UNITED STATES |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 28, 2007 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___ |
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Commission file number 0-15451 |
PHOTRONICS, INC. |
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Connecticut |
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06-0854886 |
15 Secor Road, Brookfield, Connecticut 06804 |
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(203) 775-9000 |
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Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value per share - NASDAQ |
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Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No x
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 o
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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of April 29, 2007, which was the last business day of the registrant's most recently completed second fiscal quarter, the
aggregate market value of the shares of the registrant common stock held by non-affiliates was approximately $601,210,952 (based
upon the closing price of $15.38 per share as reported by the Nasdaq National Market on that date).
As of December 31, 2007, 41,886,362 shares of the registrant's common stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE |
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Proxy Statement for the 2008 |
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Annual Meeting of Shareholders |
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Incorporated into Part III |
to be held in April 2008 |
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of this Form 10-K |
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Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
statements made by or on behalf of Photronics, Inc. (the "Company"). These statements are based on management's beliefs, as well as
assumptions made by and information currently available to management. Forward-looking statements may be identified by words like
"expect", "anticipate", "believe", "plan", "projects", and similar expressions. All forward-looking statements involve risks and
uncertainties that are difficult to predict. In particular, any statement contained in this annual report on Form 10-K, in press
releases, written statements or other documents filed with the Securities and Exchange Commission, or in the Company's
communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and
conference calls, regarding the consummation and benefits of future acquisitions, expectations with respect to future sales,
financial performance, operating efficiencies and product expansion, are subject to known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company. These factors may cause actual results, performance or
achievements to differ materially from anticipated results, performances or achievements. Factors that might affect such
forward-looking statements include, but are not limited to, overall economic and business conditions; the demand and receipt of
orders for the Company's products; competitive factors in the industries and geographic markets in which the Company competes;
changes in federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law
interpretations); the Company's ability to place new equipment in service on a timely basis; interest rate fluctuations and other
capital market conditions, including foreign currency rate fluctuations; economic and political conditions in international
markets; the ability to obtain additional financings; the ability to achieve anticipated synergies and other cost savings in
connection with acquisitions and productivity programs; uncertainties with respect to the integration and management of MP Mask
Technology Center, LLC ("MP Mask"); delays in equipping, and ramp up of production of the state-of-the-art nanofab facility ("U.S.
Nanofab"); the timing, impact and other uncertainties of future acquisitions; the seasonal and cyclical nature of the semiconductor
and flat panel display industries; the availability of capital; management changes; damage or destruction to the Company's
facilities by natural disasters, labor strikes, political unrest or terrorist activity; the ability to fully utilize its tools; the
ability of the Company to receive desired yields, pricing, product mix, and market acceptance of its products; changes in
technology; and the ability of the Company to obtain necessary export licenses. Any forward-looking statements should be considered
in light of these factors. Accordingly, there is no assurance that the Company's expectations will be realized. The Company does
not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to
provide revisions to any forward-looking statements.
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PART I
ITEM 1. BUSINESS
General
Photronics, Inc. (the "Company") is a Connecticut corporation, organized in 1969. Its
principal executive offices are located at 15 Secor Road, Brookfield, Connecticut 06804, telephone (203) 775-9000. Photronics, Inc.
and its subsidiaries are collectively referred to herein as "Photronics" or the "Company." The Company's website is located at
http://www.photronics.com. The Company makes available, free of charge through its website, its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically
filed or furnished to the Securities and Exchange Commission. The information contained or incorporated in the Company's website is
not part of these documents.
Photronics is one of the world's leading manufacturers 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 flat panel displays ("FPD"), and are used as masters to transfer circuit patterns onto semiconductor wafers and
flat panel substrates during the fabrication of integrated circuits ("IC") and a variety of FPDs and, to a lesser extent, other
types of electrical and optical components. The Company operates principally from ten manufacturing facilities, two of which are
located in the United States, three in Europe, two in Taiwan, and one each in Korea, Singapore and China. Also, under a
build-to-suit lease, in the first quarter of fiscal 2008, a capital lease agreement commenced with Micron Technology, Inc.
("Micron") for a state-of-the-art nanofab facility ("U.S. Nanofab") in Boise, Idaho.
Manufacturing Technology
The Company manufactures photomasks, which are used as masters to transfer circuit patterns onto
semiconductor wafers and flat panel substrates. The Company's photomasks are manufactured in accordance with circuit designs
provided on a confidential basis by its customers. The typical manufacturing process for a photomask involves the receipt and
conversion of circuit design data to manufacturing pattern data. A lithography system then exposes the circuit pattern onto the
photomask blank. The exposed areas are developed 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 (protective translucent
cellulose membranes) are applied and, after final inspection, the photomask is shipped to the customer.
The Company currently supports customers across the full spectrum of IC production and large area
technologies by manufacturing photomasks using electron beam or optical-based technologies. Electron beam and laser-based systems
are the predominant technologies used for photomask manufacturing. These technologies are capable of producing the finer line
resolution, tighter overlay and larger die size for the larger and more complex circuits currently being designed. Electron beam
and laser generated photomasks can be used with the most advanced processing techniques to produce the most advanced semiconductor
devices intended for use in an array of products. These include devices used for microprocessors, memory, telecommunications and
related applications. The Company currently owns a number of high-end and mature electron beam and laser-based systems. The
production of photomasks by the optical method is less expensive and less precise than those manufactured on high-end electron beam
systems.
The first several layers of photomasks are sometimes required to be delivered by the Company
within 24 hours from the time it receives customers' design data. The ability to manufacture high quality photomasks within short
time periods is dependent upon efficient manufacturing methods, high yield and high equipment reliability. The Company works to
meet these requirements by making 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 continues to make substantial investments in equipment to inspect and repair photomasks to ensure that
customer specifications are met. After inspection and any necessary repair, the Company utilizes proprietary processes to clean the
photomasks prior to shipment.
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The vast majority of photomask units produced for the semiconductor industry employ geometries of
130 nanometer or larger for ICs, and Generation 6 technologies or lower for FPDs. At these geometries, the Company can produce full
lines of photomasks and there is no significant technology employed by the Company's competitors that is not available to the
Company. Semiconductor fabrication also occurs below the 90 nanometer range for IC photomask technology and Generation 7 and above
for FPD photomask technology. The Company is currently capable of producing a selective range of photomasks at these smaller
geometries. However, as is typical of industries in the midst of technological change, some of the Company's competitors may be
able to achieve higher manufacturing yields than the Company when producing these smaller geometry photomasks, in part because
these competitors may have completed more cycles of learning than the Company in this area, and in part because of the Company's
need to replicate production of these complex photomasks at its many locations worldwide. The Company believes that these cases are
few and are not material to its business.
Sales and Marketing
The market for photomasks primarily consists of domestic and international semiconductor and FPD
manufacturers and designers, including a limited number of manufacturers who 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. Some prices may remain in effect for an extended period. In some instances, the Company enters into sales
arrangements, based on the understanding that, as 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 primarily through a staff of full-time
sales personnel and customer service representatives who work closely with the Company's management and technical personnel. In
addition to the sales personnel at the Company's manufacturing facilities, the Company has sales offices throughout the United
States, Europe and Asia.
The Company supports international customers through both its domestic and international
facilities. 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 identifiable assets attributable to
each of the Company's geographic areas of operations, see Note 16 to the Company's consolidated financial statements.
Customers
The Company primarily sells its products to leading semiconductor and FPD
manufacturers. The Company's largest customers during the fiscal year ended October 28, 2007 ("fiscal 2007"), included the
following:
Atmel Corp. |
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Magnachip Semiconductor |
AU Optronics Corp. |
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Maxim Integrated Products, Inc. |
Chartered Semiconductor Manufacturing, Ltd. |
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National Semiconductor Corporation |
Fairchild Semiconductor Intl., Inc. |
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NXP Semiconductors |
Freescale Semiconductor, Inc. |
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Samsung Electronics Co., Ltd. |
HannStar Display Corp. |
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Skyworks Solutions, Inc. |
IM Flash Technologies, LLC |
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ST Microelectronics, Inc. |
Jazz Semiconductor, Inc. |
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Systems on Silicon Mfg. Co., Pte. Ltd. |
Jenoptik Laser, Optik, Systeme GmbH |
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Texas Instruments Incorporated |
LG Philips LCD Co., Ltd. |
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United Microelectronics Corp. |
During fiscal year 2007, the Company sold its products and services to approximately 600
customers. Samsung Electronics Co., Ltd. accounted for approximately 25%, 25% and 24% of the Company's net sales in fiscal 2007,
2006 and 2005, respectively. This included sales of both IC and FPD photomasks. The Company's five largest customers, in the
aggregate, accounted for approximately 43% in fiscal 2007, 46% in fiscal 2006 and 42% in fiscal 2005, of net sales. A significant
decrease in the amount of sales to any of these customers could have a material adverse effect on the financial performance and
business prospects of the Company.
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Seasonality
The Company's quarterly revenues can be affected by the seasonal purchasing of its customers. The
Company is typically impacted during its first fiscal quarter by the North American and European holiday periods as some customers
reduce their effective workdays and orders during this period. Additionally, the Company can be impacted during its first or second
quarter by the Asian New Year holiday period which also may reduce customer orders. For fiscal 2008, the Asian New Year holiday
will be in the Company's second fiscal quarter, as it was in fiscal 2007. At times, the Company's first quarter revenues
have been down sequentially by as much as 10%. During the past three years, the second quarter resulted in increased sequential
revenues of 3% to 12%.
Research and Development
The Company conducts its primary research and development activities in the MP Mask
Technology Center, LLC ("MP Mask") joint venture operation and in site-specific research and development programs in various
locations around the world, primarily at its research and development centers at PK, Ltd. ("PKL") and Photronics Semiconductor Mask
Corporation ("PSMC"). The MP Mask research and development programs coupled with site specific research and development
initiatives are designed to advance the Company's leadership in technology and manufacturing efficiency. The Company also conducts
research and development activities to support advanced product integration including but not limited to numerical modeling and
simulation of photomask processes, fabrication, and delivery of product prototypes for next generation customer needs and
development of software tools and workflows necessary for effective integration of the most advanced mask-based optical lithography
solutions. Currently, research and development photomask activities are focused on 65, 45 and 32 nanometer node IC technology and
Generation 8 FPD technology. The Company believes these core competencies will continue to be a critical part of semiconductor
manufacturing as optical lithography continues to scale device capabilities at and below 90 nanometer. The Company has incurred
research and development expenses of $17.3 million, $27.3 million and $32.2 million in fiscal 2007, 2006 and 2005, respectively.
The Company believes that it owns or controls valuable proprietary information necessary for its business as presently conducted.
This includes trade secrets as well as patents. Recently, the Company has either applied for or been granted patents pertaining to
its manufacturing processes. The Company believes that its intellectual property is and will continue to be important to the
Company's technical leadership in the field of photomasks.
Patents and Trademarks
The Company owns or has rights to approximately 34 patents in the United States. The general
subject matter of these patents relates to the manufacture of photomasks themselves and the use of photomasks to manufacture other
products. The expiration dates of these patents range from 2011 to 2023. Additionally, pursuant to the technology license
agreement with Micron, the Company has access to certain technology of Micron and MP Mask. The Company also has a number of
trademarks and trademark registrations in the United States and in other countries.
While the Company believes that its intellectual property is, and will continue to be, important
to the Company's technical leadership in the field of photomasks, the Company's operations are not dependent on any one individual
patent. The Company protects its intellectual property rights regarding products and manufacturing processes through patents and
trade secrets. The Company also relies on non-disclosure agreements with employees and vendors to protect its intellectual property
and proprietary processes.
Materials, Supplies and Equipment
Raw materials used by the Company generally include high precision quartz plates (including large
area plates), which are used as photomask blanks, primarily obtained from Japanese and Korean suppliers; pellicles and electronic
grade chemicals, which are used in the manufacturing process; and compacts, which are durable plastic containers in which
photomasks are shipped. These materials are generally sourced from several suppliers and the Company is not dependent on any one
supplier for its raw materials. The Company believes that its utilization of a select group of strategic suppliers enables it to
access the most advanced materials technologically available. On an ongoing basis, the Company continues to consider additional
supplier sources.
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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 and additional suppliers to develop future generations of manufacturing systems to support the Company's
requirements.
Backlog
The first several levels of a set of photomasks for a circuit pattern at times are
often required to be shipped within 24 hours of receiving a customer's designs. Because of the short period between order and
shipment dates (typically from 1 day to 2 weeks) for a significant amount of the Company's sales, the dollar amount of current
backlog is not considered to be a reliable indication of future sales volume.
International Operations
International sales were approximately 75%, 73% and 69% of the Company's sales in fiscal
2007, 2006 and 2005, respectively. The Company believes that maintaining significant international operations requires it to have,
among other things, a local presence in the markets in which it operates. This requires a significant investment in financial,
management, operational and other resources.
Operations outside the United States are subject to inherent risks, including fluctuations in
exchange rates, political and economic conditions in various countries, unexpected changes in regulatory requirements, tariffs and
other trade barriers, difficulties in staffing and managing international operations, longer accounts receivable collection cycles
and potentially adverse tax consequences. These factors may have a material adverse effect on the Company's ability to generate
sales outside the United States and, consequently, on its business and results of operations.
Note 16 of the notes to the Company's consolidated financial statements reports net sales,
operating income (loss) and total identifiable assets by geographic region.
Competition
The photomask industry is highly competitive and most of the Company's customers utilize multiple
photomask suppliers. The Company's ability to compete depends primarily 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 where cycle time from order to delivery is critical. Certain competitors have substantially
greater financial, technical, sales, marketing and other resources than the Company. The Company believes that consistency of
product quality, timeliness of delivery and price are the principal factors considered by customers in selecting their photomask
suppliers. The Company's inability to meet these requirements could adversely affect its sales. 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.
The Company estimates that for the types of photomasks
it manufactures (IC and FPD) the size of the total market (captive and merchant) is approximately $3.5 billion. Competitors
include Compugraphics, Inc., Dai Nippon Printing Co., Ltd., Hoya Corporation, Taiwan Mask Corporation, Toppan Printing Co., Ltd.
and Toppan Chungwha Electronics. The Company also competes with semiconductor manufacturers' captive photomask manufacturing
operations that supply photomasks for internal use and, in some instances, also for external customers and foundries. The
Company expects to face continued competition, which in the past has led to pressure to reduce prices, which the Company believes
contributed to the decrease in the number of independent manufacturers. This pressure to reduce prices may continue in the
future.
Employees
As of October 28, 2007, the Company and its majority-owned subsidiaries had
approximately 1,540 full-time and part-time employees. The Company believes it offers competitive compensation and other benefits
and that its employee relations are good. None of the Company's employees were represented by a union as of October 28, 2007,
however, effective the beginning of January 2008, certain employees in the United Kingdom are represented by a union.
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ITEM 1A. RISKS RELATING TO THE COMPANY'S BUSINESS
The Company is dependent on the semiconductor industry which as a whole is volatile and could have a negative material impact
on its business.
The Company sells substantially all of its photomasks to semiconductor designers, manufacturers
and foundries, as well as to other high performance electronics manufacturers. The Company believes that the demand for photomasks
depends primarily on design activity rather than sales volume from products using photomask technology. Consequently, an increase
in semiconductor sales does not necessarily result in a corresponding increase in photomask sales. In addition, the reduced use of
customized ICs, a reduction in design complexity or other changes in the technology or methods of manufacturing or designing
semiconductors or a slowdown in the introduction of new semiconductor designs could reduce demand for photomasks even if demand for
semiconductors increases. Further, advances in design and production methods for semiconductors and other high performance
electronics could reduce the demand for photomasks. Historically, the semiconductor industry has been volatile, with sharp periodic
downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess
production capacity and accelerated erosion of selling prices.
The Company's sales of photomasks for use in fabricating high performance electronic products such
as FPDs decreased in fiscal 2007 as compared to fiscal 2006. The Company's results may suffer if the FPD photomask market
does not grow or if the Company is unable to serve this market successfully. As is the case with semiconductor photomask demand,
the Company believes that demand for photomasks for FPDs depends primarily on design activity, and to a lesser extent upon an
increase in the number of production facilities used to manufacture FPDs. As a result, an increase in FPD sales will not
necessarily lead to a corresponding increase in photomask sales. The technology for fabricating FPDs continues to develop in order
to increase the size and improve the resolution of FPDs. A slowdown in the development of new technologies for fabricating FPDs
could reduce the demand for related photomasks even if demand for FPDs increases.
The Company's quarterly operating results fluctuate significantly and may continue to do so in the future which could
adversely impact the Company's business.
The Company has experienced fluctuations in its quarterly operating results and anticipates that
such fluctuations will continue and could intensify in the future. Fluctuations in operating results may result in volatility in
the prices of the Company's securities, particularly its common stock and securities linked to the value of the Company's common
stock. Operating results may fluctuate as a result of many factors, including size and timing of orders and shipments, loss of
significant customers, product mix, technological change, fluctuations in manufacturing yields, competition and general economic
conditions. The Company operates in a high fixed cost environment and to the extent its revenues and asset utilization increase or
decrease, operating margins will be positively or negatively impacted. The Company's customers generally order photomasks on an as
needed basis, and substantially all of the Company's net sales in any quarter are dependent on orders received during that quarter.
Since the Company operates with little backlog and the rate of new orders may vary significantly from month-to-month, the Company's
capital expenditures and expense levels are based primarily on sales forecasts. Consequently, if anticipated sales in any quarter
do not occur when expected, capital expenditures and expense levels could be disproportionately high, and the Company's operating
results would be adversely affected. Due to the foregoing factors, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future
performance. In addition, in future quarters the Company's operating results could be below the expectations of public market
analysts and investors, which, in turn, could materially adversely affect the market prices of the Company's common stock and of
the debt securities.
The Company's industry is subject to rapid technological change and might fail to remain competitive which could have a
material adverse effect on the Company's business and results of operations.
The photomask industry has been and is expected to continue to be characterized by technological
change and evolving industry standards. In order to remain competitive, the Company will be required to continually anticipate,
respond to and utilize changing technologies of increasing complexity in both traditional and emerging markets that it serves. In
particular, the Company believes that, as semiconductor geometries continue to become smaller and FPDs become larger with improved
performance, it will be required to manufacture increasingly complex photomasks. Additionally, demand
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for photomasks has been, and could in the future be adversely affected by changes in methods of fabricating semiconductors and
high performance electronics (that could affect the type or quantity of photomasks utilized), such as changes in semiconductor
demand that favor field programmable gate arrays and other semiconductor designs that replace application-specific ICs.
Additionally, increased market acceptance of alternative methods of IC designs onto semiconductor wafers, such as direct-write
lithography, could reduce or eliminate the need for photomasks entirely in the production of semiconductors. Through fiscal 2007,
direct-write lithography has not been proven to be a commercially viable alternative to photomasks, as it is considered too slow
for high volume semiconductor wafer production. However, should direct-write or any other alternative methods of transferring IC
designs to semiconductor wafers without the use of photomasks achieve market acceptance, the Company's business and results of
operations would be materially adversely affected. If the Company is unable to anticipate, respond to or utilize these or other
changing technologies, due to resource, technological or other constraints, its business and results of operations could be
materially adversely affected.
Further, should sales volumes decrease based upon the flow of design releases from the Company's
customers, the Company may have excess or underutilized production capacity that could significantly impact operating margins, or
result in write-offs from asset impairments.
The Company's operations will continue to require substantial capital, which it may be unable to obtain.
The manufacture of photomasks requires substantial investments in high-end manufacturing
capability at existing and new facilities. The Company expects that it will be required to continue to make substantial capital
expenditures to meet the technological demands of its customers and to position it for future growth. The Company's capital
expenditure payments for fiscal 2008 are expected to be in the range of $120 million to $150 million, of which $70 million was
accrued as of October 28, 2007, though the range may be greater should conditions warrant. The Company cannot provide assurance
that it will be able to obtain the additional capital required in connection with its operations on reasonable terms, if at all, or
that any such expenditure will not have a material adverse effect on its business and results of operations.
