<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........April 30, 2002........
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.
Class Outstanding at May 31, 2002
COMMON STOCK, $.01 PAR VALUE 31,896,150 SHARES
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PHOTRONICS, INC.
AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
at April 30, 2002 (unaudited) and
October 31, 2001 3 - 4
Condensed Consolidated Statements of
Operations for the Three and Six Months
Ended April 30, 2002 (unaudited) and
April 30, 2001 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
April 30, 2002 (unaudited) and
April 30, 2001 (unaudited) 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7 - 11
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 11 - 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16 - 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
2
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PART I. FINANCIAL INFORMATION
ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<Table>
<Caption>
APRIL 30, OCTOBER 31,
2002 2001
-------- --------
(UNAUDITED)
Current assets:
Cash and cash equivalents $141,953 $ 34,684
Accounts receivable, net 74,312 70,704
Inventories 21,529 21,492
Deferred income taxes and
other current assets 24,892 24,516
-------- --------
Total current assets 262,686 151,396
Property, plant and equipment, net 436,397 402,776
Intangible assets, net 122,569 93,199
Investments and other assets 33,820 26,167
-------- --------
$855,472 $673,538
======== ========
</Table>
See accompanying notes to condensed consolidated financial statements.
3
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PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
APRIL 30, OCTOBER 31,
2002 2001
--------- ---------
(UNAUDITED)
Current liabilities:
Current portion of long-term debt $ 34,909 $ 33,918
Accounts payable 37,942 37,142
Other accrued liabilities 30,965 31,604
--------- ---------
Total current liabilities 103,816 102,664
Long-term debt 324,048 188,021
Deferred income taxes and other liabilities 52,689 50,682
--------- ---------
Total liabilities 480,553 341,367
Minority interest 39,243 45,010
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,
150,000 shares authorized at
April 30, 2002 and
75,000 shares authorized at
October 31, 2001,
31,722 shares issued and
outstanding at April 30, 2002
and 30,276 shares issued
and outstanding at October 31, 2001 317 303
Additional paid-in capital 190,642 146,378
Retained earnings 167,486 163,220
Accumulated other comprehensive loss (22,769) (22,740)
--------- ---------
Total shareholders' equity 335,676 287,161
--------- ---------
$ 855,472 $ 673,538
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements.
4
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PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 103,057 $ 100,572 $ 198,743 $ 199,129
Costs and expenses:
Cost of sales 71,319 64,235 139,073 127,464
Selling, general and administrative 14,656 13,137 28,501 26,611
Research and development 7,451 6,130 14,584 11,986
Consolidation, restructuring and
related charges -- 38,100 -- 38,100
--------- --------- --------- ---------
Operating income (loss) 9,631 (21,030) 16,585 (5,032)
Other expenses, net (4,122) (1,837) (7,191) (4,613)
--------- --------- --------- ---------
Income (loss) before income taxes
and minority interest 5,509 (22,867) 9,394 (9,645)
Provision (benefit) for income taxes 800 (8,200) 1,300 (4,500)
--------- --------- --------- ---------
Income (loss) before minority interest 4,709 (14,667) 8,094 (5,145)
Minority interest in income of
consolidated subsidiary (2,190) (1,524) (3,828) (2,644)
--------- --------- --------- ---------
Net income (loss) $ 2,519 $ (16,191) $ 4,266 $ (7,789)
========= ========= ========= =========
Earnings (loss) per share:
Basic $ 0.08 $ (0.54) $ 0.14 $ (0.26)
========= ========= ========= =========
Diluted $ 0.08 $ (0.54) $ 0.14 $ (0.26)
========= ========= ========= =========
Weighted average number of common
shares outstanding:
Basic 30,833 29,908 30,573 29,811
========= ========= ========= =========
Diluted 31,909 29,908 31,556 29,811
========= ========= ========= =========
</Table>
See accompanying notes to condensed consolidated financial statements.
