<PAGE>
FILED PURSUANT TO
RULE NO. 424(b)(5)
REGISTRATION NO. 333-26009
REGISTRATION NO. 333-27667
$90,000,000
PHOTRONICS, INC.
[LOGO OF PHOTRONICS, INC.]
6.00% Convertible Subordinated Notes due June 1, 2004
---------------
The Notes are convertible at any time prior to maturity, unless previously
redeemed or repurchased, into shares of Common Stock, par value $.01 per share
("Common Stock"), of Photronics, Inc. (the "Company") at a conversion rate of
17.8771 shares per each $1,000 principal amount of Notes (equivalent to a
conversion price of approximately $55.94 per share), subject to adjustment in
certain circumstances. On May 22, 1997, the last reported bid price of the
Common Stock, which is traded under the symbol "PLAB" on The Nasdaq National
Market, was $44.75 per share.
Interest on the Notes is payable on June 1 and December 1 of each year,
commencing December 1, 1997. The Notes are redeemable in whole or in part at
the Company's option at any time on or after June 1, 2000 at the redemption
prices set forth herein, plus accrued interest to the date of redemption. See
"Description of Notes--Optional Redemption." The Notes are not entitled to any
sinking fund. The Notes will mature on June 1, 2004.
In the event of a Change of Control (as defined herein), each holder of
Notes may require the Company to repurchase its Notes, in whole or in part,
for cash or, at the Company's option, Common Stock (valued at 95% of the
average closing prices for the five trading days immediately preceding and
including the third trading day prior to the repurchase date) at a repurchase
price of 100% of the principal amount of Notes to be repurchased, plus accrued
interest to the repurchase date. See "Description of Notes--Repurchase at
Option of Holders Upon a Change of Control."
The Notes are unsecured obligations subordinated in right of payment to all
existing and future Senior Indebtedness (as defined herein) of the Company and
effectively subordinated in right of payment to all indebtedness and other
liabilities of the Company's subsidiaries. As of May 22, 1997, the Company had
$17.0 million of Senior Indebtedness outstanding. After giving effect to the
offering of the Notes and the application of net proceeds therefrom, the
Company will have $2.0 million of Senior Indebtedness outstanding. As of May
4, 1997, the Company's subsidiaries had other indebtedness and liabilities of
approximately $40 million (excluding intercompany obligations). The Indenture
will not restrict the Company or its subsidiaries from incurring additional
Senior Indebtedness or other indebtedness.
The Notes will be represented by a Global Note registered in the name of the
nominee of The Depository Trust Company ("DTC"), which will act as depositary.
Beneficial interests in the Global Note will be shown on, and transfers
thereof will be effected only through, records maintained by DTC and its
direct and indirect participants. Except as described herein, Notes in
definitive form will not be issued. The Notes will be issued in registered
form in denominations of $1,000 and integral multiples thereof. See
"Description of the Notes--Book-Entry."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS
IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY, SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
<TABLE>
<CAPTION>
INITIAL
PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) DISCOUNT(2) COMPANY(1)(3)
----------- ------------ -------------
<S> <C> <C> <C>
Per Note ................................ 100.0% 3.25% 96.75%
Total(4)................................. $90,000,000 $2,925,000 $87,075,000
</TABLE>
- -------
(1) Plus accrued interest, if any, from May 29, 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
(3) Before deducting estimated expenses of $375,000 payable by the Company.
(4) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional $13,500,000 aggregate principal amount of Notes at the
initial public offering price shown above, less the underwriting discount,
solely to cover over-allotments, if any. If such option is exercised in
full, the total initial public offering price, underwriting discount and
proceeds to the Company will be $103,500,000, $3,363,750 and $100,136,250,
respectively. See "Underwriting."
---------------
The Notes offered hereby are offered by the Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right
to reject any order in whole or in part. It is expected that the Notes will be
ready for delivery in book-entry form only through the facilities of DTC in
New York, New York, on or about May 29, 1997 against payment therefor in
immediately available funds.
GOLDMAN, SACHS & CO.
ROBERTSON, STEPHENS & COMPANY
SMITH BARNEY INC.
The date of this Prospectus is May 22, 1997.
<PAGE>
[PHOTO OF PHOTOMASK APPEARS HERE] [PHOTO OF PERSON AT EQUIPMENT CONSOLE
APPEARS HERE]
Photronic is a leading global manufacturer of photomasks, which are high
precision quartz plates containing microscopic images of electronic circuits.
[PHOTO OF PHOTOMASK SEMICONDUCTOR INTERFACE APPEARS HERE]
[PHOTO OF PROCESS EQUIPMENT APPEARS HERE] [PHOTO OF PHOTOMASK APPEARS HERE]
Photomasks are a key element in the manufacture of semiconductors. They are
used as masters to transfer circuit patterns onto semiconductor wafers.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES AND THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF PENALTY BIDS, IN CONNECTION WITH THE
OFFERING. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY)
ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in, or incorporated by reference into, this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option.
THE COMPANY
Photronics, Inc. ("Photronics" or the "Company") is a leading manufacturer of
photomasks, which are used primarily by the semiconductor industry in the
manufacture of integrated circuits. A photomask is a high precision
photographic quartz plate that is used as a master to transfer microscopic
circuit patterns onto semiconductor wafers during the fabrication of integrated
circuits. The Company's manufacturing network includes five facilities in the
United States (with a sixth under construction) as well as facilities in
Singapore, Switzerland and the United Kingdom. Based upon available market
information, the Company believes that it has a larger share of the United
States market for photomasks than any other photomask manufacturer and is one
of the largest photomask manufacturers in the world.
Photomasks are a key element in the manufacture of semiconductors and are
used to transfer integrated circuit patterns onto semiconductor wafers during
the fabrication of integrated circuits and, to a lesser extent, other types of
electronic components. Each integrated circuit consists of a series of separate
patterns, each of which is imaged onto a different photomask. The resulting
series of photomasks is then used to successively layer the circuit patterns
onto the semiconductor wafer. Demand for photomasks is driven both by
semiconductor design activity and increases in the complexity of integrated
circuits. As the complexity of integrated circuits has increased, the number
and complexity of photomasks used in the manufacture of a single circuit also
has increased. VLSI Research Inc. estimates that worldwide photomask sales
exceeded $1.7 billion in 1996 and projects a compound annual growth rate of
approximately 17% through 2001.
Photomasks are manufactured by independent manufacturers, like the Company,
and captives, which are semiconductor manufacturers that produce photomasks
almost exclusively for their own use. Since the mid-1980s, there has been a
trend in the United States and Europe toward the divestiture or closing of
captive photomask operations by semiconductor manufacturers and an increase in
the share of the market served by independent manufacturers. At the same time,
the number of significant independent manufacturers in the United States and
Europe has decreased from approximately 14 in the mid-1980s to four in 1996.
The Company has completed a number of strategic acquisitions of both
independent and captive photomask manufacturers.
The Company's objective is to expand its position as a worldwide leader in
the manufacture of photomasks. The Company's strategy includes maintaining
technological leadership through investment in state-of-the-art manufacturing
capabilities, ensuring strong customer relationships through high levels of
customer satisfaction and leveraging the Company's network of manufacturing
facilities to provide timely product delivery and rapid response to customer
demands. During 1996, the Company significantly expanded its operations in
international markets by acquiring existing photomask operations located in the
United Kingdom and Switzerland, establishing manufacturing operations in
Singapore and acquiring an equity interest in a photomask manufacturing
operation in Korea. The Company also continued its aggressive investment
program in its manufacturing operations in the United States by completing a
new state-of-the-art facility in Allen, Texas, starting construction of a
facility in Austin, Texas and adding leading-edge manufacturing equipment to
its existing operations.
3
<PAGE>
The Company sells its products primarily through a direct sales force. The
Company conducts its sales activities from ten sales locations in the United
States, two in the United Kingdom, and one in each of Switzerland, Singapore
and Taiwan. The Company's customers include Analog Devices, Inc., Atmel Corp.,
Cirrus Logic, Inc., Cypress Semiconductor Corporation, LSI Logic Corp.,
Motorola Inc., Plessey Semiconductors Ltd., Symbios Logic Inc., Texas
Instruments Incorporated, and VLSI Technology Inc.
The Company is a Connecticut corporation, organized in 1969. Its principal
executive offices are located at 1061 East Indiantown Road, Jupiter, Florida
33473, telephone (561) 745-1222.
THE OFFERING
SECURITIES OFFERED...... $90,000,000 aggregate principal amount of 6.00%
Convertible Subordinated Notes due June 1, 2004
(the "Notes"). The Company has granted the
Underwriters an option for 30 days to purchase up
to $13,500,000 additional aggregate principal
amount of Notes, solely to cover over-allotments.
INTEREST PAYMENT DATES.. Interest on the Notes is payable at the rate set
forth on the cover page hereof, semi-annually on
each June 1 and December 1, commencing December
1, 1997.
CONVERSION RIGHT........ The Notes are convertible at any time prior to
maturity, unless previously redeemed or
repurchased, into shares of Common Stock at a
conversion rate of 17.8771 shares per $1,000
principal amount of Notes (equivalent to a
conversion price of approximately $55.94 per
share), subject to adjustment in certain
circumstances as described herein. See
"Description of Notes--Conversion Rights."
SUBORDINATION........... The Notes are subordinated in right of payment to
all existing and future Senior Indebtedness (as
defined herein) of the Company and will be effec-
tively subordinated to all indebtedness and other
liabilities of the Company's subsidiaries. As of
May 22, 1997, the Company had $17.0 million ag-
gregate principal amount of Senior Indebtedness
outstanding, approximately $15 million of which
will be repaid with the net proceeds from this
offering. As of May 4, 1997, the Company's sub-
sidiaries had other indebtedness and liabilities
of approximately $40 million (excluding
intercompany obligations). The Indenture will not
restrict the Company or its subsidiaries from in-
curring additional Senior Indebtedness or other
indebtedness. See "Capitalization," "Management's
Discussion and Analysis of Results of Operations
and Financial Condition" and "Description of
Notes--Subordination."
OPTIONAL REDEMPTION..... The Notes will be redeemable at the Company's
option, in whole or in part, at any time on or
after June 1, 2000 at the redemption prices set
forth herein plus accrued interest to the date of
redemption. See "Description of Notes--Optional
Redemption."
4
<PAGE>
REPURCHASE AT OPTION OF
HOLDERS UPON A CHANGE
OF CONTROL.............. In the event of a Change of Control, each holder
of Notes may require the Company to repurchase
the Notes, in whole or in part, for cash or, at
the Company's option, Common Stock (valued at 95%
of the average closing prices for the five
trading days immediately preceding and including
the third trading day prior to the repurchase
date) at a repurchase price of 100% of the
principal amount of Notes to be repurchased, plus
accrued interest to the repurchase date. See
"Description of Notes--Repurchase at Option of
Holders Upon a Change of Control."
USE OF PROCEEDS......... The Company intends to use approximately $15
million to repay outstanding borrowings under a
revolving credit facility. The remainder of the
net proceeds will be used for general corporate
purposes, including capital expenditures and
possible acquisitions. See "Use of Proceeds."
LISTING................. The Notes will not be listed on any securities
exchange or quoted on The Nasdaq Stock Market.
Although each of the Underwriters has advised the
Company that it intends to make a market in the
Notes, they are not obligated to do so, and any
market making may be discontinued at any time at
the sole discretion of each of the Underwriters
without notice. See "Underwriting."
COMMON STOCK............ The Common Stock is quoted on The Nasdaq National
Market under the symbol "PLAB."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED
----------------------------------------- -----------------------
JANUARY 31, FEBRUARY 2,
1992 1993 1994 1995 1996 1996 1997(1)
------- ------- ------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF EARNINGS DATA:
Net sales............... $41,305 $48,363 $80,696 $125,299 $160,071 $34,668 $40,029
Operating income........ 5,868 6,991 14,237 23,590 32,265 7,006 7,345
Income before income
taxes.................. 6,719 7,436 15,301 29,842 33,903 7,551 8,625
Net income(2)........... $ 4,367 $ 4,908 $10,336 $ 18,632 $ 21,003 $ 4,651 $ 5,325
Net income per common
share(2)(3)............ $ 0.55 $ 0.59 $ 1.03 $ 1.66 $ 1.74 $ 0.39 $ 0.44
OTHER DATA:
Ratio of earnings to
fixed charges(4)........ 67x 75x 205x 213x 213x 211x 241x
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 2, 1997(1)
--------------------
AS
ACTUAL ADJUSTED(5)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $ 16,494 $103,194
Property, plant and equipment.......................... 135,243 135,243
Total assets........................................... 209,075 299,075
Long-term debt, less current portion(6)................ 2,005 92,005
Total shareholders' equity............................. $160,673 $160,673
</TABLE>
- --------
(1) Beginning with the current fiscal year, the Company has adopted a fiscal
year ending on the Sunday closest to October 31.
(2) Includes (i) a benefit of $237,000, or $0.02 per share, for fiscal 1994
representing the cumulative effect of the Company adopting Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
effective November 1, 1993, (ii) approximately $2 million, or $0.16 per
share, for fiscal 1995 attributable to an after-tax gain from the sale of
equity investments less a non-recurring research and development charge
related to an acquisition and (iii) $0.7 million, or $0.05 per share, for
the first quarter of 1997 attributable to an after tax gain from the sale
of equity investments.
(3) Per share data reflect a 3-for-2 stock split effected in March 1995.
(4) For purposes of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income before income taxes plus fixed charges and (ii)
fixed charges consist of interest expense incurred.
(5) As adjusted to give effect to the issuance and sale of the Notes and the
application of net proceeds therefrom.
(6) Does not include approximately $15 million that the Company borrowed under
its line of credit subsequent to February 2, 1997, which will be paid with
the net proceeds from this offering. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
risk factors relating to the offering and the business of the Company,
together with the information and financial data set forth elsewhere or
incorporated by reference in this Prospectus, prior to making an investment
decision. Certain statements under this caption constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). See "--Forward-Looking Statements".
DEPENDENCE ON SEMICONDUCTOR INDUSTRY
The Company sells substantially all of its photomasks to semiconductor
designers and manufacturers. The Company believes that the demand for
photomasks primarily depends on integrated circuit design activity rather than
the volume of semiconductor sales. Consequently, an increase in semiconductor
sales does not necessarily result in a corresponding increase in photomask
sales. In addition, the reduced use of customized integrated circuits or other
changes in the technology or methods of manufacturing semiconductors could
reduce demand for photomasks even if demand for semiconductors increases.
Further, advances in semiconductor and photomask design and semiconductor
production methods could reduce the demand for photomasks. During the early
1990s, certain of these factors contributed to flat demand for photomasks
despite increased semiconductor design activity. Although demand for
photomasks has increased since late 1993, there can be no assurance that any
of the foregoing factors will not have a material adverse effect on the
Company's business and results of operations. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business--
Industry Overview."
FLUCTUATIONS IN QUARTERLY PERFORMANCE
The Company has experienced fluctuations in its quarterly operating results
and it anticipates that such fluctuations will continue and could intensify in
the future. Fluctuations in operating results may result in volatility in the
price of the Common Stock and the Notes. 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, competition,
sales of used equipment by the Company (which have widely varying gross
margins) and general economic conditions. The Company's customers generally
order the Company's products 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 a limited 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 such
comparisons cannot be relied upon as indicators of future performance. In
addition, in some future quarter 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 price of the Common Stock
and of the Notes. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and Note 12 of Notes to Consolidated
Financial Statements.
RAPID TECHNOLOGICAL CHANGE
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,
the Company will be required to manufacture optical proximity correction and
phase-shift photomasks. These
7
<PAGE>
technologies currently are in developmental stages and the Company has not yet
manufactured these types of photomasks in significant volume. In addition,
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) or increased market acceptance of
alternative methods of transferring circuit designs onto semiconductor wafers
which could reduce or eliminate the need for photomasks. If the Company were
unable, due to resource, technological or other constraints, to anticipate,
respond to or utilize these or other changing technologies, the Company's
business and results of operations could be materially adversely affected. See
"Business--Research and Development."
CAPITAL INTENSIVE OPERATIONS
The manufacture of photomasks requires a significant investment in fixed
assets. The Company expects that it will be required to continue to make
significant capital expenditures in connection with its operations. There can
be no assurance that the Company will be able to obtain any additional capital
required in connection with such expansion on reasonable terms, or at all, or
that any such expansion will not have a material adverse effect on the
Company's business and results of operations, particularly during the start-up
phase of new operations. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition."
DEPENDENCE ON MAJOR CUSTOMERS
Approximately 26% of the Company's net sales in fiscal 1996 was derived from
sales to Texas Instruments Incorporated ("Texas Instruments"). In addition,
approximately 19% of net sales in fiscal 1996 was derived from sales to the
Company's next four largest customers, but no customer other than Texas
Instruments accounted for more than 10% of the Company's net sales in fiscal
1996. Although the Company has purchasing arrangements which assure the
Company a specified amount of certain customers' requirements so long as the
Company's performance is satisfactory, none of the Company's customers has
contracts requiring it to purchase any minimum quantity of photomasks from the
Company. Any loss of, or significant reduction in, orders from any of these
customers, particularly Texas Instruments, could have a material adverse
effect on the Company's business and results of operations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
"Business--Customers."
DEPENDENCE ON SUPPLIERS
The Company relies on a limited number of photomask equipment manufacturers
to develop and supply the equipment used in the photomask manufacturing
process. Significant manufacturing systems used by the Company usually are
built to order and typically have order lead times that can exceed one year.
Further, the Company relies on equipment suppliers to develop future
generations of manufacturing systems to support the Company's requirements.
The inability to obtain equipment when required could have a material adverse
affect on the Company's business and results of operations.
The Company uses high precision quartz photomask blanks, pellicles (which
are protective transparent cellulose membranes) and electronic grade chemicals
in its manufacturing processes. Any delays or quality problems in connection
with significant raw materials, particularly photomask blanks, could cause
delays in shipments of photomasks which could adversely affect the Company's
business and results of operations. The fluctuation of exchange rates with
respect to prices of significant raw materials used in manufacturing also
could have a material adverse effect on the Company's business and results of
operations, although they have not been material to date. See "Business--
Materials and Supplies."
8
<PAGE>
MANAGEMENT OF EXPANDING OPERATIONS
The Company recently has experienced rapid expansion of its operations,
primarily due to its acquisitions of existing photomask manufacturing
operations. The Company may make additional acquisitions in the future. This
expansion has placed, and is expected to continue to 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 to other business concerns,
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 such customers
transition to another vendor in order to ensure a second source of supply.
Furthermore, in connection with any future acquisitions, the Company would be
required to utilize its cash reserves and/or issue new securities, which could
have a dilutive effect on the Company's earnings per share, particularly
during the initial integration of the acquired operations into the Company's
operations. In addition, the Company has experienced in the past, and could
experience in the future, difficulties and delays in ramping up new production
facilities. Any failure of the Company to successfully manage its expanding
operations could have a material adverse effect on the Company's business and
results of operations. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
COMPETITION
The photomask industry is highly competitive, and most of the Company's
customers utilize more than one photomask supplier. The Company competes
primarily with DuPont Photomasks, Inc. ("DuPont") and, to a lesser extent,
with other independent photomask suppliers. The Company also competes with
semiconductor manufacturers' captive photomask manufacturing operations. The
Company expects to face continued competition from these and other suppliers
in the future. Certain competitors have substantially greater financial,
technical, sales, marketing and other resources than the Company.
The Company believes that consistency of product quality and timeliness of
delivery are the principal factors considered by customers in selecting their
photomask suppliers. The inability of the Company to meet these requirements
could adversely affect the Company's sales. In the past, competition led to
pressure to reduce prices which, the Company believes, contributed to the
decrease in the number of independent manufacturers. There can be no assurance
that there will not be pressure to reduce prices in the future. See
"Business--Competition."
EXPANSION INTO INTERNATIONAL MARKETS
In fiscal 1996, international sales accounted for approximately 18% of the
Company's net sales. The Company believes that achieving significant
additional international sales requires it to develop, among other things, a
local presence in the markets on which it is focused. Such a strategy requires
a significant investment of financial, management, operational and other
resources. During fiscal 1996, the Company significantly expanded its
operations in international markets by acquiring existing operations in the
United Kingdom and Switzerland, establishing manufacturing operations in
Singapore and acquiring an equity interest in a photomask manufacturing
operation in Korea. In international markets, existing independent photomask
suppliers, including, in certain markets, DuPont, have significant local
presences and market share. Accordingly, the Company has encountered
significant competition which could adversely affect the Company's ability to
establish a significant presence in international markets that it targets.