The Company's agreements with Micron have several risks; should either company not comply or execute under these agreements
it could significantly disrupt the Company's business and technology activities which could have a material effect on the Company's
operations or cash flows.
On May 5, 2006, Photronics and Micron entered into a joint venture known as MP Mask.
The joint venture develops and produces photomasks for leading-edge and advanced next generation semiconductors. As part of the
formation of the joint venture, Micron contributed its existing photomask technology center located at its Boise, Idaho,
headquarters to MP Mask and Photronics has paid Micron $127.5 million through October 28, 2007, and a final amount of $7.5 million
is payable to Micron on May 5, 2008 in exchange for a 49.99% interest in MP Mask and a license for photomask technology of Micron
and certain supply agreements. In 2007, the Company invested an additional $3.5 million in MP Mask for capital expenditure
and working capital purposes.
In the first quarter of fiscal 2008, a capital lease agreement commenced with Micron for the U.S.
Nanofab for $61.7 million principal amount. Photronics' total investment in the purchase and equipping of its U.S. Nanofab is
expected to fall within a range of $190 million to $200 million and may include redeployment of some existing Photronics assets.
The U.S. Nanofab is expected to begin production in the first quarter of calendar 2008.
Failure by Photronics or Micron to comply or execute under any of these agreements, to capitalize
on the use of existing technology or to further develop technology could result in a significant disruption to the Company's
business and technology activities, and could adversely affect the Company's operations and cash flows.
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The Company has been dependent on sales to a limited number of large customers; the loss of any of these customers or any
reduction in orders from these customers could have a material adverse effect on its sales and results of operations.
Historically, the Company has sold a significant proportion of photomasks to a limited number of
IC and FPD manufacturers. During fiscal 2007, one customer, Samsung Electronics Co., Ltd, accounted for approximately 25% of the
Company's net sales. The Company's five largest customers, in the aggregate, accounted for 43% of net sales in fiscal 2007, 46% in
fiscal 2006, and 42% in fiscal 2005. None of the Company's customers has entered into a long-term agreement with the Company
requiring them to purchase the Company's products. The loss of a significant customer or any reduction or delay in orders from any
significant customer, including reductions or delays due to customer departures from recent buying patterns, or market, economic or
competitive conditions in the semiconductor or FPD industries, could have a material adverse effect on the Company's financial
performance and business prospects. The continuing consolidation of semiconductor manufacturers may increase the likelihood and
adverse effect of losing a significant customer.
The Company depends on a small number of suppliers for equipment and raw materials and, if the Company's suppliers do not
deliver their products to them, the Company may be unable to deliver its products to its customers, which could adversely affect
its business and results of operations.
The Company relies on a limited number of photomask equipment manufacturers to develop and supply
the equipment it uses. These equipment manufacturers currently require lead times of up to 12 months between the order and the
delivery of certain photomask imaging and inspection equipment. The failure of such manufacturers to develop or deliver such
equipment on a timely basis could have a material adverse effect on the Company's business and results of operations. Further, the
Company relies on equipment manufacturers to develop future generations of manufacturing equipment to meet its requirements. In
addition, the manufacturing equipment necessary to produce advanced photomasks could become prohibitively expensive.
The Company uses high precision quartz photomask blanks, pellicles, and electronic grade chemicals
in its manufacturing processes. There are a limited number of suppliers of these raw materials, and the Company has no long-term
contract for the supply of these raw materials. Any delays or quality problems in connection with significant raw materials,
particularly photomask blanks, could cause delays in shipments of photomasks, which could adversely affect the Company's business
and results of operations. The fluctuation of exchange rates with respect to prices of significant raw materials used in
manufacturing also could have a material adverse effect on the Company's business and results of operations, although they have not
been material to date.
The Company faces risks associated with complex manufacturing processes, including the use of sophisticated equipment and
manufacturing processes with complex technologies; should the Company be unable to effectively utilize such processes and
technologies it could have a material adverse effect on its business and results of operations.
The Company's complex manufacturing processes require the use of expensive and technologically
sophisticated equipment and materials and are continuously modified in an effort to improve manufacturing yields and product
quality. Minute impurities, defects or other difficulties in the manufacturing process can lower manufacturing yields and make
products unmarketable. Moreover, manufacturing leading-edge photomasks is more complex and time consuming than manufacturing less
advanced photomasks, and may lead to general delays in the manufacturing of all levels of photomasks. The Company has, on occasion,
experienced manufacturing difficulties and capacity limitations that have delayed the Company's ability to deliver products within
the time frames contracted for by its customers. The Company cannot provide assurance that it will not experience these or other
manufacturing difficulties, or be subject to increased costs or production capacity constraints in the future, any of which could
result in a loss of customers or could otherwise have a material adverse effect on its business and results of operations.
In 2007, the Company completed construction of a new photomask manufacturing facility in Shanghai,
China and, in the first quarter of fiscal 2008, a capital lease agreement commenced with Micron for the U.S. Nanofab. The
Company cannot provide assurance that these facilities will ramp up to anticipated production levels or that they will not
experience any production or other difficulties.
-9-
The Company's prior and future acquisitions may entail certain operational and financial risks.
The Company has made significant acquisitions throughout its history. Acquisitions have focused on
increasing its manufacturing presence in Asia, including its acquisition of PSMC, a Taiwanese photomask manufacturer, in 2000 and
PKL, a Korean photomask manufacturer, in 2001 and increasing the technology base through the MP Mask joint venture between
Photronics and Micron in 2006. The Company may make additional acquisitions in the future. Acquisitions place significant demands
on the Company's administrative, operational and financial personnel and systems. Managing acquired operations entails numerous
operational and financial risks, including difficulties in the assimilation of acquired operations, diversion of management's
attention from other business concerns, managing assets in multiple geographic regions, amortization of acquired intangible assets
and potential loss of key employees of acquired operations. Sales of acquired operations also may decline following an acquisition,
particularly if there is an overlap of customers served by the Company and the acquired operation, and these customers transition
to another vendor in order to ensure a second source of supply. Furthermore, the Company may be required to utilize its cash
reserves and/or issue new securities for future acquisitions, which could have a dilutive effect on its earnings per share.
The Company operates in a highly competitive industry; should the Company be unable to meet its customers requirements for
product quality, timelines of delivery or technical capabilities, it could adversely affect its sales.
The photomask industry is highly competitive, and most of the Company's customers utilize more
than one photomask supplier. The Company's competitors include Compugraphics, Inc., Dai Nippon Printing Co., Ltd., Hoya
Corporation, Taiwan Mask Corporation, Toppan Printing Co., Ltd. and Toppan Chungwha Electronics. The Company also competes with
semiconductor manufacturers' captive photomask manufacturing operations. The Company expects to face continued competition from
these and other suppliers in the future. Many of the Company's competitors have substantially greater financial, technical, sales,
marketing and other resources than it does. Also, some of the Company's competitors may be able to more rapidly develop, produce,
and achieve higher manufacturing yields than the Company, when producing smaller geometry photomasks. The Company believes that
consistency of product quality and timeliness of delivery, as well as price, technical capability and service, are the principal
factors considered by customers in selecting their photomask suppliers. The Company's inability to meet these requirements could
adversely affect its sales. In the past, competition led to pressure to reduce prices which, the Company believes, contributed to
the decrease in the number of independent manufacturers. This pressure to reduce prices may continue in the future. In addition,
certain semiconductor manufacturers such as International Business Machines Corporation, Taiwan Semiconductor Manufacturing
Company, Samsung Electronics Co., Ltd. and LG Phillips LCD Co., Ltd. possess their own captive facilities for manufacturing
photomasks. Also, certain semiconductor manufacturers market their photomask manufacturing services to outside customers as well as
to their internal organizations.
The Company's substantial international operations are subject to additional risks.
International sales accounted for approximately 75% of the Company's net sales for fiscal 2007,
73% in fiscal 2006, and 69% in fiscal 2005. The Company believes that maintaining significant international operations requires it
to have, among other things, a local presence in the markets in which it operates. This requires a significant investment of
financial, management, operational and other resources. Since 1996, the Company has significantly expanded its operations in
international markets by acquiring existing businesses in Europe, establishing manufacturing operations in Singapore, acquiring
majority equity interests in photomask manufacturing operations in Korea and Taiwan and building a new manufacturing facility for
FPD photomasks in Taiwan and a new photomask manufacturing facility in Shanghai, China. As the served market continues to
shift to Asia, the Company will continue to assess its manufacturing base and may close or open new facilities to adapt to these
market conditions.
Operations outside the United States are subject to inherent risks, including fluctuations in
exchange rates, political and economic conditions in various countries, unexpected changes in regulatory requirements, tariffs and
other trade barriers, difficulties in staffing and managing international operations, longer accounts receivable payment cycles and
potentially adverse tax consequences. These factors may have a material adverse effect on the Company's ability to generate sales
outside the United States and, consequently, on its business and results of operations.
-10-
The Company's operating results are influenced by the performance of Asian economies which have been volatile and subject to
fluctuations in local currencies, which could have a material adverse impact on the Company's financial position and results of
operations.
In fiscal 2007, the Company derived approximately 58% of its net sales from Asia, compared to 56%
in fiscal 2006 and 53% in fiscal 2005. As the Company continues to expand its operations in Asia, it expects sales in Asia will
continue to represent a significant portion of its overall revenue mix. As a result, its business is exposed to risks presented by
Asian economies. In recent years, Asian economies have been highly volatile and recessionary, resulting in significant fluctuations
in local currencies, declining asset values and other instabilities. These instabilities may continue for some time or worsen,
which could have a material adverse impact on its financial position and results of operations. Asian economies may also be
adversely affected by the outbreak of the bird flu and any recurring outbreak of severe acute respiratory syndrome (SARS) in the
region and by other geopolitical risks.
The Company's business depends on management and technical personnel, who are in great demand.
The Company's success, in part, depends upon key managerial, engineering and technical personnel,
as well as its ability to continue to attract and retain additional personnel. The loss of certain key personnel could have a
material adverse effect upon the Company's business and results of operations. There can be no assurance that the Company can
retain its key managerial, engineering and technical employees or that it can attract similar additional employees in the future.
The Company believes that it provides competitive compensation and incentive packages to its employees.
The Company may be unable to enforce or defend its ownership and use of proprietary technology.
The Company believes that the success of its business depends more on its proprietary technology,
information and processes and know-how than on its patents or trademarks. Much of its proprietary information and technology
relating to manufacturing processes is not patented and may not be patentable. The Company cannot offer assurance that:
* it will be able to adequately protect its technology;
* competitors will not independently develop similar technology; or
* international intellectual property laws will adequately protect its intellectual
property rights.
The Company may become the subject of infringement claims or legal proceedings by third parties
with respect to current or future products or processes. Any such claims or litigation, with or without merit, to enforce or
protect its intellectual property rights or to defend the Company against claimed infringement of the rights of others could result
in substantial costs, diversion of resources and product shipment delays or could force the Company to enter into royalty or
license agreements rather than dispute the merits of these claims. Any of the foregoing could have a material adverse effect on the
Company's business, results of operations and financial position.
The Company may be unprepared for changes to environmental laws and regulations and may have liabilities arising from
environmental matters.
The Company is subject to numerous environmental laws and regulations that impose various
environmental controls on, among other things, the discharge of pollutants into the air and water and the handling, use, storage,
disposal and clean-up of solid and hazardous wastes. Changes in these laws and regulations may have a material adverse effect on
the Company's financial position and results of operations. Any failure by the Company to adequately comply with these laws and
regulations could subject it to significant future liabilities.
In addition, these laws and regulations may impose clean-up liabilities on current and former
owners and operators of real property without regard to fault and these liabilities may be joint and several with other parties. In
the past, the Company has been involved in remediation activities relating to its properties. The Company believes, based upon
current information, that environmental liabilities relating to these activities or other matters will not be material to its
financial statements. However, there can be no assurances that the Company will not incur any material environmental liabilities in
the future.
-11-
The Company's production facilities could be damaged or disrupted by a natural disaster or labor strike.
The Company's facilities in Taiwan are located in a seismically active area. In addition, a major
catastrophe such as an earthquake or other natural disaster or labor strikes or work stoppages at any of the Company's
manufacturing facilities could result in a prolonged interruption of its business. Any disruption resulting from these events could
cause significant delays in shipments of the Company's products and the loss of sales and customers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. DESCRIPTION OF PROPERTY
The following table presents certain information about the Company's photomask
manufacturing facilities:
|
|
Type of |
|
|
|
|
|
|
|
|
|
|
|
|
Allen, Texas |
|
Owned |
|
|
Boise, Idaho |
|
Leased |
|
(1) |
Brookfield, Connecticut (Building #1) |
|
Owned |
|
|
Brookfield, Connecticut (Building #2) |
|
Owned |
|
|
Bridgend, South Wales |
|
Leased |
|
|
Cheonan, Korea |
|
Owned |
|
|
Dresden, Germany |
|
Leased |
|
|
Hsinchu, Taiwan |
|
Leased |
|
|
Manchester, England |
|
Owned |
|
|
Shanghai, China |
|
Owned |
|
(2) |
Singapore |
|
Leased |
|
|
Taichung, Taiwan |
|
Owned |
|
(2) |
(1) |
|
In the first quarter of fiscal 2008, a capital lease agreement commenced with Micron for the U.S. Nanofab. |
|
|
|
(2) |
|
The Company owns its manufacturing facilities in Shanghai and Taichung, however, it leases the related land. |
The Company believes that its existing manufacturing facilities are suitable and adequate for its
present purposes. The Company also leases various sales offices. The Company's administrative headquarters are located in
Brookfield, Connecticut in a building that it owns.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims that arise in the ordinary course of business. The
Company believes such claims, individually or in the aggregate, will not have a material adverse effect on the business of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of fiscal 2007.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDERS'
MATTERS
The Common Stock of the Company is traded on the NASDAQ Stock Market, Inc. ("NASDAQ") under the
symbol PLAB. The table below shows the range of high and low sale prices per share for each quarter for fiscal year 2007 and 2006,
as reported on the NASDAQ.
|
|
High |
|
Low |
|
|
|
|
|
Fiscal Year Ended October 28, 2007: |
|
|
|
|
|
|
|
|
|
Quarter Ended January 28, 2007 |
|
$16.97 |
|
$13.68 |
Quarter Ended April 29, 2007 |
|
16.88 |
|
15.00 |
Quarter Ended July 29, 2007 |
|
15.96 |
|
14.14 |
Quarter Ended October 28, 2007 |
|
14.54 |
|
10.38 |
|
|
|
|
|
Fiscal Year Ended October 29, 2006: |
|
|
|
|
|
|
|
|
|
Quarter Ended January 29, 2006 |
|
$19.04 |
|
$14.80 |
Quarter Ended April 30, 2006 |
|
20.50 |
|
16.58 |
Quarter Ended July 30, 2006 |
|
19.46 |
|
13.51 |
Quarter Ended October 29, 2006 |
|
15.38 |
|
13.00 |
On December 31, 2007, the closing sale price for the Common Stock as reported by NASDAQ was $12.47.
Based on information available to the Company, the Company believes it has approximately 13,000 beneficial shareholders.
The Company has not paid any cash dividends to date and, for the foreseeable future, anticipates
that earnings will continue to be retained for use in its business. Further, the Company's revolving credit facility ("credit
facility") precludes it from paying cash dividends.
The information regarding the Company's equity compensation required to be disclosed by Item
201(d) of Regulation S-K is incorporated by reference from the Company's 2008 definitive Proxy Statement into Item 12 of Part III
of this report.
-13-
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the Company's audited consolidated financial
statements. The data should be read in conjunction with the audited consolidated financial statements and notes thereto and other
financial information included elsewhere in this Form 10-K (in thousands, except per share amounts):
|
|
Year Ended |
|
||||||||
|
|
|
|
||||||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
October 31, |
|
November 2, |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$421,479 |
|
$454,875 |
|
$440,770 |
|
$395,539 |
|
$348,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
(321,958) |
|
(307,851) |
|
(295,649) |
|
(260,232) |
|
(250,687) |
|
Selling, general and administrative |
|
(61,507) |
|
(62,215) |
|
(54,295) |
|
(53,487) |
|
(56,154) |
|
Research and development |
|
(17,300) |
|
(27,337) |
|
(32,152) |
|
(30,520) |
|
(29,965) |
|
Consolidation, restructuring and |
|
|
|
|
(a) |
|
|
|
|
|
|
Gain on sale of facility |
|
2,254 |
|
- |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
22,968 |
|
41,833 |
|
58,674 |
|
51,300 |
|
(29,922) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(5,928) |
|
(11,916) |
|
(10,885) |
|
(14,723) |
|
(17,089) |
|
Investment and other income, net |
|
6,844 |
|
15,469 |
|
7,556 |
(b) |
4,468 |
(c) |
5,346 |
(e) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision) |
|
3,178 |
|
(10,462) |
|
(10,058) |
|
(5,761) |
|
(924) |
|
Minority interest in income of |
|
|
|
(5,592) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ 24,523 |
|
$ 29,332 |
(a) |
$ 38,653 |
(b) |
$ 24,466 |
(c) |
$(48,162) |
(d) (e) |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$0.59 |
|
$0.71 |
(a) |
$1.09 |
(b) |
$0.75 |
(c) |
$(1.50) |
(d) (e) |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$0.56 |
|
$0.66 |
(a) |
$0.95 |
(b) |
$0.68 |
(c) |
$(1.50) |
(d) (e) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
41,539 |
|
41,369 |
|
35,519 |
|
32,564 |
|
32,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
51,282 |
|
51,072 |
|
45,256 |
|
42,339 |
|
32,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
-14-
BALANCE SHEET DATA: |
|
|
||||||||
|
|
|
|
|
|
As of |
|
|
|
|
|
|
|
||||||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
October 31, |
|
November 2, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$96,606 |
|
$127,691 |
|
$300,557 |
|
$240,401 |
|
$256,872 |
Property, plant and equipment, net |
|
531,578 |
|
443,637 |
|
412,429 |
|
396,461 |
|
387,977 |
Total assets |
|
1,059,780 |
|
1,045,683 |
|
945,729 |
|
858,210 |
|
863,903 |
Long-term debt |
|
191,253 |
|
170,288 |
|
238,949 |
|
315,888 |
|
368,307 |
Shareholders' equity |
|
654,284 |
|
614,282 |
|
561,875 |
|
349,473 |
|
308,329 |
(a) |
|
Includes consolidation charges of $15.6 million after tax in connection with the closure of the Company's Austin, Texas manufacturing and research and development facility. |
|
|
|
(b) |
|
Includes early extinguishment charge of $1.7 million in connection with the early redemption of $64.4 million of the Company's 4.75% convertible notes. |
|
|
|
(c) |
|
Includes early extinguishment charge of $1.2 million in connection with the early redemption of $48.5 million of the Company's 4.75% convertible notes. |
|
|
|
(d) |
|
Includes consolidation charge of $42.0 million in connection with the closure of the Company's Phoenix, Arizona manufacturing facility and the consolidation of the Company's North American operating infrastructure. |
|
|
|
(e) |
|
Includes early extinguishment charge of $0.9 million in connection with the early redemption of $62.1 million of the Company's 6% convertible notes. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations for the Years Ended October 28, 2007, October 29, 2006 and October 30, 2005
Overview
The Company sells substantially all of its photomasks to semiconductor designers and
manufacturers, and manufacturers of FPDs. Photomask technology is also being applied to the fabrication of other higher
performance electronic products such as photonics, micro-electronic mechanical systems and certain nanotechnology applications.
Thus, the Company's selling cycle is tightly interwoven with the development and release of new semiconductor designs and flat
panel applications, particularly as it relates to the semiconductor industry's migration to more advanced design methodologies and
fabrication processes. The Company believes that the demand for photomasks primarily depends on design activity rather than sales
volumes from products produced using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not
necessarily result in a corresponding increase in photomask sales. In addition, the reduced use of customized ICs, reductions in
design complexity or other changes in the technology or methods of manufacturing semiconductors or a slowdown in the introduction
of new semiconductor or FPD designs could reduce demand for photomasks even if demand for semiconductors and FPDs increases.
