Photronics, Inc. - SEC Filing

SECURITES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ______________ Commission file number 0-15451 ----------- PHOTRONICS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) CONNECTICUT 06-0854886 ----------- ---------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1061 EAST INDIANTOWN ROAD, JUPITER, FL 33477 - ------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (561) 745-1222 ------------------------------------------------------ (Registrant's telephone number, including area code) ------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 31, 2000 COMMON STOCK, $.01 PAR VALUE 29,542,967 SHARES 1

PHOTRONICS, INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet at July 31, 2000 (unaudited) and October 31, 1999 3 - 4 Condensed Consolidated Statement of Income for the Three and Nine Months Ended July 31, 2000 and August 1, 1999 (unaudited) 5 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended July 31, 2000 and August 1, 1999 (unaudited) 6 Condensed Consolidated Statement of Shareholders' Equity for the Nine Months Ended July 31, 2000 and August 1, 1999 (unaudited) 7 Notes to Condensed Consolidated Financial Statements (unaudited) 8 - 10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 - 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports 14 2

PART I. FINANCIAL INFORMATION ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PHOTRONICS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheet (dollars in thousands) ASSETS JULY 31, OCTOBER 31, 2000 1999 ----------- ----------- (UNAUDITED) Current assets: Cash, cash equivalents and short-term investments $ 50,272 $ 23,115 Accounts receivable (less allowance for doubtful accounts of $815 in 2000 and $692 in 1999) 60,027 50,899 Inventories 19,504 17,444 Other current assets 19,553 16,256 -------- -------- Total current assets 149,356 107,714 Property, plant and equipment, net 396,352 348,144 Intangible assets (less accumulated amortization of $8,807 in 2000 and $8,384 in 1999) 61,131 36,875 Investments and other assets 16,821 14,276 -------- -------- $623,660 $507,009 ======== ======== See accompanying notes to condensed consolidated financial statements. 3

PHOTRONICS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheet (dollars in thousands, except per share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY JULY 31, OCTOBER 31, 2000 1999 ------------ ---------- (UNAUDITED) Current liabilities: Current portion of long-term debt $ 2,022 $ 1,574 Accounts payable 34,032 51,724 Other current liabilities 11,797 16,232 --------- --------- Total current liabilities 47,851 69,530 Long-term debt 223,396 148,281 Deferred taxes and other liabilities 32,743 35,068 --------- --------- Total liabilities 303,990 252,879 --------- --------- Minority interest 34,646 -- --------- --------- Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value, 2,000,000 shares authorized, none issued and outstanding -- -- Common stock, $0.01 par value, 75,000,000 shares authorized, 29,542,967 shares issued in 2000 and 27,925,000 shares in 1999 295 279 Additional paid-in capital 133,122 99,544 Retained earnings 158,457 156,929 Accumulated other comprehensive loss (6,654) (2,571) Deferred compensation on restricted stock (196) (51) --------- --------- Total shareholders' equity 285,024 254,130 --------- --------- $ 623,660 $ 507,009 ========= ========= See accompanying notes to condensed consolidated financial statements. 4

PHOTRONICS, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Income (dollars in thousands, except per share amounts) (unaudited) THREE MONTHS ENDED NINE MONTHS ENDED ------------------------ ------------------------- JULY 31, AUGUST 1, JULY 31, AUGUST 1, 2000 1999 2000 1999 ---------- --------- --------- ---------- Net sales $ 85,595 $ 72,395 $ 234,540 $ 198,796 Costs and expenses: Cost of sales 56,676 49,818 158,065 140,482 Selling, general and administrative 11,485 10,222 32,585 29,404 Research and development 5,319 4,327 15,056 12,025 Merger related costs 5,500 -- 5,500 -- Restructuring and related charges -- -- 17,500 -- --------- --------- --------- --------- Operating income 6,615 8,028 5,834 16,885 Other expense, net (1,857) (1,080) (3,647) (2,944) --------- --------- --------- --------- Income before income taxes 4,758 6,948 2,187 13,941 Provision for income taxes 1,600 2,600 800 5,200 --------- --------- --------- --------- Net income $ 3,158 $ 4,348 $ 1,387 $ 8,741 ========= ========= ========= ========= Earnings per share: Basic $ 0.11 $ 0.16 $ 0.05 $ 0.31 ========= ========= ========= ========= Diluted $ 0.11 $ 0.16 $ 0.05 $ 0.31 ========= ========= ========= ========= Weighted average number of common shares outstanding: Basic 29,148 27,723 28,466 27,802 ========= ========= ========= ========= Diluted 29,148 27,723 28,466 27,802 ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements. 5