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
9
<PAGE>
regulatory requirements, tariffs and other trade barriers, difficulties in
staffing and managing foreign operations, longer accounts receivable payment
cycles and potentially adverse tax consequences. There can be no assurance
that such factors will not have a material adverse effect on the Company's
ability to generate sales outside the United States and, consequently, on the
Company's business and results of operations. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business--
Strategy."
DEPENDENCE ON MANAGEMENT AND TECHNICAL PERSONNEL
The Company's success, in part, depends upon key managerial, engineering and
technical personnel, as well as its ability to continue to attract and retain
additional personnel. The loss of certain key personnel could have a material
adverse effect upon the Company's business and results of operations. There
can be no assurance that the Company can retain its key managerial,
engineering and technical employees or that it can attract similar additional
employees in the future. While the Company believes that it provides
competitive compensation and incentive packages, it does not have written
employment agreements with employees. See "Business--Employees" and
"Management."
SUBORDINATION
The Notes will be unsecured and subordinated in right of payment in full to
all existing and future Senior Indebtedness of the Company. As a result of
such subordination, in the event of the Company's liquidation or insolvency, a
payment default with respect to Senior Indebtedness, a covenant default with
respect to Senior Indebtedness or upon acceleration of the Notes due to an
event of default, the assets of the Company will be available to pay
obligations on the Notes only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on
any or all of the Notes then outstanding. The Company may from time to time
incur indebtedness constituting Senior Indebtedness. The Company conducts its
operations through its subsidiaries. Accordingly, the Company's ability to
meet its cash obligations depends, in part, upon the ability of its
subsidiaries to make distributions to the Company, which is and will continue
to be restricted by, among other limitations, applicable provisions of law.
The Indenture will not restrict the ability of the Company's subsidiaries to
incur contractual restrictions on their ability to make distributions to the
Company. The right of the Company to participate in the assets of any
subsidiary (and thus the ability of holders of the Notes to benefit indirectly
from such assets) are generally subject to the prior claims of creditors,
including trade creditors, of that subsidiary. The Notes, therefore, will be
structurally subordinated to the claims of creditors, including trade
creditors, of subsidiaries of the Company. As of May 22, 1997, the Company had
$17.0 million of Senior Indebtedness outstanding. After giving effect to the
offering of the Notes and the application of net proceeds therefrom, the
Company will have approximately $2 million of Senior Indebtedness outstanding.
As of May 4, 1997, the Company's subsidiaries had outstanding indebtedness and
other liabilities of approximately $40 million (excluding intercompany
obligations). See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Description of Notes--Subordination."
LIMITATIONS ON REPURCHASE OF NOTES
Upon a Change in Control, each holder of Notes will have the right, at the
holder's option, to require the Company to repurchase all or a portion of such
holder's Notes. If a Change of Control were to occur, there can be no
assurance that the Company would have sufficient funds to pay the repurchase
price for all Notes tendered by the holders thereof. The Company's repurchase
of Notes as a result of the occurrence of a Change of Control may be
prohibited or limited by, or create an event of default under, the terms of
agreements related to borrowings which the Company may enter into from time to
time, including agreements relating to Senior Indebtedness. The Company also
may elect to make any payment to holders of Notes upon a Change of Control
using shares of Common Stock. See "Description of Notes--Repurchase at Option
of Holders Upon a Change of Control."
10
<PAGE>
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes will be a new issue of securities with no established trading
market. Although the Underwriters have advised the Company that they intend to
make a market in the Notes, they are not obligated to do so, and any such
market making may be discontinued at any time at the sole discretion of any
such Underwriter without notice. There can be no assurance that an active
market for the Notes will develop and continue upon completion of the offering
or that the market price of the Notes will not decline. Various factors could
cause the market price of the Notes to fluctuate significantly, including
changes in prevailing interest rates or changes in perceptions of the
Company's creditworthiness. The trading price of the Notes also could be
significantly affected by the market price of the Common Stock, which could be
subject to wide fluctuations in response to a variety of factors, including
quarterly variations in operating results, announcements of technological
innovations or new products by the Company in the industry and general
economic and market conditions. The Notes will not be listed on any securities
exchange or quoted on the Nasdaq Stock Market and will only be traded on the
over-the-counter market. See "--Fluctuations in Stock Price" and
"Underwriting."
FLUCTUATIONS IN STOCK PRICE
The trading prices of the Company's Common Stock have fluctuated
significantly. The prices at which the Common Stock trades are determined in
the marketplace and may be influenced by many factors, including the
performance of, and investor expectations for, the Company, including
shortfalls in net sales or earnings from levels expected by securities
analysts, the trading volume in the Common Stock and general economic and
market conditions. In addition, in recent years the stock market in general,
and the shares of technology companies in particular, have experienced extreme
price and volume fluctuations. This volatility has substantially affected the
market prices of securities issued by many companies for reasons unrelated to
their operating performance. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock and the Notes. There can
be no assurance as to the price at which the Common Stock will trade in the
future. See "Price Range of Common Stock."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known or unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
nationally and internationally, including in those localities in which the
Company operates manufacturing facilities; uncertain demand for photomasks and
the cyclical nature of the semiconductor industry; rapid technological
changes; competition; the need for capital to fund the expansion of the
Company's business; the ability to manage expanding operations; dependence on
customers and suppliers; and other factors referenced in this Prospectus,
including without limitation, those referenced under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Business." Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the results of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered by the
Company hereby, after deducting estimated underwriting discounts, commissions
and offering expenses payable by the Company, are estimated to be
approximately $86.7 million ($99.8 million if the Underwriters' over-allotment
option is exercised in full).
The Company intends to use approximately $15 million of the net proceeds
from the offering to repay outstanding borrowings under the Company's
revolving line of credit. Such borrowings bear interest at a fluctuating rate
which, at April 28, 1997, was 6.6875% per annum, and mature on October 31,
1998. The Company incurred such indebtedness to finance working capital needs
during the second quarter of fiscal 1997. After repayment of such borrowings,
the revolving credit facility will remain available to the Company for future
borrowings thereunder. The Company intends to use the remainder of the net
proceeds for general corporate purposes, including capital expenditures. The
Company may use a portion of the net proceeds in connection with the possible
exercise of options to purchase additional equity in a Korean photomask
manufacturer in which the Company has invested and shares of the minority
shareholder of the Company's Swiss subsidiary. If the Company were to exercise
both options in full, it would utilize aggregate net proceeds of approximately
$20 million. In addition, from time to time the Company evaluates and enters
into negotiations with respect to potential acquisitions of the equipment and
other assets of both captive and independent photomask manufacturers and may,
as opportunities become available, make such acquisitions in the future. The
foregoing represents the Company's best estimate of the allocation of the net
proceeds from this offering based upon current economic and industry
conditions and the current state of its business operations and plans. The
application of proceeds for any particular purpose will depend on a number of
factors, including the timing of expenditures and the availability of funds
from operations or other sources. Pending such uses, proceeds will be invested
in short-term instruments. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on The Nasdaq National Market
under the symbol "PLAB" since the Company's initial public offering in March
1987. The following table sets forth high and low sales prices for the Common
Stock as reported on The Nasdaq National Market for the periods indicated. The
Company effected a three-for-two stock split on March 20, 1995, and per share
prices prior to such date have been adjusted to reflect such stock split.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal year ended October 31, 1995
First quarter............................................. $20.50 $16.00
Second quarter............................................ 24.50 19.17
Third quarter............................................. 36.00 21.75
Fourth quarter............................................ 40.48 25.50
Fiscal year ended October 31, 1996
First quarter............................................. 32.75 19.25
Second quarter............................................ 27.50 18.75
Third quarter............................................. 30.00 19.75
Fourth quarter............................................ 35.00 24.75
Fiscal year ending November 2, 1997
First quarter............................................. 40.25 23.50
Second quarter............................................ 38.50 26.25
Third quarter (through May 22, 1997)...................... 47.13 34.63
</TABLE>
On May 22, 1997, the last sale price for the Common Stock as reported on The
Nasdaq National Market was $44.813 per share. Based on information available
to the Company, the Company believes that it has approximately 7,500
beneficial shareholders.
DIVIDEND POLICY
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. The terms of the Company's financing agreements contain certain
financial covenants, including covenants that require the maintenance of
minimum net worth and working capital and compliance with ratios of total
unsubordinated liabilities to tangible net worth and of accounts receivable
and cash to current liabilities, which could have the effect of limiting the
payment of dividends.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 2, 1997 and as adjusted to give effect to the issuance and sale of
$90,000,000 aggregate principal amount of the Notes being offered hereby.
<TABLE>
<CAPTION>
FEBRUARY 2, 1997
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:(1)
Convertible Subordinated Notes............................ $ -- $ 90,000
Other indebtedness, less current portion(2)............... 2,005 2,005
-------- --------
Total long-term debt.................................... 2,005 92,005
-------- --------
Shareholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; none issued and outstanding.................. -- --
Common Stock, $.01 par value, 20,000,000 shares
authorized; 11,983,744 shares issued;
and 11,847,244 shares outstanding........................ 120 120
Additional paid-in capital................................ 78,084 78,084
Retained earnings......................................... 79,298 79,298
Unrealized gains on investments(3)........................ 3,230 3,230
Treasury stock, 136,500 shares at cost.................... (245) (245)
Cumulative foreign exchange translation adjustment........ 186 186
-------- --------
Total shareholders' equity.............................. 160,673 160,673
-------- --------
Total capitalization.................................. $162,678 $252,678
======== ========
</TABLE>
- --------
(1) See Note 4 of Notes to Consolidated Financial Statements for a description
of the Company's long-term debt.
(2) Does not include approximately $15 million that the Company borrowed under
its revolving credit facility subsequent to February 2, 1997, which will
be repaid with the net proceeds from this offering.
(3) Reflects unrealized gains on the Company's shares in two publicly-held
technology companies. See Note 2 of Notes to Consolidated Financial
Statements.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of
October 31, 1992, 1993, 1994, 1995 and 1996 and for the years then ended have
been derived from the audited consolidated financial statements of the
Company. The financial statements as of October 31, 1995 and 1996 and for each
of the years in the three year period ended October 31, 1996, and the report
of Deloitte & Touche LLP, independent auditors, with respect to such periods,
are included elsewhere in this Prospectus. The selected financial data as of
February 2, 1997 and for the three months ended January 31, 1996 and February
2, 1997 have been derived from the unaudited financial statements which
contain adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation of the financial
information for such periods. The results of operations for the three months
ended February 2, 1997 are not necessarily indicative of the operating results
that may be expected for any other period or the full year. The data are
qualified by reference to, and should be read in conjunction with,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated Financial Statements and related notes and
other financial information appearing elsewhere in this Prospectus or
incorporated by reference herein. Beginning with the current fiscal year, the
Company has adopted a fiscal year ending on the Sunday closest to October 31.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED
----------------------------------------- -----------------------
JANUARY 31, FEBRUARY 2,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF
EARNINGS DATA:
Net sales............... $41,305 $48,363 $80,696 $125,299 $160,071 $34,668 $40,029
Costs and expenses:
Cost of sales.......... 27,142 32,048 51,204 76,683 98,267 21,252 25,347
Selling, general and
administrative......... 5,746 6,580 10,517 17,127 21,079 4,585 5,035
Research and
development(1)......... 2,549 2,744 4,738 7,899 8,460 1,825 2,302
------- ------- ------- -------- -------- ------- -------
Operating income........ 5,868 6,991 14,237 23,590 32,265 7,006 7,345
Interest and other
income, net(2)......... 851 445 1,064 6,252 1,638 545 1,280
------- ------- ------- -------- -------- ------- -------
Income before income
taxes.................. 6,719 7,436 15,301 29,842 33,903 7,551 8,625
Provision for income
taxes(3)............... 2,352 2,528 4,965 11,210 12,900 2,900 3,300
------- ------- ------- -------- -------- ------- -------
Net income(3)........... $ 4,367 $ 4,908 $10,336 $ 18,632 $ 21,003 $ 4,651 $ 5,325
======= ======= ======= ======== ======== ======= =======
Net income per common
share(3)(4)............ $ 0.55 $ 0.59 $ 1.03 $ 1.66 $ 1.74 $ 0.39 $ 0.44
======= ======= ======= ======== ======== ======= =======
Weighted average number
of common shares
outstanding(4)......... 7,998 8,372 10,062 11,207 12,101 12,058 12,227
======= ======= ======= ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------- FEBRUARY 2,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital.......... $20,771 $17,577 $32,329 $ 49,653 $ 21,613 $ 16,494
Property, plant and
equipment............... 25,148 41,585 39,205 72,063 123,666 135,243
Total assets(5).......... 52,026 74,441 98,346 174,218 211,903 209,075
Long-term debt, less
current portion......... 1,698 1,051 495 1,809 1,987 2,005
Total shareholders'
equity(5)............... $44,011 $62,626 $80,402 $134,045 $156,417 $160,673
</TABLE>
- --------
(1) Includes a non-recurring charge of $1.5 million in fiscal 1995
representing amounts assigned to certain research and development projects
of Microphase Laboratories, Inc. ("Microphase"), which amounts were
expensed at the time of the acquisition.
(2) Includes net gains of $5.1 million and $1.1 million in fiscal 1995 and the
three months ended February 2, 1997, respectively, from the sale of
investments.
(3) Includes (i) a benefit of $237,000, or $0.02 per share, for fiscal 1994
representing the cumulative effect of the Company adopting Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
effective November 1, 1993, (ii) approximately $2 million, or $0.16 per
share, for fiscal 1995 attributable to an after-tax gain from the sale of
equity investments less a non-recurring research and development charge
related to the Microphase acquisition and (iii) $0.7 million, or $0.05 per
share, for the first quarter of 1997 attributable to an after-tax gain
from the sale of equity investments.
(4) Share and per share data reflect a 3-for-2 split effected in March 1995.
(5) Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which the Company
adopted effective October 1994, equity investments are included in assets
at fair market value and unrealized gains on investments are reported as a
separate component of total shareholders' equity. See Notes 1 and 2 of
Notes to Consolidated Financial Statements.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Photronics established itself as a multinational company during fiscal 1996,
by acquiring two European operations, opening a new, state-of-the-art
manufacturing facility in Singapore and acquiring a minority interest in an
independent photomask manufacturer in Korea. These facilities, together with
the Company's five United States manufacturing facilities, comprise a global
manufacturing network of nine manufacturing facilities supporting
semiconductor manufacturers in the Asian, European and North American markets.
Net sales to foreign markets increased in each of the last three fiscal years.
As a result of the international expansion, the Company expects that net sales
to foreign markets will continue to increase.
European expansion included the acquisition of the photomask manufacturing
operations and assets of Plessey Semiconductors Limited ("Plessey") located in
Manchester, United Kingdom, on January 24, 1996, and a controlling interest in
the Litomask Division ("Litomask") of Centre Suisse d'Electronique et de
Microtechnique S.A. ("CSEM") located in Neuchatel, Switzerland, on April 1,
1996 (see Note 6 of Notes to the Consolidated Financial Statements).
Individually, neither of these acquisitions had a material effect on the
results of operations in fiscal 1996.
Net sales also have been affected by the increased demand for higher
technology photomasks, which have higher average selling prices. To meet this
demand and position the Company for future growth, the Company continues to
make substantial investments in high-end manufacturing technology and capacity
both at existing and new facilities. In addition to the Singapore facility,
the Company completed construction of its new state-of-the-art facility in
Allen, Texas, to which it relocated its Dallas, Texas operation in the fourth
quarter of fiscal 1996. The Company currently is constructing a new
manufacturing facility in Manchester, United Kingdom, to which the existing
Manchester operations will be relocated during fiscal 1997. A new
manufacturing facility near Austin, Texas, which the Company expects will be
operational in late fiscal 1997, will be the Company's tenth manufacturing
facility.
The Company acquired the photomask manufacturing operations and assets of
Hoya Micro Mask, Inc. ("Micro Mask") in Sunnyvale, California, on December 1,
1994, and Microphase in Colorado Springs, Colorado, on June 20, 1995. The
acquisition of Micro Mask contributed significantly to the Company's growth in
fiscal 1995 and, to a lesser extent, in fiscal 1996. Except for a non-
recurring charge in fiscal 1995 to research and development expenses (see Note
6 of Notes to the Consolidated Financial Statements), the financial results of
the new Colorado facility did not have a material effect on the Company's
results of operations or financial position.
The Company has an option to purchase additional equity of PK Limited, an
independent Korean photomask manufacturer. If the Company were to acquire a
controlling interest, PK Limited's results of operations and financial
condition would be included in the Company's financial statements. At December
31, 1996, to the Company's knowledge, PK Limited had total liabilities of
$27.4 million, to which the Notes would be effectively subordinated.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items in the Company's Consolidated Statement
of Earnings for each period:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED
------------------------- -----------------------
JANUARY 31, FEBRUARY 2,
1994 1995 1996 1996 1997
------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales.............. 63.4 61.2 61.4 61.3 63.3
Selling, general and
administrative............. 13.0 13.7 13.2 13.2 12.6
Research and 5.9 6.3 5.3 5.3 5.8
development(1)............. ------- ------- ------- ----- -----
Operating income............ 17.7 18.8 20.1 20.2 18.3
Interest and other income, 1.3 5.0 1.0 1.6 3.2
net(2)...................... ------- ------- ------- ----- -----
Income before income taxes.. 19.0 23.8 21.1 21.8 21.5
Provision for income 6.2 8.9 8.0 8.4 8.2
taxes(3).................... ------- ------- ------- ----- -----
Net income(3)............... 12.8% 14.9% 13.1% 13.4% 13.3%
======= ======= ======= ===== =====
</TABLE>
- --------
(1) Includes a non-recurring charge of $1.5 million, or 1.2% of net sales, in
fiscal 1995, representing amounts assigned to certain Microphase research
and development projects acquired by the Company, which amounts were
expensed by the Company at the time of the acquisition. See Note 6 of
Notes to Consolidated Financial Statements.
(2) Includes net gains of $0.8 million, $5.1 million and $1.1 million in
fiscal 1994, fiscal 1995 and the first quarter of fiscal 1997,
respectively, or 1.0%, 4.1% and 2.6% of net sales, respectively, from the
sale by the Company of equity investments.
(3) Includes a benefit from the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," of $237,000 for fiscal
1994, or 0.3% of net sales.
THREE MONTHS ENDED FEBRUARY 2, 1997 AND JANUARY 31, 1996
NET SALES
Net sales for the three months ended February 2, 1997 increased 15.5% to
$40.0 million compared with $34.7 million for the three months ended January
31, 1996. Sales from Photronics' new international manufacturing operations
accounted for slightly more than one-half of this increase. The remaining
portion of the growth resulted from increased shipments to customers from
existing facilities due to the availability of greater manufacturing
capability, reflecting the implementation of the Company's capacity expansion
program, as well as stronger overall demand.
COST OF SALES
Gross profit for the three months ended February 2, 1997 increased 9.4% to
$14.7 million compared with $13.4 million for the same period in the prior
fiscal year. Gross margin decreased to 36.7% for the three months ended
February 2, 1997, as compared with 38.7% in the corresponding period in the
prior fiscal year. The increase in gross profit resulted principally from
increases in sales volume, both from existing operations in the United States
and from new international operations. To allow for increased manufacturing
capability, the Company has continued to increase its staffing levels and
added to its manufacturing systems, resulting in higher labor and equipment-
related costs, including depreciation expense. The lower margins were due
primarily to the Company's newly expanded manufacturing base, which was not
fully utilized, as well as the inclusion of international operations which
generated margins below those generally experienced in the Company's domestic
operations. Partially offsetting these increased costs were better margins
resulting from a favorable
17
<PAGE>
product mix of complex photomasks during the current fiscal year. The Company
anticipates that its fixed operating costs will increase in connection with
its continuing capacity expansion which it expects to offset with increases in
net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 9.8% to $5.0 million
for the three months ended February 2, 1997, compared with $4.6 million for
the same period in the prior fiscal year. However, as a percentage of net
sales, selling, general and administrative expenses decreased to 12.6% for the
three months ended February 2, 1997, compared with 13.2% for the same period
in the prior fiscal year. The increases in costs resulting from the addition
of the international operations were offset by the absence of a proportionate
increase in costs in the U.S. business which have not been significantly
different than in the prior year.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended February 2,
1997, increased 26.1% to $2.3 million, compared with $1.8 million for the same
period in the prior fiscal year. This increase reflects expansion of the
Company's research and development organization and an increase in its
development efforts which have focused on new high-end, more complex
photomasks, including phase shift, optical proximity correction and deep
ultra-violet technologies as well as large area photomasks. As a percentage of
net sales, research and development expenses increased to 5.8% for the three
months ended February 2, 1997, compared with 5.3% in the corresponding prior
fiscal period.
