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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended ...November 2, 1997...
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from................. to ................
Commission file number...0-15451...
...PHOTRONICS, INC....
(Exact name of registrant as specified in its charter)
...Connecticut... ...06-0854886...
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
...1061 East Indiantown Road, Jupiter, Florida... ..33477..
(Address of principal executive offices) (Zip Code)
...(561) 745-1222...
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on which
Title of each class registered
______None______ _____________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
.....Common Stock, $0.01 par value per share.....
(Title of Class)
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. [X]
As of December 31, 1997, 24,301,580 shares of the registrant's Common Stock
were outstanding. The aggregate market value of registrant's voting stock
held by non-affiliates of the registrant as of December 31, 1997 was
approximately $515,600,000.
________________________
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1998 Incorporated into Part
Annual Meeting of Shareholders III of this Form 10-K.
to be held on March 18, 1998.
PART I
ITEM 1. BUSINESS
General
Photronics, Inc. (the "Company") is a leading manufacturer of
photomasks, which are high precision photographic quartz plates containing
microscopic images of electronic circuits. Photomasks are a key element
in the manufacture of semiconductors and are used as masters to transfer
circuit patterns onto semiconductor wafers during the fabrication of
integrated circuits and, to a lesser extent, other types of electrical
components.
During fiscal 1997, the Company continued to increase its global
manufacturing network and enhance its technological and manufacturing
capabilities by expanding its existing facilities and acquiring or
establishing new manufacturing operations. In the United States, the
Company continued its aggressive investment program in its manufacturing
network, constructing a new state-of-the-art manufacturing facility in
Austin, Texas, and adding leading edge manufacturing systems to its
existing manufacturing operations. Construction of the new Austin, Texas
facility was substantially completed during the last calendar quarter of
1997 and it will become operational in early 1998. In addition, in August
1997, the Company announced that it would construct a new manufacturing
facility in the Portland, Oregon region. It is expected that the Oregon
facility will commence operations in fiscal 1999.
In the European market, the Company acquired Maskenzentrum Fur
Mikrostrkturierung Dresden GmbH ("MZD") on June 26, 1997. The operations
acquired represent a modern photomask manufacturing operation located in
a leased facility in Dresden, Germany. The acquisition was funded with
the issuance of shares of Common Stock and available cash reserves. The
Company is continuing to operate this facility in place.
Further, in October 1997, the Company held the official grand opening of
its new state-of-the-art manufacturing facility in Manchester, United
Kingdom. As part of the establishment of this facility, the Company
relocated operations from an existing facility in the region and vacated
such existing facility.
On October 17, 1997, the Company announced that it had reached an
agreement in principle to acquire the internal photomask manufacturing
operations of Motorola, Inc. ("Motorola") in Mesa, Arizona. The
acquisition was completed on December 31, 1997 and the assets acquired
included modern manufacturing systems capable of supporting a wide range
of photomask technologies. Additionally, the Company entered into a
supply agreement whereby it will supply the photomask requirements
previously provided by the acquired operation. The Company will continue
to operate the facility in place until it can be relocated to an
independent facility in the Mesa area.
In addition to its other efforts during 1997, the Company has
continued to focus on maintaining technological leadership at its existing
facilities. As a result, the Company has increased its research and
development activities and has continued to invest in advanced
manufacturing equipment to allow it to meet future technological and
volume demands.
The Company believes that its efforts have established it as a
leading independent photomask manufacturer on a global basis and provided
it with the facilities and expertise to continue to expand its sales base.
The Company, through its wholly owned subsidiary Beta Squared, Inc.
("Beta Squared"), sells and services wafer plasma etching systems and
engages in the sale of refurbished semiconductor manufacturing equipment,
engineering services and replacement parts, and field service for such
equipment on a third-party basis.
The Company is a Connecticut corporation, organized in 1969. Its
principal executive offices are located at 1061 East Indiantown Road,
Jupiter, Florida, telephone (561) 745-1222.
Manufacturing Technology
The Company manufactures photomasks, which are primarily used as
masters to transfer circuit patterns onto semiconductor wafers. The
Company's photomasks are manufactured in accordance with circuit designs
provided on a confidential basis by its customers. The typical
manufacturing process for one of the Company's photomasks involves receipt
and conversion of circuit design data to manufacturing pattern data. This
manufacturing data is then used to control the lithography system that
exposes the circuit pattern onto the photomask blank. The exposed areas
are dissolved and etched to produce that pattern on the photomask. The
photomask is inspected for defects and conformity to the customer design
data, any defects are repaired, any required pellicles (or protective
membranes) are applied and, after final cleaning, the photomask is shipped
to the customer.
The Company currently supports customers across the full spectrum of
integrated circuit production technologies by manufacturing photomasks
using electron beam or laser-based technologies and, to a significantly
lesser degree, optical-based technologies. Laser-based or electron beam
systems are the predominant technologies used for photomask manufacturing.
Such technologies are capable of producing the finer line resolution,
lighter overlay and larger die size for the larger and more complex
circuits currently being designed. Laser and electron beam generated
photomasks can be used with the most advanced processing techniques to
produce VLSI (very large scale integrated circuit) devices. The Company
currently owns a number of laser writing systems and electron beam systems
and has committed to purchase additional advanced systems in order to
maintain technological leadership. Compared to laser or electron beam
generated photomasks, the production of photomasks by the optical method
is less expensive, but also less precise. The optical method
traditionally is used on less complex and lower priced photomasks.
The first several levels of photomasks sometimes are required to be
delivered by the Company within 24 hours from the time it receives a
customer's design. The ability to manufacture high quality photomasks
within short time periods is dependent upon efficient manufacturing
methods, high yields and high equipment reliability. The Company believes
that it meets these requirements and has made significant investments in
manufacturing and data processing systems and statistical process control
methods to optimize the manufacturing process and reduce cycle times.
Quality control is an integral part of the photomask manufacturing
process. Photomasks are manufactured in temperature, humidity and
particulate controlled clean rooms because of the high level of precision,
quality and yields required. Each photomask is inspected several times
during the manufacturing process to ensure compliance with customer
specifications. The Company has made a substantial investment in
equipment to inspect and repair photomasks and to ensure that customer
specifications are met. After inspection and any necessary repair, the
Company utilizes technological processes to clean the photomasks prior to
shipment.
Sales and Marketing
The market for photomasks primarily consists of semiconductor
manufacturers and designers, both domestic and international, including
manufacturers that have the capability to manufacture photomasks.
Generally, the Company and each of its customers engage in a qualification
and correlation process before the Company becomes an approved supplier.
Thereafter, the Company typically negotiates pricing parameters for a
customer's orders based on the customer's specifications in order to
expedite the placement of individual purchase orders. Some of these
prices may remain in effect for an extended period. The Company also
negotiates prices, and occasionally enters into purchase arrangements,
based on the understanding that, so long as the Company's performance is
competitive, the Company will receive a specified percentage of that
customer's photomask requirements.
The Company conducts its sales and marketing activities through a
staff of full-time sales personnel and customer service representatives
who work closely with the Company's general management and technical
personnel. In addition to the sales personnel at the Company's
manufacturing facilities in Brookfield, Connecticut; Milpitas and
Sunnyvale, California; Colorado Springs, Colorado; Allen and Austin,
Texas; Dresden, Germany; Manchester, United Kingdom; Neuchatel,
Switzerland; and Singapore, the Company has sales offices in Carlsbad and
Pasadena, California; Raleigh, North Carolina; Hillsboro, Oregon;
Lancaster, United Kingdom; Bailly, France; and Taiwan.
The Company supports international customers through both its
domestic and foreign facilities. The Company also has sub-contract
manufacturing arrangements in Taiwan and Korea. The Company considers its
presence in international markets important to attracting new customers,
providing global solutions to its existing customers and serving customers
that utilize manufacturing foundries outside of the United States,
principally in Asia. For a statement of the amount of net sales,
operating income or loss, and assets attributable to each of the Company's
geographic areas of operations, see Note 13 of Notes to the Consolidated
Financial Statements.
Equipment Sales and Services
In addition to the manufacture of photomasks, the Company, through
its wholly-owned subsidiary, Beta Squared, manufactures, sells and
services a wafer plasma etching system used in the processing of
semiconductor wafers. The original system was developed by Texas
Instruments which licensed to Beta Squared the right to manufacture and
sell the system. Beta Squared also sells refurbished semiconductor
Manufacturing equipment, engineering services and replacement parts and
field service for such equipment on a third-party basis. Such activities
represented approximately 2% of the Company's net sales during fiscal
1997.
Customers
The Company primarily sells its products to leading semiconductor
manufacturers. The Company's largest customers during fiscal 1997
included the following:
Advanced Micro Devices, Inc. Micron Technology, Inc.
Analog Devices, Inc. Motorola, Inc.
Atmel Corporation National Semiconductor
Chartered Semiconductor Corporation
Manufacturing, Ltd. Orbit Semiconductor Inc.
Cirrus Logic, Inc. Plessey Semiconductors Limited
Cypress Semiconductor Corporation Rockwell International Corporation
Digital Equipment Corporation Symbios Logic, Inc.
Integrated Device Technology, Inc. Texas Instruments Incorporated
LSI Logic Corp. VLSI Technology, Inc.
Lucent Technologies, Inc. Zilog, Inc.
The Company has continually expanded its customer base and, during
fiscal 1997, sold its products and services to approximately 400
customers. The Company assumed an agreement with Texas Instruments as
part of the acquisition of the Dallas, Texas operation in fiscal 1993 and,
as a result, Texas Instruments became a more significant customer of the
Company. In fiscal 1997, sales to Texas Instruments represented
approximately 23% of net sales, and the loss of Texas Instruments or a
significant decrease in the amount of the purchases by Texas Instruments
from the Company would have a material adverse effect on the Company. The
agreement with Texas Instruments continues until March 31, 2000 and
provides that the Company will be Texas Instruments' principal photomask
supplier in the United States and Europe so long as the Company's price,
quality, service and delivery are competitive. The agreement also
requires the Company to ensure that prices charged to Texas Instruments
are not less favorable than those otherwise extended by the Company to
other customers with similar specifications, volume, delivery and other
requirements. During fiscal 1997, no single customer other than Texas
Instruments accounted for more than 10% of the Company's net sales. As a
result of the acquisition of Motorola's Mesa, Arizona, photomask operation
on December 31, 1997, it is anticipated that Motorola will become a more
significant customer of the Company. The Company's five largest
customers, in the aggregate, accounted for approximately 44% of net sales
in fiscal 1997.