Advances in semiconductor and photomask design and semiconductor production methods could reduce the demand for photomasks.
Historically, the semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. These downturns have been
characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling
prices.
The global semiconductor industry is driven by end markets which have been closely tied to
consumer driven applications for high performance semiconductor devices including, but not limited to communications and mobile
computing solutions. The Company cannot predict the timing of the industry's transition to volume production of next generation
technology nodes or the timing of up and down cycles with precise accuracy, but believes that such transitions and cycles will
continue into the future, beneficially and adversely affecting its business, financial condition and operating results in the near
term. The Company's ability to remain successful in these environments is based upon achieving its goals of being a service and
technology leader, an efficient solutions supplier, and a company able to continually reinvest in its global infrastructure.
-15-
As of December 2007, state-of-the-art production for semiconductor masks is considered to be 45
nanometer for ICs, and Generation 7 to Generation 8 process technologies for FPDs, while 65 nanometer has moved into volume
production. 130 and above nanometer and Generation 3 through Generation 6 process technologies for FPDs constitute the
majority of high performance designs being fabricated in volume today. The Company expects there to be an increase in 65 nanometer
designs moving to wafer fabrication throughout fiscal 2008 and believes it is well positioned to service an increasing volume of
this business through investments in manufacturing processes and technology in the global regions where its customers are located.
In 2005 and 2006, the Company experienced growth in demand for FPD photomasks, which it currently supplies from its facilities in
Korea and Taiwan. In December 2006, the Company completed construction of its manufacturing facility in Shanghai, China, which
began production in the second quarter of the Company's 2007 fiscal year.
The photomask industry has been, and is expected to continue to be, characterized by technological
change and evolving industry standards. In order to remain competitive, the Company will be required to continually anticipate,
respond to and utilize changing technologies. In particular, the Company believes that, as semiconductor geometries continue to
become smaller, it will be required to manufacture even more complex optically-enhanced reticles, including optical proximity
correction and phase-shift photomasks. Additionally, demand for photomasks has been, and could in the future be adversely affected
by changes in methods of semiconductor manufacturing (which could affect the type or quantity of photomasks utilized), such as
changes in semiconductor demand that favor field programmable gate arrays and other semiconductor designs that replace
application-specific ICs. Through fiscal 2007, the Company has not experienced a significant loss of revenue as a result of
alternative semiconductor design methodologies. Additionally, increased market acceptance of alternative methods of transferring
circuit designs onto semiconductor wafers, such as direct-write lithography, could reduce or eliminate the need for photomasks.
Through fiscal 2007, direct-write lithography has not been proven to be a commercially viable alternative to photomasks, as it is
considered too slow for high volume semiconductor wafer production. However, should direct-write or any other alternative methods
of transferring IC designs to semiconductor wafers be done without the use of photomasks, the Company's business and results of
operations would be materially adversely affected. If the Company is unable to anticipate, respond to, or utilize these or other
changing technologies, due to resource, technological or other constraints, its business and results of operations could be
materially adversely affected.
Both revenues and costs have been affected by the increased demand for high-end technology
photomasks that require more advanced manufacturing capabilities but generally command higher average selling prices ("ASP"). To
meet the technological demands of its customers and position the Company for future growth, the Company continues to make
substantial investments in high-end manufacturing capability both at existing and new facilities. The Company's cash payments for
capital expenditures for new facilities and equipment to support its customers' requirements for high-end technology products
aggregated approximately $310 million for the three fiscal years ended October 28, 2007, resulting in significant increases in
operating expenses. Based on the anticipated technological changes in the industry, the Company expects these trends to continue.
In 2006, the Company invested $135 million in the MP Mask joint venture, and technology license and related agreements, and will
continue to invest in advanced technologies.
The manufacture of photomasks for use in fabricating ICs and other related products built using
comparable photomask-based process technologies has been, and continues to be, capital intensive due to the need to maintain a
technology-based infrastructure. The Company's integrated global manufacturing network and employees, which consist of ten current
manufacturing sites, plus commencement of a capital lease agreement in the first quarter of fiscal 2008 for the U.S. Nanofab, which
is scheduled to begin production during the first quarter of calendar 2008, represent a significant portion of its fixed operating
cost base. Should sales volumes decrease based upon the flow of design releases from the Company's customers, the Company may have
excess or underutilized production capacity that could significantly impact operating margins, or result in write-offs from asset
impairments.
The vast majority of photomasks produced for the semiconductor industry employ geometries of 130
nanometers or larger for ICs, and Generation 6 technologies or lower for FPDs. At these geometries, the Company can produce full
lines of photomasks and there is no significant technology employed by the Company's competitors that is not available to the
Company. Semiconductor fabrication also occurs below 90 nanometer for ICs, and Generation 7 and above for FPDs. The Company is
currently capable of producing a selective range of photomasks at these smaller geometries, and has begun accelerating its efforts
to support the development and production of photomasks for 65, 45 and 32 nanometer technology nodes in semiconductors and
Generation 8 in FPD. However, as is typical of industries in the midst of technological change, some of the Company's competitors
may be able to achieve higher manufacturing yields than the Company when
-16-
producing these smaller geometry photomasks, in part because these competitors may have completed more cycles of learning than
the Company in this area and in part because of the Company's need to replicate production of these complex photomasks at its four
advanced technology locations worldwide, and at its U.S. Nanofab.
On May 5, 2006, Photronics and Micron entered into the MP Mask joint venture, which develops and
produces photomasks for leading-edge and advanced next generation semiconductors. As part of the formation of the joint venture,
Micron contributed its existing photomask technology center located at its Boise, Idaho, headquarters to MP Mask and Photronics has
paid Micron $127.5 million through October 28, 2007, and a final payment of $7.5 million is due to Micron on May 5, 2008, in
exchange for a 49.99% interest in MP Mask and a license for photomask technology of Micron and certain supply agreements. In
2007, the Company invested an additional $3.5 million in MP Mask for capital expenditure and working capital purposes.
In the first quarter of fiscal 2008, a capital lease agreement commenced with Micron for the U.S.
Nanofab for a total cost of $61.7 million (total payments under the capital lease are $73.9 million of which $12.2 million
represents interest). Photronics' total investment in the purchase and equipping of its U.S. Nanofab is expected to fall within a
range of $190 million to $200 million and may include the redeployment of some existing Photronics assets. The U.S. Nanofab is
expected to begin production during the first quarter of calendar 2008.
In March of 2006, the Company further streamlined its operating infrastructure in North America by
closing the Austin, Texas manufacturing and research and development center and relocating certain development and manufacturing
work to other facilities within the global network. The Company incurred total restructuring charges of $15.6 million in its
fiscal year ended October 29, 2006. In January 2007, the Company sold its Austin, Texas manufacturing and research and development
facility for proceeds of $5.0 million and realized a gain of $2.3 million.
Results of Operations
The following table represents selected operating information expressed as a percentage of net
sales:
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
100.0% |
|
100.0% |
|
100.0% |
Cost of sales |
|
(76.4) |
|
(67.7) |
|
(67.1) |
|
|
|
|
|
|
|
Gross margin |
|
23.6 |
|
32.3 |
|
32.9 |
Selling, general and administrative expenses |
|
(14.6) |
|
(13.7) |
|
(12.3) |
Research and development expenses |
|
(4.1) |
|
(6.0) |
|
(7.3) |
Consolidation, restructuring and related charges |
|
- |
|
(3.4) |
|
- |
Gain on sale of facility |
|
0.5 |
|
- |
|
- |
|
|
|
|
|
|
|
Operating income |
|
5.4 |
|
9.2 |
|
13.3 |
Interest expense |
|
(1.4) |
|
(2.6) |
|
(2.5) |
Investment and other income, net |
|
1.6 |
|
3.4 |
|
1.8 |
|
|
|
|
|
|
|
Income before income tax benefit |
|
|
|
|
|
|
(provision) and minority interest |
|
5.6 |
|
10.0 |
|
12.6 |
Income tax benefit (provision) |
|
0.8 |
|
(2.3) |
|
(2.3) |
Minority interest |
|
(0.6) |
|
(1.3) |
|
(1.5) |
|
|
|
|
|
|
|
Net income |
|
5.8% |
|
6.4% |
|
8.8% |
|
|
|
|
|
|
|
-17-
Note: All the following tabular comparisons, unless otherwise indicated, are for the fiscal
years ended October 28, 2007 (2007), October 29, 2006 (2006) and October 30, 2005 (2005), in millions of dollars.
Net Sales
|
|
|
|
|
|
|
|
Percent Change |
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
2007 to |
|
2006 to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FPD |
|
$ 82.1 |
|
$ 99.8 |
|
$ 79.3 |
|
(17.7)% |
|
25.9% |
IC |
|
339.4 |
|
355.1 |
|
361.5 |
|
(4.4) |
|
(1.8) |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$421.5 |
|
$454.9 |
|
$440.8 |
|
(7.3)% |
|
3.2% |
|
|
|
|
|
|
|
|
|
|
|
Net sales for 2007 decreased 7.3% to $421.5 million as compared to $454.9 million for 2006. The
decrease is related to reducedsales of FPD photomasks of $17.7 million associated with decreased ASPs primarily for high-end FPD
photomasks; and reduced sales of IC photomasks of $15.7 million as a result of a decline in ASPs, primarily from mainstream
products. High-end photomask applications, which typically have higher ASPs, include mask sets for FPD products using G6 and above
technologies and IC products using 90 nanometer and below technologies. During 2007, sales of high-end photomasks totaled
$92 million as compared to $91 million in 2006. Total sales of high-end FPD masks decreased by $18 million, while sales of
high-end IC photomasks increased by $19 million. By geographic area, net sales in 2007 as compared to 2006 decreased by $9.8
million or 3.9% in Asia, by $15.2 million or 12.4% in North America, and by $8.4 million or 10.5% in Europe. As a percent of total
sales in 2007, sales were 58% in Asia, 25% in North America, and 17% in Europe. By geographic area, 2007 compared to 2006, net
sales in Asia decreased $9.8 million or 3.9%, North American sales decreased $15.2 million or 12.4%, and European sales decreased
$8.4 million or 10.5%.
Net sales for 2006 increased 3.2% to $454.9 million as compared to fiscal year 2005, due
principally to increased sales of FPD photomasks, as a result of increased consumer demand for FPD applications. This increase was
somewhat mitigated by decreased sales of IC photomasks of 1.8% as a result of reduced demand for mainstream IC photomasks. Total
sales of high-end photomasks, which include FPD and IC, increased to 35% in 2006 as compared to 21% in 2005. FPD revenue for 2006
increased to $99.8 million as compared to $79.3 million in 2005. High-end technology applications typically have higher ASPs, for
both IC and FPD photomasks. High-end photomask applications include mask sets for semiconductor designs at and below 130 nanometer
for ICs, and for FPD products using G6 and above technologies. By geographic area, 2006 compared to 2005, net sales in Asia
increased $19.9 million or 8.6%, North American sales decreased $12.6 million or 9.3%, and European sales increased $6.8 million or
9.3%.
Gross Margin
|
|
|
|
|
|
|
|
Percent Change |
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
2007 to |
|
2006 to |
|
|
2007 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$99.5 |
|
$147.0 |
|
$145.1 |
|
(32.3)% |
|
1.3% |
Gross margin % |
|
23.6% |
|
32.3% |
|
32.9% |
|
- |
|
- |
Gross margin decreased to 23.6% in 2007 from 32.3% in 2006 primarily due to decreased ASPs for both
IC and FPD photomasks and the Company's increased manufacturing base in Asia. The Company operates in a high fixed cost environment
and to the extent that the Company's revenues and utilization increase or decrease, gross margin will be positively or negatively
impacted. The gross margin percentage for fiscal 2008 could be negatively impacted by increased depreciation expense
associated with the Company's recent capital expenditures, principally for its U.S. Nanofab and for PKL, its subsidiary in
Korea.
-18-
Gross margin decreased slightly to 32.3% of net sales for 2006 as compared to 32.9% in 2005 as a
result of the Company's increased infrastructure and expanded manufacturing capability which includes increased high-end IC
manufacturing capability and increased FPD capacity, principally with the opening of the Taiwan FPD facility.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
Percent Change |
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
2007 to |
|
2006 to |
|
|
2007 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S,G&A expense |
|
$61.5 |
|
$62.2 |
|
$54.3 |
|
(1.1)% |
|
14.6% |
% of net sales |
|
14.6% |
|
13.7% |
|
12.3% |
|
- |
|
- |
Selling, general and administrative expenses decreased by $0.7 million or 1.1% to $61.5 million in
2007 from $62.2 million in 2006. The decrease was primarily due to decreased compensation expense, which was partially offset
by start-up expenses related to the U.S. Nanofab.
Selling, general and administrative expenses increased 14.6% in 2006 as compared to 2005,
primarily due to the Company's expanded Asian infrastructure, which includes expansion in Shanghai, China and Taichung, Taiwan, and
increased stock compensation expenses of $1.3 million related to the Company's 2006 adoption of Statement of Financial Accounting
Standards ("SFAS") No. 123(R).
Research and Development
|
|
|
|
|
|
|
|
Percent Change |
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
2007 to |
|
2006 to |
|
|
2007 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D expense |
|
$17.3 |
|
$27.3 |
|
$32.2 |
|
(36.7)% |
|
(15.0)% |
% to net sales |
|
4.1% |
|
6.0% |
|
7.3% |
|
- |
|
- |
Research and development expenditures consist primarily of global development efforts of
high-end process technologies for advanced sub-wavelength reticle solutions for IC and FPD technologies. Research and
development expenses decreased in both 2007 and 2006 as compared to each prior year as a result of cost savings associated with the
2006 closure of the Company's Austin, Texas research and development operations, which were in part offset by amortization expenses
of the fair value of the agreement to license technology from Micron.
Consolidation, Restructuring and Related Charges
In the second quarter of 2006, the Company continued to streamline its operating infrastructure
in North America by ceasing the manufacture and research and development of photomasks at its Austin, Texas facility. The Company
recorded total restructuring charges of $15.6 million in 2006, primarily comprised of $14.3 million related to the impairment of
facilities and equipment and $1.3 million relating to workforce reductions of approximately 95 employees in the United
States.
The Company continues to assess its global manufacturing strategy as its sales volume continues to
grow in Asia. This ongoing assessment could result, in the future, in facilities closures, asset redeployment, workforce
reductions, and the addition of increased manufacturing facilities, all of which would be predicated by market conditions and
customer requirements.
Gain on Sale of Facility
In January 2007, the Company sold its Austin, Texas manufacturing and research and development
facility for proceeds of $5.0 million and realized a gain of $2.3 million.
-19-
Other Income (Expense)
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$(5.9) |
|
$(11.9) |
|
$(10.9) |
Investment and other income, net |
|
6.8 |
|
15.5 |
|
7.6 |
|
|
|
|
|
|
|
Total other income (expense) |
|
$ 0.9 |
|
$ 3.6 |
|
$ (3.3) |
|
|
|
|
|
|
|
Interest expense decreased in 2007 as compared to 2006, primarily as a result of the Company's
repaying the remaining outstanding balance of its $87.1 million, 4.75% convertible subordinated notes upon maturity on December 15,
2006. Investment and other income net, for 2007, decreased as compared to 2006, primarily due to reduced foreign currency gains and
reduced investment income associated with reduced investment balances. Further, realized gains on the sales of investments
and other assets were $0.9 million in 2007 as compared to $3.6 million in 2006.
Interest expense increased in 2006 as compared to 2005 due to increases in interest rates as the
Company's interest rate swap contract effectively converted $100 million of its 4.75% fixed rate convertible subordinated notes to
a variable rate. Investment and other income increased in 2006 as compared to 2005 primarily due to foreign currency transaction
gains of $4.3 million in 2006 as compared to $1.6 million in 2005; net realized gains on the sales of certain investments of $3.6
million in 2006 as compared to $0.1 million in 2005; and interest income of $6.8 million in 2006 as compared to $4.2 million in
2005. Further, investment and other income, net, for 2005 includes early extinguishment charges of $1.7 million relating to the
redemption of $64.4 million of the Company's 4.75% convertible subordinated notes.
Income Tax Benefit (Provision)
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision) |
|
$3.2 |
|
$(10.5) |
|
$(10.1) |
|
|
|
|
|
|
|
Effective income tax rate |
|
13.3% |
|
(23.1)% |
|
(18.2)% |
The Company's operations have followed the recent migration of semiconductor industry fabrication to
Asia, where the Company operates in countries where it is accorded favorable tax treatments. PKLT, the Company's FPD manufacturing
facility in Taiwan, is accorded a tax holiday which expires in December 2012. In addition, the Company has been accorded a tax
holiday in China which is expected to expire in 2011. In Korea, various investment tax credits have been utilized to reduce the
Company's effective income tax rate. The Company's tax returns are subject to periodic examination by the tax authorities in
the various jurisdictions in which it operates. The Company regularly assesses the potential outcomes of ongoing and future
examinations and has provided accruals for tax contingencies in accordance with SFAS No. 5, "Accounting for Contingencies."
The income tax benefit for the fiscal year ended October 28, 2007 was $3.2 million or 13.3% of
pretax income, which differs from the federal statutory income tax expense rate of 35%, primarily as a result of a recognized tax
benefit of $7.4 million and to a lesser extent available tax credits in Korea. During the fiscal year ended October 28, 2007,
the Company recorded a tax benefit in the amount of $7.4 million relating to the resolution and settlement of U.S. and foreign tax
matters that were associated with certain tax positions in prior years.
The provision for income taxes for the fiscal year ended October 29, 2006 was $10.5 million on a
pre-tax income of $45.4 million. The provision differs from the federal statutory rate of 35% as a result of Taiwan's tax holiday,
available tax credits in Korea, and valuation reserves on losses generated in the United States.
The Company evaluates the recoverability of deferred tax assets from future taxable income and
establishes valuation allowances if recovery is deemed not likely. The valuation allowance increased $2.4 million and $1.7 million
in fiscal 2007 and 2006, respectively.
-20-
The availability of tax holidays in some Asian jurisdictions did not have a significant impact on
the Company's decision to close some of its North American facilities nor in the Company's increased Asian presence which is in
response to fundamental changes taking place in the semiconductor industry that the Company serves. As semiconductor fabrication
has migrated to Asia, in large part from the United States, the Company has followed, in order to avoid a severe loss of
business.
Minority Interest in Consolidated Subsidiaries
Minority interest in consolidated subsidiaries, which
represents the minority interest in earnings of the Company's non-wholly owned subsidiaries in Taiwan and Korea, was $2.5 million
in fiscal year 2007 as compared to $5.6 million in fiscal year 2006. The decrease in minority interest expense is due to
decreased net income of the Company's non-wholly owned subsidiary in Taiwan. The Company's ownership in its subsidiary in
Korea was 99.7% at October 28, 2007 and October 29, 2006, and 96.5% at October 30, 2005. The Company's ownership in its subsidiary
in Taiwan was 58% at October 28, 2007, October 29, 2006 and October 30, 2005. The Company increased its ownership in its
subsidiary in Korea from 75.0% to 96.5% during fiscal 2005 for cash of approximately $58.2 million, and further increased its
ownership to 99.7% in 2006 for cash of approximately $8.5 million.
Liquidity and Capital Resources
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
(in millions) |
|
(in millions) |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$146.0 |
|
$129.4 |
|
$196.0 |
Short-term investments |
|
5.7 |
|
69.9 |
|
90.6 |
|
|
|
|
|
|
|
Total |
|
$151.7 |
|
$199.3 |
|
$286.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$134.7 |
|
$ 116.2 |
|
$ 142.6 |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$(29.7) |
|
$(201.2) |
|
$(185.5) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
$(89.8) |
|
$ 13.5 |
|
$ 98.6 |
The Company's working capital decreased $31.1 million to $96.6 million as of the end of fiscal
2007, as compared to $127.7 million at the end of fiscal 2006. The decrease was partially related to reduced short-term investments
and accounts receivables due to decreased sales in 2007. Additionally, in 2007 there was an increase in accounts payable,
primarily related to $51.6 million of increased accrued capital expenditures compared to the prior year. During fiscal 2007 the
Company paid off $87.1 million of the remaining outstanding balance of the Company's 4.75% convertible subordinated notes which
matured on December 15, 2006.
