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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 026240
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ALIGN-RITE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 954528353
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2428 ONTARIO STREET, BURBANK, CA 91504
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICER) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 843-7220
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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
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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. Yes [X]
As of May 30, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $63,640,215 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 30, 1998, the Registrant had outstanding 4,465,980 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, 1998 are incorporated by reference under Part III.
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION
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PAGE NO.
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PART I
1. Business.................................................... 1
2. Properties.................................................. 5
3. Legal Proceedings........................................... 5
4. Submission of Matters to a Vote of Security Holders......... 5
PART II
5. Market for the Registrant's Common Equity and Related 7
Shareholder Matters.........................................
6. Selected Financial Data..................................... 8
7. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations...................................
8. Financial Statements and Supplementary Data................. 14
9. Changes in and Disagreements with Auditors on Accounting and 30
Financial Disclosure........................................
PART III
10. Directors and Executive Officers of the Registrant.......... 30
11. Executive Compensation and Related Matters.................. 30
12. Security Ownership of Certain Beneficial Owners and 30
Management..................................................
13. Certain Relationships and Related Transactions.............. 30
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 31
8K..........................................................
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PART I
ITEM 1. BUSINESS
GENERAL
Align-Rite International, Inc., a California corporation ("ARII") together
with its wholly-owned subsidiaries, the ("Company"), manufactures and markets
quality photomasks for the global semiconductor industry. 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, laser beam and optical microlithography methods
at its manufacturing facilities in Burbank, California, Bridgend, Wales and
Heilbronn, Germany.
The Company is comprised of ARII, 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 B.V. ("ARBV"), and
Align-Rite GmbH ("ARGmbH"). ARII and its subsidiaries are collectively referred
to herein as the "Company". All significant intercompany accounts and
transactions have been eliminated.
ARII, ARI and ARBV are primarily that of holding companies into which their
respective subsidiaries are consolidated. On July 21, 1995, ARII 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. ARGmbH 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'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
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cellular telephones, pagers, automotive control systems, medical products,
computers and printers, electronically controlled industrial equipment,
satellites, security systems and consumer appliances. According to VLSI
Research, the worldwide demand for photomasks exceed $2.0 billion in 1997 with
growing demand in both units and dollars forecast for the next three years at a
CAGR in excess of 20%.
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 1998 as a result of industry consolidation and closing of operations. The
Company believes that this consolidation was primarily due to competitive
pressures on photomask manufacturers during this period and that further
significant industry consolidation is unlikely. These competitive pressures were
mainly 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 the following trends are increasing the demand
for photomasks and the photomask industry's importance in the semiconductor
manufacturing process:
Customization of Semiconductor Designs. Growing demand for semiconductors,
including application specific integrated circuits ("ASICs"), application
specific standard products ("ASPs"), embedded microcontrollers and a growing
variety of memory products, has generated increasing demand for photomasks as
each new type of semiconductor device requires additional new and often more
advanced photomasks.
Increasing Device Complexity. As the complexity of semiconductor devices
has increased in response to continued efforts to improve the performance and
functionality of these devices through greater transistor densities and smaller
feature sizes, the number of successive layers of patterns required to
manufacture an integrated circuit has increased. The number of photomasks used
to manufacture microprocessors in 1991 was 14 as compared to 25 photomasks now
required for the most advanced generation of microprocessors.
Decreasing Size of Semiconductor Designs. The semiconductor industry's
growth is driven by its ability to produce smaller and more powerful
semiconductor chips at lower costs. As semiconductor line widths become as small
as the wavelength of the illumination sources in political lithography, the
semiconductor manufacturing process becomes increasingly dependent upon high
precision photomasks to deliver process results to more demanding specifications
and tolerances. Future generations of wafer lithography equipment are expected
to increase the need for high precision photomasks, thereby further increasing
demand for advanced photomasks with tighter specifications. Development of
increasingly small design features is likely to generate increased demand for
advanced photomasks that can accurately and reliably replicate intricate design
features.
Proliferation of Semiconductor Applications. Semiconductor devices of all
types are continuing to proliferate into new products, including cellular
telephones, pagers, automobiles, medical products, household appliances and
other consumer electronic products. In addition, the demand for semiconductor
devices from traditional markets such as personal computers is growing
significantly as semiconductor content in electronic systems increases and as
personal computers expand further into homes and other new market segments. The
Company believes that the proliferation of semiconductor applications will leads
to an increase in semiconductor design activity and resulting demand for
photomasks.
The Company believes that all of these changes in the semiconductor
industry are increasing the demand for photomasks and increasing the already
important role of photomasks in the semiconductor manufacturing process.
SALES AND MARKETING
Because each photomask is unique, the Company works closely with each
customer to define and communicate precisely the specification required by the
customer. The Company endeavors to develop long-term customer relationships
primarily with semiconductor manufacturers and other electronics companies whose
annual independent photomask expenditures range from $250,000 to $10,000,000. An
important market
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segment for the Company is custom integrated circuit 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, and to a lesser degree with 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
semiconductor and 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, and sometimes three, 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 conducts its sales and marketing activities at its facilities
in Burbank, California, Bridgend, Wales, and in Heilbronn, Germany. The Company
maintains sales and technical service centers in California, Arizona, 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 15 to Consolidated
Financial Statements for a summary of net sales to the largest customers.
STRATEGIC ALLIANCE PARTNERS
The Company has formed three (3) strategic alliances: 1.) Harris Advanced
Imaging Group, a captive photomask manufacturer located in Florida, 2.) Innova,
Inc. a photomask manufacturer in Hsinchu, Taiwan, and 3.) Telefunken
Microelectronic Group based in Heilbronn, Germany. 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 by allowing for mutual use of each
other's photomask manufacturing resources; (iii) share advancements in process
technology; and (iv) in the case of Innova, Inc., allows the Company to 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.
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ELECTRON BEAM IMAGING
The Company currently images photomasks using electron beam, laser beam,
and optical microlithography 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 seven electron beam photomask imaging systems, four in the United
States and three in Europe.
LASER BEAM IMAGING
The Company has entered 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 currently
operates three Core 2564 laser beam imaging systems, two in the United States
and one in Europe.
In May 1998, the Company announced its intention to expand its laser beam
imaging capabilities by ordering two ETEC Alta 3500 systems, which now give the
Company advanced lithography capability. The Company believes that the systems
will allow the Company to meet the challenging requirements for placement,
critical dimension, butting and alignment control imposed by .25 micron
photomask production. The Company intends to install the two ETEC Alta 3500
systems in its facilities in Europe and the United States in Summer 1998 and
early 1999, respectively. See Note 17 of Notes to Consolidated Financial
Statements.
OPTICAL IMAGING
In addition to electron beam and laser beam lithography manufacturing
methods, the Company uses, to a lesser degree, optical microlithography methods.
In the optical photomask imaging process, magnetic tapes containing the
integrated circuit design patterns are used to "drive" a microlithographic
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 photorepeater. 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 photorepeaters at
each of its manufacturing facilities.
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
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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 to a lesser extent, with other significantly smaller
independent manufacturers. In Europe, the Company primarily competes with
Compugraphics International Limited, DuPont, and Photronics, Inc. The Company
also competes, to a lesser extent, 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, customer service and technical support, 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, 1998, the Company employed approximately 178 people in the
United States and 108 in Europe on a full time basis. None of the Company's
employees are currently represented by a labor union. The Company's German
subsidiary, however, is subject to German law, which binds it as a member of a
selected industry group to agreements reached by industry management and
employee representatives. 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 a 26,000 square foot facility,
located in Bridgend, Wales under a lease which expires in 2006 and a 15,000
square foot facility located in Heilbronn, Germany which expires in 2007.
The Company also has approximately 15,000 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.
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. See Note 9 of
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings the adverse
outcome of which would have a material adverse effect on the financial condition
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 31, 1998 are as follows:
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NAME AGE POSITION
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James L. MacDonald 51 Chairman of the Board, President and Chief Executive Officer
Jeffery R. Lee 53 Executive Vice President, European Operations
Petar N. Katurich 35 Vice President of Finance, Chief Financial Officer, and
Secretary
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JAMES L. MACDONALD founded the Company in 1970 and since then has served as
its Chairman of the Board, President and Chief Executive Officer. Mr. MacDonald
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 has been employed by the
Company since 1980. Mr. Lee manages the Eurpopean 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
ARII's Common Stock is traded on the Nasdaq National Market under the
trading symbol "MASK". ARII's Common Stock began trading on July 21, 1995 upon
completion of an initial public offering of its Common Stock. The range of daily
closing prices on a per share basis for ARII's Common Stock for the twelve
months ended March 31, 1998 was:
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HIGH LOW
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Year Ended March 31, 1998:
Fourth quarter........................................ $17.125 $ 13.00
Third quarter......................................... $ 24.00 $ 12.75
Second quarter........................................ $23.875 $ 12.00
First quarter......................................... $ 14.75 $ 9.9375
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HIGH LOW
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Year Ended March 31, 1997:
Fourth quarter........................................ $ 13.75 $ 11.375
Third quarter......................................... $ 12.75 $ 10.50
Second quarter........................................ $ 11.25 $ 8.50
First quarter......................................... $ 14.25 $ 9.25
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The reported closing sales price of ARII's Common Stock on the Nasdaq
National Market on March 31, 1998 was $15.75. As of March 31, 1998 there were 89
holders of record of ARII's Common Stock.
ARII has 35,000,000 shares of authorized Common Stock of $.01 par value, of
which 4,463,980 shares were outstanding as of March 31, 1998.
ARII has not issued any Preferred Stock. ARII has elected not to pay any
cash dividends on its Common Stock as it currently intends to retain its
earnings to fund the development and growth of its business. In addition, the
Company's bank line of credit includes certain restrictions and requirements
relating to the prohibition of dividend declarations or payments. 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, 1998, 1997 and 1996 and for each of the three years in the period ended
March 31, 1998, are derived from the audited financial statements of the Company
included herein. The selected consolidated financial data as of March 31, 1995
and 1994 are derived from the audited consolidated financial statements of the
Company, which are not included herein. 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.
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FISCAL YEARS ENDED MARCH 31,
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1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Consolidated Statement of Operations Data:
Net sales........................................ $46,721 $38,001 $33,290 $25,404 $20,217
Cost of sales.................................... 29,745 23,863 20,689 15,887 13,833
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Gross profit................................... 16,976 14,138 12,601 9,517 6,384
Selling, general and administrative
expenses(1).................................... 7,442 6,072 5,571 4,515 3,407
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Income from operations......................... 9,534 8,066 7,030 5,002 2,977
Interest (income) expense, net................... (122) (308) (345) 151 339
Other expense (income)........................... (132) (7) 20 49 (44)
------- ------- ------- ------- -------
Income before income tax provision, minority
interest, cumulative effect of change in
accounting principle and extraordinary
item........................................ 9,788 8,381 7,355 4,802 2,682
Income tax provision............................. 3,688 3,056 2,219 1,216 1,229
Minority interest................................ -- -- 172 162 158
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Income before cumulative effect of change in
accounting principle and extraordinary
item........................................ 6,100 5,325 4,964 3,424 1,295
Cumulative effect of change in accounting for
income taxes(2)................................ -- -- -- -- 434
------- ------- ------- ------- -------
Net income....................................... $ 6,100 $ 5,325 $ 4,964 $ 3,424 $ 1,729
======= ======= ======= ======= =======
Net income per common share(3)
Income before cumulative effect of change in
accounting for income taxes................. 1.37 1.21 1.46 3.05 1.05
Cumulative effect of accounting change........... -- -- -- -- 0.17
------- ------- ------- ------- -------
Net income..................................... $ 1.37 $ 1.21 $ 1.46 $ 3.05 $ 1.54
======= ======= ======= ======= =======
Net income per common share-assuming dilution(3)
Income before cumulative effect of change in
accounting for income taxes................. 1.25 1.11 1.12 1.17 .55
Cumulative effect of accounting change........... -- -- -- -- 0.18
------- ------- ------- ------- -------
Net income..................................... $ 1.25 $ 1.11 $ 1.12 $ 1.17 $ 0.74
======= ======= ======= ======= =======
Weighted average shares outstanding.............. 4,439 4,386 3,393 1,123 1,123
======= ======= ======= ======= =======
Weighted average shares outstanding - assuming
dilution....................................... 4,865 4,799 4,446 2,933 2,350
======= ======= ======= ======= =======
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 5,523 $ 6,734 $12,707 $ 3,861 $ 2,981
Working capital.................................. 6,636 10,727 17,254 3,849 3,031
Property and equipment, net...................... 33,575 22,089 8,517 6,506 4,349
Total assets..................................... 51,158 38,781 30,422 17,261 12,452
Long-term debt, less current portion............. -- -- -- 1,905 2,752
Total shareholders' equity....................... 37,766 31,373 25,285 5,977 2,376
</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.
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(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ARII was incorporated on April 27, 1995. Immediately prior to the initial
public offering completed on July 21, 1995, ARII exchanged shares of its Common
Stock for all of the outstanding capital stock of ARI, and consequently, became
the holding company of ARI. All references in this section to 1998, 1997 and
1996 relate to the fiscal years ended March 31, 1998, 1997 and 1996,
respectively.