Research and Development
The Company conducts ongoing research and development programs
intended to maintain the Company's leadership in technology and
manufacturing efficiency. Since fiscal 1994, the Company has increased
its investment in research and development activities and current efforts
include deep ultraviolet, phase-shift and optical proximity correction
photomasks for advanced semiconductor manufacturing as well as photomasks
for future generation post-optical manufacturing technologies such as x-
ray and electron beam. Phase-shift and optical proximity correction
photomasks use advanced lithography techniques for enhanced resolutions of
images on a semiconductor wafer. Post-optical manufacturing technologies
use an exposure source other than light (such as an x-ray or electron beam
source) for wafer patterning and are designed for the manufacture of
integrated circuits with critical dimensions below that believed possible
with currently utilized optical exposure methods. Post-optical
manufacturing technologies are still under development and have not yet
been adopted as standard production methods. The Company incurred
expenses of $7.9 million (including a non-recurring charge of $1.5
million), $8.5 million and $10.6 million for research and development in
fiscal 1995, 1996 and 1997, respectively. While the Company believes that
it possesses valuable proprietary information and has received licenses
under certain patents, the Company does not believe that patents are a
material factor in the photomask manufacturing business and it holds only
one patent.
Materials and Supplies
Raw materials utilized by the Company generally include high
precision quartz plates, which are used as photomask blanks, primarily
obtained from Japanese suppliers (including Toppan Printing Co., Ltd.
["Toppan"] and Hoya Corporation ["Hoya"]), pellicles (which are protective
transparent cellulose membranes) and electronic grade chemicals used in
the manufacturing process. Such materials are generally available from a
number of suppliers and the Company is not dependent on any one supplier
for its raw materials. The Company believes that its utilization of a
broad range of suppliers enables it to access the most advanced material
technology available. The Company has established purchasing arrangements
with each of Toppan and Hoya and it is expected that the Company will
purchase substantially all of its photomask blanks from Toppan and Hoya so
long as their price, quality, delivery and service are competitive.
The Company relies on a limited number of equipment suppliers to
develop and supply the equipment used in the photomask manufacturing
process. Although the Company has been able to obtain equipment on a
timely basis, the inability to obtain equipment when required could
adversely affect the Company's business and results of operations. The
Company also relies on these suppliers to develop future generations of
manufacturing systems to support the Company's requirements.
Backlog
The first several levels of photomasks for a circuit sometimes are
required to be shipped within 24 hours of receiving a customer's design.
Because of the short period between order and shipment dates (typically
from one day to two weeks) for the principal portion of the Company's
sales, the dollar amount of current backlog is not considered to be a
reliable indication of future sales volume.
Competition
The photomask industry is highly competitive and most of the
Company's customers utilize more than one photomask supplier. The
Company's ability to compete primarily depends upon the consistency of
product quality and timeliness of delivery, as well as pricing, technical
capability and service. The Company also believes that proximity to
customers is an important factor in certain markets. Certain competitors
have considerably greater financial and other resources than the Company.
The Company believes that it is able to compete effectively because of its
dedication to customer service, its investment in state-of-the-art
photomask equipment and facilities and its experienced technical
employees.
There has been a decrease since the mid-1980s in the number of
independent manufacturers as a result of independents being acquired or
discontinuing operations. The Company believes that entry into the market
by a new independent manufacturer would require a major investment of
capital, a significant period of time to establish a commercially viable
operation and additional time to attain meaningful market share and
achieve profitability. In the past, competition and relatively flat
demand led to pressure to reduce prices which the Company believes
contributed to the decrease in the number of independent manufacturers.
Although independent photomask manufacturers have experienced increased
demand since late 1993, there can be no assurance that past trends in
pricing and demand will not re-emerge.
Based upon available market information, the Company believes that it
has a larger share of the United States market than any other photomask
manufacturer and that it is one of the largest photomask manufacturers in
the world. Competitors in the United States include DuPont Photomasks and
Align-Rite International; and in international markets, Dai Nippon
Printing, Toppan, Hoya, DuPont, Taiwan Mask Corp., Innova, Align-Rite and
Compugraphics. In addition, some of the Company's customers possess their
own captive facilities for manufacturing photomasks and certain
semiconductor manufacturers market their photomask manufacturing services
to outside customers as well as to their internal organization.
Employees
As of November 2, 1997, the Company employed approximately 1,050
persons on a full-time basis. The Company believes that it offers
competitive compensation and other benefits and that its employee
relations are good. Except for employees in the United Kingdom, none of
the Company's employees is represented by a union.
ITEM 1A. EXECUTIVE OFFICERS OF REGISTRANT
The names of the executive officers of the Company are set forth
below, together with the positions held by each person in the Company.
All executive officers are elected annually by the Board of Directors and
serve until their successors are duly elected and qualified.
SERVED AS AN
NAME AND AGE POSITION OFFICER SINCE
Constantine S. Macricostas, 62 Chairman of the 1974
Board and Director
Michael J. Yomazzo, 55 President, 1977
Chief Executive
Officer and Director
Jeffrey P. Moonan, 41 Senior Vice President, 1988
General Counsel and
Secretary
Robert J. Bollo, 53 Vice President/Finance 1994
and Chief Financial
Officer
The terms of certain financing for the Company specify that if Mr.
Macricostas ceases to maintain day-to-day control of the Company, Mr.
Yomazzo, or another acceptable replacement, must assume such duties,
otherwise the Company may be declared in default.
For the past five years each of the executive officers of the Company
held the office shown, except as follows:
Mr. Macricostas served as Chief Executive Officer until August 1997.
Mr. Macricostas also serves as a Director of Nutmeg Federal Savings and
Loan Association and the DII Group, Inc., a supplier of integrated
electronic manufacturing products and services.
Michael J. Yomazzo has been President and Chief Executive Officer
since August 1997. From January 1994 until August 1997 he served as
President and Chief Operating Officer and from November 1990 until January
1994, he served as Executive Vice President and Chief Financial Officer.
Jeffrey P. Moonan has been Senior Vice President since January 1994
and General Counsel and Secretary since July 1988. From July 1989 until
January 1994, he also served as Vice President/Administration.
Robert J. Bollo has been Vice President/Finance and Chief Financial
Officer since November 1994. From August 1994 to November 1994, he served
as Director of Finance. From April 1992 to July 1994, he was a Principal
of CFO Associates, Inc., a financial management firm. Prior to April
1992, he was with Kollmorgen Corporation, serving as a Vice President
since January 1990 and Controller and Chief Accounting Officer since
February 1985.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's properties include buildings in which the Company
currently conducts manufacturing operations or is constructing facilities
for future manufacturing operations. The following table presents certain
information about the Company's manufacturing facilities.
Facility Size Type of
Location (sq.ft.) Interest
Brookfield, CT (Building #1) 19,600 Owned
Brookfield, CT (Building #2) 20,000 Leased
Milpitas, CA (2 buildings) 49,000 Leased
Sunnyvale, CA (3 buildings) 40,000 Owned
Colorado Springs, CO 27,000 Leased
Allen, TX 60,000 Owned
Austin, TX 50,000 Owned
Manchester, UK 42,000 Owned
Neuchatel, Switzerland 7,000 Leased
Singapore 20,000 Leased
Dresden, Germany 10,000 Leased
Lease terms range from five years with options to renew to up to
twenty years for other facilities. In addition, the Company leases office
space in Jupiter, Florida; Carlsbad and Pasadena, California; Hillsboro,
Oregon and certain adjacent property in Brookfield, Connecticut. The
Company has also obtained property in Hillsboro, Oregon for the
construction of an additional manufacturing facility.
The Company believes it has made adequate arrangements for the lease
or ownership of its current manufacturing facilities and continually
evaluates opportunities for further expansion, both domestically and
internationally.
The leased properties in Brookfield, Connecticut, are leased from
entities controlled by Constantine S. Macricostas under fixed lease rates
which were determined by reference to fair market value rates at the
beginning of the respective lease term. Mr. Macricostas is Chairman of
the Board and a Director of the Company.
For the year ended November 2, 1997, the Company leased real property
and equipment at an aggregate annual rental of approximately $1.2 million
and $3.3 million, respectively.
Other than new manufacturing facilities or equipment which have not
yet been placed into service, the Company believes it substantially
utilized its facilities during the 1997 fiscal year.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings,
nor is the property of the Company subject to any such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders of the Company was held on
November 13, 1997 pursuant to a Notice of Meeting and Proxy Statement,
dated October 6, 1997. The meeting was called for the sole purpose of
approving an amendment to the Certificate of Incorporation of the Company
increasing the authorized Common Stock of the Company from 20,000,000 to
75,000,000 shares. The vote on such amendment was as follows:
For 8,801,215
Against 1,345,440
Abstain 9,712
Broker Non-Votes 0
The number of shares outstanding for the meeting was 12,062,368 and the
amendment was approved at the meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
The Common Stock of the Company is traded on the NASDAQ National
Market System (NMS) under the symbol PLAB. The table below shows the
range of high and low sale prices per share for each quarter for fiscal
year 1997 and 1996, as reported on the NASDAQ NMS. All per share prices
have been adjusted for a two-for-one stock split for shareholders of
record on November 17, 1997.