5
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PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
----------------------
APRIL 30, APRIL 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 4,266 $ (7,789)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 39,918 35,581
Deferred taxes and other 504 (7,817)
Consolidation, restructuring and related charges -- 38,100
Changes in assets and liabilities:
Accounts receivable (1,931) (5,507)
Inventories (287) (1,654)
Other current assets (341) 1,000
Accounts payable and accrued liabilities 2,074 8,055
--------- ---------
Net cash provided by operating activities 44,203 59,969
Cash flows from investing activities:
Investment in photomask operations (12,689)
Deposits on and purchases of property, --
plant and equipment (68,702) (28,886)
Other 139 667
--------- ---------
Net cash used in investing activities (68,563) (40,908)
Cash flows from financing activities:
Payment of long term debt (62,884) (34,016)
Proceeds from issuance of common stock 1,075 3,577
Proceeds from issuance of convertible debt, net 193,431 --
--------- ---------
Net cash provided by (used in) financing activities 131,622 (30,439)
Effect of exchange rate changes on cash flows 7 (1,617)
--------- ---------
Net increase (decrease) in cash
and cash equivalents 107,269 (12,995)
Cash and cash equivalents at beginning of period 34,684 38,182
--------- ---------
Cash and cash equivalents at end of period $ 141,953 $ 25,187
========= =========
Cash paid during the period for:
Interest $ 5,539 $ 5,435
Income taxes $ 987 $ 156
</Table>
See accompanying notes to condensed consolidated financial statements.
6
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PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED APRIL 30, 2002 AND 2001
(UNAUDITED)
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
Photronics, Inc. and its subsidiaries (the "Company" or "Photronics")
manufacture 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. The
Company operates principally from 11 facilities, five of which are located in
the United States, three in Europe and one each in Korea, Singapore and Taiwan.
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 annual 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
interim period are not necessarily indicative of the results that may be
expected for the full year ending November 3, 2002. 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, 2001.
NOTE 2 - ACQUISITION OF PKL LTD.
In 2001, the Company completed the acquisition of a majority equity
interest (approximately 51%) in PKL Ltd. ("PKL"), a leading Korean photomask
supplier, for $56 million. In April 2002, the Company acquired an additional 28%
of PKL in exchange for 1,212,218 shares of Photronics common stock. The
acquisition was accounted for as a purchase and accordingly goodwill in the
aggregate of $69.4 million was recorded. The operating results of PKL have been
included in the Company's Consolidated Statements of Operations since August
27, 2001. Had the acquisition of PKL occurred at the beginning of fiscal 2001,
the unaudited pro forma condensed consolidated net sales for the three and six
months ended April 30, 2001 would have been $111.2 million and $220.3 million,
respectively, the pro forma net loss would have been $(17.1) million and $(9.5)
million, respectively, and loss per share would have been $(0.57) and $(0.32)
per share, respectively. In management's opinion, these unaudited pro forma
amounts are not necessarily indicative of what the actual combined results of
operations might have been if the acquisition of PKL had been effective at the
beginning of the periods presented.
7
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NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The following table summarizes comprehensive income (loss) for the
three and six months ended April 30, 2002 and 2001:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ----------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
2002 2001 2002 2001
--------- --------- --------- --------
Net income (loss) $ 2,519 $(16,191) $ 4,266 $ (7,789)
Other comprehensive loss:
Unrealized (losses) on investments, net (1,306) (1,633) (1,182) (1,491)
Foreign currency translation adjustments 2,289 (5,741) 1,843 (6,175)
Net change in cash flow hedges - (690)
------- -------- ------- --------
983 (7,374) (29) (7,666)
------- -------- ------- --------
$ 3,502 $(23,565) $ 4,237 $(15,455)
======= ======== ======= ========
</Table>
NOTE 4 - EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated in accordance with
the provisions of 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.
A reconciliation of basic and diluted EPS for the three and six months
ended April 30, 2002 and 2001, respectively, follows (in thousands, except per
share amounts):
<Table>
<Caption>
NET AVERAGE EARNINGS
INCOME SHARES (LOSS)
(LOSS) OUTSTANDING PER SHARE
------ ------------ ---------
THREE MONTHS
2002:
Basic $ 2,519 30,883 $ 0.08
Effect of potential dilution
from exercise of stock options (a) - 1,026
-------- ------
Diluted $ 2,519 31,909 $ 0.08
======== ====== ======
2001:
Basic and diluted (b) $(16,191) 29,908 $(0.54)
======== ====== ======
8
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<Caption>
NET AVERAGE EARNINGS
INCOME SHARES (LOSS)
(LOSS) OUTSTANDING PER SHARE
------ ------------ ---------
SIX MONTHS
2002:
Basic $ 4,266 30,573 $ 0.14
Effect of potential dilution
from exercise of stock options (a) - 983
------- ------ ------
Diluted $ 4,266 31,556 $ 0.14
======= ====== ======
2001:
Basic and diluted (b) $(7,789) 29,811 $(0.26)
======= ====== ======
</Table>
(a) The effect of the conversion of the Company's convertible
notes for the three and six months ended April 30, 2002 is
anti-dilutive. If the assumed conversion of convertible
subordinated notes had been dilutive, the incremental
additional shares outstanding would have been 9,098 and 7,747
for the three and six months ended April 30, 2002,
respectively.