PHOTRONICS, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows (in thousands) (unaudited) NINE MONTHS ENDED ----------------------- JULY 31, AUGUST 1, 2000 1999 --------- --------- Cash flows from operating activities: Net income $ 1,387 $ 8,741 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 38,817 35,055 Restructuring and related charges 17,500 -- Gains on sale of investments (5,305) (1,087) Other (5) 2,316 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (914) (6,917) Inventories (583) 683 Other current assets 2,606 3,552 Accounts payable and accrued liabilities (34,317) (3,759) -------- -------- Net cash provided by operating activities 19,186 38,584 -------- -------- Cash flows from investing activities: Acquisitions of and investments in photomask operations, net of cash acquired (34,782) -- Deposits on and purchases of property, plant and equipment (26,918) (67,306) Net change in short-term investments -- 7,532 Proceeds from sale of investments 5,557 1,184 Other (1,973) (2,518) -------- -------- Net cash used in investing activities (58,116) (61,108) -------- -------- Cash flows from financing activities: Repayment of long-term debt (23,667) (2,998) Borrowings under revolving credit facility 65,250 13,775 Proceeds from issuance of common stock 28,987 4,216 Purchase and retirement of common stock -- (6,900) Other (131) (151) -------- -------- Net cash provided by financing activities 70,439 7,942 -------- -------- Effect of exchange rate changes on cash flows (878) (1,298) -------- -------- Net increase (decrease) in cash and cash equivalents 30,631 (15,880) Cash and cash equivalents at beginning of period 23,115 28,004 Adjustment related to Align-Rite's net cash flows from October 1, 1999 to October 31, 1999 (3,474) -- -------- -------- Cash and cash equivalents at end of period $ 50,272 $ 12,124 ======== ======== Cash paid during the period for: Interest $ 7,776 $ 6,607 Income taxes $ 192 $ 2,695 See accompanying notes to condensed consolidated financial statements. 6

