<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, 1998 _________
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
in corporation 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 October 20, 1998
Common Stock, $.01 par value 4,483,997 Shares
- --------------------------------------------------------------------------------
<PAGE> 2
ALIGN-RITE INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30,1998 and March 31, 1998............... 3
Consolidated Statements of Operations for the Three and Six Months ended
September 30,1998 and 1997........................................................ 4
Consolidated Statements of Comprehensive Income for the Three and Six Months
ended September 30, 1998 and 1997................................................. 5
Consolidated Statements of Cash Flows for the Six Months ended
September 30, 1998 and 1997....................................................... 6
Notes to Consolidated Financial Statements........................................ 7
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.................................................. 11
Signatures........................................................................ 12
Statement Regarding Computation of Earnings Per Share............................. 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 Sept. 30, At March 31,
1998 1998
------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 4,163 $5,523
Accounts receivable, net............................................................. 7,643 7,395
Inventories, primarily raw materials................................................. 3,108 2,783
Prepaid and other current assets..................................................... 2,896 835
-------- -------
Total current assets........................................................... 17,810 16,536
Property and equipment, net............................................................. 47,441 33,575
Other assets......................................................................... 1,960 1,047
-------- -------
Total assets................................................................... $ 67,211 $ 51,158
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable............................................................... $ 5,031 $ 4,371
Equipment Payables................................................................... 5,748 1,201
Accrued expenses and other.............................................................. 2,798 2,927
Taxes payable........................................................................... 2,432 1,402
-------- -------
Total current liabilities...................................................... 16,009 9,901
Long-Term Debt.......................................................................... 6,200 -
Deferred taxes.......................................................................... 2,792 2,792
Other liabilities....................................................................... 646 699
Shareholders' equity:
Common stock:
Authorized - 35,000 shares $.01 par value; Issued and Outstanding 4,484 and 4,464
shares, respectively................................................................. 45 45
Additional paid-in capital.............................................................. 18,751 18,589
Retained earnings....................................................................... 22,390 18,794
Accumulated other comprehensive income ................................................. 378 338
-------- -------
Total shareholders' equity..................................................... 41,564 37,766
-------- -------
Total liabilities and shareholders' equity.................................. $ 67,211 $ 51,158
======== ========
</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,
(Unaudited - 000's omitted, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .............................. $ 13,993 $ 11,424 $ 27,683 $ 22,040
Cost of sales .......................... 8,633 7,131 17,184 13,618
-------- -------- -------- --------
Gross profit ...................... 5,360 4,293 10,499 8,422
Selling, general and administrative .... 2,240 1,829 4,343 3,523
Research and development ............... 215 103 417 214
-------- -------- -------- --------
Income from operations ............. 2,905 2,361 5,739 4,685
Other income ........................... 11 -- 11 --
Interest income (expense), net ......... (9) 29 27 45
-------- -------- -------- --------
Income before provision for income taxes 2,907 2,390 5,777 4,730
Provision for income taxes ............. 1,096 899 2,181 1,791
-------- -------- -------- --------
Net income ............................. $ 1,811 $ 1,491 $ 3,596 $ 2,939
======== ======== ======== ========
Per share information:
Basic earnings per share ............. $ .40 $ .34 $ .80 $ .66
Shares used in per share computation . 4,480 4,432 4,473 4,438
Diluted earnings per share ........... $ .37 $ .31 $ .74 $ .61
Shares used in per share computation . 4,862 4,872 4,869 4,853
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
Align-Rite International, Inc.
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended September 30,
(Unaudited - 000's omitted)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ................................ $ 1,811 $ 1,491 $ 3,596 $ 2,939
Other comprehensive income:
Foreign currency translation adjustments 15 (337) 40 (342)
------- ------- ------- -------
Comprehensive income ...................... $ 1,826 $ 1,154 $ 3,636 $ 2,597
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
Align-Rite International, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended September 30,
(Unaudited - 000's omitted)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income:..................................................................... $ 3,596 $ 2,939
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................ 2,810 1,830
Bad debt expense......................................................... - 31
Compensation related to stock options granted............................ 55 55
Changes in assets and liabilities:
Accounts receivable, net................................................ (241) (811)
Inventories.............................................................. (322) (573)
Prepaids and other assets............................................... (3,045) 227
Trade accounts payable..................................................... (544) (560)
Equipment payables..................................................... 5,748 1,201
Accrued expenses and other liabilities.................................... 858 2,748
--------- --------
Net cash provided by operating activities.............................. 8,915 7,087
--------- --------
Cash flows from investing activities
Purchase of property and equipment..................................... (16,574) (4,680)
Payments for business acquisition, net of cash received................ -- (2,467)
--------- --------
Net cash used in investing activities.............................. (16,574) (7,147)
--------- --------
Cash flows from financing activities:
Proceeds from line of credit........................................... 6,200 --
Stock options exercised................................................ 86 31
--------- --------
Net cash provided by financing activities.......................... 6,286 31
--------- --------
Effect of exchange rate on cash................................................. 13 (104)
Net decrease in cash............................................................ (1,360) (133)
--------- --------
Cash and cash equivalents, beginning of year.................................... 5,523 6,734
--------- --------
Cash and cash equivalents, end of year.......................................... $ 4,163 $ 6,601
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
Align-Rite International, Inc.