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:
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FISCAL YEARS ENDED MARCH 31,
-----------------------------
1998 1997 1996
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Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 63.7 62.8 62.1
----- ----- -----
Gross profit........................................ 35.9 37.2 37.9
Selling, general & administrative expenses.......... 15.9 16.0 16.7
----- ----- -----
Income from operations.............................. 20.4 21.2 21.2
Interest (income) expense........................... (.3) (0.8) (1.0)
Other (income) expense and minority interest........ (.3) (0.1) 0.5
----- ----- -----
Income before provision for income taxes............ 20.9 22.1 21.6
Provision for income taxes.......................... 7.9 8.1 6.6
----- ----- -----
Net income.......................................... 13.1% 14.0% 14.9%
===== ===== =====
</TABLE>
1998 COMPARED WITH 1997
Net Sales -- Net sales were $46.7 million during 1998, an increase of 23%
compared to net sales of $38.0 million during 1997. The increase in net sales is
attributable to increased demand from the Company's customers, the acquisition
of the photomask business unit of Temic and the utilization of increased
capacity through the addition of several key pieces of manufacturing equipment.
Net Sales of U.S. operations were $27.5 million or 7% higher compared to
the prior year's net sales of $25.8 million. The U.S. operations overall
customer base increased as compared to the prior year, but sales volume was
affected by a drop in demand from thin-film head customers by 19%. Net sales of
European operations were $19.3 million or 58% higher compared to prior year net
sales of $12.2 million. The 58% increase in European sales was driven by an
increase in the overall demand from the customer base and an increase in sales
volume. European sales also include the new manufacturing facility in Heilbronn,
Germany, which began operations under the Company's control beginning June 1,
1997.
The Company, in anticipation of future sales growth, continues to invest in
capital equipment to accommodate its customers who are continually enhancing
their product designs to smaller and more sophisticated geometries which the
Company believes helps drive the demand for photomasks. The Company intends to
install additional laser core imaging systems in both the U.S. and Europe to
address the demand for more advanced photomask products. See Note 16 of Notes to
Consolidated Financial Statements.
Gross Profit -- Gross profit increased to $17.0 million during 1998, an
increase of 20.6% as compared to $14.1 million during 1997, resulting primarily
from higher costs associated with increased sales. As a
9
<PAGE> 12
percentage of net sales, gross profit decreased slightly to 35.9% in 1998,
compared to 37.2% in 1997. The primary costs that affect gross profit are
materials, labor, depreciation, and overhead. The slight decrease was primarily
attributable to higher costs associated with depreciation which increased 54.8%
in 1998 to $4.3 million from $2.8 million in the prior year. The Company
anticipates that with the capital expenditures planned and those already
purchased fixed costs will be higher in the future.
Selling, General and Administrative Expenses -- 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 increased to $7.4 million during 1998, an
increase of 22.6% compared to $6.1 million in 1997. As a percentage of net
sales, selling, general and administrative expenses decreased slightly to 15.9%
in 1998 compared with 16.0% in 1997. The increase in selling, general and
administrative costs was primarily attributable to the purchase of the photomask
division of Temic in June 1997. The Company anticipates that selling, general
and administrative costs will continue to grow heavier as a percentage of sales
they will be consistent.
Interest Income -- Interest Income decreased to $122,000 in 1998, compared
to $308,000 in 1997. The decrease was attributable to lower cash balances on
deposit as a result of a large capital expenditure program taking place
throughout the year.
Provision for Income Taxes -- The effective income tax rate increased to
37.5% in 1998 from 36.4% in 1997. The slight increase in the effective income
tax rate is attributable to a higher income tax rate from the ARGmbH's
operations compared to other manufacturing locations.
1997 COMPARED WITH 1996
Net Sales -- Net sales were $38.0 million during 1997, an increase of 14.1%
compared to net sales of $33.3 million during 1996. During the year, the Company
installed an additional Electron Beam Imaging system along with a Laser Imaging
system in the second and third quarters, respectively. Until these
installations, the Company's capacity was constrained. The installation of the
additional equipment allowed for increased unit production, which directly
impacted sales. Late in the third quarter and early in the fourth quarter, the
Company experienced a slight decline in European demand compared with the first
two quarters. Sales were down in that sector approximately 13% for the third and
fourth quarters, however, the demand appears to have increased in the first
quarter of fiscal year ended March 31, 1998. Despite the softness in Europe for
the last two quarters, net sales have increased at both the U.S. and European
facilities when compared to prior years.
Net sales of the U.S. operations were $25.8 million or 12.7% higher
compared to prior year net sales of $22.9 million, while net sales of the
European operations were $12.2 million or 17.3% higher compared to prior year
net sales of $10.4 million.
Gross Profit -- Gross Profit increased to $14.1 million during 1997, an
increase of 12.2% as compared to $12.6 million during 1996, resulting primarily
from higher costs associated with increased sales. As a percentage of net sales,
gross profit decreased slightly to 37.2% in 1997, compared to 37.9% in 1996. The
primary costs that affect gross profit are materials, labor, depreciation and
overhead. The slight decrease was primarily attributable to higher costs
associated with depreciation, which increased 63.1% in 1997 to $2.8 million from
$1.7 million.
Selling, General and Administrative Expenses -- 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 increased to $6.1 million during 1997, an
increase of 9.0% compared to $5.6 million in 1996. As a percentage of net sales,
selling, general and administrative expenses decreased to 16.0% in 1997 compared
with 16.7% in 1996. The decrease was largely due to the lower level of employee
incentive compensation expense in fiscal 1997, coupled with the fixed costs
being spread over a larger revenue base.
10
<PAGE> 13
Interest Expense -- Interest expense decreased to $0 in 1997 compared to
$113,000 in 1996. The decrease is attributable to the repayment of debt out of
the proceeds from the Company's initial public offering completed in July 1995
and the Company had long-term and short-term debt during 1997.
Interest Income -- Interest income decreased to $308,000 in 1997 compared
to $458,000 in 1996. The decrease was attributable to lower cash balances on
deposit as a result of a large capital expenditure program taking place
throughout the year.
Provision for Income Taxes -- The effective income tax rate increased to
36.4% in 1997 from 30.9% in 1996. The increase in the effective income tax rate
is attributable to a benefit recorded in 1996 resulting from a reduction of the
valuation allowance due to higher than anticipated foreign taxable income and
management's estimate of the amounts expected to be utilized in the future.
LIQUIDITY AND CAPITAL RESOURCES
As compared to March 1997, total assets at March 31, 1998 grew 31.9% to
$51.2 million and stockholders' equity grew 20.4% to $37.8 million. The
Company's cash and cash equivalents decreased $1.2 million to $5.5 million at
March 31, 1998. The decrease was primarily a result of over $14.3 million of
capital expenditures related to the construction of cleanrooms and equipment
purchases in connection with the Company's expansion of manufacturing capacity
in its U. S. and European manufacturing sites.
Net cash provided by operating activities was $15.3 million in 1998,
compared to $10.1 million in 1997. Operating cash flows in 1998 reflect higher
net income and higher non-cash charges related to depreciation and higher
accounts receivable, accounts payable and accrued expense balances coupled with
relatively small increases when compared to the prior year in inventories.
Accounts receivable increased to $7.4 million at the end of 1998, up from
$6.1 million at the end of 1997. The primary factor contributing to the increase
in accounts receivable was the 23% growth in net sales. During 1998, inventories
increased by approximately 27.7% to $2.8 million at the end of 1998, compared to
$2.2 million at the end of 1997. The higher levels of inventory were on hand to
support the 1998 sales growth and the expected continued increases in sales
demand for these products in 1999. Accounts payable increased 51.8% from $3.7
million at the end of 1997 to $5.6 million at the end of 1998. The increase in
accounts payable was due to generally higher business levels and an increased
vendor base along with approximately $1.2 million in equipment payables.
In 1998, cash used in investing activities totaled $16.8 million compared
to $16.0 million in 1997. The Company's capital expenditures during 1998 were
primarily related to the construction of cleanrooms and the purchase of
equipment which will support and complement new process development and
higher-end products along with increasing capacity of each of its manufacturing
sites located in the United States and Europe and payments equivalent to $2.5
million for a business acquisition.
In 1998, cash from financing activities was $270,000. Cash from financing
activities was provided by the sale of 41,172 shares of ARII's Common Stock
through the exercise of stock options, which generated net proceeds of $83,157.
In addition, 7,020 shares of Common Stock were issued through the Company's
Employee Stock Purchase Plan which generated net proceeds of $67,883. In
addition, the Company received $119,731 of grant income from a government source
in Europe.
In June 1998, subsequent to the Company's March 31, 1998 fiscal year end,
the Company increased its available line of credit from $10.0 million to $20.0
million. No amounts have been drawn down on the line of credit. The line of
credit will allow the Company to borrow up to $20.0 million, and would bear
interest at 1.25% above LIBOR. Under the terms of this line of credit, the
Company would not be able to enter into certain transactions or declare
dividends without receiving prior written consent from the bank and would be
required to comply with certain financial covenants as well as maintain certain
financial ratios.
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
11
<PAGE> 14
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.
The Company announced in May , 1998 that it had placed an order with ETEC
Systems, Inc. for two Etec ALTA 3500 systems and several MEBES Electron Beam
systems upgrades. The total amount of the order was approximately $25 million.
The ALTA 3500 systems, the industry's most advanced photomask production laser
pattern generation systems are currently scheduled to be installed at the
Company's facilities in Wales and California in summer 1998 and in early
calendar 1999, respectively.
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.
The estimated cost to complete the project 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
completed 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 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
results of operations and cash flows. There can, however, be no assurance that
such risks will not have a material adverse impact on the Company's financial
position, results of operations, and cash flows in the future. See Note 15 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 financial position, results of operations and cash flows will not be
materially affected by inflation in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130, which requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997, establishes standards for 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
12
<PAGE> 15
from transactions and other events and circumstances from nonowner sources.
Management does not believe the adoption of SFAS 130 will have a material effect
on its consolidated financial statements.
In June 1997, the FASB issued Financial Accounting Standards SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). This statement requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997, requires publicly-held companies to
report financial and other information about key revenue-producing segments of
the Company for which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts reported in
the financial statements would be provided. Management is currently evaluating
the requirements of adopting SFAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
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 and
cash flows to differ materially, including the following: the Company's belief
that total photomask production in the United States and Europe will continue to
expand in 1998; the Company's belief that outsourcing of photomask manufacturing
will continue in the future; the Company's belief that European demand will
continue to be strong going forward; the Company's potential expansion in
certain international markets and any corresponding increase in manufacturing
capacity; 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 and its available lines of credit; the Company's intention to
expand its laser beam imaging capabilities by ordering and installing two ETEC
Alta 3500 systems and several Mebes electron beam system upgrades and the belief
that such systems will allow the Company to meet the requirements imposed by .25
micron photomask production; and the Company's intention to assess and modify
its computer software systems to ensure that they are Year 2000 compliant; and
the Company's belief that it anticipates selling, general and administrative
costs as a percentage of net sales to remain consistent.
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> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants........................... 15
Financial Statements:
Consolidated Balance Sheets at March 31, 1998 and 1997.... 16
For the years ended March 31, 1998, 1997, and 1996:
Consolidated Statements of Operations.................. 17
Consolidated Statements of Shareholders' Equity........ 18
Consolidated Statements of Cash Flows.................. 19
Notes to Consolidated Financial Statements.................. 20
Supporting Consolidated Financial Statement Schedule Covered
by the Foregoing Report of Independent Accountants:
Schedule II. Valuation and Qualifying Accounts.............. 28
</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
consolidated financial statements or related notes.
