<Page> SECURITES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2001 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, FL 33477 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (561) 745-1222 -------------------- (Registrant's telephone number, including area code) -------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <Table> <Caption> Class Outstanding at August 23, 2001 COMMON STOCK, $.01 PAR VALUE 29,991,000 SHARES </Table> <Page> PHOTRONICS, INC. AND SUBSIDIARIES INDEX <Table> <Caption> PAGE PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet at July 31, 2001 (unaudited) and October 31, 2000 3 - 4 Condensed Consolidated Statement of Operations for the Three and Nine Months Ended July 31, 2001 (unaudited) and July 31, 2000 (unaudited) 5 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended July 31, 2001 (unaudited) and July 31, 2000 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7 - 10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 - 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports 15 </Table> <Page> PART I. FINANCIAL INFORMATION ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PHOTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS) ASSETS <Table> <Caption> JULY 31, OCTOBER 31, 2001 2000 ----------- ----------- (UNAUDITED) Current assets: Cash, cash equivalents and short term investments $ 24,706 $ 38,182 Accounts receivable (less allowance for doubtful accounts of $771 in 2001 and $881 in 2000) 63,110 64,019 Inventories 18,028 18,486 Deferred income taxes and other current assets 24,604 17,906 --------- --------- Total current assets 130,448 138,593 Property, plant and equipment (less accumulated depreciation of $269,883 in 2001 and $231,426 in 2000) 347,637 395,281 Intangible assets (less accumulated amortization of $12,600 in 2001 and $9,373 in 2000) 50,026 59,277 Investments and other assets 49,310 16,410 --------- --------- $ 577,421 $ 609,561 ========= ========= </Table> See accompanying notes to condensed consolidated financial statements. 3 <Page> PHOTRONICS, INC. AND SUBISIDARIES CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY <Table> <Caption> JULY 31, OCTOBER 31, 2001 2000 ---------- ----------- (UNAUDITED) Current liabilities: Current portion of long-term debt $ 52 $ 849 Accounts payable 31,443 37,917 Accrued salaries and wages 6,598 5,264 Other accrued liabilities 14,576 7,539 -------- -------- Total current liabilities 52,669 51,569 Long-term debt 166,839 202,797 Deferred income taxes and other liabilities 38,121 34,089 -------- -------- Total liabilities 257,629 288,455 -------- -------- Minority interest 33,161 27,126 Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value, 2,000 shares authorized, none issued and outstanding - - Common stock, $0.01 par value, 75,000 shares authorized, 29,974 shares issued and outstanding in 2001 and 29,688 issued and outstanding in 2000 300 297 Additional paid-in capital 141,874 136,445 Retained earnings 161,232 167,246 Accumulated other comprehensive loss (16,775) (9,877) Deferred compensation on restricted stock - (131) -------- -------- Total shareholders' equity 286,631 293,980 -------- -------- $577,421 $609,561 ======== ======== </Table> See accompanying notes to condensed consolidated financial statements. 4 <Page> PHOTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED ------------------------- ---------------------- JULY 31, JULY 31, JULY 31, JULY 31, 2001 2000 2001 2000 ---------- ---------- ---------- --------- Net sales $ 85,016 $ 85,595 $284,145 $234,540 Costs and expenses: Cost of sales 60,569 56,676 188,033 158,143 Selling, general and administrative 12,979 11,485 39,590 32,913 Research and development 6,250 5,319 18,236 15,056 Consolidation, restructuring and related charges - 5,500 38,100 23,000 ------- -------- ------- ------- Operating income 5,218 6,615 186 5,428 Other expenses, net (2,080) (1,857) (6,693) (3,241) ------- -------- ------- ------- Income (loss) before income taxes and minority interest 3,138 4,758 (6,507) 2,187 Provision (benefit) for income taxes 500 1,600 (4,000) 800 ------- -------- ------- ------- Income (loss) before minority interest 2,638 3,158 (2,507) 1,387 Minority interest in income of consolidated subsidiary (861) - (3,505) - ------- ------- -------- ------- Net income (loss) $ 1,777 $ 3,158 $(6,012) $ 1,387 ======= ======= ======= ======= Earnings (loss) per share: Basic $ 0.06 $ 0.11 $ (0.20) $ 0.05 ====== ======= ======= ====== Diluted $ 0.06 $ 0.11 $ (0.20) $ 0.05 ====== ======= ======= ====== Weighted average number of common shares outstanding: Basic 29,972 29,148 29,865 28,466 ====== ====== ====== ====== Diluted 29,972 29,148 29,865 28,466 ====== ====== ====== ====== </Table> See accompanying notes to condensed consolidated financial statements. 