High Low
------ ------
Fiscal Year Ended November 2, 1997:
Quarter Ended February 2, 1997 $20.13 $11.75
Quarter Ended May 4, 1997 19.25 13.13
Quarter Ended August 3, 1997 28.50 17.31
Quarter Ended November 2, 1997 32.06 16.75
Fiscal Year Ended October 31, 1996:
Quarter Ended January 31, 1996 $16.38 $ 9.63
Quarter Ended April 30, 1996 13.75 9.38
Quarter Ended July 31, 1996 15.00 9.88
Quarter Ended October 31, 1996 17.50 12.38
On December 31, 1997, the closing sale price for the Common Stock as
reported by NASDAQ was $24.25. Based on information available to the
Company, the Company believes it has approximately 5,000 beneficial
shareholders.
The Company has not paid any cash dividend to date and, for the
foreseeable future, anticipates that earnings will continue to be retained
for use in its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the Company's
consolidated financial statements. The data should be read in conjunction
with the consolidated financial statements and notes thereto and other
financial information included elsewhere in this Form 10-K. All share and
per share amounts have been adjusted for a two-for-one stock split
effected November, 1997.
Year Ended Years Ended October 31,
November 2, -------------------------------------------------------
1997 1996 1995 1994 1993
----------- -------- -------- ------- -------
(in thousands, except per share amounts)
OPERATING DATA:
Net sales $197,451 $160,071 $125,299 $80,696 $48,363
Costs and expenses:
Cost of sales 121,502 98,267 76,683 51,204 32,048
Selling, general and
administrative 24,940 21,079 17,127 10,517 6,580
Research and development 10,605 8,460 7,899 4,738 2,744
-------- -------- -------- ------- -------
Operating income 40,404 32,265 23,590 14,237 6,991
Other income and expense:
Interest income 2,424 1,601 1,627 568 547
Interest expense (2,226) (160) (141) (75) (101)
Other income (expense), net 834 197 4,766 571 (1)
-------- -------- -------- ------- -------
Income before income taxes
and cumulative effect of
change in accounting for
income taxes 41,436 33,903 29,842 15,301 7,436
Provision for income taxes 15,800 12,900 11,210 5,202 2,528
-------- -------- -------- ------- -------
Income before cumulative effect
of change in accounting
for income taxes 25,636 21,003 18,632 10,099 4,908
Cumulative effect of change in
accounting for income taxes - - - 237 -
-------- -------- -------- ------- -------
Net income $ 25,636 $ 21,003 $ 18,632 $10,336 $ 4,908
======== ======== ======== ======= =======
Net income per share:
Income before cumulative effect
of change in accounting
for income taxes $1.03 $0.87 $0.83 $0.50 $0.29
Cumulative effect of change in
accounting for income taxes - - - 0.01 -
----- ----- ----- ----- -----
Net income $1.03 $0.87 $0.83 $0.51 $0.29
===== ===== ===== ===== =====
Weighted average number of
common shares outstanding 24,916 24,202 22,414 20,124 16,744
====== ====== ====== ====== ======
November 2, October 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
----------- -------- -------- ------- -------
BALANCE SHEET DATA:
Working capital $ 81,398 $ 21,613 $ 49,653 $32,329 $17,577
Property, plant and equipment 203,813 123,666 72,063 39,205 41,585
Total assets 365,212 211,903 174,218 98,346 74,441
Long-term debt 106,194 1,987 1,809 495 1,051
Shareholders' equity 185,975 156,417 134,045 80,402 62,626
Cash dividends declared per share - - - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the
Years Ended November 2, 1997 and October 31, 1996 and 1995
OVERVIEW
In fiscal 1996, Photronics established its first operations outside
of the United States by acquiring operations in Oldham, U.K., and in
Neuchatel, Switzerland, opening a new manufacturing facility in Singapore
and acquiring a minority interest in an independent photomask manufacturer
in Korea. In addition, during 1997 the Company acquired an independent
photomask manufacturer in Dresden, Germany. These facilities, together
with the Company's five existing U.S. facilities, comprised a global
manufacturing network of ten facilities supporting semiconductor
fabricators in the Asian, European and North American markets. As a
result of the Company's globalization, revenues from foreign operations
increased to 11.9% in 1997, compared with 4.3% in 1996, and that trend is
expected to continue. Individually, none of these acquisitions had a
material effect on the result of operations in fiscal 1996 or 1997 (see
Note 6 of Notes to the Consolidated Financial Statements). Substantially
all of the Company's consolidated Asian sales are denominated in U.S.
Dollars resulting in minimal foreign currency exchange risk on
transactions due to recent weaknesses in Asian currencies.
Revenues and costs also have been affected by the increased demand
for higher technology photomasks which require more advanced manufacturing
capabilities and generally command higher average selling prices. To meet
this demand and position the Company for future growth, the Company
continues to make substantial investments in high-end manufacturing
technology and capacity both at existing and new facilities. Since 1996,
the Company has constructed four (4) new manufacturing facilities. In
addition to the Singapore facility, the Company completed construction of
its new state-of-the-art facility in Allen, Texas, to which it relocated
its Dallas, Texas operation in the fourth quarter of fiscal 1996.
During the fourth quarter of 1997, the Company completed construction of
its new state-of-the-art facility in Manchester, U.K., to which the former
Oldham, U.K. operation was relocated. During 1997, the Company completed
construction of a new manufacturing facility near Austin, Texas, which
will be operational in early 1998. The Company has also announced its
plans to construct a new facility in Hillsboro, Oregon, which it expects
to be operational in 1999. In addition, on December 31, 1997, the Company
acquired the internal photomask manufacturing operation of Motorola, Inc.
in Mesa, Arizona, and plans to relocate that operation to an independent
facility in the Mesa area by early 1999 (see Note 14 of Notes to
Consolidated Financial Statements).
RESULTS OF OPERATIONS
Net Sales:
Net sales for the fiscal year ended November 2, 1997 increased 23% to
$197.5 million, compared with $160.1 million in the prior year. Sales
from Photronics' new international manufacturing operations accounted for
approximately 40% of the 1997 increase. The remaining portion of the
growth resulted from increased shipments to customers from existing
facilities due to stronger high-end product demand and the availability of
greater advanced manufacturing capability, reflecting the implementation
of the Company's capacity expansion program.
Net sales in fiscal 1996 represented an increase of 27.8% over fiscal
1995 net sales of $125.3 million. The majority of the growth was from
increased shipments to customers from existing facilities due to greater
manufacturing capacity resulting from the Company's capital expansion
program, and from increased average selling prices due to a larger
proportion of higher technology photomask shipments in fiscal 1996.
Approximately 20% of the increase was attributable to the European
acquisitions. The increase in sales was also favorably affected by the
inclusion of a full year's sales for the Company's Colorado and Sunnyvale
facilities which were acquired during fiscal 1995, and increased sales
from the Company's wholly owned subsidiary, Beta Squared, Inc. ("Beta
Squared").
Cost of Sales:
Cost of sales for the year ended November 2, 1997, increased 23.6% to
$121.5 million, compared with $98.3 million in the prior fiscal year.
Gross margins decreased slightly to 38.5% of sales in 1997, compared with
38.6% in 1996. Favorable margins resulting from a higher capacity
utilization and a more favorable mix of higher-end products were offset by
the cost of the Company's expanded manufacturing base, which was still in
the process of ramping-up to higher levels of utilization earlier in the
year, and the inclusion of international operations which generated
margins below those generally experienced in the Company's domestic
operations. In addition, margins were lower at the Company's Beta Squared
subsidiary. To allow for increased manufacturing capability, the Company
has continued to increase its staffing levels and added to its
manufacturing systems, resulting in higher labor and equipment-related
costs, including depreciation expense. The Company anticipates that its
fixed operating costs will increase in connection with its continuing
capacity expansion which it expects to offset with increases in net sales.
Cost of sales for fiscal 1996 increased 28.1% over fiscal 1995 cost
of sales of $76.7 million. These increases resulted principally from
increases in sales volume, including those resulting from the Company's
acquisitions. To meet the increased production demands, the Company
increased its staffing levels and manufacturing capacity, resulting in,
among other things, increased labor costs, depreciation expense and
equipment maintenance costs. Gross margins as a percentage of net sales
decreased slightly to 38.6% in fiscal 1996, compared with 38.8% in fiscal
1995. Improvements from higher capacity utilization of the Company's
installed equipment base and a more favorable mix of advanced photomasks
were offset by the absorption of increased costs resulting from
manufacturing capacity expansion and lower margins generally at recently
acquired operations, at Beta Squared, and on sales contracted to foreign
manufacturing partners.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses increased 18.3% to $24.9
million for the year ended November 2, 1997, compared with $21.1 million
in the prior fiscal year. However, as a percentage of net sales, selling,
general and administrative expenses decreased to 12.6% in 1997, compared
with 13.2% in 1996. The increases in costs resulted from the addition of
the new international operations, as well as increased staffing and other
costs associated with the Company's domestic expansion.
Selling, general and administrative expenses in fiscal 1996 increased
23.1% over fiscal 1995 expenses of $17.1 million. Nearly half of all the
increase was due to the addition of the Company's foreign operations. The
remaining increase primarily is attributable to the inclusion of a full
year's expenses for the Company's Colorado and Sunnyvale facilities which
were acquired during fiscal 1995 and increased staffing levels to
accommodate the Company's significant growth, partially offset by lower
incentive compensation expense. As a percentage of net sales, selling,
general and administrative expenses decreased to 13.2% for fiscal 1996
compared to 13.7% in the prior fiscal year, largely due to the lower level
of employee incentive compensation expenses in fiscal 1996.
Research and Development:
Research and development expenses for the year ended November 2,
1997, increased 25.4% to $10.6 million, compared with $8.5 million in the
prior fiscal year. This increase reflects continued engineering on more
complex photomasks, including phase shift, optical proximity correction
and deep ultra-violet technologies, as well as on next generation "post-
optical" technologies, such as SCALPEL and x-ray. In addition, 1997 R&D
expense included Beta Squared's development of PLASMAX, a proprietary "in-
situ" dry cleaning process that removes contamination from a silicon wafer
during plasma etching. As a percentage of net sales, research and
development expenses increased to 5.4% for the year ended November 2,
1997, compared with 5.3% in the prior fiscal year.