14
<PAGE> 17
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 14 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, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended March 31, 1998,
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.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
May 28, 1998
15
<PAGE> 18
PART II
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,523,416 $ 6,733,730
Accounts receivable, less allowance for doubtful accounts
of $278,495 and $271,493 at March 31, 1998 and 1997,
respectively........................................... 7,395,086 6,119,751
Inventories............................................... 2,783,070 2,179,592
Prepaid and other current assets.......................... 212,395 803,379
Deferred taxes............................................ 622,219 430,404
----------- -----------
Total current assets.............................. 16,536,186 16,266,856
Property and equipment, net................................. 33,574,694 22,089,072
Intangible, net............................................. 915,296 --
Other assets................................................ 131,986 424,744
----------- -----------
Total assets...................................... $51,158,162 $38,780,672
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 5,571,569 $ 3,669,889
Accrued expenses and other liabilities.................... 2,927,039 1,542,971
Taxes payable............................................. 1,401,983 327,355
----------- -----------
Total current liabilities......................... 9,900,591 5,540,215
Deferred taxes.............................................. 2,792,938 1,397,732
Other liabilities........................................... 698,301 470,220
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock -- $.01 par value Authorized -- 35,000,000
shares; 4,463,980 and 4,415,788 shares issued and
outstanding at March 31, 1998 and 1997, respectively... 44,640 44,158
Additional paid-in-capital................................ 18,589,170 18,286,640
Retained earnings......................................... 18,794,209 12,693,708
Foreign currency translation adjustment................... 338,313 347,999
----------- -----------
Total shareholders' equity........................ 37,766,332 31,372,505
----------- -----------
Total liabilities and shareholders' equity........ $51,158,162 $38,780,672
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 19
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $46,721,054 $38,000,597 $33,289,982
Cost of sales....................................... 29,744,531 23,863,297 20,688,947
----------- ----------- -----------
Gross profit................................... 16,976,523 14,137,300 12,601,035
Selling, general and administrative expenses........ 7,442,474 6,072,166 5,570,853
----------- ----------- -----------
Income from operations......................... 9,534,049 8,065,134 7,030,182
Interest expense.................................... -- -- 113,126
Interest income..................................... (121,776) (308,531) (458,322)
Other expense (income).............................. (132,239) (7,562) 20,426
----------- ----------- -----------
Income before provision for income taxes and
minority interest............................ 9,788,064 8,381,227 7,354,952
Income tax provision................................ 3,687,563 3,056,440 2,219,088
Minority interest................................... -- -- 171,600
----------- ----------- -----------
Net income.......................................... $ 6,100,501 $ 5,324,787 $ 4,964,264
=========== =========== ===========
Net income per common share......................... $ 1.37 $ 1.21 $ 1.46
=========== =========== ===========
Net income per common share -- assuming dilution.... $ 1.25 $ 1.11 $ 1.12
=========== =========== ===========
Weighted average common shares outstanding.......... 4,439,147 4,386,387 3,393,447
=========== =========== ===========
Weighted average common shares outstanding and
dilutive shares................................... 4,865,176 4,798,753 4,446,188
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 20
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<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, 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..................... -- -- -- -- -- -- -- --
Issuance of Common Stock upon
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
Net income..................... -- -- -- -- -- -- -- --
Exercise of stock options...... -- -- -- -- -- -- 64,257 643
Issuance of Common Stock in
connection with employee
stock purchase plan
purchases.................... -- -- -- -- -- -- 5,116 51
Compensation related to stock
options granted.............. -- -- -- -- -- -- -- --
Tax benefit resulting from
exercise of options.......... -- -- -- -- -- -- -- --
Translation adjustments........ -- -- -- -- -- -- -- --
-------- -------- ---------- --------- ---------- -------- --------- -------
Balance at March 31, 1997........ -- -- -- -- -- -- 4,415,788 44,158
Net income..................... -- -- -- -- -- -- -- --
Exercise of stock options...... -- -- -- -- -- -- 41,172 412
Issuance of Common Stock in
connection with employee
stock plan purchases......... -- -- -- -- -- -- 7,020 70
Compensation related to stock
options granted.............. -- -- -- -- -- -- -- --
Tax benefit resulting from
exercise of options.......... -- -- -- -- -- -- -- --
Translation adjustments........ -- -- -- -- -- -- -- --
-------- -------- ---------- --------- ---------- -------- --------- -------
Balance at March 31, 1998........ 4,463,980 $44,640
========= =======
<CAPTION>
FOREIGN
ADDITIONAL RETAINED CURRENCY TOTAL
PAID-IN EARNINGS TRANSLATION SHAREHOLDERS'
CAPITAL (DEFICIT) ADJUSTMENT EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
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
Issuance of Common Stock upon
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
Net income..................... -- 5,324,787 -- 5,324,787
Exercise of stock options...... 83,578 -- -- 84,221
Issuance of Common Stock in
connection with employee
stock purchase plan
purchases.................... 47,784 -- -- 47,835
Compensation related to stock
options granted.............. 110,616 -- -- 110,616
Tax benefit resulting from
exercise of options.......... 215,747 -- -- 215,747
Translation adjustments........ -- -- 304,740 304,740
----------- ----------- -------- -----------
Balance at March 31, 1997........ 18,286,640 12,693,708 347,999 31,372,505
Net income..................... -- 6,100,501 -- 6,100,501
Exercise of stock options...... 82,745 -- -- 83,157
Issuance of Common Stock in
connection with employee
stock plan purchases......... 67,813 -- -- 67,883
Compensation related to stock
options granted.............. 110,616 -- -- 110,616
Tax benefit resulting from
exercise of options.......... 41,356 -- -- 41,356
Translation adjustments........ -- -- (9,686) (9,686)
----------- ----------- -------- -----------
Balance at March 31, 1998........ $18,589,170 $18,794,209 $338,313 $37,766,332
=========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 21
ALIGN-RITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 6,100,501 $ 5,324,787 $ 4,964,264
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 4,280,554 2,773,946 1,700,519
Deferred tax provision.............................. 1,203,388 860,328 169,000
Bad debt expense.................................... 7,002 -- 95,000
Gain on sale of property and equipment.............. -- (9,543) (51,515)
Compensation related to stock options granted....... 110,616 110,616 --
Minority interests.................................. -- -- 171,600
Changes in assets and liabilities:
Accounts receivable trade and other................. (1,283,994) (21,197) (1,532,119)
Inventories......................................... (604,130) (312,192) (623,195)
Prepaids and other assets........................... 883,354 (59,128) (671,957)
Trade accounts payable.............................. 1,902,438 230,377 (533,277)
Accrued expenses and other liabilities.............. 2,689,525 1,197,086 (49,186)
------------ ------------ -----------
Net cash provided by operating activities... 15,289,254 10,095,080 3,639,134
------------ ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment.................. (14,300,383) (16,001,528) (3,911,111)
Payments for business acquisition, net of cash
received......................................... (2,467,000) -- --
Proceeds from the sale of property, and equipment... -- 12,000 106,503
------------ ------------ -----------
Net cash used in investing activities............... (16,767,383) (15,989,528) (3,804,608)
------------ ------------ -----------
Cash flows from financing activities:
Net proceeds from initial public offering........... -- -- 13,598,708
Principal payments on borrowings (notes)............ -- -- (1,668,530)
Proceeds from stock options exercised............... 83,157 84,221 39,458
Proceeds from sale of stock under employee stock
purchase plan.................................... 67,883 47,835 --
Grant income received............................... 119,731 -- --
Repayment of obligation under capital leases........ -- -- (1,949,957)
Payment of preferred dividend by subsidiary......... -- -- (171,600)
Redemption of preferred stock....................... -- -- (831,942)
------------ ------------ -----------
Net cash provided by financing activities... 270,771 132,056 9,016,137
------------ ------------ -----------
Effect of exchange rate on cash....................... (2,956) (210,835) (4,820)
------------ ------------ -----------
Net increase (decrease) in cash....................... (1,210,314) (5,973,227) 8,845,841
Cash and cash equivalents, beginning of year.......... 6,733,730 12,706,957 3,861,116
------------ ------------ -----------
Cash and cash equivalents, end of year................ $ 5,523,416 $ 6,733,730 $12,706,957
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.............................................. $ -- $ -- $ 166,494
Income taxes.......................................... $ 1,970,600 $ 1,876,000 $ 2,120,655
Non-cash activities:
Tax benefit related to stock options.................. $ 41,356 $ 215,747 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 22
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"),
Align-Rite B.V. ("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 principal activity of ARII, ARI and ARBV is that of holding companies
into which their respective subsidiaries are consolidated. On July 21, 1995 ARII
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. 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, and 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.
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, laser beam and
optical microlithography methods at its manufacturing facilities in Burbank,
California and Bridgend, Wales.
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:
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.
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. 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
20
<PAGE> 23
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Intangible Assets
Cash paid in excess of fair value of acquired company and certain costs
related to the acquisition represent the value of intangible assets. Intangible
assets are amortized on a straight-line basis over 15 years. The Company
periodically reviews intangibles to assess recoverability. Impairment is
recognized in operating results, if deemed permanent.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
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.
Net Income Per Common Share
Net Income per common share ("basic EPS") is computed by dividing net
income available to common shareholders (the numerator) by the weighted average
number of common shares outstanding (the denominator) during the period. The
computation of net income per common share -- assuming dilution ("diluted EPS")
is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.
Accounting for Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and complies with the
disclosure requirements of SFAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost, if any, is recognized over
the respective vesting period based on the difference, on the date of grant,
between the fair value of the Company's Common Stock and the grant price.
Foreign Currency Translations
The functional currency of ARI and ARL is the Pound Sterling. 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
21
<PAGE> 24
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fiscal year. The aggregate effect of translating the financial statements of ARI
and ARL is included as a separate component of shareholders' equity. The Company
has included in operating income all foreign exchange transaction gains and
losses arising from foreign currency transactions.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year classifications.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130, which requires companies to adopt its provisions for fiscal
years beginning 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. Management does not believe the
adoption of SFAS 130 will have a material effect on its consolidated financial
statements.
In June 1997, the FASB issued Financial Accounting Standard SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). This statement requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997, requires publicly-held companies to
report financial and other information about key revenue-producing segments of
the Company for which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts reported in
the financial statements would be provided. Management is currently evaluating
the requirements of adopting SFAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
3. INVENTORIES:
A summary of inventories, by component, at March 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials......................................... $2,531,358 $1,989,565
Work-in-process....................................... 123,873 74,205
Supplies.............................................. 127,839 115,822
---------- ----------
$2,783,070 $2,179,592
========== ==========
</TABLE>
22
<PAGE> 25
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Plant and machinery............................... $ 49,678,066 $ 29,898,332
Leasehold improvements............................ 1,453,590 1,166,445
Furniture and fixtures............................ 4,038,457 3,216,630
------------ ------------
55,170,113 34,281,407
Less, accumulated depreciation and amortization... (22,235,256) (17,839,752)
------------ ------------
32,934,857 16,441,655
Construction in progress.......................... 639,837 5,647,417
------------ ------------
Total................................... $ 33,574,694 $ 22,089,072
============ ============
</TABLE>
At March 31, 1998 and 1997, the Company had approximately $13,700,000 and
$12,700,000, respectively, of fully depreciated assets still in use.
5. INTANGIBLE ASSETS
Intangibles at March 31,1998 consist of the following:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Cash paid in excess of fair value......................... $682,187
Deferred acquisition costs................................ 283,320
--------
965,507
Less, accumulated amortization............................ (50,211)
--------
Intangible assets, net.................................... $915,296
========
</TABLE>
6. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued and other liabilities at March 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Volume discounts.............................. $ 450,250 $ 276,205
Bonuses....................................... 362,657 201,226
Vacation and payroll related costs............ 1,068,987 399,922
Deferred revenue.............................. 178,176 127,193
Audit and legal fees.......................... 221,516 141,674
Sales tax payable............................. 116,903 91,627
Other......................................... 528,550 305,124
---------- ----------
$2,927,039 $1,542,971
========== ==========
</TABLE>
7. LONG-TERM DEBT:
ARC maintains a line of credit agreement with a bank to obtain financing of
up to $5,000,000 at a variable interest rate, equal to 1.5% above the bank's
LIBOR rate, per annum, expiring on June 30, 1999, if not extended. The line of
credit is guaranteed by ARII and ARI and 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
23
<PAGE> 26
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assumed, and the transfer of assets. Additionally, ARII maintains a line of
credit agreement with a bank to obtain financing of up to $5,000,000 at a
variable interest rate, equal to 1.5% above the bank's LIBOR rate, per annum,
expiring on June 30, 1999, if not extended. The line of credit is guaranteed by
ARC and ARI. This agreement contains similar restrictive covenants to those
described in the ARC line of credit agreement above. There were no borrowings on
these lines of credit at March 31, 1998.
In June 1998, ARC's line of credit was amended to provide financing of up
to $15,000,000. Borrowings under the facility bear interest at 1.25% above the
banks LIBOR rate, per annum. This agreement expires on June 30, 1999, if not
renewed, and contains similar restrictive covenants to these described in the
ARC line of credit agreement above.
8. INCOME TAXES:
The components of the United States and foreign income before provision for
income taxes and minority interest and the components of the provisions for
income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income before provision for income taxes
and minority interest:
United States......................... $5,231,768 $5,054,202 $4,929,552
Foreign............................... 4,556,296 3,327,025 2,425,400
---------- ---------- ----------
Total............................ $9,788,064 $8,381,227 $7,354,952
========== ========== ==========
Provision for income taxes:
Current
Federal............................... $ 881,122 $1,467,145 $1,576,009
State................................. 1,600 1,600 457,000
Foreign............................... 1,601,453 727,367 17,079
---------- ---------- ----------
2,484,175 2,196,112 2,050,088
Deferred
Federal............................... 972,350 724,177 (103,000)
State................................. (30,704) (152,593) 25,000
Foreign............................... 261,742 288,744 247,000
---------- ---------- ----------
1,203,388 860,328 169,000
---------- ---------- ----------
Total............................ $3,687,563 $3,056,440 $2,219,088
</TABLE>
The difference between the Company's effective income tax rate and the
United States federal statutory rate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate............................. 34.0% 34.0% 34.0%
State taxes, net of federal benefit................ (0.2) -- 4.3
Change in deferred tax valuation allowance......... -- -- (6.2)
Other.............................................. 3.9 2.5 (1.9)
---- ---- ----
Total.................................... 37.7% 36.5% 30.2%
==== ==== ====
</TABLE>
24
<PAGE> 27
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
State tax credits................................... $ 426,991 $ 200,000
Net operating losses................................ 29,372 95,000
Other............................................... 769,645 583,870
----------- -----------
1,226,008 878,870
Valuation allowance................................. (29,372) (26,000)
----------- -----------
Deferred tax assets................................. 1,196,636 852,870
Deferred tax liabilities:
Depreciation and amortization....................... (3,306,394) (1,597,000)
Other............................................... (60,961) (223,198)
----------- -----------
Deferred tax liabilities............................ (3,367,355) (1,820,198)
----------- -----------
Net deferred taxes.................................. $(2,170,719) $ (967,328)
=========== ===========
</TABLE>
A valuation allowance of $29,372 and $26,000 was provided at March 31, 1998
and 1997, respectively, based primarily on carryforward amounts which may not be
utilized by the foreign entity relating to capital leases and net operating loss
carryforwards.
For State Franchise Tax purposes in 1998 and 1997, the Company generated
excess California prior year manufacturers' investment credits of approximately
$430,000 and $200,000, respectively; these credits begin expiring in 2005.
