UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 1, 2009
OR
(cid:134)
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
(State or other jurisdiction
of incorporation or organization)
06-0854886
(IRS Employer
Identification Number)
15 Secor Road, Brookfield, Connecticut 06804
(Address of principal executive offices and zip code)
(203) 775-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value per share - NASDAQ Global Select Market
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 (cid:134) No ⌧
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 (cid:134) No ⌧
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 ⌧ No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ⌧ No (cid:134)
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. ⌧
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 (cid:134) Accelerated Filer ⌧ Non-Accelerated Filer (cid:134) Smaller Reporting Company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:134) No ⌧
As of May 3, 2009, 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's common stock held by non-affiliates was approximately $67,211,105
(based upon the closing price of $1.76 per share as reported by the Nasdaq Global Select Market on that date).
As of December 31, 2009, 53,185,252 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2010
Annual Meeting of Shareholders
to be held in April 2010
Incorporated into Part III
of this Form 10-K
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. ("Company" or "we"). 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 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 changes in the market price of the
Company's common stock; foreign currency rate fluctuations; economic and political conditions in international markets;
the ability to obtain additional financing; the ability to achieve anticipated synergies and other cost savings in connection
with acquisitions and productivity programs; the timing, impact and other uncertainties of future acquisitions; the seasonal
and cyclical nature of the semiconductor and flat panel display industries; 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 achieve 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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ITEM 1. BUSINESS
General
PART I
Photronics, Inc. ("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, Inc. and its subsidiaries 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, or FPDs, and are used as masters to transfer circuit patterns
onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits, or ICs, and a variety of
FPDs and, to a lesser extent, other types of electrical and optical components. The Company currently operates principally
from nine manufacturing facilities; two of which are located in Europe, two in Taiwan, one each in Korea and Singapore;
and three in the United States. The Company closed its manufacturing facilities in Manchester, United Kingdom and
Shanghai, China during the year ended November 1, 2009.
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. IC and FPD photomasks are manufactured in layers, each having a
distinct pattern which is etched onto a different photomask. The resulting series of photomasks is then used to image the
circuit patterns onto each successive layer of a semiconductor wafer or flat panel substrate. 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 FPD 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 and FPD display devices intended for use in an array of products. However, in the case of
IC production, electron beam technologies fabricate the large majority of critical layer photomasks. End markets served
with IC photomasks 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 (laser-based) 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 robust processes, geographic location, efficient manufacturing methods, high yield and high equipment
reliability. The Company works to meet these requirements by making significant investments in research and
development, manufacturing and data processing systems, and by utilizing 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
3
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.
The majority of IC photomasks produced for the semiconductor industry employ geometries of 90 nanometers or
larger. 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 also available to the Company. The Company is also capable of
producing full lines of photomasks for high-end IC and FPD applications. In the case of IC, this includes masks at and
below the 65 nanometer technology node and for FPD at and above the Generation 7 technology node. The Company has
access to technology and customer qualified manufacturing capability that allows it to compete in high-end markets
serving both IC and FPD applications.
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 internally manufacture
photomasks. Photomasks are manufactured by independent merchant manufacturers like us, and by semiconductor and
FPD manufacturers that produce photomasks exclusively for their own use (captive manufacturers). Since the mid-1980s,
there has been a strong trend in Asia, Europe and North America toward the divesture or closing of captive photomask
operations by semiconductor manufacturers and an increase in the share of the market served by independent
manufacturers. This trend has been driven by the increasing complexity involved in manufacturing plus the high cost of
the necessary capital equipment.
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
customers, minimizing delivery time, and serving customers that utilize manufacturing foundries outside of the United
States, principally in Asia. See Note 17 to the Company's consolidated financial statements for the amount of net sales and
long-lived assets attributable to each of the Company's geographic areas of operations.
Customers
The Company primarily sells its products to leading semiconductor and FPD manufacturers. The Company's largest
customers during the fiscal year ended November 1, 2009 ("fiscal 2009") included the following:
AU Optronics Corp.
Chartered Semiconductor Manufacturing, Ltd.
Dongbu HiTek Co. Ltd.
Freescale Semiconductor, Inc.
HannStar Display Corp.
IM Flash Technologies, LLC
Integrated Device Technology, Inc.
Jazz Semiconductor, Inc.
LG Philips LCD Co., Ltd.
Magnachip Semiconductor
Maxim Integrated Products, Inc.
Micron Technology, Inc.
National Semiconductor Corporation
Novatek Microelectronics Corp., Ltd.
ON Semiconductor Corporation
Samsung Electronics Co., Ltd.
Skyworks Solutions, Inc.
ST Microelectronics, Inc.
Texas Instruments Incorporated
United Microelectronics Corp.
4
During fiscal 2009, the Company sold its products and services to approximately 600 customers. Samsung Electronics
Co., Ltd. accounted for approximately 19% of the Company's net sales in fiscal 2009, and 25% in fiscal 2008 and 2007.
This included sales of both IC and FPD photomasks. The Company's five largest customers, in the aggregate, accounted
for approximately 42% in fiscal 2009, 44% in fiscal 2008 and 43% in fiscal 2007, 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.
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.
Research and Development
The Company conducts its primary research and development activities at the MP Mask Technology Center, LLC
("MP Mask") joint venture operation located in Boise, Idaho, and in site-specific research and development programs to
support strategic customers. 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 application oriented research and development activities to support the early adoption of new
photomask or supporting data and services technology into the customers' applications. Currently, research and
development photomask activities are focused on 32 nanometer node and below IC technology and Generation 8 and
higher 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 45 nanometer. The
Company has incurred research and development expenses of $15.4 million, $17.5 million and $17.3 million in fiscal
2009, 2008 and 2007, respectively. The Company believes that it owns, controls, or licenses valuable proprietary
information necessary for its business as it is presently conducted. This includes trade secrets as well as patents. The
Company believes that its intellectual property and trade secret know-how will continue to be important to its technical
leadership in the field of photomasks.
Patents and Trademarks
The Company has over 45 patents with ownership interest in the United States. The subject matter of these patents
generally 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 2027. Additionally, pursuant to the technology license agreement
with Micron Technology, Inc. (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 although the Company is not
dependent on any one supplier for most of its raw materials, glass blanks used for the production of certain high-end
photomasks are only available from one supplier. The Company believes that its utilization of a select group of strategic
suppliers enables it to access the most technologically advanced materials available. On an ongoing basis, the Company
continues to consider additional supply sources.
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
5
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 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 indicator of future sales volume.
International Operations
International sales were approximately 72%, 77% and 75% of the Company's sales in fiscal 2009, 2008 and 2007,
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 to deploy resources where they can be used to their greatest advantage, and consequently
may adversely affect its financial conditions and results of operations.
Note 17 of the notes to the Company's consolidated financial statements reports net sales and long-lived 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 its 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. A few competitors have 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 $3.2 billion. Competitors include Compugraphics, Inc., Dai Nippon Printing Co.,
Ltd., Hoya Corporation, SK-Electronics Co. Ltd., 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. The
Company believes the pressure to reduce prices has contributed to the decrease in the number of independent
manufacturers, and expects such pressure to continue in the future.
Employees
As of November 1, 2009, the Company and its majority-owned subsidiaries had approximately 1,300 employees. The
Company believes it offers competitive compensation and other benefits and that its employee relations are good.
6
ITEM 1A. RISK FACTORS
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 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, a reduction in design complexity, other changes in the
technology or methods of manufacturing or designing 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. 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 semiconductor industry began to
experience a downturn in fiscal 2008, which continued through fiscal 2009, and had an adverse impact on the Company's
2009 operating results.
The Company's sales of photomasks for use in fabricating high performance electronic products such as FPDs
decreased in fiscal 2009 as compared to fiscal 2008. 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 incurred net losses in fiscal years 2009 and 2008, and may incur future net losses.
The Company incurred net losses of $41.9 million in fiscal 2009 and $210.8 million in fiscal 2008. These net losses
were incurred due to the global recession and related severe downturn experienced by the semiconductor industry that
began in 2008. Net losses incurred in both fiscal years 2009 and 2008 include significant non-cash charges for
restructurings, impairments of goodwill, and impairments of long-lived assets. The Company cannot provide assurance of
when Photronics will return to profitability.
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.
7
The Company's industry is subject to rapid technological change and the Company 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 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 in
the production of semiconductors. As of the end of fiscal 2009, 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 2010 are expected to be in the range of $45 million to $55 million, of which $10 million was accrued
as of November 1, 2009. Further, the Company's credit facility has a limitation on capital expenditure payments. 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 paid Micron $135.0 million in exchange for a 49.99% interest in MP Mask, a license for photomask
technology of Micron and certain supply agreements. The Company invested an additional $2.6 million in 2008 and $3.5
million in 2007 in MP Mask for capital expenditure and working capital purposes, and received distributions from MP
Mask of $5.0 million in both 2009 and 2008.
MP Mask is governed by a Board of Managers, appointed by Micron and Photronics. Since MP Mask's inception,
Micron as a result of its majority ownership, has appointed the majority of the managers. The number of managers
appointed by each party is subject to change as ownership interests change. Under the operating agreement relating to the
MP Mask joint venture, through May 5, 2010, the Company may be required to make additional contributions to the joint
venture up to the maximum amount defined in the operating agreement. However, should the Board of Managers
determine that additional funding is required, the joint venture shall pursue its own financing. If the joint venture is unable
to obtain its own financing it may request additional capital contributions from the Company. Should the Company
choose not to make a requested contribution to the joint venture, Photronics' ownership interest may be reduced.
On May 19, 2009, the Company's capital lease agreement with Micron for the U.S. nanoFab was canceled, at which
time Photronics and Micron agreed to enter into a new lease agreement for the U.S. nanoFab building. Under provisions
8
of the new lease agreement, quarterly lease payments were reduced, the lease term was extended, and ownership of the
property will not transfer to the Company at the end of the lease term. As a result of the new lease agreement, the
Company reduced its lease obligations and the carrying value of its assets under capital leases by approximately $28
million. Including the $28 million reduction in carrying value of assets under capital leases, the Company's total
investment to date in the purchase and equipping of the Company's U.S. nanoFab is approximately $157 million. The U.S.
nanoFab began production in the second fiscal quarter of 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.
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 2009, one customer, Samsung Electronics Co., Ltd., accounted for approximately 19% of the
Company's net sales. The Company's five largest customers, in the aggregate, accounted for 42% of net sales in fiscal
2009, 44% in fiscal 2008, and 43% in fiscal 2007. 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 an unfavorable change in 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 and economic downturn in the
semiconductor industry may increase the likelihood of losing a significant customer and have an adverse effect on the
Company's financial performance and business prospects.
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, for production of certain
high-end photomasks, there is only one available supplier. The Company has no long-term contracts 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 have a material adverse effect on the Company's
business and results of operations. The fluctuation of foreign currency exchange rates with respect to prices of equipment
and raw materials used in manufacturing also could have a material adverse effect on the Company's business and results
of operations.
The Company faces risks associated with complex manufacturing processes, including the use of sophisticated
equipment and manufacturing processes with complex technologies. The inability of the Company to effectively
utilize these processes and technologies 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
9
manufacturing less advanced photomasks, and may lead to 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.
The Company's debt agreements limit its ability to obtain financing and obligates the Company to repay debt.
As of November 1, 2009, the Company had $2.6 million outstanding under its revolving credit facility and $27.2
million outstanding under its term loan agreement. The outstanding balance of the revolving credit facility was reduced by
$120.2 million during the quarter ended November 1, 2009, primarily with the net proceeds of the Company's 5.5%
convertible notes and common stock offerings, and with cash from operations. On June 8, 2009, the Company entered into
the aforementioned term loan agreement in the U.S. for $27.2 million, which was used to repay outstanding foreign loans
on June 12, 2009. Financial covenants related to these debts include, among others, a Senior Leverage Ratio, Total
Leverage Ratio, Minimum Fixed Charge Ratio and minimum six-month EBITDA levels. Existing covenant restrictions
limit the Company's ability to obtain additional debt financing and, should Photronics be unable to meet one or more of
these covenants, the bank may require the Company to repay the outstanding balances prior to the expiration date of the
agreements.
The Company's ability to comply with the financial and other covenants in its debt agreements may be affected by
worsening economic or business conditions, or other events. Should the Company be unable to meet one or more of these
covenants, lenders may require the Company to repay its outstanding balances prior to the expiration date of the
agreements. The Company cannot assure that additional sources of financing will be available to pay off long-term
borrowings to avoid default. Should the Company default on any of the long-term borrowings, a cross default would
occur on other long-term borrowings, unless amended or waived.
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 Precision Semiconductor Mask Corporation, a Taiwanese
photomask manufacturer, in 2000 and PK Ltd., a Korean photomask manufacturer, in 2001 and increasing its 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's cash flow from operations and current holdings of cash may not be adequate for its current and
long term needs.
The Company's liquidity is highly dependent on its sales volume and the timing of its capital expenditures, (which can
vary significantly from period to period), as it operates in a high fixed cost environment. Depending on conditions in the
IC semiconductor and FPD market, the Company's cash flows from operations and current holdings of cash may not be
adequate to meet the Company's current and long-term needs for capital expenditures, operations and debt repayments.
Historically, in certain years the Company has used external financing to fund these needs. Due to conditions in the credit
markets, some financing instruments used by the Company in the past may not be currently available to it. The Company
is evaluating alternatives to increase its capital, delaying capital expenditures and evaluating further cost reduction
initiatives. However, the Company cannot assure that additional sources of financing would be available to it on
commercially favorable terms should its capital requirements exceed cash available from operations and existing cash,
and cash available under its credit facility.
10
The Company may incur unforeseen charges related to its 2009 restructurings in China and the U.K. or, it may fail
to realize projected benefits related to these or any other possible future facility closures or restructures.
In order to lower its operating costs and increase its manufacturing efficiencies, the Company ceased the manufacture
of photomasks at its facility in Manchester, U.K., in January 2009 and at its facility in Shanghai, China, in July 2009.
However, the Company cannot assure that these actions will not result in unforeseen costs, disruptions in its operations, or
other negative events that could result in its failing to realize the projected benefits of these restructures.
The Company also cannot assure that there will not be additional facility closures or other restructurings in the near or
long term, nor can it assure that it will not incur significant charges should there be any additional future facility closures
or restructures.
The Company operates in a highly competitive industry; should the Company be unable to meet its customers'
requirements for product quality, timeliness of delivery or technical capabilities, it could adversely affect the
Company's 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, SK-
Electronics Co., Ltd., Taiwan Mask Corporation, Toppan Printing Co., Ltd. and Toppan Chungwha Electronics
Corporation. The Company also competes with semiconductor manufacturers' captive photomask manufacturing
operations, some of which market their photomask manufacturing services to outside customers. 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, when producing smaller
geometry photomasks, some of the Company's competitors may be able to more rapidly develop, produce, and achieve
higher manufacturing yields than the Company. 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 have a material adverse
effect on its business and results of operations. 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.
The Company's substantial international operations are subject to additional risks.
International sales accounted for approximately 72% of the Company's net sales for fiscal 2009, 77% in fiscal 2008,
and 75% in fiscal 2007. 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 significant investments of financial,
managerial, operational, and other resources. Since 1996, the Company has significantly expanded its operations in
international markets by acquiring existing businesses in Europe, establishing a manufacturing operation 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. 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.
Changes in foreign currency exchange rates could materially, adversely affect the Company's business, results of
operations, or financial condition.
The Company's financial statements are prepared in accordance with accounting principals generally accepted in the
United States of America (U.S. GAAP) and are reported in U.S. dollars. The Company's international operations have
transactions and balances denominated in currencies other than the U.S. dollar, primarily the Korean won, New Taiwan
dollar, Japanese yen, Singapore dollar, euro, British pound and Chinese renminbi. In fiscal 2009, the Company recorded a
net loss of $3.1 million in its statement of operations from changes in foreign currency rates, while its net assets were
increased by $10.7 million as a result of the translation of foreign currency financial statements to U.S. dollars. In the
event of significant foreign currency fluctuations, the Company's results of operations, financial condition or cash flows
may be adversely affected.
11
The Company's business depends on managerial and technical personnel, who are in great demand, and its
inability to attract and retain qualified employees could adversely affect the Company's business and results of
operations.
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, 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, and the
utilization of unprotected Company developed technology by its competitors could adversely affect the Company's
business, results of operations and financial position.
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, with or without merit, or litigation to enforce or protect its
intellectual property rights or to defend itself 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 incur 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, so that 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 are not material to its financial
statements. However, there can be no assurances that the Company will not incur any material environmental liabilities in
the future.
The Company's production facilities could be damaged or disrupted by a natural disaster or labor strike, either of
which could adversely affect its financial position, results of operations and cash flows.
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, labor strikes, or work stoppage 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, which could have a material, adverse
effect on the Company's financial position, results of operations, and cash flows.
12
The Company's sales can be impacted by the health and stability of the general economy, which could adversely
affect its operations and cash flows.
The global recession and other unfavorable changes in general economic conditions in the U.S. or other countries in
which the Company does business may have the effect of reducing the demand for photomasks. For example, an
economic downturn may lead to a decrease in demand for end products whose manufacturing process involves the use of
photomasks, which may result in a reduction in new product design and development by semiconductor manufacturers,
which could adversely affect the Company's operations and cash flows.
Changes in the Company's credit standing could adversely affect its financial position.
The Company's ability to raise debt capital can be materially influenced by acquisitions, dispositions, other investment
decisions, and the results of its operations in the near-term. Should the Company's credit standing decline, its cost and
ability to raise needed working and investment capital could adversely affect its results of operations and cash flows.
Additional taxes could adversely affect the Company's financial results.
The Company's tax filings are subjected to audit by tax authorities in the various jurisdictions in which it does
business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or
through the courts. Currently, the Company believes there are no outstanding assessments whose resolution would result
in a material adverse financial result. However, the Company cannot offer assurances that unasserted or potential future
assessments would not have a material, adverse effect on its financial condition or results of operations.