Notes to Consolidated Financial Statements
For the Three and Six Months Ended September 30, 1998
(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 three and six months ended September 30, 1998 are not
necessarily indicative of results to be expected for the year ended March 31,
1999. 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, 1998 and 1997 and for the three years in the period ended March
31, 1998 as filed on Form 10K. Certain items shown in the prior financial
statements have been reclassified to conform with the presentation of the
current period.
Effective April 1,1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," and accordingly has
included separate statements of comprehensive income following the Company's
Consolidated Statements of Operations. Comprehensive income generally represents
all changes in shareholders' equity during the period except those resulting
from investments by or distributions to, shareholders. The balance of
accumulated other comprehensive income at September 30,1998 and March 31,1998
consists of accumulated foreign currency translation adjustments.
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.
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. Item 2.
Management's Discussions and Analysis of Results of Operations and Financial
Condition.
7
<PAGE> 8
Net sales for the three and six months ended September 30, 1998, increased 22%
to $13,993,000 and 26% to $27,683,000 respectively, compared to $11,424,000 and
$22,040,000 in the same periods in the prior fiscal year. The increase in net
sales is attributable to increased unit demand for photomasks from new and
pre-existing customers. The Company's continues to experience strong competitive
conditions including product-pricing pressures in most sectors of the photomask
market. Average selling prices have declined slightly with the increase in sales
stemming from increased capacity utilization and units shipped.
While the Company experienced strong growth during the three and six months
ended September 30, 1998, early in the Company's third quarter which ends
December 31, 1998, the Company has experienced a softening in demand from
certain European customers. If such demand trends were to continue throughout
the remainder of the third quarter, the growth rate in net sales for the third
and fourth quarters would not be as high as in the first two quarters.
Gross profit as a percentage of net sales for the three months ended September
30, 1998 increased to 38.3%, compared to 37.6% in the same period in the prior
year. The increase in gross margin is primarily attributable to improved
capacity utilization and the integration of other manufacturing efficiencies.
These gains in gross margins were net of a 53% increase in depreciation expense
due to recent installations of equipment and the prior year acquisition of the
photomask business unit of TEMIC, which increased the Company's asset base.
Depreciation expense for the quarter increased to $1,442,000, compared to
$943,000 in the same period in the prior fiscal year. Gross margins for the six
months ended September 30, 1998 decreased slightly to 37.9%, compared to 38.2%
in the same period in the prior fiscal year. The slight decrease is attributable
to higher depreciation costs, as discussed above. As the Company continues to
invest in capital equipment to keep pace with anticipated increases in demand,
the Company expects its gross profit to fluctuate slightly based on the timing
of equipment purchases 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 months ended
September 30, 1998 increased 22% to $2,240,000, compared with $1,829,000, in the
same period in the prior fiscal year. Selling general and administrative
expenses as a percentage of net sales remained consistent at 16.0% for both
periods. The overall increase in selling, general and administrative expenses is
attributable to higher sales levels and 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 between 15% - 16%.
Research and development ("R&D") expense is comprised primarily of personnel
costs, material consumption, depreciation and engineering costs. The Company
spent $215,000 for the quarter ended September 30, 1998, compared to $103,000 in
the related prior period. For the six months ended September 30, 1998, the
Company spent $417,000, compared to $214,000 in the related prior period. The
Company believes it will continue to spend between 1% - 2% of sales on R&D
related projects. The Company anticipates that R&D expense will continue to
increase in absolute terms in the future reflecting its strategy of advancing
their technology.
8
<PAGE> 9
Interest income (expense), net for the quarter ended September 30, 1998 was
effected by the Company's $6.2 million draw-down on its available line of
credit. Interest expense associated with this draw-down was $39,000 for the
quarter.
