-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JLy4DDnqNEgOFA14jU6PbYPt1qdYiH9FpIEr2RRGYuaX09hXZC0S7vMnMmE05nhN w0/2D0oYf9IAPeMwUFE2HQ== 0000950150-98-001095.txt : 19980701 0000950150-98-001095.hdr.sgml : 19980701 ACCESSION NUMBER: 0000950150-98-001095 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19980629 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALIGN RITE INTERNATIONAL INC CENTRAL INDEX KEY: 0000945122 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] IRS NUMBER: 954528353 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26240 FILM NUMBER: 98657372 BUSINESS ADDRESS: STREET 1: 2428 ONTARIO ST CITY: BURBANK STATE: CA ZIP: 91504 BUSINESS PHONE: 8188437720 MAIL ADDRESS: STREET 1: 2428 ONTARIO ST CITY: BURBANK STATE: CA ZIP: 91504 10-K405 1 FORM 10-K FOR THE PERIOD ENDED MARCH 31, 1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 026240 ------------------------ ALIGN-RITE INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 954528353 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2428 ONTARIO STREET, BURBANK, CA 91504 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICER) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 843-7220 ------------------------ 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 ------------------------ 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. ================================================================================ 2 TABLE OF CONTENTS ITEM NUMBER AND CAPTION
PAGE NO. -------- 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..........................................................
i 3 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 1 4 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 2 5 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. 3 6 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 4 7 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. 5 8 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of March 31, 1998 are as follows:
NAME AGE POSITION ---- --- -------- 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
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. 6 9 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:
HIGH LOW ------- -------- 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
HIGH LOW ------- -------- 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
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. 7 10 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.
FISCAL YEARS ENDED MARCH 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ------- ------- ------- ------- ------- 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 ------- ------- ------- ------- ------- 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 ------- ------- ------- ------- ------- 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
- --------------- (1) Includes a nondeductible expense of $264,000 recorded in connection with the grant of 211,250 options in August 1994. 8 11 (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:
FISCAL YEARS ENDED MARCH 31, ----------------------------- 1998 1997 1996 ------- ------- ------- 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% ===== ===== =====
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 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 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 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 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 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE NO. -------- 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
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 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 18 PART II ALIGN-RITE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS ASSETS
AT MARCH 31, -------------------------- 1998 1997 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 16 19 ALIGN-RITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- 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 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 17 20 ALIGN-RITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
SERIES A SERIES B PREFERRED STOCK PREFERRED STOCK ORDINARY SHARES COMMON STOCK ------------------- ---------------------- --------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- -------- ---------- --------- ---------- -------- --------- ------- 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 ========= ======= FOREIGN ADDITIONAL RETAINED CURRENCY TOTAL PAID-IN EARNINGS TRANSLATION SHAREHOLDERS' CAPITAL (DEFICIT) ADJUSTMENT EQUITY ----------- ----------- ----------- ------------- 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 =========== =========== ======== ===========
The accompanying notes are an integral part of these consolidated financial statements. 18 21 ALIGN-RITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, ----------------------------------------- 1998 1997 1996 ------------ ------------ ----------- 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 --
The accompanying notes are an integral part of these consolidated financial statements. 19 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 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 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:
1998 1997 ---------- ---------- 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 ========== ==========
22 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:
1998 1997 ------------ ------------ 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 ============ ============
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:
1998 -------- 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 ========
6. ACCRUED EXPENSES AND OTHER LIABILITIES: Accrued and other liabilities at March 31, 1998 and 1997 consists of the following:
1998 1997 ---------- ---------- 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 ========== ==========
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 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:
FOR THE YEARS ENDED 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- 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
The difference between the Company's effective income tax rate and the United States federal statutory rate are as follows:
FOR THE YEARS ENDED MARCH 31, ------------------------ 1998 1997 1996 ---- ---- ---- 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% ==== ==== ====
24 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:
1998 1997 ----------- ----------- 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) =========== ===========
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:
OPERATING LEASES ---------- 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 ==========
Rent expense for the years ended March 31, 1998, 1997 and 1996 was $847,254, $489,991 and $535,759, respectively. 25 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:
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- 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
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 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:
1998 1997 -------------------- -------------------- WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE OF PRICE PER OF PRICE PER SHARES SHARE SHARES SHARE ------- --------- ------- --------- 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 ====== ======
The following table summarizes information about stock options outstanding at March 31, 1998:
OUTSTANDING -------------------------------- EXERCISABLE WEIGHTED ------------------ AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE -------------------- ------- ----------- -------- ------- -------- 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 ======= =======
27 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:
UNAUDITED AS REPORTED PRO FORMA ----------- ---------- 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
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 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:
1998 1997 1996 -------------------------- -------------------------- -------------------------- PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES ---------- ------------- ---------- ------------- ---------- ------------- 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% ==== ==== ====
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.
1998 1997 1996 ----------- ----------- ----------- 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 =========== =========== ===========
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 32 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED CREDITED TO DEDUCTIONS BALANCE AT BEGINNING OF COSTS AND OTHER FROM END OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD ------------ --------- ----------- ---------- ---------- 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
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 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
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 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.
31 34
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 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.
32 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. /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
33 EX-10.17 2 1998 CREDIT AGREEMENT 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 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 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 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 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 6 (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 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 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 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 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 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 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 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 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 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 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 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 EX-10.18 3 AMENDMENT OF COMMERCIAL CREDIT AGREEMENT 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) 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 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) 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) 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) 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) 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) 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) 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) 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) 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) 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) EX-21 4 SUBSIDIARIES OF THE REGISTRANT 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.
JURISDICTION OF INCORPORATION ------------- 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.
EX-23 5 CONSENT OF COOPERS & LYBRAND L.L.P. 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 EX-27 6 FINANCIAL DATA SCHEDULE
5 3-MOS 12-MOS MAR-31-1998 MAR-31-1998 MAR-31-1998 MAR-31-1998 5,523,416 5,523,416 0 0 7,395,086 7,395,086 278,495 278,495 2,783,070 2,783,070 16,536,186 16,536,186 55,809,950 55,809,950 22,235,256 22,235,256 51,158,162 51,158,162 9,900,591 9,900,591 0 0 0 0 0 0 44,640 44,640 37,721,692 37,721,692 37,766,332 37,766,332 12,992,054 46,721,054 12,992,054 46,721,054 8,439,531 29,744,531 8,439,531 29,744,531 0 (254,014) 0 0 0 0 2,681,064 9,788,064 999,564 3,687,564 1,681,501 6,100,501 0 0 0 0 0 0 1,681,501 6,100,501 0.38 1.37 0.34 1.25 For Purposes of This Exhibit, Primary means Basic.
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