The Company's business could be adversely impacted by global or regional catastrophic events.
The Company's business could be adversely affected by terrorist acts, major natural disasters, widespread outbreaks of
infectious diseases, or the outbreak or escalation of wars, especially in the Asian region where the Company generates a
significant portion of its international sales. Such events in the geographic regions in which the Company does business,
including political tensions within the Korean Peninsula where a major portion of the Company's foreign operations are
located, could have material, adverse impacts on its sales volume, cost of raw materials, earnings, cash flows and financial
condition.
The fair value of certain warrants issued on the Company's common stock is subject to fluctuations with the
market price of the Company's common stock, and may have a material, adverse effect on the Company's results
of operations.
On May 15, 2009, in connection with an amendment to the Company's credit facility, Photronics issued 2.1 million
warrants to purchase the Company's common stock, approximately 0.8 million of which were outstanding at November 1,
2009. As a result of certain net cash settleable put provisions, the warrants were recorded as a liability during fiscal 2009
and are subsequently being reported at fair value. The warrants are each exercisable for one share of common stock and
have an exercise price of $0.01. Therefore, changes in the market price of the Company's common stock could result in a
significant change in the fair value of the warrants, which would result in a charge or credit to other income (expense) in
the Company's statements of operations. During the period that the warrants were outstanding in fiscal 2009, the market
price of the Company's common stock increased, which resulted in a non-cash loss of $0.3 million. Changes in the market
price of the Company's common stock may continue to have a material adverse effect on the Company's results of
operations on a non-cash basis.
Certain warrants issued by the Company include a "put" provision, giving the holders the option to sell the
warrants to the Company at approximately the market price of the Company's common stock, which may have a
material adverse effect on the Company's cash flows.
The warrants discussed above include a put provision which may be exercised from May 15, 2012 through the
expiration of the warrants on May 15, 2014. The put provision is only exercisable if the Company's common stock is not
traded on a national exchange or if the Company's credit facility, which matures on January 31, 2011, has not been paid in
full by another financing facility (new credit facility, debt and/or an equity securities, or capital contributions) or with
other funds. As of November 1, 2009, approximately 768,000 warrants were outstanding that include a put provision. The
purchase of a significant amount of the Company's common stock by Photronics under the put provision may have a
material adverse effect on the Company's cash flows.
13
Servicing the Company's debt requires a significant amount of cash, and the Company may not have sufficient
cash flow from its operations to pay its indebtedness.
The Company's ability to make scheduled payments of the principal and interest or to refinance its indebtedness
depends on its future performance, which is subject to economic, financial, competitive and other factors beyond the
Company's control. The Company's business may not continue to generate sufficient cash flow from operations in the
future to service its debt and make necessary capital expenditures. If the Company is unable to generate such cash flow, it
may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity
capital on terms that may be onerous or highly dilutive. The Company's ability to refinance its indebtedness will depend
on the capital markets and the Company's financial condition at such time. The Company may not be able to engage in
any of these activities or engage in these activities on desirable terms, which could result in a default on its debt
obligations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. DESCRIPTION OF PROPERTY
The following table presents certain information about the Company's photomask manufacturing facilities:
Location
Allen, Texas
Boise, Idaho
Brookfield, Connecticut
Bridgend, South Wales
Cheonan, Korea
Dresden, Germany
Hsinchu, Taiwan
Shanghai, China
Singapore
Taichung, Taiwan
Type of
Interest
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Owned
(1) (2)
(1)
(1) The Company owns its manufacturing facilities in Shanghai and Taichung, however, it leases the related land.
(2) Production at the Shanghai, China facility ceased in July 2009.
14
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 2009.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDERS' MATTERS
PART II
The Common Stock of the Company is traded on the NASDAQ Global Select Market ("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 2009 and
2008, as reported by NASDAQ.
Fiscal Year Ended November 1, 2009:
Quarter Ended February 1, 2009
Quarter Ended May 3, 2009
Quarter Ended August 2, 2009
Quarter Ended November 1, 2009
Fiscal Year Ended November 2, 2008:
Quarter Ended January 27, 2008
Quarter Ended April 27, 2008
Quarter Ended July 27, 2008
Quarter Ended November 2, 2008
High
Low
$ 2.15
1.82
5.46
5.49
$13.10
12.87
11.16
4.74
$0.33
0.65
1.53
4.00
$8.91
8.44
4.40
0.39
On December 29, 2009, the closing sale price for the Common Stock as reported by NASDAQ was $4.54. Based on
information available to the Company, the Company believes it has approximately 5,900 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 2010 definitive Proxy Statement into Item 12 of Part III of this
report.
15
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):
November 1,
2009
November 2,
2008
October 28,
2007
October 29,
October 30,
2006
2005
Year Ended
OPERATING DATA:
Net sales
Cost and expenses:
Cost of sales
Selling, general and administrative
Research and development
Consolidation, restructuring and
related charges
Impairment of long-lived assets
Impairment of goodwill
Gains on sales of facilities
Operating income (loss)
Other income (expense):
Interest expense
Investment and other income
(expense), net
Income (loss) before income tax
benefit (provision) and minority interest
Income tax benefit (provision)
Minority interest in income of
consolidated subsidiaries
$361,353
$422,548
$421,479
$454,875
$440,770
(304,282)
(41,162)
(15,423)
(13,557) (a)
(1,458) (b)
-
2,034
(12,495)
(349,841)
(55,167)
(17,475)
(510) (d)
(66,874) (e)
(138,534) (f)
-
(321,958)
(61,507)
(17,300)
-
-
-
2,254
(307,851)
(62,215)
(27,337)
(15,639) (g)
-
-
-
(295,649)
(54,295)
(32,152)
-
-
-
-
(205,853)
22,968
41,833
58,674
(22,401)
(11,878)
(5,928)
(11,916)
(10,885)
(2,208) (c)
5,562
6,844
15,469
7,556 (h)
(37,104)
(4,323)
(483)
(212,169)
2,778
(1,374)
23,884
3,178
(2,539)
45,386
(10,462)
55,345
(10,058)
(5,592)
(6,634)
Net income (loss)
$(41,910) (a) (b) (c)
$(210,765) (d) (e) (f)
$ 24,523
$ 29,332 (g)
$ 38,653 (h)
Earnings (loss) per share:
Basic
Diluted
Weighted average number of
common shares outstanding:
Basic
Diluted
$(0.97) (a) (b) (c)
$(5.06) (d) (e) (f)
$(0.97) (a) (b) (c)
$(5.06) (d) (e) (f)
$0.59
$0.56
$0.71 (g)
$1.09 (h)
$0.66 (g)
$0.95 (h)
43,210
43,210
41,658
41,658
41,539
51,282
41,369
51,072
35,519
45,256
16
BALANCE SHEET DATA
As of
November 1, November 2,
2009
2008
October 28,
2007
October 29,
2006
October 30,
2005
Working capital
Property, plant and equipment, net
Total assets
Long-term debt
Shareholders' equity
$ 89,542
347,889
663,656
112,137
399,755
$ 66,419
436,528
758,007
202,979
382,782
$ 96,606
531,578
1,059,780
191,253
654,284
$ 127,691
443,637
1,045,683
170,288
614,282
$300,557
412,429
945,729
238,949
561,875
(a)
Includes consolidation and restructuring charges of $13.6 million ($12.9 million net of tax) in connection with the closures of the Company's Shanghai, China,
and Manchester, U.K. manufacturing facilities.
(b)
(c)
(d)
(e)
(f)
(g)
Includes impairment charge of $1.5 million ($1.1 million net of tax) related to the Company's Manchester, U.K. manufacturing facility.
Includes non-cash mark-to-market charge of $0.3 million net of tax in connection with warrants issued to purchase the Company's common stock.
Includes consolidation and restructuring charges of $0.5 million ($0.4 million net of tax) in connection with the closure of the Company's Manchester, U.K.
manufacturing facility.
Includes impairment charge of $66.9 million ($60.9 million net of tax) for certain long-lived assets in Asia and Europe.
Includes impairment of goodwill charge of $138.5 million ($137.3 million net of tax).
Includes consolidation and restructuring charges of $15.6 million net of tax in connection with the closure of the Company's Austin, Texas manufacturing and
research and development facility.
(h)
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations for the Years Ended November 1, 2009, November 2, 2008 and October 28, 2007
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, other changes in the technology or methods
of manufacturing or designing 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 semiconductor industry experienced a downturn in 2008 that continued into 2009, which had a
negative impact on the Company's 2009 operating results. The Company's 2009 operating results were also negatively
impacted by the global recession, which could also impact the Company's 2010 operating results.
17
The global semiconductor industry is driven by end markets which have been closely tied to consumer driven
applications of high performance semiconductor devices including, but not limited to, communications and mobile
computing solutions. The Company is typically required to fulfill its customer orders within a short period of time,
sometimes within 24 hours. This results in the Company having a minimal level of back-log orders, typically one to two
weeks. 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.
The effects of the worsening global economy and the tightening credit market are also making it increasingly difficult
for the Company to obtain external sources of financing to fund its operations. The Company faces challenges in the
current and near term that require it to continue to make significant improvements in its competitiveness. The Company
continues to evaluate financing alternatives, delay capital expenditures and evaluate further cost reduction initiatives.
The Company is focused on improving its competitiveness by advancing its technology and reducing costs. In addition,
the Company increased its high-end manufacturing capability in 2008 with the commencement of production at its
nanofab facility ("U.S. nanoFab") in Boise, Idaho. In order to lower its operating costs and increase its manufacturing
efficiencies, the Company ceased the manufacture of photomasks at its facility in Manchester, U.K., in January 2009 and
at its facility in Shanghai, China, in July 2009.
As of December 2009, state-of-the-art production for semiconductor masks is considered to be 45 nanometer and lower
for ICs, and Generation 8 and above process technologies for FPDs, while 65 nanometer is currently in volume
production. Currently, however, 90 nanometer and above geometries and Generation 7 and below process technologies for
FPDs constitute the majority of designs being fabricated in volume today. The Company expects 65 nanometer designs to
continue to move to wafer fabrication throughout fiscal 2010, 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.
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. Furthermore, 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. As of the end of fiscal 2009, 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, and the Company has not experienced a significant loss of revenue as a result of alternative semiconductor
design methodologies. 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 ("ASPs"). The
Company's capital expenditure payments for new facilities and equipment aggregated approximately $234 million for the
three fiscal years ended November 1, 2009, resulting in significant increases in operating expenses. While the Company
intends to continue to make the required investments to support the technological demands of its customers and position
itself for future growth, its level of investment, when compared to recent years, decreased significantly in fiscal 2009, and
the Company expects that its level of capital expenditures will continue at this reduced level for the next several years.
18
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, which consists of nine
manufacturing sites, and its employees 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 photomask units produced for the semiconductor industry employ geometries of 90 nanometers or
larger for ICs, and Generation 7 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 8 and above for FPDs.
In September 2009 the Company issued approximately 11.1 million shares of its common stock at a price of $4.15 per
share. Gross proceeds from the offering were $46.0 million which were reduced by underwriting commissions and other
expenses to yield net proceeds of approximately $43.1 million. The net proceeds from the offering were used to reduce
outstanding amounts under the Company's credit facility.
Also in September 2009 the Company issued $57.5 million aggregate principal amount of 5.5% convertible senior
notes which mature on October 1, 2014. Note holders may convert each $1,000 principal amount of notes to 196.7052
shares of stock (equivalent to an initial conversion price of approximately $5.08 per share of common stock) on or before
September 30, 2014. The conversion rate may be increased in the event of a make-whole fundamental change (as defined
in the prospectus supplement filed by the Company on September 11, 2009) and the Company may not redeem the notes
prior to their stated maturity date. The net proceeds of the offering were approximately $54.9 million, which were used to
reduce outstanding amounts under the Company's credit facility. Concurrent with the issuance of the 5.5% convertible
senior notes, the Company issued warrants to Intel Capital Corporation to purchase a total of 750,000 shares of the
Company's common stock, 500,000 of which were at an exercise price of $4.15 per share and 250,000 at an exercise price
of $5.08 per share. The warrants expire on September 10, 2014, and were issued to Intel Capital Corporation, an affiliate
of Intel Corporation, in consideration for an agreement between the Company and Intel Corporation to share technical and
operations information regarding the development of the Company's products, the capabilities of the Company's
photomask manufacturing lines and the alignment of photomask toolsets. Intel Capital Corporation also invested in the
Company's convertible debt offering described above.
In the third quarter of 2009 the Company ceased the manufacture of photomasks at its Shanghai, China facility.
Through the end of fiscal 2009, the Company recorded total restructuring charges related to this action of $10.2 million,
including $9.9 million related to asset write-downs, primarily for the Shanghai manufacturing facility whose fair value
was determined by management using a market approach. Approximately seventy-five employees were affected by this
action. The total after-tax restructuring charge is expected to range between $11 million to $13 million through its
completion in fiscal 2010.
In the first quarter of 2009 the Company ceased the manufacture of photomasks at its Manchester, U.K. facility and in
connection therewith, restructuring charges (primarily for termination costs and asset write-downs) of $3.3 million ($2.7
million net of tax) were incurred in fiscal 2009. Approximately eighty-five employees were affected by this action.
In the third quarter of fiscal 2008, the Company recorded impairment charges of $66.9 million for certain of its long-
lived assets and wrote off all $138.5 million of its goodwill (see Note 13 to the consolidated financial statements).
In the first quarter of 2008 a capital lease agreement commenced for the U.S. nanoFab facility. Quarterly lease
payments, which bore interest at 8% were $3.8 million through January 2013. This lease was cancelled in the third fiscal
quarter of 2009, at which time the Company and Micron Technologies, Inc. (the lessor) entered into a new lease
agreement for the facility. Under the provisions of the new lease agreement, quarterly lease payments were reduced from
$3.8 million to $2.0 million, the term of the lease was extended from December 31, 2012 to December 31, 2014, and
ownership of the property will not transfer to the Company at the end of the lease term. As a result of the new lease
agreement, the Company reduced its lease obligation and the carrying value of its assets under capital leases by
approximately $28 million. The lease will continue to be accounted for as a capital lease until the end of its original lease
term on December 31, 2012. For the additional two years of the new lease term, the lease will be accounted for as an
operating lease. The U. S. nanoFab began production in the second quarter of 2008 and, through the end of fiscal 2009,
the Company's total capital investment in the facility was approximately $157 million.
19
Results of Operations
The following table represents selected operating information expressed as a percentage of net sales:
Net sales
Cost of sales
Gross margin
Selling, general and administrative expenses
Research and development expenses
Consolidation, restructuring and related charges
Impairment of long-lived assets
Impairment of goodwill
Gains on sales of facilities
Operating income (loss)
Interest expense
Investment and other income (expense), net
Income (loss) before income tax benefit
(provision) and minority interest
Income tax benefit (provision)
Minority interest
Net income (loss)
Year Ended
November 1,
2009
November 2,
October 28,
2008
2007
100.0%
(84.2)
15.8
(11.4)
(4.3)
(3.8)
(0.4)
-
0.6
(3.5)
(6.2)
(0.6)
(10.3)
(1.2)
(0.1)
(11.6)%
100.0%
(82.8)
17.2
(13.1)
(4.1)
(0.1)
(15.8)
(32.8)
-
(48.7)
(2.8)
1.3
(50.2)
0.6
(0.3)
(49.9)%
100.0%
(76.4)
23.6
(14.6)
(4.1)
-
-
-
0.5
5.4
(1.4)
1.6
5.6
0.8
(0.6)
5.8%
Note: All the following tabular comparisons, unless otherwise indicated, are for the fiscal years ended November 1,
2009 (2009), November 2, 2008 (2008) and October 28, 2007 (2007), in millions of dollars.
Net Sales
2009
2008
2007
Percent Change
2008 to
2009
2007 to
2008
IC
FPD
Total net sales
$272.9
88.5
$361.4
$314.9
107.6
$422.5
$339.4
82.1
$421.5
(13.3)%
(17.8)
(14.5)%
(7.2)%
31.1
0.3 %
20
Net sales for 2009 decreased 14.5% to $361.4 million as compared to $422.5 million for 2008. The decrease was
primarily associated with the global recession which led to reduced demand for IC and FPD photomasks. Accordingly,
sales of IC photomasks decreased by $42.0 million, primarily related to decreases in both units and ASPs for mainstream
photomasks, and FPD photomasks decreased by $19.1 million, primarily related to decreased sales of high-end FPD
photomasks. High-end photomask applications, which typically have higher ASPs, include photomask sets for IC products
using 65 nanometer and below technologies and for FPD products using G7 and above technologies. During 2009, sales
of high-end photomasks totaled $77 million as compared to $92 million in 2008. Total sales of high-end FPD photomasks
decreased by $22.0 million, while sales of high-end IC photomasks increased by $7.0 million. By geographic area, net
sales in 2009 as compared to 2008 decreased by $36.1 million or 13.9% in Asia, increased by $3.0 million or 3.1% in
North America, and decreased by $28.0 million or 42.3% in Europe. As a percent of total sales in 2009, sales were 62% in
Asia, 28% in North America and 10% in Europe.
Net sales for 2008 increased 0.3% to $422.5 million as compared to $421.5 million for 2007. The increase is related to
increased sales of FPD photomasks of $25.5 million, primarily related to increased sales of high-end FPD photomasks;
substantially offset by reduced sales of IC photomasks of $24.5 million associated with decreased units and ASPs for
mainstream photomasks. During 2008, sales of high-end photomasks totaled $92 million. By geographic area, net sales in
2008 as compared to 2007 increased by $16.5 million or 6.8% in Asia, decreased by $10.4 million or 9.7% in North
America, and decreased by $5.0 million or 7.0% in Europe. As a percent of total sales in 2008, sales were 61% in Asia,
23% in North America and 16% in Europe.