(b) The effect of stock options and the conversion of the
Company's convertible notes for the three and six months ended
April 30, 2001 is anti-dilutive. If the assumed exercise of
stock options and conversion of convertible subordinated notes
had been dilutive, the incremental additional shares
outstanding would have been 4,686 and 4,561 for the three and
six months ended April 30, 2001, respectively.
NOTE 5 - LONG TERM DEBT
On December 12, 2001 the Company sold $200 million of 4.75% Convertible
Subordinated Notes due 2006 ("Notes") in a private offering pursuant to SEC Rule
144A. The Notes are convertible into the Company's common stock at a conversion
price of $37.00 per share. Net proceeds from the issuance amounted to
approximately $193.4 million. Concurrent with the issuance of the Notes, on
December 12, 2001 the Company repaid all of the outstanding borrowings under its
Revolving Credit Agreement which amounted to $57.7 million and terminated the
agreement. The Company intends to obtain a new revolving credit agreement during
2002.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Effective November 1, 2001 the Company adopted Financial Accounting
Standard ("FAS") No. 142, "Goodwill and Other Intangible Assets." The standard
changes the accounting for goodwill and intangible assets with an indefinite
life whereby such assets will no longer be amortized; however, the standard does
require evaluation for impairment and a corresponding writedown, if appropriate.
FAS No. 142 requires an initial evaluation of goodwill impairment upon adoption.
Such evaluation was performed as of November 1, 2001 resulting in no impairment
in the value of the Company's goodwill.
9
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Comparative information as if goodwill had not been amortized in the
three and six months ended April 30, 2001 is as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
2002 2001 2002 2001
-------- -------- -------- --------
Reported net income (loss) $ 2,519 $(16,191) $ 4,266 $ (7,789)
Goodwill amortization - 82 336
------- -------- ------- --------
Adjusted net income (loss) $ 2,519 $(16,109) $ 4,266 $ (7,453)
======= ======== ======= ========
Basic and diluted earnings per share:
Reported basic and diluted earnings (loss)
per share $ 0.08 $ (0.54) $ 0.14 $ (0.26)
Goodwill amortization - - - 0.01
------ -------- ------ -------
Adjusted basic and diluted earnings (loss)
per share $ 0.08 $ (0.54) $ 0.14 $ (0.25)
====== ======== ====== =======
</Table>
Goodwill at April 30, 2002 and October 31, 2001 amounted to
approximately $115.9 million and $85.1 million, respectively. Other intangible
assets, which continue to be amortized, consist of software development costs
and a non-compete agreement. The balance of other intangible assets consists of
a gross carrying amount of $12,984 at April 30, 2002 and October 31, 2001, less
accumulated amortization of $6,280 and $4,911 at April 30, 2002 and October 31,
2001, respectively.
Amortization expense of other intangible assets for the three and six
months ended April 30, 2002 was approximately $0.7 million and $1.4 million,
respectively. Estimated annual amortization expense (in thousands) of other
intangible assets is expected to be $2,740 in 2002, $2,707 in 2003, and $1,942
in 2004.
NOTE 7 - DERIVATIVE INSTRUMENTS, HEDGING INSTRUMENTS AND HEDGING ACTIVITY
In fiscal year 2001, the Company entered into forward currency
contracts to hedge transactions to purchase equipment to be settled in Japanese
yen. Such derivatives were designated and qualified as cash flow hedging
instruments and were reported at fair value. These transactions were settled
during 2002 resulting in a loss of $1.1 million, which was recorded in other
comprehensive loss, as these hedges were highly effective and the forecasted
purchase of equipment occurred. Therefore, the losses on the contracts are
included in Accumulated Other Comprehensive Loss and will be amortized as a
charge to earnings over the estimated useful life of the related equipment.
NOTE 8 - OTHER NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 supersedes previous guidance for financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset.
10
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In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds certain guidance for reporting
extinguishments of debt and provides guidance to determine if the transactions
are part of recurring operations or if they meet the criteria for classification
as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions.