Cash provided by operating activities was $134.7 million for fiscal 2007, as compared to $116.2
million for fiscal 2006. This increase was primarily due to lower accounts receivable balances associated with decreased 2007 sales
as well as increases in accounts payable partially offset by decreased accrued liabilities.
Cash used in investing activities in fiscal 2007 decreased to $29.7 million, as compared to $201.2
million in 2006, primarily as a result of the initial payment of $120 million to Micron for the investment in MP Mask and related
technology license and supply agreements having been made in fiscal 2006 and a decrease in the purchase of short-term investments
from $82.6 million in 2006 to $4.2 million in 2007. Capital expenditures for the fiscal years ended 2007, 2006, and 2005
were $94.1 million, $94.6 million and $121.4 million, respectively. The Company expects capital expenditure payments for fiscal
2008 to be approximately $120 million to $150 million, primarily to continue the expansion of its high-end IC manufacturing
capability.
-21-
In 2007, cash used in financing activities was $89.8 million, which is primarily related to the
Company's redeeming its $87.1 million outstanding 4.75% convertible subordinated notes in December 2006. In 2006, cash provided by
financing activities was $13.5 million, which was primarily a result of net proceeds from long-term debt of $11.7 million to
support the start-up of the new facility in China.
On June 6, 2007, the Company entered into a credit agreement with a group of financial
institutions that provides for a 5-year, credit facility with an aggregate commitment of $155 million at October 28, 2007. In
connection therewith, the Company has classified its $150 million, 2.25% convertible subordinated notes due April 15, 2008 as
long-term. The credit facility allows for borrowings in various currencies. The applicable interest rate spread and facility
fee vary based upon the Company's senior leverage ratio. Under the terms of the credit facility, the Company is subject to
compliance with certain financial and other covenants, as defined, including, but not limited to: Senior Leverage Ratio, Total
Leverage Ratio and Minimum Unrestricted Cash Balances; and limits the amount of both secured and unsecured debt. The credit
facility is secured by a pledge of the Company's stock in certain of its subsidiaries. Borrowings under the credit facility
bear interest at a LIBOR rate, as defined, plus 87 basis points. As of October 28, 2007, $3.3 million of the credit facility
was utilized for a standby letter of credit, and the remaining balance of $151.7 million was available to the Company.
The Company's commitments represent investments in the tooling of the U.S. Nanofab, additional
manufacturing capacity, as well as advanced equipment for the production of high-end, more complex photomasks in Asia, principally
Korea. At October 28, 2007, the Company had capital commitments outstanding of approximately $66 million, primarily related to
equipment for its U.S. Nanofab facility and equipment in Korea, plus $61.7 million principal amount for a build-to-suit capital
lease through 2012 for its U.S. Nanofab facility. The Company will use its working capital and its credit facility to finance its
capital expenditures. Photronics believes that its currently available resources, together with its capacity for growth, and its
access to other debt and equity financing sources, will be sufficient to satisfy its currently planned capital expenditures,
as well as its anticipated working capital requirements for the 2008 fiscal year. However, the Company cannot assure that
additional sources of financing would be available to the Company on commercially favorable terms should the Company's capital
requirements exceed cash available from operations and existing cash, short-term investments and its credit facility.
Cash Requirements
The Company's cash requirements in fiscal 2008 will be primarily to fund operations, including
spending on capital expenditures, MP Mask commitments, and debt service, including its $150 million, 2.25% subordinated convertible
notes due April 15, 2008, as well as any cash acquisitions that it may undertake. The Company expects that cash, cash equivalents
and short-term investments and cash generated from operations, along with borrowings under its $155 million credit facility, along
with access to other debt and equity financing sources, if needed, will be sufficient to meet its cash requirements for the next 12
months. The Company regularly reviews the availability and terms on which it might issue additional equity or debt securities in
the public or private markets. However, the Company cannot assure that additional sources of financing would be available to the
Company on commercially favorable terms should the Company's capital requirements exceed cash available from operations, cash
available under its credit facility, existing cash and short-term investments.
-22-
Contractual Cash Obligations
The following table quantifies the Company's future contractual obligations as of October 28, 2007
(in millions):
|
|
Payments Due |
||||||||
|
|
|
||||||||
|
|
|
|
Less |
|
|
|
|
|
More |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
|
$175.8 |
|
$150.9 |
|
$24.9 |
|
$ - |
|
$ - |
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
8.2 |
|
2.5 |
|
2.9 |
|
1.8 |
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Capital leases |
|
81.6 |
|
15.0 |
|
30.9 |
|
35.7 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations |
|
78.0 |
|
71.1 |
|
6.9 |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
21.8 |
|
7.7 |
|
11.1 |
|
3.0 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$365.4 |
|
$247.2 |
|
$76.7 |
|
$40.5 |
|
$1.0 |
|
|
|
|
|
|
|
|
|
|
|
Certain Transactions
The Company has a 49.99% ownership interest in the MP Mask joint venture that was established in
2006 with Micron. Since the Company does not control this venture, the Company does not consolidate the results. As
part of the joint venture, various supply agreements exist between the Company, Micron, and MP Mask. As of October 28, 2007,
the Company owed MP Mask $6.4 million and had a receivable from Micron of $6.1 million primarily related to the supply agreements.
During 2007, the Company recognized net revenue of $2.1 million related to commissions earned under supply agreements between the
Company, Micron and MP Mask; comprised of gross commission income of $3.9 million less $1.8 million of amortization of the value of
the supply agreement intangible asset. The gross commission revenue includes $56.3 million in orders from Micron less the Company's
cost of the corresponding orders placed with MP Mask in the amount of $52.4 million. In addition, in 2007 the Company
incurred outsourcing expenses of $1.0 million from MP Mask for research and development activities purchased by the Company.
Further, the Company recorded cost of sales in the amount of $3.7 million for photomasks produced by MP Mask for sales to the
Company's customers in 2007. As of October 29, 2006, the Company owed MP Mask $8.7 million and had a receivable from Micron
of $8.3 million. During 2006, the Company recognized net revenue of $1.0 million related to commissions earned under supply
agreements between the Company, Micron and MP Mask; comprised of gross commission income of $1.7 million less $0.7 million of
amortization of the value of the supply agreement intangible asset. The gross commission income results from $23.8 million in sales
orders from Micron less the Company's cost of the corresponding orders placed with MP Mask in the amount of $22.1 million. In
addition, in 2006 the Company incurred outsourcing expenses of $0.4 million from MP Mask for research and development activities
purchased by the Company. In 2007, the Company invested an additional $3.5 million in MP Mask. Also, the Company
purchased excess equipment from MP Mask for use in its U.S. Nanofab in the amount of $4.0 million in 2007. In addition, in the first quarter of fiscal 2008, a capital lease agreement commenced with Micron
for the U.S. Nanofab for total capital lease payments by the Company of $73.9 million, of which $12.2 million represents interest
and $61.7 million represents both principal and the cost of the facility.
The Chairman of the Board of the Company is also the Chairman of the Board and majority
shareholder of a company who is a supplier of secure managed information technology services. Another director of the Company is
also a shareholder, CEO and Executive Vice Chairman of this company. Since 2002, the Company has entered into various service
contracts with this company to provide services to all of the Company's worldwide facilities. The Company incurred expenses of $3.8
million in 2007, $4.3 million in 2006, and $3.7 million in 2005 related to services provided by the company, for which the amount
owed to this company was $0.6 million at October 28, 2007 and $0.1 million at October 29, 2006. In 2006, the Company signed a new
3-year service contract with this company for $2.5 million per year.
-23-
An officer of the Company is also the CEO, president and director of one of the Company's majority
held subsidiaries. The Company purchases photomask blanks from a company of which this officer of the Company is a significant
shareholder. The Company purchased $21.6 million, $16.8 million, and $13.6 million of photomask blanks from this company in 2007,
2006, and 2005, respectively, for which the amount owed to this company was $5.0 million at October 28, 2007 and $2.2 million at
October 29, 2006.
The Company believes that the terms of the transactions described above with affiliated persons
were negotiated at arm's-length and were no less favorable to the Company than the Company could have obtained from non-affiliated
parties.
During fiscal years 2005 and 2006, the Company acquired substantially all of the remaining
outstanding shares of its non-wholly owned subsidiary in Korea, PKL. As part of the purchase of outstanding shares in 2005,
the Company acquired 1,136,036 shares or 3.4% from employees, including officers, of PKL for 8,980 won per share or $8.70 U.S.
dollars per share. Two of these employees were also officers of the Company. The total purchase price of $9.9 million from PKL
employees represents a premium of approximately 15% per share above similar purchases of stock from other stockholders during the
same time period.
Stock-based Compensation
Total stock-based compensation expense for the year ended October 28, 2007 was $2.9 million, as
compared to $2.0 million for the year ended October 29, 2006, substantially all of which is in selling, general and administrative
expenses. No compensation cost was capitalized as part of inventory, and no income tax benefit has been recorded. As of
October 28, 2007 total unrecognized compensation cost of $7.1 million is expected to be recognized over a weighted average
amortization period of 2.6 years.
Business Outlook
A majority of the Company's revenue growth has come from, and is expected to continue to come
from, the Asian region as customers increase their use of manufacturing foundries located outside of North America and
Europe. Additional revenue growth is also anticipated from North America and Europe as a result of utilizing technology
licensed under the Company's technology license with Micron. The Company's Korean and Taiwanese operations are non-wholly owned
subsidiaries; therefore a portion of earnings generated at each location is allocated to the minority shareholders.
The Company continues to assess its global manufacturing strategy as its sales volume continues to
grow in Asia. In addition to the restructuring plan implemented in the second quarter of 2006 relating to closing the Austin
facility, this ongoing assessment could result in the future, in facilities closures, asset redeployment, workforce reductions, and
the addition of increased manufacturing facilities, all of which would be based on market conditions and customer
requirements.
The Company's future results of operations and the other forward-looking statements contained in
this filing involve a number of risks and uncertainties. Various factors that have been discussed and a number of other factors
could cause actual results to differ materially from the Company's expectations.
Application of Critical Accounting Procedures
The Company's consolidated financial statements are based on the selection and application
of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes
that the following are some of the more critical judgment areas in the application of the Company's accounting policies that affect
its financial condition and results of operations.
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 estimates and assumptions that affect amounts reported in
them. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. Significant accounting estimates include management's review of long-lived assets
-24-
and goodwill for potential impairment, income tax provision, allowance for uncollectible accounts receivable, inventory
valuation allowances and restructuring reserves. The Company's estimates are based on the facts and circumstances available
at the time; different reasonable estimates could have been used in the current period, and changes in the accounting estimates
used are likely to occur from period to period, which may have a material impact on the presentation of the Company's financial
condition and results of operations. Actual results reported by the Company may differ from such estimates. The Company reviews
these estimates periodically and reflects the effect of revisions in the period that they are determined.
Derivative Instruments and Hedging Activities
The Company records derivatives in the consolidated 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 Company's
consolidated statements of income or as accumulated other comprehensive income, 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 uses judgment in assessing the fair value of derivatives and related financial instruments,
including assumptions utilized in derivative fair value models in areas such as projected interest rates and changes in the
Company's stock price during the contract term. The Company's derivatives primarily relate to cash flow hedges to manage
foreign currency fluctuation risk.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and amortization.
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 removed from the accounts, and any resulting gain or loss is reflected in operations.
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. Judgment and assumptions are used in establishing
estimated useful lives and depreciation periods. The Company also uses judgment and assumptions as it periodically reviews
property, plant and equipment for any potential impairment in carrying values whenever events such as a significant industry
downturn, plant closures, technological obsolescence or other changes in circumstances indicate that their carrying amount may not
be recoverable. Actual fair values may differ from estimated fair values.
Goodwill and Other Intangible Assets
Intangible assets consist primarily of goodwill and other acquisition-related intangibles, a
technology license agreement and a supply agreement. These assets are stated at fair value as of the date acquired less accumulated
amortization. Amortization is calculated on a straight-line basis or another method that more fairly represents the utilization of
the assets. The future economic benefit of the carrying value of intangible assets is reviewed annually and the Company uses
judgment whenever events or changes in circumstances indicate the carrying value of an intangible asset may not be recoverable
based on discounted cash flows or market factors and an impairment loss would be recorded in the period so determined.
The Company recognizes the excess of the cost of acquired businesses over the fair value of the
net assets purchased as goodwill. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least
annually. A review of goodwill completed in the second quarter and the fourth quarter found no impairment. In
accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," the Company tests goodwill and other
intangible assets with indefinite lives for impairment on an annual basis (or on an interim basis if an event occurs that indicates
an impairment might exist). The Company completed its required annual impairment tests in fiscal 2007, 2006 and 2005, and it was
determined that the carrying value of goodwill and other intangible assets with indefinite lives was not impaired.
-25-
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination
of recoverability is based on the Company's judgment and estimate of future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that
management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible
assets to be disposed of are reported at the lower of carrying amount or fair value less costs of disposition.
Investment in Joint Venture
Investments in joint ventures over which the Company has the ability to exercise significant
influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net income (loss) of
the joint venture. These investments are evaluated for impairment in accordance with the requirements of Accounting Principles
Board ("APB") Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." An impairment loss would be
recorded whenever a decline in value of an equity investment below its carrying amount is determined to be other than temporary. In
judging "other than temporary", the Company would consider the length of time and extent to which the fair value of the investment
has been less than the carrying amount of the equity company, the near-term and longer-term operating and financial prospects of
the equity company, and its longer-term intent of retaining the investment in the equity company.
Income Taxes
The income tax provision (benefit) is computed on the basis of consolidated financial statement
income or loss before income taxes. Deferred income taxes reflect the tax effects of differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company uses judgment and
assumptions to determine if valuation allowances for deferred income tax assets are required if realization is not likely by
considering future market growth, forecasted operations, future taxable income, and the mix of earnings in the tax jurisdictions in
which it operates in order to determine the need for a valuation allowance.
The Company considers income taxes in each of the tax jurisdictions in which it operates in order
to determine its effective income tax rate. Current income tax exposure is identified along with assessing temporary differences
resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax
assets and liabilities, which are included in the Company's consolidated balance sheets. Additionally, the Company evaluates the
recoverability of deferred income tax assets from future taxable income and establishes valuation allowances if recovery is deemed
not likely. Accordingly, the income tax provision in the consolidated statements of operations is impacted by changes in the
valuation allowance. Significant management estimates and judgment are required in determining any valuation allowance recorded
against net deferred tax assets.
Revenue Recognition
The Company recognizes revenue when both title and risk of loss transfer to the customer. The
Company makes estimates and assumptions and uses judgment relating to discounts and estimates for product return and warranties,
which are accrued and recognized at the time of sale.
Discounts - Sales discounts are negotiated with customers prior to billing and at the time
of billing, sales invoices are prepared net of negotiated sales discounts.
Product Returns- Customer returns have historically been insignificant. However,
the Company does record a liability for the immaterial amount of estimated sales returns based upon historical experience.
Warranties and Other Post Shipment Obligations - For a 30-day period, the Company
warrants that items sold will conform to customer specifications. However, the Company's liability is limited to repair or
replacement of the photomasks at its sole option. The Company inspects photomasks for conformity to customer specifications prior
to shipment. Accordingly, customer returns of items under warranty have historically been insignificant. However, the
-26-
Company records a liability for the insignificant amount of estimated warranty returns based on historical experience. The
Company's specific return policies include accepting returns for products with defects, or products that have not been produced to
precise customer specifications. At the time of revenue recognition, a liability is established for these items.
Stock-based Compensation
The Company adopted SFAS No. 123(R) on October 31, 2005, using the modified prospective method.
Subsequently, compensation expense is recognized in the Company's consolidated statements of income, over the service period that
the awards are expected to vest. The Company recognizes expense for all stock-based compensation with graded vesting granted on or
after October 31, 2005 on a straight-line basis over the vesting period of the entire award. For awards with graded vesting
granted prior to October 31, 2005, the Company continues to recognize compensation cost over the vesting period following
accelerated recognition as if each underlying vesting date represented a separate award. Stock-based compensation expense includes
the estimated effects of forfeitures, which will be adjusted over the requisite service period to the extent actual forfeitures
differ, or are expected to differ from such estimates. Changes in estimated forfeitures are recognized in the period of
change and will also impact the amount of expense to be recognized in future periods. The Company adopted the alternative
transition method provided in Financial Accounting Standards Board ("FASB") Staff Position No. 123(R)-3 for calculating the tax
effects of share-based compensation. Determining the appropriate fair-value model and calculating the fair value of stock-based
awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and
forfeiture rates.
The Company uses the Black-Scholes option valuation model to value employee stock awards. The
Company estimates stock price volatility based on weekly averages of its historical volatility over a term approximately equal to
the grant's estimated option life. Estimated option life and forfeiture rate assumptions are derived from historical
data.
Effect of New Accounting Standards
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements - an amendment of Accounting Research Bulletin ("ARB") No. 51." SFAS No. 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary for the deconsolidation of a subsidiary. SFAS No. 160 is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim statements within those
fiscal years. The Company is currently evaluating the impact, if any, SFAS No. 160 will have on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations." SFAS No. 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information
to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination.
SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim
statements within those fiscal years. The Company is currently evaluating the impact, if any, SFAS No. 141R will have on its
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities-Including an Amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value, and is effective as of the beginning of an entity's first fiscal
year that begins after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS No. 159 will
have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The
Company is currently evaluating the impact, if any, that SFAS No. 157 may have on its consolidated financial statements.
-27-
In September 2006, the United States Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements" ("SAB No. 108"). This SAB provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The Company early adopted SAB
No. 108 during its quarter ended January 28, 2007, and its adoption did not have a material impact on its consolidated financial
statements.
In June 2006, the FASB issued FASB Interpretation
Number 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109." The
interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with
SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of
being realized upon ultimate settlement. The provisions are effective as of the beginning of the Company's 2008 fiscal year.
The Company is analyzing the impact that the adoption of FIN 48 will have on its consolidated financial statements, but expects the
adjustment to decrease shareholders' equity as of October 29, 2007 to be approximately $0.5 million to $1.0 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company records derivatives on the balance sheet as assets or liabilities, measured at fair
value. The Company does not engage in derivative instruments for speculative purposes. 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, 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, among other criteria 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 and interest rates.
The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each
hedge.
In the fourth quarter of fiscal year 2002, the Company entered into an interest rate swap
contract, which effectively converted $100 million of its 4.75% fixed rate convertible subordinated notes to a variable rate.
Contract payments were made on a LIBOR based variable rate (6.69% at October 29, 2006) and are received at the 4.75% fixed
rate. This swap expired in December 2006 when the Company repaid the remaining outstanding balance of its 4.75% convertible
subordinated notes. At this time, the Company does not have plans to enter into additional interest rate swap contracts,
however, at a future point the Company may decide to do so.
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, operating margins and retained earnings. The principal functional currencies of the
Company's Asian subsidiaries are the Korean won, New Taiwan dollar, Chinese renminbi and Singapore dollar. The principal functional
currencies of the Company's European subsidiaries are the British pound and euro.
The Company attempts to minimize its risk to foreign currency transaction losses by producing its
products in the same country in which the products are sold and thereby generating revenues and incurring expenses in the same
currency and by managing its working capital. In some instances, the Company may sell products in a currency other than the
functional currency of the country where it was produced. To date, the Company has not experienced a significant foreign exchange
loss on these sales. However, there can be no assurance that this approach will be successful, especially in the event of a
significant adverse movement in the value of any foreign currencies against the U.S. dollar. The Company does not engage in
purchasing forward exchange contracts for speculative purposes.
The Company's primary net foreign currency exposures as of October 28, 2007 included the Korean
won, the Singapore dollar, the New Taiwan dollar, the Chinese renminbi, the British pound and the euro. As of October 28, 2007, a
10% adverse movement in the value of these currencies against the U.S. dollar would have resulted in a net unrealized pre-tax loss
of $4.7 million. The Company does not believe that a 10% change in the exchange rates of other non-U.S. dollar currencies would
have a material effect on its consolidated financial position, results of operations or cash flows.