Research and development expenses in fiscal 1996 increased 7.1% over
fiscal 1995 expenses of $7.9 million. In connection with the Microphase
acquisition in fiscal 1995, the Company recorded a one-time charge of $1.5
million, representing amounts assigned to certain Microphase research and
development projects, principally for the manufacture of large area masks,
which were expensed upon acquisition. Excluding this non-recurring
charge, research and development expenses for fiscal 1996 increased
approximately 32% compared to fiscal 1995. This increase reflected the
expansion of the Company's research and development organization and the
resulting increase in its development efforts that have focused on new
high-end, more complex photomasks utilizing phase shift, optical proximity
correction and deep ultra-violet technologies, and on large area
photomasks. As a percentage of net sales, excluding the Microphase
charge, research and development expenses increased to 5.3% in fiscal 1996
from 5.1% in fiscal 1995.
Other Income and Expense:
Other income and expense decreased $0.6 million in fiscal 1997,
principally as a result of interest expense on borrowings, including
interest on the newly issued convertible notes. However, 1997 included a
$1.6 million gain from the sale of investment securities, offset by an
increase in net interest expense resulting from borrowings and lower
levels of funds available for investment earlier in the year.
Other income for fiscal 1996 consisted principally of interest income
which remained fairly constant at $1.6 million compared with 1995. Other
income, net, decreased to $0.2 million for fiscal 1996 compared to $4.8
million for the prior fiscal year principally due to the $5.1 million net
gain from the sales of investment securities during fiscal 1995.
Minority interest expense and foreign currency transaction gains or
losses were not significant in fiscal 1997 or 1996.
Income Taxes:
The Company provided federal, state and foreign income taxes at an
estimated combined effective annual tax rate of 38.1% in 1997 as compared
to 38.0% in 1996 and 37.6% in 1995. The increase in the Company's
estimated tax rate primarily is the result of a decrease in tax-exempt
investment income.
Net Income:
Net income for the year ended November 2, 1997, increased 22.1% to
$25.6 million, or $1.03 per share, compared with $21.0 million, or $0.87
per share, in the prior fiscal year. Net income in 1997 included $1.0
million, or $0.04 per share, from the gain on the sale of investment
securities. The weighted average number of common shares outstanding
increased to 24.9 million for the year ended November 2, 1997, from 24.2
million in the prior fiscal year, principally as a result of the issuance
of shares in connection with employee stock option exercises.
Net income for fiscal 1996 increased 12.7% over fiscal 1995 net
income of $18.6 million, or $0.83 per share. Excluding the non-recurring
research and development charge and the net gain from the sale of
investment securities in fiscal 1995 which increased net income by
approximately $2 million, or $0.08 per share, net income for fiscal 1996
increased approximately 26%. Earnings per share were based on 24.2
million weighted average shares outstanding in fiscal 1996, compared with
22.4 million shares in 1995. The increase in weighted average shares
outstanding in fiscal 1996 and 1995 principally are the result of a public
offering of 3.0 million shares in April and May 1995 and the issuance of
approximately 200,000 shares in connection with the Microphase acquisition
in June 1995.
All share and earnings per share amounts have been adjusted for a
two-for-one stock split effected in November 1997 (see Note 14 of Notes to
the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
increased $59.4 million during fiscal 1997, largely as a result of $100
million of proceeds from the sale of a new issue of convertible
subordinated notes. In addition, operating activities provided cash of
$46.5 million. Offsetting these increases were $97.4 million of capital
expenditures for building construction and equipment purchases in
connection with the Company's expansion of manufacturing capacity,
together with the acquisition of MZD in Dresden, Germany. Other increases
in cash during 1997, included proceeds from the sale of investments of
$1.9 million, and $6.1 million from sales of stock under the employee
stock option and purchase plans.
Accounts receivable increased 40% to $34.6 million at November 2,
1997 from $24.8 million at October 31, 1996, primarily as a result of
higher order activity over the course of the fourth quarter of 1997, and
sales by the new foreign operations. Inventories increased $3.3 million,
or 41.4% from October 31, 1996 to $11.3 million at November 2, 1997, as a
result of higher volumes and more locations, as well as the purchase in
1997 of several machines for refurbishment and resale by Beta Squared.
Other current assets increased to $7.0 million at November 2, 1997, from
$6.2 million at October 31, 1996, primarily due to an increase in prepaid
expenses.
Property, plant and equipment increased to $203.8 million at November
2, 1997, from $123.7 million at October 31, 1996. Deposits on and
purchases of equipment and construction in progress on new facilities
aggregated $96.3 million during the year ended November 2, 1997. These
increases were offset by depreciation expense totalling $19.8 million in
fiscal 1997. The decrease in intangible assets from $9.3 million at
October 31, 1996 to $8.2 million at November 2, 1997, was due primarily to
amortization expense during the year.
Investments and other assets increased from $13.4 million at October
31, 1996 to $14.2 million at November 2, 1997 due to the deferral of
certain costs and fees incurred in connection with the issuance of
convertible notes, offset by the sale of certain investment securities.
In addition to new foreign operations and a higher level of costs
generally due to the Company's growth, accounts payable and other accrued
liabilities increased $8.0 million from October 31, 1996 to $46.4 million
at November 2, 1997, due to the substantial completion of construction in
Austin, Texas and in Manchester, U.K., and the acceptance of a significant
amount of new capital equipment at the end of the year. Accrued salaries
and wages increased to $7.4 million at November 2, 1997 from $5.6 million
at October 31, 1996, largely as a result of fiscal 1997 accruals,
including incentive compensation and timing of other expenses.
During 1997, the Company sold $103.5 million of convertible
subordinated notes, due in 2004, in a public offering. The notes bear
interest at 6% per annum and are convertible into 3.7 million shares of
the Company's common stock. The Company received the proceeds, net of
underwriting discounts and costs, of $100 million on May 29, 1997, and
repaid $15 million outstanding under its revolving credit facility. Other
changes in long-term debt were due to the imputation of interest on the
obligation incurred in connection with an acquisition in fiscal 1995.
Deferred income taxes and other liabilities increased from $9.5
million at October 31, 1996, to $15.5 million at November 2, 1997, largely
due to increases in deferred income taxes resulting from the increase in
accelerated depreciation for tax purposes and amounts due in the future in
connection with the acquisition of MZD.
The Company's commitments represent on-going investments in
additional manufacturing capacity, as well as advanced equipment for
research and development of the next generation of higher technology and
more complex photomasks. At November 2, 1997, the Company had commitments
outstanding for capital expenditures of approximately $53 million.
Additional commitments are expected to be incurred during 1998.
The Company has amended its revolving credit facility to permit
borrowings of up to $30.0 million at any time through October 31, 1998.
All amounts outstanding at October 31, 1998 will be due and payable on
such date. The Company believes that its currently available resources,
together with its capacity for substantial growth and its accessibility to
other debt and equity financing sources, are sufficient to satisfy its
cash requirements for the foreseeable future.
EFFECT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share", which establishes new standards for the computation
and disclosure of earnings per share ("EPS"). The new statement requires
dual presentation of "basic" EPS and "diluted" EPS. Basic EPS is based on
the weighted average number of common shares outstanding for the period,
excluding any dilutive common share equivalents. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted. The Company cannot adopt
SFAS 128 until the first quarter of fiscal 1998. The effect of SFAS 128,
had it been adopted beginning in fiscal 1995, would have been to present
basic EPS that would have been greater than EPS actually reported by $0.04
for 1995, by $0.02 for 1996 and $0.04 for 1997. The presentation of
diluted EPS would have been the same as EPS actually reported for the
respective periods.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." Both of these statements establish new
standards for financial statement reporting and disclosure of certain
information effective for the Company in fiscal 1999. Neither of the new
statements is expected to have a material impact on the Company's current
financial reporting.
YEAR 2000 COSTS
The Company is currently implementing new worldwide computerized
manufacturing and information systems which will be completed in 1998.
Such systems have the ability to process transactions with dates for the
year 2000 and beyond at no incremental cost and, accordingly, "Year 2000"
issues are not expected to have any material impact on the Company's future
financial condition or results of operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995:
Except for historical information, the matters discussed above may be
considered forward-looking statements and may be subject to certain risks
and uncertainties that could cause the actual results to differ materially
from those projected, including uncertainties in the market, pricing,
competition, procurement and manufacturing efficiencies, and other risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENT
Page
Independent Auditors'
Report.......................................... 19
Consolidated Balance Sheet
at November 2, 1997 and October 31, 1996........ 20 - 21
Consolidated Statement of Earnings for
the years ended November 2, 1997 and
October 31, 1996 and 1995....................... 22
Consolidated Statement of Shareholders'
Equity for the years ended November 2,
1997 and October 31, 1996 and 1995.............. 23
Consolidated Statement of Cash Flows
for the years ended November 2,
1997 and October 31, 1996 and 1995.............. 24
Notes to Consolidated
Financial Statements............................ 25 - 36
Independent Auditors' Report
Board of Directors and Shareholders
Photronics, Inc.