OTHER INCOME
Interest and other income, net, for the three months ended February 2, 1997,
increased to $1.3 million compared with $0.5 million for the same period in
the prior fiscal year due principally to a $1.1 million gain from the sale of
investment securities, offset in part by a decrease in interest income
resulting from lower levels of funds available for investment.
NET INCOME
Net income for the three months ended February 2, 1997, increased 14.5% to
$5.3 million, or $0.44 per share, compared with $4.7 million, or $0.39 per
share, for the same period in the prior fiscal year. Net income in the first
quarter of 1997 included $0.7 million, or $0.05 per share, from the gain on
the sale of investment securities. The weighted average number of common
shares outstanding increased to 12.2 million for the three months ended
February 2, 1997, from 12.1 million for the same period in the prior fiscal
year principally as a result of the issuance of shares in connection with
employee stock option exercises since the first quarter of 1996.
FISCAL YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NET SALES
Net sales in fiscal 1996 increased 27.8% to $160.1 million compared with net
sales of $125.3 million in the prior fiscal year. The majority of the growth
was from increased shipments to customers from existing facilities due to
greater manufacturing capacity resulting from the Company's capital expansion
program, and from increased average selling prices due to a larger proportion
of higher technology photomask shipments in fiscal 1996. Approximately 20% of
the increase is attributable to the European acquisitions, including sales to
Plessey under a long-term supply agreement which was executed in connection
with the acquisition. The increase in sales was also favorably affected by the
18
<PAGE>
inclusion of a full year's sales for the Company's Colorado and Sunnyvale
facilities which were acquired during fiscal 1995 and increased sales from the
Company's wholly owned subsidiary, Beta Squared, Inc. ("Beta Squared"). Net
sales for fiscal 1995 represented an increase of 55.3% over fiscal 1994 sales
of $80.7 million. Approximately one-half of the fiscal 1995 increase was
attributable to the inclusion of the Company's new Sunnyvale facility,
commencing December 1, 1994. Furthermore, shipments to customers from existing
facilities increased due to stronger demand generally and greater
manufacturing capacity as the Company implemented its capacity expansion
program.
COST OF SALES
Cost of sales for fiscal 1996 increased 28.1% to $98.3 million compared to
$76.7 million for the prior fiscal year. These increases resulted principally
from increases in sales volume, including those resulting from the Company's
recent acquisitions. To meet the increased production demands, the Company has
increased its staffing levels and manufacturing capacity, resulting in, among
other things, increased labor costs, depreciation expense and equipment
maintenance costs. As a percentage of net sales, cost of sales increased
slightly to 61.4% in fiscal 1996, compared with 61.2% in fiscal 1995.
Improvements from higher capacity utilization of the Company's installed
equipment base and a more favorable mix of advanced photomasks were offset by
the absorption of increased costs resulting from manufacturing capacity
expansion and lower margins generally at recently acquired operations, at Beta
Squared, and on sales contracted to foreign manufacturing partners. The
Company anticipates that its fixed operating costs will increase in connection
with its continuing capacity expansion. While cost of sales may increase
initially, the Company expects to match these higher costs with continued
increases in revenues as the new facilities and equipment progress to a higher
level of utilization.
Cost of sales for fiscal 1995 increased 49.8% over fiscal 1994 cost of sales
of $51.2 million. This increase resulted principally from increases in sales
volume, including those resulting from the Micro Mask acquisition. Staffing
levels were increased to meet production demands and higher employee incentive
compensation expenses were incurred as a result of the Company's performance.
The addition of manufacturing capacity resulted in increased equipment-related
costs, including maintenance and depreciation. However, as a percentage of net
sales, cost of sales in fiscal 1995 decreased to 61.2% from 63.4% in fiscal
1994. This improvement was due primarily to the continued higher capacity
utilization and greater operating efficiencies afforded by sales volume
increases, most notably at the Company's Dallas, Texas, operation which was
acquired from Toppan Printronics (USA), Inc. ("Toppan") on October 1, 1993,
and a more favorable mix of more complex photomasks.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 23.1% to $21.1
million in fiscal 1996 compared to $17.1 million in fiscal 1995. Nearly half
of the increase was due to the addition of the Company's foreign operations.
The remaining increase primarily is attributable to the inclusion of a full
year's expenses for the Company's Colorado and Sunnyvale facilities which were
acquired during fiscal 1995 and increased staffing levels to accommodate the
Company's significant growth, partially offset by lower incentive compensation
expense. As a percentage of net sales, selling, general and administrative
expenses decreased to 13.2% for fiscal 1996 compared to 13.7% in the prior
fiscal year, largely due to the lower level of employee incentive compensation
expense in fiscal 1996. Selling, general and administrative expenses in fiscal
1995 increased 62.9% over fiscal 1994 expenses of $10.5 million. This increase
was principally due to the inclusion of the Company's Sunnyvale facility and
higher employee incentive compensation expenses resulting from the Company's
performance. Moreover, increased staffing levels and other associated costs
were incurred in the latter part of 1994 and in 1995 to accommodate the
Company's business expansion. As a percentage of net sales, selling, general
and administrative expenses in fiscal 1995 increased to 13.7% from 13.0% in
fiscal 1994.
19
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 1996 increased 7.1% to $8.5
million from $7.9 million for the prior fiscal year. In connection with the
Microphase acquisition in fiscal 1995, the Company recorded a one-time charge
of $1.5 million, representing amounts assigned to certain Microphase research
and development projects, principally for the manufacture of large area masks,
which were expensed upon acquisition. Excluding this non-recurring charge,
research and development expenses for fiscal 1996 increased approximately 32%
compared to fiscal 1995. This increase reflects the expansion of the Company's
research and development organization and the resulting increase in its
development efforts that have focused on new high-end, more complex photomasks
utilizing phase shift, optical proximity correction and deep ultra-violet
technologies, and on large area photomasks. As a percentage of net sales,
excluding the Microphase charge, research and development expenses increased
slightly to 5.3% in fiscal 1996 from 5.1% in fiscal 1995. Research and
development expenses in fiscal 1995, excluding the Microphase charge,
increased approximately 35% over fiscal 1994 expenses of $4.7 million. As a
percentage of net sales, research and development expenses, excluding the
Microphase charge, declined to 5.1% in fiscal 1995 from 5.9% of net sales in
fiscal 1994 because of the substantial increase in net sales.
OTHER INCOME AND EXPENSE
Interest income for fiscal 1996 remained fairly constant at $1.6 million.
Other income, net, decreased to $197,000 for fiscal 1996 compared to $4.8
million for the prior fiscal year principally due to the $5.1 million net gain
from the sales of equity investments during fiscal 1995. Gains on disposition
of investments in fiscal 1994 totaled $831,000. Minority interest expense and
foreign currency transaction gains or losses were not significant in fiscal
1996.
INCOME TAXES
For fiscal 1996, the Company provided Federal, state and foreign income
taxes at an estimated combined effective annual tax rate of 38.0% as compared
to 37.6% in fiscal 1995 and 34.0% in fiscal 1994. The increase in the
Company's estimated tax rate primarily is the result of a decrease in tax-
exempt investment income for fiscal 1996. The change in the estimated tax rate
from fiscal 1994 to fiscal 1995 was the result of a larger portion of income
being subject to the 35% incremental Federal income tax rate and a greater
portion of the Company's income being generated in California following the
Micro Mask acquisition. In 1994, the Company recognized the cumulative effect
of the adoption of SFAS 109, "Accounting for Income Taxes," resulting in a
benefit of $237,000, or $0.02 per share.
NET INCOME
Net income for fiscal 1996 amounted to $21.0 million, or $1.74 per share,
compared with $18.6 million, or $1.66 per share, in fiscal 1995 and $10.3
million, or $1.03 per share, in fiscal 1994. Excluding the non-recurring
research and development charge and the net gain from the sale of equity
investments in the third quarter of fiscal 1995 which increased prior year net
income by approximately $2 million, or $0.16 per share, net income for fiscal
1996 increased approximately 26%. Earnings per share were based on 12.1
million weighted average shares outstanding in fiscal 1996, compared with 11.2
million shares in 1995 and 10.1 million shares in 1994. The increases in
weighted average shares outstanding in fiscal 1996 and 1995 principally are
the result of a public offering of 1.5 million shares in April and May 1995
and the issuance of approximately 100,000 shares in connection with the
Microphase acquisition in June 1995. All share and earnings per share amounts
reflect a three-for-two stock split effected in March 1995.
20
<PAGE>
QUARTERLY RESULTS
The following tables present unaudited quarterly consolidated financial data
for each of the eight quarters in the period ended October 31, 1996 and for
the fiscal quarter ended February 2, 1997 and such data as a percentage of net
sales. This data has been prepared on a basis consistent with the audited
consolidated financial statements appearing elsewhere in this Prospectus, and
in the opinion of management, includes all necessary adjustments (consisting
only of normal recurring adjustments) to present fairly the unaudited
quarterly results when read in conjunction with the audited consolidated
financial statements of the Company and notes thereto appearing elsewhere in
this Prospectus. The results of operations for any quarter are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
FISCAL 1997
FISCAL 1995 FISCAL 1996 THREE MONTHS
THREE MONTHS ENDED THREE MONTHS ENDED ENDED
------------------------------------------- ------------------------------------------- ------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, FEBRUARY 2,
1995 1995 1995 1995 1996 1996 1996 1996 1997
----------- --------- -------- ----------- ----------- --------- -------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $26,176 $30,037 $32,854 $36,232 $34,668 $40,514 $42,677 $42,212 $40,029
Costs and expenses:
Cost of sales....... 16,417 18,422 20,015 21,829 21,252 24,811 26,249 25,955 25,347
Selling, general and
administrative..... 3,543 4,104 4,489 4,991 4,585 5,447 5,587 5,460 5,035
Research and
development(1)..... 1,348 1,595 3,177 1,779 1,825 2,123 2,218 2,294 2,302
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income..... 4,868 5,916 5,173 7,633 7,006 8,133 8,623 8,503 7,345
Interest and other
income, net(2)...... 334 179 5,187 552 545 334 290 469 1,280
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes............... 5,202 6,095 10,360 8,185 7,551 8,467 8,913 8,972 8,625
Provision for income
taxes............... 1,935 2,275 3,900 3,100 2,900 3,200 3,400 3,400 3,300
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income(3)........ $ 3,267 $ 3,820 $ 6,460 $ 5,085 $ 4,651 $ 5,267 $ 5,513 $ 5,572 $ 5,325
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per common
share(3)............ $ 0.32 $ 0.36 $ 0.54 $ 0.42 $ 0.39 $ 0.44 $ 0.46 $ 0.46 $ 0.44
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average
number of common
shares outstanding.. 10,256 10,513 11,945 12,113 12,058 12,048 12,111 12,196 12,227
======= ======= ======= ======= ======= ======= ======= ======= =======
Net sales............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales....... 62.7 61.3 60.9 60.2 61.3 61.2 61.5 61.5 63.3
Selling, general and
administrative..... 13.5 13.7 13.7 13.8 13.2 13.4 13.1 12.9 12.6
Research and
development(1)..... 5.2 5.3 9.7 4.9 5.3 5.3 5.2 5.5 5.8
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income..... 18.6 19.7 15.7 21.1 20.2 20.1 20.2 20.1 18.3
Interest and other
income, net(2)...... 1.3 0.6 15.8 1.5 1.6 0.8 0.7 1.1 3.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes............... 19.9 20.3 31.5 22.6 21.8 20.9 20.9 21.2 21.5
Provision for income
taxes............... 7.4 7.6 11.8 8.6 8.4 7.9 8.0 8.0 8.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income........... 12.5% 12.7% 19.7% 14.0% 13.4% 13.0% 12.9% 13.2% 13.3%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes a non-recurring charge of $1.5 million, or 4.6% of net sales, in
the three months ended July 31, 1995, representing amounts attributed to
certain Microphase research and development projects, which were expensed
at the time of the Microphase acquisition.
(2) Includes net gains of $0.4 million, $4.7 million and $1.1 million in the
three months ended January 31, 1995, July 31, 1995 and February 2, 1997,
respectively, or 1.5%, 14.3% and 2.6%, respectively, of net sales for such
periods from the sale of equity investments.
(3) Includes (i) approximately $2 million, or $0.16 per share, in the third
quarter of fiscal 1995 attributable to the sale of equity investments less
the non-recurring research and development charge and (ii) $0.7 million,
or $0.05 per share, attributable to the sale of equity investments in the
first quarter of fiscal 1997.
21
<PAGE>
In the past, the Company has experienced fluctuations in its quarterly
operating results and it anticipates that such fluctuations will continue and
could intensify in the future. Operating results may fluctuate as a result of
many factors, including size and timing of orders and shipments, product mix,
sales of equipment (which have widely varying gross margins), technological
change, competition, loss of significant customers and general economic
conditions. The Company's customers generally order the Company's products on
an as-needed basis, and substantially all of the Company's net sales in any
quarter are dependent on orders received during the quarter. Since the Company
operates with a limited backlog and the rate of new orders may vary
significantly from month to month, the Company's capital expenditures and
overhead expense levels are based primarily on sales forecasts. Consequently,
if anticipated sales and shipments in any quarter do not occur when expected,
capital expenditures and overhead expense levels could be disproportionately
high and the Company's operating results would be adversely affected. In
addition, substantially all of the Company's net sales are derived from
customers in the semiconductor industry. This industry is highly cyclical and
has been characterized by periodic downturns, which in some cases have had
severe effects on suppliers to the industry. There can be no assurance that
any of the foregoing factors will not have a material adverse effect on the
Company's business and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments decreased
$25.2 million during fiscal 1996, largely as a result of $55.8 million of
capital expenditures for building construction and equipment purchases in
connection with the Company's expansion of manufacturing capacity and $12.4
million for the acquisitions of the photomask manufacturing operations and
assets of Plessey and Litomask and the investment in PK Limited. Offsetting
these decreases during fiscal 1996 were cash provided by operating activities
totaling $38.6 million, $2.8 million from sales of stock under employee stock
option and purchase plans and the receipt of approximately $1.0 million of
local government financial incentives to be utilized for the Company's new
Manchester operation. Cash, cash equivalents and short-term investments
decreased $13.7 million during the three months ended February 2, 1997,
largely as a result of funding $15.7 million of capital expenditures for
equipment and construction in progress in connection with the Company's
expansion of manufacturing capacity.
Accounts receivable increased to $24.8 million at October 31, 1996 from
$17.9 million at October 31, 1995, primarily as a result of higher year-end
sales levels, including sales by the new foreign operations, and slower
collections generally. Accounts receivable increased only slightly during the
first quarter of fiscal 1997. Inventories increased to $8.0 million at October
31, 1996 from $6.4 million at October 31, 1995, primarily due to general
increases to accommodate the escalating sales volume and the addition of the
foreign facilities. Inventories increased $1.1 million, or 14.0%, from October
31, 1996 to $9.1 million at February 2, 1997, as a result of the purchase of
several machines for refurbishment and resale during the quarter by Beta
Squared. Other current assets increased to $6.2 million at October 31, 1996,
from $3.4 million at October 31, 1995, primarily due to an increase in prepaid
income taxes and prepaid expenses at the newly acquired foreign operations.
Property, plant and equipment increased to $135.2 million at February 2,
1997 and to $123.7 million at October 31, 1996, from $72.1 million at October
31, 1995. Deposits on and purchases of equipment, building construction at the
new Allen, Texas and Singapore facilities, and construction in progress on the
new Manchester and Austin, Texas facilities totaled $55.8 million and $15.7
million in fiscal 1996 and during the three months ended February 2, 1997,
respectively, and fixed assets totaling $8.1 million were acquired in
connection with the Plessey and Litomask acquisitions in fiscal 1996. These
increases were offset by depreciation expense totaling $12.1 million and $4.2
million in fiscal 1996 and the first quarter of fiscal 1997, respectively.
Decreases in intangible assets from $10.3 million at October 31, 1995 to $9.3
million at October 31, 1996 and to $9.0 million at February 2, 1997 was due
primarily to amortization expense during the applicable periods.
Investments increased to $13.2 million at October 31, 1996, from $12.3
million at October 31, 1995, due to the Company's investment in PK Limited,
offset by a decrease in the fair values of the
22
<PAGE>
Company's available-for-sale investments during fiscal 1996. Investments
decreased to $10.4 million at February 2, 1997, due to the sale of certain
investment securities as well as the net decrease in the fair value of
investment securities during the period.
Accounts payable increased to $34.2 million at October 31, 1996, from $17.9
million at October 31, 1995, primarily due to increased payables related to
the completion of new facilities during the fourth quarter, recent major
equipment purchases, the addition of the foreign operations and a higher level
of purchases generally due to the Company's growth. Accounts payable decreased
$4.2 million from October 31, 1996 to $29.9 million at February 2, 1997, due
to payments made of unusually high payables at October 31, 1996 which had
resulted from the acceptance of significant equipment purchases at the end of
fiscal 1996. Accrued salaries and wages and other accrued liabilities
decreased to $9.8 million at October 31, 1996, from $11.9 million at October
31, 1995. This decrease is largely attributable to the settlement of fees in
connection with the conclusion of several of the Company's expansion projects,
together with lower sales, use and property tax liabilities because of the
resolution of related assessments. Accrued salaries and wages and other
accrued liabilities decreased to $7.8 million at February 2, 1997, largely as
a result of payments for fiscal 1996 incentive compensation and timing of
other expenses.
The Company has amended its revolving credit facility to permit borrowings
of up to $30.0 million at any time through October 31, 1998. All amounts
outstanding at October 31, 1998 will be due and payable on such date.
Borrowings under the revolving credit facility will be guaranteed by the
Company's domestic subsidiaries and secured by the pledge of up to two-thirds
of the capital stock of its foreign subsidiaries.
The Company did not incur any long-term debt during 1996. Changes in long-
term debt are due to the imputation of interest on the obligation incurred in
connection with the Micro Mask acquisition. Deferred income taxes decreased
from $8.3 million at October 31, 1995 to $7.5 million at October 31, 1996 and
to $6.6 million at February 2, 1997, largely due to a reduction in unrealized
gains on investments. Other liabilities increased to $2.1 million at October
31, 1996, from $265,000 at October 31, 1995, principally due to financial
incentives received in connection with the Company's new Manchester operations
and minority interest associated with the Company's Swiss subsidiary.
The Company's commitments represent on-going investments in additional
manufacturing capacity as well as advanced equipment for research and
development of the next generation of higher technology, more complex
photomasks. At February 2, 1997, the Company had commitments outstanding for
capital expenditures of approximately $62 million. Additional commitments are
expected to be incurred during fiscal 1997. Subsequent to the end of the first
quarter of fiscal 1997, the Company utilized its revolving credit facility
and, at May 22, 1997, approximately $15 million was outstanding. The Company
believes that its currently available resources, together with its capacity
for substantial growth and its accessibility to other debt and equity
financing sources, are sufficient to satisfy its cash requirements for the
foreseeable future.
EFFECT OF NEW ACCOUNTING STANDARD
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share,"
which establishes new standards for the computation and disclosure of earnings
per share ("EPS"). The new statement requires dual presentation of "basic" EPS
and "diluted" EPS. Basic EPS is based on the weighted average number of common
shares outstanding for the period, excluding any dilutive common share
equivalents. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted. The Company cannot adopt SFAS 128 until the first quarter of fiscal
year 1998. The effect of SFAS 128, had it been adopted beginning in fiscal
year 1994, would have been to present basic EPS that would have been greater
than EPS actually reported by $0.03 in fiscal year 1994; $0.07 in 1995; $0.05
in 1996; and $0.01 for the first quarter of 1996 and for the first quarter of
1997. The presentation of diluted EPS would have been the same as EPS actually
reported for the respective periods.
23
<PAGE>
BUSINESS
Photronics is a leading manufacturer of photomasks, which are used primarily
by the semiconductor industry in the manufacture of integrated circuits. A
photomask is a high precision photographic quartz plate that is used as a
master to transfer microscopic circuit patterns onto semiconductor wafers
during the fabrication of integrated circuits. Based upon available market
information, the Company believes that it has a larger share of the United
States market for photomasks than any other photomask manufacturer and is one
of the largest photomask manufacturers in the world.