-28-
In April, 2006, the Company's Korean subsidiary entered into a foreign currency rate swap contract
which was maintained throughout 2007. Under the terms of the contract, the Company has effectively converted a $50 million interest
bearing intercompany loan denominated in U.S. dollars to Korean won. Subsequent to fiscal year-end 2007, the intercompany loan and
the related swap were reduced to a balance of $30 million. This contract was initially scheduled to expire in December 2006,
however, it has been extended to November 2008. The Company elected not to designate the foreign currency rate swap contract as a
hedge which results in a mark-to-market adjustment in the income statement.
In September, 2006, the Company entered into forward contracts to convert the fixed yen purchase
price of certain equipment into fixed U.S. dollar amounts. In accordance with SFAS No. 133, "Accounting for Derivatives and Hedging
Activities," hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as
cash flow and are evaluated for effectiveness. The Company records these derivative instruments in either other current
assets or non current assets or accrued liabilities, depending on their net position, at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of the derivative financial instrument are recognized in earnings or
in shareholders equity as a component of accumulated other comprehensive income depending on whether the derivative financial
instrument qualifies for hedge accounting as defined by SFAS No. 133.
Interest Rate Risk
The majority of the Company's borrowings at October 28, 2007 was in the form of a convertible
subordinated note with a fixed interest rate of 2.25% and certain unsecured international notes payable which bear interest at
rates ranging from 6.57% to 6.93% at October 28, 2007, and ranging from 6.12% to 6.48% at October 29, 2006. The $86.9 million net
carrying value of its 4.75% convertible subordinated note was repaid by the Company in December 2006. In addition, the
interest rate swap contract discussed above subjects the Company to market risk as interest rates fluctuate on the $100 million
notional amount of the contract. At October 28, 2007 and October 29, 2006, the Company had approximately $97 million and $56
million, respectively, in net variable rate financial instruments which were sensitive to interest rate risk. A 10% change in
interest rates would not have a material effect on the Company's consolidated financial position, results of operations or cash
flows in either 2007 or 2006.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
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Consolidated Balance Sheets at October 28, 2007 and October 29, 2006 |
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Report of Independent Registered Public Accounting Firm |
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-29-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Photronics, Inc.
Brookfield, Connecticut
We have audited the accompanying consolidated balance sheets of Photronics, Inc. and subsidiaries
(the "Company") as of October 28, 2007 and October 29, 2006 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three fiscal years ended October 28, 2007, October 29, 2006 and October 30, 2005. We
also have audited the Company's internal control over financial reporting as of October 28, 2007, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to
express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the
supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control
over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of October 28, 2007 and October 29, 2006, and the results of their
operations and their cash flows for each of the fiscal years ended October 28, 2007, October 29, 2006 and October 30, 2005, in
conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of October 28, 2007, based on the
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
January 9, 2008
-30-
Consolidated Balance Sheets |
(in thousands, except per share amounts) |
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October 28, |
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October 29, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ 146,049 |
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$ 129,425 |
Short-term investments |
|
5,657 |
|
69,899 |
Accounts receivable, net of allowance of $3,721 in 2007 |
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|
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and $4,471 in 2006 |
|
68,248 |
|
84,299 |
Inventories |
|
17,716 |
|
19,209 |
Deferred income taxes |
|
3,071 |
|
2,623 |
Other current assets |
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6,244 |
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13,432 |
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Total current assets |
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246,985 |
|
318,887 |
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Property, plant and equipment, net |
|
531,578 |
|
443,637 |
Goodwill |
|
138,534 |
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138,534 |
Investment in joint venture |
|
67,900 |
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64,365 |
Other intangibles, net |
|
68,835 |
|
71,763 |
Other assets |
|
5,948 |
|
8,497 |
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$1,059,780 |
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$1,045,683 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Current portion of long-term borrowings |
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$ 4,482 |
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$ 86,903 |
Accounts payable |
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114,221 |
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53,907 |
Accrued liabilities |
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31,676 |
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50,386 |
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Total current liabilities |
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150,379 |
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191,196 |
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Long-term borrowings |
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191,253 |
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170,288 |
Deferred income taxes |
|
8,143 |
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9,700 |
Other liabilities |
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6,256 |
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14,220 |
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Total liabilities |
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356,031 |
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385,404 |
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Minority interest |
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49,465 |
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45,997 |
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Shareholders' equity: |
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Preferred stock, $0.01 par value, |
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Common stock, $0.01 par value, |
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415 |
Additional paid-in capital |
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381,876 |
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378,143 |
Retained earnings |
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227,175 |
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202,652 |
Accumulated other comprehensive income |
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44,817 |
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33,072 |
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Total shareholders' equity |
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654,284 |
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614,282 |
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$1,059,780 |
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$1,045,683 |
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See accompanying notes to consolidated financial statements. |
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-31-
Consolidated Statements of Income |
(in thousands, except per share amounts) |
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Year Ended |
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October 28, |
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October 29, |
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October 30, |
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Net sales |
|
$421,479 |
|
$454,875 |
|
$440,770 |
|
|
|
|
|
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
(321,958) |
|
(307,851) |
|
(295,649) |
|
|
|
|
|
|
|
Selling, general and administrative |
|
(61,507) |
|
(62,215) |
|
(54,295) |
|
|
|
|
|
|
|
Research and development |
|
(17,300) |
|
(27,337) |
|
(32,152) |
|
|
|
|
|
|
|
Consolidation, restructuring and related charges |
|
- |
|
(15,639) |
|
- |
|
|
|
|
|
|
|
Gain on sale of facility |
|
2,254 |
|
- |
|
- |
|
|
|
|
|
|
|
Operating income |
|
22,968 |
|
41,833 |
|
58,674 |
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(5,928) |
|
(11,916) |
|
(10,885) |
|
|
|
|
|
|
|
Investment and other income, net |
|
6,844 |
|
15,469 |
|
7,556 |
|
|
|
|
|
|
|
Income before income tax benefit (provision) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision) |
|
3,178 |
|
(10,462) |
|
(10,058) |
|
|
|
|
|
|
|
Income before minority interest |
|
27,062 |
|
34,924 |
|
45,287 |
|
|
|
|
|
|
|
Minority interest in income of consolidated subsidiaries |
|
(2,539) |
|
(5,592) |
|
(6,634) |
|
|
|
|
|
|
|
Net income |
|
$ 24,523 |
|
$ 29,332 |
|
$ 38,653 |
|
|
|
|
|
|
|
Income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$0.59 |
|
$0.71 |
|
$1.09 |
|
|
|
|
|
|
|
Diluted |
|
$0.56 |
|
$0.66 |
|
$0.95 |
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
41,539 |
|
41,369 |
|
35,519 |
|
|
|
|
|
|
|
Diluted |
|
51,282 |
|
51,072 |
|
45,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
- -32-
|
Consolidated Statements of Shareholders' Equity |
Years Ended October 28, 2007, October 29, 2006 and October 30, 2005 |
(in thousands) |
|
|
|
|
|
|
|
|
Accumu- |
|
Deferred |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 1, 2004 |
|
32,690 |
|
$327 |
|
$202,313 |
|
$134,667 |
|
$12,166 |
|
$ - |
|
$349,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
- |
|
- |
|
- |
|
38,653 |
|
- |
|
- |
|
38,653 |
Change in unrealized gains on investments |
|
- |
|
- |
|
- |
|
- |
|
(16) |
|
- |
|
(16) |
Change in fair value of cash flow hedge |
|
- |
|
- |
|
- |
|
- |
|
112 |
|
- |
|
112 |
Foreign currency translation adjustment |
|
- |
|
- |
|
- |
|
- |
|
1,588 |
|
- |
|
1,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
40,337 |
Sale of common stock through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee stock option and purchase plans |
|
546 |
|
5 |
|
8,942 |
|
- |
|
- |
|
- |
|
8,947 |
Restricted stock awards, net of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to compensation expense |
|
18 |
|
- |
|
300 |
|
- |
|
- |
|
(34) |
|
266 |
Common stock issued in public offering |
|
8,050 |
|
81 |
|
162,771 |
|
- |
|
- |
|
- |
|
162,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2005 |
|
41,304 |
|
413 |
|
374,326 |
|
173,320 |
|
13,850 |
|
(34) |
|
561,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
- |
|
- |
|
- |
|
29,332 |
|
- |
|
- |
|
29,332 |
Change in unrealized gains on investments |
|
- |
|
- |
|
- |
|
- |
|
(1,109) |
|
- |
|
(1,109) |
Change in fair values of cash flow hedges |
|
- |
|
- |
|
- |
|
- |
|
(35) |
|
- |
|
(35) |
Foreign currency translation adjustment |
|
- |
|
- |
|
- |
|
- |
|
20,366 |
|
- |
|
20,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
48,554 |
Sale of common stock through employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock option and purchase plan |
|
151 |
|
2 |
|
2,078 |
|
- |
|
- |
|
- |
|
2,080 |
Restricted stock awards, net of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to compensation expense |
|
30 |
|
- |
|
399 |
|
- |
|
- |
|
34 |
|
433 |
Stock-based compensation expense |
|
- |
|
- |
|
1,340 |
|
- |
|
- |
|
- |
|
1,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 29, 2006 |
|
41,485 |
|
415 |
|
378,143 |
|
202,652 |
|
33,072 |
|
- |
|
614,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
- |
|
- |
|
- |
|
24,523 |
|
- |
|
- |
|
24,523 |
Change in unrealized gains on investments |
|
- |
|
- |
|
- |
|
- |
|
(458) |
|
- |
|
(458) |
Change in fair values of cash flow hedges |
|
- |
|
- |
|
- |
|
- |
|
(1,024) |
|
- |
|
(1,024) |
Foreign currency translation adjustment |
|
- |
|
- |
|
- |
|
- |
|
13,496 |
|
- |
|
13,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
36,537 |
Sale of common stock through employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock option and purchase plan |
|
80 |
|
1 |
|
972 |
|
- |
|
- |
|
- |
|
973 |
Restricted stock awards, net of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to compensation expense |
|
70 |
|
- |
|
730 |
|
- |
|
- |
|
- |
|
730 |
Stock-based compensation expense |
|
- |
|
- |
|
2,031 |
|
- |
|
- |
|
- |
|
2,031 |
Other |
|
- |
|
- |
|
- |
|
- |
|
(269) |
|
- |
|
(269) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 28, 2007 |
|
41,635 |
|
$416 |
|
$381,876 |
|
$227,175 |
|
$44,817 |
|
$ - |
|
$654,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
- -33-
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$ 24,523 |
|
$ 29,332 |
|
$ 38,653 |
Adjustments to reconcile net income |
|
|
|
|
|
|
to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization of property, |
|
|
|
|
|
|
plant and equipment |
|
89,752 |
|
85,409 |
|
85,303 |
Amortization of deferred financing fees and intangible assets |
|
8,266 |
|
5,269 |
|
2,545 |
Stock-based compensation |
|
2,890 |
|
1,970 |
|
266 |
Minority interest in income of consolidated subsidiaries |
|
2,539 |
|
5,592 |
|
6,634 |
Gain on sale of facility |
|
(2,254) |
|
- |
|
- |
Loss on repurchase of note |
|
- |
|
- |
|
1,677 |
Deferred income taxes |
|
(961) |
|
965 |
|
4,636 |
Restructuring and related charges |
|
- |
|
15,639 |
|
- |
Changes in assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
18,370 |
|
(9,161) |
|
3,553 |
Inventories |
|
2,008 |
|
3,302 |
|
(1,672) |
Other current assets |
|
7,528 |
|
(7,272) |
|
768 |
Accounts payable, accrued liabilities and other |
|
(17,968) |
|
(14,846) |
|
204 |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
134,693 |
|
116,199 |
|
142,567 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
(94,132) |
|
(94,646) |
|
(121,354) |
Purchases of short-term investments and other |
|
(4,151) |
|
(82,582) |
|
(94,550) |
Proceeds from sales of short-term investments and other |
|
66,304 |
|
104,962 |
|
88,629 |
Investment in joint venture, technology and supply agreements |
|
(3,499) |
|
(120,505) |
|
- |
Proceeds from sale of facility and other |
|
5,784 |
|
- |
|
- |
Acquisition of additional interest in PK, Ltd. |
|
- |
|
(8,432) |
|
(58,248) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
(29,694) |
|
(201,203) |
|
(185,523) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from long-term borrowings |
|
4,303 |
|
20,303 |
|
4,511 |
Repayments of long-term borrowings |
|
(87,084) |
|
(8,566) |
|
(76,628) |
Payment to Micron Technology, Inc. |
|
(7,500) |
|
- |
|
- |
Proceeds from exercised stock options and other |
|
988 |
|
1,809 |
|
7,815 |
Net proceeds from issuance of common stock |
|
- |
|
- |
|
162,852 |
Other |
|
(527) |
|
- |
|
- |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
(89,820) |
|
13,546 |
|
98,550 |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
1,445 |
|
4,834 |
|
(1,845) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
16,624 |
|
(66,624) |
|
53,749 |
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
129,425 |
|
196,049 |
|
142,300 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$146,049 |
|
$129,425 |
|
$196,049 |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
Change in accrual for purchases of property, |
|
|
|
|
|
|
plant and equipment |
|
$51,582 |
|
$ 18,692 |
|
$(19,834) |
Capital lease obligation for purchases of property, |
|
|
|
|
|
|
plant and equipment |
|
$19,912 |
|
$ - |
|
$ - |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
-34-
Notes to Consolidated Financial Statements |
Years Ended October 28, 2007, October 29, 2006 and October 30, 2005 |
(in thousands, except share amounts) |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Photronics, Inc. and its subsidiaries ("Photronics" or the "Company") is one of the world's
leading manufacturers 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 flat panel displays ("FPD"), and are
used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of
integrated circuits ("IC") and a variety of FPD and, to a lesser extent, other types of electrical and optical components. The
Company currently operates principally from ten manufacturing facilities, two of which are located in the United States, three in
Europe, two in Taiwan, and one each in Korea, Singapore and China, which began production in the second quarter of the Company's
fiscal 2007 year. Also, under a build-to-suit lease, in the first quarter of fiscal 2008, a capital lease agreement
commenced with Micron Technology, Inc. ("Micron") for a state-of-the-art nanofab facility ("U.S. Nanofab") in Boise, Idaho.
Consolidation
The accompanying consolidated financial statements include the accounts of Photronics and its
majority-owned subsidiaries, in which the Company exercises control. All significant intercompany balances and transactions have
been eliminated in consolidation.
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 estimates and assumptions that affect amounts reported in
them. Actual results may differ from such estimates.
Derivative Instruments and Hedging Activities
The Company records derivatives in the consolidated balance sheets at fair value. The Company does
not engage in derivative instruments for speculative purposes. Gains or losses resulting from changes in the values of those
derivatives are reported in the consolidated statements of operations or as accumulated other comprehensive income ("OCI"),
depending on whether they meet certain criteria and qualify for hedge accounting. Among other criteria, 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 uses judgment in assessing the fair value of derivatives and related
financial instruments including assumptions utilized in derivative fair value models in such areas as projected interest rates and
bond prices which are affected by changes in the Company's stock price during the contract term.
Fiscal Year
The Company's fiscal year ends on the Sunday closest to October thirty-first, and, as a result, a
53-week year occurs every 5 to 6 years. Fiscal years 2005, 2006 and 2007 included 52 weeks; fiscal year 2008 will include 53
weeks.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments purchased with an original
maturity of 3 months or less. The carrying values approximate fair values based on the short maturity of these instruments.
-35-
Investments
The Company's investments, comprised of marketable equity securities, fixed income bonds, and
auction rate securities, are classified as available-for-sale, and are carried at fair value. Investments available for current
operations are classified in the consolidated balance sheets as current assets; investments held for long-term purposes are
classified as non-current assets. Unrealized gains and losses, net of tax, are reported in OCI as a separate component of
shareholders' equity. Gains and losses are reported in the consolidated statements of operations when realized, determined based on
the disposition of specifically identified investments.
Investments identified by the Company as having potential impairment are subject to further
analysis to determine if the impairment is other than temporary. Other than temporary declines in market value from original costs
are charged to investment and other income, net, in the period in which the loss occurs. In determining whether investment holdings
are other than temporarily impaired, the Company considers the nature, cause, severity and duration of the impairment. The Company
and its investment advisors used analyst reports, credit ratings or other items as part of its review. None of the Company's
investments were impaired as of October 28, 2007.
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 is stated at cost less accumulated depreciation and amortization.
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 operations.
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. The Company periodically reviews property, plant, and
equipment for any potential impairment in carrying values. Judgment and assumptions are used in establishing estimated useful lives
and depreciation periods.
Goodwill and Other Intangible Assets
Intangible assets consist primarily of goodwill and other acquisition-related intangibles, a
technology license agreement and a supply agreement. These assets are stated at fair value as of the date acquired less accumulated
amortization. Amortization is calculated on a straight-line basis or another method that more fairly represents the utilization of
the assets. The future economic benefit of the carrying value of all intangible assets is reviewed annually and the Company uses
judgment whenever events or changes in circumstances indicate the carrying value of an intangible asset may not be recoverable
based on discounted cash flows or market factors and an impairment loss would be recorded in the period so determined (see Note
6).
The Company recognizes the excess cost of acquired businesses over the fair value of the net
assets purchased as goodwill. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least
annually. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," the Company tests goodwill and other intangible assets with indefinite lives for impairment on an annual
basis (or on an interim basis if an event occurs that indicates an impairment might exist). The Company completed its required
annual impairment tests in fiscal 2007, 2006 and 2005, and it was determined that the carrying value of goodwill and other
intangible assets with indefinite lives was not impaired.
-36-
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination
of recoverability is based on the Company's judgment and estimate of future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that
management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible
assets to be disposed of are reported at the lower of carrying amount or fair value less costs of disposition.
Investment in Joint Venture
Investments in joint ventures over which the Company has the ability to exercise significant
influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net income (loss) of
the joint venture. These investments are evaluated for impairment in accordance with the requirements of Accounting Principles
Board ("APB") Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." An impairment loss would be
recorded whenever a decline in value of an equity investment below its carrying amount is determined to be other than temporary. In
judging "other than temporary," the Company would consider the length of time and extent to which the fair value of the investment
has been less than the carrying amount of the equity company, the near-term and longer-term operating and financial prospects of
the equity company, and its longer-term intent of retaining the investment in the equity company.
Income Taxes
The income tax provision (benefit) is computed on the basis of consolidated financial statement
income or loss before income taxes. 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. The Company uses judgment and
assumptions to determine if a valuation allowance for deferred income tax assets is required if realization is not likely.
The Company considers income taxes in each of the tax jurisdictions in which it operates in order
to determine its effective income tax rate. Current tax exposure is identified along with assessing temporary differences resulting
from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Company's consolidated balance sheets. Additionally, the Company evaluates the
recoverability of deferred tax assets from future taxable income and establishes valuation allowances if recovery is deemed not
likely. Accordingly, the income tax provision in the consolidated statements of operations is impacted by changes in the valuation
allowance. Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against net deferred tax assets.
Earnings Per Share
Basic earnings per share ("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 certain securities or other contracts to issue common stock were exercised or converted.
Stock-Based Compensation
The Company adopted SFAS No. 123(R), "Share-Based Payments" on October 31, 2005, using the
modified prospective method. Subsequently compensation expense is recognized in its consolidated statements of operations over the
service period that the awards are expected to vest. The Company recognizes expense for all stock-based compensation with graded
vesting granted on or after October 31, 2005 on a straight-line basis over the vesting period of the entire award. For awards
with graded vesting granted prior to October 31, 2005, the Company continues to recognize compensation cost over the vesting period
following accelerated recognition as if each underlying vesting date represented a separate award. Stock-based compensation expense
includes the estimated effects of forfeitures, which will be adjusted over the requisite service period to the extent actual
forfeitures differ, or are expected to differ from such estimates. Changes in estimated forfeitures will be recognized in the
period of change and will also impact the amount of expense to be recognized in future periods.