Gross Margin
2009
2008
2007
Percent Change
2008 to
2009
2007 to
2008
Gross margin
Gross margin %
$57.1
15.8%
$72.7
17.2%
$99.5
23.6%
(21.5)%
-
(26.9)%
-
Gross margin percentage decreased to 15.8% in 2009 from 17.2% in 2008, primarily as a result of a year-over-year
decrease in net sales. 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.
Gross margin percentage decreased to 17.2% in 2008 from 23.6% in 2007 primarily due to costs relating to the
Company's increased manufacturing base, including costs associated with the U.S. nanoFab which commenced operations
in the second fiscal quarter of 2008, and reduced ASPs for IC photomasks, principally mainstream. The decreased gross
margin was partially mitigated by increased high-end revenues, primarily for FPD photomasks.
Selling, General and Administrative Expenses
2009
2008
2007
Percent Change
2008 to
2009
2007 to
2008
S,G&A expense
% of net sales
$41.2
11.4%
$55.2
13.1%
$61.5
14.6%
(25.4)%
-
(10.3)%
-
Selling, general and administrative expenses decreased by $14.0 million to $41.2 million in 2009, compared with $55.2
million in 2008. The decrease was primarily related to reduced compensation costs (due in part, to reduced employee head
count), cost reduction programs and to certain U.S. nanoFab costs reported in selling, general and administrative expenses
(prior to its commencing production in Q2-08).
21
Selling, general and administrative expenses decreased by $6.3 million or 10.3% to $55.2 million in 2008, as compared
to $61.5 million in 2007. The decrease was related to certain U.S. nanoFab costs reported in costs of sales since
production commenced in the second quarter of fiscal 2008, and reduced compensation expense, due in part to reduced
headcount and cost reduction programs.
Research and Development
2009
2008
2007
Percent Change
2008 to
2009
2007 to
2008
R&D expense
% of net sales
$15.4
4.3%
$17.5
4.1%
$17.3
4.1%
(11.7)%
-
1.0%
-
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 2009 as compared to 2008 primarily due to reduced advanced development activity, principally in
Asia, as a result of a downturn in the semiconductor industry in fiscal 2009.
Consolidation, Restructuring and Related Charges
In the third quarter of fiscal 2009, the Company ceased the manufacture of photomasks at its Shanghai, China facility.
In connection with this restructuring, the Company recorded a total restructure charge of $10.2 million in fiscal 2009,
primarily comprised of impairments of the facility and manufacturing equipment. Approximately 75 employees are
expected to be affected by this restructuring. The Company expects the total after tax cost of this restructure to range
between $11 million to $13 million through its completion in fiscal 2010. The Company is currently in negotiations to sell
its Shanghai, China facility.
In the first quarter of fiscal 2009, the Company ceased the manufacture of photomasks at its Manchester, U.K. facility.
This initiative began with the recording of a $0.5 million charge for the impairment of certain long-lived assets at the
facility in the fourth quarter of fiscal 2008, and includes additional charges of $3.3 million incurred in fiscal 2009,
primarily for employee termination costs and asset write-downs. Approximately 85 employees were affected by this plan.
The total after tax cost of this restructure, which was completed in fiscal 2009, was $3.0 million.
The Company continues to assess its global manufacturing strategy as its sales volume is dependent upon customer
requirements which have become more concentrated in Asia and to a lesser extent in the U.S. 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.
Impairment of Long-Lived Assets
In the second quarter of fiscal 2009, the Company recorded an impairment charge of $1.5 million to reduce the
carrying value of its Manchester, U.K. facility to its estimated fair value, which was determined by management using a
market approach.
As a result of the Company's projected undiscounted future cash flows related to certain of its asset groups (located in
Europe and Asia) being less than the carrying value of those assets, the Company recorded an impairment charge of $66.9
million in the third quarter of fiscal 2008. The carrying value of the assets determined to be impaired were reduced to their
fair values, determined based upon market conditions, the income approach which utilized cash flow projections, and
other factors.
Impairment of Goodwill
Through the third quarter of fiscal 2008, the Company experienced a sustained, significant decline in its stock price. As
a result of the decline in stock price, the Company's market capitalization fell significantly below the recorded value of its
consolidated net assets during the third quarter of fiscal 2008. Due to the decrease in its market capitalization and
quarterly net losses incurred through the third quarter of fiscal 2008, management tested the Company's goodwill for
impairment. The results of the test indicated that there would be no remaining implied value attributable to the Company's
goodwill and, accordingly, the Company wrote off all $138.5 million of its goodwill in fiscal 2008.
22
Gains on Sales of Facilities
In September 2009, the Company sold its Manchester, U.K. manufacturing facility for $4.3 million and realized a gain
of $2.0 million ($1.5 million net of tax). In January 2007, the Company sold its Austin, Texas manufacturing and research
and development facility for $5.0 million and realized a gain of $2.3 million.
Other Income (Expense)
2009
2008
2007
Interest expense
Investment and other income (expense), net
Total other income (expense)
$(22.4)
(2.2)
$(24.6)
$(11.9)
5.6
$ (6.3)
$(5.9)
6.8
$ 0.9
Interest expense increased in 2009 as compared to 2008 due to increased interest rates associated with increased
borrowings on the Company's revolving credit facility coupled with higher interest rates and fees associated with bank
amendments in fiscal 2009. The outstanding balance of the Company's variable rate debt was reduced substantially during
the quarter ended November 1, 2009 with net proceeds from its common stock and convertible debt offerings. Investment
and other income (expense), net decreased in 2009 as compared to 2008, primarily due to less favorable foreign currency
transaction results.
Interest expense increased in 2008 as compared to 2007, primarily as a result of increased interest rates and increased
outstanding debt balances. Investment and other income, net decreased in 2008 as compared to 2007, primarily due to
reduced interest income associated with lower cash and investment balances, which were offset by increased foreign
currency gains.
Income Tax Benefit (Provision)
2009
2008
2007
Income tax (provision) benefit
Effective income tax rate
$(4.3)
(11.7)%
$2.8
1.3%
$3.2
13.3%
The income tax provision for the fiscal year ended November 1, 2009 was $4.3 million or 11.7% of the loss before
income taxes. The income tax (provision) benefit differs from the amount that would result from applying the federal
statutory income tax rate of 35% to the Company's loss before income taxes primarily due to the Company's inability to
realize a full income tax benefit in jurisdictions where valuation allowances were recorded.
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.
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 $6.6 million and $8.8 million in fiscal
2009 and 2008, respectively.
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. The
availability of these tax holidays did not have a significant impact on the Company's decision to increase its Asian
presence which was in response to fundamental changes taking place in the semiconductor industry that the Company
serves. These tax holidays had no dollar or per share effect on the 2009, 2008 or 2007 fiscal years. 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.
23
Minority Interest in Consolidated Subsidiaries
Minority interest in consolidated subsidiaries, which represents the minority interest in earnings (losses) principally
related to the Company's non-wholly owned subsidiary in Taiwan was $0.5 million in fiscal year 2009 as compared to
$1.4 million in fiscal year 2008. The Company's ownership in its subsidiary in Taiwan was 58% at November 1, 2009 and
November 2, 2008. The decrease in minority interest expense is primarily 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 November 1,
2009 and November 2, 2008.
Liquidity and Capital Resources
Cash and cash equivalents
Short-term investments
Total
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
November 1,
November 2,
October 28,
2009
2008
2007
(in millions)
(in millions)
(in millions)
$ 88.5
0.2
$ 88.7
$ 68.1
$(24.7)
$(40.5)
$ 83.8
1.3
$ 85.1
$ 92.1
$(99.2)
$(47.7)
$146.0
5.7
$151.7
$134.7
$(29.7)
$(89.8)
As of November 1, 2009 the Company had cash, cash equivalents and short-term investments of $88.7 million
compared to $85.1 million as of November 2, 2008.
The Company's working capital increased $23.1 million to $89.5 million at the end of fiscal 2009, as compared to
$66.4 million at the end of fiscal 2008. The increase was primarily related to decreases in accounts payable resulting from
reductions in obligations for accrued capital expenditures, and for a decrease in the current portion of long-term
borrowings.
Cash provided by operating activities was $68.1 million for fiscal 2009, as compared to $92.1 million for fiscal 2008.
This decrease was primarily due to increased losses as a result of reduced sales. Cash provided by operating activities was
$92.1 million for fiscal 2008, as compared to $134.7 million for fiscal 2007. This decrease was primarily due to a net loss
incurred in fiscal 2008 as compared to net income in fiscal 2007, and lower year-over-year accounts payable and accrued
liability balances.
Cash used in investing activities in fiscal 2009 decreased to $24.7 million, as compared to $99.2 million in 2008,
primarily due to capital expenditures decreasing year-over-year by $70.1 million. Capital expenditures were higher in
fiscal 2008 primarily relating to equipment for the U.S. nanoFab which began production in 2008. Capital expenditures
for the 2009, 2008, and 2007 fiscal years were $35.0 million, $105.1 million and $94.1 million, respectively. The
Company expects capital expenditure payments for fiscal 2010 to be approximately $45 million to $55 million, primarily
related to investment in high-end IC manufacturing capability. Cash used in investing activities in fiscal 2008 increased to
$99.2 million, as compared to $29.7 million in 2007, primarily due to a year-over-year decrease in proceeds from the sale
of short-term investments of $62.5 million.
Cash used in financing activities was $40.5 million in fiscal 2009, a decrease of $7.2 million as compared to $47.7
million in fiscal 2008, and is primarily comprised of $133.7 million in net repayments of long-term borrowings. These
repayments were primarily made with $98 million in net proceeds from convertible debt and common stock offerings,
with cash generated by operations of $18 million and proceeds from the sale of the Manchester facility of $4.3 million.
Cash used in financing activities in 2008 was primarily related to the Company's redemptions of its $150.0 million
outstanding 2.25% convertible subordinated notes on April 15, 2008, offset in part by $122.5 million net borrowings on
its revolver. The decrease in cash used in financing activities in 2009 was primarily attributable to the decrease in the
Company's payments to Micron.
24
On June 6, 2007, the Company and a group of financial institutions entered into a credit agreement, which allows for
borrowings under various currencies. In 2008 and 2009 the credit agreement was amended and on May 15, 2009 the
maturity date of the agreement was changed from July 30, 2010 to January 31, 2011 and the aggregate commitment was
amended and reduced to $130 million. Per the credit agreement, the bank debt repayments primarily from the net proceeds
of the convertible debt and common stock offerings, further reduced the aggregate commitment and as of November 1,
2009 the aggregate commitment was $50 million. On January 31, 2010 the aggregate commitment will be further reduced
to $34 million. Amounts borrowed under the credit agreement are secured by substantially all of the Company's assets
located in the United States as well as stock held by the Company of certain of its subsidiaries.
The cash interest rate on the outstanding debt balance is the greater of LIBOR or two percent, plus a spread, as defined.
Fourth quarter 2009 payment-in-kind (PIK) interest, which accrues on the outstanding debt balance, is one percent and
increases fifty basis points per quarter to a maximum of two and one-half percent. The PIK interest can be paid during the
term of the credit facility or at maturity. In addition, the Company entered into a warrant agreement with its lenders for
five percent (2.1 million shares) of its common stock. Forty percent of the warrants were exercisable upon issuance, with
twenty percent increments exercisable after October 31, 2009, April 30, 2010, and October 31, 2010 at an exercise price
of $0.01 per share. Approximately 67,000 warrants were exercised since the warrants were issued. Provisions which allow
the Company to cancel up to sixty percent of the outstanding warrants by early payment of defined amounts of the
amended credit facility were effectuated during the fourth fiscal quarter of 2009 and, as of the end of fiscal 2009, 0.8
million of these warrants remained outstanding and exercisable. The warrant agreement also includes a net cash settleable
put provision exercisable starting in May 2012 and a call provision exercisable starting in May 2013, both of which are
exercisable only if the Company's common stock is not traded on a national exchange or if its credit facility, which
matures on January 31, 2011, is not paid in full by another financing facility (new credit facility, debt and/or equity
securities, or capital contributions) or with other funds. As a result of the aforementioned net cash settleable put
provisions, the warrants were recorded as a liability (included in other liabilities) during the quarter ended August 2, 2009
and are subsequently being reported at their fair value.
In conjunction with the credit facility discussed above, the Company also entered into a term loan agreement in the
U.S. dated June 8, 2009 with an aggregate commitment of $27.2 million. The term loan has the same interest rate terms,
maturity date and covenants as the credit facility discussed above. In June 2009, the Company borrowed $27.2 million
under the term loan and used the proceeds of this facility to repay the remaining outstanding balances of its foreign loans
in China. Under the terms of the term loan agreement, $9.1 million is due on January 31, 2010 and the remaining balance
is due by January 31, 2011. It is the Company's intention to pay the $9.1 million due on January 31, 2010 by utilizing
funds available under its credit facility and, therefore, the Company has classified the $9.1 million as a long-term
borrowing as of November 1, 2009.
The credit facility's financial covenants include, among other items as defined: a Senior Leverage Ratio, Total
Leverage Ratio, Minimum Fixed Charge Ratio, Maximum Capital Expenditures limitation, and a six-month minimum
EBITDA covenant. Cash received as a result of certain defined events is required to be used to pay down the outstanding
loan balance and reduce the available commitment of the credit facility by the same amount. In addition, the credit facility
requires Minimum Unrestricted Cash Balances, as defined, at the end of each quarter. Should the Company default on any
of its long-term borrowings, a cross default would occur on its other long-term borrowings, unless amended or waived.
On September 11, 2009 the Company sold, through a public offering, $57.5 million aggregate principal amount of
5.5% convertible senior notes which mature on October 1, 2014. Note holders may convert each $1,000 principal amount
of notes to 196.7052 shares of stock (equivalent to an initial conversion price of approximately $5.08 per share of
common stock) on or before September 30, 2014. The conversion rate may be increased in the event of a make-whole
fundamental change (as defined in the prospectus supplement) and the Company may not redeem the notes prior to their
stated maturity date. The net proceeds of the offering were approximately $54.9 million, which were used to reduce
outstanding amounts under the Company's credit facility. Concurrent with the issuance of the 5.5% convertible senior
notes, on September 11, 2009 the Company also sold, through a public offering, approximately 11.1 million shares of its
common stock at a price of $4.15 per share. Gross proceeds from the offering were $46.0 million which were reduced by
underwriting commissions and other expenses to yield net proceeds of approximately $43.1 million. The net proceeds
from the offering were used to reduce outstanding amounts under the Company's credit facility.
25
Net proceeds of the Company's 5.5% convertible debt and common stock offerings of approximately $98 million, cash
from operations and proceeds from the sale of the Manchester, U.K. facility of $4.3 million were used to reduce the
amount of borrowings under the credit facility from $122.5 million to its November 1, 2009 balance of $2.6 million,
which included the above mentioned PIK interest. As of November 1, 2009, the Company's available credit under its
credit facility was $50.0 million of which $2.6 million was borrowed and $47.4 million was unused and available. All
borrowings under the credit facility are due on January 31, 2011.
On May 19, 2009, the Company entered into a new lease agreement with Micron (the lessor) for the U.S. nanoFab.
Under the provisions of the new lease agreement, quarterly lease payments were reduced and, as compared to the prior
lease agreement, resulted in cash savings for the Company of approximately $6.5 million in fiscal 2009.
The Company's liquidity is highly dependent on its sales volume, cash conversion cycle, and the timing of its capital
expenditures, as it operates in a high fixed cost environment. Depending on conditions in the IC semiconductor and FPD
market, the Company's cash flows from operations and current holdings of cash may not be adequate to meet its current
and long-term needs for capital expenditures, operations and debt repayments. Historically, in certain years the Company
has used external financing to fund these needs. Due to conditions in the credit markets, some financing instruments used
by the Company in the past may not be currently available to it. The Company is evaluating alternatives to increase its
capital, delaying capital expenditures and evaluating further cost reduction initiatives. However, the Company cannot
assure that additional sources of financing would be available to it on commercially favorable terms should its capital
requirements exceed cash available from operations and existing cash, and cash available under its credit facility.
At November 1, 2009, the Company had outstanding purchase commitments of approximately $42.0 million, which
include approximately $35.0 million related to capital expenditures, primarily for investment in high-end IC
manufacturing capability. The Company intends to use its working capital and cash generated from operations to finance
its capital expenditures.
Cash Requirements
The Company's cash requirements in fiscal 2010 will be primarily to fund operations, including capital spending and
debt service. The Company believes that its cash on hand, cash generated from operations and amounts available under its
credit facility 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 its cash available from operations,
existing cash, and cash available under its credit facility.
26
Contractual Cash Obligations
The following table quantifies the Company's future contractual obligations as of November 1, 2009:
Payments Due
Less
Than
1 Year
1 - 3
Years
More
Than
5 Years
3 - 5
Years
Total
Long-term borrowings
$ 87.3
$ -
$29.8
$57.5
Operating leases
Capital leases
Unconditional purchase obligations
Interest
Total
23.9
35.2
42.0
24.2
2.2
3.2
10.3
22.6
40.2
8.7
1.8
9.4
15.5
2.3
-
6.1
$ -
3.0
-
-
-
$212.6
$61.4
$66.8
$81.4
$3.0
As of November 1, 2009, the Company had recorded an accrual for tax contingencies of $2.0 million which was not
included in the above table due to the high degree of uncertainty regarding the timing of future payments relating to such
liabilities, and it was not practical to determine a reasonably reliable estimate of the amount and period when such
liabilities might be paid.
Off-Balance Sheet Arrangements
Under the Operating Agreement relating to the MP Mask joint venture, through May 5, 2010, the Company may be
required to make additional capital contributions to the joint venture of up to a maximum amount as defined in the
Operating Agreement. Through the end of fiscal year 2009, the Company has contributed $6.1 million to the joint venture,
and has received two distributions from the joint venture totaling $10.0 million.