At March 31, 1998 and 1997, the Company had approximately $95,000 and
$290,000, respectively, of foreign operating loss carryforwards with no
expiration date.
9. 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.
Future minimum lease payments related to noncancelable operating leases at
March 31, 1998 are summarized below:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Years Ending March 31,
1999........................................... $ 914,550
2000........................................... 904,536
2001........................................... 730,207
2002........................................... 609,695
2003........................................... 615,335
Thereafter..................................... 1,566,217
----------
$5,340,540
==========
</TABLE>
Rent expense for the years ended March 31, 1998, 1997 and 1996 was
$847,254, $489,991 and $535,759, respectively.
25
<PAGE> 28
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. NET INCOME PER COMMON SHARE:
In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." This
statement requires dual presentation of newly defined basic and diluted earnings
per share ("EPS") on the face of the income statement for all entities with
complex capital structures. The following table provides a reconciliation of the
numerator and denominators of the basic and diluted per-share computations for
the years ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Year Ended March 31, 1996:
Basic EPS............................. $4,964,264 3,393,447 $1.46
Effect of dilutive securities:........ --
Stock options...................... 500,807
Preferred stock.................... 345,843
Warrants........................... 206,091
---------- ---------
Diluted EPS............................. $4,964,264 4,446,188 $1.12
Year Ended March 31, 1997:
Basic EPS............................. $5,324,787 4,386,387 $1.21
Effect of dilutive securities:........ -- 412,366
Stock options......................
---------- ---------
Diluted EPS........................... $5,324,787 4,798,753 $1.11
Year Ended December 31, 1998:
Basic EPS............................. $6,100,501 4,439,147 $1.37
Effect of dilutive securities:........ -- 426,029
Stock options......................
---------- ---------
Diluted EPS........................... $6,100,501 4,865,176 $1.25
</TABLE>
11. 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, make contributions to the Plan on a
periodic basis. Additionally, the employer will match 25% of the first 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 $68,380, $48,241 and $45,115 in 1998, 1997,
and 1996.
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 1998, 1997 and 1996 were
$66,438, $22,423 and $18,554, respectively.
12. EMPLOYEE STOCK PURCHASE PLAN
During fiscal year 1996, the Company adopted an Employee Stock Purchase
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, of which 7,020 and 5,116 were purchased in the fourth quarter
of 1998 and 1997, at an average price per share of $9.67 and $9.35,
respectively.
26
<PAGE> 29
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLANS:
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. As of March 31,
1998, the Company had 226,340 shares outstanding under this scheme. 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 subsequent to August 31, 1994 expire five years from the
date of grant. Options 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 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 ninety
days after termination of employment.
A summary of the status of the Company's stock options as of March 31, 1998
and 1997, and the changes during the years ended on those dates, are presented
below:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF PRICE PER OF PRICE PER
SHARES SHARE SHARES SHARE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Balance, beginning.................................. 547,762 $ 2.83 596,521 $ 2.43
Options granted..................................... 58,500 $15.56 18,500 $11.30
Options canceled.................................... (1,015) $ 2.20 (3,002) $ 8.25
Options exercised................................... (41,172) $ 2.06 (64,257) $ 1.31
------- -------
Balance, end........................................ 564,075 $ 4.21 547,762 $ 2.83
======= =======
Options exercisable at year-end..................... 417,307 $ 2.97 414,652 $ 2.11
======= =======
Options available for grant......................... 72,586 -- 129,271 --
======= =======
Weighted average fair value of options granted
during the year................................... $ 9.02 $ 4.32
====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------- EXERCISABLE
WEIGHTED ------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE
-------------------- ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
0 - $5.00....................................... 452,736 4.5 $ 2.10 363,619 $ 1.80
$5.01 to $10.00................................. 29,839 8.0 $ 8.31 28,839 $ 8.27
$10.01 to $15.00................................ 35,500 8.5 $12.10 14,175 $12.09
$15.01 to $20.00................................ 46,000 9.4 $16.25 10,674 $16.25
------- -------
564,075 5.4 $ 4.21 417,307 $ 2.97
======= =======
</TABLE>
27
<PAGE> 30
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of options granted during 1998 and 1997 is estimated
$323,067 and $195,966, respectively, on the dates of grants using the
Black-Scholes option-pricing model with the following assumptions: (i) divided
yield of 0%, (ii) expected volatility of 61% and 40% for 1998 and 1997
respectively, (iii) weighted average risk-free interest rates ranging from 6.1%
to 6.6% and 6.5% for 1998 and 1997 respectively, (iv) weighted average expected
life of 5.0 years for 1998 and 1997, and (v) assumed forfeiture rate of 1% for
1998 and 1997.
The Company applies APB No. 25 in accounting for its stock options granted
to employees. Accordingly, no compensation expense has been recognized for the
Company's stock-based compensation plans. Had compensation costs for the
Company's stock option and purchase plans been determined based upon the
methodology prescribed under SFAS No. 123, the Company's net income and earnings
per share would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
UNAUDITED
AS REPORTED PRO FORMA
----------- ----------
<S> <C> <C>
Year Ended March 31, 1998
Net income........................................ $6,100,501 $5,636,065
Net income per common share....................... 1.37 1.27
Net income per common share -- assuming
dilution....................................... 1.25 1.16
Year Ended March 31, 1997
Net income........................................ $5,324,787 $5,128,821
Net income per common share....................... 1.21 1.17
Net income per common share -- assuming
dilution....................................... 1.11 1.07
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
Options granted 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, 1997 exchange rate, ranged from $.82 to $2.82.
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 of $1,106,160
will be charged to operations at a rate of 10% per year.
The Company has reserved 636,661 shares of Common Stock for issuance upon
the exercise of options.
14. 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 Mid-Glamorgan Enterprises.
For the years ended March 31, 1996, the subsidiary recorded deemed
preferred dividends of L109,831 ($171,600), 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.
28
<PAGE> 31
ALIGN-RITE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. 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,
1998, 1997 and 1996, net sales, as a percentage of consolidated net sales, of
its largest customers is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Customer A............... $4,159,612 8.9% $5,253,000 13.8% $4,175,000 12.5%
Customer B............... 3,748,399 8.0% 2,458,000 6.5% 3,044,000 9.1%
Customer C............... 3,650,696 7.8% 2,382,000 6.3% 3,377,000 10.1%
---- ---- ----
24.7% 26.6% 31.7%
==== ==== ====
</TABLE>
16. GEOGRAPHICAL DATA:
The following tables set forth the amount of net sales, income before
provision for income taxes and minority interest and identifiable assets by
geographical area for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States..................... $27,467,497 $25,868,264 $22,874,860
Europe(1)......................... 19,253,557 12,132,333 10,415,122
----------- ----------- -----------
Total..................... $46,721,054 $38,000,597 $33,289,982
=========== =========== ===========
Income before provision for income
taxes and minority interest:
United States..................... $ 4,480,623 $ 4,796,603 $ 4,487,129
Europe............................ 4,983,031 3,276,093 2,522,627
----------- ----------- -----------
9,684,164 8,072,696 7,009,756
----------- ----------- -----------
Interest income (expense), net...... 103,900 308,531 345,196
----------- ----------- -----------
Total..................... $ 9,788,064 $ 8,381,227 $ 7,354,952
=========== =========== ===========
Identifiable assets:
United States..................... $28,697,454 $24,867,768 $23,095,001
Europe............................ 22,460,708 13,912,904 7,326,591
----------- ----------- -----------
Total..................... $51,128,162 $38,780,672 $30,421,592
=========== =========== ===========
</TABLE>
17. SUBSEQUENT EVENT
On May 26, 1998, the Company entered into an agreement with a vendor to
acquire two Alta 3500 systems and several MEBES electron beam upgrades. The
aggregate cost of the equipment is approximately $25 million. The Company plans
to install the two Alta 3500 systems and related upgrades in its facilities in
Europe and the United States in summer 1998 and early calendar 1999,
respectively.
29
<PAGE> 32
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED CREDITED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FROM END OF
PERIOD EXPENSES ACCOUNTS RESERVES PERIOD
------------ --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998
Allowance for doubtful receivables.......... $271,493 $ 7,002 -- -- $278,495
Deferred tax asset valuation allowance...... $ 26,000 $ 3,372 -- -- $ 29,372
Year ended March 31, 1997
Allowance for doubtful receivables.......... $152,633 -- $118,860 -- $271,493
Deferred tax asset valuation allowance...... $ 26,000 -- -- -- $ 26,000
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
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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 1998 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 1998 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 1998 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 1998 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Executive Compensation and Other Information"
and "Certain Transactions."
30
<PAGE> 33
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.
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
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.
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.
MacDonald 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 1998 Credit Agreement -- Align-Rite Corporation.
10.18 Amendment of Commercial Credit Agreement -- Align-Rite
International.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
</TABLE>
32
<PAGE> 35
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 29, 1998 By /s/ JAMES L. MACDONALD
------------------------------------
James L. MacDonald
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/ Date: June 29, 1998
- ------------------------------------------------
James L. MacDonald
Chairman of the Board, President and
Chief Executive Officer
/s/ Date: June 29, 1998
- ------------------------------------------------
Petar N. Katurich
Vice President Finance, Chief Financial Officer,
Secretary and Director
/s/ Date: June 29, 1998
- ------------------------------------------------
George Wells
Director
/s/ Date: June 29, 1998
- ------------------------------------------------
William Elder
Director
</TABLE>
33
<PAGE> 1
EXHIBIT 10.17
[SANWA BANK CALIFORNIA LOGO]
1998 CREDIT AGREEMENT
This 1998 CREDIT AGREEMENT (the "Agreement") is made and entered into this
1st day of June, 1998, by and between SANWA BANK CALIFORNIA (the "Bank") and
ALIGN RITE CORPORATION (the "Borrower"), on the terms and conditions that
follow. The Borrower is currently indebted to the Bank pursuant to a Line of
Credit Agreement dated as of March 28, 1996 (together with all addenda and
amendments, the "1996 Agreement"). It is the intention of the parties that this
Agreement supersede in its entirety the 1996 Agreement.
1. DEFINITIONS
1.1 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):
"Advance" shall mean an advance to the Borrower under the Line of
Credit and includes a COF Advance, a LIBOR Advance and a Variable Rate
Advance, as the context requires.
"Business Day" shall mean a day, other than a Saturday or Sunday,
on which commercial banks are open for business in California.
"Close-Out Date" means the day (which shall be a Business Day) on
which the Bank, pursuant to Section 4.8(a) hereof, closes out and
liquidates FX Transactions.
"Closing Value" has the meaning given to it in Section 4.8(a)(1)
hereof.
"Closing Gain" means the amount determined in accordance with
Section 4.8(a)(2) or 4.8(a)(3) hereof, as applicable.
"Closing Loss" means the amount determined in accordance with
Section 4.8(a)(2) or 4.8(a)(3) hereof, as applicable.
"COF Advance" has the meaning given in Section 2.4(c).
"COF Interest Period" has the meaning given in Section 2.4(c).
"COF Rate" means a rate per annum quoted by the Bank with respect
to a COF Advance which is approximately equal to the Bank's cost (as
determined by the Bank in its sole and absolute discretion) of acquiring
funds in an amount approximately equal to the relevant COF Advance and
for a period of time approximately equal to relevant COF Interest Period
for such COF Advance plus one and one quarter percent (1.25%), adjusted
any and all assessments, surcharges and reserve requirements pertaining
to the borrowing or purchase of such funds.
"Credit Limit" means FIFTEEN MILLION DOLLARS ($15,000,000.00).
"Debt" shall mean all liabilities of the Borrower less Subordinated
Debt.
"Debt Coverage Ratio" shall mean (a) the sum of net income after
tax and exclusive of extraordinary gains, plus depreciation and
amortization expense plus interest expense minus dividends for the twelve
month period then ending divided by (b) the sum of (1) 25% of the then
outstanding (A) principal amount of Advances
1998 CREDIT AGREEMENT-Page 1
<PAGE> 2
plus (B) Letter of Credit Obligations and (C) FX Risk Liability plus (2) the
current portion long term debt plus (3) interest expense for the twelve month
period then ending.
"Default Interest Rate" has the meaning given in Section 10.2.
"Drawing" shall mean the presentation of a draft(s) together with any
accompanying documents by a beneficiary under a Letter of Credit to seeking
payment under such Letter of Credit.
"Effective Tangible Net Worth" means 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 including, but not limited to, investments in and all amounts
due form affiliates, officers or employees).
"Environmental Claims" means 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 (a) 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 Material at, in, or from
property, whether or not owned by the Borrower, or (b) any other circumstances
forming the basis of any violation, or alleged violation, of any Environmental
Law.
"Environmental Laws" means 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.
"Environmental Permits" has the meaning provided in Section 7.11 hereof.
"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.
"Event of Default" means any of the events described in Section 9.1
which have not been waived by the Bank in writing.
"Expiration Date" means June 30, 1999 or the date of termination of the
Bank's commitment to lend under this Agreement pursuant to Section 9, whichever
shall occur first.
"Foreign Currency" means a legally traded currency (other than U.S.
Dollars) which may be transferred by paperless wire transfer and which the Bank
regularly trades.
"FX Risk Liability" means twenty percent (20%) (or such greater or
lesser percentage as the Bank may designate for any given FX Transaction due to
the Foreign Currency involved or the length of the FX Transaction) of the
aggregate of the Notional Values of all FX Transaction outstanding, net of any
Offsetting Transactions.