PHOTRONICS, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders' Equity (dollars in thousands) (unaudited) COMMON STOCK ADD'L PAID- RETAINED SHARES AMOUNT IN-CAPITAL EARNINGS --------- --------- ---------- ---------- NINE MONTHS ENDED AUGUST 1, 1999: BALANCE AT NOVEMBER 1, 1998 27,958 $ 280 $ 100,973 $ 138,885 Comprehensive income (loss): Net income -- -- -- 8,741 Adjustment to reflect Align-Rite's results for the period from April 1, 1998 to September 30, 1998 -- -- -- 3,596 Change in unrealized gains on -- -- -- -- investments Foreign currency translation adjustment -- -- -- -- --------- Total comprehensive income -- -- -- 12,337 Sale of common stock through employee stock option and purchase plans 315 3 4,571 -- Amortization of restricted stock to compensation expense -- -- -- -- Common stock repurchase (500) (5) (6,895) -- --------- --------- --------- --------- BALANCE AT AUGUST 1, 1999 27,773 $ 278 $ 98,649 $ 151,222 ========= ========= ========= ========= NINE MONTHS ENDED JULY 31, 2000: BALANCE AT OCTOBER 31, 1999 27,925 $ 279 $ 99,544 $ 156,929 Comprehensive income (loss): Net income -- -- -- 1,387 Adjustment to reflect Align-Rite's results for the period from October 1 to October 31, 1999 -- -- -- 141 Change in unrealized gains on investments -- -- -- -- Foreign currency translation adjustment -- -- -- -- --------- Total comprehensive income (loss) -- -- -- 1,528 Sale of common stock through employee stock option and purchase plans and private placement 1,618 16 33,317 -- Restricted stock awards, net -- -- 261 -- --------- --------- --------- --------- BALANCE AT JULY 31, 2000 29,543 $ 295 $ 133,122 $ 158,457 ========= ========= ========= ========= ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ---------------------------------- DEFERRED UNREALIZED FOREIGN COMPENSATION TOTAL INVESTMENT CURRENCY ON RESTRICTED SHAREHOLDERS' GAINS TRANSLATION TOTAL STOCK EQUITY ---------- ------------ --------- ------------- ----------- NINE MONTHS ENDED AUGUST 1, 1999: BALANCE AT NOVEMBER 1, 1998 $ 1,167 $ (2,970) $ (1,803) $ (139) $ 238,196 Comprehensive income (loss): Net income -- -- -- -- 8,741 Adjustment to reflect Align-Rite's results for the period from April 1, 1998 to September 30, 1998 -- -- -- -- 3,596 Change in unrealized gains on 2,281 -- 2,281 -- 2,281 investments Foreign currency translation adjustment -- (2,185) (2,185) -- (2,185) --------- --------- --------- --------- Total comprehensive income 2,281 (2,185) 96 -- 12,433 Sale of common stock through employee stock option and purchase plans -- -- -- -- 4,574 Amortization of restricted stock to compensation expense -- -- -- 66 66 Common stock repurchase -- -- -- -- (6,900) --------- --------- --------- --------- --------- BALANCE AT AUGUST 1, 1999 $ 3,448 $ (5,155) $ (1,707) $ (73) $ 248,369 ========= ========= ========= ========= ========= NINE MONTHS ENDED JULY 31, 2000: BALANCE AT OCTOBER 31, 1999 $ 2,524 $ (5,095) $ (2,571) $ (51) $ 254,130 Comprehensive income (loss): Net income -- -- -- -- 1,387 Adjustment to reflect Align-Rite's results for the period from October 1 to October 31, 1999 -- -- -- -- 141 Change in unrealized gains on investments 2,922 -- 2,922 -- 2,922 Foreign currency translation adjustment -- (7,005) (7,005) -- (7,005) --------- --------- --------- --------- Total comprehensive income (loss) 2,922 (7,005) (4,083) -- (2,555) Sale of common stock through employee stock option and purchase plans and private placement -- -- -- -- 33,333 Restricted stock awards, net -- -- -- (145) 116 --------- --------- --------- --------- --------- BALANCE AT JULY 31, 2000 $ 5,446 $ (12,100) $ (6,654) $ (196) $ 285,024 ========= ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements. 7

PHOTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JULY 31, 2000 AND AUGUST 1, 1999 (UNAUDITED) NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended July 31, 2000 are not necessarily indicative of the results that may be expected for the year ending October 31, 2000. Certain amounts in the Condensed Consolidated Financial Statements for prior periods have been reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 1999. NOTE 2 - ALIGN-RITE MERGER On June 7, 2000, Photronics completed its merger with Align-Rite International, Inc. ("Align-Rite"), herein after collectively referred to as the Company. Under the terms of the merger agreement, each of the 4,731,232 shares of common stock of Align-Rite issued and outstanding as of June 7, 2000 was converted into 0.85 shares of common stock of Photronics. Cash was paid in lieu of the issuance of any fractional shares of Photronics that would have been otherwise issued. Any stock options to acquire Align-Rite common stock that had not been exercised as of June 7, 2000 became fully vested options to acquire Photronics common stock in accordance with the Merger Agreement. The merger constituted a tax free reorganization and has been accounted for as a pooling-of-interests. The July 31, 2000 Condensed Consolidated Financial Statements for the three and nine months ended July 31, 2000 and August 1, 1999 and the accompanying notes thereto reflect the Company's financial position, results of operations and cash flows as if Align-Rite had been a wholly-owned subsidiary of Photronics for all periods presented. Prior to the merger, Align-Rite's fiscal year ended on March 31. For purposes of the Condensed Consolidated Financial Statements, Align-Rite's financial statements for the three and nine months ended June 30, 1999 (unaudited) have been combined with Photronics' three and nine months ended August 1, 1999 (unaudited), respectively. The financial statement balances of Align-Rite have been reclassified to conform to Photronics' presentation. 8