Stock-based Compensation
Total stock-based compensation expense for the year ended November 1, 2009 was $2.1 million, as compared to $2.6
million for the year ended November 2, 2008, 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 November
1, 2009, total unrecognized compensation cost of $3.0 million is expected to be recognized over a weighted-average
amortization period of 3.0 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 and monitor its market capitalization, sales volume
and related cash flows from operations. This ongoing assessment could result in future facilities closures, asset
redeployments, additional impairments of intangible or long-lived assets, workforce reductions, or the addition of
increased manufacturing facilities, all of which would be based on market conditions and customer requirements.
27
The Company's future results of operations and the other forward-looking statements contained in this filing involve a
number of risks and uncertainties. While various risks and uncertainties have been discussed, 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 consolidated 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 assumptions that are believed to be reasonable
under the circumstances. Significant accounting estimates include those used in the testing of long-lived assets for
potential impairment, and those used in developing income tax provisions, allowances for uncollectible accounts
receivable, inventory valuation allowances, restructuring reserves and valuation models. The Company's estimates are
based on the facts and circumstances available at the time they are made. Changes in 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 in which they are
determined.
Fair Value of Financial Instruments
The fair values of the Company's short-term and long-term investments and its 5.5% convertible senior notes are
estimated by management based upon reference to quoted market prices and other available market information. The fair
values of the Company's cash and cash equivalents, accounts receivable, accounts payable, certain other current assets and
current liabilities, and variable rate borrowings approximate their carrying value due to their short-term maturities.
Derivative Instruments and Hedging Activities
The Company records derivatives in the consolidated balance sheets 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 consolidated statements 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 a
hedge of an interest rate, price, foreign currency exchange rate, or credit risk, expected to be highly effective at the
inception of the hedge and be highly effective in achieving offsetting changes in the fair value or cash flows of the hedged
item during the term of the hedge, and formally documented at the inception 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 and
interest rates. The Company documents its risk management strategy and hedge effectiveness at the inception of, and
during the term of each hedge.
Property, Plant and Equipment
Property, plant and equipment, except as explained below under "Impairment of Long-Lived Assets," are 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 using 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
28
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.
Goodwill and Other Intangible Assets
Intangible assets consist primarily of a technology license agreement, a supply agreement, acquisition-related
intangibles, and prior to July 27, 2008, goodwill. These assets, except as explained below, 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 values of intangible assets
that are subject to amortization are tested for recoverability whenever events or changes in circumstances indicate the
carrying value of an intangible asset may not be recoverable based on undiscounted cash flows or market factors, and an
impairment loss would be recorded in the period so determined.
The Company tested goodwill for impairment annually and when an event occurred or circumstances changed that
would more likely than not have reduced the fair value of a reporting unit below its carrying value. Goodwill was tested
for impairment using a two-step process. In the first step, the fair value of the reporting unit was compared to its carrying
value. For purposes of testing impairment, the Company is a single reporting unit. If the fair value of the reporting unit
exceeded the carrying value of its net assets, goodwill was considered not impaired and no further testing was required. If
the carrying value of the net assets exceeded the fair value of the reporting unit, a second step of the impairment test was
performed in order to determine the implied fair value of a reporting unit's goodwill. Determining the implied fair value of
goodwill required a valuation of the reporting unit's tangible and intangible assets and liabilities in a manner similar to the
allocation of purchase price in a business combination. If the carrying value of the reporting unit's goodwill exceeded the
implied fair value of its goodwill, goodwill was deemed impaired and was written down to the extent of the difference.
In connection with the Company's latest test, the Company wrote off all of its $138.5 million of goodwill in its third
fiscal quarter of 2008.
Impairment of Long-Lived Assets
Long-lived assets 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
estimates of undiscounted future cash flows resulting from the use of the assets and their 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 assets.
The carrying values of the assets determined to be impaired are reduced to their estimated fair values. Fair values of
the impaired assets would generally be determined using a market or income approach.
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.
An impairment loss would be recognized whenever a decline in the value of such an 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 investment, the
near-term and longer-term operating and financial prospects of the investee, and the Company's longer-term intent of
retaining the investment in the investee.
Income Taxes
The income tax (provision) benefit is computed on the basis of the various tax jurisdictions' 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
29
by considering future market growth, forecasted operations, future taxable income, and the amounts of earnings in the tax
jurisdictions in which it operates.
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 and temporary differences resulting from differing
treatments of items for tax and financial reporting purposes are assessed. 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 more likely than not. Accordingly, income taxes in the consolidated statements of operations are 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. The Company accounts for uncertain tax positions by
recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in
its tax returns.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred,
the sales price is fixed or determinable, and collectibility is reasonably assured. The Company uses judgment when
estimating the effect on revenue of discounts and product warranty obligations, both of which are accrued when the
related revenue is recognized.
Warranties and Other Post Shipment Obligations - For a 30-day period, the Company warrants that items sold will
conform to customer specification. 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 operations net of sales taxes, if any
(excluded from revenues).
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R) "Share-Based Payment"
(primarily codified under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC 718))
on October 31, 2005, using the modified prospective method. Subsequently, compensation expense is recognized in the
Company's 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 recognized 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 FASB Staff Position No. 123(R)-3 for calculating the tax effects of share-based compensation.
Determining the appropriate option pricing model and calculating the grant date fair value of stock-based awards requires
considerable judgment, including estimating stock price volatility and the expected term of options granted.
The Company uses the Black-Scholes option valuation model to value employee stock options. The Company
estimates stock price volatility based on daily averages of its historical volatility over a term approximately equal to the
grant's estimated option life. The expected term of options and forfeiture rate assumptions are derived from historical data.
Effect of New Accounting Standards
In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 which provides amended
guidance for multiple-deliverable revenue arrangements. ASU No. 2009-13 changes the criteria for separating
30
consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling
price of a deliverable. Under ASU No. 2009-13, the selling price for each deliverable in a multiple-deliverable
arrangement will, in order of preference and when available, be based on vendor specific objective evidence, third party
evidence, or estimated selling price. ASU No. 2009-13 prescribes that estimated selling price be determined in a manner
that is consistent with that used to determine the price to sell the deliverable on a stand alone basis, and eliminates the
residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement
to all deliverables using the relative selling price method. ASU No. 2009-13 also significantly expands the disclosures
related to multiple-deliverable arrangements, and is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 2010 with early adoption permitted. The Company does not
expect that the adoption of ASU No. 2009-13 will have a material impact on its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05 which provides amended guidance for the fair value measurement
of liabilities. ASU No.2009-05 clarifies, among other things, that in circumstances in which a quoted market price in an
active market for the identical liability is not available, a reporting entity is required to measure fair value using valuation
techniques specified in the ASU. ASU No. 2009-05 was adopted by the Company on November 2, 2009. The adoption of
ASU No. 2009-05 did not have a material impact on the Company's consolidated financial statements.
In June 2009 the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" (primarily codified under ASC
105). With limited "grandfathered" exceptions, SFAS No. 168 establishes the FASB Accounting Standards Codification,
along with rules and interpretative releases of the Securities and Exchange Commission, as being the sources of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied to SEC
registrants. SFAS No. 168 also superseded SFAS No. 162 "The Hierarchy of Generally Accepted Accounting Principles"
as all of the contents of the FASB Accounting Standards Codification carries the same level of authority, thereby
modifying the hierarchy of GAAP to include only two levels: authoritative and non-authoritative. SFAS No. 168 is
effective for financial statements issued for interim and annual periods ended after September 15, 2009. The Company
adopted this guidance during the three month period ended November 1, 2009 and its adoption did not materially impact
its consolidated financial statements.
In June 2009 the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (primarily codified
under ASC 810). SFAS No. 167 amends Interpretation 46(R) to require an enterprise to perform an analysis to determine
whether its variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis is
to identify the primary beneficiary of the variable interest entity as being the enterprise that has certain characteristics
described in SFAS No. 167. SFAS No. 167, in addition to other requirements, requires an enterprise to assess whether it
has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining
whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity's
financial performance and, mandates ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity. SFAS No. 167 is effective for financial statements issued for fiscal years beginning after
November 15, 2009 and interim financial statements within those fiscal years. The Company is currently evaluating the
impact, if any, this guidance will have on its consolidated financial statements.
In May 2008, the FASB issued FSP No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (codified under ASC 470)." FSP No. APB 14-1
requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the
liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP No. APB 14-1 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years, and is required to be retrospectively applied. The Company adopted
this guidance on November 2, 2009. Its adoption had no effect on the Company's consolidated financial statements.
In February 2008, the FASB issued FSP No. 157-2 "Effective Date of FASB Statement No.157" (codified under ASC
820), which delayed the effective date of FASB Statement No. 157 "Fair Value Measurements" for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The Company elected to defer the application of SFAS No. 157 to any nonfinancial
assets and nonfinancial liabilities to which it would apply. The deferral expires in the Company's first fiscal quarter of
2010, when the Company will adopt the deferred provisions of this guidance. The adoption of this guidance is not
expected to have a material effect on the Company's consolidated financial statements.
31
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements -
an amendment of Accounting Research Bulletin No. 51" (codified under ASC 810). SFAS No. 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The
Company adopted this guidance on November 2, 2009. Its adoption resulted in the reclassification of its $49.9 million of
minority interest in the consolidated balance sheet to equity.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (codified under ASC 805). SFAS
No. 141(R) 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. 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December
15, 2008. The Company adopted this guidance on November 2, 2009. Its adoption had no effect on its consolidated
financial statements.
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 condensed consolidated 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 a
hedge for an interest rate, price, foreign currency exchange rate, or credit risk, expected to be highly effective at the
inception of the hedge and be highly effective in achieving offsetting changes in the fair value or cash flows of the hedged
item during the term of the hedge, and formally documented at the inception 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 and
interest rates. The Company documents its risk management strategy and hedge effectiveness at the inception of, and
during the term of each hedge.
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 functional currencies of the Company's Asian
subsidiaries are the Korean won, New Taiwan dollar, Singapore dollar and the Chinese renminbi. The functional
currencies of the Company's European subsidiaries are the British pound, the euro.
The Company attempts to minimize its risk of foreign currency transaction losses by producing its products in the same
country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by
managing its working capital. In some instances, the Company may sell or purchase products in a currency other than the
functional currency of the country where it was produced. There can be no assurance that this approach will continue to be
successful, especially in the event of a significant adverse movement in the value of any foreign currencies against the
U.S. dollar. In recent years the Company experienced significant foreign exchange losses on these transactions in its
statements of operations.
The Company's primary net foreign currency exposures as of November 1, 2009 included the Korean won, the
Japanese yen, the Singapore dollar, the New Taiwan dollar, the British pound, the euro and the Chinese renminbi. As of
November 1, 2009, 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 $4.8 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.
32
In April, 2006, the Company's Korean subsidiary entered into a foreign currency rate swap contract which, under the
terms of the contract, effectively converted a $50 million interest bearing intercompany loan denominated in U.S. dollars
to Korean won. The intercompany loan was repaid and the related swap was settled during the year ended November 2,
2008.
Interest Rate Risk
At November 1, 2009, the Company had $29.8 million in variable rate borrowings, and cash and cash equivalents of
$82.6 million which bore interest at variable rates, resulting in approximately $53 million in net variable rate financial
assets at November 1, 2009 and approximately $72 million in net variable rate financial liabilities at November 2, 2008
which were subject to interest rate risk. A 10% change in interest rates would not have had a material effect on the
Company's consolidated financial position, results of operations, or cash flows in 2009 or 2008.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at November 1, 2009 and November 2, 2008
Consolidated Statements of Operations
for the years ended November 1, 2009, November 2, 2008 and October 28, 2007
Consolidated Statements of Shareholders' Equity
for the years ended November 1, 2009, November 2, 2008 and October 28, 2007
Consolidated Statements of Cash Flows
for the years ended November 1, 2009, November 2, 2008 and October 28, 2007
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
for the years ended November 1, 2009, November 2, 2008 and October 28, 2007
Page
34
35
36
37
38
39
73
73
33
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
November 1, 2009 and November 2, 2008 and the related consolidated statements of operations, shareholders' equity, and cash flows
for each of the three fiscal years ended November 1, 2009, November 2, 2008 and October 28, 2007. We also have audited the
Company's internal control over financial reporting as of November 1, 2009, 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 Photronics, Inc. and subsidiaries as of November 1, 2009 and November 2, 2008, and the results of their operations and their cash
flows for each of the three fiscal years ended November 1, 2009, November 2, 2008 and October 28, 2007, 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 November 1, 2009, 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 7, 2010
34
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
November 1,
2009
November 2,
2008
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $2,669 in 2009
and $2,788 in 2008
Inventories
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, net
Investment in joint venture
Intangibles, net
Other assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term borrowings
Accounts payable
Accrued liabilities
Total current liabilities
Long-term borrowings
Deferred income taxes
Other liabilities
Total liabilities
Minority interest
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value,
2,000 shares authorized, none issued and outstanding
Common stock, $0.01 par value,
150,000 shares authorized, 53,011 shares issued and outstanding
at November 1, 2009 and 41,712 shares issued and outstanding
at November 2, 2008
Additional paid-in capital
Retained earnings (deficit)
Accumulated other comprehensive loss
Total shareholders' equity
See accompanying notes to consolidated financial statements.
35
$ 88,539
$ 83,763
66,920
14,826
3,264
6,448
179,997
347,889
60,945
55,054
19,771
68,095
17,548
2,843
10,248
182,497
436,528
65,737
62,386
10,859
$663,656
$758,007
$ 10,301
59,187
20,967
90,455
112,137
1,487
9,881
213,960
49,941
$ 20,630
69,791
25,657
116,078
202,979
1,813
4,739
325,609
49,616
-
-
530
432,160
(26,546)
(6,389)
399,755
417
384,502
15,364
(17,501)
382,782
$663,656
$758,007
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended
November 1,
2009
November 2,
2008
October 28,
2007
$361,353
$ 422,548
$421,479
(304,282)
(349,841)
(321,958)
(41,162)
(15,423)
(13,557)
(1,458)
-
2,034
(55,167)
(17,475)
(510)
(66,874)
(138,534)
-
(12,495)
(205,853)
(22,401)
(2,208)
(37,104)
(4,323)
(41,427)
(483)
(11,878)
5,562
(212,169)
2,778
(209,391)
(1,374)
(61,507)
(17,300)
-
-
-
2,254
22,968
(5,928)
6,844
23,884
3,178
27,062
(2,539)
$(41,910)
$(210,765)
$ 24,523
$(0.97)
$(0.97)
43,210
43,210
$(5.06)
$(5.06)
41,658
41,658
$0.59
$0.56
41,539
51,282
Net sales
Cost and expenses:
Cost of sales
Selling, general and administrative
Research and development
Consolidation, restructuring and related charges
Impairment of long-lived assets
Impairment of goodwill
Gains on sales of facilities
Operating income (loss)
Other income (expense):
Interest expense
Investment and other income (expense), net
Income (loss) before income tax benefit (provision)
and minority interest
Income tax benefit (provision)
Income (loss) before minority interest
Minority interest in income of consolidated subsidiaries
Net income (loss)
Income (loss) per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
36
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended November 1, 2009, November 2, 2008 and October 28, 2007
(in thousands)
Accumulated Other Comprehensive Income (Loss)
Common Stock
Shares Amount
Add'l
Paid-In
Capital
Retained
Earnings
(Deficit)
Unrealized
Investment
Gains
Foreign
Cash
Currency
Flow
Hedges Translation Other
Share-
holders'
Equity
Total
Balance at October 29, 2006
41,485
$415
$378,143
$202,652
$675
$(821)
$33,218
$ -
$33,072
$614,282
Comprehensive income:
Net income
Unrealized holding gains
Less: reclassification adjustments
Change in fair value of
cash flow hedge
Foreign currency translation
adjustment
Other
Total comprehensive income
Sale of common stock through
employee stock option and
purchase plans
Restricted stock awards,
net of amortization to
compensation expense
Stock based compensation expense
-
-
-
-
-
-
80
70
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
972
730
2,031
24,523
-
-
-
-
-
-
-
-
-
142
(600)
-
-
-
-
-
-
-
-
-
(1,024)
-
-
-
-
-
-
-
142
(600)
24,523
142
(600)
(1,024)
(1,024)
-
-
-
-
-
-
13,496
-
-
(269)
13,496
(269)
-
-
-
-
-
-
-
-
-
-
-
-
13,496
(269)
36,268
973
730
2,031
Balance at October 28, 2007
41,635
416
381,876
227,175
217
(1,845)
46,714
(269)
44,817
654,284
Comprehensive income:
Net loss
Unrealized holding losses
Less: reclassification adjustments
Amortization of cash flow hedges
Foreign currency translation
adjustments
Other
Total comprehensive loss
Sale of common stock through
employee stock option and
purchase plan
Restricted stock awards,
net of amortization to
compensation expense
Stock-based compensation expense
Adoption of FIN 48 adjustment
-
-
-
-
-
-
25
52
-
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
162
1,167
1,297
-
(210,765)
-
-
-
-
-
-
-
-
(1,046)
-
(340)
61
-
-
-
-
193
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(62,234)
-
-
-
-
-
-
-
-
-
-
-
2
-
-
-
-
-
-
(340)
61
193
(210,765)
(340)
61
193
(62,234)
2
(62,234)
2
-
(273,083)
-
-
-
-
162
1,168
1,297
(1,046)
Balance at November 2, 2008
41,712
417
384,502
15,364
(62)
(1,652)
(15,520)
(267)
(17,501)
382,782
Comprehensive income:
Net loss
Unrealized holding gains
Less: reclassification adjustments
Amortization of cash flow hedges
Foreign currency translation
adjustments
Other
Total comprehensive loss
Sale of common stock through
employee stock option and
purchase plan
Restricted stock awards,
net of amortization to
compensation expense
Stock-based compensation expense
Common stock issued in public
offering, net
Common stock warrants issued
Common stock warrants exercised
-
-
-
-
-
-
-
28
121
-
-
-
-
-
-
-
-
-
1
-
11,084
-
66
111
-
1
-
-
-
-
-
-
-
117
809
1,326
42,986
2,081
339
(41,910)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
62
-
-
-
-
-
-
-
-
-
-
-
-
-
576
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
62
576
(41,910)
-
62
576
10,712
-
-
(238)
10,712
(238)
10,712
(238)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(30,798)
117
810
1,326
43,097
2,081
340
Balance at November 1, 2009
53,011
$530
$432,160
$(26,546)
$ -
$(1,076)
$(4,808)
$(505)
$(6,389)
$399,755
See accompanying notes to consolidated financial statements.