"FX Limit" means $375,000.00.
"FX Transaction" means any transaction between the Bank and the
Borrower pursuant to which the Bank has agreed to sell to or to purchase from
the Borrower a Foreign Currency of an agreed amount at an agreed price in U.S.
Dollars, deliverable and payable on an agreed date.
1998 CREDIT AGREEMENT-Page 2
<PAGE> 3
"Guarantor" and "Guaranty" has the meaning given in Section 5.2.
"Hazardous Materials" means 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.
"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.
"Interest Period" means a COF Interest Period or a LIBOR Interest
Period, or both, as the context requires.
"Letter of Credit" shall mean a letter of credit issued by Bank
pursuant to Section 3.
"Letter of Credit Obligations" shall mean, at any time, the aggregate
obligations of the Borrower then outstanding, or which may thereafter arise in
respect of Letters of Credit then issued by Bank, to reimburse the amount paid
by the Bank with respect to a past, present or future Drawing under Letters of
Credit.
"LIBOR" means the 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 such period appearing on page 3750 (or such other
page as may replace page 3750 of the Telerate screen at or about 11:00 a.m.
(London time) on the second Business Day prior to the first days of such period
(adjusted for any and all assessments, surcharges and reserve requirements).
"LIBOR Advance" has the meaning given in Section 2.4(b).
"LIBOR Interest Period" has the meaning given in Section 2.4(b).
"LIBOR Rate" means an interest rate per annum equal to LIBOR as quoted
by the Bank plus one and one quarter percent (1.25%).
"Line Account" shall have the meaning provided in Section 2.11 hereof.
"Line of Credit" shall mean the credit facility described in Section
2.
"Notional Value" means, with respect to any FX Transaction, the U.S.
Dollar value of such transaction (the U.S. Dollar equivalent of the price at
which the Bank agreed to sell to the Borrower a Foreign Currency or the price at
which the Bank agreed to purchase of a Foreign Currency from the Borrower).
"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, the Letter of Credit Obligations, and FX Risk Liability.
"Offsetting Transaction" means an FX Transaction to purchase a Foreign
Currency and an FX Transaction to sell a Foreign Currency which are for the same
Foreign Currency and which have the same Settlement Date and designated as an
Offsetting Transaction at the time of the Transaction.
"Ordinary Course of Business" shall mean, with respect to any
transaction involving the Borrower or any of its subsidiaries or affiliates, the
ordinary course of the Borrower's business, as conducted by the Borrower in
accordance with past practice and undertaken by the borrower in good faith and
not for the purpose of evading
1998 CREDIT AGREEMENT-Page 3
<PAGE> 4
any covenant or restriction in this Agreement or in any other document,
instrument or agreement executed in connection herewith.
"Permitted Liens": shall mean: (a) liens and security interests
securing indebtedness owed by the Borrower to the Bank; (b) liens for taxes,
assessments or similar charges not yet due; (c) 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; (d) 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; and (e) liens and security
interests which, as of the date hereof, have been disclosed to and approved by
the Bank in writing.
"Reference Rate" means 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.
"Settlement Date" means, with respect to any FX Transaction, the
Business Day on which the Borrower has agreed to (i) deliver the required amount
of Foreign Currency or (ii) to pay in U.S. Dollars, the agreed purchase price of
the Foreign Currency.
"Sight Credit" means a Letter of Credit, the terms of which require
the Bank to make payment upon presentation of conforming documents.
"Standby Credit" means a Letter of Credit designed to be payable in
the event of default or other nonperformance by party obligated to the
beneficiary, such event to be evidenced by the presentation of documents.
"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.
"Usance Credit" means a Letter of Credit, the terms of which require
the Bank to make payment at a specified date or time not more than 90 days after
presentation of conforming documents.
"Variable Rate Advance" means as defined in Section 2.4(a).
"Variable Rate" means an interest rate per annum equal to the
Reference Rate.
1.2 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.
1.3 OTHER TERMS: Other terms not otherwise defined shall have the meanings
attributed to such terms in the California Uniform Commercial Code.
2. THE LINE OF CREDIT
2.1 THE LINE OF CREDIT: The Bank agrees to make Advances to the Borrower
from time to time from the date hereof to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed
$15,000,000 subject, however, to the further limitations provided in Section
5.1. Within the foregoing limits, the Borrower may borrow, partially or wholly
prepay, and re-borrow under this Section 2.
2.2 MAKING LINE ADVANCES: Each Advance shall be conclusively deemed to
have been made at the request of and for the benefit of the Borrower (a) when
credited to any deposit account of the Borrower maintained with the Bank or (b)
when paid in accordance with the Borrower's written instructions. Subject to
the conditions precedent of Section 6 and provided such request is made in a
timely manner a provided in Section 2.6 below, Advances shall be made by the
Bank under the Line of Credit.
1998 CREDIT AGREEMENT-Page 4
<PAGE> 5
2.3 REPAYMENT: On the Expiration Date, the Borrower hereby promises and
agrees to pay to the Bank in full the aggregate unpaid principal amount of all
Advances then outstanding, together with all accrued and unpaid interest
thereon.
2.4 INTEREST. Interest shall accrue from the date of each Advance under
the Line of Credit at one of the following rates, as quoted by the Bank and as
elected by the Borrower:
(a) Variable Rate Advances: At the Variable Rate, interest shall be
adjusted concurrently with any change in the Reference Rate. An Advance
based upon the Variable Rate is hereinafter referred to as a "Variable Rate
Advance".
(b) LIBOR Advances: At the LIBOR Rate as quoted by the Bank for
Advances in the minimum amount of $100,000.00 and in $100,000.00 increments
thereafter and for periods of 1, 2, 3 6, or 12 months or for such other
period of time that the Bank may quote and offer (the "LIBOR Interest
Period"), provided that (1) no LIBOR Interest Period shall extend beyond
the Expiration Date, (2) any LIBOR Interest Period which begins on the last
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Business Day of the calendar month
at the end of such Interest Period, and (3) any LIBOR Interest Period which
expires on a day which is other than a Business Day shall expire on the
next succeeding Business day unless the next succeeding Business Day is in
the next calendar month in which case the LIBOR Interest Period shall
expire on the immediate preceding Business Day. An Advance based upon the
LIBOR Rate is hereinafter referred to as a "LIBOR Advance".
(c) COF Advances: At the COF Rate quoted by the Bank for Advances in
the minimum amount of $100,000,000 and in $100,000 increments thereafter
and for a period of time that the Bank may quote not less than ____ days
(the "COF Interest Period") and provided that (1) any such period of time
does not extend beyond the Expiration Date (2) any COF Interest Period
which would end on a day which is not a Business Day shall end on the next
succeeding Business Day. Advances based upon the COF Rate are hereinafter
referred to as "COF Advances".
2.5 NOTICE OF BORROWING. 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 borrow under the Line of Credit by requesting:
(a) A Variable Rate Advance or COF Advance: A Variable Rate Advance or
COF Advance may be made on the day notice is received by the Bank;
provided, however, that if the Bank shall not have received notice at or
before 2:00 a.m. on the day such Advance is requested to be made, such
Variable Rate Advance or COF Advance may, at the Bank's option, be made on
the next Business Day.
(b) A LIBOR Advance: Notice of any LIBOR Advance 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 such LIBOR Advance to be made.
2.6 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) Variable to COF: That interest on a Variable Rate Advance shall be
adjusted to accrue at the COF Rate; provided, however, that such notice
shall be received by the Bank no later than 2:00 p.m. on the Business Day
on which the Borrower requests that interest be adjusted to accrue at the
COF Rate.
(b) Variable to LIBOR: That interest on a Variable Rate Advance shall
be adjusted to accrue at the LIBOR Rate; provided, however, that such
notice shall be received by the Bank no later than two Business Days prior
to the Business Day on which the Borrower requests that interest be
adjusted to accrue at the LIBOR Rate.
(c) COF to Variable or COF: That interest on a COF Advance shall
continue to accrue at a newly quoted COF 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 2:00 p.m. on the last
day of the Interest Period pertaining to such COF Advance.
1998 CREDIT AGREEMENT-Page 5
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(d) COF TO LIBOR: That interest on a COF Advance shall accrue at a
newly quoted LIBOR Rate provided that such notice shall be received by the Bank
no later than two Business Days prior to the last day of the last day of the
expiring COF Interest Period.
(e) LIBOR TO LIBOR: That interest on a LIBOR Advance shall accrue at
a newly quoted LIBOR Rate provided that such notice shall be received by the
Bank no later than two Business Days prior to the last day of the relevant LIBOR
Interest Period.
(f) LIBOR TO VARIABLE OR COF: That interest on a LIBOR Advance shall
accrue at a newly quoted COF 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 the last day of the relevant LIBOR Interest Period.
(g) FAILURE TO GIVE NOTICE: If the Bank shall not have received notice
as prescribed herein of the Borrower's election that interest on a COF Advance
shall accrue interest at a newly quoted LIBOR Rate or at a newly quoted COF Rate
or that interest on a LIBOR Advance shall accrue at the newly quoted COF Rate or
a newly quoted LIBOR Rate, as the case may be, the Borrower shall be deemed to
have elected that interest thereon shall be adjusted to accrue at the Variable
Rate upon the expiration of the relevant COF Interest Period or LIBOR Interest
Period pertaining to such Advance.
2.7 PAYMENT OF INTEREST. The Borrower promises and agrees to pay interest
on the outstanding principal balance of Advances in arrears on the last day of
each calendar month commencing with the first such day to occur after the date
of this Agreement. If interest is not paid when due, it may, without waiving any
default occasioned by such nonpayment, be added to principal and thereafter bear
like interest.
2.8 PREPAYMENT. The Borrower may prepay any Variable Rate Advance in
whole or in part, at any time and without penalty, provided, however, that any
partial prepayment shall first be applied at the Bank's option, to accrued and
unpaid interest and next to the outstanding principal balance. The Borrower may
not voluntarily prepay a COF Advance or a LIBOR Advance other that on the last
day of the LIBOR Interest Period or COF Interest Period pertaining to such
Advance. If the whole or any part of any LIBOR Advance or COF Advance is prepaid
by reason of acceleration or pursuant to 2.10 below or as otherwise required by
this Agreement, the Borrower shall, upon the Bank's request, promptly pay to and
indemnify the Bank for all costs, expenses and any loss (including loss of
future interest income) actually incurred by the Bank and any loss (including
loss of profit resulting from the re-employment of funds) deemed sustained by
the Bank as a consequence of such prepayment. The Bank shall be entitled to fund
all or any portion of its Advances in any manner it may determine in its sole
discretion, but all calculations and transactions hereunder shall be conducted
as though the Bank actually funded all Advances through the purchase of dollar
deposits bearing interest at the same rate as U.S. Treasury securities in the
amount of the relevant Advance and in maturities corresponding to (a) the then
applicable Interest Period (b) the date of such purchase to the Expiration Date
hereunder.
2.9 INDEMNIFICATION FOR LIBOR RATE OR COF COSTS. During any period of
time in which interest on any Advance is accruing on the basis of the LIBOR
Rate or COF 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 requirement or any
surcharge, tax or fee imposed upon the Bank 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 LIBOR Rate or
COF Rate.
2.10. CONVERSION FROM LIBOR RATE OR COF 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 LIBOR Rate or COF Rate (a) has become infeasible because the Bank
is unable to determine the LIBOR Rate or COF 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 LIBOR Interest Period or Interest
Period as the case may be or (b) is or has become unlawful 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 promptly give telephonic notice thereof (confirmed in writing) to
the Borrower, in which event any Advance bearing interest at the LIBOR Rate or
COF Rate as the case may be shall be deemed to be a Variable Rate Advance and
interest shall thereupon immediately accrue at the Variable Rate and shall
continue at such rate until the Bank determines that the LIBOR Rate or COF Rate
is no longer infeasible or unlawful.
1998 CREDIT AGREEMENT-Page 6
<PAGE> 7
2.11 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 (the "Line Account"). The Bank shall provide the Borrower with a monthly
statement of the Borrower's Line Account upon the Borrower's request therefor
from time to time, which statement shall be considered to be correct and
conclusively binding on the Borrower unless the Borrower notifies the Bank to
the contrary within 30 days after the Borrower's receipt of any such statement
which it deems to be incorrect.
2.12 LATE PAYMENT. In addition to any other rights the Bank may hereunder,
if any payment of principal (other than a principal payment due pursuant to
Section 2.3) or interest, or any portion thereof, under this Agreement is not
paid when due, a late payment charge equal to five percent (5%) of such past
due payment may be assessed and shall be immediately payable.
3. LETTERS OF CREDIT
3.1. LETTERS OF CREDIT. The Bank hereby agrees to issue Sight Credits,
Usance Credits and Standby Credits for and on behalf of Borrower provided that
the total Letter of Credit Obligations shall not exceed $1,000,000 subject,
however, to the further limitations of Section 5.1.
3.2 LETTER OF CREDIT GENERAL CONDITIONS.
(a) Letters of Credit may be issued to support the Borrower's normal
business operations.
(b) As a condition precedent to Bank's obligation to issue any
Letter of Credit hereunder, the Borrower shall pay to the Bank its standard
(published) issuance fees with respect to each Letter of Credit and shall
promptly pay, upon request, such other fees, commissions, costs and any
out-of-pocket expenses charged or incurred by the Bank with respect to any
Letter of Credit.