In the third quarter of 2000, the Company recorded a pre-tax charge of approximately $5.5 million for transaction costs incurred in connection with the merger. Such costs consisted primarily of investment banking, legal, accounting, financial printing and other related charges. NOTE 3 - ACQUISITON OF PSMC Effective June 20, 2000, the Company acquired approximately 51% of the total share capital of Precision Semiconductor Mask Corporation (PSMC), a photomask manufacturer based in Taiwan, for approximately $62.0 million. The acquisition was accounted for as a purchase. Accordingly, a portion of the purchase price has been allocated to assets acquired and liabilities assumed based upon estimated fair value at the date of acquisition while the balance of $26.0 million was recorded as goodwill and is being amortized over 15 years. The purchase price allocation is preliminary and further refinements are likely to be made based upon the completion of the final valuation. The operating results of PSMC have been included in the Condensed Consolidated Statement of Income from June 20, 2000. Had the acquisition of PSMC occurred at the beginning of fiscal 1999, the unaudited pro forma condensed consolidated net sales for the nine months ended July 31, 2000 and August 1, 1999 would have been $250.2 million and $206.7 million, respectively, and the pro forma net income (loss) and earnings (loss) per share for the nine months ended July 31, 2000 and August 1, 1999 would have been ($2.9) million and ($0.10), and $5.1 million and $0.18, respectively. In management's opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual combined results of operations might have been if the acquisition of PSMC had been effective at the beginning of the periods presented. NOTE 4 - EARNINGS PER SHARE Earnings per share ("EPS") amounts are calculated in accordance with the provisions of SFAS No. 128. Basic EPS is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. A reconciliation of basic and diluted EPS for the three and nine months ended July 31, 2000 and August 1, 1999, respectively, is as follows (in thousands, except per share amounts): 9

AVERAGE NET SHARES EARNINGS INCOME OUTSTANDING PER SHARE ------ ----------- --------- THREE MONTHS - ------------ 2000: Basic and diluted (a) $3,158 29,148 $0.11 ====== ====== ===== 1999: Basic and diluted (a) $4,348 27,723 $0.16 ====== ====== ===== NINE MONTHS - ----------- 2000: Basic and diluted (a) $1,387 28,466 $0.05 ====== ====== ===== 1999: Basic and diluted (a) $8,741 27,802 $0.31 ====== ====== ===== (a) The effect of the exercise of stock options and the conversion of notes for the three and nine months ended July 31, 2000 and August 1, 1999 is anti-dilutive. NOTE 5 - RESTRUCTURING AND RELATED CHARGES During March, 2000, the Company implemented a plan to consolidate its mature products group in order to increase capacity utilization, manufacturing efficiencies and customer service activities worldwide. Total restructuring and related charges associated with this consolidation plan of $17.5 million were recorded in the second quarter of 2000. Of the total charge, $9.1 million related to restructuring and $8.4 million related to the impairment of intangible assets. The significant components of the consolidation plan included the closing of the Company's Sunnyvale, California and Neuchatel, Switzerland manufacturing facilities and the consolidation and regionalization of sales and customer service functions. The Company anticipates that the closing of the Sunnyvale and Neuchatel facilities will maximize capacity utilization at its remaining mature products facilities. As part of the plan, the Company reduced its work force by approximately 125 employees. The restructuring charge of $9.1 million includes $1.5 million of cash charges for severance benefits paid to terminated employees which was disbursed over their entitlement periods and $2.3 million for facilities closings and lease termination costs to be expended over the next twelve months. Additionally, non-cash charges of $5.3 million approximated the carrying value primarily of fixed assets associated with the manufacturing consolidation based upon their expected disposition. Such assets, consisting principally of specialized manufacturing tools and equipment, were subsequently taken out of service. The charges also included $8.4 million related to the impairment in value of associated intangible assets. It was determined during the period that such assets no longer had future economic benefit to the Company because the anticipated undiscounted cumulative cash flows from these assets were insufficient to support their carrying value. NOTE 6 - COMMON STOCK On June 1, 2000, the Company sold one million of its unregistered common shares in a private placement to accredited institutional investors. The proceeds of the sale, net of fees and expenses, amounted to $22 million. 10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW On June 7, 2000, Photronics, Inc. ("Photronics" or the "Company"), completed its merger with Align-Rite International, Inc. ("Align-Rite"), an independent publicly traded manufacturer of photomasks in the United States and Europe. Under the terms of the merger agreement, each of the 4,731,232 shares of common stock of Align-Rite issued and outstanding as of June 7, 2000 was converted into 0.85 shares of common stock of Photronics. Cash was paid in lieu of the issuance of any fractional shares of Photronics that would have been otherwise issued. Any stock options to acquire Align-Rite common stock that had not been exercised as of June 7, 2000 became fully vested options to acquire Photronics common stock in accordance with the Merger Agreement. The transaction was accounted for as a pooling-of-interests. The condensed consolidated financial statements, the accompanying notes and this management discussion and analysis have been restated to reflect the Company's financial position, results of operations and cash flows as if Align-Rite was a consolidated wholly-owned subsidiary of the Company for all periods presented. Effective June 20, 2000, the Company acquired approximately 51% of the total share capital of Precision Semiconductor Mask Corporation (PSMC), a photomask manufacturer based in Taiwan, for approximately $62.0 million. The acquisition was accounted for as a purchase. The operating results of PSMC have been included in the Condensed Consolidated Statement of Income from June 20, 2000. MATERIAL CHANGES IN RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED JULY 31, 2000 VERSUS AUGUST 1, 1999 Net sales for the three and nine months ended July 31, 2000 increased 18.2% to $85.6 million and 18.0% to $234.5 million, respectively, compared with $72.4 million and $198.8 million for the corresponding prior year periods. The increase for the three and nine months ended July 31, 2000 resulted primarily from an increase in new design releases and higher average selling prices resulting from an improved mix of high-end technology products, together with the consolidation of PSMC's results from June 20, 2000. Gross margins for the three and nine month periods ended July 31, 2000 increased to 33.8% and 32.6%, respectively, compared to 31.2% and 29.3% for the corresponding prior year periods. The increases in gross margin, attributable to a greater mix of high-end, higher margin revenues, increased capacity utilization and efficiencies realized from the Company's recent restructurings, were partially offset by substantially lower margins currently being experienced at PSMC. 11