SFAS No.'s 143, 144 and 145 become effective for the Company's
financial statements for fiscal year 2003. The Company does not expect the
adoption of these statements to have a material impact on its consolidated
financial position, consolidated results of operations or consolidated cash
flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
In 2001, the Company completed the acquisition of a majority equity
interest (approximately 51%) in PKL Ltd. ("PKL"), a leading Korean photomask
supplier, for $56 million. In April 2002, the Company acquired an additional 28%
of PKL in exchange for 1,212,218 shares of Photronics common stock. The
acquisition was accounted for as a purchase and accordingly goodwill in the
aggregate of $69.4 million was recorded. The operating results of PKL have been
included in the Company's Consolidated Statements of Operations since August
27, 2001.
As the final phase of its merger with Align-Rite, in April 2001, the
Company initiated 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. Total consolidation and related charges
associated with this plan of $38.1 million were recorded in the second quarter
of 2001.
The consolidation charge consisted of cash charges of $8.5 million for
severance benefits, facility closings, lease termination costs, and non-cash
charges of $22.1 million related to the disposition of fixed assets. Through
April 30, 2002 cash charges of approximately $5.6 million had been paid. Other
related charges include $7.5 million for the impairment in value of associated
intangible assets.
11
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MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED APRIL 30, 2002 VERSUS APRIL 30, 2001
The following table represents selected financial information,
expressed as a percentage of net sales:
<Table>
<Caption>
Three Months Ended Six Months Ended
--------------------------- -------------------------
April 30, April 30, April 30, April 30,
2002 2001 2002 2001
-------- --------- --------- --------
Net sales 100% 100.0% 100% 100.0%
Cost of sales 69.2 63.9 70.0 64.0
----- ----- ----- -----
Gross margin 30.8 36.1 30.0 36.0
Selling, general and
administrative expenses 14.2 13.0 14.3 13.4
Research and development expenses 7.3 6.1 7.4 6.0
Consolidation, restructuring - 37.9 - 19.1
and related charges ----- ------ ----- -----
Operating income (loss) 9.3% (20.9)% 8.3% (2.5)%
===== ====== ===== =====
</Table>
Net sales for the three months ended April 30, 2002 increased 2.5% to
$103.1 million as compared to $100.6 million for the three months ended April
30, 2001. Net sales for the six months ended April 30, 2002 were $198.7 million
as compared to $199.1 million for the six months ended April 30, 2001. The
increase in sales for the second quarter of 2002 resulted primarily from the
inclusion of our majority-held subsidiary in Korea. This increase, however, was
mitigated by the continued slowdown in design releases for mature technology
products and an increase in competitive pricing pressures for photomasks
associated with the depressed global semiconductor market the Company has
experienced over the last four quarters. The decline in volume for mature
technology products has been somewhat mitigated by an increased volume of
high-end technology products, which have design rules of 0.18 micron and below.
Net sales from international operations for the three and six months ended April
30, 2002 accounted for 50% and 47% of total net sales, respectively, as compared
to 40% and 38% for the three and six months ended April 30, 2001, respectively.
Gross margins decreased to 30.8% and 30.0% for the three and six months
ended April 30, 2002, respectively, as compared to 36.1% and 36.0% for the three
and six months ended April 30, 2001, respectively. The decreases for the three
and six months ended April 30, 2002 as compared to the three and six months
ended April 30, 2001 are primarily associated with lower utilization of our
expanding fixed equipment cost base. The positive effect from increased revenue
associated with improved high-end demand during the three and six months ended
April 30, 2002 was mitigated by continued investments in the Company's global
manufacturing network and decreased demand for mature technology products.
Selling, general and administrative expenses increased 11.6% to $14.7
million and 7.1% to $28.5 million for the three and six months ended April 30,
2002, respectively, compared with $13.1 million and $26.6 million for the same
periods in the prior fiscal year. As a percentage of net sales, selling, general
and administrative expenses increased to 14.2% and 14.3% for the three and six
month periods ended April 30, 2002, respectively, compared with 13.0% and 13.4%
for the same periods in the prior fiscal year. Increased selling, general and
12
<Page>
administrative expenses associated with the inclusion of PKL in 2002 were
partially mitigated by cost reductions associated with our 2001 consolidation
plan.