For the three and six months ended September 30, 1998 and 1997, the Company
provided for Federal and State income taxes at an estimated combined effective
rate of approximately 38 percent. This is in-line with the prior year and
management's expectations.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $4,163,000 at September 30, 1998.
Net cash provided by operating activities amounted to $8,915,000 for the six
months ended September 30, 1998, compared to $7,087,000 for the same period in
the prior year. Additions to operating cash flows for the six months ended
September 30, 1998 reflect higher net income, increased non-cash charges related
to depreciation and amortization expenses and an increase in equipment payables
primarily related to fixed assets purchased that had not been paid as of
September 30, 1998. These additions to operating cash flows were partially
offset by an increase in prepaids and other assets primarily due to deposits
associated with fixed asset purchases.
For the six months ended September 30, 1998, cash used in investing activities
totaled $16,574,000 compared to $7,147,000 in the related prior year period. The
Company's investing activities during the six months ended September 30, 1998
primarily related to purchases of equipment and facility renovations, which will
support 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 the photomask business unit of
TEMIC for a purchase price of $2,467,000.
In June 1998, the Company increased its combined lines of credit from $10
million to $20 million. These lines of credit will allow the Company to borrow
at an interest rate of 1.25% above LIBOR. As of September 30, 1998, the Company
had drawn $6,200,000 on these lines of credit with $13,800,000 still available.
The Company anticipates further borrowings on these lines during the fourth
quarter of fiscal year 1999, to fund additional capital equipment purchases.
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 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.
Year 2000 Compliance. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, operate equipment, and engage in similar normal business
activities.
The Company is in the process of assessing and modifying its computer software
systems to ensure that they are Year 2000 compliant. The Company is currently
developing a plan that would include initiating formal communications with all
of its significant vendors, and large customers to determine the extent to which
the Company is vulnerable to Year 2000 issues.
9
<PAGE> 10
The total cost of these Year 2000 compliance activities, estimated at less than
$500,000, has not been and is not expected to have a material effect on the
financial position, results of operations and cash flows of the Company. The
Company will utilize both internal and external resources for Year 2000 Issues.
However, if the modifications are not made, or are not completely timely, the
Year 2000 Issue could have a material adverse impact on the financial position,
results of operations, and cash flows of the Company. Further, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
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. 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 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 liquidity and 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 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 beginning 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. 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) 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; (v) the Company's belief regarding Year 2000
compliance and (vi) 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 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 September 30, 1998.
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, 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
13
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
ALIGN-RITE INTERNATIONAL, INC.
The following table provides a reconciliation of the numerator and denominators
of the basic and diluted per-share computations for the three and six months
ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
For the Three Months Ended September 30, 1998:
Basic EPS..................................................... $1,811,000 4,480,000 $0.40
Effective of dilutive securities:
Stock Options............................................. -- 382,000
---------- ---------
Diluted EPS................................................... $1,811,000 4,862,000 $0.37
========== =========
For the Three Months Ended September 30, 1997:
Basic EPS..................................................... $1,491,000 4,432,000 $0.34
Effective of dilutive securities:
Stock Options............................................. -- 440,000
---------- ---------
Diluted EPS................................................... $1,491,000 4,872,000 $0.31
========== =========
For the Three Months Ended September 30, 1998:
Basic EPS..................................................... $3,596,000 4,473,000 $0.80
Effective of dilutive securities:
Stock Options............................................. -- 396,000
---------- ---------
Diluted EPS................................................... $3,596,000 4,869,000 $0.74
========== =========
For the Three Months Ended September 30, 1997:
Basic EPS..................................................... $2,939,000 4,438,000 $0.66
Effective of dilutive securities:
Stock Options............................................. -- 415,000
---------- ---------
Diluted EPS................................................... $2,939,000 4,853,000 $0.61
========== =========
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,163
<SECURITIES> 0
<RECEIVABLES> 7,643
<ALLOWANCES> 0
<INVENTORY> 3,108
<CURRENT-ASSETS> 17,810
<PP&E> 47,441
<DEPRECIATION> 2,810
<TOTAL-ASSETS> 67,211
<CURRENT-LIABILITIES> 16,009
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 41,519
<TOTAL-LIABILITY-AND-EQUITY> 67,211
<SALES> 27,683
<TOTAL-REVENUES> 27,683
<CGS> 17,184
<TOTAL-COSTS> 10,499
<OTHER-EXPENSES> 4,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 5,777
<INCOME-TAX> 2,181
<INCOME-CONTINUING> 3,596
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,596
<EPS-PRIMARY> 0.80<F1>
<EPS-DILUTED> 0.74
<FN>
<F1>FOR THE PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