Jupiter, Florida
We have audited the accompanying consolidated balance sheets of
Photronics, Inc. and its subsidiaries as of November 2, 1997 and October
31, 1996, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the
period ended November 2, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Photronics,
Inc. and its subsidiaries as of November 2, 1997 and October 31, 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended November 2, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
December 8, 1997
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
November 2, 1997 and October 31, 1996
(dollars in thousands)
Assets 1997 1996
- ------ -------- --------
Current assets:
Cash and cash equivalents $ 57,845 $ 18,766
Short-term investments 28,189 7,918
Accounts receivable (less allowance
for doubtful accounts of $235 in
1997 and 1996) 34,563 24,750
Inventories 11,302 7,992
Other current assets 7,038 6,154
-------- --------
Total current assets 138,937 65,580
Property, plant and equipment 203,813 123,666
Intangible assets (less accumulated
amortization of $4,048 in 1997
and $3,256 in 1996) 8,218 9,305
Investments 10,421 13,239
Other assets 3,823 113
-------- --------
$365,212 $211,903
======== ========
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
November 2, 1997 and October 31, 1996
(dollars in thousands, except per share amounts)
Liabilities and Shareholders' Equity 1997 1996
- ------------------------------------ -------- --------
Current liabilities:
Current portion of long-term debt $ 272 $ 38
Accounts payable 34,173 34,168
Income taxes payable 3,454 -
Accrued salaries and wages 7,423 5,561
Other accrued liabilities 12,217 4,200
-------- --------
Total current liabilities 57,539 43,967
Long-term debt 106,194 1,987
Deferred income taxes 10,508 7,481
Other liabilities 4,996 2,051
-------- --------
Total liabilities 179,237 55,486
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized,
none issued and outstanding - -
Common stock, $.01 par value,
75,000,000 shares authorized in 1997,
20,000,000 shares authorized in 1996,
24,300,970 shares issued in 1997 and
11,973,290 shares issued in 1996 243 120
Additional paid-in capital 85,129 77,833
Retained earnings 99,609 73,973
Unrealized gains on investments 3,251 4,678
Treasury stock, 136,500 shares at cost - (245)
Foreign currency translation adjustment (2,008) 58
Deferred compensation on
restricted stock (249) -
-------- --------
Total shareholders' equity 185,975 156,417
-------- --------
$365,212 $211,903
======== ========
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
Years Ended November 2, 1997 and October 31, 1996 and 1995
(in thousands, except per share amounts)
1997 1996 1995
-------- -------- --------
Net sales $197,451 $160,071 $125,299
Costs and expenses:
Cost of sales 121,502 98,267 76,683
Selling, general
and administrative 24,940 21,079 17,127
Research and development 10,605 8,460 7,899
-------- -------- --------
Operating income 40,404 32,265 23,590
Other income and expense:
Interest income 2,424 1,601 1,627
Interest expense (2,226) (160) (141)
Other income, net 834 197 4,766
------- -------- --------
Income before income taxes 41,436 33,903 29,842
Provision for income taxes 15,800 12,900 11,210
-------- -------- --------
Net income $ 25,636 $ 21,003 $ 18,632
======== ======== ========
Net income per common share $1.03 $0.87 $0.83
===== ===== =====
Weighted average number of
common shares outstanding 24,916 24,202 22,414
====== ====== ======
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Years Ended November 2, 1997 and October 31, 1996 and 1995
(in thousands)
Unreal- Foreign
ized Currency Deferred
Addi- Gains Trans- Compensa-
Common Stock tional on lation tion on Total
-------------- Paid-In Retained Invest- Treasury Adjust- Restricted Shareholders'
Shares Amount Capital Earnings ments Stock ment Stock Equity
------ ------ ------- -------- ------ -------- -------- ---------- -------------
Balance at
November 1, 1994 6,660 $ 67 $41,338 $34,338 $5,608 ($245) $ - ($704) $ 80,402
Net income - - - 18,632 - - - - 18,632
Sale of common stock
in connection with
public offering 1,500 15 29,336 - - - - - 29,351
Issuance of common
stock related to
acquisition 98 1 2,399 - - - - - 2,400
Sale of common stock
through warrants and
employee stock option
and purchase plans 170 2 2,043 - - - - - 2,045
Amortization of
restricted stock to
compensation expense - - - - - - - 352 352
Change in unrealized
gains on investments - - - - 863 - - - 863
Three-for-two stock split 3,330 33 (33) - - - - - -
------ ---- -------- ------ ------ ----- ------ ------ --------
Balance at
October 31, 1995 11,758 118 75,083 52,970 6,471 (245) - (352) 134,045
Net income - - - 21,003 - - - - 21,003
Sale of common stock
through employee
stock option and
purchase plans 215 2 2,750 - - - - - 2,752
Foreign currency
translation adjustment - - - - - - 58 - 58
Amortization of
restricted stock to
compensation expense - - - - - - - 352 352
Change in unrealized
gains on investments - - - - (1,793) - - - (1,793)
------ ---- ------- ------- ------ ----- ------- ------ --------
Balance at
October 31, 1996 11,973 120 77,833 73,973 4,678 (245) 58 - 156,417
Net income - - - 25,636 - - - - 25,636
Issuance of common
stock related to
acquisition 50 - 1,337 - - - - - 1,337
Sale of common stock
through employee
stock option and
purchase plans 258 3 6,060 - - - - - 6,063
Foreign Currency
translation adjustment - - - - - - (2,066) - (2,066)
Restricted stock
awards, net 6 - 264 - - - - (249) 15
Retirement of
treasury stock (136) (1) (244) - - 245 - - -
Change in unrealized
gains on investments - - - - (1,427) - - - (1,427)
Two-for-one stock split 12,150 121 (121) - - - - - -
------ ---- ------- ------- ------ ----- ----- ------ -------
Balance at
November 2, 1997 24,301 $243 $85,129 $99,609 $3,251 $ - ($2,008) ($249) $185,975
====== ==== ======= ======= ====== ===== ====== ==== ========
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended November 2, 1997 and October 31, 1996 and 1995
(in thousands)
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net income $25,636 $21,003 $18,632
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property, plant and equipment 19,817 12,120 8,747
Amortization of intangible assets 1,082 1,100 1,039
Gain on sale of investments (1,562) - (5,110)
Deferred income taxes 989 1,000 (842)
Research and development expense
from acquisition - - 1,484
Other 338 626 377
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable (9,405) (6,893) (7,639)
Inventories (3,157) (1,228) (2,922)
Other current assets (870) (3,260) 199
Accounts payable and accrued liabilities 13,677 14,159 19,587
------- ------- -------
Net cash provided by operating activities 46,545 38,627 33,552
------- ------- -------
Cash flows from investing activities:
Acquisitions of and investments in
photomask operations (1,065) (12,397) (10,536)
Deposits on and purchases of property,
plant and equipment (96,319) (55,762) (35,547)
Net change in short-term investments (20,271) 8,303 (13,686)
Proceeds from sale of investments 1,939 - 5,750
Other 2,151 1,635 90
------- ------- -------
Net cash used in investing activities (113,565) (58,221) (53,929)
------- ------- -------
Cash flows from financing activities:
Issuance of subordinated convertible notes,
net of deferred issuance costs 99,697 - -
Repayment of long-term debt (151) (36) (467)
Proceeds from issuance of common stock 6,063 2,752 31,396
------- ------- -------
Net cash provided by financing activities 105,609 2,716 30,929
------- ------- -------
Effect of exchange rate changes on cash flows 490 - -
------- ------- -------
Net increase (decrease) in cash and cash equivalents 39,079 (16,878) 10,552
Cash and cash equivalents at beginning of year 18,766 35,644 25,092
------- ------- -------
Cash and cash equivalents at end of year $57,845 $18,766 $35,644
======= ======= =======
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended November 2, 1997 and October 31, 1996 and 1995
(dollars in thousands, except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the
accounts of Photronics, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain
amounts in the consolidated financial statements for periods prior to
November 2, 1997 have been reclassified to conform to the current
presentation. The Company adopted a fifty-two (52) week fiscal year
beginning in the first quarter of fiscal 1997. No material impact
resulted from this change.
Foreign Currency Translation
The Company's subsidiaries in Europe and Singapore maintain their
accounts in their respective local currencies. Assets and liabilities of
such subsidiaries are translated to U.S. dollars at year-end exchange
rates. Income and expenses are translated at average rates of exchange
prevailing during the year. Foreign currency translation adjustments are
accumulated in a separate component of shareholders' equity. The effects
of changes in exchange rates on foreign currency transactions are
included in income.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less. The
carrying values approximate fair value based on the short maturity of the
instruments.
Investments
The Company's debt and equity investments available for sale are
carried at fair value. Short-term investments include a diversified
portfolio of high quality marketable securities which will be liquidated
as needed to meet the Company's current cash requirements. All other
investments are classified as non-current assets. Unrealized gains and
losses, net of tax, are reported as a separate component of shareholders'
equity. Gains and losses are included in income when realized,
determined based on the disposition of specifically identified
investments.
Inventories
Inventories, principally raw materials, are stated at the lower of
cost, determined under the first-in, first-out (FIFO) method, or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated
depreciation. The capitalized cost of newly constructed facilities
includes an interest component where appropriate. Repairs and
maintenance as well as renewals and replacements of a routine nature are
charged to operations as incurred, while those which improve or extend
the lives of existing assets are capitalized. Upon sale or other
disposition, the cost of the asset and accumulated depreciation are
eliminated from the accounts, and any resulting gain or loss is reflected
in income.
For financial reporting purposes, depreciation and amortization are
computed on the straight-line method over the estimated useful lives of
the related assets. Buildings and improvements are depreciated over 15
to 40 years, machinery and equipment over 3 to 10 years and furniture,
fixtures and office equipment over 3 to 5 years. Leasehold improvements
are amortized over the life of the lease or the estimated useful life of
the improvement, whichever is less. For income tax purposes,
depreciation is computed using various accelerated methods and, in some
cases, different useful lives than those used for financial reporting.
Intangible And Other Assets
Intangible assets include goodwill and other costs arising from
business acquisitions. Other assets include deferred costs incurred in
connection with the issuance of Convertible Notes. Goodwill, which
represents the excess of cost over fair value of assets acquired, is
being amortized on a straight-line basis over fifteen to twenty years.
Costs allocated to sales, non-compete and technology agreements arising
from business acquisitions and other intangible assets are being
amortized on a straight-line basis over the respective agreement periods
ranging from three to ten years. Deferred issuance costs are amortized
on a straight-line basis over the term of the notes. The future economic
benefit of the carrying value of intangible assets is reviewed
periodically and any dimunition in useful life or impairment in value
based on future anticipated cash flows would be recorded in the period so
determined.