During March, 2000, the Company implemented a plan to consolidate its mature products group in order to increase capacity utilization, manufacturing efficiencies and customer service activities worldwide. Total restructuring and related charges associated with this consolidation plan of $17.5 million were recorded in the second quarter of 2000. Of the total charge, $9.1 million related to restructuring and $8.4 million related to the impairment of intangible assets. The significant components of the consolidation plan included the closing of the Company's Sunnyvale, California and Neuchatel, Switzerland manufacturing facilities and the consolidation and regionalization of sales and customer service functions. The Company anticipates that the closing of the Sunnyvale and Neuchatel facilities will maximize capacity utilization at its remaining mature products facilities. As part of the plan, the Company reduced its work force by approximately 125 employees. The restructuring charge of $9.1 million includes $1.5 million of cash charges for severance benefits paid to terminated employees which was disbursed over their entitlement periods and $2.3 million for facilities closings and lease termination costs to be expended over the next twelve months. Additionally, non-cash charges of $5.3 million approximated the carrying value primarily of fixed assets associated with the manufacturing consolidation based upon their expected disposition. Such assets, consisting principally of specialized manufacturing tools and equipment, were subsequently taken out of service. The charges also included $8.4 million related to the impairment in value of associated intangible assets. It was determined during the period that such assets no longer had future economic benefit to the Company because the anticipated undiscounted cumulative cash flows from these assets were insufficient to support their carrying value. Selling, general and administrative expenses increased 12.4% to $11.5 million, and 10.8% to $32.6 million for the three and nine months ended July 31, 2000, respectively, compared with $10.2 million and $29.4 million for the same periods in the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses decreased to 13.4% and 13.9%, respectively, compared to 14.1% and 14.8% for the same periods in the prior fiscal year. The higher expenses were due principally to staffing and other costs associated with the Company's expansion, both domestically and internationally, including increases in information technology and communications costs. Research and development expenses for the three and nine months ended July 31, 2000, increased 22.9% to $5.3 million and 25.2% to $15.1 million, respectively, compared with $4.3 million and $12.0 million for the same periods in the prior fiscal year. These increases reflect the continuing development efforts on high-end, more complex photomasks such as phase shift, optical proximity correction and next generation lithography applications. Research and development was 6.2% and 6.4% of net sales for the three and nine months ended July 31, 2000, respectively, compared to 6.0% in both of the corresponding prior year periods. 12