(c) The commitment by the Bank to issue Letters of Credit shall,
unless earlier terminated in accordance with the terms of the Agreement,
automatically terminate on the Expiration Date and no Letter of Credit shall
expire, and no draft under a Letter of Credit shall be payable on a date which
more than 90 days after the Expiration Date.
(d) Each Letter of Credit shall be in form and substance satisfactory
to the Bank, shall require (except in the case of a Standby Credit) as a
condition of payment the presentment of non-negotiable bills of lading in favor
the Bank or negotiable bills of lading payable to the order of the Bank, and
shall be in favor of beneficiaries satisfactory to the Bank, provided that the
Bank may refuse to issue a Letter of Credit due to the nature of the transaction
or its terms or in connection with any transaction where the Bank, due to the
beneficiary or the nationality or residence of the beneficiary, would be
prohibited by any applicable law, regulation or order from issuing such Letter
of Credit.
(e) Prior to the issuance of each Letter of Credit, but in no event
later than 10:00 a.m. (California time) on the day such Letter of Credit is to
be issued (which shall be a Business Day), the Borrower shall deliver to the
Bank the Bank's standard form of application for issuance of a letter of credit
with proper insertions, duly executed by Borrower.
3.3 DRAWINGS. Upon receipt from any beneficiary under a Letter of Credit
of a demand for payment under such Letter of Credit (each a "Drawing"), the
Bank shall promptly notify the Borrower. Each Drawing shall be payable in full
by the Borrower on the date thereof, without demand or notice of any kind. If
the Borrower desires to repay a Drawing from the proceeds of an Advance, the
Borrower may request an Advance in accordance with the terms and conditions of
this Agreement and, if disbursed on the date of such Drawing, shall be applied
in payment of such obligation by the Borrower. If any Drawing shall not be paid
when due in accordance with the terms of this Agreement, the Borrower shall
reimburse the Bank for each Drawing together with interest thereon until paid
at the Default Interest Rate. The obligation of the Borrower to reimburse the
Bank for Drawings shall be absolute, irrevocable, and unconditional under any
and all circumstances whatsoever and irrespective of any set-off, counterclaim
or defense to payment which the Borrower may have or have had against the Bank
(except such as may arise out of the Bank's gross negligence or willful
misconduct) or any other person, including, without limitation, and set-off,
counterclaim or defense based upon or arising out of:
(a) any lack of validity or enforceability of this Agreement or any
of the other Loan Documents;
1998 CREDIT AGREEMENT-Page 7
<PAGE> 8
(b) any amendment or waiver of or consent to departure from the
terms of any Letter of Credit;
(c) the existence of any claim, set-off, defense or other right
which the Borrower or any other person may have at any time against any
beneficiary or any transferee of any Letter of Credit (or any person for whom
any such beneficiary or any such transferee may be acting); or
(d) any allegation that any demand, statement or any other
document presented under any Letter of Credit is forged, fraudulent, invalid or
insufficient in any respect, or any statement therein being untrue or inaccurate
in any respect whatsoever or any variations in punctuation, capitalization,
spelling or format of the drafts or any statements presented in connecting with
any Drawing.
3.4 RELEASE OF DOCUMENTS. The Bank shall not be obligated to release
any documents accompanying a Drawing under a Sight Credit until such time as
the Borrower has paid the full amount of such Drawing. No past or future custom
or practice of releasing documents prior to receiving such payment shall
operate as a waiver of the Bank's right under this Subsection. From and after
the occurrence of an Event of Default and until such time as such Event of
Default has been cured or waived, the Bank shall not be obligated to release
documents accompanying a Drawing under any Usance Credit until such time as
the Borrower has deposited with the Bank, the full amount of such Drawing.
4. FX TRANSACTIONS
4.1 FOREIGN EXCHANGE FACILITY. The Bank agrees, as the Borrower's
request, to enter into FX Transactions with the Borrower from time to time
prior to the Expiration Date, provided that, at no time shall the aggregate FX
Risk Liability exceed $375,000.00 subject, however, to the further limitations
of Section 5.1.
4.2 REQUESTS FOR FX TRANSACTIONS. Each request for a FX Transaction
shall be made by telephone to the Bank's Treasury Department (each a "Request")
and may be confirmed in writing to the address specified in Section 10.5 below,
shall specify the currency to be purchased or sold, the amount of such currency
and the settlement date. Each Request shall be delivered or communicated to the
Bank no later than 3:00 p.m. (California time) on the day (which shall be a
Business Day) on which the FX Transaction is requested. By making any such
Request, Borrower agrees that all matters relating to each such FX Transaction
shall be governed by this Agreement and Borrower restates all warranties and
representations made by Borrower herein as if made on the date the FX
Transaction is entered into.
4.3 EXPIRATION DATE. The commitment by the Bank to enter into FX
Transactions shall, unless earlier terminated in accordance with this
Agreement, automatically terminate on the Expiration Date and no FX Transaction
shall expire on a date which is more than 90 days after the Expiration Date.
4.4 TENOR. No FX Transaction shall have a Settlement Date which is more
than 90 days after the Expiration Date.
4.5 AVAILABILITY. Bank may refuse to enter into a FX Transaction with
the Borrower where the Bank, in its sole discretion, determines that the
requested Foreign Currency is unavailable, if the Bank is not then dealing in
the requested Foreign Currency, or where Bank would be prohibited by any
applicable law, regulation or order from purchasing such Foreign Currency.
4.6 PURPOSE. The FX Transaction shall be used to hedge the Borrower's
foreign exchange exposure and/or risk and not for purposes of speculation.
4.7 PAYMENT. Payment is due on the Settlement Date of the respective FX
Transaction. Bank is hereby authorized by Borrower to charge the full
settlement price of any FX Transaction against the depository account or
accounts maintained by the Borrower with Bank on the Settlement Date. In the
event that Borrower fails to pay the settlement price of any Foreign Exchange
Contract on the relevant Payment Date, or the balances in the depository
account or accounts maintained by the Borrower with Bank are insufficient to
pay the settlement price on the Payment Date, without limiting the rights of
Bank under the Agreement or this Addendum or waiving any Event of Default
caused thereby, Bank may, and Borrower hereby authorizes Bank to create an
Advance bearing interest at the rate provided in the Agreement to pay the
settlement price on the Settlement Date.
4.8 REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default,
the Bank, may, at its sole and absolute discretion, without demand and only
upon such notice as may be required by law;
1998 CREDIT AGREEMENT-Page 8
<PAGE> 9
(a) CLOSE-OUT AND LIQUIDATION. The Bank shall have the right to
close-out and liquidate all, but not less than all, the outstanding FX
Transactions (except to the extent that, in the good faith opinion of the Bank,
certain FX Transactions may not be closed-out and liquidated under applicable
law) in the following manner:
(1) Close-out and liquidation shall be effected by
closing-out each outstanding FX Transaction (including any FX Transaction which
has not been performed and in respect of which the Settlement Date is on or
proceeds the Close-Out Date) so that each FX Transaction is canceled. The Bank
shall then calculate, in good faith, as of the value of each such canceled FX
Transaction (the "Closing Value") by converting:
(A) in the case of an FX Transaction whose Settlement
Date is the same as or later than the Close-Out Date, the amount of the Foreign
Currency into U.S. Dollars at a rate of exchange at which the Bank can buy or
sell, as appropriate, U.S. Dollars with or against the Foreign Currency for
delivery on the Settlement Date of the respective FX Transaction, or
(B) in the case of an FX Transaction whose Settlement
Date precedes the Close-Out Date, converting the amount of the Foreign
Currency, adjusted by adding interest with respect thereto at the Variable
Interest Rate from the Settlement Date to the Close-Out Date, into U.S. Dollars
at a rate of exchange at which the Bank can buy or sell, as appropriate, U.S.
Dollars with or against the Foreign Currency for delivery on the Close-Out Date;
(2) With respect to a FX Transaction pursuant to which the
Bank agreed to purchase a Foreign Currency from the Borrower, the amount by
which the Closing Value as so determined exceeds the Notional Value is a
Closing Loss and the amount by which the Closing Value as so determined is less
than the Notional Value is a Closing Gain.
(3) With respect to a FX Transaction pursuant to which the
Bank agreed to sell a Foreign Currency to the Borrower, the amount by which the
Closing Value as so determined exceeds the Notional Value is Closing Gain and
the amount by which the Closing Value as so determined is less than the
Notional Value a Closing Loss.
(4) To the extent permitted by applicable law, the Closing
Gain or Closing Loss, as the case may be, for each Settlement Date falling after
the Close-Out Date will be adjusted (discounted) to its net present value (the
calculation of the amount of such adjustment shall be made by the Bank and
shall be conclusive as between the parties).
(5) To the extent the net amount of Closing Gains exceeds
Closing Losses, such amount shall be payable by the Bank to the Borrower. To
the extent the net amount of Closing Losses exceeds Closing Gains, such amount
shall be payable by Borrower. In the case of the latter, the Borrower promises
and agrees to pay interest on the amount so payable from the Close-Out Date
until paid at the Variable Rate.
(b) TERMINATION. Terminate any future obligation of the Bank with
respect to FX Transactions, without affecting the Borrower's obligations to the
Bank or the Bank's rights and remedies under this Agreement.
(c) RECORDING. Borrower agrees and consents that the Bank may
(but will not be required to) record mechanically by tape recorder or other
such device all telephonic communications between the Borrower, its officers,
employees or authorized representatives and the Bank with respect to FX
Transactions and that the Bank may retain the recordings for such periods as it
deems advisable. Any such recording shall be conclusive as to the substance of
such communications.
5. GENERAL LOAN TERMS
5.1 MAXIMUM CREDIT. The Bank shall not be under any obligation to make
an Advance, issue a Letter of Credit, or enter into an FX Transaction if,
immediately thereafter, the principal amount of Advances plus the Letter of
Credit Obligations plus the FX Risk Liability would exceed the Credit Limit.
1998 CREDIT AGREEMENT-Page 9
<PAGE> 10
5.2. GUARANTIES. Borrower's payment of all Obligations and its full and
timely performance of the terms and conditions of the Agreement shall be
jointly and severally guaranteed in writing, in form and substance satisfactory
to the Bank (each a "Guaranty") by Align-Rite International, Ltd. and Align-Rite
International, Inc. (each a "Guarantor").
5.3. FACILITY FEE. The Borrower promises and agrees to pay to the Bank a
fee (the "Facility Fee") equal to three 16ths of one percent (0.1875%) per
annum times the difference between the average principal amount of Advances
outstanding under this Agreement and the Credit Limit. The Facility Fee shall
be payable on the first calendar day of each calendar quarter based on the
Advances outstanding and Credit Limit outstanding as of the calendar quarter
just ended.
5.4. COMPUTATION OF INTEREST AND FEES. Interest and any per annum fees
payable by the Borrower under this Agreement shall be computed on the basis of
360 days per year, but charged on the actual number of days elapsed.
5.5. NATURE AND PLACE OF PAYMENTS. All payments made on account of the
Obligations shall be made without setoff or counterclaim in lawful money of the
United States of America in either immediately available or next day available
funds, free and clear of and without deduction for any taxes, fees or other
charges of any nature whatsoever imposed by any taxing authority (other than
California and United States income tax payable by the Bank), and must be
received by Bank by 2:00 p.m. (California time) on the day of payment, it being
expressly agreed and understood that if payment is received by the Bank after
2:00 p.m. (California time), such payment will be considered to have been made
on the next succeeding Business Day and interest thereon shall be payable at
the then applicable rate during such extension. If any payment required to be
made by the Borrower hereunder becomes due and payable on a day other than a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day and interest thereon shall be payable at the then applicable rate
during such extension. All payments required to be made hereunder shall be made
to the office of the Bank designated for the receipt of notices in Section 10.5
below or such other office as Bank shall from time to time designate.
6. CONDITIONS OF LENDING
6.1. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE: The obligation of the
Bank to make the initial Advance and the first extension of credit to or on
account of the Borrower hereunder is subject to the conditions precedent that
the Bank shall have received before the date of such initial Advance and such
first extension of credit all of the following, in form and substance
satisfactory to the Bank:
(a) Evidence that the execution, delivery and performance by the
Borrower of this Agreement and any document, instrument or agreement
required hereunder have been duly authorized.
(b) The Bank has received each Guaranty together with evidence
that the execution, delivery and performance by signatory thereto has
been duly authorized by the respective Guarantor.
(c) Such other evidence as the Bank may request to establish the
consummation of the transaction contemplated hereunder and compliance
with the conditions of this Agreement.
6.2 CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT: The obligation of
the Bank to make each Advance, issue each Letter of Credit and enter into each
FX Transaction to or on account of the Borrower (including the initial Advance
and the first extension of credit) shall be subject to the further conditions
precedent that, on the date thereof and immediately after such extension of
credit:
(a) The Bank shall have received such supplemental approvals,
opinions or documents as the Bank may reasonably request.
(b) The representations contained in Section 7 and in any other
document, instrument or certificate delivered to the Bank hereunder are
true, correct and complete.
(c) 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.
The Borrower's acceptance of the proceeds of any Advance or the
Borrower's execution of any document or instrument evidencing or creating any
Obligation hereunder shall be deemed to constitute the Borrower's representation
and warranty that all of the above statements are true and correct.
1998 CREDIT AGREEMENT-Page 10
<PAGE> 11
7. REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to
the Bank, which representations and warranties are continuing:
7.1. STATUS. The Borrower is a corporation duly organized and validly
existing under the laws of the State of Nevada, and is properly licensed and is
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.