-37-
Prior to October 31, 2005, the Company recorded stock-based compensation in accordance with the
provisions of APB Opinion No. 25. The Company estimated the fair value of stock option awards in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," and disclosed the resulting estimated effect on net income on a pro forma basis.
Forfeitures of employee awards were provided in the pro forma effects as they occurred.
As a result of adopting SFAS No. 123(R) on October 31, 2005, the Company's income before income
taxes and net income for the year ended October 29, 2006 was $1.3 million, or $0.03 per basic and diluted share less than if it had
continued to account for share-based compensation under APB Opinion No. 25. There was no change in the statement of cash flows as a
result of adoption of SFAS No. 123(R).
The following table illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123(R), "Accounting for Stock-Based Compensation," to stock-based
employee compensation for the year ended October 30, 2005:
Year Ended October 30, 2005: |
|
|
|
|
|
Net income |
|
$38,653 |
|
|
|
Add: Stock-based employee compensation |
|
|
|
|
|
Deduct: Total stock-based compensation |
|
|
|
|
|
Pro forma net income |
|
$31,060 |
|
|
|
|
|
|
Basic earnings per share: |
|
|
As reported |
|
$1.09 |
Pro forma |
|
$0.87 |
|
|
|
Diluted earnings per share: |
|
|
As reported |
|
$0.95 |
Pro forma |
|
$0.78 |
Research and Development
Research and development costs are expensed as incurred, and consist primarily of global
development efforts of high-end process technologies for advanced sub wavelength reticle solutions for IC and FPD photomask
technologies.
Research and development expenses also include the amortization of the carrying value of a
technology license agreement with Micron (see Note 2 and Note 6). Under this technology license agreement, the Company has access
to certain photomask technology developed by Micron.
Foreign Currency Translation
The Company's international subsidiaries 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 and reported as OCI as a separate component of shareholders' equity. The effects of changes in exchange rates on
foreign currency transactions, which are included in investment and other income, net, were $1.0 million, $4.3 million and $1.6
million in fiscal 2007, 2006 and 2005, respectively.
-38-
Minority Interest
Minority interest represents the minority shareholders' proportionate share in the equity of the
Company's two majority-owned subsidiaries, PK, Ltd. ("PKL") in Korea, and Photronics Semiconductor Mask Corporation ("PSMC") in
Taiwan, of which minority shareholders owned approximately 0.3% and 42%, respectively, as of October 28, 2007.
Revenue Recognition
The Company recognizes revenue when both title and risk of loss transfer to the customer. The
Company makes estimates and assumptions and uses judgment relating to discounts and estimates for product return and warranties,
which are accrued and recognized at the time of sale.
Discounts - Sales discounts are negotiated with customers prior to billing and at the time
of billing, sales invoices are prepared net of negotiated sales discounts.
Product Returns - Customer returns have historically been insignificant. However,
the Company does record a liability for the insignificant amount of estimated sales returns based upon historical experience.
Warranties and Other Post Shipment Obligations - For a 30-day period, the Company
warrants that items sold will conform to customer specifications. However, the Company's liability is limited to repair or
replacement of the photomasks at its sole option. The Company inspects photomasks for conformity to customer specifications prior
to shipment. Accordingly, customer returns of items under warranty have historically been insignificant. However, the Company
records a liability for the insignificant amount of estimated warranty returns based on historical experience. The Company's
specific return policies include accepting returns for products with defects, or products that have not been produced to precise
customer specifications. At the time of revenue recognition, a liability is established for these items.
Sales Taxes - The Company presents it revenues in the consolidated statements of income,
net of sales taxes, if any (excluded from revenues).
NOTE 2 - JOINT VENTURE, TECHNOLOGY LICENSE AND OTHER
AGREEMENTS WITH MICRON
TECHNOLOGY, INC.
On May 5, 2006, Photronics and Micron entered into the MP Mask joint venture, which develops and
produces photomasks for leading-edge and advanced next generation semiconductors. As part of the formation of the joint venture,
Micron contributed its existing photomask technology center located at its Boise, Idaho, headquarters to MP Mask and Photronics
has, as of October 28, 2007, paid Micron $127.5 million to date, and will pay Micron an additional $7.5 million (included in
accrued liabilities at October 28, 2007) on May 5, 2008 in exchange for a 49.99% interest in MP Mask and a license for photomask
technology of Micron and certain supply agreements. In 2007, the Company invested an additional $3.5 million in MP Mask for
capital expenditure and working capital purposes.
In the first quarter of fiscal 2008, a capital lease agreement commenced with Micron for the U.S.
Nanofab for a total of $61.7 million principal amount, payable by the Company to Micron over a 5-year period (see Note 8).
Photronics' total investment in the purchase and equipping of its U.S. Nanofab is expected to fall within a range of $190 million
to $200 million and may include redeployment of some existing Photronics assets. This U.S. Nanofab is expected to begin production
in the first quarter of calendar 2008.
The Company has completed its analysis of fair value attributes of its total $135,505 investment
through the use of independent appraisals and management estimates, and has reallocated values that were preliminarily allocated to
the investment in MP Mask joint venture and related intangible assets. The Company has allocated $64,209 to the net fair value of
tangible assets acquired, $59,616 to the technology agreement, which will be amortized over 15 years, $6,959 to the supply
agreement which will be amortized over 10 years, and $4,721 to goodwill. The Company accounts for its interest in the joint venture
using the equity method of accounting. The Company's proportionate share of income or losses from its investment in the joint
venture is recorded in other income and expense. In fiscal 2007, the Company invested an additional $3.5 million in the MP
Mask joint venture.
-39-
NOTE 3 - ACQUISITION OF ADDITIONAL SHARES OF PK, LTD. ("PKL")
During the first quarter of fiscal 2006, Photronics invested $8.5 million to purchase additional
shares of PKL, its non-wholly owned subsidiary in Korea. This transaction increased the Company's ownership in PKL from 96.5% as of
October 30, 2005 to 99.7% as of October 29, 2006. During 2005, the Company invested $58.3 million to purchase additional shares of
PKL which increased the Company's ownership in PKL from 75% at October 31, 2004 to 96.5% at October 30, 2005. The Company has
completed its analysis of fair value attributes of the additional ownership through the use of independent appraisals and
management estimates, and has reallocated values that were preliminarily allocated to goodwill to PKL's customer relationships and
patents which are included in "Other Intangibles, net" in the consolidated balance sheets (see Note 6).
NOTE 4 - INVESTMENTS
Short-term investments at October 28, 2007 and October 29, 2006 consist of available-for-sale
fixed income and marketable equity securities. Long-term investments of $0.1 million at October 28, 2007 and $0.7 million at October 29, 2006
included in "Other Assets" consist primarily of available-for-sale equity securities, where fair values were determined based upon
quoted market prices.
Available-for-sale investments at October 28, 2007 were as follows:
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term deposit |
|
$3,260 |
|
$ - |
|
$ - |
|
$3,260 |
|
|
|
|
|
|
|
|
|
Foreign bond funds and other |
|
2,289 |
|
108 |
|
- |
|
2,397 |
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
5,549 |
|
108 |
|
- |
|
5,657 |
|
|
|
|
|
|
|
|
|
Long-term equity investments |
|
29 |
|
109 |
|
- |
|
138 |
|
|
|
|
|
|
|
|
|
|
|
$5,578 |
|
$217 |
|
$ - |
|
$5,795 |
|
|
|
|
|
|
|
|
|
Available-for-sale investments at October 29, 2006 were as follows:
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
$50,400 |
|
$ - |
|
$ - |
|
$50,400 |
|
|
|
|
|
|
|
|
|
Foreign bond funds and other |
|
19,479 |
|
125 |
|
(105) |
|
19,499 |
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
69,879 |
|
125 |
|
(105) |
|
69,899 |
|
|
|
|
|
|
|
|
|
Long-term equity investments |
|
51 |
|
655 |
|
- |
|
706 |
|
|
|
|
|
|
|
|
|
|
|
$69,930 |
|
$780 |
|
$(105) |
|
$70,605 |
|
|
|
|
|
|
|
|
|
In determining whether investment holdings are other than temporarily impaired, the Company considers
the nature, cause, severity and duration of the impairment. The Company and its investment advisors used analyst reports, credit
ratings or other items as part of its review. No investments were impaired as of October 28, 2007.
-40-
The maturities of available-for-sale short-term investments as of October 28, 2007 were as
follows:
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$5,549 |
|
$5,657 |
|
|
|
|
|
Gross realized gains and losses related to the Company's investments are as follows:
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$851 |
|
$4,037 |
|
$353 |
Gross realized losses |
|
(87) |
|
(410) |
|
(271) |
|
|
|
|
|
|
|
Net realized gains |
|
$764 |
|
$3,627 |
|
$ 82 |
|
|
|
|
|
|
|
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
October 28, |
|
October 29, |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ 8,429 |
|
$ 9,221 |
Buildings and improvements |
|
103,010 |
|
111,818 |
Machinery and equipment |
|
1,076,938 |
|
914,756 |
Leasehold improvements |
|
6,085 |
|
5,535 |
Furniture, fixtures and office equipment |
|
20,700 |
|
18,578 |
Construction in progress |
|
119,277 |
|
95,011 |
|
|
|
|
|
|
|
1,334,439 |
|
1,154,919 |
Less accumulated depreciation and amortization |
|
802,861 |
|
711,282 |
|
|
|
|
|
|
|
$ 531,578 |
|
$ 443,637 |
|
|
|
|
|
At October 28, 2007, machinery and equipment with a cost of $19.9 million was recorded under a capital
lease with no accumulated amortization. There were no capital leases at October 29, 2006. The Company capitalized
interest expense of $0.2 million during the fiscal year ended October 28, 2007.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying value of goodwill was $138.5 million at October 28, 2007 and October 29, 2006.
Intangible assets that do not have indefinite lives are amortized based on average lives, which range from 3 to 15 years.
Intangible asset amortization is forecasted to range from $5.1 million to $7.4 million per year for the next 5 years.
Other intangible assets include assets related to the purchase of additional shares of PKL and the
investment to form the MP Mask joint venture. The following table summarizes the type, value and amortization periods of other
intangible assets as of October 28, 2007:
-41-
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology license agreement |
|
$59,616 |
|
$ 5,630 |
|
$53,986 |
|
15 years |
Customer lists |
|
7,210 |
|
1,321 |
|
5,889 |
|
10 years |
Supply agreement |
|
6,959 |
|
2,461 |
|
4,498 |
|
10 years |
Patents |
|
156 |
|
28 |
|
128 |
|
10 years |
Software and other |
|
5,969 |
|
1,635 |
|
4,334 |
|
3 years |
|
|
|
|
|
|
|
|
|
|
|
$79,910 |
|
$11,075 |
|
$68,835 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
October 28, |
|
October 29, |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ 4,977 |
|
$18,789 |
Salaries, wages and related benefits |
|
7,466 |
|
9,997 |
Restructuring |
|
1,687 |
|
2,654 |
Interest |
|
309 |
|
818 |
Property taxes |
|
919 |
|
1,609 |
Payable to Micron Technology, Inc. |
|
7,500 |
|
7,500 |
Other |
|
8,818 |
|
9,019 |
|
|
|
|
|
|
|
$31,676 |
|
$50,386 |
|
|
|
|
|
NOTE 8 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
|
|
October 28, |
|
October 29, |
|
|
|
|
|
|
|
|
|
|
2.25% convertible subordinated |
|
|
|
|
|
|
|
|
|
4.75% convertible subordinated notes |
|
|
|
|
|
|
|
|
|
Unsecured foreign notes payable |
|
25,823 |
|
20,288 |
|
|
|
|
|
5.6% capital lease obligation due |
|
|
|
|
|
|
|
|
|
|
|
195,735 |
|
257,191 |
Less current portion |
|
4,482 |
|
86,903 |
|
|
|
|
|
|
|
$191,253 |
|
$170,288 |
|
|
|
|
|
-42-
As of October 28, 2007, long-term borrowings, excluding capital lease obligations, mature as
follows:
Fiscal Year: |
|
|
|
|
|
2008 |
|
$150,936 |
2009 |
|
- |
2010 |
|
24,887 |
|
|
|
|
|
175,823 |
Less current portion |
|
936 |
|
|
|
Long-term portion |
|
$174,887 |
|
|
|
As of October 28, 2007, minimum lease payments under the Company's capital lease obligations are
as follows:
Fiscal Year: |
|
|
|
|
|
2008 |
|
$ 4,582 |
2009 |
|
4,582 |
2010 |
|
4,582 |
2011 |
|
4,582 |
2012 |
|
4,582 |
|
|
|
|
|
22,910 |
Less interest |
|
2,998 |
|
|
|
Net minimum lease payments |
|
|
Less current portion of net |
|
|
|
|
|
Long-term portion of |
|
|
|
|
|
In the first quarter of fiscal 2008, a capital lease agreement which bears interest at 8%
commenced for the U.S. Nanofab. Quarterly lease payments are $3.7 million for the period January 2008 through December
2012. Total lease amounts payable are $73.9 million of which $61.7 million represents principal and $12.2 million represents
interest. At the end of the 5-year lease term, ownership of the property transfers to the Company.
On June 6, 2007, the Company entered into a credit agreement with a group of financial
institutions that provides for a 5-year, revolving credit facility ("credit facility") with an aggregate commitment of $155 million
at October 28, 2007. In connection therewith, the Company has classified its $150 million, 2.25% convertible subordinated
notes due April 15, 2008 as long-term. The credit facility allows for borrowings in various currencies. The applicable
interest rate spread and facility fee vary based upon the Company's senior leverage ratio. Under the terms of the credit facility,
the Company is subject to compliance with certain financial and other covenants, as defined, including, but not limited to: Senior
Leverage Ratio, Total Leverage Ratio, Minimum Unrestricted Cash Balances; and limits the amounts of both secured and unsecured
debt. The credit facility is secured by a pledge of the Company's stock in certain of its subsidiaries. Borrowings under the
credit facility bear interest at a LIBOR rate, as defined, plus 87 basis points. As of October 28, 2007, $3.3 million of the
credit facility was utilized for a standby letter of credit, and the remaining balance of $151.7 million was available to the
Company.
In October 2007, the Company entered into a capital lease agreement in the amount of $19.9 million
associated with certain equipment (see Note 5). Under the capital lease agreement, the Company is required to maintain the
equipment in good working condition, and is required to comply with certain non-financial covenants. Payments under the lease
are $0.4 million per month over a 5-year term at a 5.6% interest rate.
-43-
Unsecured foreign notes payable at October 28, 2007 consist of term and revolving debt under a
credit facility in China. As of October 28, 2007, the credit facility interest rate was 6.7% and the term loan facility
interest rate was 6.93%. Rates are subject to change based on the People's Bank of China base rate, as defined. As of October 28,
2007, this total facility of RMB $186 million ($24.9 million) was fully outstanding and is due in October 2010. Under the
terms of the unsecured foreign note payable agreements, the Company is subject to certain financial and other covenants similar to
those of its credit facility described above.
The $87.1 million notional amount of the 4.75% convertible notes outstanding at October 29, 2006
were effectively converted to a variable rate under an interest rate swap contract and are stated at an amount equal to the sum of
their principal amount less $0.2 million. The difference between the notional amount and the carrying value of the debt represents
the change in the fair value of the debt obligation attributable to the interest rate risk being hedged. This interest rate swap
was settled on December 15, 2006 concurrent with the repayment of the related debt. This fair value adjustment was calculated using
a discounted cash flow methodology. The 4.75% convertible subordinated notes were repaid at maturity on December 15, 2006
(see Note 15).
On April 15, 2003, the Company sold $150 million of 2.25% convertible subordinated notes due April
15, 2008 in a private offering pursuant to the United States Securities and Exchange Commission ("SEC") Rule 144A. These notes are
convertible into the Company's common stock at a conversion price of $15.89 per share. Based upon quoted market prices the
fair value of the 2.25% convertible subordinated notes was approximately $147.1 million as of October 28, 2007 and $162.2 million
as of October 29, 2006.
Cash paid for interest was $7.6 million, $9.9 million and $10.1 million in fiscal 2007, 2006 and
2005, respectively.
NOTE 9 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented as follows:
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$24,523 |
|
$29,332 |
|
$38,653 |
Effect of dilutive securities: |
|
|
|
|
|
|
Interest expense on convertible notes, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for diluted earnings per share |
|
$28,924 |
|
$33,675 |
|
$42,996 |
|
|
|
|
|
|
|
Weighted average common shares computations: |
|
|
|
|
|
|
Weighted average common shares used for |
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
Convertible notes |
|
9,441 |
|
9,441 |
|
9,441 |
Employee stock options |
|
302 |
|
262 |
|
296 |
|
|
|
|
|
|
|
Dilutive potential common shares |
|
9,743 |
|
9,703 |
|
9,737 |
|
|
|
|
|
|
|
Weighted average common shares used for |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$0.59 |
|
$0.71 |
|
$1.09 |
Diluted earnings per share |
|
$0.56 |
|
$0.66 |
|
$0.95 |
- -44-
The effect of the potential conversion of some of the Company's convertible subordinated notes,
stock options, and restricted stock awards and the exercise of certain stock options has been antidilutive. The following table
shows the amount of incremental shares outstanding that would have been added if the assumed conversion of convertible subordinated
notes and stock options and restricted stock awards had been dilutive:
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes |
|
304 |
|
2,354 |
|
2,788 |
Employee stock options |
|
2,040 |
|
1,412 |
|
876 |
|
|
|
|
|
|
|
Total potentially dilutive shares excluded |
|
2,344 |
|
3,766 |
|
3,664 |
|
|
|
|
|
|
|
NOTE 10 - INCOME TAXES
The income tax (benefit) provision consists of the following:
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
Federal |
|
$(8,430) |
|
$ - |
|
$ - |
State |
|
- |
|
- |
|
- |
Foreign |
|
6,213 |
|
9,497 |
|
5,422 |
|
|
|
|
|
|
|
|
|
(2,217) |
|
9,497 |
|
5,422 |
Deferred: |
|
|
|
|
|
|
Federal |
|
- |
|
- |
|
- |
State |
|
- |
|
- |
|
- |
Foreign |
|
(961) |
|
965 |
|
4,636 |
|
|
|
|
|
|
|
|
|
(961) |
|
965 |
|
4,636 |
|
|
|
|
|
|
|
Total |
|
$(3,178) |
|
$10,462 |
|
$10,058 |
|
|
|
|
|
|
|
The income tax (benefit) provision differs from the amount computed by applying the statutory U.S.
federal income tax rate to the income before taxes as a result of the following:
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal income tax at statutory rate |
|
$ 8,359 |
|
$15,885 |
|
$19,371 |
Change in tax basis of acquired assets |
|
- |
|
- |
|
(5,137) |
State income taxes, net of federal benefit |
|
108 |
|
(255) |
|
2,991 |
Change in valuation allowance |
|
2,399 |
|
4,054 |
|
3,704 |
Foreign tax rate differential |
|
(6,973) |
|
(9,272) |
|
(10,638) |
Resolution and settlement of tax matters |
|
(7,394) |
|
- |
|
- |
Other, net |
|
323 |
|
50 |
|
(233) |
|
|
|
|
|
|
|
|
|
$(3,178) |
|
$10,462 |
|
$10,058 |
|
|
|
|
|
|
|
-45-
During the fiscal year ended October 28, 2007, the Company recorded a tax benefit in the amount of
$7.4 million relating to the resolution and settlement of U.S. and foreign tax matters that were associated with certain tax
positions in prior years.