During 1996, the Company focused on developing a global network and
enhancing its technological and manufacturing capabilities by expanding its
existing facilities and acquiring or establishing new manufacturing
operations. The Company transferred its Dallas, Texas operations to a new,
advanced manufacturing facility in Allen, Texas and began construction of
another facility in Austin, Texas that the Company expects will begin
operations by late 1997. The Company established manufacturing operations
outside the United States by acquiring facilities in the United Kingdom and
Switzerland, constructing a state-of-the-art manufacturing facility in
Singapore and acquiring an equity interest in PK Limited, a Korean photomask
manufacturer. As a result of these efforts and its continuing investment in
sophisticated manufacturing equipment, the Company believes that its
manufacturing capacity is among the largest and most advanced in the industry.
INDUSTRY OVERVIEW
Photomasks are used to transfer circuit patterns onto semiconductor wafers
during the fabrication of integrated circuits and, to a lesser extent, other
types of electronic components. Each integrated circuit design consists of a
series of separate patterns, each of which is imaged onto a different
photomask. The resulting series of photomasks then is used to successively
layer the circuit patterns onto the semiconductor wafer. The manufacture of
modern photomasks requires the use of advanced cleanrooms and sophisticated
lithography, inspection, repair and process systems as well as complex data
handling capabilities.
VLSI Research Inc. estimates that worldwide photomask sales exceeded $1.7
billion in 1996 and projects a compound annual growth rate of approximately
17% through 2001. These amounts include sales by both independent
manufacturers and captives, which are semiconductor manufacturers that produce
photomasks almost exclusively for their own use. Since the mid-1980s, there
has been a trend in the United States and Europe towards the divestiture or
closing of captive photomask operations by semiconductor manufacturers and an
increase in the share of the market served by independent manufacturers. The
Company believes that this trend is attributable to an increase in the
complexity of integrated circuit devices and resultant increases in the
complexity of photomasks necessary to produce such circuits. These
developments have increased substantially the capital requirements and costs
related to photomask operations, making it no longer cost effective in many
cases for semiconductor manufacturers to maintain captive photomask
operations. At the same time, due in part to these increasing capital
requirements and competitive pressures, the number of significant independent
manufacturers in the United States and Europe decreased from approximately 14
in the mid-1980s to four in 1996.
The Company believes that increased photomask demand reflects increased
semiconductor design activity and is only indirectly affected by changes in
semiconductor sales volumes. Increased design activity has been stimulated by
both the rapid development of new generation semiconductor designs and the
proliferation of application-specific integrated circuits. In addition, the
Company believes the following factors have affected and will continue to
affect the photomask industry:
. Proliferation of Semiconductor Applications. Semiconductor devices of
all types continue to be incorporated into new products, including
cellular telephones, pagers, automobiles,
24
<PAGE>
medical products, household appliances and other electronic consumer
products. These applications are function specific and typically require
new integrated circuit designs and corresponding sets of photomasks. In
addition, the demand for semiconductor devices from traditional markets
such as computer systems is growing significantly as semiconductor
content in electronic systems increases and as the market for personal
computers and other electronic systems expands.
. Increasing Device Complexity. Semiconductor manufacturers and designers
continue to increase the complexity of integrated circuits which has led
to a corresponding increase in the complexity and number of photomasks
required in the manufacture of an integrated circuit. For example, a
typical 64 Mbit DRAM uses 23 photomasks compared to 14 photomasks for an
older generation 1 Mbit DRAM.
. Limited High-End Photomask Manufacturing Capacity. High-end photomasks
typically require more advanced manufacturing systems and processes.
These systems generally are significantly more expensive than prior
generation systems, and photomasks requiring these advanced systems are
usually more expensive to produce. The Company believes that only a
limited number of photomask manufacturers throughout the world currently
have the capacity to produce high-end photomasks in significant volume.
. New Advanced Semiconductor Manufacturing Facilities. In response to the
increasing demand for integrated circuits, semiconductor manufacturers
have added, or announced the addition of, a significant number of new
state-of-the-art manufacturing facilities. These facilities are likely
to require the most advanced photomasks.
. Limited Technological Capabilities. As semiconductor manufacturers
continue to increase the complexity of integrated circuits, they have
encountered technological limitations in their installed equipment base.
One solution to these limitations has been to incorporate advanced
lithographic techniques into the design of photomasks. These advanced
photomasks, generally known as phase-shift and optical proximity
correction (OPC) photomasks, are among the most difficult and expensive
photomasks to manufacture, and only a small number of photomask
manufacturers have the expertise and the sophisticated equipment to
manufacture such photomasks.
STRATEGY
The Company's strategy to expand its position as a leader in the manufacture
of photomasks consists of the following elements:
. Maintain Technological Leadership. Maintaining technological leadership
in photomask manufacture is important to the Company's long-term
success. The Company invests in state-of-the-art manufacturing systems
and facilities to support advanced technological and high volume
demands. The Company will continue to devote significant resources to
the development of technologies for the manufacture of advanced
photomasks, including optical proximity correction and phase-shift
photomasks, which are designed to improve circuit image resolution on a
semiconductor wafer.
. Ensure Strong Customer Relationships. Critical to the Company's position
as an industry leader is developing and maintaining high levels of
customer satisfaction. Because each photomask is specific to a
particular circuit design and customers expect rapid delivery, the
Company believes that consistency of product quality and timeliness of
delivery are critical to its success. The Company has invested in the
facilities and personnel necessary to expeditiously handle incoming
customer designs and works closely with each customer to ensure that the
customer's specifications are properly reflected in the final product.
In addition, the Company has entered into arrangements with certain key
customers under which the Company is designated a preferred supplier and
the customer is assured a level of priority access to the Company's
manufacturing capabilities.
25
<PAGE>
. Leverage Strategically Located Manufacturing Facilities. The Company
believes that in certain markets proximity to customers is an important
competitive factor. In order to accelerate delivery times and respond to
customer demands, the Company has established multiple manufacturing
facilities in key locations. The Company's manufacturing network now
includes five facilities in the United States (with a sixth under
construction) as well as facilities in Singapore, Switzerland and the
United Kingdom. The Company also has an option to increase its equity
ownership of a manufacturing operation in Korea. The Company continually
evaluates new markets and acquisition opportunities to support its
customers.
. Provide Global Solution. As the semiconductor industry becomes
increasingly global, the ability to satisfy a customer's requirements in
multiple markets throughout the world can improve a manufacturer's
market position. The Company has established manufacturing operations in
Europe and Asia in order to achieve this objective and can support an
individual customer's requirements across many markets.
MANUFACTURING TECHNOLOGY
The Company's photomasks are manufactured in accordance with circuit designs
provided on a confidential basis by its customers. The typical manufacturing
process for one of the Company's photomasks involves receipt and conversion of
circuit design data to manufacturing pattern data. This manufacturing data is
then used to control the lithography system that exposes the circuit pattern
onto the photomask blank. The exposed areas are dissolved 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 (or protective membranes) are applied and, after final
cleaning, the photomask is shipped to the customer.
The Company currently supports customers across the full spectrum of
integrated circuit production technologies by manufacturing photomasks using
electron beam or laser-based technologies and, to a significantly lesser
degree, optical-based technologies. Laser-based or electron beam systems are
the predominant technologies used for photomask manufacturing. Such
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. Laser and electron beam generated photomasks can be used with
the most advanced processing techniques to produce VLSI (very large scale
integrated circuit) devices. The Company currently owns a number of laser
writing systems and electron beam systems and has committed to purchase
additional advanced systems in order to maintain technological leadership.
Compared to laser or electron beam generated photomasks, the production of
photomasks by the optical method is less expensive, but also less precise. The
optical method traditionally is used on less complex and lower priced
photomasks.
The first several levels of photomasks frequently are required to be
delivered by the Company within 24 hours from the time it receives a
customer's design. The ability to manufacture high quality photomasks within
short time periods is dependent upon efficient manufacturing methods, high
yields and high equipment reliability. The Company believes that it meets
these requirements and has made significant investments in manufacturing and
data processing systems and statistical process control methods to optimize
the manufacturing process and reduce cycle times.
Quality control is an integral part of the photomask manufacturing process.
Photomasks are manufactured in temperature, humidity and particulate
controlled cleanrooms because of the high level of precision, quality and
yields required. Each photomask is inspected several times during the
manufacturing process to ensure compliance with customer specifications. The
Company has made a substantial investment in equipment to inspect and repair
photomasks and to ensure that customer specifications are met. After
inspection and any necessary repair, the Company utilizes technological
processes to clean the photomasks prior to shipment.
26
<PAGE>
SALES AND MARKETING
The market for photomasks primarily consists of semiconductor manufacturers
and designers, both domestic and international, including manufacturers that
have the capability to manufacture photomasks. Generally, the Company and each
of its customers engage in a qualification and correlation process before the
Company becomes an approved supplier. Thereafter, the Company typically
negotiates pricing parameters for a customer's orders based on the customer's
specifications in order to expedite the placement of individual purchase
orders. Some of these prices may remain in effect for an extended period. The
Company also negotiates prices, and occasionally enters into purchase
arrangements, based on the understanding that, so 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 through a staff of
full-time sales personnel and customer service representatives who work
closely with the Company's general management and technical personnel. In
addition to the sales personnel at the Company's manufacturing facilities in
Brookfield, Connecticut; Milpitas and Sunnyvale, California; Colorado Springs,
Colorado; Allen, Texas; Manchester, United Kingdom; Neuchatel, Switzerland and
Singapore, the Company has sales offices in Carlsbad, California; Austin,
Texas; Raleigh, North Carolina; Hillsboro, Oregon; Lancaster, United Kingdom;
and Taiwan.
The Company supports international customers through both its domestic and
foreign facilities. The Company also has sub-contract manufacturing
arrangements in Taiwan. The Company considers its presence in international
markets important to attracting new customers, providing global solutions to
its existing customers and serving customers that utilize manufacturing
foundries outside of the United States, principally in Asia. Current customers
include companies in Australia, Canada, Germany, Italy, Japan, Singapore,
Switzerland, Taiwan and the United Kingdom. For a statement of the amount of
net sales, operating income or loss, and assets attributable to each of the
Company's geographic areas of operations, see Note 13 of Notes to the
Consolidated Financial Statements.
EQUIPMENT SALES AND SERVICES
In addition to the manufacture of photomasks, the Company, through its
wholly-owned subsidiary, Beta Squared, manufactures, sells and services a
wafer plasma etching system used in the processing of semiconductor wafers.
The original system was developed by Texas Instruments which licensed to Beta
Squared the right to manufacture and sell the system. Beta Squared also sells
refurbished semiconductor manufacturing equipment, engineering services and
replacement parts and field service for such equipment on a third-party basis.
Such activities represented approximately 5% of the Company's net sales during
fiscal 1996.
CUSTOMERS
The Company primarily sells its products to leading semiconductor
manufacturers. The Company's largest customers during fiscal 1996 included the
following:
Advanced Micro Devices, Inc. Micron Technology, Inc.
Analog Devices, Inc. Motorola, Inc.
Atmel Corporation National Semiconductor Corporation
Chartered Semiconductor Orbit Semiconductor Inc.
Manufacturing, Ltd. Philips N.V.
Cirrus Logic, Inc. Plessey Semiconductors Limited
Cypress Semiconductor Corporation Symbios Logic Inc.
Digital Equipment Corporation Texas Instruments Incorporated
Integrated Device Technology, Inc. Unitrode Corp.
LSI Logic Corp. VLSI Technology Inc.
Zilog, Inc.
27
<PAGE>
The Company has continually expanded its customer base and, during fiscal
1996, sold its products and services to approximately 400 customers. The
Company assumed an agreement with Texas Instruments as part of the acquisition
of the Dallas, Texas operation in fiscal 1993 and, as a result, Texas
Instruments became a more significant customer of the Company. In fiscal 1996,
sales to Texas Instruments represented approximately 26% of net sales, and the
loss of Texas Instruments or a significant decrease in the amount of the
purchases by Texas Instruments from the Company would have a material adverse
effect on the Company. The agreement with Texas Instruments continues until
March 31, 2000 and provides that the Company will be Texas Instruments'
principal photomask supplier in the United States and Europe so long as the
Company's price, quality, service and delivery are competitive. The agreement
also requires the Company to ensure that prices charged to Texas Instruments
are not less favorable than those otherwise extended by the Company to other
customers with similar specifications, volume, delivery and other
requirements. During fiscal 1996, no single customer other than Texas
Instruments accounted for more than 10% of the Company's net sales. The
Company's five largest customers, in the aggregate, accounted for
approximately 45% of net sales in fiscal 1996.
RESEARCH AND DEVELOPMENT
The Company conducts ongoing research and development programs intended to
maintain the Company's leadership in technology and manufacturing efficiency.
Since fiscal 1994, the Company has increased its investment in research and
development activities and current efforts include deep ultraviolet, phase-
shift and optical proximity correction photomasks for advanced semiconductor
manufacturing. Phase-shift and optical proximity correction photomasks use
advanced lithography techniques for enhanced resolutions of images on a
semiconductor wafer. The Company incurred expenses of $4.7 million, $7.9
million (including a non-recurring charge of $1.5 million) and $8.5 million
for research and development in fiscal 1994, 1995 and 1996, respectively.
While the Company believes that it possesses valuable proprietary information
and has received licenses under certain patents, the Company does not believe
that patents are a material factor in the photomask manufacturing business and
it holds only one patent.
MATERIALS AND SUPPLIES
Raw materials utilized by the Company generally include high precision
quartz plates, which are used as photomask blanks, primarily obtained from
Japanese suppliers (including Toppan Printing Co., the parent of Toppan
("Toppan Printing"), and Hoya Corporation ("Hoya")), pellicles (which are
protective transparent cellulose membranes) and electronic grade chemicals
used in the manufacturing process. Such materials are generally available from
a number of suppliers and the Company is not dependent on any one supplier for
its raw materials. The Company believes that its utilization of a broad range
of suppliers enables it to access the most advanced material technology
available. The Company has established purchasing arrangements with each of
Toppan and Hoya and it is expected that the Company will purchase
substantially all of its photomask blanks from Toppan and Hoya so long as
their price, quality, delivery and service are competitive.
The Company relies on a limited number of equipment suppliers to develop and
supply the equipment used in the photomask manufacturing process. Although the
Company has been able to obtain equipment on a timely basis, the inability to
obtain equipment when required could adversely affect the Company's business
and results of operations. The Company also relies on these suppliers to
develop future generations of manufacturing systems to support the Company's
requirements.
BACKLOG
The first several levels of photomasks for a circuit frequently are required
to be shipped within 24 hours of receiving a customer's design. Because of the
short period between order and shipment dates (typically from one day to two
weeks) for the principal portion of the Company's sales, the dollar amount of
current backlog is not considered to be a reliable indication of future sales
volume.
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<PAGE>
COMPETITION
The photomask industry is highly competitive and most of the Company's
customers utilize more than one photomask supplier. The Company's ability to
compete primarily depends upon the consistency of product quality and
timeliness of delivery, as well as pricing, technical capability and service.
The Company also believes that proximity to customers is an important factor
in certain markets. Certain competitors have considerably greater financial
and other resources than the Company. 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 its experienced
technical employees.
There has been a decrease since the mid-1980s in the number of independent
manufacturers as a result of independents being acquired or discontinuing
operations. The Company believes that entry into the market by a new
independent manufacturer would require a major investment of capital, a
significant period of time to establish a commercially viable operation and
additional time to attain meaningful market share and achieve profitability.
In the past, competition and relatively flat demand led to pressure to reduce
prices which the Company believes contributed to the decrease in the number of
independent manufacturers. Although independent photomask manufacturers have
experienced increased demand since late 1993, there can be no assurance that
past trends in pricing and demand will not re-emerge.
Based upon available market information, the Company believes that it has a
larger share of the United States market than any other photomask manufacturer
and is one of the largest photomask manufacturers in the world. Competitors in
the United States include DuPont and Align-Rite; and in international markets,
Dai Nippon Printing, Toppan, Hoya, DuPont, Taiwan Mask Corp., Innova, Align-
Rite and Compugraphics. In addition, some of the Company's customers possess
their own captive facilities for manufacturing photomasks and certain
semiconductor manufacturers market their photomask manufacturing services to
outside customers as well as to their internal organization.
EMPLOYEES
As of April 1, 1997, the Company employed approximately 900 persons on a
full-time basis. The Company believes that it offers competitive compensation
and other benefits and that its employee relations are good. Except for
employees in the United Kingdom, none of the Company's employees is
represented by a union.
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<PAGE>
PROPERTY
The Company's properties include buildings in which the Company currently
conducts manufacturing operations or is constructing facilities for future
manufacturing operations. The following table presents certain information
about the Company's manufacturing facilities.
<TABLE>
<CAPTION>
FACILITY
SIZE
(SQ. TYPE OF
LOCATION FT.) INTEREST
-------- -------- --------
<S> <C> <C>
Brookfield, Connecticut 19,600 Owned
(Building #1)
Brookfield, Connecticut 20,000 Leased
(Building #2)
Milpitas, California 49,000 Leased
(2 buildings)
Sunnyvale, California 40,000 Owned
(3 buildings)
Colorado Springs, Colorado 27,000 Leased
Allen, Texas 60,000 Owned
Austin, Texas 50,000 Owned
(under construction)
Manchester, United Kingdom 13,000 Leased
(current facility)
Manchester, United Kingdom 42,000 Owned
(new facility under construction to
replace current facility)
Neuchatel, Switzerland 7,000 Leased
Singapore 20,000 Leased
</TABLE>
Lease terms range from less than one year, for facilities from which the
Company is planning to relocate operations, to up to five years, with options
to renew for certain facilities. In addition, the Company leases office space
in Jupiter, Florida; Austin, Texas; Carlsbad, California; Hillsboro, Oregon
and certain property adjacent to its facilities in Brookfield, Connecticut.
During fiscal 1996, the Company leased real property at an aggregate annual
rental of $2.3 million and leased equipment at an aggregate annual rental of
$3.3 million.
The leased properties in Brookfield, Connecticut are leased from entities
controlled by Constantine S. Macricostas under fixed lease rates which were
determined by reference to fair market value rates at the beginning of the
respective lease term. Mr. Macricostas is the Chairman of the Board, Chief
Executive Officer and a director of the Company.
Other than new manufacturing facilities or systems which had not yet been
placed into service, the Company believes that it substantially utilized its
facilities during fiscal 1996.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, nor is
the property of the Company subject to any such proceedings.
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<PAGE>
MANAGEMENT
The names of the officers and directors of the Company are set forth below,
together with the positions held by each person in the Company and their ages
as of April 24, 1997. All officers are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ----------------------------------------------------
<S> <C> <C>
Constantine S. 61 Chairman of the Board, Chief Executive Officer
Macricostas and Director
Michael J. Yomazzo 54 President, Chief Operating Officer and Director
Jeffrey P. Moonan 41 Senior Vice President, General Counsel and Secretary
Robert J. Bollo 52 Vice President--Finance and Chief Financial Officer
David C. Heilman 58 Senior Vice President--Sales and Marketing
James Northup 36 Senior Vice President--Operations
Jack P. Moneta 54 Senior Vice President--Business Development
Walter M. Fiederowicz 50 Director
Joseph A. Fiorita, Jr. 52 Director
Yukio Tagawa 59 Director
</TABLE>
The terms of the Company's revolving credit facility specify that if Mr.
Macricostas ceases to maintain day-to-day control of the Company, Mr. Yomazzo,
or another replacement acceptable to the bank, must assume such duties,
otherwise the Company may be declared in default.
For the past five years each of the officers and directors of the Company has
held the office shown, except as follows:
Constantine S. Macricostas, a founder of the Company, served as Treasurer
and Chief Financial Officer of the Company from 1974 until September 1987 and
as President from 1974 until November 1990. Mr. Macricostas also serves as a
Director of Nutmeg Federal Savings and Loan Association and The DII Group,
Inc. (a provider of integrated electronic manufacturing products and
services).
Michael J. Yomazzo has served as President and Chief Operating Officer since
January 1994. From November 1990 until January 1994, he served as Executive
Vice President; from July 1989 until November 1990, he served as Senior Vice
President--Finance and Planning and since 1977, he has served as a Vice
President of the Company with responsibilities which have included finance,
sales and marketing.