In the third quarter of fiscal 2000, the Company recorded a pre-tax charge of approximately $5.5 million for transaction costs incurred in connection with the Align-Rite merger. Such costs consisted primarily of investment banking, legal, accounting, financial printing and other related charges. Net other expense of $1.9 and $3.6 million for the three and nine months ended July 31, 2000 increased by $0.8 million and $0.7 million, as compared to the three and nine months ended August 1, 1999, respectively. The increases, which were offset by income earned on investments, are primarily attributable to increased interest costs associated with increased borrowings, principally for the PSMC acquisition. Net income for the three and nine months ended July 31, 2000, decreased to $3.2 million and $1.4 million, respectively, or $0.11 and $0.05 per basic and diluted share. These amounts compare to $4.3 million, or $0.16 per basic and diluted share, and $8.7 million, or $0.31 per basic and diluted share, for the corresponding prior year periods. Fiscal year 2000 includes the effect of the restructuring and related charges and merger related costs amounting to $14.8 million after tax, or $0.52 per share. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at July 31, 2000 was $101.5 million as compared to $38.2 million at October 31, 1999. The increase in working capital is due primarily to higher cash resulting from increased borrowings under the Company's unsecured revolving credit agreement. Cash and cash equivalents at July 31, 2000 were $50.3 million as compared to $23.1 million at October 31, 1999. Cash provided by operating activities for the nine months ended July 31, 2000 was $19.2 million as compared to $38.6 million for the nine months ended August 1, 1999. This decrease is primarily attributable to a decrease in accounts payable and accruals of $34.3 million from October 31, 1999, principally due to the timing of progress payments for capital equipment coming due during the period. Cash used by investing activities of $58.1 million consisted principally of the acquisition of PSMC and capital equipment purchases. Cash flows from financing activities of $70.4 million included increased net borrowings of $41.6 million, primarily associated with the PSMC acquisition, and $29.0 million in proceeds from the issuance of common stock, the majority of which resulted from the sale of one million shares of common stock to institutional investors in June of 2000. The Company's $125 million unsecured revolving credit facility was amended as of April 28, 2000, in order to obtain the lenders' consent to the Align-Rite and PSMC acquisitions, and to modify certain covenants and definitions in connection with the restructuring. The Company is subject to compliance with and maintenance of certain financial covenants and ratios set forth in the credit facility, as amended. The Company had $78.0 million of outstanding borrowings under the revolving credit facility at July 31, 2000. 13

Photronics' commitments represent investments in additional manufacturing capacity as well as advanced equipment for the production of high-end, more complex photomasks. At July 31, 2000, Photronics had commitments outstanding for capital expenditures of approximately $40.0 million. Additional commitments for capital requirements are expected to be incurred during fiscal 2000. Photronics will continue to use its working capital and bank lines of credit to finance its capital expenditures. Photronics believes that its currently available resources, together with its capacity for substantial growth and its access to other debt and equity financing sources, are sufficient to satisfy its currently planned capital expenditures, as well as its anticipated working capital requirements for the foreseeable future. "SAFE HARBOR STATEMENT" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Except for historical information, the matters discussed above may be considered forward-looking statements and may be subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected, including uncertainties in the market, pricing, competition, procurement and manufacturing efficiencies, and other risks. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibits Index. (b) Reports on Form 8-K During the quarter for which this report is filed, the following reports on Form 8-K were filed by the Company, each reporting information under Form 8-K, Item 5: (i) Form 8-K dated May 19, 2000. (ii) Form 8-K dated May 26, 2000. In addition, a report on Form 8-K dated June 21, 2000 was filed by the Company reporting information under Form 8-K, Items 2, 5 and 7 and a report on Form 8-KA dated June 30, 2000 was filed by the Company reporting the following financial information: financial statements of business acquired and supplementary consolidated financial statements as required by such Form 8-K. 14

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHOTRONICS, INC. Registrant By: /s/ Robert J. Bollo ------------------- Robert J. Bollo Senior Vice President Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) DATE: SEPTEMBER 12, 2000 15

5 7-MOS JUL-31-2000 JUL-31-2000 50,272 0 60,842 815 19,504 149,356 598,352 202,000 623,660 47,851 223,396

0 0 295 284,729

623,660 234,540 234,540 158,065 158,065

23,000

6,588 2,187 800 1,387 0 0 0 1,387 0.05 0.05 Gross trade receivables Total current assets Gross PP&E Long-term debt Total equity less common stock For Photronics, this amount is COS Operating expenses exclusive of COS, SG&A and R&D Bad debt expense