5 <Page> PHOTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <Table> <Caption> NINE MONTHS ENDED --------------------------------- JULY 31, JULY 31, 2001 2000 ----------- ----------- Cash flows from operating activities: Net income (loss) $(6,012) $ 1,387 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 54,779 38,817 Deferred taxes and other (5,312) (5,310) Consolidation, restructuring and related charges 38,100 17,500 Changes in assets and liabilities: Accounts receivable 887 (914) Inventories 476 (583) Other current assets 820 2,606 Accounts payable and accrued liabilities 5,574 (34,317) ------- ------- Net cash provided by operating activities 89,312 19,186 ------- ------- Cash flows from investing activities: Investment in photomask operations (33,798) (34,782) Deposits on and purchases of property, plant and equipment (38,570) (26,918) Other 4,042 3,584 ------- ------- Net cash used in investing activities (68,326) (58,116) ------- ------- Cash flows from financing activities: Borrowings (repayments) of long term debt (36,664) 41,583 Proceeds from issuance of common stock 5,973 28,856 ------- ------- Net cash (used in) provided by financing activities (30,691) 70,439 ------- ------- Effect of exchange rate changes on cash flows (3,771) (878) ------- ------- Net increase (decrease) in cash and cash equivalents (13,476) 30,631 Cash and cash equivalents at beginning of period 38,182 23,115 Adjustment related to Align-Rite's net cash flows from differences in fiscal reporting periods - (3,474) ------- ------- Cash and cash equivalents at end of period $24,706 $50,272 ======= ======= Cash paid during the period for: Interest $ 9,164 $ 7,776 Income taxes $ 239 $ 192 </Table> See accompanying notes to condensed consolidated financial statements. 6 <Page> PHOTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 2001 (UNAUDITED) NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended July 31, 2001 are not necessarily indicative of the results that may be expected for the year ending October 31, 2001. Certain amounts in the Condensed Consolidated Financial Statements for prior periods have been reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2000. NOTE 2 - COMPREHENSIVE INCOME (LOSS) The following table summarizes comprehensive income (loss) for the three and nine months ended July 31, 2001 and 2000: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ---------------------- JULY 31, JULY 31, JULY 31, JULY 31, 2001 2000 2001 2000 -------- -------- -------- -------- Net income (loss) $ 1,777 $ 3,158 $ (6,012) $ 1,387 Other comprehensive income (loss): Unrealized gains (losses) on investments 4,112 (11) 2,621 5,466 Foreign currency translation adjustments and other (3,344) (3,855) (9,519) (12,100) ------- ------- -------- -------- 768 3,866 (6,898) (6,634) ------- ------- -------- -------- $ 2,545 $ (708) $(12,910) $ (5,247) ======= ======= ======== ======== </Table> NOTE 3 - EARNINGS PER SHARE Earnings per share ("EPS") amounts are calculated in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS"), SFAS No. 128. 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. 7 <Page> A reconciliation of basic and diluted EPS for the three and nine months ended July 31, 2001 and 2000, respectively, is as follows (in thousands, except per share amounts): <Table> <Caption> NET AVERAGE EARNINGS INCOME SHARES (LOSS) (LOSS) OUTSTANDING (b) PER SHARE ------- ----------- --------- THREE MONTHS 2001: Basic and diluted (a) $ 1,777 29,972 0.06 ======= ====== ==== 2000: Basic and diluted (a) $ 3,158 29,148 0.11 ======= ====== ==== NINE MONTHS 2001: Basic and diluted (a) $(6,012) 29,865 (0.20) ======= ====== ==== 2000: Basic and diluted (a) $ 1,387 28,466 0.05 ======= ====== ==== </Table> (a) The effect of the conversion of the convertible subordinated notes and stock options for the three and nine months ended July 31, 2001 and 2000 is anti-dilutive. (b) If the assumed conversion of convertible subordinated notes and exercise of stock options had been dilutive the incremental additional shares outstanding would have been 4,413 and 4,510 for the three and nine months ended July 31, 2001, respectively, and 4,701 and 4,833 for the three and nine months ended July 31, 2000, respectively. NOTE 4 - CONSOLIDATION, RESTRUCTURING AND RELATED CHARGES In April 2001, the Company announced a plan ("the consolidation plan") to consolidate its global photomask manufacturing network in order to increase capacity utilization and manufacturing efficiencies, as well as to accelerate the expansion of its world-class technology development. The Company initiated the consolidation plan as the final phase of its June 2000 merger with Align-Rite. Total consolidation and related charges associated with this plan of $38.1 million were recorded in the second quarter of 2001. Of the total charge, $30.6 million related to the consolidation plan and $7.5 million related to the impairment of intangible assets. The significant components of the consolidation plan include the closing of the former Align-Rite manufacturing facilities in Burbank, California, Palm Bay, Florida and Heilbronn, Germany within twelve months. The Company anticipates that the closing of these facilities will maximize capacity utilization at its remaining facilities. In addition, the Company will be relocating its Northern California operations to a new, state-of-the-art manufacturing facility in the Silicon