Income Taxes
The provision for income taxes is computed on the basis of
consolidated financial statement income. Deferred income taxes reflect
the tax effects of differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income tax
purposes.
Net Income Per Common Share
Net income per common and common equivalent share is calculated
using the weighted average number of common and common equivalent shares
outstanding during each year. When dilutive, stock options and stock
purchase warrants are included as common equivalent shares using the
treasury stock method.
Stock Options
The Company records stock option awards in accordance with the
provisions of Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees". The Company estimates the fair value of
stock option awards in accordance with Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," and discloses the resulting estimated compensation effect
on net income on a pro forma basis.
NOTE 2 - INVESTMENTS
Short-term investments consist of:
November 2, October 31,
1997 1996
----------- -----------
Government agency securities $ 4,205 $7,918
Corporate bonds 18,178 -
Certificates of deposit 5,806 -
------- ------
$28,189 $7,918
======= ======
The estimated fair value of short-term investments, based upon
current yields of like securities, approximates cost, resulting in no
significant unrealized gains or losses. Short-term investments at
November 2, 1997, mature by their terms, as follows:
Due within one year $18,049
Due after one year, but within three years 7,988
Due after three years 2,152
-------
$28,189
=======
Other investments consist of available-for-sale equity securities of
publicly traded technology companies and a minority interest in a
photomask manufacturer in Korea. The fair values of available-for-sale
investments are based upon quoted market prices. The Company is a
supplier to one of the investee companies. In the absence of quoted
market prices, the estimated fair value is based upon the financial
condition and the operating results and projections of the investee and
is considered to approximate cost. Unrealized gains on investments were
determined as follows:
November 2, October 31,
1997 1996
----------- -----------
Fair value $10,421 $13,239
Cost 4,767 5,104
------- -------
5,654 8,135
Less deferred income taxes 2,403 3,457
------- -------
Net unrealized gains $ 3,251 $ 4,678
======= =======
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
November 2, October 31,
1997 1996
----------- -----------
Land $ 2,735 $ 2,735
Buildings and improvements 39,115 21,798
Machinery and equipment 220,199 140,297
Leasehold improvements 9,910 9,703
Furniture, fixtures and office equipment 3,754 1,873
-------- --------
275,713 176,406
Less accumulated depreciation and
amortization 71,900 52,740
-------- --------
Property, plant and equipment $203,813 $123,666
======== ========
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
November 2, October 31,
1997 1996
----------- -----------
6% Convertible Subordinated Notes
due June 1, 2004 $103,500 $ -
Acquisition indebtedness payable
December 1, 1998, net of interest of
$122 at October 31, 1997 and $234 at
October 31, 1996, imputed at 7.45% 1,678 1,566
Installment note payable by foreign
subsidiary with interest at 4.75%
through June, 2001 867 -
Industrial development mortgage note,
secured by building, with interest at
6.58%, payable through November 2005 421 459
-------- ------
106,466 2,025
Less current portion 272 38
-------- ------
Long-term debt $106,194 $1,987
======== ======
Long-term debt matures as follows: 1999 - $1,953; 2000 - $278; 2001 -
$223; 2002 - $53; years after 2002 - $103,687. The fair value of long-
term debt not yet substantively extinguished is estimated based on the
current rates offered to the Company and is not significantly different
from carrying value, except that the fair value of the convertible
subordinated notes, based upon the most recently reported trade as of
November 2, 1997, amounted to $116.0 million.
On May 29, 1997, the Company sold $103.5 million of convertible
subordinated notes, due in 2004, in a public offering. The notes bear
interest at 6% per annum and are convertible at any time by the holders
into 3.7 million shares of the Company's common stock, at a conversion
price of $27.97 per share. The notes are redeemable at the Company's
option, in whole or in part, at any time after June 1, 2000 at certain
premiums decreasing through the maturity date. Interest is payable semi-
annually commencing December 1, 1997.
In March 1995, the Company entered into an unsecured revolving credit
facility which was amended in 1997 to provide for borrowings of up to $30
million at any time through October 31, 1998. The Company is charged a
commitment fee on the average unused amount of the available credit and
is subject to compliance with and maintenance of certain financial
covenants and ratios. During 1997, the Company borrowed $15 million
under this agreement, but at November 2, 1997 no amounts were
outstanding.
Cash paid for interest was $164, $48 and $38 in 1997, 1996 and 1995,
respectively.
NOTE 5 - SHAREHOLDERS' EQUITY
In September 1997, the Company's Board of Directors authorized a two-for-
one stock split effected in the form of a stock dividend, which was paid
to shareholders of record on November 17, 1997 (see Note 14). In January
1995, the Company effected a three-for-two stock split resulting in the
issuance of 3.3 million additional shares of common stock. All
applicable share and per share amounts reflected in the financial
statements have been restated to reflect both stock splits.
In connection with a public offering, in April and May 1995, the Company
issued 3 million new shares of common stock at a price of $10.50 per
share ($9.92 per share after underwriting discounts), 80,000 shares of
common stock due to the exercise of stock options at prices ranging from
$0.92 to $1.59 per share and 15,000 additional shares of common stock
resulting from the exercise of a warrant at $2.62 per share. The
proceeds, net of costs of the issue, amounted to $29.6 million.
In June 1997, the Company issued 99,000 shares of common stock in
connection with the acquisition of MZD. In June 1995, the Company issued
197,118 shares of common stock in connection with the acquisition of
Microphase Laboratories, Inc. See Note 6.
NOTE 6 - ACQUISITIONS
European Photomask Operations
On June 26, 1997, the Company acquired all of the outstanding shares
of MZD Maskenzentrum fur Mikrostruktrierung Dresden GmbH (MZD), an
independent photomask manufacturer located in Dresden, Germany, for $3.1
million in cash and common shares of the Company. The acquisition was
accounted for as a purchase and, accordingly, the acquisition price was
allocated to assets and liabilities based on relative fair value. The
results of MZD were not material to the Company for the periods
presented.
In January 1996, the Company acquired the photomask manufacturing
operations and assets of Plessey Semiconductors Limited ("Plessey")
located in Oldham, United Kingdom, for $4.9 million in cash. In
connection with the transaction, the Company leased the facilities from
Plessey previously utilized by them for the manufacture of photomasks.
The acquisition was accounted for as a purchase and, accordingly, the
acquisition price was allocated to property and equipment based on
relative fair value.
In April 1996, the Company, through a majority-owned subsidiary,
acquired the photomask manufacturing operations and assets of the
Litomask Division ("Litomask") of Centre Suisse d'Electronique et de
Microtechnique S.A. ("CSEM") located in Neuchatel, Switzerland for $3.4
million in cash. CSEM retained the remaining interest in this subsidiary
for up to two years at which time it will be acquired by the Company for
an additional consideration of $3.3 million. In connection with the
transaction, the Company leased the facilities and retained certain
services from CSEM previously utilized by Litomask. The acquisition was
accounted for as a purchase and, accordingly, the acquisition price was
allocated to property and equipment based on relative fair value.
The consolidated statement of earnings includes the results of
European photomask operations beginning on the effective date of the
respective acquisition. Such results were not material to the Company.
Hoya Micro Mask, Inc.
In December 1994, the Company acquired certain assets held by Hoya
Micro Mask, Inc. ("Micro Mask"), an independent photomask manufacturer
with manufacturing operations located in Sunnyvale, California. The
transaction included the purchase of the land, buildings, inventory and
certain assets other than cash and receivables. In addition, significant
manufacturing systems owned by Micro Mask were leased by the Company from
Micro Mask. The acquisition was financed through the payment of
approximately $10.2 million in cash and the obligation to pay $1.8
million, without interest, four years after the closing. The operating
lease of the significant manufacturing systems has a term ranging from 44
to 62 months and includes the right to purchase the systems at fair
market value at the end of the lease. The acquisition was accounted for
as a purchase and, accordingly, the acquisition price was allocated to
property, plant and equipment as well as certain intangible assets based
on relative fair value. The excess of purchase price over the fair value
of assets acquired is being amortized over 20 years. The consolidated
statement of earnings includes the results of Micro Mask's operations
from December 1, 1994, the effective date of the acquisition.
Microphase Laboratories, Inc.
In June 1995, the Company acquired the manufacturing operations and
assets, exclusive of cash and accounts receivable, of Microphase
Laboratories, Inc. ("Microphase"), an independent photomask manufacturer
located in Colorado Springs, Colorado, in exchange for 197,118 shares of
common stock of the Company valued at $2.4 million. The acquisition was
accounted for as a purchase. Of the total purchase price, $1.5 million
was allocated to Microphase's research and development projects and,
accordingly, was charged to research and development expenses. The
consolidated statement of earnings includes the results of the Microphase
operations beginning June 20, 1995, the effective date of the
acquisition. Such results were not material to the Company.
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
---- ---- ----
Current: Federal $11,993 $ 9,905 $10,234
State 2,617 1,908 1,818
Foreign 201 87 -
------- ------- -------
14,811 11,900 12,052
------- ------- -------
Deferred: Federal 995 918 (617)
State (6) 82 (225)
------- ------ ------
989 1,000 (842)
------- ------ ------
$15,800 $12,900 $11,210
======= ======= =======
The provision for income taxes differs from the amount computed by
applying the statutory U.S. Federal income tax rate to income before
taxes as a result of the following:
1997 1996 1995
------- ------- -------
U.S. Federal income tax at
statutory rate $14,503 $11,866 $10,445
State income taxes, net of
Federal benefit 1,697 1,294 1,035
Tax benefits of tax
exempt income (35) (302) (389)
Foreign tax rate differential (681) (291) -
Other, net 316 333 119
------- ------- -------
$15,800 $12,900 $11,210
======= ======= =======
The Company's net deferred tax liability consists of the following:
November 2, October 31,
1997 1996
----------- -----------
Deferred income tax liabilities:
Property, plant and equipment $7,915 $3,876
Investments 2,403 3,457
Other 190 454
------ ------
Total deferred tax liability 10,508 7,787
------ ------
Deferred income tax assets:
Reserves not currently deductible 2,667 1,226
Other 2,097 483
------ ------
Total deferred tax asset 4,764 1,709
------ ------
Net deferred tax liability $5,744 $6,078
====== ======
Cash paid for income taxes was $7.2 million, $13.0 million and $11.6
million in 1997, 1996 and 1995, respectively.
