information about
key revenueoproducing segments of the entity for which such information is
available and is utilized by the chief operation decision makers. Specific
information to be reported for individual segments include profit or loss,
certain and expense and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
The impact on the Company of adopting SFAS No. 131 has not been determined.
10
<PAGE> 11
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995.
In addition to historical information, this report includes certain forward
looking statements regarding events and financial and industry trends which may
affect the Company's future operating results and financial position. Such
statements include, but are not limited to, statements as to: (i) the Company's
belief regarding the continuation of the increased demand for photomasks; (ii)
the Company's belief that future capital equipment purchases will not
dramatically further erode gross margins; (iii) the Company's belief that
Selling, general and administrative costs as a percentage of sales should remain
consistent; (iv) the Company's belief regarding the adequacy of its reserve for
bad debts, and (v) the sufficiency of funds to meet the Company's normal
operating requirements over the next 12 months. Such statements 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. Such risks and uncertainties include
but are not limited to: adverse 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 production of photomasks; greater than anticipated levels
of competition and competitive pricing, manufacturing difficulties or capacity
limitations; shortage of raw materials; delays in 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.
11
<PAGE> 12
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
11.1 Statement regarding computation of Net Income per common
share.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
12
<PAGE> 13
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1997 Align-Rite International, Inc.
- ------------------------------------
James Mac Donald
Chairman of the Board, President &
Chief Executive Director
- ------------------------------------
Petar Katurich
Vice President of Finance,
Chief Financial Officer & Secretary
13
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
ALIGN-RITE INTERNATIONAL, INC.
The computation of net income per share for the six months ended September 30,
1997 and 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
PRIMARY
Net Income ................................... $2,939,000 $2,715,000
========== ==========
Average common stock outstanding ............. 4,426,679 4,379,529
Common stock equivalent issuable upon the
exercise of options and warrants currently
outstanding to purchase common stock
subject to 20% limitation
assumed repurchase ......................... 426,628 426,177
---------- ----------
Sub-Total 4,853,307 4,805,706
Net income per share ......................... $0.61 $0.57
===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997
<PERIOD-START> JUL-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 6,601 6,601
<SECURITIES> 0 0
<RECEIVABLES> 6,841 6,841
<ALLOWANCES> 0 0
<INVENTORY> 2,730 2,730
<CURRENT-ASSETS> 17,281 17,281
<PP&E> 26,424 26,424
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 44,730 44,730
<CURRENT-LIABILITIES> 8,544 8,544
<BONDS> 0 0
0 0
0 0
<COMMON> 44 44
<OTHER-SE> 34,056 34,056
<TOTAL-LIABILITY-AND-EQUITY> 44,730 44,730
<SALES> 11,424 22,040
<TOTAL-REVENUES> 11,424 22,040
<CGS> 7,233 13,832
<TOTAL-COSTS> 7,233 13,832
<OTHER-EXPENSES> 1,829 3,523
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,390 4,730
<INCOME-TAX> 899 1,791
<INCOME-CONTINUING> 1,491 2,939
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,491 2,939
<EPS-PRIMARY> .31 .61
<EPS-DILUTED> .31 .61
</TABLE>