37
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of property,
plant and equipment
Amortization of deferred financing costs and intangible assets
Consolidation, restructuring and related charges - non cash
Impairment of long-lived assets
Impairment of goodwill
Stock-based compensation
Minority interest in income of consolidated subsidiaries
Gains on sales of facilities
Deferred income taxes
Changes in assets and liabilities:
Accounts receivable
Inventories
Other current assets
Accounts payable, accrued liabilities and other
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Return of investment from joint venture
Proceeds from sale of facility
Proceeds from sales of short-term investments and other
Purchases of short-term investments and other
Investments in joint venture
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term borrowings
Repayments of long-term borrowings
Proceeds from debt and equity offerings
Payments of expenses related to debt and equity offerings
Deferred financing costs and other
Payments to Micron Technology, Inc.
Proceeds from exercised stock options
Net cash used in financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Year Ended
November 1,
2009
November 2,
2008
October 28,
2007
$(41,910)
$(210,765)
$ 24,523
76,530
13,944
10,514
1,458
-
2,136
483
(2,034)
(2,943)
2,709
3,111
3,087
1,063
68,148
(34,995)
5,000
4,321
1,158
(162)
-
(24,678)
28,112
(161,841)
103,500
(5,539)
(4,734)
-
-
(40,502)
1,808
4,776
83,763
95,931
8,001
510
66,874
138,534
2,622
1,374
-
(1,944)
(7,310)
(2,622)
(4,410)
5,285
92,080
(105,125)
5,000
-
3,815
(327)
(2,598)
(99,235)
139,640
(176,009)
-
-
(3,790)
(7,500)
-
(47,659)
(7,472)
(62,286)
89,752
8,266
-
-
-
2,890
2,539
(2,254)
(961)
18,370
2,008
7,528
(17,968)
134,693
(94,132)
-
5,784
66,304
(4,151)
(3,499)
(29,694)
4,303
(87,084)
-
-
(527)
(7,500)
988
(89,820)
1,445
16,624
146,049
129,425
Cash and cash equivalents at end of year
$ 88,539
$ 83,763
$146,049
Supplemental disclosure of cash flow information:
Change in accrual for purchases of property,
plant and equipment
Capital lease obligation for purchases of property,
plant and equipment
Issuances of common stock warrants
See accompanying notes to consolidated financial statements.
38
$(13,551)
$(28,244)
$ 5,320
$(46,769)
$ 61,662
$ -
$ 51,582
$ 19,912
$ -
PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended November 1, 2009, November 2, 2008 and October 28, 2007
(in thousands, except share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Photronics, Inc. and its subsidiaries (the "Company" or "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 ("FPDs"), 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 currently operates principally from nine manufacturing facilities; two of which are located in Europe, two in
Taiwan, one in Korea, one in Singapore, and three in the United States. The Company closed its manufacturing facilities
in Manchester, United Kingdom and Shanghai, China during the year ended November 1, 2009.
Consolidation
The accompanying consolidated financial statements include the accounts of Photronics, Inc. and its majority-owned
subsidiaries that the Company controls. 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.
Subsequent Events
The Company has performed an evaluation of subsequent events through January 8, 2010, which is the date these
financial statements were issued in Form 10-K.
Derivative Instruments and Hedging Activities
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 consolidated statement of operations, or as accumulated other comprehensive income
("OCI"), 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 a hedge for an
interest rate, price, foreign currency exchange rate, or credit risk, expected to be highly effective at the inception of the
hedge and be highly effective in achieving offsetting changes in the fair value or cash flows of the hedged item during the
term of the hedge, and formally documented at the inception 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 and interest rates. The
Company documents its risk management strategy and hedge effectiveness at the inception of, and during the term of each
hedge.
39
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 2009 and 2007 included 52 weeks; while fiscal year 2008 included 53 weeks. Fiscal year
2010 will include 52 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 of cash equivalents approximate their fair values due to the short maturities of these
instruments.
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, except as explained below under "Impairment of Long-Lived Assets," are 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 a straight-line basis 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 change in circumstances indicate that
their carrying amount may not be recoverable.
Goodwill and Other Intangible Assets
Intangible assets consist primarily of a technology license agreement, a supply agreement, acquisition-related
intangibles, and prior to July 27, 2008, goodwill. These assets, except as explained below, 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 values of intangible assets
that are subject to amortization are tested for recoverability whenever events or changes in circumstances indicate the
carrying value of an intangible asset may not be recoverable based on undiscounted cash flows or market factors, and an
impairment loss would be recorded in the period so determined.
The Company tested goodwill for impairment annually and when an event occurred or circumstances changed that
would more likely than not have reduced the fair value of a reporting unit below its carrying value. Goodwill was tested
for impairment using a two-step process. In the first step, the fair value of the reporting unit was compared to its carrying
value. For purposes of testing impairment, the Company is a single reporting unit. If the fair value of the reporting unit
exceeded the carrying value of its net assets, goodwill was considered not impaired and no further testing was required. If
the carrying value of the net assets exceeded the fair value of the reporting unit, a second step of the impairment test was
performed in order to determine the implied fair value of a reporting unit's goodwill. Determining the implied fair value of
goodwill required a valuation of the reporting unit's tangible and intangible assets and liabilities in a manner similar to the
allocation of purchase price in a business combination. If the carrying value of the reporting unit's goodwill exceeded the
implied fair value of its goodwill, goodwill was deemed impaired and was written down to the extent of the difference. In
connection with the Company's latest test, the Company wrote off all of its $138.5 million of goodwill in its third fiscal
quarter of 2008.
40
Impairment of Long-Lived Assets
Long-lived assets 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
estimates of undiscounted future cash flows resulting from the use of the assets and their 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 assets.
The carrying values of assets determined to be impaired are reduced to their estimated fair values. Fair values of any
impaired assets would generally be determined using a market or income approach.
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.
An impairment loss would be recognized whenever a decline in the value of such an 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 investment, the
near-term and longer-term operating and financial prospects of the investee, and the Company's longer-term intent of
retaining the investment in the investee.
Income Taxes
The income tax (provision) benefit is computed on the basis of the various tax jurisdictions' 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.
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 and temporary differences resulting from differing
treatments of items for tax and financial reporting purposes are assessed. 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 more likely than not. 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. The Company accounts for uncertain tax
positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to
be taken, in its tax returns.
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 Statement of Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment"
(primarily codified under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718)
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
recognized 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 recognized 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
41
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. 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 and the expected term
of options granted.
The Company uses the Black-Scholes option valuation model to value employee stock awards. The Company
estimates stock price volatility based on daily averages of its historical volatility over a term approximately equal to the
grant's estimated option life. The expected term of options and forfeiture rate assumptions are derived from historical data.
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 Technologies, Inc. (Micron). 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 in 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 a loss of $3.1 million in 2009, a gain
of $3.8 million in 2008 and a gain of $1.0 million in 2007.
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 November 1, 2009 and
November 2, 2008.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred,
the sales price is fixed or determinable, and collectability is reasonably assured. The Company uses judgment when
estimating the effect on revenue of discounts and product warranty obligations, both of which are accrued when the
related revenue is recognized.
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).
42
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Land
Buildings and improvements
Machinery and equipment
Leasehold improvements
Furniture, fixtures and office equipment
Construction in progress
Less accumulated depreciation and amortization
November 1,
November 2,
2009
2008
$ 7,901
91,167
1,001,085
7,338
15,351
17,183
1,140,025
792,136
$ 8,393
120,808
1,016,741
5,813
17,528
6,551
1,175,834
739,306
$ 347,889
$ 436,528
Property, plant and equipment at November 1, 2009 reflects an approximately $28 million reduction in the carrying
value of the Company's assets under capital leases that resulted from the cancellation of the Company's lease agreement
with Micron for the U.S. nanoFab facility. Concurrently with this lease cancellation, the Company and Micron entered
into a new lease for the facility (see Note 4 for further discussion). This lease will continue to be accounted for as a capital
lease through December 31, 2012, at which time it will be accounted for as an operating lease. See Note 7 for further
discussion.
Property under capital leases are included in above property, plant and equipment as follows:
Buildings and improvements
Machinery and equipment
Less accumulated amortization
November 1,
November 2,
2009
2008
$33,621
19,912
53,533
10,876
$61,662
19,912
81,574
3,482
$42,657
$78,092
The Company capitalized interest expense of $0.5 million during the fiscal year ended November 2, 2008.
43
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 13 to the consolidated financial statements, the Company wrote off all of its $138.5 million of
goodwill during the fiscal year ended November 2, 2008. Intangible assets that do not have indefinite lives are amortized
based on their estimated useful lives, which range from 3 to 15 years. Intangible asset amortization is forecasted to range
from $4.8 million to $6.0 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. Other intangible assets consist of:
As of November 1, 2009
Technology license agreement
Customer lists
Supply agreement
Patents
Software and other
As of November 2, 2008
Technology license agreement
Customer lists
Supply agreement
Patents
Software and other
Gross
Amount
Accumulated
Amortization
Net
Amount
$59,616
7,210
6,959
156
5,190
$79,131
$59,616
7,210
6,959
156
5,569
$79,510
$13,579
2,709
4,907
59
2,823
$24,077
$ 9,605
1,490
4,016
32
1,981
$17,124
$46,037
4,501
2,052
97
2,367
$55,054
$50,011
5,720
2,943
124
3,588
$62,386
NOTE 4 - 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 invested $135 million in exchange for a 49.99% interest in MP Mask (to which $64.2 million of the original
investment was allocated), a license for photomask technology of Micron, and certain supply agreements. Of the total
$135 million investment, $120 million was paid to Micron on May 6, 2006 and, as of that date, the remaining $15 million
was a non-cash financing activity, which was subsequently paid in two installments of $7.5 million each in May 2007 and
June 2008.
This joint venture is a variable interest entity primarily because all costs of the joint venture will be passed on to the
Company and Micron through purchase agreements they have entered into with the joint venture. The Company
determined that, in regards to this variable interest entity ("VIE"), it and Micron are de facto agents as that term was
defined in FIN 46(R) (primarily codified under ASC 810) and that Micron is the primary beneficiary of the VIE as it is the
de facto agent within the aggregated group of de facto agents (i.e. the Company and Micron) that is the most closely
associated with the VIE. The primary reasons the Company concluded that Micron is the most closely associated of the de
facto agents to the VIE are that Micron is both the ultimate purchaser of substantially all of the products produced by the
VIE and that it is the holder of decision making authority in the ordinary course of business.
MP Mask is governed by a Board of Managers, appointed by Micron and the Company. Since MP Mask's inception,
Micron, as a result of its majority ownership, has appointed the majority of the managers. The number of managers
appointed by each party is subject to change as ownership interests change. Under the Operating Agreement relating to the
MP Mask joint venture, through May 5, 2010, the Company may be required to make additional capital contributions to
44
the joint venture up to the maximum amount defined in the Operating Agreement. In the event that the Board of Managers
determines that additional funding is required, the joint venture will first pursue its own financing and, if it is unable to
obtain its own financing, it may request additional capital contributions from the Company. Should the Company choose
not to make a requested contribution to the joint venture, its ownership interest may be reduced. The Company received
$5 million distributions from MP Mask in both the years ended November 1, 2009 and November 2, 2008. The Company
invested $2.8 million in MP Mask during the year ended November 2, 2008, which was used for working capital and
capital expenditure purposes.
The Company's investment in the VIE, which represents its maximum exposure to loss, was $60.9 million and $65.7
million at November 1, 2009 and November 2, 2008, respectively. These amounts are reported in the Company's
condensed consolidated balance sheets as "Investment in joint venture".
The Company has utilized MP Mask for both high-end IC photomask production and research and development
purposes. MP Mask charges its variable interest holders based on their actual usage of its facility. MP Mask separately
charges for any research and development activities it engages in at the requests of its owners.
As of November 1, 2009, the Company owed MP Mask $4.3 million and had a receivable from Micron of $3.8 million,
both primarily related to the supply agreements. The Company, in 2009, recorded $1.8 million of commission revenue
earned under the supply agreements it has with Micron and MP Mask. Amortization of $0.9 million of the supply
agreement intangible asset resulted in net earnings related to the supply agreements of $0.9 million in 2009. The recorded
commission revenue of $1.8 million represents the excess of $37.9 million in orders received from Micron over the
Company's cost of $36.1 million to fulfill the orders through MP Mask. The Company, for certain sales during 2009, also
recorded cost of sales in the amount of $4.2 million for photomasks produced by MP Mask for the Company's customers
and, incurred outsourcing expenses of $2.0 million from MP Mask for research and development activities and other
goods and services purchased by the Company.
As of November 2, 2008, the Company owed MP Mask $3.5 million and had a receivable from Micron of $3.8 million,
both primarily related to the supply agreements. The Company, in 2008, recorded $2.7 million of commission revenue
earned under the supply agreements it has with Micron and MP Mask. Amortization of $1.5 million of the supply
agreement intangible asset resulted in net earnings related to the supply agreements of $1.2 million in 2008. The recorded
commission revenue of $2.7 million represents the excess of $44.8 million in orders received from Micron over the
Company's cost of $42.1 million to fulfill the orders through MP Mask. For certain sales during 2008, the Company also
recorded cost of sales in the amount of $3.2 million for photomasks produced by MP Mask for the Company's customers
and incurred outsourcing expenses of $1.7 million from MP Mask for research and development activities purchased by
the Company. The Company also purchased excess equipment from MP Mask for use in its U.S. nanoFab in the amount
of $4.1 million in 2008.
In the first quarter of 2008 a capital lease agreement commenced for the U.S. nanoFab facility. Quarterly lease
payments, which bore interest at 8% were $3.8 million through January 2013. This lease was cancelled in the third fiscal
quarter of 2009, at which time the Company and Micron (the lessor) entered into a new lease agreement for the facility.
Under the provisions of the new lease agreement, quarterly lease payments were reduced from $3.8 million to $2.0
million, the term of the lease was extended from December 31, 2012 to December 31, 2014, and ownership of the
property will not transfer to the Company at the end of the lease term. As a result of the new lease agreement, the
Company reduced its lease obligation and the carrying value of its assets under capital leases by approximately $28
million. The lease will continue to be accounted for as a capital lease until the end of its original lease term. For the
additional two years of the new lease term, the lease will be accounted for as an operating lease. The U. S. nanoFab began
production in the second quarter of 2008 and, through the end of fiscal 2009, the Company's total capital investment in the
facility is approximately $157 million.
45
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Income taxes
Salaries, wages and related benefits
Restructuring
Interest
VAT and other taxes
Property taxes
Other
November 1,
November 2,
2009
2008
$ 5,808
4,728
414
1,113
1,610
1,225
6,069
$ 8,586
5,967
1,134
984
1,240
1,507
6,239
$20,967
$25,657
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes derivative instruments to reduce its exposure to the effects of the variability of interest rates and
foreign currencies on its financial performance when it believes such action is warranted. Historically, the Company has
been a party to derivative instruments to hedge either the variability of cash flows of a prospective transaction or the fair
value of a recorded asset or liability. In certain instances, the Company has designated these transactions as hedging
instruments. However, whether or not a derivative was designated as being a hedging instrument, the Company's purpose
for engaging in the derivative has always been for risk management (and not speculative) purposes. The Company has
historically not been a party to a significant number of derivative instruments and does not expect its derivative activity to
significantly increase in the foreseeable future.
In addition to the utilization of derivative instruments discussed above, the Company attempts to minimize its risk of
foreign currency exchange rate variability by, whenever possible, procuring production materials within the same country
that it will utilize the materials in manufacturing and, by selling to customers from manufacturing sites within the country
in which the customers are located.
On May 15, 2009, in connection with an amendment to its credit facility, the Company issued 2.1 million warrants,
each exercisable for one share of the Company's common stock at an exercise price of $0.01 per share. Forty percent of
the warrants were exercisable upon issuance, and the remaining balance was to become exercisable in twenty percent
increments at various points in time after October 31, 2009. As a result of certain net cash settleable put provisions within
the warrant agreement, the warrants were recorded as a liability in the Company's consolidated balance sheet. As of the
issuance date and for future periods that such warrants remain outstanding, the Company has, and will continue to, adjust
the liability based upon the current fair value of the warrants, with any changes in their fair value being recognized in
earnings. Due to the warrants' exercise price of $0.01 per share, their fair value will approximate the market price of the
Company's common stock. Approximately 1.2 million of these warrants were cancelled as a result of the Company's early
repayment of certain amounts under its credit facility during the year ended November 1, 2009 and the associated liability
was reduced accordingly (see Note 7 for further discussion).
The Company was a party to two foreign currency forward contracts which expired during the year ended November 1,
2009, both of which were not accounted for as hedges, as they were economic hedges of intercompany loans denominated
in U.S. dollars that were remeasured at fair value and recognized immediately in earnings. A portion of an existing loss on
a cash flow hedge in the amount of $0.1 million is expected to be reclassified into earnings during fiscal year 2010.
The table below presents the effect of derivative instruments on the Company's consolidated balance sheet at
November 1, 2009.