Jeffrey P. Moonan has served as Senior Vice President since January 1994 and
General Counsel and Secretary since July 1988. From July 1989 until January
1994, he served as Vice President/ Administration.
Robert J. Bollo has served as Vice President--Finance and Chief Financial
Officer since November 1994. From August 1994 to November 1994, he served as
Director of Finance. From April 1992 to July 1994, he was a Principal of CFO
Associates, Inc., a financial management firm. Prior to April 1992, he was
with Kollmorgen Corporation, serving as a Vice President since January 1990
and Controller and Chief Accounting Officer from February 1985 until January
1990.
David C. Heilman has served as Senior Vice President--Sales and Marketing
since November 1996. From September 1993 until November 1996, he served as
Vice President--Sales and Marketing. Prior to joining the Company, he served
in various capacities for more than five years with DuPont Photomasks, Inc.,
including as Executive Vice President and Chief Operating Officer, Vice
President, Sales and Marketing and most recently as General Manager of
DuPont's Kokomo, Indiana facility.
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<PAGE>
James Northup has served as Senior Vice President--Operations since November
1996. From May 1995 until November 1996, Mr. Northup served as Vice
President--California, Connecticut and Colorado Operations; from January 1994
until May 1995, he served as Director of Connecticut Operations and from April
1990 until January 1994 he served as Operations Manager for the Company's
Connecticut operations.
Jack P. Moneta has served as Senior Vice President--Business Development
since November 1996. From January 1994 until November 1996, he served as Vice
President--Texas Operations. From August 1992 to January 1994, he served as
Director of Texas Operations. He served in various capacities with
International Business Machines Corporation for 25 years, including most
recently as the General Manager of IBM's United States photomask operations
with overall responsibility for coordinating IBM's worldwide photomask
operations.
Walter M. Fiederowicz has served since April 1997 as the President and Chief
Executive Officer of World Corp, Inc., a holding company that owns
approximately 61.3% of the common stock of World Airways, Inc. (a leading
provider of long-range passenger and cargo air transportation services to
major airlines) and approximately 28.9% of the common stock of InteliData
Technologies Corporation (a provider of caller identification based
telecommunications devices, smart telephone and on-line electronics
information services). From March 1996 until April 1997, Mr. Fiederowicz was a
private investor and consultant. Mr. Fiederowicz served as chairman of
Colonial Data Technologies Corp., (a distributor of telecommunications
equipment) from August 1994 to March 1996. From January 1991 until July 1994,
he held various positions, including executive vice president and chairman and
served as director of Conning and Company (the parent company of an investment
firm). Mr. Fiederowicz was chairman and director of Covenant Mutual Insurance
Company, a property and casualty insurance company ("Covenant"), from 1989
until March 1993, and was president and chief executive officer of Covenant
from 1989 until December 1992. Covenant was placed in rehabilitation by the
Insurance Commissioner of the State of Connecticut in 1993 and subsequently
liquidated as a result of losses in connection with insurance claims relating
to Hurricane Andrew. Mr. Fiederowicz also serves as a director of InteliData
Technologies Corporation, Blau Marketing Technologies, Inc. (a marketing firm)
and First Albany Companies, Inc. (the parent of a broker-dealer).
Joseph A. Fiorita, Jr. is a partner in Fiorita, Kornhaas and Van Houten,
P.C., independent certified public accountants.
Yukio Tagawa has served as a Director of the Company since January 1997. Mr.
Tagawa has served as Vice Divisional Manager for the Electronics Division of
Toppan since June 1996 and as a Director of Toppan from June 1995. Prior to
assuming such duties, Mr. Tagawa served in other managerial capacities with
Toppan since March 1991. Toppan is a diversified manufacturing company with
operations in printing and electronics industries (including photomask
manufacture) and had revenues in excess of $11 billion during its last fiscal
year.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Common Stock of Photronics as of
April 1, 1997. Information is presented with respect to (i) persons
beneficially owning five percent or more of the outstanding Common Stock; (ii)
each director and certain executive officers of the Company and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP (1)
NAME AND ADDRESS OF ---------------------------
BENEFICIAL OWNER NUMBER PERCENT
------------------- -------------- ------------
<S> <C> <C>
Constantine S. Macricostas (2)(3)................... 1,595,459 13.3%
1061 East Indiantown Road
Jupiter, Florida 33477
Toppan Printing Co., Ltd. ......................... 1,590,000 13.4
1, Kanda Izumi-cho Chiyoda-Ku
Tokyo, Japan 101
Yukio Tagawa (4).................................... 1,590,000 13.4
Toppan Printing Co., Ltd.
1, Kanda Izumi-cho Chiyoda-Ku
Tokyo, Japan 101
Macricostas Partners, L.P. ........................ 1,140,000 9.6
1122 Bel Air
Allen, Texas 75013
Michael J. Yomazzo (2)(5)........................... 195,609 1.6
Jeffrey P. Moonan (2)............................... 76,250 *
Walter M. Fiederowicz (2)(6)........................ 26,125 *
Joseph A. Fiorita, Jr. (2).......................... 13,925 *
Robert J. Bollo (2)................................. 7,500 *
Directors and Executive
Officers as a group (seven persons)(7) ............. 3,504,868 28.9
</TABLE>
- --------
* Represents less than 1%.
(1) Except as otherwise indicated, the named person has the sole voting and
investment power with respect to the shares of the Company's Common Stock
set forth opposite such person's name.
(2) Includes shares of Common Stock subject to stock options exercisable as of
May 30, 1997 as follows: Mr. Bollo (7,500); Mr. Fiederowicz (13,725); Mr.
Fiorita (13,725); Mr. Macricostas (145,628); Mr. Yomazzo (56,400); and Mr.
Moonan (65,000).
(3) Includes 17,000 shares held by the wife of Mr. Macricostas, as to which
shares he disclaims beneficial ownership. Also includes 1,140,000 shares
owned by Macricostas Partners, L.P., of which Mr. Macricostas is a limited
partner and 25,309 shares owned by the corporate general partner of such
partnership of which Mr. Macricostas is the President, a director and a
significant shareholder. Mr. Macricostas disclaims beneficial ownership of
those shares not represented by his ownership interests.
(4) Includes 1,590,000 shares owned by Toppan Printing Co., Ltd. of which Mr.
Tagawa is an executive officer and a director, as to which shares Mr.
Tagawa disclaims beneficial ownership.
(5) Also includes 31,000 shares held by the wife of Mr. Yomazzo, as to which
shares he disclaims beneficial ownership.
(6) Includes 6,000 shares owned by the wife of Mr. Fiederowicz and 1,375
shares owned by his children, as to which shares he disclaims beneficial
ownership.
(7) Includes the shares listed in notes (2), (3), (4), (5) and (6) above.
33
<PAGE>
TOPPAN STOCK PURCHASE AGREEMENT
In October 1993, the Company sold 1,590,000 shares of Common Stock to Toppan
Printing in connection with the Company's acquisition of the photomask
manufacturing business of Toppan, a subsidiary of Toppan Printing. Under the
terms of the stock purchase agreement, Toppan Printing may not acquire
additional shares of the Company's Common Stock, if, after such acquisition,
Toppan Printing beneficially will own more than 19% of the Company's
outstanding Common Stock. The Company has granted Toppan Printing certain
demand and piggyback registration rights commencing in 1996 with respect to
shares of Common Stock owned by it. The stock purchase agreement restricts
sales of Common Stock by Toppan Printing until October 1998 and grants to the
Company rights of first refusal with respect to proposed sales to unaffiliated
third parties, with certain exceptions. Such restrictions and rights of first
refusal terminate in October 1998, or earlier if at any time Toppan Printing
owns less than 5% of the Company's Common Stock or if certain other events
occur. Under the stock purchase agreement, the Company is required to use its
best efforts to nominate a director designated by Toppan Printing for as long
as it owns at least 1,500,000 shares of Common Stock and such holdings
represent at least 15% of the outstanding shares of the Company's Common Stock
on a fully diluted basis. The stock purchase agreement also requires Toppan
Printing to vote all voting securities of the Company that it beneficially
owns in favor of each nominee for election to the Board who has been
recommended by the Board. In addition, for a ten-year period, the Company
agreed to pay Toppan Printing annual commissions of from 1% to 2.5% of sales
over $3 million to Texas Instruments. Such commissions amounted to
approximately $560,000 in fiscal 1996.
34
<PAGE>
DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture, to be dated as of May 29,
1997 (the "Indenture"), between the Company and The Chase Manhattan Bank, as
trustee (the "Trustee"), a copy of which is filed as an exhibit to the
Registration Statement. Wherever particular defined terms of the Indenture
(including the Notes) are referred to, such defined terms are incorporated
herein by reference (the Notes and various terms relating to the Notes being
referred to in the Indenture as "Securities"). References in this section to
the "Company" are solely to Photronics, Inc. and not to its subsidiaries. The
following summaries of certain provisions of the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by
reference to, the detailed provisions of the Notes and the Indenture,
including the definitions therein of certain terms. Section references below
are references to sections of the Indenture.
GENERAL
The Notes will be unsecured subordinated obligations of the Company, will be
limited to $103,500,000 aggregate principal amount, and will mature on June 1,
2004. The Notes will bear interest at the rate per annum shown on the front
cover of this Prospectus from the date of issuance, payable semiannually on
June 1 and December 1 of each year, commencing on December 1, 1997. ((S)301)
The Notes will be convertible into Common Stock initially at the conversion
rate stated on the cover page hereof, subject to adjustment upon the
occurrence of certain events described under "--Conversion Rights," at any
time prior to the close of business on the maturity date, unless previously
redeemed or repurchased. ((S)1301)
The Notes are redeemable under the circumstances and at the redemption
prices set forth below under "--Optional Redemption," plus accrued interest to
the Redemption Date. ((S)1101)
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. ((S)302) No service
charge will be made for any registration of transfer or exchange of Notes, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. ((S)305)
CONVERSION RIGHTS
The Holder of any Note will have the right, at the Holder's option, to
convert any portion of the principal amount of a Note that is an integral
multiple of $1,000 into shares of Common Stock at any time prior to the close
of business on the maturity date, unless previously redeemed or repurchased,
at a conversion rate of 17.8771 shares of Common Stock per $1,000 principal
amount of Notes (the "Conversion Rate") (equivalent to a conversion price of
approximately $55.94 per share of Common Stock) (subject to adjustment as
described below). The right to convert a Note called for redemption or
tendered for repurchase will terminate at the close of business on the
Redemption Date or the Repurchase Date for such Note, as the case may be.
((S)1301)
The right of conversion attaching to any Note may be exercised by the Holder
by delivering the Note at the specified office of the Conversion Agent,
accompanied by a duly signed and completed notice of conversion, a copy of
which may be obtained from the Trustee. The conversion date will be the date
on which the Note and the duly signed and completed notice of conversion are
so delivered. As promptly as practicable on or after the conversion date, the
Company will issue and deliver to the Trustee a certificate or certificates
for the number of full shares of Common Stock issuable upon conversion,
together with payment in lieu of any fraction of a share; such certificate
will be sent by the Trustee to the Conversion Agent (if other than the
Trustee) for delivery to the Holder. Such shares of Common Stock issuable upon
conversion of the Notes, in accordance with the provisions of the
35
<PAGE>
Indenture, will be fully paid and nonassessable and will rank pari passu with
the other shares of Common Stock of the Company outstanding from time to time.
Any Note surrendered for conversion during the period from the close of
business on any Regular Record Date next preceding any Interest Payment Date
to the opening of business on such Interest Payment Date (except Notes (or
portions thereof) called for redemption on a Redemption Date or which are
repurchasable on a Repurchase Date occurring, in either case, within such
period) must be accompanied by payment of an amount equal to the interest
payable on such Interest Payment Date on the principal amount of Notes being
surrendered for conversion. The interest so payable on such Interest Payment
Date with respect to any Note (or portion thereof, if applicable) which has
been called for redemption on a Redemption Date, or which may be repurchased
on a Repurchase Date, occurring, in either case, during the period from the
close of business on any Regular Record Date next preceding any Interest
Payment Date to the opening of business on such Interest Payment Date, which
Note (or portions thereof, if applicable) is surrendered for conversion during
such period, shall be paid to the Holder of such Note being converted in an
amount equal to the interest that would have been payable on such Note if such
Note had been converted as of the close of business on such Interest Payment
Date. The interest so payable on such Interest Payment Date in respect of any
Note (or portion thereof, as the case may be) which has not been called for
redemption on a Redemption Date, or is not eligible for repurchase on a
Repurchase Date, occurring, in either case, during the period from the close
of business on any Record Date next preceding any Interest Payment Date to the
opening of business on such Interest Payment Date, which Note (or portion
thereof, as the case may be) is surrendered for conversion during such period,
shall be paid to the Holder of such Note as of such Regular Record Date.
Interest payable in respect of any Note surrendered for conversion or
repurchase on or after an Interest Payment Date shall be paid to the Holder of
such Note as of the next preceding Regular Record Date, notwithstanding the
exercise of the right of conversion or repurchase. As a result of the
foregoing provisions, except as provided above, Holders that surrender Notes
for conversion on a date that is not an Interest Payment Date will not receive
any interest from the Interest Payment Date next preceding the date of
conversion to the date of conversion or for any later period, even if the
Notes are surrendered after a notice of redemption (except for the payment of
interest on Notes called for redemption on a Redemption Date or to be
repurchased on a Repurchase Date between a Regular Record Date and the
Interest Payment Date to which it relates, as provided above). No other
payment or adjustment for interest, or for any dividends in respect of Common
Stock, will be made upon conversion. Holders of Common Stock issued upon
conversion will not be entitled to receive any dividends payable to holders of
Common Stock as of any record time or date before the close of business on the
conversion date. No fractional shares will be issued upon conversion but, in
lieu thereof, the Company will pay an appropriate amount in cash based on the
market price of Common Stock at the close of business on the day of
conversion. ((S)(S)101, 203, 307, 1302 and 1303)
A Holder delivering a Note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of Common Stock on
conversion but will be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue or delivery of the Common Stock
in a name other than that of the Holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the Holder have been paid. ((S)1308)
The Conversion Rate is subject to adjustment in certain events, including,
without duplication: (a) dividends (and other distributions) payable in Common
Stock, (b) the issuance to all holders of Common Stock of rights, options or
warrants entitling them to subscribe for or purchase Common Stock at less than
the then Current Market Price of such Common Stock (determined as provided in
the Indenture) as of the record date for shareholders entitled to receive such
rights, options or warrants, (c) subdivisions, combinations and
reclassifications of Common Stock, (d) distributions to all holders of Common
Stock of evidences of indebtedness of the Company, shares of capital stock, or
other property (including securities, but excluding those dividends, rights,
options, warrants and
36
<PAGE>
distributions referred to above, dividends and distributions paid exclusively
in cash and in mergers and consolidations to which the next succeeding
paragraph applies), (e) distributions consisting exclusively of cash
(excluding any cash portion of distributions referred to in (d) above, or cash
distributed upon a merger or consolidation to which the next succeeding
paragraph applies) to all holders of Common Stock in an aggregate amount that,
combined together with (i) other such all-cash distributions made within the
preceding 12 months in respect of which no adjustment has been made and (ii)
any cash and the fair market value of other consideration payable in respect
of any tender offer by the Company or any of its subsidiaries for Common Stock
concluded within the preceding 12 months in respect of which no adjustment has
been made, exceeds 10% of the Company's market capitalization (being the
product of the then Current Market Price per share of the Common Stock and the
number of shares of Common Stock then outstanding) on the record date for such
distribution, and (f) the successful completion of a tender offer made by the
Company or any of its subsidiaries for Common Stock which involves an
aggregate consideration that, together with (i) any cash and other
consideration payable in a tender offer by the Company or any of its
subsidiaries for Common Stock expiring within the 12 months preceding the
expiration of such tender offer in respect of which no adjustment has been
made and (ii) the aggregate amount of any such all-cash distributions referred
to in (e) above to all holders of Common Stock within the 12 months preceding
the expiration of such tender offer in respect of which no adjustments have
been made, exceeds 10% of the Company's market capitalization on the
expiration of such tender offer. Notwithstanding the foregoing, (i) if the
options, rights or warrants described in clause (b) above are exercisable only
upon the occurrence of certain triggering events, then the Conversion Rate
will not be adjusted until such triggering events occur and (ii) if such
options, rights or warrants expire unexercised, the Conversion Rate will be
readjusted to take into account only the actual number of such options, rights
or warrants which were exercised. The Company reserves the right to make such
increases in the Conversion Rate in addition to those required in the
foregoing provisions as it considers to be advisable in order that any event
treated for federal income tax purposes as a dividend or distribution of stock
or issuance of rights or warrants to purchase or subscribe for stock will not
be taxable to the recipients. No adjustment of the Conversion Rate will be
required to be made until the cumulative adjustments amount to 1% or more of
the Conversion Rate. ((S)1304) The Company shall compute any adjustments to
the Conversion Rate pursuant to this paragraph and will give notice to the
Holders of the Notes of any adjustments. ((S)1305)
In case of any consolidation or merger of the Company with or into another
Person or any merger of another Person into the Company (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of any sale or transfer of all
or substantially all of the assets of the Company, each Note then outstanding
will, without the consent of the Holder of any Note, become convertible only
into the kind and amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer by a holder of the number of
shares of Common Stock into which such Note was convertible immediately prior
thereto (assuming such holder of Common Stock failed to exercise any rights of
election and that such Note was then convertible). ((S)1311)
To the extent permitted by applicable law, the Company from time to time may
increase the Conversion Rate by any amount for any period of time if the
period is at least twenty (20) days, the increase is irrevocable during such
period, and the Board of Directors shall have made a determination that such
increase would be in the best interests of the Company, which determination
shall be conclusive; provided, however, that no such increase shall be taken
into account for purposes of determining whether the Closing Price Per Share
of the Common Stock equals or exceeds 105% of the Conversion Price in
connection with an event which would otherwise be a Change of Control.
Whenever the Conversion Rate is increased pursuant to the preceding sentence,
the Company shall give notice of the increase to the Holders at least fifteen
(15) days prior to the date the increased Conversion Rate takes effect, and
such notice shall state the increased Conversion Rate and the period during
which it will be in effect. ((S)1304)
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<PAGE>
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
United States federal income tax purposes (e.g., distributions of evidences of
indebtedness or assets of the Company, but generally not stock dividends on
Common Stock or rights to subscribe for Common Stock) and, pursuant to the
anti-dilution provisions of the Indenture, the number of shares into which
Notes are convertible is increased, such increase may be deemed for federal
income tax purposes to be the payment of a taxable dividend to Holders of
Notes. See "Certain Federal Income Tax Considerations."
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
will be subordinated in right of payment, to the extent set forth in the
Indenture, to the prior payment in full of the principal of, premium, if any,
interest and other amounts in respect of all Senior Indebtedness of the
Company. As of May 22, 1997, the Company had $17.0 million of Senior
Indebtedness outstanding. At such date, after giving effect to this offering
and the application of proceeds therefrom, the Company would have had $2.0
million of Senior Indebtedness outstanding. Senior Indebtedness is defined in
the Indenture to mean the principal of (and premium, if any) and interest
(including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) on, and all fees and
other amounts payable in connection with, the following, whether absolute or
contingent, secured or unsecured, due or to become due, outstanding on the
date of the Indenture or thereafter created, incurred or assumed: (a)
indebtedness of the Company to banks, insurance companies and other financial
institutions evidenced by credit or loan agreements, notes or other written
obligations, (b) all other indebtedness of the Company (including indebtedness
of others guaranteed by the Company) other than the Notes, whether outstanding
on the date of the Indenture or thereafter created, incurred or assumed, which
is (i) for money borrowed or (ii) evidenced by a note, security, debenture,
bond or similar instrument, (c) obligations of the Company as lessee under
leases required to be capitalized on the balance sheet of the lessee under
generally accepted accounting principles, (d) obligations of the Company under
interest rate and currency swaps, caps, floors, collars or similar agreements
or arrangements, (e) obligations of the Company issued or assumed as the
deferred purchase price of property, (f) obligations of the Company for the
reimbursement of letters of credit to the extent such obligations are Senior
Indebtedness under clauses (a) through (c) of this paragraph, and (g)
renewals, extensions, modifications, restatements and refundings of, and any
amendments, modifications or supplements to, or any indebtedness or obligation
issued in exchange for, any such indebtedness or obligation described in
clauses (a) through (d) of this paragraph; provided, however, that Senior
Indebtedness shall not include any such indebtedness or obligation if the
terms of such indebtedness or obligation (or the terms of the instrument under
which, or pursuant to which, it is issued) expressly provide that such
indebtedness or obligation shall not be senior in right of payment to the
Notes, or expressly provide that such indebtedness or obligation is pari passu
with or junior to the Notes. ((S)(S)101, 1201, 1202 and 1216)
No payment on account of principal, premium, if any, or interest on, the
Notes may be made by the Company if there shall have occurred (i) a default in
the payment of principal, premium, if any, or interest (including a default
under any repurchase or redemption obligation) with respect to any Senior
Indebtedness or (ii) any other event of default with respect to any Senior
Indebtedness, permitting the holders thereof to accelerate the maturity
thereof, and such event of default shall not have been cured or waived or
shall not have ceased to exist after written notice of such event of default
shall have been given to the Company and the Trustee by any holder of Senior
Indebtedness. Upon any acceleration of the principal due on the Notes or
payment or distribution of assets of the Company to creditors upon any
dissolution, winding up, liquidation or reorganization, whether voluntary or
involuntary, or in bankruptcy, insolvency, receivership or other similar
proceedings of the Company, all principal, premium, if any, and interest or
other amounts due on all Senior Indebtedness must be paid in full before the
Holders of the Notes are entitled to receive any payment. By reason of such
subordination,
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in the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness are likely to recover more, ratably, than the Holders of the
Notes, and such subordination may result in a reduction or elimination of
payments to the Holders of the Notes. ((S)(S)1202, 1203 and 1204)
The Company is a holding company with no business operations of its own.
