<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 December 31, 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 December 31, 1997
- ---------------------------- --------------------------------
Common Stock, $.01 par value 4,452,627 Shares
<PAGE> 2
ALIGN-RITE INTERNATIONAL, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
December 31, 1997 and March 31, 1997 3
Consolidated Statements of Operations for the Three
and Nine Months ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Nine
Months ended December 31, 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
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 At
March 31, December 31,
1997 1997
--------- -----------
<S> <C> <C>
ASETS
Current assets:
Cash and cash equivalents.............................. $ 6,734 $ 4,185
Accounts receivable, net............................... 6,120 7,400
Inventories, primarily raw materials................... 2,180 3,320
Prepaid and other current assets....................... 1,233 981
------- -------
Total current assets.............................. 16,267 15,886
Property and equipment, net............................ 22,089 34,470
Other assets........................................... 425 88
------- -------
Total assets...................................... $38,781 $50,444
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................. $ 3,670 $ 9,955
Accrued expenses and other............................. 1,543 2,070
Taxes payable.......................................... 327 661
------- -------
Total current liabilities......................... 5,540 12,686
Deferred taxes............................................ 1,398 1,398
Other liabilities......................................... 470 724
Shareholders' equity:
Common stock:
Authorized - 35,000 shares $.01 par value;
Issued 4,453 shares and 4,416 shares respectively..... 44 45
Additional paid-in capital............................. 18,287 18,435
Retained earnings...................................... 12,694 17,114
Cumulative foreign currency translation adjustment..... 348 42
------- -------
Total shareholders' equity........................ 31,373 35,636
------- -------
Total liabilities and shareholders' equity..... $38,781 $50,444
======= =======
</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 Nine Months Ended December 31, 1997 and 1996
(Unaudited - 000's omitted, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................... $ 9,395 $11,689 $28,574 $33,729
Cost of sales............................... 5,952 7,473 17,896 21,305
------- ------ ------- -------
Gross profit................................ 3,443 4,216 10,678 12,424
Selling, general and administrative......... 1,548 1,868 4,661 5,391
------ ------- ------- ------
Income from operations...................... 1,895 2,348 6,017 7,033
Interest income, net........................ 78 29 280 74
------- ------- ------- -------
Income before provision for income taxes.... 1,973 2,377 6,297 7,107
Provision for income taxes.................. 727 897 2,336 2,688
----- ------- ------- -------
Net income.................................. $1,246 $1,480 $3,961 $4,419
====== ====== ====== ======
Per share information:
Shares used in per share computation...... 4,823 4,871 4,823 4,850
Earnings per share........................ $ .26 $ .30 $ .82 $ .91
</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 Nine Months Ended December 31, 1997 and
1996 (Unaudited - 000's omitted)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 3,961 $ 4,419
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................ 1,881 3,019
Bad debt expense......................................... -- 31
Compensation related to stock options granted............ -- 83
Changes in assets and liabilities:
Accounts receivable, net................................. 580 (1,364)
Inventories.............................................. (1,010) (1,161)
Prepaids and other assets................................ (159) 578
Trade accounts payable................................... 540 6,309
Accrued expenses and other liabilities................... 123 1,203
------- --------
Net cash provided by operating activities.......... 5,916 13,117
------- --------
Cash flows from investing activities:
Purchase of property and equipment........................... (11,683) (13,172)
Payments for business acquisition, net of cash received...... -- (2,467)
------- --------
Net cash used in investing activities.............. (11,683) (15,639)
------- --------
Cash flows from financing activities:
Proceeds from stock options exercised....................... 77 65
------- --------
Net cash provided by financing activities.......... 77 65
------- --------
Effect of exchange rate changes on cash........................ (402) (92)
------- --------
Net decrease in cash........................................... (6,092) (2,549)
Cash and cash equivalents, beginning of year................... 12,707 6,734
------- --------
Cash and cash equivalents, end of year......................... $ 6,615 $ 4,185
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the nine months ended December 31, for:
Income taxes........................................... $1,100,000 $1,207,000
</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 Nine Months Ended December 31, 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 December 31, 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 10K.
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.
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 Telefunken Microelectronic Gmbh ("Temic"), a division of
Daimler-Benz, located in Heilbronn, Germany. The acquisition was accounted for
using the purchase method of accounting. The acquisition was not material to the
financial position, results of operations or cash flows 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.
6
<PAGE> 7
Item 2. Management's Discussions and Analysis of Results of Operations and
Financial Condition.
Net sales for the three and nine months ended December 31, 1997, increased 24%
to $11,689,000 and 18% to $33,729,000 respectively, compared with $9,395,000 and
$28,574,000 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. Additionally, the increase resulted from an overall increase in
volume from the Company's United Kingdom (U.K.) operations. U.K. net sales for
the three and nine months ended December 31, 1997 increased 50% to $4,175,000
and 19% to $11,066,000, respectively, compared with $2,788,000 and $9,273,000 in
the same periods in the prior year. United States net sales for the three and
nine months ended December 31, 1997 decreased slightly to $6,391,000 and
increased slightly to $19,998,000 respectively, compared with $6,607,000 and
$19,301,000 in the same period of the prior fiscal year. The slight decline in
U.S. revenue in the quarter was due to two factors: a temporary decline in
demand from four U.S. based customers and an unanticipated interruption in
certain areas of the manufacturing operations. 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 third quarter.