7.2. 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: (a) violate any provision of
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having application to the Borrower;
(b) result in a breach of or constitute a default under any material indenture
or loan or credit agreement or other material agreement, lease or instrument to
which the Borrower is a party or by which it or its properties may be bound or
affected; or (c) require any consent or approval of its stockholders or violate
any provision of its articles of incorporation or by-laws.
7.3. LEGAL EFFECT. This Agreement constitutes, and any instrument,
document or agreement required hereunder when delivered hereunder will
constitute, legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their respective terms.
7.4. FICTITIOUS TRADE STYLES. The Borrower does not use any fictitious
trade styles in connection with its business operations. The Borrower shall
notify the Bank not less than 30 days prior to effecting any change in the
matters described below or prior to using any other fictitious trade style at
any future date, indicating the trade style and state(s) of its use.
7.5. FINANCIAL STATEMENTS. All financial statements, information and
other data which may have been or which may hereafter be submitted by the
Borrower to the Bank are true, accurate and correct and have been or will be
prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent the financial condition or, as
applicable, the other information disclosed therein. Since the most recent
submission of such financial information or 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.
7.6. 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.
7.7. 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.
7.8. 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.
7.9. 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 such taxes which are currently payable without penalty or interest
or those which are being duly contested in good faith.
7.10. MARGIN STOCK. The proceeds of any Advance under the Line of Credit
will not be used to purchase or carry margin stock as such term is defined
under Regulation U of the Board of Governors of the Federal Reserve System.
7.11. 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 all licenses, permits,
authorizations and registrations required under any Environmental Law
("Environmental Permits") and necessary for its ordinary course operations, all
such Environmental Permits are in good standing, and the Borrower is
1998 CREDIT AGREEMENT-Page 11
<PAGE> 12
In compliance with all material terms and conditions of such Environmental
Permits; neither the Borrower nor any of its present property or operations is
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 any underground storage tanks (x) that are not properly registered or
permitted under applicable Environmental Laws, or (y) that are leaking or
disposing of Hazardous Materials off-site, and (ii) the Borrower has notified
all of their 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.
8. 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 will, unless the Bank shall otherwise consent in
writing.
8.1 REPORTING AND CERTIFICATION REQUIREMENTS. Deliver or cause to be
delivered to the bank in form and detail satisfactory to the Bank:
(a) 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, prepared and certified by the Borrower.
(b) Not later than 45 days after the end of each of the first three
fiscal quarters of each of the Borrower's fiscal year's Borrower's, a copy
of the Borrower's financial statement as of such quarter end.
(c) Upon request by the Bank, a copy of the Borrower's most recent
federal income tax returns.
(d) Upon request by the Bank, an aging of accounts receivable and an
aging of accounts payable as of the immediately preceding month end.
(e) Promptly upon the Bank's request, such other information
pertaining to the Borrower, the Collateral or any guarantor hereunder as
the Bank may reasonably request.
8.2 FINANCIAL CONDITION. The Borrower promises and agrees, during the
term of this Agreement and until payment in full of all of the Borrower's
obligations, the Borrower will maintain:
(a) A minimum Effective Tangible Net Worth of at least
$12,000,000.00.
(b) A ratio of Debt to Effective Tangible Net Worth of not more than
1.0 to 1.0.
(c) A ratio of current assets to current liabilities (excluding
accounts payable relating to the purchase of equipment which would,
according to GAAP, be capitalized) of not less than 1.25 to 1.0.
(d) A ratio of the sum of cash, cash equivalents and accounts
receivable to current liabilities (excluding accounts payable relating to
the purchase of equipment which would, according to GAAP, be capitalized)
of not less than 0.75 to 1.0.
(e) A minimum net profit after tax of at least $750,000 at the end of
the second fiscal quarter and at least $1,500,000.00 at each fiscal
year-end.
(f) A Debt Coverage Ratio as of the end of each fiscal quarter of
not less than 1.50 to 1.0.
8.3 PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS: Maintain
and preserve its existence and all rights and privileges now enjoyed; and
conduct its business and operations in accordance with all applicable laws,
rules and regulations.
1998 CREDIT AGREEMENT - Page 12
<PAGE> 13
8.4 MERGE OR CONSOLIDATE. Not liquidate or dissolve, merge or
consolidate with or into, or acquire any other business organization.
8.5. 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. Upon the Bank's request, the Borrower shall
furnish the Bank with the original policy or binder of all such insurance.
8.6 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.
8.7. INSPECTION RIGHTS AND ACCOUNTING RECORDS: The Borrower will maintain
adequate books and records in accordance with generally accepted accounting
principals consistently applies and in a manner otherwise acceptable to Bank,
and, 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 discuss the business and operations of the
Borrower with any employee or representative thereof. If the Borrower shall
maintain any records (including, but not limited to, computer generated records
or 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 which it may request, all at the Borrower's
expense, the amount of which shall be payable immediately upon demand. In
addition, the Bank may, at any reasonable time and from time to time, conduct
inspections and audits of the Collateral and the Borrower's accounts payable,
the cost and expenses of which shall be paid by the Borrower to the Bank upon
demand.
8.8. PAYMENT OF DIVIDENDS: Not declare or pay any dividends on any class
of stock now or hereafter outstanding except dividends payable solely in the
Borrower's capital stock.
8.9. REDEMPTION OR REPURCHASE OF STOCK: Not redeem or repurchase any
class of the Borrower's stock now or hereafter outstanding.
9.10. ADDITIONAL INDEBTEDNESS: Not, after the date hereof, create, incur
or assume, directly or indirectly, any additional 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 Business.
8.11. 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 and subsidiaries of the Borrower,
except for (a) credit extended in the Ordinary Course of Business and (b) loans
to Align-Rite Ltd., or Align-Rite International Inc. (PK) to facilitate the
payment of indebtedness owed by the Borrower's affiliates to the Bank.
8.12. 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 or 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 of such properties,
except for Permitted Liens.
8.13. TRANSFER ASSETS: Not, after the date hereof, sell, contract for
sale, convey, transfer, assign, lease or sublet, any of its assets (including,
but not limited to, the Collateral) except in the Ordinary Course of Business
as presently conducted by the Borrower and, then, only for full, fair and
reasonable consideration.
8.14. CHANGE IN NATURE OF BUSINESS: Not make any material change in its
financial structure or the nature of its business as existing or conducted as
of the date hereof.
8.15. NOTICE: Give the Bank prompt written notice of any and all (i)
Events of Default: (ii) litigation, arbitration or administrative proceedings
to which the Borrower is a party and in which the claim or liability exceeds
$500,00.00; (iii) other matters which have resulted in, or might result in a
material adverse change in the Collateral or the financial condition or
business operations of the Borrower (iv) any enforcement, cleanup, removal or
other governmental or regulatory actions instituted, completed or threatened
against the Borrower or any of its properties.
1998 CREDIT AGREEMENT -- Page 13
<PAGE> 14
8.16. ENVIRONMENTAL COMPLIANCE. The Borrower shall conduct its operations
and keep and maintain all of its property in compliance with all Environmental
Laws and, upon the written request of the Bank, the Borrower shall submit to
the Bank, at the Borrower's sole cost and expense, at reasonable intervals, a
report providing the status of any environmental, health or safety compliance,
hazard or liability.
9. DEFAULT
9.1. EVENTS OF DEFAULT. Any one or more of the following described
events shall constitute an event of default (an "Event of Default") under this
Agreement:
(a) NON-PAYMENT: The Borrower shall fail to pay the principal amount
of any Obligations when due or interest on the Obligations within 10 days
of when due.
(b) PERFORMANCE UNDER THIS AGREEMENT: 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
relating to this Agreement and any such failure shall continue unremedied
for more than 30 days after the occurrence thereof.
(c) 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.
(d) OTHER AGREEMENTS: If there is a default under any agreement to
which Borrower is a party with the Bank or with a third party or parties
resulting in a right by the Bank or such third party or parties, whether
or not exercised, to accelerate the maturity of any Indebtedness.
(3) 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 and 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 substantial part of its properties, assets or businesses and shall not
be discharged within 30 days after the date of such appointment.
(f) 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.
(g) 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 a
Guarantor shall fail to observe any covenant or agreement contained is its
respective Guaranty.
(h) 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.
(i) MATERIAL ADVERSE CHANGE: If there occurs a material change in
the Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations.
(j) CHANGE IN OWNERSHIP: If 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.
(k) CONSOLIDATED FINANCIAL CONDITION: Align-Rite International, Inc.
shall fail to maintain, on a consolidated basis:
1998 CREDIT AGREEMENT-Page 14
<PAGE> 15
(1) A minimum Effective Tangible Net Worth of at least
$32,500,000.00.
(2) A ratio of Debt to Effective Tangible Net Worth of not more
than 1.0 to 1.0.
(3) A ratio of Current Assets to current liabilities of not less
than 1.50 to 1.0. Current liabilities exclude A/P relating to the
purchase of equipment which according to GAAP would be capitalized.
9.2. REMEDIES. Upon the occurrence of any Event of Default, the Bank may,
at its sole and absolute election, without demand and only upon such notice as
may be required by law:
(a) ACCELERATION: Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or any other document,
instrument or agreement, immediately due and payable, whether or not
otherwise due and payable.
(b) 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.
(c) SECURE LETTERS OF CREDIT: Require Borrower to deposit with Bank an
amount equal to the then existing Letter of Credit Obligations.
(d) 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.
(e) 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.
10. MISCELLANEOUS
10.1. AMOUNTS PAYABLE ON DEMAND. If the Borrower shall fail 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 having so failed to pay such amount, create an Advance under the
Line of Credit in an amount equal to the amount so payable, which Advance shall
thereafter bear interest as provided under the Line of Credit.
10.2 DEFAULT INTEREST RATE. If an Event of Default, or an event which,
with notice or passage of time could become an Event of Default, has occurred or
is continuing, the Borrower shall 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 then in effect under this Agreement (the "Default Interest Rate").
10.3 RELIANCE. Each warranty, representation, covenant, obligation 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 and agreements which the Borrower now or
hereafter shall give, or cause to be given, to the Bank.
10.4 ATTORNEY'S FEES. Borrower shall pay to the Bank all costs and
expenses, including but not limited to reasonable attorneys fees, incurred by
Bank in connection with the administration, enforcement, including any
bankruptcy, appeal or the enforcement of any judgment or any refinancing or
restructuring of this Agreement or any document, instrument or agreement
executed with respect to, evidencing or securing the indebtedness hereunder.
10.5 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 hereto, shall be given or made to such party by hand delivery or
through deposit in the United States mail, postage prepaid, or by facsimile
delivery, or to such other address as may be specified from time to time in
writing by either party to the other.
1998 CREDIT AGREEMENT-Page 15
<PAGE> 16
- -------------------------------------------------------------------------------
To the Bank: To the Borrower:
Sanwa Bank California Align-Rite Corporation
Newport Beach Commercial Banking Center 2428 Ontario Street
4400 MacArthur Blvd Burbank, California 91504
Suite 200 Attn:
Newport Beach, California 92660 --------------------------------
Attn: Dan Wilson
- -------------------------------------------------------------------------------
10.6. 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 other 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.
10.7. CONFLICTING PROVISIONS. To the extent the 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.
10.8. 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 prior written
consent of the Bank. The Bank may sell, assign or grant participation 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.
10.9. 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 or California,
to the jurisdiction of whose courts the parties hereby submit.
10.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK EACH WAIVE
THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES
AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS,
TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY.
WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE
RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY
ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO
CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS.
10.11. AMENDMENT. This Agreement may be amended or modified only by an
instrument in writing signed by the Bank and the Borrower.
10.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts all such counterparts taken together shall be deemed to
constitute on and the same instrument.
10.13. HEADINGS. The headings herein set forth are solely for the
purpose of identification and have no legal significance.
10.14. 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 pertaining to
the transactions contemplated hereunder not incorporated or referenced in this
Agreement or in such documents, instruments and agreements are superseded
hereby.
1998 CREDIT AGREEMENT-Page 16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ALIGN-RITE CORPORATION
By: /s/ SANDRA RUSH By: /s/ JAMES MACDONALD
------------------------------ ------------------------------
Sandra Rush, V.P. James MacDonald
------------------------------ Chairman & President
(name/title) ------------------------------
(name/title)
By: /s/ PETER KATURICH
------------------------------
PETER KATURICH / CFO
-------------------------------
(name/title)
1998 CREDIT AGREEMENT-Page 17
<PAGE> 1
[SANWA BANK LOGO]
EXHIBIT 10.18
AMENDMENT OF COMMERCIAL CREDIT AGREEMENT
This Amendment of Commercial Credit Agreement ("Amendment") is made and entered
into this 1st day of June 1998 by and between SANWA BANK CALIFORNIA (the
"Bank") and ALIGN-RITE INTERNATIONAL, INC. (the "Borrower") with respect to the
following:
This Amendment shall be deemed to be a part of and subject to that certain
commercial credit agreement between the parties hereto and dated as of March
28, 1996, as it may have been or be amended from time to time, and any and all
addenda, riders, exhibits and schedules thereto (collectively, the
"Agreement"). Unless otherwise defined herein, all terms used in this Amendment
shall have the same meanings as in the Agreement. To the extent that any of the
terms or provisions of this Amendment conflict with those contained in the
Agreement, the terms and provisions contained herein shall control.