Accordingly, the Notes will be structurally subordinated to all indebtedness
and other liabilities (including trade payables and lease obligations) of the
Company's subsidiaries, as any right of the Company to receive any assets of
its subsidiaries upon their liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's creditors
(including trade creditors), except to the extent that the Company itself is
recognized as a creditor of such subsidiary, in which case the claims of the
Company would still be subordinate to any security interest in the assets of
such subsidiary and any indebtedness of such subsidiary senior to that held by
the Company. As of May 4, 1997, the Company's subsidiaries had an aggregate
outstanding amount of total indebtedness and other liabilities of
approximately $40 million, which amount will remain outstanding after giving
effect to the offering of the Notes and the application of net proceeds
therefrom.
The Indenture does not limit the Company's ability to incur Senior
Indebtedness or any other indebtedness.
OPTIONAL REDEMPTION
The Notes may not be redeemed prior to June 1, 2000. Thereafter, the Notes
may be redeemed, in whole or in part, at the option of the Company, upon not
less than 20 nor more than 60 days' prior notice as provided under "--Notices"
below, at the redemption prices set forth below.
The redemption prices (expressed as a percentage of principal amount) are as
follows for the 12-month period beginning on June 1 of the following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000........................................................... 103.4286%
2001........................................................... 102.5714
2002........................................................... 101.7143
2003........................................................... 100.8571
</TABLE>
and thereafter at a redemption price equal to 100% of the principal amount, in
each case together with accrued interest to the date of redemption. ((S)203,
Article Eleven)
No sinking fund is provided for the Notes.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control (as defined) occurs, each Holder of Notes shall have
the right, at the Holder's option, to require the Company to repurchase all of
such Holder's Notes, or any portion of the principal amount thereof that is
equal to $1,000 or an integral multiple of $1,000 in excess thereof, on the
date (the "Repurchase Date") that is 45 days after the date of the Company
Notice (as defined), at a price equal to 100% of the principal amount of the
Notes to be repurchased, together with interest accrued to the Repurchase Date
(the "Repurchase Price"). ((S)1401)
The Company may, at its option, in lieu of paying the Repurchase Price in
cash, pay the Repurchase Price in Common Stock valued at 95% of the average of
the closing prices of the Common Stock for the five consecutive Trading Days
ending on and including the third Trading Day preceding the Repurchase Date;
provided that payment may not be made in Common Stock unless the Company
satisfies certain conditions with respect to such payment as provided in the
Indenture. ((S)(S)1401 and 1402)
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Within 30 days after the occurrence of a Change of Control, the Company is
obligated to give to all Holders of the Notes notice, as provided in the
Indenture (the "Company Notice"), of the occurrence of such Change of Control
and of the repurchase right arising as a result thereof, or, at the request of
the Company on or before the 15th day after such occurrence, the Trustee shall
give the Company Notice. The Company must also deliver a copy of the Company
Notice to the Trustee and to the office of each Paying Agent. To exercise the
repurchase right, a Holder of Notes must deliver on or before the 30th day
after the date of the Company Notice irrevocable written notice to the Trustee
or Paying Agent of the Holder's exercise of such right, together with the
Notes with respect to which the right is being exercised. ((S)1403)
A Change of Control shall be deemed to have occurred at such time after the
original issuance of the Notes as there shall occur:
(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) of beneficial ownership,
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of transactions, of shares of capital stock of the
Company entitling such Person to exercise 50% or more of the total voting
power of all shares of capital stock of the Company entitled to vote
generally in elections of directors, other than any such acquisition by the
Company, any Subsidiary of the Company or any employee benefit plan of the
Company; or
(ii) any consolidation or merger of the Company with or into any other
Person, any merger of another Person into the Company, or any conveyance,
sale, transfer, or lease of all or substantially all of the assets of the
Company (other than (a) any consolidation or merger (x) which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock, and (y) pursuant to which the holders
of 50% or more of the total voting power of all shares of capital stock of
the Company entitled to vote generally in elections of directors
immediately prior to such transaction have the entitlement to exercise,
directly or indirectly, 50% or more of the total voting power of all shares
of capital stock of the continuing or surviving corporation entitled to
vote generally in elections of directors of the continuing or surviving
corporation immediately after such transaction and (b) a merger which is
effected solely to change the jurisdiction of incorporation of the Company
and results in a reclassification, conversion or exchange of outstanding
shares of Common Stock into solely shares of common stock);
provided, however, that a Change of Control shall not be deemed to have
occurred if (i) the Closing Price Per Share of the Common Stock for any five
Trading Days within the period of 10 consecutive Trading Days ending
immediately after the later of the Change of Control or the public
announcement of the Change of Control (in the case of a Change of Control
under clause (i) above) or ending immediately prior to the date of the Change
of Control (in the case of a Change of Control under clause (ii) above) shall
equal or exceed 105% of the Conversion Price of the Notes in effect on each
such Trading Day or (ii) all of the consideration (excluding cash payments for
fractional shares or cash payments for appraisal rights) in the transaction or
transactions constituting the Change of Control consists of shares of common
stock or securities convertible into common stock that are, or upon issuance
will be traded on a national securities exchange or through The Nasdaq
National Market and as a result of such transaction or transactions the Notes
become convertible solely into such common stock or securities. The
"Conversion Price" is equal to $1,000 divided by the Conversion Rate.
"Beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act, as in effect on the date
of original execution of the Indenture. ((S)1404)
The Company's ability to repurchase Notes upon the occurrence of a Change of
Control is subject to limitations. There can be no assurance that the Company
would have the financial resources, or would be able to arrange financing, to
pay the Repurchase Price for all the Notes that might be delivered by Holders
of Notes seeking to exercise the purchase right. In addition, the Company's
ability
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to purchase Notes may be limited or prohibited by the terms of its Senior
Indebtedness. The Company's ability to purchase Notes with cash may also be
limited by the terms of its subsidiaries' then-existing borrowing arrangements
due to dividend restrictions. Any failure by the Company to repurchase the
Notes when required following a Change of Control could result in an Event of
Default under the Indenture whether or not such repurchase is permitted by the
subordination provisions of the Indenture. Any such default may, in turn,
cause a default under Senior Indebtedness of the Company. Moreover, the
occurrence of a Change of Control may cause an event of default under Senior
Indebtedness of the Company. As a result, in any such case, any repurchase of
the Notes would, absent a waiver, be prohibited under the subordination
provisions of the Indenture until the Senior Indebtedness is paid in full. See
"--Subordination" and "Risk Factors--Subordination."
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to Holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving
the Company that may adversely affect Holders.
MERGERS AND SALES OF ASSETS BY THE COMPANY
The Company may not consolidate with or merge into any other Person or
convey, transfer, or lease its properties and assets substantially as an
entirety to any Person, and the Company may not permit any Person to merge
into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (a) the Person formed by
such consolidation or into which the Company is merged or the Person to which
the properties and assets of the Company are so transferred or leased is a
corporation, limited liability company, partnership or trust organized and
existing under the laws of the United States, any state thereof or the
District of Columbia and has expressly assumed the due and punctual payment of
the principal of, premium, if any, and interest on the Notes and the
performance of the other covenants of the Company under the Indenture and has
provided for conversion rights in accordance with the Indenture, (b)
immediately after giving effect to such transaction, no Event of Default, and
no event which, after notice or lapse of time or both, would become an Event
of Default, shall have occurred and be continuing, and (c) the Company has
provided to the Trustee an Officer's Certificate and Opinion of Counsel if
required by the Indenture. ((S)801)
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal or Redemption Price of any Note when due, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (b)
failure to pay any interest on any Note when due, continuing for 30 days,
whether or not such payment is prohibited by the subordination provisions of
the Indenture; (c) default in the Company's obligation to provide a Company
Notice of a Change in Control; (d) failure to perform any other covenant of
the Company in the Indenture, continuing for 60 days after written notice as
provided in the Indenture; (e) any indebtedness for money borrowed by the
Company in an aggregate principal amount in excess of $15 million is not paid
at final maturity or upon acceleration thereof and such default in payment or
acceleration is not cured or rescinded within 30 days after written notice as
provided in the Indenture; and (f) certain events of bankruptcy, insolvency or
reorganization. ((S)501) Subject to the provisions of the Indenture relating
to the duties of the Trustee in case an Event of Default shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders, unless such Holders shall have offered to the Trustee reasonable
indemnity. ((S)603) Subject to such provisions for the indemnification of the
Trustee, the Holders of a majority in aggregate
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principal amount of the Outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
((S)512)
If an Event of Default (other than an Event of Default specified in clause
(f) above) occurs and is continuing, either the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Outstanding Notes, by
notice in writing to the Company, may declare the principal of all the Notes
to be due and payable immediately, and upon any such declaration such
principal and any accrued interest thereon will become immediately due and
payable. If an Event of Default specified in clause (f) occurs and is
continuing, the principal and any accrued interest on all of the then
Outstanding Notes shall ipso facto become due and payable immediately without
any declaration or other Act on the part of the Trustee or any Holder.
((S)502)
At any time after a declaration of acceleration has been made but before a
judgment or decree based on acceleration, the Holders of a majority in
aggregate principal amount of Outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal and interest have been
cured or waived as provided in the Indenture. ((S)502)
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of a
majority in aggregate principal amount of the Outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. ((S)507) However, such limitations do not apply to
a suit instituted by a Holder of a Note for the enforcement of payment of the
principal of, premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note or of the right to convert such
Note in accordance with the Indenture. ((S)508)
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance. ((S)1004)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made, and certain past
defaults by the Company may be waived, with the written consent of the Holders
of not less than a majority in aggregate principal amount of the Notes at the
time Outstanding. However, no such modification or amendment may, without the
consent of the Holder of each outstanding Note affected thereby, (a) change
the Stated Maturity of the principal of, or any installment of interest on,
any Note, (b) reduce the principal amount of, or the premium, if any, or rate
of interest on, any Note, (c) reduce the amount payable upon redemption or
mandatory repurchase, (d) modify the provisions with respect to the repurchase
right of the Holders in a manner adverse to the Holders, (e) change the place
or currency of payment of principal of, premium, if any, or interest on, any
Note, (f) impair the right to institute suit for the enforcement of any
payment on or with respect to any Note (including any payment of the
Repurchase Price in respect of such Note), (g) modify the obligation of the
Company to maintain an office or agency in New York City, (h) except as
otherwise permitted by the Indenture or contemplated by provisions concerning
consolidation, merger, conveyance, transfer, sale or lease of all or
substantially all of the property and assets of the Company, adversely affect
the right of Holders to convert any of the Notes or to require the Company to
repurchase any Note other than as provided in the Indenture, (i) modify the
subordination provisions in a manner adverse to the Holders of the Notes,
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<PAGE>
(j) reduce the above-stated percentage of Outstanding Notes necessary to
modify or amend the Indenture, or (k) reduce the percentage of aggregate
principal amount of Outstanding Notes necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults.
((S)(S)902 and 513)
The Holders of a majority in aggregate principal amount of the Outstanding
Notes may waive compliance by the Company with certain restrictive provisions
of the Indenture. ((S)1009) The Holders of a majority in aggregate principal
amount of the Outstanding Notes also may waive any past default under the
Indenture, except a default in the payment of principal, premium, if any, or
interest. ((S)513)
TRANSFER AND EXCHANGE
The Company has initially appointed the Trustee as Security Registrar and
transfer agent for the Notes, acting through its Corporate Trust Office in the
City of New York. The Company reserves the right to vary or terminate the
appointment of the Security Registrar or of any transfer agent or to appoint
additional or other transfer agents or to approve any change in the office
through which any security registrar or any transfer agent acts. ((S)(S)305
and 1002)
PURCHASE AND CANCELLATION
The Company or any Subsidiary may at any time and from time to time purchase
Notes at any price in the open market or otherwise.
All Notes surrendered for payment, redemption, repurchase, registration of
transfer or exchange or conversion shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee. All Notes so delivered to the
Trustee shall be canceled promptly by the Trustee. No Notes shall be
authenticated in lieu of or in exchange for any Notes canceled as provided in
the Indenture. All canceled Notes held by the Trustee shall be disposed of in
accordance with the Trustee's normal procedures. ((S)309)
TITLE
The Company and the Trustee may treat the registered owner (as reflected in
the Security Register) of any Note as the absolute owner thereof (whether or
not such Note shall be overdue) for the purpose of making payment and for all
other purposes. ((S)308)
NOTICES
Notice to Holders of the Notes will be given by mail to the addresses of
such Holders as they appear in the Security Register. Such notices will be
deemed to have been given on the date of such mailing. ((S)106)
Notice of a redemption of Notes will be given at least once not less than 20
nor more than 60 days prior to the Redemption Date (which notice shall be
irrevocable) and will specify, among other things, the Redemption Date.
((S)1105)
SATISFACTION AND DISCHARGE
The Company may discharge its payment obligations under the Indenture while
Notes remain outstanding if (a) all outstanding Notes have become due and
payable or will become due and payable at their scheduled maturity within one
year, (b) all outstanding Notes are scheduled for redemption within one year
or (c) all outstanding Notes are delivered to the Trustee for conversion in
accordance with the Indenture and in the case of (a) or (b) above, the Company
has deposited with the Trustee an amount sufficient to pay and discharge the
entire indebtedness on all outstanding Notes on the date of their scheduled
maturity or the scheduled date of redemption. ((S)401)
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REPLACEMENT OF NOTES
Notes that become mutilated, destroyed, stolen or lost will be replaced by
the Company at the expense of the Holder upon delivery to the Trustee of the
mutilated Notes or evidence of the loss, theft or destruction thereof
satisfactory to the Company and the Trustee. In the case of a lost, stolen or
destroyed Note, indemnity satisfactory to the Trustee and the Company may be
required at the expense of the Holder of such Note before a replacement Note
will be issued. ((S) 306)
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York. ((S)112)
THE TRUSTEE
In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee security or indemnity
satisfactory to it. ((S)(S)601 and 603)
BOOK-ENTRY
The Notes will be issued in the form of a global note (the "Global Note")
deposited with, or on behalf of, DTC and registered in the name of Cede & Co.
as DTC's nominee. Owners of beneficial interests in the Notes represented by
the Global Note will hold such interests pursuant to the procedures and
practices of DTC and must exercise any rights in respect of their interests
(including any right to convert or require repurchase of their interests) in
accordance with those procedures and practices. Such beneficial owners will
not be Holders, and will not be entitled to any rights under the Global Note
or the Indenture, with respect to the Global Note, and the Company and the
Trustee, and any of their respective agents, may treat DTC as the sole Holder
and owner of the Global Note.
DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds securities that its
participants deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
direct participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the Securities and Exchange Commission.
Unless and until they are exchanged in whole or in part for certificated
Notes in definitive form as set forth below, the Global Note may not be
transferred except as a whole by DTC to a nominee of DTC, or by a nominee of
DTC to DTC or another nominee of DTC.
The Notes represented by the Global Note will not be exchangeable for
certificated Notes, provided that if DTC is at any time unwilling, unable or
ineligible to continue as depositary, or an Event
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<PAGE>
of Default has occurred and is continuing with respect to the Global Note, the
Company may issue individual Notes in definitive form in exchange for the
Global Note. In the event of such an exchange, an owner of a beneficial
interest in a Global Note will be entitled to physical delivery of Notes in
definitive form equal in principal amount to such beneficial interest and to
have such Notes registered in its name. Individual Notes so issued in
definitive form will be issued in denominations of $1,000 and any larger
amount that is an integral multiple of $1,000 and will be issued in registered
form only, without coupons.
Payments of principal of and interest on the Notes will be made by the
Company through the Trustee to DTC or its nominee, as the case may be, as the
registered owner of the Global Note. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global
Note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. The Company expects that DTC, upon receipt of
any payment of principal or interest in respect of the Global Note, will
credit the accounts of the related participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in the Global Note as shown on the records of DTC. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note will be governed by standing customer instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participants.
So long as the Notes are represented by a Global Note, DTC or its nominee
will be the only entity that can exercise a right to repayment pursuant to the
Holder's option to elect repayment of its Notes or the right of conversion of
the Notes. Notice by participants or by owners of beneficial interests in a
Global Note held through such participants of the exercise of the option to
elect repayment, or the right of conversion, of beneficial interests in Notes
represented by the Global Note must be transmitted to DTC in accordance with
its procedures on a form required by DTC and provided to participants. In
order to ensure that DTC's nominee will timely exercise a right to repayment,
or the right of conversion, with respect to a particular Note, the beneficial
owner of such Notes must instruct the broker or other participant through
which it holds an interest in such Notes to notify DTC of its desire to
exercise a right to repayment, or the right of conversion. Different firms
have different cut-off times for accepting instructions from their customers
and, accordingly, each beneficial owner should consult the broker or other
participant through which it holds an interest in a Note in order to ascertain
the cut-off time by which such an instruction must be given in order for
timely notice to be delivered to DTC. The Company will not be liable for any
delay in delivery of such notice to DTC.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 2,000,000 shares of
preferred stock, $.01 par value, of which no shares are issued and
outstanding, and 20,000,000 shares of Common Stock, $.01 par value per share,
of which 11,874,490 shares are issued and outstanding as of April 1, 1997.
COMMON STOCK
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share on all matters to be voted upon by
stockholders. At a meeting of stockholders at which a quorum is present, a
majority of the votes cast decides all questions, unless the matter is one
upon which, by express provision of the Certificate of Incorporation, the By-
Laws or statute, a different vote is required. There is no cumulative voting
with respect to the election of directors, which means that the holders of a
majority of the shares can elect all the directors if they choose to do so,
and in such event, the holders of the remaining shares would not be able to
elect any directors.
The holders of Common Stock have no preemptive rights, nor are there any
redemption rights provisions with respect to Common Stock. The shares offered
hereby, when issued and paid for, will be fully paid and nonassessable and not
subject to further call or assessment by the Company.
The holders of Common Stock are entitled to such dividends, if any, as may
be declared by the Board of Directors in its discretion out of funds legally
available for the purpose and to participate pro rata in any distribution of
the Company's assets upon liquidation.
The Company has reserved 1,424,720 shares of Common Stock for issuance under
its stock option plans and has reserved 207,199 shares of Common Stock for
issuance under an employee stock purchase plan. See Note 8 of Notes to
Consolidated Financial Statements.
PREFERRED STOCK
The Board of Directors has the authority by resolution to issue up to
2,000,000 shares of Preferred Stock in one or more series and to fix the
number of shares constituting any such series, the voting powers,
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption (including
sinking fund provisions), redemption price or prices, conversion rights and
liquidation preferences of the shares constituting any series, without any
further vote or action by the stockholders. For example, the Board of
Directors is authorized to issue a series of Preferred Stock that would have
the right to vote separately or with any other series of Preferred Stock on
any proposed amendment to the Company's Certificate of Incorporation or any
other proposed corporate action including business combinations and other
transactions. However, the Board of Directors currently does not contemplate
the issuance of any Preferred Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
At April 1, 1997, there were 6,493,591 shares of Common Stock which were not
outstanding or reserved for issuance and 2,000,000 shares of unissued and
undesignated Preferred Stock. These additional shares may be utilized for a
variety of proper corporate purposes, including future public offerings to
raise additional capital or facilitate corporate acquisitions. The Company
does not currently have any plan to issue additional shares of Common Stock or
Preferred Stock (other than shares of Common Stock to be issued upon the
exercise of outstanding options and warrants and other than shares of Common
Stock reserved for issuance under the Company's stock option plans).