NOTE 8 - EMPLOYEE STOCK PURCHASE AND OPTION PLANS
In March 1996, the shareholders approved the adoption of the 1996 Stock
Option Plan which includes provisions allowing for the award of qualified
and non-qualified stock options and the granting of restricted stock
awards. A total of 1.2 million shares of common stock may be issued
pursuant to options or restricted stock awards granted under the Plan.
Restricted stock awards do not require the payment of any cash
consideration by the recipient, but shares subject to an award may be
forfeited unless conditions specified in the grant are satisfied.
The Company has adopted a series of other stock option plans under which
incentive and non-qualified stock options and restricted stock awards for
a total of 3.6 million shares of the Company's common stock may be
granted to employees and directors. All plans provide that the exercise
price may not be less than the fair market value of the common stock at
the date the options are granted and limit the maximum term of options
granted to a range of from five to ten years.
The following table summarizes stock option activity under the plans:
Stock Options Exercise Prices
------------- ---------------
Balance at November 1, 1994 1,845,524 $ 0.92- 7.42
Granted 483,280 9.34-13.69
Exercised (290,546) 0.92- 6.71
Cancelled (78,378) 3.09-12.00
---------
Balance at October 31, 1995 1,959,880 0.92-13.69
Granted 964,100 10.75-12.50
Exercised (368,862) 0.92-13.69
Cancelled (171,592) 3.09-13.69
---------
Balance at October 31, 1996 2,383,526 1.59-13.69
Granted 275,300 14.88-21.97
Exercised (454,042) 1.59-13.69
Cancelled (65,006) 3.75-16.38
---------
Balance at November 2, 1997 2,139,778 $ 1.75-21.97
=========
The following table summarizes information concerning currently
outstanding and exercisable options:
Range of Exercise Prices
------------------------------------------
$1.75-$5.00 $5.00-$10.00 $10.00-$21.97
----------- ------------ -------------
Outstanding:
Number of options 517,528 297,106 1,325,144
Weighted average
remaining years 4.7 6.8 8.7
Weighted average
exercise price $3.19 $7.41 $13.46
Range of Exercise Prices
------------------------------------------
$1.75-$5.00 $5.00-$10.00 $10.00-$21.97
----------- ------------ -------------
Exercisable:
Number of options 517,528 154,401 262,969
Weighted average
exercise price $3.19 $6.99 $12.59
At November 2, 1997, 331,021 shares were available for grant and 934,898
shares were exercisable at a weighted average exercise price of $6.46.
The Company has not recognized compensation expense in connection with
stock option grants under the plans. However, had compensation expense
been determined based on the fair value of the options on the grant
dates, the Company's pro forma net income and earnings per share for 1997
would have been reduced by approximately $1.5 million, or $0.06 per
share, and for 1996 would have been reduced by approximately $0.3
million, or $0.01 per share. The weighted average fair value of options
granted was $7.39 per share in 1997 and $5.05 per share in 1996. Fair
value is estimated based on the Black-Scholes option-pricing model with
the following weighted average assumptions: dividend yield of 0%;
expected volatility of 50.8% in 1997 and 51.6% in 1996; risk-free
interest rates of 6.4% in 1997 and 1996.
In 1997, restricted stock awards representing a total of 12,000 shares
were awarded to certain outside directors. The market value of these
awards amounted to $0.3 million at the date of grant and was charged to
"Deferred Compensation on Restricted Stock", a component of shareholders'
equity. Such amount is being amortized as compensation expense over a
three-year period during which the shares under these awards are subject
to forfeiture. In 1994, restricted stock awards representing a total of
157,500 shares were awarded to certain key employees. The market value
of the grant amounted to $1.1 million at the date of grant and was
charged to "Deferred Compensation on Restricted Stock." Such amount was
amortized as compensation expense over the three-year period during which
the shares under these awards were subject to forfeiture.
In 1992, the shareholders approved the Company's adoption of an Employee
Stock Purchase Plan (Purchase Plan), under which 600,000 shares of common
stock are reserved for issuance. The Purchase Plan enables eligible
employees to subscribe, through payroll deductions, to purchase shares of
the Company's common stock at a purchase price equal to 85% of the lower
of the fair market value on the commencement date of the offering and the
last day of the payroll payment period. At November 2, 1997, 247,950
shares had been issued and 74,298 shares were subject to outstanding
subscriptions under the Purchase Plan.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Savings and Profit-Sharing Plan (the
"Plan") which covers all domestic employees who have completed six months
of service and are eighteen years of age or older. Under the terms of
the Plan, an employee may contribute up to 15% of their compensation
which will be matched by the Company at 50% of the employee's
contributions which are not in excess of 4% of the employee's
compensation. Employee and employer contributions vest fully upon
contribution. Employer contributions amounted to $0.5 million in 1997,
1996 and 1995.
The Company maintains a cafeteria plan to provide eligible domestic
employees with the option to receive non-taxable medical, dental,
disability and life insurance benefits. The cafeteria plan is offered to
all active full-time employees and their qualifying dependents. The
Company's contribution amounted to $3.0 million in 1997, $1.8 million in
1996 and $1.4 million in 1995.
The Company's foreign subsidiaries maintain benefit plans for their
employees which vary by country. The obligations and cost of these plans
are not significant to the Company.
NOTE 10 - LEASES
The Company leases various real estate and equipment under non-cancelable
operating leases. Rental expense under such leases amounted to $4.5
million in 1997, $5.6 million in 1996 and $4.9 million in 1995. Included
in such amounts were $0.1 million in each year to affiliated entities,
which are owned, in part, by a significant shareholder of the Company.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms in excess of one year amounted to $8.9 million
at November 2, 1997, as follows:
1998.....$4,042 2001...........$482
1999..... 2,598 2002........... 202
2000..... 1,358 Thereafter..... 216
Included in such future lease payments are amounts to affiliated entities
of $0.1 million in each year from 1998 to 2002, and $0.2 million in years
thereafter.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company and a significant shareholder have jointly guaranteed a loan
totaling approximately $0.5 million as of November 2, 1997, on certain
real estate which is being leased by the Company. The Company is subject
to certain financial covenants in connection with the guarantee.
As of November 2, 1997, the Company had capital expenditure purchase
commitments outstanding of approximately $53 million.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions, including collectibility of accounts
receivable, and depreciable lives and recoverability of property, plant,
equipment and intangible assets. Actual results may differ from such
estimates.
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and temporary cash investments.
The Company sells its products primarily to manufacturers in the
semiconductor and computer industries in North America, Europe and Asia.
The Company believes that the concentration of credit risk in its trade
receivables is substantially mitigated by the Company's ongoing credit
evaluation process and relatively short collection terms. The Company
does not generally require collateral from customers. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and
other information. Historically, the Company has not incurred any
significant credit related losses.
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
data:
First Second Third Fourth Year
------- ------- ------- ------- -------
1997:
Net sales $40,029 $49,034 $53,081 $55,307 $197,451
Gross profit 14,682 18,751 20,661 21,855 75,949
Net income $ 5,325 $ 6,184 $ 6,839 $ 7,288 $ 25,636
Net income
per share $ 0.22 $ 0.25 $ 0.27 $ 0.29 $ 1.03
1996:
Net sales $34,668 $40,514 $42,677 $42,212 $160,071
Gross profit 13,416 15,703 16,428 16,257 61,804
Net income $ 4,651 $ 5,267 $ 5,513 $ 5,572 $ 21,003
Net income
per share $ 0.19 $ 0.22 $ 0.23 $ 0.23 $ 0.87
NOTE 13 - SEGMENT INFORMATION
The Company operates in a single industry segment as a manufacturer of
photomasks, which are high precision quartz plates containing microscopic
images of electronic circuits for use in the fabrication of semiconductors.
In addition to its manufacturing facilities in the United States, the
Company has operations in the United Kingdom, Switzerland, Germany and
Singapore. Prior to 1996, the Company had no operations outside of the
United States. The Company's 1997 and 1996 net sales, operating profit and
identifiable assets by geographic area were as follows:
Net Operating Identifiable
Sales Income (Loss) Assets
-------- ------------- ------------
1997:
United States $174,043 $37,989 $288,970
Europe 12,938 180 46,586
Asia 10,470 2,235 29,656
-------- ------- --------
$197,451 $40,404 $365,212
======== ======= ========
1996:
United States $153,227 $32,660 $181,255
Europe and Asia 6,844 (395) 30,648
-------- ------- --------
$160,071 $32,265 $211,903
======== ======= ========
Approximately 7% of net domestic sales in 1997 were for delivery outside of
the United States (14% in 1996 and 11% in 1995).
The Company's largest single customer represented approximately 23% of total
net sales in 1997, 26% in 1996 and 32% in 1995.
NOTE 14 - SUBSEQUENT EVENTS
At a Special Meeting of Shareholders on November 13, 1997, an amendment to
the Company's Certificate of Incorporation increasing the authorized common
stock of the Company from 20 million shares to 75 million shares was
approved. As a result, a two-for-one stock split effected in the form of a
stock dividend, which had been authorized by the Company's Board of
Directors on September 15, 1997, was paid to the shareholders of record on
November 17, 1997. The stock split resulted in the issuance of 12.2 million
additional shares of common stock. All applicable shares and per share
amounts included in the financial statements and notes thereto have been
adjusted to reflect the stock split.
On December 31, 1997, the Company acquired the internal photomask
manufacturing operations of Motorola, Inc. ("Motorola") in Mesa, Arizona for
$29 million in cash. The assets acquired include modern manufacturing
systems, capable of supporting a wide range of photomask technologies.