46
Derivatives
Not Designated
as Hedging
Instruments Under
ASC 815
Balance Sheet Location
Fair Value
Warrants on common stock
Other liabilities
$3,205
The table below presents the effect of derivative instruments on the Company's statement of operations for the year
ended November 1, 2009.
Derivatives
Not Designated
as Hedging
Instruments Under
ASC 815
Location of Gain (Loss)
Recognized in
Income on
Derivatives
Amount of Gain (Loss)
Recognized in
Income on
Derivatives
Warrants on common stock
Investment and other income (expense), net
Foreign exchange contracts
Investment and other income (expense), net
$ (305)
$ 93
NOTE 7 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
5.50% convertible senior notes due
on October 1, 2014
Borrowings under revolving credit facility, which
bears interest at a variable rate, as defined (8.00% at
November 1, 2009; 6.36% at November 2, 2008)
Term loan which bears interest at a variable rate
as defined (8.00% at November 1, 2009)
8.0% capital lease obligation payable through
January 2013
5.6% capital lease obligation payable through
October 2012
Foreign loans (repaid in 2009):
Revolving loan
Term loan
Short-term loan
Less current portion
November 1,
November 2,
2009
2008
$ 57,500
$ -
2,568
27,204
22,552
12,614
-
-
-
122,438
10,301
122,500
-
53,895
16,669
19,045
8,204
3,296
223,609
20,630
$112,137
$202,979
47
As of November 1, 2009, long-term borrowings, excluding capital lease obligations, mature as follows: $9,068 in fiscal
year 2010, $20,704 in fiscal year 2011, and $57,500 in fiscal year 2014. It is the Company's intention to pay the $9,068
maturing in 2010 by utilizing funds available under its credit facility and, as a result, this amount has been classified as a
long-term borrowing.
As of November 1, 2009, minimum lease payments under the Company's capital lease obligations were as follows:
Fiscal Year:
2010
2011
2012
2013
Less interest
Net minimum lease payments under capital leases
Less current portion of net minimum lease payments
Long-term portion of minimum lease payments
$12,149
12,531
12,531
2,369
39,580
4,414
35,166
10,301
$24,865
On September 11, 2009 the Company sold, through a public offering, $57.5 million aggregate principal amount of
5.5% convertible senior notes which mature on October 1, 2014. Note holders may convert each $1,000 principal amount
of notes to 196.7052 shares of stock (equivalent to an initial conversion price of approximately $5.08 per share of
common stock) on September 30, 2014. The conversion rate may be increased in the event of a make-whole fundamental
change (as defined in the prospectus supplement filed by the Company on September 11, 2009) and the Company may not
redeem the notes prior to their maturity date. The net proceeds of the convertible senior notes offering were approximately
$54.9 million, which were used to reduce outstanding amounts under the Company's credit facility.
On June 6, 2007, the Company and a group of financial institutions entered into a credit agreement, which allows for
borrowings under various currencies. In 2008 and 2009 the credit agreement was amended and on May 15, 2009 the
maturity date of the agreement was changed from July 30, 2010 to January 31, 2011 and the aggregate commitment was
amended and reduced to $130 million. Per the credit agreement, the bank debt repayments primarily from the net proceeds
of the convertible debt and common stock offerings, further reduced the aggregate commitment and as of November 1,
2009 the aggregate commitment was $50 million. On January 31, 2010 the aggregate commitment will be further reduced
to $34 million. Amounts borrowed under the credit agreement are secured by substantially all of the Company's assets
located in the United States as well as stock held by the Company of certain of its subsidiaries.
The cash interest rate on the outstanding debt balance is the greater of LIBOR or two percent, plus a spread, as defined.
Fourth quarter 2009 payment-in-kind (PIK) interest, which accrues in the outstanding debt balance, is one percent and
increases fifty basis points per quarter to a maximum of two and one-half percent. The PIK interest can be paid during the
term of the credit facility or at maturity. In addition, the Company entered into a warrant agreement with its lenders for
2.1 million shares of its common stock. Forty percent of the warrants were exercisable upon issuance, with twenty percent
increments exercisable after October 31, 2009, April 30, 2010, and October 31, 2010 at an exercise price of $0.01 per
share. In fiscal 2009, approximately 0.1 million warrants were exercised and 1.2 million were cancelled in connection
with the Company's early repayment of a portion of the outstanding balance under its credit facility. At November 1,
2009, 0.8 million of these warrants remained outstanding and exercisable. The warrant agreement also includes a net cash
settleable put provision exercisable starting in May 2012 and a call provision exercisable starting in May 2013, both of
which are exercisable only if the Company's common stock is not traded on a national exchange or if its credit facility,
which matures on January 31, 2011, is not paid in full by another financing facility (new credit facility, debt and/or equity
securities, or capital contributions) or with other funds. As a result of the aforementioned net cash settleable put
provisions, the warrants were recorded as a liability (included in other liabilities) and are subsequently reported at their
fair value.
48
The credit facility's financial covenants include, among other items as defined: a Senior Leverage Ratio, Total
Leverage Ratio, Minimum Fixed Charge Ratio, Maximum Capital Expenditures limitation, and a six-month minimum
EBITDA covenant. Cash received as a result of certain defined events is required to be used to pay down the outstanding
loan balance and reduce the available credit facility by the same amount. In addition, the credit facility prohibits the
payment of dividends and requires Minimum Unrestricted Cash Balances, as defined, at the end of each quarter.
Net proceeds of the Company's 5.5% convertible debt and common stock offerings of approximately $98 million, cash
from operations of $18 million and proceeds from the sale of the Manchester, U.K. facility of $4.3 million were used to
reduce the credit facilities outstanding balance from $122.5 million at November 2, 2008 to its November 1, 2009 balance
of $2.6 million, which included the above mentioned PIK interest. The Company's available credit under its credit facility
has been reduced to $50.0 million, $47.4 million of which is unused at November 1, 2009, and all of which is due on
January 31, 2011.
In addition to the credit facility discussed above, the Company also entered into a term loan agreement in the U.S.
dated June 8, 2009 with an aggregate commitment of $27.2 million. The term loan has the same interest rate terms,
maturity date and covenants as the credit facility discussed above. In June 2009, the Company borrowed $27.2 million
under the term loan and used the proceeds of this loan to repay the remaining outstanding balances of its foreign loans in
China. Under the terms of the term loan agreement, $9.1 million is due on January 31, 2010 and the remaining balance is
due by January 31, 2011. It is the Company's intention to pay the $9.1 million due on January 31, 2010 by utilizing funds
available under its credit facility and, therefore, the Company has classified the $9.1 million as a long-term borrowing.
As of November 2, 2008, foreign loans were in China, and consisted of a term and revolving debt credit facility and a
short-term loan, which were fully outstanding, and amounted to RMB 186 million ($27.2 million) and RMB 22.5 million
($3.3 million), respectively. Interest rates were variable and based on the People's Bank of China base rate, plus a spread,
as defined. The short-term credit line was repaid in March 2009 and the term and revolving debt credit facility were repaid
with the proceeds of the term loan entered into in June 2009.
In the first quarter of 2008 a capital lease agreement commenced for the U.S. nanoFab facility. Quarterly lease
payments, which bore interest at 8% were $3.8 million through January 2013. This lease was cancelled in the third fiscal
quarter of 2009, at which time the Company and Micron (the lessor) entered into a new lease agreement for the facility.
Under the provisions of the new lease agreement, quarterly lease payments were reduced from $3.8 million to $2.0
million, the term of the lease was extended from December 31, 2012 to December 31, 2014, and ownership of the
property will not transfer to the Company at the end of the lease term. As a result of the new lease agreement, the
Company reduced its lease obligation and the carrying value of its assets under capital leases by approximately $28
million. The lease will continue to be accounted for as a capital lease until the end of its original lease term. For the
additional two years of the new lease term, the lease will be accounted for as an operating lease. As of November 1, 2009,
total capital lease amounts payable were $25.8 million, of which $22.5 million represented principal and $3.3 million
represented interest.
In October 2007, the Company entered into a capital lease agreement in the amount of $19.9 million associated with
certain equipment. 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.
Interest payments were $20.8 million, $12.5 million and $8.1 million in fiscal 2009, 2008 and 2007, respectively;
including deferred financing cost payments of $6.5 million, $1.6 million and $0.5 million in fiscal 2009, 2008 and 2007,
respectively.
49
NOTE 8 - COMMON STOCK WARRANTS
On September 10, 2009 the Company entered into two warrant agreements with Intel Capital Corporation to purchase a
total of 750,000 shares of the Company's common stock. Under one warrant agreement 500,000 shares of the Company's
common stock can be purchased at an exercise price of $4.15 per share and under the second warrant agreement 250,000
shares of the Company's common stock can be purchased at an exercise price of $5.08 per share. The warrant agreements
expire on September 10, 2014. Also on September 10, 2009 the Company and Intel Corporation entered into an agreement
to share technical and operations information regarding the development of the Company's products, the capabilities of the
Company's photomask manufacturing lines and the alignment of photomask toolsets. Intel Capital Corporation also
invested in the Company's convertible debt offering. The warrants were recorded at their fair value on their date of grant,
which was determined using the Black-Scholes option pricing model.
In conjunction with the May 15, 2009 amendment to its credit facility, the Company also entered into a warrant
agreement with its lenders. See Note 7 for further discussion of these warrants.
NOTE 9 - OPERATING LEASES
The Company leases various real estate and equipment under non-cancelable operating leases. Rental expense under
such leases amounted to $3.6 million in fiscal 2009, $3.1 million in fiscal 2008 and $3.4 million in fiscal 2007. As
discussed in Note 7, the Company entered into a new lease agreement for the U.S. nanoFab, under which the lease will be
accounted for as a capital lease through December 31, 2012 (the end date of its original lease term) and, thereafter, as an
operating lease through its expiration on December 31, 2014.
Future minimum lease payments under non-cancelable operating leases (including lease payments in 2013 and 2014
for the U.S. nanoFab facility discussed above) with initial or remaining terms in excess of one year at November 1, 2009
follow:
2010
2011
2012
2013
2014
Thereafter
$ 2,157
1,715
1,473
7,112
8,427
3,031
$23,915
See Note 7 for disclosures related to the Company's capital lease obligations.
NOTE 10 - 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 officers, employees, directors, consultants, advisors, and independent
contractors of the Company or its subsidiaries. The Plan, aspects of which are more fully described below, prohibits
further awards from being issued under prior plans. The Company incurred compensation cost under the Plan of $2.0
million, $2.6 million and $2.9 million for fiscal 2009, 2008 and 2007, respectively. No compensation cost was capitalized
as part of inventory, no income tax benefits were recorded, and no equity awards were settled in cash during the periods
presented.
50
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 grant date fair value of options is generally based on the closing price on the date 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 expected term, 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 2009, 2008 and 2007 are presented in the following table:
Year Ended
November 1,
November 2,
October 28,
2009
2008
2007
Volatility
69.8%
43.1%
52.4.%
Risk-free rate of return
1.9 - 2.5%
2.99%
4.5%
Dividend yield
Expected term
0.0%
0.0%
0.0%
4.7 years
4.7 years
4.6 years
A summary of option activity under the Plan as of November 1, 2009 and changes during the year then ended is
presented as follows:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Outstanding at November 2, 2008
Granted
Exercised
Cancelled and forfeited
2,172,207
1,350,250
-
(188,599)
$18.21
0.77
-
15.75
Outstanding at November 1, 2009
3,333,858
$11.21
6.4 years
Exercisable at November 1, 2009
1,819,039
$18.79
4.4 years
$4,618
$ 18
Expected to vest as of November 1, 2009
1,447,196
$ 1.92
8.9 years
$4,458
51
The weighted average grant date fair value of options granted during the fiscal years 2009, 2008 and 2007 was $0.44,
$1.86 and $7.15 respectively. The total intrinsic value of options exercised during fiscal years 2009, 2008, and 2007 was
$0.0 million, $0.0 million, and $0.1 million, respectively. A summary of the status of the Company's non-vested options
as of November 1, 2009 is presented below:
Non-vested Options
Shares
Non-vested at November 2, 2008
Granted
Vested
Cancelled and forfeited
418,763
1,350,250
(141,769)
(112,425)
Non-vested at November 1, 2009
1,514,819
Weighted
Average
Fair Value
at Grant
Date
$6.92
0.44
7.47
7.07
$1.09
As of November 1, 2009 the total compensation cost for non-vested option awards not yet recognized was
approximately $1.2 million. That cost is expected to be recognized over a weighted average amortization period of 1.8
years.
Restricted Stock
The Company periodically grants restricted stock awards. 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 stock grants
during the fiscal years 2009, 2008 and 2007 was $0.76, $11.72 and $13.75, respectively. The total value of awards for
which restrictions lapsed during fiscal years 2009, 2008 and 2007 was $0.3 million, $0.6 million and $0.1 million,
respectively. As of November 1, 2009, the total compensation cost for non-vested option awards not yet recognized was
approximately $1.9 million. That cost is expected to be recognized over a weighted average amortization period of 3.7
years. A summary of the status of the Company's non-vested restricted shares as of November 1, 2009 is presented as
follows:
Restricted Stock
Shares
Weighted
Average
Fair Value
at Grant
Date
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Outstanding at November 2, 2008
Granted
Vested
Cancelled and forfeited
292,675
75,000
(121,203)
(76,187)
$14.60
0.76
7.70
15.49
Outstanding at November 1, 2009
170,285
$13.02
3.0 years
Expected to vest as of November 1, 2009
148,897
$12.69
2.9 years
$712
$622
52
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 currently available for purchase under the ESPP. The vesting period for the ESPP is approximately one
year. Under the ESPP 777,490 shares had been issued through November 1, 2009 and an additional 143,965 shares are
subject to outstanding subscriptions.
NOTE 11 - 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 $0.2 million in
fiscal 2009, $0.5 million in fiscal 2008 and $0.4 million in fiscal 2007.
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.
NOTE 12 - CONSOLIDATION, RESTRUCTURING AND RELATED CHARGES
2009 Restructurings
Shanghai, China Facility
During the three months ended August 2, 2009, the Company ceased the manufacture of photomasks at its Shanghai,
China facility. In connection with this restructuring, the Company recorded a total restructure charge of $10.2 million,
including $9.9 million for asset write-downs, principally related to the Company's manufacturing facility. The fair value
of the assets written down was determined by management using a market approach. Approximately 75 employees were
affected by this restructuring.
The Company expects the total after tax cost of this restructure to range between $11 million to $13 million through its
expected completion in 2010. The following table sets forth the Company's restructuring reserve as of November 1, 2009
relating to its Shanghai, China facility, and reflects the activity affecting the reserve for the year then ended.
Year Ended November 1, 2009
November 3,
2008
Charges
Utilized
2009
November 1,
Asset write-downs
Other
$ -
-
$ -
$ 9,908
$ (9,908)
324
(190)
$10,232
$(10,098)
$ -
134
$134
The Company is currently in negotiations to sell its Shanghai, China facility.
53
Manchester, U.K. Facility
During the three months ended February 1, 2009, the Company ceased the manufacture of photomasks at its
Manchester, U.K. facility, and in connection therewith incurred restructuring charges of $3.3 million in fiscal 2009,
primarily for employee termination costs and asset write-downs. Approximately 85 employees were affected by this plan,
which was completed in the fourth quarter of fiscal 2009. The following table sets forth the Company's 2009 restructuring
reserve related to its Manchester, U.K. facility as of November 1, 2009, and reflects the activity affecting the reserve for
the year then ended.
Year Ended November 1, 2009
November 3,
2008
Charges
Utilized
2009
November 1,
$ -
-
$ -
$2,375
950
$3,325
$(2,375)
(950)
$(3,325)
$ -
-
$ -
Employee terminations
Asset write-downs and other
Prior Restructurings
In May 2006, the Company closed its Austin, Texas manufacturing and research and development facility, and in
March 2003 closed its Phoenix, Arizona manufacturing facility. The following tables set forth the Company's
restructuring reserves as of November 1, 2009, November 2, 2008, and October 28, 2007, and reflect the activity affecting
the reserves for the years then ended.
Year Ended November 1, 2009
November 3,
2008
Balance
Charges
Utilized
November 1,
2009
Balance
Manufacturing capacity reduction and other
Total
$1,134
$1,134
$ -
$ -
$(854)
$(854)
$280
$280
Year Ended November 2, 2008
October 29,
2007
Balance
Charges
Utilized
November 2,
2008
Balance
Manufacturing capacity reduction and other
Total
$1,687
$1,687
$ -
$ -
$(553)
$(553)
$1,134
$1,134
Manufacturing capacity reduction and other
Workforce reductions
Total
October 30,
2006
Balance
$2,528
126
$2,654
Year Ended October 28, 2007
Charges
Utilized
October 28,
2007
Balance
$ -
-
$ -
$(841)
(126)
$(967)
$1,687
-
$1,687
54
NOTE 13 - IMPAIRMENTS OF GOODWILL AND LONG-LIVED ASSETS
The Company, as of July 27, 2008, the Company performed an interim impairment test of its goodwill and certain of
its long-lived assets (principally machinery and equipment, and buildings and improvements) due to events and changes in
circumstances through the third quarter of fiscal 2008 that indicated an impairment might have occurred.
Factors deemed by management to have collectively constituted an impairment triggering event included net losses in
each of three quarters of fiscal 2008, and a significant decrease in the Company's market capitalization through the third
quarter of fiscal 2008 which was significantly below its consolidated net assets. As a result of this impairment testing, the
Company recorded the following impairment charges during the three and nine months ended July 27, 2008.