Research and development expenses increased 21.5% to $7.5 million and
21.7% to $14.6 million for the three and six months ended April 30, 2002,
respectively, compared with $6.1 million and $12.0 million for the same periods
in the prior fiscal year. As a percentage of net sales, research and development
expenses increased to 7.3% and 7.4% for the three and six months ended April 30,
2002, respectively, compared with 6.1% and 6.0% for the same periods in the
prior fiscal year. This increase in costs reflects the continued development of
advanced, sub-wavelength reticle solutions and Next Generation Lithography (NGL)
applications coupled with the inclusion of expenses associated with our Korean
subsidiary in 2002.
Net other expenses of $4.1 million and $7.2 million for the three and
six months ended April 30, 2002, respectively, increased $2.3 million and $2.6
million, respectively. The increased costs for the three and six months ended
April 30, 2002 are primarily associated with higher interest costs from our $200
million convertible debt issuance in December 2001 and additional debt assumed
with the PKL acquisition.
The provision for income taxes was $0.8 million and $1.3 million for
the three and six months ended April 30, 2002, respectively, as compared to an
income tax benefit of $8.2 million and $4.5 million for the three and six months
ended April 30, 2001, respectively. The effective income tax rate was 24.1% and
23.4% for the three and six months ended April 30, 2002, respectively,
primarily due to a higher portion of income derived from jurisdictions with
favorable tax attributes and tax holidays.
Minority interest for the three and six months ended April 30, 2002 was
$2.2 million and $3.8 million, respectively, as compared to $1.5 million and
$2.6 million for the three and six months ended April 30, 2001, respectively,
and reflects the minority interest in earnings of the Company's subsidiaries in
Taiwan and Korea.
Net income was $2.5 million, or $0.08 per basic and diluted share and
$4.2 million, or $0.14 per basic and diluted share for the three and six months
ended April 30, 2002, respectively. These amounts compare to a net loss of $16.2
million and $7.8 million or $0.54 and $0.26 per basic and diluted share for the
three and six months ended April 30, 2001, respectively. Financial results for
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.
LIQUIDITY AND CAPITAL RESOURCES
On December 12, 2001 the Company sold $200 million of 4.75% Convertible
Subordinated Notes due 2006 ("Notes") in a private offering pursuant to SEC Rule
144A. The Notes are convertible into the Company's common stock at a conversion
price of $37.00 per share. Net proceeds from the issuance amounted to
approximately $193.4 million. Concurrent with the issuance of the Notes, on
December 12, 2001 the Company repaid all of the outstanding borrowings under its
Revolving Credit Agreement which amounted to $57.7 million and terminated the
agreement. The Company intends to obtain a new revolving credit agreement during
2002.
13
<Page>
The Company's working capital at April 30, 2002 increased to $158.9
million compared to $48.7 million at October 31, 2001, primarily as a result of
the net proceeds received from the convertible debt offering. Cash and cash
equivalents at April 30, 2002 were $142.0 million compared to $34.7 million at
October 31, 2001. Cash provided by operating activities for the six months ended
April 30, 2002 decreased to $44.2 million compared to $60.0 million for the six
months ended April 30, 2001, primarily as a result of reduced income from
operations excluding restructuring and related charges. Cash used in investing
activities of $68.6 million consisted principally of capital equipment
purchases. The Company expects capital expenditures for fiscal 2002 to be
approximately $125 million, which will be used primarily to expand the Company's
high-end technical capability. Cash flows provided by financing activities of
$131.6 million consisted primarily of the net proceeds from the $200 million
convertible note issuance, offset by the repayment of the Company's revolving
credit agreement.
Photronics' commitments represent investments in additional
manufacturing capacity as well as advanced equipment for the production of
high-end photomasks. At April 30, 2002, Photronics had commitments outstanding
for the capital expenditures of approximately $80.0 million. Additional
commitments for capital expenditures are expected to be incurred during fiscal
2002. Photronics will continue to use its working capital 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
Effective November 1, 2001 the Company adopted Financial Accounting
Standard ("FAS") No. 142, "Goodwill and Other Intangible Assets." The standard
changes the accounting for goodwill and intangible assets with an indefinite
life whereby such assets will no longer be amortized; however, the standard does
require evaluation for impairment and a corresponding writedown, if appropriate.
FAS No. 142 requires an initial evaluation of impairment upon adoption. Such
evaluation was performed as of November 1, 2001 resulting in no impairment in
the value of the Company's goodwill and other intangible assets.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 supersedes previous guidance for financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds certain guidance for reporting
extinguishments of debt and provides guidance to determine if the transactions
are part of recurring operations or if they meet the criteria for classification
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as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions.