Gross profit as a percentage of net sales for the three and nine months ended
December 31, 1997 decreased slightly to 36.1% and 36.8%, respectively, compared
to 36.6% and 37.4% in the same periods in the prior year. The slight decrease in
gross profit as a percentage of net sales for the three and nine months ended
December 31, 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 nine months ended December 31, 1997
increased 88% to $1,189,000 and 61% to $3,019,000, respectively, compared to
$634,000 and $1,881,000 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 administration expenses for the three
and nine months ended December 31, 1997 increased 21% to $1,868,000 and 16% to
$5,391,000, respectively, compared with $1,548,000 and $4,661,000 in the same
period, in the prior fiscal year, while the absolute dollars increased each
period, selling general and administrative expenses as a percentage of net sales
decreased to 16% for both the three and nine months ended December 31, 1997,
compared with 16.5% and 16.3% in the same period 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 nine months ended December 31, 1997 decreased
as compared to the same periods in the prior year due to the maintenance of
lower cash balances by the Company.
7
<PAGE> 8
For the three and nine months ended December 31, 997, 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
current period rates are slightly higher due to German income being taxed at a
higher rate than the United States and United Kingdom.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $4,185,000 at December 31, 1997.
Net cash provided by operating activities amounted to $13,117,000 for the nine
months ended December 31, 1997 compared to $5,916,000 for the same period in the
prior year. Additions to operating cash flows for the nine months ended December
31, 1997 reflect a higher net income, increased non-cash charges related to
increased depreciation and amortization expenses and increases in accounts
payable, primarily due to a payable related to equipment purchases in the amount
of $4,500,000, and accrued expenses which were partially offset by increases in
accounts receivable and inventory.
Accounts receivable increased $1,280,000 or 21% during the nine months ended
December 31, 1997, due largely to an 18% increase in net sales. Inventory levels
increased 52% to $3,320,000 during the nine months ended December 31, 1997
primarily due to three reasons: 1) higher sales levels; 2) the Company's
strategy of maintaining different types of photoblanks to serve the requirements
of its growing customer base, and, 3) ramping up due to long lead times and
anticipated year end vendor shut-downs.
For the nine months ended December 31, 1997, cash used in investing activities
totaled $15,639,000 compared to $11,683,000 in the prior year. The Company's
capital expenditures during the nine months ended December 31, 1997 in the
amount of $13,172,000 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 nine months ended December 31, 1997 was the
purchase of photomask business unit of TEMIC for a purchase price of $2,467,000.
Effective June 1, 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.
No amounts have been drawn down on the Company's $10 million line of credit.
These lines of credit will 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 may not 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.
8
<PAGE> 9
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 financial position,
results of operations and cash flows. 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
financial position, results of operations and cash flows. 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 and Comprehensive
Income." SFAS No. 130, which required companies to adopt its provisions for
fiscal years ending after December 15, 19978, 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 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 publicly held companies to report financial and other information about
key revenue producing 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 less,
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 by
the Company.
9
<PAGE> 10
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) 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.
10
<PAGE> 11
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 6. Exhibits and Reports of Form 8-K
(a) Exhibits
11.1 Statement regarding computation of Net Income per
common share.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
11
<PAGE> 12
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: February 10, 1998 Align-Rite International, Inc.
/s/ JAMES MAC DONALD
----------------------------------
James Mac Donald
Chairman of the Board, President &
Chief Executive Director
/s/ PETAR KATURICH
-----------------------------------
Petar Katurich
Vice President of Finance,
Chief Financial Officer & Secretary
12
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
11.1 Statement regarding computation of Net Income per
common share.
27 Financial Data Schedule
</TABLE>
<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 three and nine months ended
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
3 mos 9 mos 3 mos 9 mos
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
PRIMARY
Net Income $1,480,767 $4,419,254 $1,246,207 $3,960,854
========== ========== ========== ==========
Average common stock outstanding: 4,444,599 4,434,708 4,410,257 4,403,722
Common stock equivalent issuable upon
the exercise of options and warrants
currently outstanding to purchase Common
stock subject to 20% limitation assumed
repurchase 426,825 415,667 413,047 419,582
---------- ---------- ----------- ----------
Sub-Total 4,871,424 4,850,375 4,823,304 4,823,304
Net income per share $ 0.30 $ 0.91 $ 0.26 $ 0.82
========= ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997
<PERIOD-START> OCT-01-1997 APR-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 4,185 4,185
<SECURITIES> 0 0
<RECEIVABLES> 7,400 7,400
<ALLOWANCES> 0 0
<INVENTORY> 3,320 3,320
<CURRENT-ASSETS> 15,886 15,886
<PP&E> 34,470 34,470
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 50,444 50,444
<CURRENT-LIABILITIES> 12,686 12,686
<BONDS> 0 0
0 0
0 0
<COMMON> 45 45
<OTHER-SE> 35,636 35,636
<TOTAL-LIABILITY-AND-EQUITY> 50,444 50,444
<SALES> 11,689 33,729
<TOTAL-REVENUES> 11,689 33,729
<CGS> 7,473 21,305
<TOTAL-COSTS> 7,473 21,305
<OTHER-EXPENSES> 1,868 5,391
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,377 7,107
<INCOME-TAX> 897 2,688
<INCOME-CONTINUING> 1,480 4,419
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,480 4,419
<EPS-PRIMARY> .30 .91
<EPS-DILUTED> .30 .91
</TABLE>