Additionally, the Company entered into a multi-year supply agreement whereby
it will supply the photomask requirements previously provided by Motorola's
internal operations. The Company will continue to operate the facility in
place until it can be relocated to an independent facility in the Mesa area.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on any accounting and financial
disclosure matters between the Company and its independent certified public
accountants for which a Form 8-K was required to be filed during the 24
months ended November 2, 1997 or for the period from November 2, 1997 to the
date hereof.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information as to Directors required by Item 401 and 405 of
Regulation S-K is incorporated by reference to the Company's definitive
proxy statement (the "Definitive Proxy Statement") which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this Form 10-K. The
information as to Executive Officers is included in Part I, Item 1a of this
report, "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is
incorporated by reference to the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is
incorporated by reference to the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is
incorporated by reference to the Definitive Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheet at November 2, 1997 and
October 31, 1996
Consolidated Statement of Earnings for the years
ended November 2, 1997 and October 31, 1996 and 1995
Consolidated Statement of Shareholders' Equity for the
years ended November 2, 1997 and October 31, 1996 and 1995
Consolidated Statement of Cash Flows for the years
ended November 2, 1997 and October 31, 1996 and 1995
Notes to Consolidated Financial Statements
2) Financial Statement Schedules
Schedules for which provision is made in Regulation
S-X of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and,
therefore, have been omitted.
3) Exhibits: See Table of Exhibits, page 41.
(B) Reports on Form 8-K
No report on Form 8-K was filed by the Company during the fourth
quarter of the Company's fiscal year ended November 2, 1997.
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.
PHOTRONICS, INC.
(Registrant)
By CONSTANTINE S. MACRICOSTAS January 26, 1998
Constantine S. Macricostas
Chairman of the Board
and Director
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.
By CONSTANTINE S. MACRICOSTAS January 26, 1998
Constantine S. Macricostas
Chairman of the Board
and Director
By MICHAEL J. YOMAZZO January 26, 1998
Michael J. Yomazzo
President, Chief Executive
Officer and Director
By ROBERT J. BOLLO January 26, 1998
Robert J. Bollo
Vice President/Finance
Chief Financial Officer
By WALTER M. FIEDEROWICZ January 26, 1998
Walter M. Fiederowicz
Director
By JOSEPH A. FIORITA, JR. January 26, 1998
Joseph A. Fiorita, Jr.
Director
By YUKIO TAGAWA January 16, 1998
Yukio Tagawa
Director
TABLE OF EXHIBITS
3.1 Certificate of Incorporation. (1)
3.2 By-Laws, as amended. (1)
3.3 Amendment to Certificate of Incorporation, dated March 16,
1990. (4)
3.4 Amendment to Certificate of Incorporation, dated March 16,
1995. (13)
3.5 Amendment to Certificate of Incorporation, dated November 13, 1997. *
4.1 Form of Stock Certificate. (1)
10.1 Loan Agreement, dated August 10, 1984, among the Company, Fairfield
Associates, and the Connecticut Development Authority. (1)
10.2 Indenture of Trust, dated August 10, 1984, between the Connecticut
Development Authority and Citytrust. (1)
10.3 Security Agreement, dated August 10, 1984, between the Company and
the Connecticut Development Authority, with assignment to
Citytrust, as Trustee. (1)
10.4 Lease Agreement, dated August 10, 1984, between the Company and
Fairfield Associates. (1)
10.5 Guaranty Agreement, dated August 10, 1984, by the Company and
Constantine Macricostas to Citytrust, as Trustee. (1)
10.6 Assumption Agreement between the Company, MC2 and the Connecticut
Development Authority, dated October 15, 1992, and related Note,
Mortgage and Collateral Assignment of Leases and amendments
thereto. (7)
10.7 Assumption Agreement, Third Amendment to Loan Agreement and
Amendment to Guaranty Photronic Labs Incorporated Project - 1984
Series, dated August 28, 1992, by and among Photronics California,
Inc., Photronics Financial Services, Inc., Photronics Investment
Services, Inc., Photronics Texas, Inc., the Company, Constantine
Macricostas, the Connecticut Development Authority, The Chase
Manhattan Bank of Connecticut, N.A. and Fairfield Associates. (7)
10.8 The Company's 1986 Amended and Restated Incentive Stock Option
Plan. (2) +
10.9 Amendment #1 to the Company's 1986 Amended and Restated Incentive
Stock Option Plan. (4) +
10.10 The Company's 1986 Non-Qualified Stock Option Plan, as amended.
(3) +
10.11 The Company's 1988 Non-Qualified Stock Option Plan. (11) +
10.12 Amendment #1 to the Company's 1988 Non-Qualified Stock Option Plan.
(4) +
10.13 Amendment to Security Agreements, dated October 31, 1988, by and among
the Company, Citytrust, Constantine S. Macricostas and Mayo
Associates. (11)
10.14 Amendment to Loan Agreements between the Company and the Connecticut
Development Authority, dated as of June 8, 1990. (4)
10.15 Second Amendment to Loan Agreement dated as of December 20, 1991 by
and among the Company, the Connecticut Development Authority and The
Chase Manhattan Bank of Connecticut, N.A. (5)
10.16 Form of severance agreement between the Company and each of Messrs.
Macricostas, Yomazzo and Moonan. (11) +
10.17 Lease dated as of November 1, 1989 between the Company, MC3, Inc.
and Alpha-Omega Associates. (11)
10.18 Consulting Agreement, dated June 1, 1992, between Joseph Fiorita
and the Company. (7) +
10.19 The Company's 1992 Stock Option Plan. (6) +
10.20 The Company's 1992 Employee Stock Purchase Plan. (6)
10.21 The Company's 1994 Employee Stock Option Plan. (9) +
10.22 Overall Agreement for Strategic Alliance, dated September 13, 1993,
by an among Toppan Printing Co., Ltd. ("Toppan"), Toppan
Printronics (USA), Inc. ("TPI") and Toppan Electronics (USA), Inc.
("TEI") and the Company. (8)
10.23 Asset Purchase Agreement, dated September 13, 1993, by and among
the Company, Toppan and TPI. (8)
10.24 Stock Purchase Agreement, dated September 13, 1993, by and between
the Company and Toppan. (8)
10.25 Technology Transfer Agreement, dated October 1, 1993, by and among
the Company, Toppan and TPI. (8)
10.26 Purchase Agreement by and among Toppan, TPI and Texas Instruments
Incorporated ("TI"), dated March 31, 1990, amendments thereto and
related assignment to the Company dated October 1, 1993. (8)
10.27 Asset Purchase Agreement, dated October 26, 1994, by and among the
Company, Hoya Micro Mask, Inc. ("Micro Mask") and Hoya Corporation
USA ("Hoya"). (10)
10.28 Equipment Lease Agreement, dated December 1, 1994, by and between
the Company and Micro Mask. (10)
10.29 Agreement of Sale and Purchase, dated October 26, 1994, by and
between Photronics California, Inc. and Micro Mask. (10)
10.30 Continuing Guaranty of the Company, dated December 1, 1994. (10)
10.31 Continuing Guaranty of Hoya, dated December 1, 1994. (10)
10.32 Form of Agreement regarding Life Insurance between the Company and
each of Messrs Macricostas, Yomazzo and Moonan. (12) +
10.33 Revolving Credit and Term Loan Agreement between the Company and
Chemical Bank, dated as of March 1, 1995. (13)
10.34 The Company's 1996 Stock Option Plan. (14) +
10.35 Letter Agreement between the Company and Michael J. Yomazzo,
dated October 10, 1997. *
10.36 Consulting Agreement between the Company and Michael J. Yomazzo,
dated October 10, 1997. *
10.37 Consulting Agreement between the Company and Constantine S.
Macricostas, dated October 10, 1997. *
10.38 Third Amendment, dated as of May 14, 1997, to the Revolving
Credit and Term Loan Agreement dated as of March 1, 1995
between the Bank and the Chase Manhattan Bank. (15)
10.39 Form of Indenture between The Chase Manhattan Bank, as Trustee,
and the Company relating to the 6% Convertible Subordinated Notes
due June 1, 2004. (16)
21 List of Subsidiaries. *
23 Consent of Deloitte & Touche LLP. *
27 Financial Data Schedule *
- --------------------
* Filed herewith.
+ Represents a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this form
pursuant to item 14(c) of this report.
- --------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1, File Number 33-11694, which was declared effective by the
Commission on March 10, 1987, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-8, File Number 33-17405, which was declared effective on October
13, 1987, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on Form
S-8, File Number 33-17530, which was declared effective on October
19, 1987, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form
S-2, File Number 33-34772 which was declared effective by the
Commission on June 22, 1990, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1991 and incorporated herein by
reference.
(6) Filed as an exhibit to the Company's Registration Statement on Form
S-8, File Number 33-47446, which was filed on April 24, 1992, and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1992, and incorporated herein by
reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K,
dated October 8, 1993, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement on Form
S-8, File Number 33-78102, which was filed on April 22, 1994, and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K,
dated December 6, 1994, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1993, and incorporated herein by
reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1995, and incorporated herein by
reference.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K,
dated March 24, 1995, and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Registration Statement on
Form S-8, File Number 333-02245, which was filed on April 4, 1996,
and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended May 4, 1997, and incorporated herein
by reference.
(16) Filed as an exhibit to the Company's Registration Statement on
Form S-3, File Number 333-26009, which was declared effective by
the Commission on May 22, 1997, and incorporated herein by
reference.
INDEX TO EXHIBITS
PAGE
3.5 Amendment to Certificate of Incorporation...........
10.35 Letter Agreement between the Company and
Michael J. Yomazzo..................................
10.36 Consulting Agreement between the Company
and Michael J. Yomazzo..............................
10.37 Consulting Agreement between the Company
and Constantine S. Macricostas......................
21 List of Subsidiaries................................
23 Consent of Deloitte & Touche LLP....................
27 Financial Data Schedule.............................