Valley region. As part of the plan, the Company will reduce its work force by approximately 125 employees. The consolidation charge of $30.6 million includes: $4.0 million of cash charges for severance benefits for terminated employees that will be paid during their entitlement periods, principally during the fourth quarter of 2001; $4.5 million for facilities closings and lease termination costs that will be expended 8 <Page> over the projected lease terms; and non-cash charges of $22.1 million that approximate the carrying value of fixed assets that are primarily associated with the consolidation plan based upon their expected disposition. The charges also included $7.5 million that are related to the impairment in value of associated intangible assets. It was determined during the period that such assets no longer had any future economic benefit to the Company because the anticipated undiscounted cumulative cash flows from these assets were insufficient to support their carrying value. NOTE 5 - REVOLVING CREDIT AGREEMENT On June 12, 2001, the Company's $125 million unsecured revolving credit facility was amended in order to modify certain financial covenants and definitions in connection with the consolidation plan. The Company is subject to compliance with and maintenance of certain financial covenants and ratios set forth in the credit facility, as amended. NOTE 6 - DERIVATIVE INSTURMENTS, HEDGING INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives are reported in the Statement of Operations or as Accumulated Other Comprehensive Income (Loss), a separate component of Shareholders' Equity, depending on the use of the derivatives and whether they qualify for hedge accounting. In order to qualify for hedge accounting, the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The Company adopted SFAS No. 133, as amended by SFAS No. 138, in the first quarter of fiscal year 2001. In fiscal year 2001, the Company entered into forward currency contracts to purchase Japanese Yen to hedge the fair value of anticipated transactions to purchase equipment to be settled in Japanese Yen in the next 12 months. Such derivatives have been designated and qualify as cash flow hedging instruments and are reported at fair value. In general, the types of risks hedged are those relating to the variability of future cash flows caused by movements in foreign currency exchange rates. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. The Company has not recognized any net gains or losses from its forward currency contracts, as these hedges are highly effective, and the forecasted purchase of equipment will occur within the next 12 months. Therefore, any gains or losses are included in Accumulated Other Comprehensive Income (Loss). Cash flow hedges of forecasted transactions resulted in an aggregate debit balance of $775,000 in Accumulated Other Comprehensive Income (Loss) at July 31, 2001. All forecasted transactions currently being hedged are expected to occur within the next 12 months. NOTE 7 - ACCOUNTING PRONOUNCEMENTS See "Effects of New Accounting Standards" in Item 2 "Management's Discussion and Analysis of Results of Operations and Financial Condition" elsewhere in this Form 10-Q. 9 <Page> NOTE 8 - SUBSEQUENT EVENT On August 21, 2001, the Company increased its equity investment in PKL Co., Ltd. (PKL), a Korean photomask manufacturer, to approximately 51%. The Company previously had an investment of approximately 35% in PKL after acquiring 300,000 shares of that Korean company in a tender offer in July 2001. Pursuant to an agreement with certain shareholders of PKL, the Company may acquire an additional 1,000,000 shares, or approximately 32% of PKL. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW On June 7, 2000, Photronics, Inc. ("Photronics" or the "Company"), completed its merger with Align-Rite International, Inc. ("Align-Rite"), an independent publicly traded manufacturer of photomasks in the United States and Europe. The transaction was accounted for as a pooling-of-interests. The Condensed Consolidated Financial Statements, the accompanying notes and this management discussion and analysis have been restated to reflect the Company's financial results of operations and cash flows as if Align-Rite was a consolidated wholly-owned subsidiary of the Company for all periods presented. During fiscal year 2000, the Company acquired a majority share of Precision Semiconductor Mask Corporation (PSMC), a photomask manufacturer based in Taiwan, for approximately $63.4 million. The acquisition was accounted for as a purchase. The operating results of PSMC have been included in the Condensed Consolidated Statement of Operations since June 20, 2000. In April 2001, the Company announced a plan ("the consolidation plan") to consolidate its global photomask manufacturing network in order to increase capacity utilization and manufacturing efficiencies, as well as to accelerate the expansion of its world-class technology development. The Company initiated the consolidation plan as the final phase of its June 2000 merger with Align-Rite. Total consolidation