SFAS No.'s 143, 144 and 145 become effective for the Company's
financial statements for fiscal year 2003. The Company does not expect the
adoption of these statements to have a material impact on its consolidated
financial position, consolidated results of operations or consolidated cash
flows.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are as follows:
CONSOLIDATION - The condensed consolidated financial statements
presented herein include the accounts of Photronics, Inc. and its majority-owned
subsidiaries in which the Company exercises control. All significant
intercompany transactions and accounts have been eliminated.
ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make certain estimates and assumptions, including
collectibility of accounts receivable, depreciable lives and recoverability of
property, plant and equipment, intangible assets and certain accrued
liabilities. Actual results may differ from such estimates.
LONG-LIVED ASSETS - Property, plant and equipment are recorded at cost
less accumulated depreciation. 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.
INTANGIBLE ASSETS - Intangible assets consist primarily of goodwill and
other acquisition-related intangibles, and software development costs. These
assets are stated at fair value as of the date incurred less accumulated
amortization. Amortization is calculated on a straight-line basis over estimated
useful lives of 3 to 15 years for goodwill and acquisition-related assets, and
over 5 years for software development costs. The future economic benefit of the
carrying value of all intangible assets is reviewed periodically and any
diminution in useful life or impairment in value based on future anticipated
undiscounted 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company records 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. 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.
In fiscal year 2001, the Company entered into forward currency
contracts to hedge transactions to purchase equipment to be settled in Japanese
yen. Such derivatives were designated and qualified as cash flow hedging
instruments and were reported at fair value. These transactions were settled
during 2002 resulting in a loss of $1.1 million, which was recorded in other
comprehensive loss, as these hedges were highly effective and the forecasted
purchase of equipment occurred. Therefore, the losses on the contracts are
included in Accumulated Other Comprehensive Income (Loss) and will be amortized
as a charge to earnings over the estimated useful life of the related equipment.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company conducts business in several major international currencies
through its worldwide operations and is subject to changes in foreign exchange
rates of such 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 of the Company's worldwide operations. The
Company does not engage in purchasing forward exchange contracts for speculative
purposes.
INTEREST RATE RISK
The majority of the Company's borrowings are in the form of its
convertible subordinated notes, which bear interest rates ranging from 4.75% to
6.0% and certain foreign secured notes payable which bear interest between
approximately 4.5% and 7.3%. The Company does not expect changes in interest
rates to have a material effect on income or cash flows in 2002, although there
can be no assurances that interest rates will not change significantly.
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
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"Forward Looking Information" contained in the Company's Annual Report on Form
10-K for the year ended October 31, 2001. Any forward looking statements should
be considered in light of these factors.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 4, 2002 the Company announced that it had sold on that date
1,212,218 shares of its Common Stock (the "Shares") to four institutional
shareholders of PKL Co., Ltd. ("PKL") upon the partial exercise of a put option,
in exchange for 859,730 shares of PKL, a Korean photomask manufacturer. The
Shares were issued in a private placement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The matters set forth in this Item 4 were submitted
to a vote of security holders of the Company at an
Annual Meeting of Shareholders held on March 20,
2002.
(b) The following directors, constituting the entire
Board of Directors, were elected at the Annual
Meeting of Shareholders held on March 20, 2002. Also
indicated are the affirmative, negative and authority
withheld votes for each director.
<Table>
<Caption>
AUTHORITY
FOR AGAINST WITHHELD
---------- ------ ---------
Walter M. Fiederowicz 25,034,840 - 691,140
Joseph A. Fiorita, Jr. 25,033,590 - 692,390
Constantine S. Macricostas 25,157,260 - 568,720
Willem D. Maris 25,470,987 - 689,890
Michael J. Yomazzo 25,036,090 - 568,720
</Table>
(c) A proposal to approve an amendment to the Company's
Certificate of Incorporation to increase the number
of authorized shares of Common Stock from 75,000,000
to 150,000,000 received the following vote:
<Table>
<Caption>
FOR AGAINST ABSTAIN
---------- --------- -------
23,466,159 2,234,706 25,115
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - see Exhibits Index
(b) During the quarter for which this report is filed, the Company
filed:
i) a Form 8-K dated April 4, 2002 reporting information
under Item 2 of Part II
ii) a Form 8-K dated March 11, 2002 announcing several
senior management promotions
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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/ SEAN T. SMITH
-----------------
Sean T. Smith
Vice President,
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: June 13, 2002
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EXHBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of the Company, as amended.
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