Impairment of goodwill
Impairment of long-lived assets
Total impairments
Goodwill
$138,534
66,874
$205,408
The Company tested goodwill for impairment annually and if an event occurred or circumstances changed that would
more likely than not have reduced the fair value of a reporting unit below its carrying value. Goodwill was tested for
impairment using a two-step process. In the first step, the fair value of the reporting unit was compared to its carrying
value. The Company, for purposes of testing its goodwill for impairment, was a single reporting unit. If the fair value of
the reporting unit exceeded the carrying value of its net assets, goodwill was considered not impaired and no further
testing was required. If the carrying value of the net assets exceeded the fair value of the reporting unit, a second step of
the impairment test was performed in order to determine the implied fair value of a reporting unit's goodwill. Determining
the implied fair value of goodwill required a valuation of the reporting unit's tangible and intangible assets and liabilities
in a manner similar to the allocation of purchase price in a business combination. If the carrying value of the reporting
unit's goodwill exceeded the implied fair value of its goodwill, goodwill was deemed impaired and was written down to
the extent of the difference.
Through the third quarter of fiscal 2008, the Company experienced a sustained, significant decline in its stock price. As
a result of the decline in stock price, the Company's market capitalization fell significantly below the recorded value of its
consolidated net assets during the third quarter of fiscal 2008. Accordingly, in the third quarter of fiscal 2008, the
Company performed an assessment of goodwill for impairment. Based on the results of the Company's initial assessment
of impairment of its goodwill, it was determined that the consolidated carrying value of the Company exceeded its
estimated fair value. Therefore, the Company performed a second step of the impairment test to determine the implied fair
value of its goodwill. The result of the analysis indicated that there would be no remaining implied value attributable to
the Company's goodwill and, accordingly, the Company wrote off all of its $138.5 million of goodwill as of July 27, 2008.
In performing the goodwill assessment, the Company used current market capitalization, discounted cash flows and
other factors as the best evidence of fair value. There are inherent uncertainties in an analysis of goodwill for impairment
and management judgment is required.
Long-Lived Assets
The Company reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net
realizable value, the asset will be written down to its fair value. In connection with the triggering events discussed above,
during the third quarter of fiscal year 2008 the Company determined that long-lived assets were impaired for certain
groups of its assets. The determination was based on reviewing estimated undiscounted cash flows for these groups of
assets, which were less than their carrying values. The Company considers its asset groups to be the long-lived assets at
each of its locations, primarily consisting of machinery and equipment, and buildings and improvements. As a result, the
Company recorded an impairment charge of $66.9 million as of July 27, 2008, which represented the difference between
the estimated fair values of these long-lived assets as compared to their carrying values for certain asset groups located in
Asia and Europe. In addition, an impairment charge of $1.5 million was incurred in 2009 relating to the Manchester, U.K.
facility. Fair values were determined based upon market conditions, the income approach which utilized cash flow
projections, and other factors.
55
NOTE 14 - INCOME TAXES
The income (loss) before income taxes and minority interest consists of the following:
United States
Foreign
Year Ended
November 1,
2009
November 2,
2008
October 28,
2007
$(35,228)
(1,876)
$(32,880)
(179,289)
$(37,104)
$(212,169)
$16,529
7,355
$23,884
The income tax provision (benefit) consists of the following:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
November 1,
2009
Year Ended
November 2,
2008
October 28,
2007
$ -
-
7,266
7,266
-
-
(2,943)
(2,943)
$4,323
$ -
-
(834)
(834)
-
-
(1,944)
(1,944)
$(8,430)
-
6,213
(2,217)
-
-
(961)
(961)
$(2,778)
$(3,178)
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:
U.S. federal income tax at statutory rate
Goodwill and other impairments
Distributions from foreign subsidiaries
State income taxes, net of federal benefit
Change in valuation allowance
Foreign tax rate differential
Resolution and settlement of tax matters
Other, net
November 1,
2009
Year Ended
November 2,
2008
October 28,
2007
$(12,986)
-
10,203
(447)
6,585
1,917
(1,218)
269
$ 4,323
$(74,259)
42,416
10,937
(1,255)
8,757
9,982
(192)
836
$ (2,778)
$ 8,359
-
-
108
2,399
(6,973)
(7,394)
323
$(3,178)
During the fiscal years ended November 1, 2009 and October 28, 2007, the Company recorded tax benefits in the
amounts of $1.2 million and $7.4 million, respectively, relating to the resolutions and settlements of U.S. and foreign tax
matters that were associated with uncertain tax positions in prior years.
56
The net deferred income tax asset consists of the following:
November 1,
2009
November 2,
2008
Deferred income tax assets:
Reserves not currently deductible
Net operating losses
Alternative minimum tax credits
Tax credit carryforwards
Other
Valuation allowance
Deferred income tax liabilities:
Property, plant and equipment
Investments and other
Other
Net deferred income tax asset
Reported as:
Current deferred tax assets
Long-term deferred tax assets
Long-term deferred tax liabilities
$ 6,455
65,123
2,926
4,495
4,531
83,530
(54,734)
28,796
(16,169)
(1,139)
(824)
(18,132)
$10,664
$ 3,264
8,887
(1,487)
$10,664
$4,369
52,143
2,926
10,051
4,175
73,664
(48,149)
25,515
(15,921)
(1,139)
(1,307)
(18,367)
$7,148
$2,843
6,118
(1,813)
$7,148
On July 13, 2006, the FASB issued FASB Interpretation Number 48 (FIN 48), "Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109" (SFAS 109) (primarily codified under ASC 740). The
interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for under
ACS 740. The Company adopted this guidance as of the beginning of its 2008 fiscal year. The total amount of the liability
accrued for unrecognized tax benefits as of the adoption date was approximately $3.9 million, which includes interest and
penalties. As compared to the Company's historical approach, the application of this guidance resulted in a net increase to
accrued income taxes payable of approximately $1.0 million (including interest and penalties of approximately $0.2
million), and a decrease to retained earnings of the same amount. In addition, the majority of the liability for unrecognized
tax benefits was reclassified from accrued income taxes to other long-term liabilities on the Company's consolidated
balance sheet. As of the date of adoption of this guidance the Company has elected to include any applicable interest and
penalties related to uncertain tax positions in its income tax provision in its consolidated statements of operations. The
gross unrecognized tax benefits for income taxes associated with uncertain tax positions totaled approximately $2.0
million (including interest and penalties of $0.4 million) and $3.1 million (including interest and penalties of $1.1 million)
at November 1, 2009 and November 2, 2008, respectively. If recognized, the benefits would favorably affect the
Company's effective tax rate in future periods. As of November 1, 2009, the Company believes it is not reasonably
possible that the total amounts of unrecognized benefits will significantly increase or decrease in the next twelve months.
Currently, the statutes of limitations remain open subsequent to and including 2006 in the U.S., 2007 in the U.K., 2008 in
Germany and 2005 in Korea.
57
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is
as follows:
Balance at beginning of year
Decreases for tax positions in prior years
Additions based on current year tax positions
Settlements
Lapse of statutes of limitations
Year Ended
November 1,
2009
November 2,
2008
$1,988
-
377
(685)
(107)
$2,280
(301)
294
(194)
(91)
Balance at end of year
$1,573
$1,988
As of November 1, 2009 the Company had available U.S. Federal tax operating loss and tax credit carryforwards
subject to expiration as follows:
Year of
Expiration
Operating
Losses
Tax
Credits
2018
2022
2023
2024
2025
2026
2027
2028
2029
$ -
7,797
36,242
22,325
12,130
4,888
1,506
7,529
12,630
$105,047
$1,272
-
-
300
510
378
138
114
-
$2,712
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 $6.6 million, $8.8 million and $2.4 million in fiscal 2009, 2008 and 2007, respectively.
As of November 1, 2009, 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 state tax credits available of $1.8 million which, if
they are not utilized, will begin to expire in 2010.
As of November 1, 2009, the undistributed earnings of foreign subsidiaries included in consolidated retained earnings
amounted to $81.2 million. During 2008 a decision was made to not indefinitely reinvest earnings in certain foreign
jurisdictions. For the year ended November 2, 2008, $12 million of earnings that were previously considered to be
permanently reinvested in foreign operations were determined to no longer be indefinitely reinvested. This decision
resulted in no impact to the consolidated statement of operations since the Company has a full valuation allowance against
its net U.S. deferred tax assets. The remaining undistributed earnings of foreign subsidiaries are considered to be
permanently reinvested. Accordingly, no provision has been made for taxes due on the remittance of these earnings.
Should the Company elect in the future to repatriate the foreign earnings so invested, it may incur additional income tax
expense on those foreign earnings.
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. These tax
holidays had no dollar or per share effect in the fiscal years ended November 1, 2009, November 2, 2008 and October 28,
2007. In Korea, various investment tax credits have been utilized to reduce the Company's effective income tax rate.
58
Income tax payments were $9.6 million, $4.4 million and $12.8 million in fiscal 2009, 2008 and 2007, respectively.
Cash received for refunds of income taxes paid in prior years amounted to $0.1 million, $1.3 million and $0.1 million in
fiscal 2009, 2008 and 2007, respectively.
The Company has elected the alternative transition method provided in FASB Staff Position No. 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment Awards," for calculating the tax effects of
share-based compensation. As of November 1, 2009 the deferred income tax expenses resulting from this method
amounted to $1.5 million.
NOTE 15 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented as follows:
Earnings for diluted earnings (loss) per share
$(41,910)
$(210,765)
Net income (loss)
Effect of dilutive securities:
Interest expense on convertible notes,
net of related tax effect
Weighted average common shares computations:
Weighted average common shares used for
basic earnings (loss) per share
Effect of dilutive securities:
Convertible notes
Employee stock options
Dilutive potential common shares
Weighted average common shares used for
diluted earnings (loss) per share
Year Ended
November 1,
2009
November 2,
October 28,
2008
2007
$(41,910)
$(210,765)
$24,523
-
-
4,401
$28,924
41,539
9,441
302
9,743
43,210
41,658
-
-
-
-
-
-
43,210
41,658
51,282
Basic earnings per share
Diluted earnings per share
$(0.97)
$(0.97)
$(5.06)
$(5.06)
$0.59
$0.56
59
In periods in which the Company incurred a net loss, the assumed exercise of certain outstanding employee stock
options and the vesting of restricted shares had an antidilutive effect. The assumed exercise of all outstanding common
stock warrants and the conversion of convertible senior notes to common stock would also have been antidilutive in the
periods that the Company reported a net loss. The table below shows the amount of incremental weighted-average shares
of these employee stock options, restricted shares, common stock warrants, and convertible debt had the Company
recognized sufficient net income in the reporting periods presented.
Year Ended
November 1,
2009
November 2,
October 28,
2008
2007
Convertible notes
Common stock warrants
Share based payment awards
Total potentially dilutive shares excluded
1,429
804
793
3,026
4,409
-
20
4,429
304
-
-
304
The table below shows the outstanding weighted-average employee stock options, restricted shares and common stock
warrants that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the
average market value of the common shares for the period or, under application of the treasury stock method, they were
otherwise determined to be antidilutive.
Year Ended
November 1
2009
November 2,
October 28,
2008
2007
Share based payment awards
Common stock warrants
Total potentially dilutive shares excluded
2,243
2
2,245
2,340
-
2,340
2,040
-
2,040
In the first quarter of fiscal year 2010, the Company awarded approximately 0.8 million stock options to its employees
and directors.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
At November 1, 2009, the Company had outstanding purchase commitments of approximately $42 million, which
includes approximately $35 million related to capital expenditures.
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.
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 its consolidated financial statements.
60
NOTE 17 - GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates as a single operating 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 manufacturing facility is located. The Company's 2009,
2008 and 2007 net sales and total long-lived assets by geographic area were as follows:
Net sales
Asia
Europe
North America
Long-lived assets
Asia
Europe
North America
Fiscal Year Ended
November 1,
2009
November 2,
2008
October 28,
2007
$223,138
38,344
99,871
$361,353
$259,293
66,398
96,857
$422,548
$242,788
71,421
107,270
$421,479
November 1,
2009
November 2,
2008
October 28,
2007
$199,179
9,579
139,131
$347,889
$228,009
14,134
194,385
$436,528
$329,619
67,084
134,875
$531,578
Samsung Electronics Co., Ltd. accounted for approximately 19% of the Company's net sales in fiscal year 2009, and
25% of the Company's net sales in fiscal years 2008 and 2007.
NOTE 18 - 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 other comprehensive income for the last three fiscal years, net of tax, were as
follows:
Fiscal Year Ended
November 1,
2009
November 2,
2008
October 28,
2007
Foreign currency translation adjustment
Change in fair value and amortization of cash flow hedges
Change in unrealized gains on investments
Other
Other comprehensive income (loss),net of tax
$10,712
576
62
(238)
$11,112
$(62,234)
193
(279)
2
$(62,318)
$13,496
(1,024)
(458)
(269)
$11,745
The foreign currency translation adjustment of $62.2 million for the fiscal year ended November 2, 2008 was primarily
due to the weakening of the Korean won against the U.S. dollar.
61
NOTE 19 - OTHER RELATED PARTY TRANSACTIONS
The Chairman of the Board and Chief Executive Officer of the Company is also the Chairman of the Board and
majority shareholder of a company that provides secure managed information technology services to Photronics. 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 $2.8 million in 2009, $3.3 million in 2008, and $3.8 million in
2007 related to services provided by the company. As of November 1, 2009, the Company had contracted with this
service provider through 2010 for a cost of approximately $2.1 million.
The Company purchases photomask blanks from a company of which an officer of the Company is a significant
shareholder. The Company purchased $25.5 million, $28.5 million, and $21.6 million of photomask blanks from this
company in 2009, 2008, and 2007, respectively, for which the amount owed to this company was $6.5 million at
November 1, 2009 and $6.8 million at November 2, 2008.
The Company believes that the terms of the transactions described above with related parties were negotiated at arm's-
length and were no less favorable to the Company than the Company could have obtained from unrelated third parties.
See Note 4 for other related party transactions.
NOTE 20 - FAIR VALUE MEASUREMENTS
The Company adopted SFAS No. 157 "Fair Value Measurements" (primarily codified under ASC 820) as of
November 3, 2008 for all financial assets and liabilities measured on both a recurring and nonrecurring basis, and for
nonfinancial assets and liabilities measured on a recurring basis. This guidance defines fair value as the price that would
be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement
date. It further prescribes that an orderly transaction is a transaction that assumes exposure to the market for a period prior
to the measurement date to allow for marketing activities that are usual and customary for transactions involving such
assets or liabilities (i.e. it is not a forced transaction). The transaction to sell the asset or transfer the liability is a
hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the
asset or owes the liability. Therefore, the objective of a fair value measurement is to determine the price that would be
received to sell the asset or paid to transfer the liability (an exit price) at the measurement date.
A fair value measurement further assumes that the hypothetical transaction occurs in the principal (or if no principal
market exists, the most advantageous) market for the asset or liability. Further, a fair value measurement assumes a
transaction involving the highest and best use of an asset and the consideration of assumptions that would be made by
market participants when pricing an asset or liability, such as transfer restrictions (in the case of an asset) or
nonperformance risk.
This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The fair value hierarchy gives the highest priority to unadjusted, quoted market prices in
active markets for identical assets or liabilities (including when the liabilities are traded as assets) while giving the lowest
priority to unobservable inputs, which are inputs that reflect the Company's assumptions about the factors that market
participants would use in valuing assets or liabilities, based upon the best information available under existing
circumstances. In cases when the inputs used to measure fair value fall in different levels of the fair value hierarchy, the
level within which the fair value measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement in its entirety. Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgment, including the consideration of factors specific to the asset or liability. The
hierarchy consists of the following three levels:
Level 1 - Inputs are prices in active markets that are accessible at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 are observable for the asset or liability, either directly
or indirectly. The Company's Level 2 liability consists of its common stock warrants.
Level 3 - Inputs are unobservable inputs for the asset or liability. The Company's Level 3 assets consist of a foreign
bond fund that is reported in other current assets.
62
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below present assets and liabilities as of November 1, 2009 that are measured at fair value on a recurring
basis.
Quoted
Prices
in Active
Markets
for Identical
Instruments
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ -
$ -
$ -
$ -
$ -
$ -
$(3,205)
$(3,205)
$ 148
$ 148
$ -
$ -
Total
$ 148
$ 148
$(3,205)
$(3,205)
Foreign bond fund
Total assets
Common stock warrants
Total liabilities
The foreign bond fund above represents the Company's investment in a fund for which there is currently no active
market. The fair value presented represents the Company's estimate of its value based upon management's judgment. The
fair value of the warrant liability was determined using the Black-Scholes option pricing model. Significant inputs to the
model include the market price and volatility of the Company's common stock at the measurement date.
Unrealized losses related to the foreign bond fund are included in accumulated other comprehensive income. Gains and
losses related to exercises of, and fair value adjustments to, the warrant liability are included in other income (expense),
net.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Under the Company's restructuring initiatives discussed in Note 12, certain long-lived assets have been measured at
and reported at their fair values. However, these are not included in the table presented above as the Company, as was
allowed under FSP FAS 157-2 (codified under ASC 820), has elected to defer the effective date for applying this guidance
to nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis until its fiscal
year ending October 31, 2010. This deferral applies to such items as nonfinancial assets initially measured at fair value in
a business combination and nonfinancial long-lived asset groups measured at fair value for an impairment assessment that
are not measured at fair value in subsequent periods. The Company does not anticipate that its adoption of this guidance
will have a material effect on its consolidated financial statements.
Fair Value of Other Financial Instruments
The fair values of the Company's cash and cash equivalents, accounts receivable, accounts payable, and certain other
current assets and current liabilities approximate their carrying value due to their short-term maturities. The fair value of
the Company's variable rate long-term debt approximates its carrying value due to the variable nature of the underlying
interest rates. As of November 1, 2009, the estimated fair value of the Company's outstanding 5.5% convertible senior
notes was approximately $63.3 million.