The net deferred income tax liability consists of the following:
|
|
October 28, |
|
October 29, |
|
|
|
|
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Reserves not currently deductible |
|
$ 3,873 |
|
$ 5,848 |
Intangibles amortization |
|
- |
|
- |
Net operating losses |
|
47,557 |
|
42,803 |
Alternative minimum tax credits |
|
2,926 |
|
2,926 |
Tax credit carryforwards |
|
9,097 |
|
3,621 |
Other |
|
1,195 |
|
85 |
|
|
|
|
|
|
|
64,648 |
|
55,283 |
Valuation allowance |
|
(39,392) |
|
(36,993) |
|
|
|
|
|
|
|
25,256 |
|
18,290 |
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
(25,093) |
|
(21,931) |
Investments and other |
|
(1,139) |
|
(1,139) |
Other |
|
(2,094) |
|
(1,307) |
|
|
|
|
|
|
|
(28,326) |
|
(24,377) |
|
|
|
|
|
Net deferred income tax liability |
|
$(3,070) |
|
$(6,087) |
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
Current deferred tax assets |
|
$ 3,071 |
|
$ 2,623 |
Long-term deferred tax assets |
|
2,002 |
|
990 |
Current deferred tax liabilities |
|
- |
|
- |
Long-term deferred tax liabilities |
|
(8,143) |
|
(9,700) |
|
|
|
|
|
|
|
$(3,070) |
|
$(6,087) |
|
|
|
|
|
|
|
|
|
|
The Company's operations have followed the recent migration of semiconductor industry fabrication to
Asia, where the Company operates in countries where it is accorded favorable tax treatment. PKLT, the Company's FPD manufacturing
facility in Taiwan, is accorded a tax holiday, which expires in December 2012. In addition, the Company has been accorded a
tax holiday in China which is expected to expire in 2011. In Korea, various investment tax credits have been utilized to
reduce the Company's effective income tax rate.
Income tax payments were $12.8 million, $9.8 million and $8.8 million in fiscal 2007, 2006 and
2005, respectively. Cash received for refunds of income taxes paid in prior years amounted to $0.1 million, $0.2 million and $1.7
million in fiscal 2007, 2006 and 2005, respectively.
-46-
As of October 28, 2007 the Company had available U.S. Federal tax operating loss and tax credit
carryforwards subject to expiration as follows:
Year of |
|
Operating |
|
Tax |
|
|
|
|
|
|
|
|
|
|
2018 |
|
$ - |
|
$1,272 |
2020 |
|
5,000 |
|
- |
2022 |
|
14,800 |
|
- |
2023 |
|
36,200 |
|
- |
2024 |
|
22,300 |
|
300 |
2025 |
|
12,200 |
|
510 |
2026 |
|
4,900 |
|
378 |
2027 |
|
1,100 |
|
- |
|
|
|
|
|
|
|
$96,500 |
|
$2,460 |
|
|
|
|
|
The Company has established a valuation allowance for a portion of its deferred tax assets,
because it is more likely than not that a portion of its net operating loss carryforwards may expire prior to utilization. The
valuation allowance increased by $2.4 million, $1.7 million and $7.8 million in fiscal 2007, 2006 and 2005, respectively.
As of October 28, 2007, the Company had $2.9 million of alternative minimum tax credit
carryforwards that are available to offset future federal taxes payable. The Company also has tax credits available in
international jurisdictions of $6.2 million that begin to expire in 2008 if not utilized and state tax credits of $0.4 million that
begin to expire in 2008 if not utilized.
As of October 28, 2007, the undistributed earnings of international subsidiaries included in
consolidated retained earnings amounted to $211.5 million. Such amounts are considered to be reinvested indefinitely. Accordingly,
no provision has been made for taxes that would be payable upon distribution of these earnings.
The Company has elected the Alternative Transition Method provided in Financial Accounting
Standards Board ("FASB") Staff Position No. 123R-3 for calculating the tax effects of share-based compensation. As of October 28,
2007 the deferred income tax expenses resulting from this method amounted to $0.2 million.
NOTE 11 - STOCK-BASED COMPENSATION
In March 2007, shareholders approved a new stock-based compensation plan ("Plan"), under which
options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, and other
awards based on, or related to shares of the Company's common stock may be granted from shares authorized but unissued, shares
previously issued and reacquired by the Company or both. A maximum of three million shares of common stock may be issued
under the Plan. Awards may be granted to Company officers, employees and directors, non-employee directors, consultants,
advisors and independent contractors of the Company or a subsidiary of the Company. The Plan prohibits further awards from
being issued under prior plans. The plans are more fully described below. The Company incurred compensation cost under
the plans of $2.9 million, $2.0 million and $0.3 million for fiscal 2007, 2006 and 2005, respectively. No compensation cost
was capitalized as part of inventory, and no income tax benefit was recorded in those years. No equity awards were settled in cash
during the periods presented.
-47-
Stock Options
Option awards generally vest in one to four years, and have a ten year contractual
term. All incentive and non-qualified stock option grants must have an exercise price no less than the market value of
the underlying common stock on the date of grant. The option and share awards provide for accelerated vesting if there is a
change in control as defined in the Plan.
The fair value of option grants is determined with the closing price on the day of grant using the
Black Scholes option pricing model. Expected volatility is based on the historical volatility of the Company's stock. The Company
uses historical option exercise behavior and employee termination data to estimate option life, which represents the period of time
that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated life of the
option is based on the U.S. treasury yield curve in effect at the time of grant. The weighted average assumptions used for
fiscal 2007, 2006 and 2005 are noted in the following table:
|
|
Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility |
|
52.4% |
|
55.0% |
|
62.0% |
|
|
|
|
|
|
|
Risk-free rate of return |
|
4.5% |
|
4.8% |
|
4.0% |
|
|
|
|
|
|
|
Dividend yield |
|
0.0% |
|
0.0% |
|
0.0% |
|
|
|
|
|
|
|
Expected average life |
|
4.6 years |
|
4.5 years |
|
3.0 years |
A summary of option activity under the Plan as of October 28, 2007 and changes during the year then
ended is presented as follows:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 29, 2006 |
|
2,515,228 |
|
$18.77 |
|
|
Granted |
|
59,250 |
|
14.68 |
|
|
Exercised |
|
(44,786) |
|
14.10 |
|
|
Cancelled and forfeited |
|
(192,389) |
|
19.79 |
|
|
|
|
|
|
|
|
|
Outstanding at October 28, 2007 |
|
2,337,303 |
|
18.68 |
|
6.4 years |
|
|
|
|
|
|
|
Exercisable at October 28, 2007 |
|
1,758,557 |
|
$19.29 |
|
5.7 years |
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the fiscal years 2007, 2006
and 2005 was $7.15, $8.50 and $7.47, respectively. The total intrinsic value of options exercised during the fiscal years
2007, 2006 and 2005 was $0.1 million, $0.4 million and $2.7 million, respectively. There was no aggregate intrinsic value of
options outstanding or exercisable at October 28, 2007. A summary of the status of the Company's non-vested shares as of
October 28, 2007 is presented as follows:
-48-
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Non-vested at October 29, 2006 |
|
790,850 |
|
$8.67 |
Granted |
|
59,250 |
|
7.15 |
Vested |
|
(210,603) |
|
8.65 |
Cancelled and forfeited |
|
(60,751) |
|
8.38 |
|
|
|
|
|
Non-vested at October 28, 2007 |
|
578,746 |
|
$8.54 |
|
|
|
|
|
As of October 28, 2007 the total compensation cost for non-vested option awards not yet recognized
was approximately $3.8 million. That cost is expected to be recognized over a weighted average amortization period of 1.8
years.
Restricted Stock
The Company also grants restricted stock awards periodically. The restrictions on these
awards lapse over a service period that has ranged from less than one to eight years. The weighted average grant date fair
value of restricted grants during the fiscal years 2007, 2006 and 2005 was $13.75, $16.54 and $16.65, respectively. The total
value of awards for which restrictions lapsed during fiscal years 2007, 2006 and 2005 was $0.1 million, $0.5 million and $0.4
million, respectively. As of October 28, 2007, the total compensation cost for non-vested option awards not yet recognized
was approximately $3.3 million. That cost is expected to be recognized over a weighted average amortization period of 3.5
years. A summary of the status of the Company's non-vested restricted shares as of October 28, 2007 is presented as
follows:
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 29, 2006 |
|
272,000 |
|
|
|
|
Granted |
|
48,752 |
|
|
|
|
Exercised |
|
(70,499) |
|
|
|
|
Cancelled and forfeited |
|
(7,750) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 28, 2007 |
|
242,503 |
|
7.0 years |
|
$2,573 |
|
|
|
|
|
|
|
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") permits employees to purchase shares at 85% of
the lower of the fair market value at the commencement of the offering or the last day of the payroll payment period. A
total of 900,000 shares are available for purchase under the ESPP. The vesting period for the ESPP is approximately one
year. Under the ESPP 724,895 shares had been issued through October 28, 2007 and an additional 34,444 shares are subject to
outstanding subscriptions.
-49-
NOTE 12 - EMPLOYEE RETIREMENT PLANS
The Company maintains a 401(k) Savings and Profit Sharing Plan ("401(k) Plan") which covers all
full-time domestic employees who have completed 3 months of service and are 18 years of age or older. Under the terms of the 401(k)
Plan, employees may contribute up to 50% of their salary, subject to certain maximum amounts, 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 $0.4 million in fiscal 2007, $0.5 million in fiscal
2006 and $0.5 million in fiscal 2005.
The Company's international subsidiaries maintain retirement plans for their employees, which vary
by country. The obligations and cost of these plans are not significant to the Company's consolidated financial statements.
Effective October 28, 2007, the Company adopted SFAS No. 158, "Employer's Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)". SFAS No. 158 requires
companies to recognize in its statement of financial condition the funded status of its defined benefit postretirement plans,
measured as the difference between the fair value of the plan assets and the benefit obligation. SFAS No. 158 also requires an
entity to recognize changes in the funded status of its defined benefit postretirement plan directly to accumulated other
comprehensive income, net of tax, to the extent such changes are not recognized in earnings as components of periodic net benefit
cost. The adoption of SFAS No. 158 did not have a material impact on the Company's consolidated financial statements.
NOTE 13 - OPERATING LEASES
The Company leases various real estate and equipment under non-cancelable operating leases. Rental
expense under such leases amounted to $3.4 million in fiscal 2007, $3.2 million in fiscal 2006 and $3.0 million in fiscal
2005.
Future minimum lease payments (excluding costs associated with facilities closed under
restructuring plans) under non-cancelable operating leases with initial or remaining terms in excess of one year at October 28,
2007 follow:
2008 |
|
$1,982 |
2009 |
|
1,383 |
2010 |
|
1,063 |
2011 |
|
1,001 |
2012 |
|
764 |
Thereafter |
|
962 |
|
|
|
|
|
$7,155 |
|
|
|
See Note 8 for disclosures relating to the Company's capital lease obligations.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
At October 28, 2007, the Company had capital expenditure purchase commitments outstanding of
approximately $66 million. In the first quarter of fiscal 2008, a capital lease agreement for $61.7 million principal commenced
with Micron for the U.S. Nanofab. Photronics' total investment in the purchase and equipping of its U.S. Nanofab is expected
to fall within a range of $190 million to $200 million and may include redeployment of some existing Photronics assets.
Financial instruments that potentially subject the Company to credit risk consist principally of
trade accounts receivable 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.
-50-
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair
value information about financial instruments, whether or not recognized in the balance sheets, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates
and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to
independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. Other than the fair values of the Company's convertible subordinated notes disclosed
in Note 8, the carrying values of the Company's other financial instruments approximate fair value.
The Company is subject to various claims that arise in the ordinary course of business. The
Company believes such claims, individually or in the aggregate, will not have a material adverse effect on the business of the
Company.
NOTE 15 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On October 22, 2002, the Company entered into an interest rate swap contract, which effectively
converted $100 million of 4.75% fixed rate debt to a variable rate. Under the contract, payments are made on a LIBOR-based variable
rate (6.69% at October 29, 2006). In August 2005, the Company reduced its 4.75% fixed rate debt to $87.1 million and in December
2006 repaid the outstanding balance. The interest rate swap expired in December 2006.
The interest rate swap contract was used to adjust the proportion of total debt that is subject to
fixed interest rates. This contract was considered to be a hedge against interest rate risk of the Company's fixed rate debt
obligations. Accordingly, the interest rate swap contract is stated at fair value in the Company's consolidated balance sheets (in
accrued liabilities at October 29, 2006) and the related portion of fixed rate debt being hedged is stated at an amount equal to
the sum of its principal amount plus an adjustment representing the change in fair value of the debt obligation attributable to the
interest rate risk being hedged. In addition, changes during any accounting period in the fair value of the interest rate swap
contract, as well as offsetting changes in the adjusted carrying value of the related portion of fixed rate debt being hedged, are
recognized as adjustments to interest expense in the Company's consolidated statements of income. The net effect of this interest
rate swap contract on the Company's consolidated statements of income is that the interest expense portion of fixed rate debt being
hedged is generally recorded based on variable rates.
The fair value of the interest rate swap contract was recorded as a liability of $0.4 million at
October 29, 2006 in the Company's consolidated balance sheets. The fair value of the contract was calculated using a discounted
cash flow methodology. The fair value adjustment for the related portion of fixed rate debt being hedged decreased the $87.1
million carrying amount of such debt by $0.2 million as of October 29, 2006 (see Note 8). The net loss on the ineffective portion
of the interest rate swap contract was not material to the Company's consolidated statements of income. This interest rate swap
expired on December 15, 2006 (see Note 8).
In April 2006, the Company's Korean subsidiary entered into a foreign currency rate swap contract.
Under the terms of the contract, the Company has effectively converted a $50 million interest bearing intercompany loan denominated
in U.S. dollars to Korean won. This contract was initially scheduled to expire in December 2006, however, it has been extended to
November 2008. The Company elected not to designate the foreign currency rate swap contract as a hedge which resulted in a
mark-to-market adjustment charged in the income statement in the amount of $0.9 million and $0.7 million in 2007 and 2006,
respectively. Subsequent to fiscal year-end 2007 the intercompany loan and the related swap were reduced to a balance of $30
million.
In September 2006, the Company entered into forward contracts to convert the fixed yen purchase
price of certain equipment into fixed U.S. dollar amounts. In accordance with SFAS No. 133, "Accounting for Derivatives and Hedging
Activities," hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as
cash flow hedges and are evaluated for effectiveness. In the fiscal years ended October 28, 2007 and October 29, 2006,
changes in the fair value of these derivative financial instruments of $1.1 million and $0.1 million, respectively, were recorded
as charges to shareholders' equity as a component of accumulated other comprehensive income since they qualified for hedge
accounting as defined by SFAS No. 133. Changes in the fair values of other forward contracts not designated as hedging
instruments in the amount of $0.3 million were charged to the income statement (included in investment and other income).
These forward contracts were settled in November 2007 at a gain of $0.1 million.
-51-
NOTE 16 - GEOGRAPHIC AND SIGNIFICANT CUSTOMER 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.
Geographic net sales are based primarily on where the Company's facility is located. The Company's 2007, 2006 and 2005 net
sales, operating income (loss) and total identifiable assets by geographic area were as follows:
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
Asia |
|
$242,788 |
|
$252,630 |
|
$232,721 |
Europe |
|
71,421 |
|
79,782 |
|
73,024 |
North America |
|
107,270 |
|
122,463 |
|
135,025 |
|
|
|
|
|
|
|
|
|
$421,479 |
|
$454,875 |
|
$440,770 |
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
Asia |
|
$15,844 |
|
$45,816 |
|
$53,304 |
Europe |
|
3,708 |
|
15,859 |
|
8,755 |
North America |
|
6,306 |
|
(2,232) |
|
(3,119) |
|
|
|
|
|
|
|
Stock-based compensation |
|
(2,890) |
|
(1,971) |
|
(266) |
Consolidation, restructuring and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$22,968 |
|
$41,833 |
|
$58,674 |
|
|
|
|
|
|
|
Total identifiable assets |
|
|
|
|
|
|
Asia |
|
$ 488,195 |
|
$ 473,181 |
|
$338,472 |
Europe |
|
107,966 |
|
112,353 |
|
109,266 |
North America |
|
463,620 |
|
460,149 |
|
497,991 |
|
|
|
|
|
|
|
|
|
$1,059,781 |
|
$1,045,683 |
|
$945,729 |
|
|
|
|
|
|
|
Samsung Electronics Co., Ltd. accounted for approximately 25%, 25% and 24% of the Company's net
sales in fiscal 2007, 2006 and 2005, respectively.
NOTE 17 - COMPREHENSIVE INCOME
The Company's comprehensive income as reported in the consolidated statements of shareholders'
equity consists of net earnings (losses) and all changes in equity during a period except those resulting from investments by
owners and distributions to owners. The components of OCI, net of tax, were as follows:
|
|
Fiscal Year Ended |
||||
|
|
|
||||
|
|
October 28, |
|
October 29, |
|
October 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
$13,496 |
|
$20,366 |
|
$1,588 |
Change in fair value of cash flow hedge |
|
(1,024) |
|
(35) |
|
112 |
Change in unrealized gains on investments |
|
(458) |
|
(1,109) |
|
(16) |
|
|
|
|
|
|
|
Other comprehensive income |
|
$12,014 |
|
$19,222 |
|
$1,684 |
|
|
|
|
|
|
|
-52-
NOTE 18 - RESTRUCTURING
Since 2001, the Company has closed manufacturing facilities in North America and in Europe due in
part to the migration of semiconductor manufacturing to Asia, excess capacity, competitive pricing pressures and weakened demand.
Decisions regarding which facilities to close were based on sales volume projections, customer base and production qualifications.
The Company continues to assess its global manufacturing strategy based on changes in market conditions. This ongoing assessment
could result, in the future, in facilities closures, asset redeployment, workforce reductions, or the addition of increased
manufacturing facilities, all of which would be predicated by market conditions and customer requirements.
In fiscal 2006, the Company recorded total restructuring charges of $15.6 million primarily
related to ceasing operations at its manufacturing and research and development facility in Austin, Texas. During the first quarter
of 2007, the Company sold this facility for proceeds of $5.0 million and realized a gain of $2.3 million.
The following tables set forth the Company's restructuring reserves as of October 28, 2007,
October 29, 2006 and October 30, 2005, and reflect activity affecting the reserves for the years then ended. As of October 28,
2007, the remaining liability of $1.7 million primarily represents non-cancelable lease obligations that are due under respective
lease terms through 2009.
|
Year Ended October 28, 2007 |
||||||||
|
|
||||||||
|
October 29, |
|
|
|
|
|
October 28, |
||
|
2006 |
|
|
|
|
|
2007 |
||
|
Balance |
|
Charges |
|
Utilized |
|
Balance |
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Manufacturing capacity reduction and other |
$2,528 |
|
$ - |
|
$(841) |
|
$1,687 |
||
|
|
|
|
|
|
|
|
||
Workforce reductions |
126 |
|
- |
|
(126) |
|
- |
||
|
|
|
|
|
|
|
|
||
Total |
$2,654 |
|
$ - |
|
$(967) |
|
$1,687 |
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
Year Ended October 29, 2006 |
||||||||
|
|
||||||||
|
|
|
|
|
|
|
|
||
|
October 30, |
|
|
|
|
|
October 29, |
||
|
2005 |
|
|
|
|
|
2006 |
||
|
Balance |
|
Charges |
|
Utilized |
|
Balance |
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Manufacturing capacity reduction and other |
$2,245 |
|
$14,383 |
|
$(14,100) |
|
$2,528 |
||
|
|
|
|
|
|
|
|
||
Workforce reductions |
- |
|
1,256 |
|
(1,130) |
|
126 |
||
|
|
|
|
|
|
|
|
||
Total |
$2,245 |
|
$15,639 |
|
$(15,230) |
|
$2,654 |
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
Year Ended October 30, 2005 |
||||||||
|
|
||||||||
|
October 31, |
|
|
|
|
|
October 30, |
||
|
2004 |
|
|
|
|
|
2005 |
||
|
Balance |
|
Charges |
|
Utilized |
|
Balance |
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Manufacturing capacity reduction and other |
$4,717 |
|
$ - |
|
$(2,472) |
|
$2,245 |
||
|
|
|
|
|
|
|
|
||
Workforce reductions |
- |
|
- |
|
- |
|
- |
||
|
|
|
|
|
|
|
|
||
Total |
$4,717 |
|
$ - |
|
$(2,472) |
|
$2,245 |
||
|
|
|
|
|
|
|
|
-53-
NOTE 19 - OTHER RELATED PARTY TRANSACTIONS
The Company has a 49.99% ownership interest in the MP Mask joint venture that was established in
2006 with Micron. Since the Company does not control this venture, the Company does not consolidate the results. As
part of the joint venture, various supply agreements exist between the Company, Micron, and MP Mask. As of October 28, 2007,
the Company owed MP Mask $6.4 million and had a receivable from Micron of $6.1 million primarily related to the supply agreements.