One of the effects of the existence of unissued and unreserved Common Stock
and undesignated Preferred Stock may be to enable the Board of Directors to
issue shares to persons friendly to current
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<PAGE>
management, which could render more difficult or discourage an attempt to
obtain control of the Company by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of the Company's
management. The Board of Directors can issue the Preferred Stock without
stockholder approval, with voting and conversion rights which could adversely
affect the voting rights of the common stockholders.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Registrar &
Transfer Company, Cranford, New Jersey.
LISTING
The Common Stock is quoted on The Nasdaq National Market under the symbol
"PLAB."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relating to the purchase, ownership and disposition of the
Notes and of Common Stock into which Notes may be converted, but does not
purport to be a complete analysis of all the potential tax considerations
relating thereto. This summary is based on laws, regulations, rulings and
decisions now in effect, all of which are subject to change. This summary
deals only with holders that are United States persons and that will hold
Notes and Common Stock into which Notes may be converted as "capital assets"
(within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code")) and does not address tax considerations applicable to
investors that may be subject to special tax rules, such as banks, tax-exempt
organizations, insurance companies, dealers in securities or currencies, or
persons that will hold Notes as a position in a hedging transaction,
"straddle" or "conversion transaction" for tax purposes. As used herein, the
term "United States person" means (1) a citizen or resident of the United
States, (2) an entity created or organized in or under the laws of the United
States or any political subdivision thereof that is classified as a
corporation or as a partnership, (3) an estate the income of which is subject
to United States federal income taxation regardless of its source, or (4) a
trust if (i) a U.S. court is able to exercise primary supervision over the
trust's administration and (ii) one or more U.S. fiduciaries have the
authority to control all the trust's substantial decisions. The term "United
States" means the United States of America (including the States and the
District of Columbia). This summary discusses the tax considerations
applicable to the initial purchasers of the Notes who purchase the Notes at
their "issue price" as defined in Section 1273 of the Code and does not
discuss the tax considerations applicable to subsequent purchasers of the
Notes. The summary below does not address the tax consequences resulting upon
a repurchase of the Notes by the Company in exchange for Common Stock upon a
Change of Control. The Company has not sought any ruling from the Internal
Revenue Service (the "IRS") with respect to the statements made and the
conclusions reached in the following summary, and there can be no assurance
that the IRS will agree with such statements and conclusions.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME
AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
PAYMENT OF INTEREST
Interest on a Note generally will be includable in the income of a Holder as
ordinary income at the time such interest is received or accrued, in
accordance with such Holder's method of accounting for United States federal
income tax purposes.
47
<PAGE>
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Upon the sale, exchange or redemption of a Note (excluding conversion), a
Holder generally will recognize capital gain or loss equal to the difference
between (i) the amount of cash proceeds and the fair market value of any
property received on the sale, exchange or redemption (except to the extent
such amount is attributable to accrued interest income not previously included
in income which is taxable as ordinary income) and (ii) such Holder's adjusted
tax basis in the Note. A Holder's adjusted tax basis in a Note generally will
equal the cost of the Note to such Holder. Such capital gain or loss will be
long-term capital gain or loss if the Holder's holding period in the Note is
more than one year at the time of sale, exchange or redemption.
CONVERSION OF THE NOTES
A Holder generally will not recognize any income, gain or loss upon
conversion of a Note into Common Stock except with respect to cash received in
lieu of a fractional share of Common Stock. A Holder's tax basis in the Common
Stock received on conversion of a Note will be the same as such Holder's
adjusted tax basis in the Note at the time of conversion (reduced by any basis
allocable to a fractional share interest), and the holding period for the
Common Stock received on conversion will generally include the holding period
of the Note converted.
Cash received in lieu of a fractional share of Common Stock upon conversion
will be treated as a payment in exchange for the fractional share of Common
Stock. Accordingly, the receipt of cash in lieu of a fractional share of
Common Stock generally will result in capital gain or loss (measured by the
difference between the cash received for the fractional share and the Holder's
adjusted tax basis in the fractional share).
CONSTRUCTIVE DISTRIBUTIONS
If at any time (i) the Company makes a distribution of cash or property to
its stockholders or purchases Common Stock and such distribution or purchase
would be taxable to such stockholders as a dividend for United States federal
income tax purposes (e.g., distributions of evidences of indebtedness or
assets of the Company, but generally not stock dividends or rights to
subscribe for Common Stock) and, pursuant to the antidilution provisions of
the Indenture, the conversion rate of the Notes is increased, or (ii), the
conversion rate of the Notes is increased at the discretion of the Company,
such increase in conversion rate may be deemed to be the receipt of taxable
income by Holders of Notes (pursuant to Section 305 of the Code). Holders of
Notes could therefore be required to report taxable income as a result of an
event pursuant to which they received no cash or property.
DIVIDENDS
Dividends paid on the Common Stock generally will be includable in the
income of a Holder as ordinary income to the extent of the Company's current
or accumulated earnings and profits. Subject to certain limitations, a
corporate taxpayer holding Common Stock that receives dividends thereon
generally will be eligible for a dividends-received deduction equal to 70% of
the dividends received. Under legislation proposed as part of the Clinton
administration's fiscal year 1998 budget proposal, the 70% dividends-received
deduction would be reduced to 50% for dividends paid or accrued more than 30
days after the date of enactment of the legislation.
SALE OF COMMON STOCK
Upon the sale or exchange of Common Stock, a Holder generally will recognize
capital gain or loss equal to the difference between (i) the amount of cash
and the fair market value of any property received upon the sale or exchange
and (ii) such Holder's adjusted tax basis in the Common Stock.
48
<PAGE>
Such capital gain or loss will be long-term if the Holder's holding period in
Common Stock is more than one year at the time of the sale or exchange. A
Holder's basis and holding period in Common Stock received upon conversion of
a Note are determined as discussed above under "--Conversion of the Notes."
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a Note, payments of dividends on
Common Stock, payments of the proceeds of the sale of a Note or Common Stock
to certain noncorporate Holders, and a 31% backup withholding tax may apply to
such payments if the Holder (i) fails to furnish or certify his correct
taxpayer identification number to the payor in the manner required, (ii) is
notified by the IRS that he has failed to report payments of interest and
dividends properly, or (iii) does not otherwise establish his entitlement to
an exemption. Any amounts withheld under the backup withholding rules from a
payment to a Holder will be allowed as a credit against such Holder's United
States federal income tax and may entitle the Holder to a refund, provided
that the required information is furnished to the IRS.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Reid & Priest LLP, New York, New York. Certain legal matters will be passed
upon for the Underwriters by Ropes & Gray, Boston, Massachusetts. Ropes & Gray
will rely on the opinion of Reid & Priest LLP as to matters of New York law.
EXPERTS
The consolidated financial statements as of October 31, 1995 and 1996 and
for each of the three years in the period ended October 31, 1996 included and
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
included and incorporated by reference herein (which reports express an
unqualified opinion and include an explanatory paragraph referring to the 1994
change in accounting for investments and income taxes), and have been so
included and incorporated in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to
the Notes offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Notes, reference is hereby
made to such Registration Statement and to the exhibits and schedules thereto.
The Company is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements, and other
information with the Commission. Such Registration Statement, reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, the Commission maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and other information
statements of the Company and other information regarding registrants that
file electronically with the Commission.
49
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed by the Company with the
Securities and Exchange Commission (the "Commission") (File Number 0-15451)
pursuant to the Exchange Act, are incorporated herein by reference: the
Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1996; all reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act
since the end of the fiscal year covered by the Company's Annual Report on
Form 10-K and the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, dated March 3, 1987, pursuant to
Section 12 of the Exchange Act.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
and to be a part hereof from the respective dates of filing. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
supersedes, to constitute a part of this Prospectus.
The Company will furnish, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the foregoing
documents incorporated herein by reference (other than certain exhibits).
Requests for such documents should be directed to Michael McCarthy, Manager of
Investor Relations, Photronics, Inc., P.O. Box 5226, 15 Secor Road,
Brookfield, Connecticut, 06804, telephone (203) 775-9000.
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PHOTRONICS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheet at October 31, 1995 and 1996 and unaudited at
February 2, 1997......................................................... F-3
Consolidated Statement of Earnings for the years ended October 31, 1994,
1995 and 1996 and the unaudited three months ended January 31, 1996 and
February 2, 1997......................................................... F-5
Consolidated Statement of Shareholders' Equity for the years ended October
31, 1994, 1995 and 1996 and the unaudited three months ended February 2,
1997..................................................................... F-6
Consolidated Statement of Cash Flows for the years ended October 31, 1994,
1995 and 1996 and the unaudited three months ended January 31, 1996 and
February 2, 1997......................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Photronics, Inc.
Jupiter, Florida
We have audited the accompanying consolidated balance sheets of Photronics,
Inc. and subsidiaries at October 31, 1995 and 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended October 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Photronics, Inc.
and its subsidiaries as of October 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for investments and income taxes.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
December 9, 1996
F-2
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
FEBRUARY 2,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 35,644 $ 18,766 $ 7,836
Short-term investments........................... 16,221 7,918 5,104
Accounts receivable (less allowance
for doubtful accounts of $195 in
1995 and $235 in 1996 and 1997, unaudited)...... 17,857 24,750 25,467
Inventories...................................... 6,357 7,992 9,102
Other current assets............................. 3,380 6,154 6,771
-------- -------- --------
Total current assets.......................... 79,459 65,580 54,280
Property, plant and equipment..................... 72,063 123,666 135,243
Intangible assets (less accumulated
amortization of $2,156 in 1995,
$3,256 in 1996 and $3,535 in 1997, unaudited)..... 10,289 9,305 9,026
Investments....................................... 12,329 13,239 10,412
Other assets...................................... 78 113 114
-------- -------- --------
$174,218 $211,903 $209,075
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ FEBRUARY 2,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............ $ 36 $ 38 $ 39
Accounts payable............................. 17,850 34,168 29,949
Accrued salaries and wages................... 5,810 5,561 4,169
Other accrued liabilities.................... 6,110 4,200 3,629
-------- -------- --------
Total current liabilities.................. 29,806 43,967 37,786
Long-term debt................................. 1,809 1,987 2,005
Deferred income taxes.......................... 8,293 7,481 6,596
Other liabilities.............................. 265 2,051 2,015
-------- -------- --------
Total liabilities.......................... 40,173 55,486 48,402
-------- -------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value,
2,000,000 shares authorized, none issued
and outstanding............................. -- -- --
Common stock, $0.01 par value,
20,000,000 shares authorized,
11,758,292 shares issued in 1995,
11,973,290 shares issued in 1996 and
11,983,744 shares issued in 1997
(unaudited)................................. 118 120 120
Additional paid-in capital................... 75,083 77,833 78,084
Retained earnings............................ 52,970 73,973 79,298
Unrealized gains on investments.............. 6,471 4,678 3,230
Treasury stock, 136,500 shares at cost....... (245) (245) (245)
Cumulative foreign currency translation ad-
justment.................................... -- 58 186
Deferred compensation on restricted stock.... (352) -- --
-------- -------- --------
Total shareholders' equity................. 134,045 156,417 160,673
-------- -------- --------
$174,218 $211,903 $209,075
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED
--------------------------- -----------------------
JANUARY 31, FEBRUARY 2,
1994 1995 1996 1996 1997
------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................ $80,696 $125,299 $160,071 $34,668 $40,029
Costs and expenses:
Cost of sales........... 51,204 76,683 98,267 21,252 25,347
Selling, general and
administrative......... 10,517 17,127 21,079 4,585 5,035
Research and
development............ 4,738 7,899 8,460 1,825 2,302
------- -------- -------- ------- -------
Operating income......... 14,237 23,590 32,265 7,006 7,345
Interest income.......... 568 1,627 1,601 575 238
Interest expense......... (75) (141) (160) (36) (36)
Other income, net........ 571 4,766 197 6 1,078
------- -------- -------- ------- -------
Income before income
taxes and cumulative
effect of change in
accounting for income
taxes................... 15,301 29,842 33,903 7,551 8,625
Provision for income
taxes................... 5,202 11,210 12,900 2,900 3,300
------- -------- -------- ------- -------
Income before cumulative
effect of change in
accounting for income
taxes................... 10,099 18,632 21,003 4,651 5,325
Cumulative effect of
change in accounting for
income taxes............ 237 -- -- -- --
------- -------- -------- ------- -------
Net income............... $10,336 $ 18,632 $ 21,003 $ 4,651 $ 5,325
======= ======== ======== ======= =======
Net income per common
share:
Income before cumulative
effect of change in
accounting for income
taxes.................. $ 1.01 $ 1.66 $ 1.74 $ 0.39 $ 0.44
Cumulative effect of
change in accounting
for income taxes....... 0.02 -- -- -- --
------- -------- -------- ------- -------
Net income.............. $ 1.03 $ 1.66 $ 1.74 $ 0.39 $ 0.44
======= ======== ======== ======= =======
Weighted average number
of common shares
outstanding............. 10,062 11,207 12,101 12,058 12,227
======= ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED FEBRUARY 2, 1997 IS
UNAUDITED)
<TABLE>
<CAPTION>
CUMULA-
TIVE
UNREAL- FOREIGN
IZED CURRENCY DEFERRED
ADDI- GAINS TRANS- COMPENSA-
COMMON STOCK TIONAL ON LATION TION ON TOTAL
------------- PAID-IN RETAINED INVEST- TREASURY ADJUST- RESTRICTED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS MENTS STOCK MENT STOCK EQUITY
------ ------ ------- -------- ------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1,
1993................... 6,484 $ 65 $38,804 $24,002 $ -- $(245) $ -- $ -- $ 62,626
Net income............. -- -- -- 10,336 -- -- -- -- 10,336
Sale of common stock
through employee stock
option and
purchase plans........ 124 1 1,478 -- -- -- -- -- 1,479
Restricted stock
awards................ 52 1 1,056 -- -- -- -- (1,057) --
Amortization of
restricted stock to
compensation expense.. -- -- -- -- -- -- -- 353 353
Cumulative effect of
change in accounting
for investments....... -- -- -- -- 5,608 -- -- -- 5,608
------ ---- ------- ------- ------ ----- ---- ------ --------
Balance at October 31,
1994................... 6,660 67 41,338 34,338 5,608 (245) -- (704) 80,402
Net income............. -- -- -- 18,632 -- -- -- -- 18,632
Sale of common stock in
connection with public
offering.............. 1,500 15 29,336 -- -- -- -- -- 29,351
Issuance of common
stock related
to acquisition........ 98 1 2,399 -- -- -- -- -- 2,400
Sale of common stock
through warrants and
employee stock option
and purchase plans.... 170 2 2,043 -- -- -- -- -- 2,045
Amortization of
restricted stock to
compensation expense.. -- -- -- -- -- -- -- 352 352
Change in unrealized
gains on investments.. -- -- -- -- 863 -- -- -- 863
Three-for-two stock
split................. 3,330 33 (33) -- -- -- -- -- --
------ ---- ------- ------- ------ ----- ---- ------ --------
Balance at October 31,
1995................... 11,758 118 75,083 52,970 6,471 (245) -- (352) 134,045
Net income............. -- -- -- 21,003 -- -- -- -- 21,003
Sale of common stock
through employee stock
option and
purchase plans........ 215 2 2,750 -- -- -- -- -- 2,752
Foreign currency
translation
adjustment............ -- -- -- -- -- -- 58 -- 58
Amortization of
restricted stock to
compensation expense.. -- -- -- -- -- -- -- 352 352
Change in unrealized
gains on investments.. -- -- -- -- (1,793) -- -- -- (1,793)
------ ---- ------- ------- ------ ----- ---- ------ --------
Balance at October 31,
1996................... 11,973 120 77,833 73,973 4,678 (245) 58 -- 156,417
Net income............. -- -- -- 5,325 -- -- -- -- 5,325
Sale of common stock
through employee stock
option and
purchase plans........ 11 -- 251 -- -- -- -- -- 251
Foreign currency
translation
adjustment............ -- -- -- -- -- -- 128 -- 128
Change in unrealized
gains on investments.. -- -- -- -- (1,448) -- -- -- (1,448)
------ ---- ------- ------- ------ ----- ---- ------ --------
Balance at February 2,
1997 (unaudited)....... 11,984 $120 $78,084 $79,298 $3,230 $(245) $186 $ -- $160,673
====== ==== ======= ======= ====== ===== ==== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
YEAR ENDED OCTOBER 31,
------------------------- JANUARY 31, FEBRUARY 2,
1994 1995 1996 1996 1997
------- ------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................. $10,336 $18,632 $21,003 $ 4,651 $ 5,325
Adjustments to reconcile net
income to net
cash provided by operating
activities:
Depreciation and amortiza-
tion of
property, plant and equip-
ment...................... 7,953 8,747 12,120 2,569 4,243
Amortization of intangible
assets.................... 694 1,039 1,100 266 247
Gain on disposition of in-
vestments................. (831) (5,110) -- -- (1,060)
Deferred income taxes...... 847 (842) 1,000 94 185
Cumulative effect of change
in accounting for income
taxes..................... (237) -- -- -- --
Research and development
expense from acquisition.. -- 1,484 -- -- --
Other...................... 403 377 626 39 27
Changes in assets and lia-
bilities, net of
effects of acquisitions:
Accounts receivable....... (372) (7,639) (6,893) 291 (717)
Inventories............... 437 (2,922) (1,228) 34 (1,110)
Other current assets...... (533) 199 (3,260) (318) (617)
Accounts payable and
accrued liabilities...... 2,305 19,587 14,159 (1,702) (6,218)
------- ------- ------- ------- -------
Net cash provided by
operating activities........ 21,002 33,552 38,627 5,924 305
Cash flows from investing ------- ------- ------- ------- -------
activities:
Acquisitions of and invest-
ment in
photomask operations...... -- (10,536) (12,397) (4,900) --
Deposits on and purchases
of property,
plant and equipment....... (6,187) (35,547) (55,762) (9,629) (15,730)
Net change in short-term
investments............... 961 (13,686) 8,303 11,026 2,814
Proceeds from sale of in-
vestments................. 615 5,750 -- -- 1,369
Other...................... (269) 90 1,635 4 70
------- ------- ------- ------- -------
Net cash used in investing
activities.................. (4,880) (53,929) (58,221) (3,499) (11,477)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Repayment of long-term
debt...................... (735) (467) (36) (9) (9)
Proceeds from issuance of 1,479 31,396 2,752 786 251
common stock.............. ------- ------- ------- ------- -------
Net cash provided by 744 30,929 2,716 777 242
financing activities........ ------- ------- ------- ------- -------
Net increase (decrease) in
cash and
cash equivalents........... 16,866 10,552 (16,878) 3,202 (10,930)
Cash and cash equivalents at 8,226 25,092 35,644 35,644 18,766
beginning of period........ ------- ------- ------- ------- -------
Cash and cash equivalents at $25,092 $35,644 $18,766 $38,846 $ 7,836
end of period.............. ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1996 AND FEBRUARY 2, 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Photronics, Inc. and its subsidiaries. All significant intercompany balances
and transactions have been eliminated. Certain amounts in the consolidated
financial statements for periods prior to October 31, 1996 have been
reclassified to conform to the current presentation. The Company has adopted a
fiscal year ending on the Sunday closest to October 31, beginning with the
current fiscal year.
FOREIGN CURRENCY TRANSLATION
The Company's subsidiaries in Europe and Singapore maintain their accounts
in their respective local currencies. Assets and liabilities of such
subsidiaries are translated to U.S. dollars at period-end exchange rates.
Income and expenses are translated at average rates of exchange prevailing
during the period. Foreign currency translation adjustments are accumulated in
a separate component of shareholders' equity. The effects of changes in
exchange rates on foreign currency transactions are included in income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less. The carrying
values approximate fair value based on the short maturity of the instruments.
INVESTMENTS
The Company's debt and equity investments available for sale are carried at
fair value. Prior to 1994, such investments were carried at cost. Short-term
investments include a diversified portfolio of high quality marketable
securities which will be liquidated as needed to meet the Company's current
cash requirements. All other investments are classified as non-current assets.