63
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data:
Fiscal 2009:
Net sales
Gross margin
Net income (loss)
Earnings (loss) per
share:
Basic
Diluted
Fiscal 2008:
Net sales
Gross margin
Net income (loss)
Earnings (loss) per
share:
Basic
Diluted
First
(a)
$ 88,042
10,559
(10,233)
Second
(b) (c)
$ 83,232
11,440
(10,072)
$(0.25)
$(0.25)
$(0.24)
$(0.24)
$103,215
20,596
(3,340)
$110,330
20,274
(2,069)
Third
(d) (e)
$ 95,401
18,054
(22,847)
$(0.55)
$(0.55)
(k)
$ 105,697
13,884
(205,592)
Fourth
Year
(f) (g) (h)
(h) (i) (j)
$94,678
17,018
1,242
$ 0.03
$(0.11)
(l)
$103,306
17,953
236
$361,353
57,071
(41,910)
$(0.97)
$(0.97)
(k) (l)
$ 422,548
72,707
(210,765)
$(0.08)
$(0.08)
$(0.05)
$(0.05)
$(4.93)
$(4.93)
$0.01
$0.01
$(5.06)
$(5.06)
(a)
(b)
Includes consolidation and restructuring charges of $1.7 million ($1.3 million net of tax) in connection with the
closure of the Company's Manchester, U.K. manufacturing facility.
Includes consolidation and restructuring charges of $0.4 million ($0.3 million net of tax) in connection with the
closure of the Company's Manchester, U.K. manufacturing facility.
(c)
Includes impairment charge of $1.5 million ($1.1 million net of tax) relating to the Company's Manchester, U.K.
manufacturing facility.
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Includes consolidation and restructuring charges of $10.7 million ($10.5 million net of tax) in connection with the
closures of the Company's Shanghai, China and Manchester, U.K. manufacturing facilities.
Includes non-cash mark-to-market charge of $6.8 million net of tax in connection with warrants issued to purchase
the Company's common stock.
Includes consolidation and restructuring charges of $0.8 million ($0.6 million net of tax) in connection with the
closures of the Company's Shanghai, China and Manchester, U.K. manufacturing facilities.
Includes non-cash mark-to-market gain of $6.5 million net of tax in connection with warrants issued (and a portion
cancelled) to purchase the Company's common stock and deferred financing fees write-off of $3.7 million net of tax
in connection with repayment of debt.
Includes gain on sale of the Company's Manchester, U.K. facility of $2.0 million ($1.5 million net of tax).
Includes consolidation and restructuring charges of $13.6 million ($12.9 million net of tax) in connection with the
closures of the Company's Shanghai, China and Manchester, U.K. manufacturing facilities.
Includes non-cash mark-to-market charge of $0.3 million net of tax, in connection with warrants issued to purchase
the Company's common stock.
Includes a $137.3 million net of tax impairment of all of the Company's goodwill and a $60.9 million net of tax
impairment of long-lived assets related to certain asset groups located in Europe and Asia.
Includes $0.4 million net of tax restructuring charge in connection with the closure of the Company's Manchester,
U.K. manufacturing facility.
64
NOTE 22 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 which provides amended
guidance for multiple-deliverable revenue arrangements. ASU No. 2009-13 changes the criteria for separating
consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling
price of a deliverable. Under ASU No. 2009-13, the selling price for each deliverable in a multiple-deliverable
arrangement will, in order of preference and when available, be based on vendor specific objective evidence, third party
evidence, or estimated selling price. ASU No. 2009-13 prescribes that estimated selling price be determined in a manner
that is consistent with that used to determine the price to sell the deliverable on a stand alone basis, and eliminates the
residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement
to all deliverables using the relative selling price method. ASU No. 2009-13 also significantly expands the disclosures
related to multiple-deliverable arrangements, and is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 2010 with early adoption permitted. The Company does not
expect that the adoption of ASU No. 2009-13 will have a material impact on its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05 which provides amended guidance for the fair value measurement
of liabilities. ASU No.2009-05 clarifies, among other things, that in circumstances in which a quoted market price in an
active market for the identical liability is not available, a reporting entity is required to measure fair value using valuation
techniques specified in the ASU. ASU No. 2009-05 was adopted by the Company on November 2, 2009. The adoption of
ASU No. 2009-05 did not have a material impact on the Company's consolidated financial statements.
In June 2009 the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" (primarily codified under ASC
105). With limited "grandfathered" exceptions, SFAS No. 168 establishes the FASB Accounting Standards Codification,
along with rules and interpretative releases of the Securities and Exchange Commission, as being the sources of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied to SEC
registrants. SFAS No. 168 will also supersede SFAS No. 162 "The Hierarchy of Generally Accepted Accounting
Principles" as all of the contents of the FASB Accounting Standards Codification carries the same level of authority,
thereby modifying the hierarchy of GAAP to include only two levels: authoritative and non-authoritative. SFAS No. 168
is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company
adopted this guidance during the three month period ended November 1, 2009 and its adoption did not materially impact
its consolidated financial statements.
In June 2009 the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (primarily codified
under ASC 810). SFAS No. 167 amends Interpretation 46(R) to require an enterprise to perform an analysis to determine
whether its variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis is
to identify the primary beneficiary of the variable interest entity as being the enterprise that has certain characteristics
described in SFAS No. 167. SFAS No. 167, in addition to other requirements, requires an enterprise to assess whether it
has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining
whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity's
financial performance and, mandates ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity. SFAS No. 167 is effective for financial statements issued for fiscal years beginning after
November 15, 2009 and interim financial statements within those fiscal years. The Company is currently evaluating the
impact, if any, this guidance will have on its consolidated financial statements.
In May 2008, the FASB issued FSP No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (codified under ASC 470)." FSP No. APB 14-1
requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the
liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP No. APB 14-1 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years, and is required to be retrospectively applied. The Company adopted
this guidance on November 2, 2009. Its adoption had no effect on the Company's consolidated financial statements.
In February 2008, the FASB issued FSP No. 157-2 "Effective Date of FASB Statement No.157" (codified under ASC
820), which delayed the effective date of FASB Statement No. 157 "Fair Value Measurements" for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The Company elected to defer the application of SFAS No. 157 to any nonfinancial
65
assets and nonfinancial liabilities to which it would apply. The deferral expires in the Company's first fiscal quarter of
2010, when the Company will adopt the deferred provisions of this guidance. The adoption of this guidance is not
expected to have a material effect on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements -
an amendment of Accounting Research Bulletin No. 51" (codified under ASC 810). SFAS No. 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The
Company adopted this guidance on November 2, 2009. Its adoption resulted in the reclassification of its $49.9 million of
minority interest in the consolidated balance sheet to shareholders' equity.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (codified under ASC 805). SFAS
No. 141(R) 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. 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December
15, 2008. The Company adopted this guidance on November 2, 2009. Its adoption had no effect on its consolidated
financial statements.
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.
66
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 November 1,
2009 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 November 1, 2009.
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 November 1, 2009, as stated in their attestation report on
page 34 of this Form 10-K.
January 8, 2010
ITEM 9B. OTHER INFORMATION
On January 6, 2009, Photronics, Inc. ("Photronics") and Soo Hong Jeong extended for one additional year the
Employment Agreement of Soo Hong Jeong, Chief Operating Officer, President, Asia Operations effective October 28,
2009 (October 28, 2009 through October 27, 2010). The Employment Agreement was originally entered into between
Photronics and Mr. Jeong on August 24, 2001, and was subsequently amended on March 18, 2004, November 28, 2005,
June 9, 2006, December 29, 2006, November 6, 2007 and October 28, 2008. The Extension Letter Agreement was
executed by Photronics on January 6, 2009 and is attached as Exhibit 10.23 to this Form 10-K.
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 2010 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 2010
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 2010 definitive Proxy Statement under the captions "EXECUTIVE COMPENSATION," "CERTAIN
AGREEMENTS", "DIRECTORS' COMPENSATION", "COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION" and "COMPENSATION COMMITTEE REPORT," respectively, and is incorporated in
this report by reference.
67
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 2010 definitive
Proxy Statement under the captions "OWNERSHIP OF COMMON STOCK BY DIRECTORS, 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
AND DIRECTOR INDEPENDENCE
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 2010 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 2010 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.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
PART IV
1.
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at November 1, 2009 and November 2, 2008
Consolidated Statements of Operations for the years ended November 1, 2009,
November 2, 2008 and October 28, 2007
Consolidated Statements of Shareholders' Equity for the years ended November 1, 2009,
November 2, 2008 and October 28, 2007
Consolidated Statements of Cash Flows for the years ended November 1, 2009,
November 2, 2008 and October 28, 2007
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules:
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
for the years ended November 1, 2009, November 2, 2008 and October 28, 2007
Schedule II, Valuation Account - Valuation and Qualifying Accounts
for the years ended November 1, 2009, November 2, 2008 and October 28, 2007
All other schedules are omitted because they are not applicable.
3.
Exhibits
68
Page
No.
34
35
36
37
38
39
73
73
69
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
EXHIBITS INDEX
Description
Certificate of Incorporation as amended July 9, 1986, April 9, 1990, March 16, 1995, November 13, 1997, April 15,
2002 and June 20, 2005 (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 28, 2007).
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).
Form of Indenture between the Company and the Bank of New York, as Trustee (incorporated by reference to
Exhibit 4.1 to the Company’s Registration Statement on Form S-3 File Number 333-160235 which was filed on
June 25, 2009).
Indenture dated September 16, 2009 between the Company and the Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on Form 8K filed September 17, 2009 (Commission File
Number 0-15451)).
Supplement to Indenture dated September 16, 2009 between the Company and the Bank of New York, as Trustee
relating the issuance of the Company’s 5.5% Convertible Notes due 2014 (incorporated by reference to Exhibit 4.2
to the Company’s Current Report on Form 8K filed September 17, 2009 (Commission File Number 0-1541)).
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.
Master Service Agreement dated January 11, 2002 between the Company and RagingWire Telecommunications,
Inc.*
Underwriting Agreement between the Company and Morgan Stanley & Co. Incorporated dated September 10, 2009
relating to the issuance of the Company’s 5.5% Convertible Notes due 2014 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8K filed September 11, 2009 (Commission File Number 0-1541)).
Underwriting Agreement between the Company and Morgan Stanley & Co. Incorporated dated September 10, 2009
relating to the issuance of 9,638,554 shares of common stock (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8K filed September 11, 2009 (Commission File Number 0-1541)).
Warrant Agreement between the Company and Intel Capital Corporation dated September 10, 2009 (incorporated by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8K filed September 11, 2009 (Commission File
Number 0-1541)).
Warrant Agreement between the Company and Intel Capital Corporation dated September 10, 2009 (incorporated by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8K filed September 11, 2009 (Commission File
Number 0-1541)).
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 April 24, 1994).+
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)).+
The Company’s 2007 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, Registration No. 333).
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)).+
10.10
Amendment No. 1 to the Consulting Agreement between Constantine S. Macricostas and the Company dated
November 10, 2008 (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10K for
the fiscal year ended November 2, 2008 (Commission File No. 0-15451)).+
69
10.11
Separation and Consulting Agreement between the Company and Michael J. Luttati dated July 12, 2008
(incorporated by reference to Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for the quarter ended
July 27, 2008 (Commission File No. 0-15451)).
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Executive Employment Agreement between the Company and Sean T. Smith dated February 20, 2003.+*
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)).#
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)).#
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)).#
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)).#
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)).#
Operating Lease Agreement dated May 19, 2009 between the Company and Micron (incorporated by reference to
Exhibit 8.02 to the Company’s Current Report on Form 8K filed on July 6, 2009 (Commission File N0. 0-15451)).
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)).
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)).
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)).
Extension of Executive Employment Agreement between the Company and Soo Hong Jeong effective October 28,
2008 and ending October 27, 2009 (incorporated by reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K filed on November 17, 2008 (Commission File No. 0-15451)).
Extension of Executive Employment Agreement between the Company and Soo Hong Jeong effective October 28,
2009 and ending October 27, 2010.*
Executive Employment Agreement between the Company and Christopher J. Progler, Vice President, Chief
Technology Officer dated September 10, 2007 (incorporated by reference to Exhibit 10.24 to the Company's Current
Report on Form 10-K filed on January 11, 2008 (Commission File No. 0-15451)).+
10.25
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)).
10.26
Amendment No. 1 to the Credit Agreement dated April 25, 2008 (incorporated by reference to Exhibit 9.01 of the
Company's Form 8-K filed on April 30, 2008 (Commission File No. 0-15451)).
70
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Amendment No. 2 to the Credit Agreement dated October 31, 2008 (incorporated by reference to Exhibit 10.29 of
the Company’s Annual Report on Form 10K for the fiscal year ended November 2, 2008 (Commission File No. 0-
15451)).
Amendment No. 3 to the Credit Agreement dated December 4, 2008 (incorporated by reference to Exhibit 10.30 of
the Company’s Annual Report on Form 10K for the fiscal year ended November 2, 2008 (Commission File No. 0-
15451)).
Amendment No. 4 to the Credit Agreement dated December 12, 2008 (incorporated by reference to Exhibit 10.31 of
the Company’s Annual Report on Form 10K for the fiscal year ended November 2, 2008 (Commission File No. 0-
15451)).
Amendment No. 5 to the Credit Agreement dated as of May 15, 2009 (incorporated by reference to Exhibit 10.39 to
the Company’s Quarterly Report on Form 10Q for the quarterly period ended May 3, 2009 (Commission File No. 0-
15451)).
Amendment No. 6 to the Credit Agreement dated as of June 8, 2009 (incorporated by reference to Exhibit 10.44 to
The company’s Quarterly Report on Form 10Q for the quarterly period ended May 3, 2009 (Commission File No. 0-
15451)).
Amendment No. 7 to the Credit Agreement dated September 7, 2009 (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8K filed September 17, 2009 (Commission File No. 0-15451)).
Amendment No. 8 to the Credit Agreement dated as of October 26, 2009.*
Security Agreement dated December 12, 2008 by and among the Company, the subsidiaries of the Company listed
on the signature page and JPMorgan Chase Bank National Association (incorporated by reference to Exhibit 10.38
to the Company’s Quarterly Report on Form 10Q for the quarterly period ended May 3, 2009 (Commission File
Number 0-15451)).
Warrant Agreement dated May 15, 2009 by and among the Company and the Purchasers Named Therein
(incorporated by reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10Q for the quarterly
period ended May 3, 2009 (Commission File No. 0-15451)).
Registration Rights Agreement dated as of May 15, 2009 by and among the Company and the Holders Named
Therein (incorporated by reference to Exhibit 10.42 to the Company’s Quarterly Report on Form 10Q for the
quarterly period ended May 3, 2009 (Commission File No. 0-15451)).
Loan Agreement dated as of June 8, 2009 among the Company, the Lenders Party Thereto and JPMorgan Chase
Bank, National Association as administrative agent and collateral agent (incorporated by reference to Exhibit 10.43
to the Company’s Quarterly Report on Form 10Q for the quarterly period ended May 3, 2009 (Commission File No.
0-15451)).
10.38
Amendment No. 1 to the Loan Agreement dated as of September 2, 2009 (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8K filed on September 17, 2009 (Commission File No. 0-15451)).
10.39
Amendment No. 2 to the Loan Agreement dated as of October 26, 2009.*
21
23
31.1
31.2
32.1
32.2
List of Subsidiaries of the Company.*
Consent of Deloitte & Touche LLP.*
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.*
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.*
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.*
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.*
71
+
#
*
Represents a management contract or compensatory plan or arrangement.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities
and Exchange Commission.
Represents an exhibit that is filed with this Annual Report on Form 10-K.
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 vice president of corporate communications at
the address of the Company's principal executive offices.
72
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
Board of Directors and Shareholders
Photronics, Inc.
Brookfield, Connecticut
We have audited the consolidated financial statements of Photronics, Inc. and subsidiaries (the "Company") as of
November 1, 2009 and November 2, 2008, and for each of the three fiscal years ended November 1, 2009, November 2,
2008 and October 28, 2007, and the Company's internal control over financial reporting as of November 1, 2009, and have
issued our report thereon dated January 7, 2010; such report is included elsewhere in this Form 10-K. Our audits also
included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial
statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
January 7, 2010
Allowance for Doubtful Accounts
Year ended November 1, 2009
Year ended November 2, 2008
Year ended October 28, 2007
Deferred Income Tax Valuation
Allowance
Year ended November 1, 2009
Year ended November 2, 2008
Year ended October 28, 2007
(a) Uncollectible accounts written off
Schedule II
Valuation and Qualifying Accounts
for the Years Ended November 1, 2009, November 2, 2008
and October 28, 2007
(in thousands)
Balance at
Beginning of
Year
Charge to
Costs and
Expenses
Deductions
Balance at
End of
Year
$ 2,788
$ 3,721
$ 4,471
$48,149
$39,392
$36,993
$ 538
$(481)
$ (25)
$6,585
$8,757
$2,399
$(657) (a)
$(452) (a)
$(725) (a)
$ 2,669
$ 2,788
$ 3,721
$ -
$ -
$ -
$54,734
$48,149
$39,392
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PHOTRONICS, INC.
(Registrant)
By
/s/ SEAN T. SMITH
Sean T. Smith
Senior Vice President
Chief Financial Officer
(Principal Accounting Officer)
January 8, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
By
/s/ CONSTANTINE S. MACRICOSTAS
January 8, 2010
Constantine S. Macricostas
Chairman of the Board
Chief Executive Officer
By
/s/ SEAN T. SMITH
Sean T. Smith
Senior Vice President
Chief Financial Officer
(Principal Accounting Officer)
By
/s/ WALTER M. FIEDEROWICZ
Walter M. Fiederowicz
Director
By
/s/ JOSEPH A. FIORITA, JR.
Joseph A. Fiorita, Jr.
Director
By
/s/ GEORGE C. MACRICOSTAS
George C. Macricostas
Director
By
/s/ WILLEM D. MARIS
Willem D. Maris
Director
By
/s/ MITCHELL G. TYSON
Mitchell G. Tyson
Director
January 8, 2010
January 8, 2010
January 8, 2010
January 8, 2010
January 8, 2010
January 8, 2010
74