WHEREAS, the Borrower and the Bank mutually desire to extend, amend and/or
modify the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the
Bank agree as follows:
1. REVISED NET WORTH. Section 5.14A of the Agreement is deleted in its
entirety and the following is substituted in lieu thereof: "5.14A Net Worth. A
minimum Effective Tangible Net Worth, on a consolidated basis, of not less than
$32,500,000.00".
2. REVISED DEBT SERVICE COVERAGE RATIO. Section 5.14E of the Agreement is
deleted in its entirety and the following is substituted in lieu thereof:
"5.14E Debt Service Coverage Ratio. Measured or determined quarterly on a
rolling four quarter basis, a ratio of not less than 1.50 to 1.00, where such
ratio is defined as the sum of net income and depreciation plus interest
expense divided by 25% of utilization of the Borrower's Line of Credit Facility
(as of the most recent quarter end) under this Agreement and the current
portion of long term debt plus interest expense".
3. REVISED CURRENT RATIO. Section 5.14C of the Agreement is hereby deleted in
its entirety and the following is substituted in lieu thereof: "5.14C Current
Ratio. A ratio of current assets to current liabilities (excluding accounts
payable relating to the purchase of equipment which would, according to
generally accepted accounting principles, be capitalized) of not less than 1.25
to 1.0".
4. INCORPORATION INTO AGREEMENT. On and after the effective date of this
Amendment, each reference in the Agreement to "this Agreement", "hereunder",
"hereof, "herein" or words of like import referring to the Agreement shall mean
and be referenced to the Agreement as amended by this Amendment.
5. NO WAIVER. The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of the Bank under, the
Agreement.
6. CONFIRMATION OF OTHER TERMS AND CONDITIONS. Except as specifically
provided in this Amendment, all other terms, conditions and covenants of the
Agreement which are unaffected by this Amendment shall remain unchanged and
shall continue in full force and effect and the Borrower hereby covenants and
agrees to perform and observe all terms, covenants and agreements provided for
in the Agreement, as hereby amended.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as
of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ALIGN-RITE INTERNATIONAL, INC.
By: /s/ SANDRA RUSH By: /s/ JAMES L. MACDONALD
------------------------------- -------------------------------
Sandra Rush, Authorized Officer James L. MacDonald,
Chief Executive Officer/President
By: /s/ PETER N. KATURICH
-------------------------------
Peter N. Katurich,
Chief Financial Officer/Secretary
(1)
<PAGE> 2
RIDER TO LINE OF CREDIT AGREEMENT
This Rider shall be deemed to be subject to the terms of that certain
Line of Credit Agreement dated as of March 28, 1996 by and between Bank and
Borrower, as it may be amended from time to time, and any and all addenda and
riders thereto (collectively the "Agreement"). Unless otherwise defined herein,
all terms used in this Rider shall have the same meanings as in the Agreement.
To the extent that any of the terms or provisions of this Rider conflict with
those contained in the Agreement, the terms and provisions contained herein
shall control.
In addition to the covenants contained in Section V of the Agreement,
Borrower shall perform all acts reasonably necessary to ensure that Borrower
(and any business in which Borrower holds a substantial interest) and all
customers, suppliers and vendors that are material to Borrower's business become
Year 2000 Compliant in a timely manner. Such acts shall include, without
limitation, performing a comprehensive review and assessment of all of
Borrower's systems and adopting a detailed plan, with itemized budget, for the
remediation and testing of such systems, as well as ascertaining that Borrower's
material customers, suppliers and vendors are taking all appropriate steps to
become Year 2000 Compliant on a timely basis. For the purposes hereof, "Year
2000 Compliant" shall mean, in regard to any entity, that all software,
hardware, firmware, equipment, goods or systems, utilized by and material to the
business operations or financial condition of such entity, will properly perform
date sensitive functions before, during and after the year 2000. Borrower shall
immediately, upon request, provide the Bank with such certifications or other
evidence of Borrower's compliance with the terms hereof as Bank may from time to
time require.
Except as specifically provided in this Rider, all other terms,
conditions and covenants contained in the Agreement shall remain unchanged and
shall continue in full force and effect.
IN WITNESS WHEREOF, this Rider has been executed by the parties
hereto as of June 1st, 1998.
BANK: BORROWER:
SANWA BANK CALIFORNIA ALIGN-RITE INTERNATIONAL, INC.
By: By: /s/ JAMES L. MACDONALD
------------------------------- -------------------------------------
Sandra Rush, Authorized Officer James L. MacDonald, CEO/President
By: /s/ PETAR N. KATURICH
-------------------------------------
Petar N. Katurich, CFO/Secretary
<PAGE> 3
[SANWA BANK LOGO]
AMENDMENT OF COMMERCIAL CREDIT AGREEMENT
This Amendment of Commercial Credit Agreement ("Amendment") is made and entered
into this 12 day of June 1997 by and between SANWA BANK CALIFORNIA (the "Bank")
and ALIGN-RITE INTERNATIONAL, INC. (the "Borrower") with respect to the
following:
This Amendment shall be deemed to be a part of and subject to that certain
commercial credit agreement between the parties hereto and dated as of March 28,
1996, as it may have been or be amended from time to time, and any and all
addenda, riders, exhibits and schedules thereto (collectively, the
"Agreement"). Unless otherwise defined herein, all terms used in this Amendment
shall have the same meanings as in the Agreement. To the extent that any of the
terms or provisions of this Amendment conflict with those contained in the
Agreement, the terms and provisions contained herein shall control.
WHEREAS, the Borrower and the Bank mutually desire to extend, amend and/or
modify the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the
Bank agree as follows:
1. REVISED PURPOSE. The following sentence is added to the end of Section 2.02A
of the Agreement (entitled "Purpose"): "and to fund sash requirements of the
subsidiaries".
2. REVISED INTERIM STATEMENTS. Section 5.06B of the Agreement (entitled "Interim
Statements") is hereby deleted in its entirety and replaced with the following
new Section 5.06B which reads as follows: "5.06B. Interim Statements. Not later
than 45 days after the end of the first three fiscal quarters, the Borrower's
financial statement as of the end of such fiscal quarters."
3. INCORPORATION INTO AGREEMENT. On and after the effective date of this
Amendment, each reference in the Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Agreement shall mean
and be referenced to the Agreement as amended by this Amendment.
4. NO WAIVER. The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of the Bank under, the
Agreement.
5. CONFIRMATION OF OTHER TERMS AND CONDITIONS. Except as specifically provided
in this Amendment, all other terms, conditions and covenants of the Agreement
which are unaffected by this Amendment shall remain unchanged and shall
continue in full force and effect and the Borrower hereby covenants and agrees
to perform and observe all terms, covenants and agreements provided for in the
Agreement, as hereby amended.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as
of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ALIGN-RITE INTERNATIONAL, INC.
By: /s/ DAN WILSON By: /s/ JAMES L. MACDONALD
------------------------------- -------------------------------------
Dan Wilson, Authorized Officer James L. MacDonald, CEO/President
By: /s/ PETAR N. KATURICH
-------------------------------------
Petar N. Katurich, Chief Financial
Officer/Secretary
(1)
<PAGE> 4
[SANWA BANK LOGO]
AMENDMENT OF COMMERCIAL CREDIT AGREEMENT
This Amendment of Commercial Credit Agreement ("Amendment") is made and entered
into this 23rd day of May 1997 by and between SANWA BANK CALIFORNIA (the "Bank")
and ALIGN-RITE INTERNATIONAL, INC. (the "Borrower") with respect to the
following:
This Amendment shall be deemed to be a part of and subject to that certain
commercial credit agreement between the parties hereto and dated as of March 28,
1996, as it may have been or be amended from time to time, and any and all
addenda, riders, exhibits and schedules thereto (collectively, the
"Agreement"). Unless otherwise defined herein, all terms used in this Amendment
shall have the same meanings as in the Agreement. To the extent that any of the
terms or provisions of this Amendment conflict with those contained in the
Agreement, the terms and provisions contained herein shall control.
WHEREAS, the Borrower and the Bank mutually desire to extend, amend and/or
modify the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the
Bank agree as follows:
1. REVISED LINE OF CREDIT FACILITY. The dollar amount of "$2,500,000.00"
contained in Section 2.02 of the Agreement (entitled "Line of Credit Facility")
is hereby amended to be "$5,000,000.00".
2. REVISED VARIABLE RATE ADVANCES. The date of "June 30, 1997" contained in
Section 2.02E(ii) of the Agreement (entitled "Variable Rate Advances") is hereby
amended to be "June 30, 1999".
3. REVISED EXPIRATION OF THE LINE OF CREDIT FACILITY. The date of "June 30,
1997" contained in Section 2.02H of the Agreement (entitled "Expiration of the
Line of Credit Facility") is hereby amended to be "June 30, 1999".
4. LOANS. A new Section 5.10A is hereby added to the Agreement which reads as
follows: "5.10A. Loans. Not make any loans or advances or extend credit to any
third person, including, but not limited to, directors, officers, shareholders,
partners, or employees of the Borrower except loans to affiliates of the
Borrower".
5. REVISED NET WORTH. Section 5.14A of the Agreement (entitled "Net Worth") is
hereby deleted in its entirety and replaced with the following: "5.14A. Net
Worth. A minimum Effective Tangible Net Worth of not less than $29,000,000.00".
6. REVISED DEBT SERVICE COVERAGE RATIO. The following words are hereby added
to the end of the first sentence contained in Section 5.14E of the Agreement
(entitled "Debt Service Coverage Ratio"): "measured annually".
7. REVISED NOTICE. A new sub-Section 5.16(iii) is hereby added to the
Agreement which reads as follows: "5.16(iii) litigation, arbitration or
administrative proceedings to which the Borrower is a party and in which the
claim of liability exceeds $500,000.00".
8. INCORPORATION INTO AGREEMENT. On and after the effective date of this
Amendment, each reference in the Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Agreement shall mean
and be referenced to the Agreement as amended by this Amendment.
9. NO WAIVER. The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of the Bank under, the
Agreement.
10. CONFIRMATION OF OTHER TERMS AND CONDITIONS. Except as specifically provided
in this Amendment, all other terms, conditions and covenants of the Agreement
which are unaffected by this Amendment shall remain unchanged and shall
continue in full force and effect and the Borrower hereby covenants and agrees
to perform and observe all terms, covenants and agreements provided for in the
Agreement, as hereby amended.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as
of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ALIGN-RITE INTERNATIONAL, INC.
By: /s/ DAN WILSON By: /s/ JAMES L. MACDONALD
------------------------------- -------------------------------------
Dan Wilson, Authorized Officer James L. MacDonald, CEO/President
By: /s/ PETAR N. KATURICH
-------------------------------------
Petar N. Katurich, Chief Financial
Officer/Secretary
(1)
<PAGE> 5
[SANWA BANK LOGO]
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 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> 6
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> 7
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 payments 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 Borrowers'
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 Band 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 Agrement 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> 8
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 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 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> 9
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
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> 10
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> 11
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 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 1 - 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 or
justice from the panel of JAMS appointed pursuant to the provisions of
Section 638(1) 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,
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> 12
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 INTERNATIONAL, INC.
By: [SIG] By:
------------------------------- -------------------------------
Dan Wilson, Authorized Officer James L. MacDonald,
Chief Executive Officer/President
Address:
Newport Beach Office (CBC) By: /s/ PETER N. 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 21
SUBSIDIARIES OF THE REGISTRANT
Align-Rite International, Inc. is incorporated in the State of
California.
The following table shows the Company's subsidiaries as of March 31,
1998, and the jurisdiction under which each subsidiary is incorporated. These
subsidiaries are included in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
JURISDICTION
OF
INCORPORATION
-------------
<S> <C>
Align-Rite International Inc. .......... California, USA
Align-Rite BV .......................... Netherlands
Align-Rite GmbH ...................... Heilbronn, Germany
Align-Rite International Limited ....... United Kingdom
Align-Rite Limited ................... United Kingdom
Align-Rite Corporation ............... Nevada, USA.
</TABLE>
<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 Nos. 33-00232,
33-96400 and 33-96402) of our report dated May 28, 1998, on our audits of the
consolidated financial statements and financial statement schedule of
Align-Rite International, Inc. as of March 31, 1998 and 1997, and for each of
the three years in the period ended March 31, 1998, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
June 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 5,523,416 5,523,416
<SECURITIES> 0 0
<RECEIVABLES> 7,395,086 7,395,086
<ALLOWANCES> 278,495 278,495
<INVENTORY> 2,783,070 2,783,070
<CURRENT-ASSETS> 16,536,186 16,536,186
<PP&E> 55,809,950 55,809,950
<DEPRECIATION> 22,235,256 22,235,256
<TOTAL-ASSETS> 51,158,162 51,158,162
<CURRENT-LIABILITIES> 9,900,591 9,900,591
<BONDS> 0 0
0 0
0 0
<COMMON> 44,640 44,640
<OTHER-SE> 37,721,692 37,721,692
<TOTAL-LIABILITY-AND-EQUITY> 37,766,332 37,766,332
<SALES> 12,992,054 46,721,054
<TOTAL-REVENUES> 12,992,054 46,721,054
<CGS> 8,439,531 29,744,531
<TOTAL-COSTS> 8,439,531 29,744,531
<OTHER-EXPENSES> 0 (254,014)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,681,064 9,788,064
<INCOME-TAX> 999,564 3,687,564
<INCOME-CONTINUING> 1,681,501 6,100,501
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,681,501 6,100,501
<EPS-PRIMARY> 0.38 1.37<F1>
<EPS-DILUTED> 0.34 1.25
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