and related charges associated with this plan of $38.1 million were recorded in the second quarter of 2001. Of the total charge, $30.6 million related to the consolidation plan and $7.5 million related to the impairment of intangible assets. The significant components of the consolidation plan include the closing of the former Align-Rite manufacturing facilities in Burbank, California, Palm Bay, Florida and Heilbronn, Germany within twelve months. The Company anticipates that the closing of these facilities will maximize capacity utilization at its remaining facilities. In addition, the Company will be relocating its Northern California operations to a new, state-of-the-art manufacturing facility in the Silicon Valley region. As part of the plan, the Company will reduce its work force by approximately 125 employees. The consolidation charge of $30.6 million includes: $4.0 million of cash charges for severance benefits for terminated employees that will be paid over their entitlement periods, principally during the fourth quarter of 2001; $4.5 million for facilities closings and lease termination costs that will be expended over the projected lease terms; and non-cash charges of $22.1 million that approximate the carrying value of fixed assets that are primarily associated with the consolidation plan based upon their expected disposition. 10 <Page> The charges also included $7.5 million that are related to the impairment in value of associated intangible assets. It was determined during the period that such assets no longer had any future economic benefit to the Company because the anticipated undiscounted cumulative cash flows from these assets were insufficient to support their carrying value. During March 2000, the Company implemented a plan to consolidate its mature products group in order to increase capacity utilization, manufacturing efficiencies and customer service activities worldwide. Total restructuring and related charges associated with this plan of $17.5 million were recorded in the second quarter of fiscal 2000. Of the total charge, $9.1 million related to restructuring and $8.4 million related to the impairment of intangible assets. MATERIAL CHANGES IN RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED JULY 31, 2001 VERSUS JULY 31, 2000 The following tables represent selected financial information, expressed as a percentage of net sales, and pro forma earnings per diluted share, respectively: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED ------------------------- ------------------------- JULY 31, JULY 31, JULY 31, JULY 31, 2001 2000 2001 2000 --------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 71.2 66.2 66.2 67.4 ------- ------- ------- ------- Gross margin 28.8 33.8 33.8 32.6 Selling, general and administrative expenses 15.3 13.4 13.9 14.0 Research and development expenses 7.4 6.2 6.4 6.4 ------- ------- ------- ------- Operating income before consolidation, restructuring and related charges 6.1% 14.2% 13.5% 12.1% ======= ======= ======= ======= Pro forma earnings (loss) per diluted share: Net income, excluding consolidation, restructuring and related charges $ 0.06 $ 0.24 $ 0.67 $ 0.57 ======= ======= ======= ======= </Table> Net sales for the three months ended July 31, 2001 decreased 0.7% to $85.0 million as compared to $85.6 for the comparable prior year period. The decrease was primarily related to the rapid cyclical downturn in the semiconductor industry primarily in the United States. The decrease, however, was partially mitigated by the inclusion of the Company's new Taiwan operation in 2001. Net sales for the nine months ended July 31, 2001 increased 21.1% to $284.1 million as compared to $234.5 million for the comparable prior year period. The increase in 2001 is primarily related to the inclusion of Taiwan, increases in unit volumes, market share, and higher average selling prices resulting from an improved mix of high-end technology products. International operations accounted for 40.0% and 37.1% of sales for the three and nine months ended July 31, 2001, respectively, compared to 33.0% and 28.5% in the corresponding prior year periods. 11 <Page> Gross margins for the three months ended July 31, 2001 decreased to 28.8% from 33.8% for the comparable prior year period primarily as a result of lower absorption of higher fixed costs associated with the downturn in the semiconductor industry. Gross margins for nine months ended July 31, 2001 increased to 33.8% compared to 32.6% for the corresponding prior year period. The gross margin increase was attributable to higher utilization of our fixed equipment cost base, primarily during the first six months of 2001, as well as a greater mix of higher margin products. Selling, general and administrative expenses increased 13.0% to $13.0 million and 20.3% to $39.6 million for the three and nine months ended July 31, 2001, respectively, compared with $11.5 million and $32.9 million for the same periods in the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses were 15.3% and 13.9% in the three and nine month periods ended July 31, 