During 2007, the Company recognized net revenue of $2.1 million related to commissions earned under supply agreements between the
Company, Micron and MP Mask; comprised of gross commission income of $3.9 million less $1.8 million of amortization of the value of
the supply agreement intangible asset. The gross commission revenue includes $56.3 million in orders from Micron less the Company's
cost of the corresponding orders placed with MP Mask in the amount of $52.4 million. In addition, in 2007 the Company
incurred outsourcing expenses of $1.0 million from MP Mask for research and development activities purchased by the Company.
Further, the Company recorded cost of sales in the amount of $3.7 million for photomasks produced by MP Mask for sales to the
Company's customers in 2007. As of October 29, 2006, the Company owed MP Mask $8.7 million and had a receivable from Micron
of $8.3 million. During 2006, the Company recognized net revenue of $1.0 million related to commissions earned under supply
agreements between the Company, Micron and MP Mask; comprised of gross commission income of $1.7 million less $0.7 million of
amortization of the value of the supply agreement intangible asset. The gross commission income results from $23.8 million in sales
orders from Micron less the Company's cost of the corresponding orders placed with MP Mask in the amount of $22.1 million. In
addition, in 2006 the Company incurred outsourcing expenses of $0.4 million from MP Mask for research and development activities
purchased by the Company. In 2007, the Company invested an additional $3.5 million in MP Mask. Also, the Company
purchased excess equipment from MP Mask for use in its U.S. Nanofab in the amount of $4.0 million in 2007. In addition, in the first quarter of fiscal 2008, a capital lease agreement commenced with Micron
for the U.S. Nanofab for total capital lease payments by the Company of $73.9 million, of which $12.2 million represents interest
and $61.7 million represents both principal and the cost of the facility.
The Chairman of the Board of the Company is also the Chairman of the Board and majority
shareholder of a company who is a supplier of secure managed information technology services. Another director of the Company is
also a shareholder, CEO and Executive Vice Chairman of this company. Since 2002, the Company has entered into various service
contracts with this company to provide services to all of the Company's worldwide facilities. The Company incurred expenses of $3.8
million in 2007, $4.3 million in 2006, and $3.7 million in 2005 related to services provided by the company, for which the amount
owed to this company was $0.6 million at October 28, 2007 and $0.1 million at October 29, 2006. In 2006, the Company signed a new
3-year service contract with this company for $2.5 million per year.
An officer of the Company is also the CEO, president and director of one of the Company's majority
held subsidiaries. The Company purchases photomask blanks from a company of which this officer of the Company is a significant
shareholder. The Company purchased $21.6 million, $16.8 million, and $13.6 million of photomask blanks from this company in 2007,
2006, and 2005, respectively, for which the amount owed to this company was $5.0 million at October 28, 2007 and $2.2 million at
October 29, 2006.
The Company believes that the terms of the transactions described above with affiliated persons
were negotiated at arm's-length and were no less favorable to the Company than the Company could have obtained from non-affiliated
parties.
During fiscal year 2005, the Company initiated a plan to acquire all of the outstanding shares of
its non-wholly owned subsidiary in Korea. As part of the purchase of outstanding shares, in 2005 the Company acquired 1,136,036
shares or 3.4% from employees, including officers, of PKL for 8,980 won per share or $8.70 U.S. dollars per share. Two of these
employees are also officers of the Company. The total purchase price of $9.9 million from PKL employees represents a premium of
approximately 15% per share above similar purchases of stock from other stockholders during the same time period.
-54-
NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data:
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Year |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$105,981 |
|
$109,626 |
|
$104,301 |
|
$101,571 |
|
$421,479 |
Gross margin |
|
29,665 |
|
26,193 |
|
23,706 |
|
19,957 |
|
99,521 |
Net income |
|
7,857 |
|
14,066 |
|
2,238 |
|
362 |
|
24,523 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$0.19 |
|
$0.34 |
|
$0.05 |
|
$0.01 |
|
$0.59 |
Diluted |
|
$0.17 |
|
$0.30 |
|
$0.05 |
|
$0.01 |
|
$0.56 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006: |
|
|
|
(a) |
|
(a) |
|
(a) |
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$111,948 |
|
$119,471 |
|
$108,160 |
|
$115,296 |
|
$454,875 |
Gross margin |
|
36,183 |
|
41,808 |
|
32,904 |
|
36,129 |
|
147,024 |
Net income |
|
9,693 |
|
5,265 |
|
4,555 |
|
9,819 |
|
29,332 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$0.23 |
|
$0.13 |
|
$0.11 |
|
$0.24 |
|
$0.71 |
Diluted |
|
$0.21 |
|
$0.12 |
|
$0.11 |
|
$0.21 |
|
$0.66 |
(a) |
|
Includes consolidation charges of $11.4 million in the second quarter of 2006, $1.8 million in the third quarter of 2006, $2.4 million in the fourth quarter of 2006, totaling $15.6 million in connection with the closure of the Company's Austin, Texas research and development and manufacturing facility and the consolidation of the Company's North American operating infrastructure. |
NOTE 21 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements - an amendment of Accounting Research Bulletin ("ARB") No. 51." SFAS No. 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary for the deconsolidation of a subsidiary. SFAS No. 160 is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim statements within those
fiscal years. The Company is currently evaluating the impact, if any, SFAS No. 160 will have on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations." SFAS No. 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information
to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008,
and interim statements within those fiscal years. The Company is currently evaluating the impact, if any, SFAS No. 141R will
have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities - Including an Amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value, and is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS
No. 159 will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157
defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact,
if any, that SFAS No. 157 may have on its consolidated financial statements.
-55-
In June 2006, the FASB issued FASB Interpretation Number 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109." The interpretation contains a two step approach to
recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to
measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The
provisions are effective as of the beginning of the Company's 2008 fiscal year. The Company is analyzing the impact the adoption of
FIN 48 will have on its consolidated financial statements, but expects the adjustment to decrease shareholders' equity as of
October 29, 2007 to range from approximately $0.5 million to $1.0 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has established and currently maintains disclosure controls and procedures designed to
ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to management, including the Company's chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating
disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company's management, with the participation of the Company's chief executive officer and
chief financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that the
Company's disclosure controls and procedures, as of the end of the period covered by this report, were designed and are functioning
effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's
rules and forms, and (ii) accumulated and communicated to management, including the chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting during the fourth
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over
financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company's internal control over financial reporting
as of October 28, 2007 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control - Integrated Framework. Management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control over
financial reporting was effective as of October 28, 2007.
-56-
The Company's independent registered public accounting firm, Deloitte & Touche LLP, has
audited the effectiveness of the Company's internal control over financial reporting as of October 28, 2007, as stated in their
report on page 30 of this Form 10-K.
January 9, 2008
ITEM 9B. OTHER INFORMATION
Under a build-to-suit lease, in the first quarter of fiscal 2008, a capital lease agreement
commenced with Micron for a nanofab facility in Boise, Idaho, for total capital lease payments by the Company of $73.9 million, of
which $12.2 million represents interest and $61.7 million represents both principal and the cost of the facility.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information as to Directors required by Item 401, 405 and 407(c)(3)(d)(4) and (d)(5) of
Regulation S-K is set forth in the Company's 2008 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 under the caption
"PROPOSAL 1 - ELECTION OF DIRECTORS", "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and in paragraph three under the
caption "MEETINGS AND COMMITTEES OF THE BOARD" and is incorporated in this report by reference. The information as to Executive
Officers is included in the Company's 2008 definitive Proxy Statement under the caption "EXECUTIVE OFFICERS" and is incorporated in
this report by reference.
The Company has adopted a code of ethics that applies to its principal executive officer,
principal financial officer and principal accounting officer or controller. A copy of the code of ethics may be obtained, free of
charge, by writing to the General Counsel of Photronics, Inc., at 15 Secor Road, Brookfield, Connecticut 06804.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K and paragraph (e)(4) and (e)(5) of Item 407
is set forth in the Company's 2008 definitive Proxy Statement under the captions "EXECUTIVE COMPENSATION", "STOCK OPTIONS",
"CERTAIN AGREEMENTS", "DIRECTORS' COMPENSATION", "COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION" and "COMPENSATION
COMMITTEE REPORT," respectively, and is incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required by Items 403 and 201(d) of Regulation S-K is set forth in the Company's
2008 definitive Proxy Statement under the captions "Ownership of Common Stock by Directors, Nominees, Officers and Certain
Beneficial Owners" and "Equity Compensation Plan Information," respectively, and is incorporated in this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K and Item 407(a) of Regulation S-K is set
forth in the Company's 2008 definitive Proxy Statement under the captions "MEETINGS AND COMMITTEES OF THE BOARD" and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" and is incorporated in this report by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A is set forth in the Company's 2008
definitive Proxy Statement under the captions "FEES PAID TO THE INDEPENDENT AUDITORS" and "AUDIT COMMITTEE REPORT," respectively,
and is incorporated in this report by reference.
-57-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-58-
|
|
Schedule II |
||||||
|
|
|
||||||
|
|
Valuation and Qualifying Accounts |
||||||
|
|
for the Years Ended October 28, 2007, October 29, 2006 |
||||||
|
|
and October 30, 2005 |
||||||
|
|
(in thousands) |
||||||
|
|
|
||||||
|
|
Balance at |
|
Charge to |
|
|
|
Balance at |
|
|
Beginning of |
|
Costs and |
|
|
|
End of |
|
|
Year |
|
Expenses |
|
Deductions |
|
Year |
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 28, 2007 |
|
$ 4,471 |
|
$ (25) |
|
$ (725) |
(a) |
$ 3,721 |
Year ended October 29, 2006 |
|
$ 2,475 |
|
$2,158 |
|
$ (162) |
(a) |
$ 4,471 |
Year ended October 30, 2005 |
|
$ 3,246 |
|
$ (593) |
|
$ (178) |
(a) |
$ 2,475 |
|
|
|
|
|
|
|
|
|
Deferred Income Tax Valuation Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 28, 2007 |
|
$36,993 |
|
$2,399 |
|
$ - |
|
$39,392 |
Year ended October 29, 2006 |
|
$35,245 |
|
$1,748 |
|
$ - |
|
$36,993 |
Year ended October 30, 2005 |
|
$27,483 |
|
$7,762 |
|
$ - |
|
$35,245 |
|
|
|
|
|
|
|
|
|
(a) Uncollectible accounts written off |
3) |
|
Exhibits |
|
|
|
|
|
EXHIBITS INDEX |
|
|
|
Exhibit |
|
|
|
|
|
3.1 |
|
Certificate of Incorporation as amended July 9, 1986, April 9, 1990, March 16, 1995, November 13, 1997, April 15, 2002 and June 20, 2005.* |
|
|
|
3.2 |
|
By-laws of the Company, (incorporated by reference to Exhibit 3.2 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). |
|
|
|
4.1 |
|
Form of Indenture between the Company and the Bank of New York, as Trustee, relating to the 2.25% Convertible Subordinated Notes due April 15, 2008 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File Number 333-105918, which was filed on June 6, 2003). |
|
|
|
4.2 |
|
Registration Rights Agreement, dated April 15, 2003 between the Company, Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner and Smith Incorporated and JPMorgan Securities, Inc. (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3, File Number 333-105918, which was filed on June 6, 2003). |
|
|
|
4.3 |
|
Underwriting Agreement dated June 29, 2005 between the Company and Merrill Lynch, Pierce, Fenner and Smith Incorporated and JPMorgan Securities, Inc. as representatives of the several underwriters, related to the public offering of 7,000,000 shares of Photronics, Inc. common stock, par value, $0.01 at a public offering price of $21.25 per share. The Company also granted the underwriters an option to purchase up to an additional 1,050,000 shares of common stock to cover over-allotments, if any (incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed on July 6, 2005 (Commission File Number 0-15451)). |
|
|
|
4.4 |
|
The Company will furnish to the Commission upon request any other debt instrument referred to in Item 601(b)(4)(iii)(A) of Regulation S-K. |
|
|
|
10.1 |
|
Master Service Agreement dated January 11, 2002 between the Company and RagingWire Telecommunications, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 3, 2002 (Commission File No. 0-15451)). |
|
|
|
10.2 |
|
The Company's 1992 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-8, File Number 33-47446 which was filed on April 24, 1994).+ |
-59-
10.3 |
|
Amendment to the Employee Stock Purchase Plan as of April 1, 1998 (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2004 (Commission File Number 0-15451)).+ |
|
|
|
10.4 |
|
Amendment to the Employee Stock Purchase Plan as of March 24, 2004 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2004 (Commission File Number 0-15451)).+ |
|
|
|
10.5 |
|
The Company's 1994 Stock Option Plan (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-8, Commission File Number 33-78102 which was filed on April 22, 1994).+ |
|
|
|
10.6 |
|
The Company's 1996 Stock Option Plan, as amended and restated March 13, 2003 (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2004 (Commission File Number 0-15451)).+ |
|
|
|
10.7 |
|
The Company's 1998 Stock Option Plan, as amended and restated March 13, 2003 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2004 (Commission File Number 0-15451)).+ |
|
|
|
10.8 |
|
The Company's 2000 Stock Option Plan, as amended and restated March 13, 2003 (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2004 (Commission File Number 0-15451)).+ |
|
|
|
10.9 |
|
Non Qualified Supplemental Deferred Compensation Plan (incorporated by reference to Exhibit 10.26 of the Company's Form 10-Q for the quarter ended April 29, 2007 (Commission File Number 0-15451)). |
|
|
|
10.10 |
|
Form of Agreement regarding life insurance between the Company and Executive (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2004 (Commission File Number 0-15451)).+ |
|
|
|
10.11 |
|
Consulting Agreement between the Company and Constantine S. Macricostas, dated July 11, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 13, 2005 (Commission File Number 0-15451)).+ |
|
|
|
10.12 |
|
Executive Employment Agreement between the Company and Edwin L. Lewis, dated January 4, 2005 (incorporated by reference to Exhibit 10.22 to the Company's Annual report on Form 10-K for the fiscal year ended October 31, 2004 (Commission File Number 0-15451)).+ |
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10.13 |
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Executive Employment Agreement between the Company and Michael J. Luttati dated May 12, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 13, 2005 (Commission File Number 0-15451)).+ |
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10.14 |
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Executive Employment Agreement between the Company and Sean T. Smith dated February 20, 2003 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 2, 2003 (Commission File No. 0-15451)).+ |
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10.15 |
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Limited Liability Company Operating Agreement of MP Mask Technology Center, LLC between Micron Technology, Inc. ("Micron") and Photronics, Inc. ("Photronics") dated May 5, 2006 (incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q filed on June 8, 2006 (Commission File No. 0-15451)).# |
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10.16 |
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Contribution and Units Purchase Agreement between Micron, Photronics and MP Mask Technology Center, LLC ("MP Mask") dated May 5, 2006 (incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed on June 8, 2006 (Commission File No. 0-15451)).# |
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10.17 |
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Technology License Agreement among Micron, Photronics and MP Mask dated May 5, 2006 (incorporated by reference to Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q filed on June 8, 2006 (Commission File No. 0-15451)).# |
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10.18 |
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Build to Suit Lease between Micron and Photronics dated May 5, 2006 (incorporated by reference to Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q filed on June 8, 2006 (Commission File No. 0-15451)).# |
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10.19 |
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Photronics to Micron Supply Agreement between Micron and Photronics dated May 5, 2006 (incorporated by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q filed on June 8, 2006 (Commission File No. 0-15451)).# |
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10.20 |
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Company to Photronics Supply Agreement between MP Mask and Photronics dated May 5, 2006 (incorporated by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q filed on June 8, 2006 (Commission File No. 0-15451)).# |
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10.21 |
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Executive Employment Agreement between the Company and Soo Hong Jeong dated August 24, 2001, as amended March 18, 2004, November 28, 2005 and June 9, 2006 (incorporated by reference to Exhibit 10.23 to the Company's Current Report on Form 10-Q filed on September 7, 2006 (Commission File No. 0-15451)). |
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10.22 |
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Extension of Executive Employment Agreement between the Company and Soo Hong Jeong effective October 29, 2006 and ending on October 28, 2007 (incorporated by reference to Exhibit 1.01 to the Company's Current Report on Form 8-K filed on January 3, 2007 (Commission File No. 0-15451)). |
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10.23 |
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Extension of Executive Employment Agreement between the Company and Soo Hong Jeong effective October 28, 2007 and ending October 27, 2008 (incorporated by reference to Exhibit 1.01 to the Company's Current Report on Form 8-K Filed on November 8, 2007 (Commission File No. 0-15451)). |
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10.24 |
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Executive Employment Agreement between the Company and Christopher J. Progler, Vice President, Chief Technology Officer dated September 10, 2007.+* |
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10.25 |
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Credit Agreement dated as of June 6, 2007 among Photronics, Inc., the foreign subsidiary borrowers party thereto, the lenders party thereto and JPMorgan Chase Bank, National Association (as Administrative Agent), Citizens Bank of Massachusetts, HSBC Bank USA, National Association and Citibank, N.A. and JPMorgan Securities, Inc. as Sole Bookrunner and Sole Lead Arranger (incorporated by reference to Exhibit 10.27 to the Company's Form 10-Q for the quarter ended July 29, 2007 (Commission File No. 0-15451)). |
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10.26 |
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Amended and Restated Agreement RMB 186,000,000 Credit Facility for Photronics Imaging Technologies (Shanghai) Co., Ltd. with JPMorgan Chase Bank (China) Company Limited, Shanghai Branch, as Administrative Agent (incorporated by reference to Exhibit 10.28 to the Company's Form 10-Q for the quarter ended July 29, 2007 (Commission File No. 0-15451)). |
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10.27 |
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Amended and Restated Guarantee Agreement by Photronics, Inc. relating to RMB 186,000,000 Credit Facility for Photronics Imaging Technologies (Shanghai) Co., Ltd. dated August 23, 2007 (incorporated by reference to Exhibit 10.29 to the Company's Form 10-Q for the quarter ended July 29, 2007 (Commission File No. 0-15451)). |
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21 |
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List of Subsidiaries of the Company.* |
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23 |
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Consent of Deloitte & Touche LLP.* |
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31.1 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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31.2 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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32.1 |
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
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32.2 |
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
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+ |
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Represents a management contract or compensatory plan or arrangement. |
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# |
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Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. |
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* |
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Represents an exhibit that is filed with this Annual Report on Form 10-K. |
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The Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Company's General Counsel at the address of the Company's principal executive offices. |
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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.
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PHOTRONICS, INC. |
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(Registrant) |
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By |
/s/ SEAN T. SMITH |
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January 9, 2008 |
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Sean T. Smith |
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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. |
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By |
/s/ CONSTANTINE S. MACRICOSTAS |
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January 9, 2008 |
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Constantine S. Macricostas |
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By |
/s/ MICHAEL J. LUTTATI |
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January 9, 2008 |
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Michael J. Luttati |
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By |
/s/ SEAN T. SMITH |
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January 9, 2008 |
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Sean T. Smith |
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By |
/s/ WALTER M. FIEDEROWICZ |
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January 9, 2008 |
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Walter M. Fiederowicz |
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By |
/s/ JOSEPH A. FIORITA, JR. |
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January 9, 2008 |
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Joseph A. Fiorita, Jr. |
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By |
/s/ GEORGE C. MACRICOSTAS |
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January 9, 2008 |
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George C. Macricostas |
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By |
/s/ WILLEM D. MARIS |
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January 9, 2008 |
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Willem D. Maris |
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By |
/s/ MITCHELL G. TYSON |
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January 9, 2008 |
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Mitchell G. Tyson |
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