2001, respectively, compared with 13.4% and 14.0% for the same periods in the prior fiscal year. The higher expenses for the three and nine months ended July 31, 2001 were principally due to costs associated with the Company's expansion, both domestically and internationally, including costs incurred in Taiwan, and growth of the Company's information technology infrastructure. Research and development expenses increased 17.5% to $6.3 million and 21.1% to $18.2 million for the three and nine months ended July 31, 2001, respectively, compared with $5.3 million and $15.1 million for the same periods in the prior fiscal year. As a percentage of net sales, research and development expenses were 7.4% and 6.4%, respectively, compared with 6.2% and 6.4% for the same periods in the prior fiscal year. This increase in costs reflects the continuing development efforts of advanced, sub-wavelength reticle solutions, primarily in the United States and Taiwan, and in Next Generation Lithography (NGL) applications. Net other expenses of $2.1 million and $6.7 million for the three and nine months ended July 31, 2001, respectively, increased $0.2 million and $3.5 million, respectively, as a result of higher interest costs, principally resulting from borrowings in connection with the Company's investments in Asia. Minority interest for the three and nine months ended July 31, 2001 was $0.9 million and $3.5 million, respectively, and reflects the minority interest in earnings of the Company's subsidiary in Taiwan. Net income (loss) for the three and nine months ended July 31, 2001, decreased to $1.8 million and ($6.0) million, respectively, or $0.06 and ($0.20) per diluted share. These amounts compare to $3.2 million, or $0.11 per diluted share, and $1.4 million, or $0.05 per diluted share, for the corresponding prior year periods. Fiscal year 2001 includes the effect of the consolidation and related charges amounting to $26.1 million after tax, or $0.75 per diluted share. Fiscal year 2000 includes the effect of the restructuring and related charges amounting to $14.8 million after tax, or $0.52 per diluted share. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at July 31, 2001 was $77.8 million compared to $87.0 million at October 31, 2000. The decrease in working capital was due primarily to lower cash balances resulting from repayments of borrowings under the Company's unsecured revolving credit line. Cash and cash equivalents at July 31, 2001 were $24.7 million compared to $38.2 million at October 31, 2000. Cash 12 <Page> provided by operating activities for the nine months ended July 31, 2001 amounted to $89.3 million compared to $19.2 million in the corresponding prior year period. This increase is primarily attributable to higher income in 2001 before depreciation, amortization and restructuring charges and the net change in working capital principally due to the timing of progress payments for capital equipment coming due during the respective periods. Cash used in investing activities of $68.3 million for the nine months ended July 31, 2001, consisted principally of capital equipment purchases and additional investments in photomask operations in Asia. Cash used in financing activities of $30.7 million for the ninth months ended July 31, 2001, included net repayments of borrowings of $36.7 million, partially offset by $6.0 million of proceeds from the exercise of employee stock options. On June 12, 2001, the Company's $125 million unsecured revolving credit facility was amended in order to modify certain financial covenants and definitions in connection with the consolidation plan. The Company is subject to compliance with and maintenance of certain financial covenants and ratios set forth in the credit facility, as amended. The Company had $41.6 million of outstanding borrowings and $83.4 million available under the revolving credit facility at July 31, 2001. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives are reported in the Statement of Operations or as Accumulated Other Comprehensive Income (Loss), a separate component of Shareholders' Equity, depending on the use of the derivatives and whether they qualify for hedge accounting. In order to qualify for hedge accounting, the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The Company adopted SFAS No. 133, as amended by SFAS No. 138, in the first quarter of fiscal year 2001. In fiscal year 2001, the Company entered into forward currency contracts to purchase Japanese Yen to hedge the fair value of anticipated transactions to purchase equipment to be settled in Japanese Yen in the next 12 months. Such derivatives have been designated and qualify as cash flow hedging instruments and are reported at fair value. In general, the types of risks hedged are those relating to the variability of future cash flows caused by movements in foreign currency exchange rates. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. The Company has not recognized any net gains or losses from its forward currency contracts, as these hedges are highly effective, and the forecasted purchase of equipment will occur within the next 12 months. Therefore, any gains or losses are included in Accumulated Other Comprehensive Income (Loss). Cash flow hedges of forecasted transactions resulted in an aggregate debit balance of $775,000 in Accumulated Other Comprehensive Income (Loss) at July 31, 2001. All forecasted transactions currently being hedged are expected to occur within the next 12 months. 13 <Page> Photronics' commitments represent investments in additional manufacturing capacity as well as advanced equipment for the production of high-end, more complex photomasks. At July 31, 2001, Photronics had commitments outstanding for capital expenditures of approximately $90 million. Additional commitments for capital requirements are expected to be incurred during fiscal 2001. Photronics will continue to use its working capital and bank lines of credit to finance its capital expenditures. Photronics believes that its currently available resources, together with its capacity for substantial growth and its access to other debt and equity financing sources, are sufficient to satisfy its currently planned capital expenditures, as well as its anticipated working capital requirements for the foreseeable future. EFFECT OF NEW ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101, as amended, is required to be adopted by the Company no later than the fourth quarter of fiscal 2001. The Company's adoption of SAB No. 101 is not expected to have a material impact on the Company's consolidated financial position or results of operations. The Financial Accounting Standards Board has issued SFAS No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interests method is no longer allowed. SFAS No. 142 requires that, upon adoption, amortization of goodwill will cease and, instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, the Company may elect early adoption of the Statement on November 1, 2001, the beginning of its 2002 fiscal year. The Company is evaluating the impact of the adoption of these standards and has not yet determined the effect of adoption on its consolidated financial position and results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company, in the normal course of doing business, is exposed to the risks associated with foreign currency exchange rates and changes in interest rates. FOREIGN CURRENCY EXCHANGE RATE RISK The Company conducts business in several major international currencies through its worldwide operations, and as a result, is subject to changes in foreign exchange rates of the various currencies. Changes in exchange rates can positively or negatively affect the Company's sales, gross margins and retained earnings. The Company attempts to minimize currency exposure risk by producing its products in the same country or region in which the products are sold and thereby generating revenues and incurring expenses in the same currency and by managing its working capital; there can be no assurance that this approach will be successful, especially in the event of a significant and sudden decline in the value of any of the international currencies in the Company's worldwide operations. The Company does not engage in purchasing forward exchange contracts for speculative purposes. 14 <Page> INTEREST RATE RISK The majority of the Company's borrowings are in the form of its convertible subordinated notes, which bear interest at the fixed rate of 6%, its unsecured revolving credit facility, which currently bears interest between 5% and 8% and secured notes payable which bear interest between 6% and 8%. The Company does not expect changes in interest rates to have a material effect on income or cash flows in the near term, although there can be no assurances that interest rates will not significantly change. FORWARD LOOKING INFORMATION Certain statements in this report are considered "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward looking statements involve risks and uncertainties. For a description of the factors that could cause the actual results of the Company to be materially different from those projected, please review the Company's SEC reports that detail these risks and uncertainties and the section captioned "Forward Looking Information" contained in the Company's Annual Report on Form 10-K for the year ended October 31, 2000. Any forward looking statements should be considered in light of these factors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibits Index. (b) Reports on Form 8-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHOTRONICS, INC. Registrant By: /s/ ROBERT J. BOLLO -------------------- Robert J. Bollo Senior Vice President Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: September 13, 2001 15 <Page> EXHIBITS INDEX <Table> <Caption> EXHIBIT NO. DESCRIPTION - ----------- ----------- 10 Put/Call Option Agreement dated August 21, 2001, by and among Photronics, Inc., Photo (L) Limited, Mask (L) Limited, Lakeway (L) Limited and March (L) Limited, The HSBC Private Equity Fund 2 Limited, The HSBC Private Equity Fund, L.P., Taiwan Mask Corp. and Blue Water Ventures International Ltd. </Table> 16