Unrealized gains and losses, net of tax, are reported as a separate component
of shareholders' equity. Gains and losses are included in income when
realized, determined based on the disposition of specifically identified
investments.
INVENTORIES
Inventories, principally raw materials, are stated at the lower of cost,
determined under the first-in, first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
depreciation. Repairs and maintenance as well as renewals and replacements of
a routine nature are charged to operations as incurred, while those which
improve or extend the lives of existing assets are capitalized. Upon sale or
other disposition, the cost of the asset and accumulated depreciation are
eliminated from the accounts, and any resulting gain or loss is reflected in
income.
F-8
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For financial reporting purposes, depreciation and amortization are computed
on the straight-line method over the estimated useful lives of the related
assets. Buildings and improvements are depreciated over 15 to 40 years,
machinery and equipment over 3 to 10 years and furniture, fixtures and office
equipment over 3 to 5 years. Leasehold improvements are amortized over the
life of the lease or the estimated useful life of the improvement, whichever
is less. For income tax purposes, depreciation is computed using various
accelerated methods and, in some cases, different useful lives than those used
for financial reporting.
INTANGIBLE ASSETS
Intangible assets include goodwill which represents the excess of cost over
fair value of assets acquired and is being amortized on a straight-line basis
over fifteen to twenty years. Costs allocated to sales, non-compete and
technology agreements arising from business acquisitions and other intangible
assets are being amortized on a straight-line basis over the respective
agreement periods ranging from three to ten years. The future economic benefit
of the carrying value of intangible assets is reviewed periodically and any
diminution in useful life or impairment in value based on future anticipated
cash flows would be recorded in the period so determined.
INCOME TAXES
The provision for income taxes is computed on the basis of consolidated
financial statement income. Deferred income taxes reflect the tax effects of
differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax purposes. The Company
adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes," effective November 1, 1993. The cumulative
effect of adopting SFAS 109 was an increase in income of $237, or $0.02 per
share, for fiscal 1994.
NET INCOME PER COMMON SHARE
Net income per common and common equivalent share is calculated using the
weighted average number of common and common equivalent shares outstanding
during each year. When dilutive, stock options and stock purchase warrants are
included as common equivalent shares using the treasury stock method.
STOCK OPTIONS
The Company records stock option awards in accordance with the provisions of
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," which the Company will be required to adopt in
fiscal 1997. Under SFAS 123, companies can elect, but are not required, to
recognize compensation expense for all stock-based awards, using a fair value
methodology. The Company does not believe that adoption of SFAS 123 will have
a material effect on its financial statements.
F-9
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--INVESTMENTS
Short-term investments consist principally of municipal bonds, commercial
paper, and money market and bond funds. The estimated fair value of short-term
investments, based upon current yields of like securities, approximates cost,
resulting in no significant unrealized gains or losses. Short-term investments
at October 31, 1996, mature by their terms, as follows:
<TABLE>
<S> <C>
Due within one year............................................... $4,113
Due after one year, but within three years........................ 3,276
Due after three years............................................. 529
------
$7,918
======
</TABLE>
Other investments consist of available-for-sale equity securities of
publicly traded technology companies and a minority interest in a photomask
manufacturer in Korea. The fair values of available-for-sale investments are
based upon quoted market prices. The Company is a supplier to one of the
investee companies. The estimated fair value of the non-available-for-sale
investment is based upon the financial condition and the operating results and
projections of the investee and is considered to approximate cost. Unrealized
gains on investments were determined as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
FEBRUARY 2,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Fair value................................... $ 12,329 $ 13,239 $ 10,412
Cost......................................... 1,075 5,104 4,794
-------- -------- --------
11,254 8,135 5,618
Less deferred income taxes................... 4,783 3,457 2,388
-------- -------- --------
Net unrealized gains......................... $ 6,471 $ 4,678 $ 3,230
======== ======== ========
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<CAPTION>
OCTOBER 31,
-----------------
FEBRUARY 2,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................... $ 2,200 $ 2,735 2,735
Buildings and improvements.................... 13,305 20,665 20,665
Machinery and equipment....................... 89,269 141,430 156,124
Leasehold improvements........................ 7,213 9,703 10,450
Furniture, fixtures and office equipment...... 993 1,873 1,906
-------- -------- --------
112,980 176,406 191,880
Less accumulated depreciation and
amortization.................................. 40,917 52,740 56,637
-------- -------- --------
Property, plant and equipment................. $ 72,063 $123,666 $135,243
======== ======== ========
</TABLE>
F-10
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------
FEBRUARY 2,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Acquisition indebtedness payable December 1,
1998,
net of interest of $450 at October 31, 1995,
$234 at
October 31, 1996, and $206 at February 2, 1997
(unaudited) imputed at 7.45% per annum......... $1,350 $1,566 $1,594
Industrial development mortgage note, secured by
building, with interest at 6.58% per annum,
payable 495 459 450
through November 2005.......................... ------ ------ ------
1,845 2,025 2,044
Less current portion............................. 36 38 39
------ ------ ------
Long-term debt................................... $1,809 $1,987 $2,005
====== ====== ======
</TABLE>
Long-term debt as of October 31, 1996 matures as follows: 1998-$41; 1999-
$1,610; 2000-$46; 2001-$50; years after 2001-$240. The fair value of long-term
debt not yet substantively extinguished is estimated based on the current
rates offered to the Company and is not significantly different from carrying
value.
In March 1995, the Company entered into an unsecured revolving credit
facility that provides for borrowings of up to $10 million per year in each of
the following three years, subject to a carryover in the second and third year
of up to the lesser of $3 million and the amount of borrowing capacity not
used in the prior years. The Company is charged a commitment fee on the
average unused amount of the available credit and is subject to compliance
with and maintenance of certain financial covenants and ratios. At February 2,
1997, the Company had not borrowed any amounts under this agreement; however,
the Company borrowed $15.0 million subsequent to February 2, 1997.
Cash paid for interest was $75, $38 and $48 in 1994, 1995 and 1996,
respectively, and $8 and $7 for the three months ended January 31, 1996 and
February 2, 1997, respectively.
NOTE 5--SHAREHOLDERS' EQUITY
In January 1995, the Company's Board of Directors authorized a three-for-two
stock split effected in the form of a stock dividend payable to shareholders
of record as of March 20, 1995. The stock split resulted in the issuance of
3.3 million additional shares of common stock. All applicable share and per
share amounts included in the financial statements reflect the stock split. On
March 16, 1995, the shareholders approved an amendment to the Company's
Certificate of Incorporation increasing the number of common shares, $0.01 par
value, which the Company is authorized to issue from 10 million to 20 million
shares.
In connection with a public offering, in April and May 1995, the Company
issued 1,500,000 new shares of common stock at a price of $21.00 per share
($19.85 per share after underwriting discounts), 40,000 shares of common stock
due to the exercise of stock options at prices ranging from $1.83 to $3.17 per
share and 7,500 additional shares of common stock resulting from the exercise
of a warrant at $5.24 per share. The proceeds, net of costs of the issue,
amounted to $29.6 million.
F-11
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In June 1995, the Company issued 98,559 shares of common stock in connection
with the acquisition of Microphase Laboratories, Inc. (see Note 6).
NOTE 6--ACQUISITIONS
EUROPEAN PHOTOMASK OPERATIONS
In January 1996, the Company acquired the photomask manufacturing operations
and assets of Plessey Semiconductors Limited ("Plessey") located in Oldham,
United Kingdom, for $4.9 million in cash. In connection with the transaction,
the Company leased the facilities from Plessey previously utilized by them for
the manufacture of photomasks. The acquisition was accounted for as a purchase
and, accordingly, the acquisition price was allocated to property and
equipment based on relative fair value.
In April 1996, the Company, through its majority-owned subsidiary, acquired
the photomask manufacturing operations and assets of the Litomask Division
("Litomask") of Centre Suisse d'Electronique et de Microtechnique S.A.
("CSEM") located in Neuchatel, Switzerland for $3.4 million in cash. CSEM
holds the remaining interest in this subsidiary and the Company has an option
to acquire CSEM's interest within a two-year period. In connection with the
transaction, the Company leased the facilities and retained certain services
from CSEM previously utilized by Litomask. The acquisition was accounted for
as a purchase and, accordingly, the acquisition price was allocated to
property and equipment based on relative fair value.
The consolidated statement of earnings includes the results of European
photomask operations beginning on the effective date of the respective
acquisition. Such results were not material to the Company.
HOYA MICRO MASK, INC.
In December 1994, the Company acquired certain assets held by Hoya Micro
Mask, Inc. ("Micro Mask"), an independent photomask manufacturer with
manufacturing operations located in Sunnyvale, California. The transaction
included the purchase of the land, buildings, inventory and certain assets
other than cash and receivables. In addition, significant manufacturing
systems owned by Micro Mask were leased by the Company from Micro Mask. The
acquisition was financed through the payment of approximately $10.2 million in
cash and the obligation to pay $1.8 million, without interest, four years
after the closing. The operating lease of the significant manufacturing
systems has a term ranging from 44 to 62 months and includes the right to
purchase the systems at fair market value at the end of the lease. The
acquisition was accounted for as a purchase and, accordingly, the acquisition
price was allocated to property, plant and equipment as well as certain
intangible assets based on relative fair value. The excess of purchase price
over the fair value of assets acquired is being amortized over 20 years. The
consolidated statement of earnings includes the results of Micro Mask's
operations from December 1, 1994, the effective date of the acquisition. The
consolidated results of the Company's operations on a proforma basis
(unaudited) for the year ended October 31, 1994, as though the purchase had
been made as of the beginning of the year, would have reflected sales of
approximately $106 million and net income of approximately $11 million, or
$1.10 per common share. The proforma results of operations are not necessarily
indicative of the actual operating results that would have occurred had the
transactions been consummated at the beginning of the year, or of the future
combined operating results.
F-12
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MICROPHASE LABORATORIES, INC.
In June 1995, the Company acquired the manufacturing operations and assets,
exclusive of cash and accounts receivable, of Microphase Laboratories, Inc.
("Microphase"), an independent photomask manufacturer located in Colorado
Springs, Colorado, in exchange for 98,559 shares of common stock of the
Company valued at $2.4 million. The acquisition was accounted for as a
purchase. Of the total purchase price, $1.5 million was allocated to
Microphase's research and development projects and, accordingly, was charged
to research and development expenses. The consolidated statement of earnings
includes the results of the Microphase operations beginning June 20, 1995, the
effective date of the acquisition. Such results were not material to the
Company.
NOTE 7--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
<S> 1994 1995 1996
------ ------- -------
<C> <C> <C>
Current:
Federal................................................ $3,722 $10,234 $ 9,905
State.................................................. 633 1,818 1,908
Foreign................................................ -- -- 87
------ ------- -------
4,355 12,052 11,900
------ ------- -------
Deferred:
Federal................................................ 832 (617) 918
State.................................................. 15 (225) 82
------ ------- -------
847 (842) 1,000
------ ------- -------
$5,202 $11,210 $12,900
====== ======= =======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal income tax rate to income before taxes as a result
of the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
<S> 1994 1995 1996
------ ------- -------
<C> <C> <C>
U.S. Federal income tax at statutory rate............. $5,255 $10,445 $11,866
State income taxes, net of Federal benefit............ 428 1,035 1,294
Tax benefits of tax exempt income..................... (168) (389) (302)
Foreign tax rate differential......................... -- -- (291)
Other, net............................................ (313) 119 333
------ ------- -------
$5,202 $11,210 $12,900
====== ======= =======
</TABLE>
F-13
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's net deferred tax liability consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Deferred income tax liabilities:
Property, plant and equipment.................................. $3,761 $3,876
Investments.................................................... 4,783 3,457
Other.......................................................... 31 454
------ ------
Total deferred tax liability................................. 8,575 7,787
------ ------
Deferred income tax assets:
Reserves not currently deductible.............................. 1,528 1,226
Other.......................................................... 643 483
------ ------
Total deferred tax asset..................................... 2,171 1,709
------ ------
Net deferred tax liability....................................... $6,404 $6,078
====== ======
</TABLE>
Cash paid for income taxes was $3.7 million, $11.6 million and $13.0 million
in 1994, 1995 and 1996, respectively, and $0.7 million and $0.2 million for
the three months ended January 31, 1996 and February 2, 1997, respectively.
NOTE 8--EMPLOYEE STOCK OPTION AND PURCHASE PLANS
In March 1996, the shareholders approved the adoption of the 1996 Stock
Option Plan which includes provisions allowing for the award of qualified and
non-qualified stock options and the granting of restricted stock awards. A
total of 600,000 shares of common stock may be issued pursuant to options or
restricted stock awards granted under the Plan. Restricted stock awards do not
require the payment of any cash consideration by the recipient, but shares
subject to an award may be forfeited unless conditions specified in the grant
are satisfied.
The Company has adopted a series of other stock option plans under which
incentive and non-qualified stock options and restricted stock awards for a
total of 1,800,000 shares of the Company's common stock may be granted to
employees and directors. All plans provide that the exercise price may not be
less than the fair market value of the common stock at the date the options
are granted and limit the maximum term of options granted to a range of from
five to ten years.
F-14
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes stock option activity under the plans:
<TABLE>
<CAPTION>
STOCK EXERCISE
OPTIONS PRICES
--------- ------------
<S> <C> <C>
Balance at November 1, 1993.......................... 964,242 $ 1.83- 8.67
Granted............................................. 249,150 10.17-14.83
Exercised........................................... (166,017) 1.83- 8.67
Canceled............................................ (124,613) 6.17-13.42
--------- ------------
Balance at October 31, 1994.......................... 922,762 1.83-14.83
Granted............................................. 241,640 18.67-27.38
Exercised........................................... (145,273) 1.83-13.42
Canceled............................................ (39,189) 6.17-24.00
--------- ------------
Balance at October 31, 1995.......................... 979,940 1.83-27.38
Granted............................................. 482,050 21.50-25.00
Exercised........................................... (184,431) 1.83-27.38
Canceled............................................ (85,796) 6.17-27.38
--------- ------------
Balance at October 31, 1996.......................... 1,191,763 $ 3.17-27.38
</TABLE>
At October 31, 1996, 270,657 shares were available for grant and 471,296
shares were exercisable.
In 1994, restricted stock awards representing a total of 78,750 shares were
awarded to certain key employees. The market value of the grant amounted to
$1.1 million at the date of grant and was charged to "Deferred Compensation on
Restricted Stock", a component of shareholders' equity. Such amount was
amortized as compensation expense over the three-year period during which the
shares under these awards were subject to forfeiture.
In 1992, the shareholders approved the Company's adoption of an Employee
Stock Purchase Plan (the "Purchase Plan"), under which 300,000 shares of
common stock are reserved for issuance. The Purchase Plan enables eligible
employees to subscribe, through payroll deductions, to purchase shares of the
Company's common stock at a purchase price equal to 85% of the lower of the
fair market value on the commencement date of the offering and the last day of
the payroll payment period. At October 31, 1996, 92,801 shares had been issued
and 32,968 shares were subject to outstanding subscriptions under the Purchase
Plan.
NOTE 9--EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Savings and Profit-Sharing Plan (the "Plan")
which covers all domestic employees who have completed six months of service
and are eighteen years of age or older. Under the terms of the Plan, an
employee may contribute up to 15% of their compensation 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 $0.3 million in
1994 and $0.5 million in 1995 and 1996.
F-15
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company maintains a cafeteria plan to provide eligible domestic
employees with the option to receive non-taxable medical, dental, disability
and life insurance benefits. The cafeteria plan is offered to all active full-
time employees and their qualifying dependents. The Company's contribution
amounted to $1.2 million in 1994, $1.4 million in 1995 and $1.8 million in
1996.
The Company's foreign subsidiaries maintain benefit plans for their
employees which vary by country. The obligations and cost of these plans are
not significant to the Company.
NOTE 10--LEASES
The Company leases various real estate and equipment under non-cancelable
operating leases. Rental expense under such leases amounted to $2.0 million in
1994, $4.9 million in 1995 and $5.6 million in 1996. Included in such amounts
were $0.1 million in each year to affiliated entities, which are owned, in
part, by a significant shareholder of the Company.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms in excess of one year amounted to $11.4 million at
October 31, 1996, as follows:
<TABLE>
<S> <C>
1997.................... $3,979
1998.................... 3,611
1999.................... 2,167
</TABLE>
<TABLE>
<S> <C>
2000.................... $980
2001.................... 350
Thereafter.............. 312
</TABLE>
Included in such future lease payments are amounts to affiliated entities of
$0.1 million in each year from 1997 to 2000, and $0.3 million in years
thereafter.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The Company and a significant shareholder have jointly guaranteed a loan
totaling approximately $0.5 million as of October 31, 1996, on certain real
estate which is being leased by the Company. The Company is subject to certain
financial covenants in connection with the guarantee.
As of October 31, 1996 and February 2, 1997, the Company had capital
expenditure purchase commitments outstanding of approximately $54 million and
$62 million, respectively.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions, including collectibility of accounts receivable, and
depreciable lives and recoverability of property, plant, equipment and
intangible assets. Actual results may differ from such estimates.
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables 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. Historically, the Company has not
incurred any significant credit related losses.
F-16
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 12--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1995:
Net sales......................... $26,176 $30,037 $32,854 $36,232 $125,299
Gross profit...................... 9,759 11,615 12,839 14,403 48,616
Net income........................ $ 3,267 $ 3,820 $ 6,460(b) $ 5,085 $ 18,632
Net income per share(a)........... $ 0.32 $ 0.36 $ 0.54(b) $ 0.42 $ 1.66
1996:
Net sales......................... $34,668 $40,514 $42,677 $42,212 $160,071
Gross profit...................... 13,416 15,703 16,428 16,257 61,804
Net income........................ $ 4,651 $ 5,267 $ 5,513 $ 5,572 $ 21,003
Net income per share (a).......... $ 0.39 $ 0.44 $ 0.46 $ 0.46 $ 1.74
</TABLE>
- --------
(a) Quarterly per share data may not equal the annual amounts due to changes
in weighted average shares and share equivalents outstanding.
(b) Includes a net gain from the sale of equity investments of $2.9 million,
or $0.24 per share, after tax, and a non-recurring charge related to the
acquisition of Microphase Laboratories, Inc. of $0.9 million, or $0.08 per
share, after tax.
NOTE 13--SEGMENT INFORMATION
The Company operates in a single industry segment as a manufacturer of
photomasks, which are high precision quartz plates containing microscopic
images of electronic circuits for use in the fabrication of semiconductors. In
addition to its manufacturing facilities in the United States, the Company has
operations in the United Kingdom, Switzerland and Singapore. Prior to 1996,
the Company had no operations outside of the United States. The Company's net
sales and operating profit for the year ended October 31, 1996 and
identifiable assets at October 31, 1996, by geographic area were as follows:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
SALES INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
United States............................... $153,227 $32,660 $181,255
Europe and Asia............................. 6,844 (395) 30,648
-------- ------- --------
$160,071 $32,265 $211,903
======== ======= ========
</TABLE>
Approximately 14% of net domestic sales in 1996 were for delivery outside of
the United States (11% in 1995 and 13% in 1994).
The Company's largest single customer represented approximately 36% of total
net sales in 1994, 32% in 1995, 26% in 1996 and 23% in the three months ended
February 2, 1997.
F-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to each of the Underwriters named below, and
each of such Underwriters has severally agreed to purchase, the respective
principal amounts of the Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
----------- -----------
<S> <C>
Goldman, Sachs & Co. ........................................... $60,000,000
Robertson, Stephens & Company LLC............................... 15,000,000
Smith Barney Inc. .............................................. 15,000,000
-----------
Total........................................................ $90,000,000
===========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Notes, if any are
taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of 1.95% of the principal amount of the Notes. The Underwriters may
allow, and such dealers may reallow, a concession not to exceed .10% of the
principal amount of the Notes to certain brokers and dealers. After the Notes
are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of
$13,500,000 additional principal amount of Notes solely to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the principal amount
of the Notes to be purchased by each of them, as shown in the foregoing table,
bears to the aggregate principal amount of the Notes offered hereby.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that they intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Notes.
The Company has also agreed that it will not offer to sell, contract to sell
or otherwise dispose of any Common Stock (other than upon conversion of the
Notes), any securities substantially similar to the Notes or the Common Stock
or any security exchangeable or exercisable for or convertible into Common
Stock or substantially similar securities (any such security, a "Covered
Security"), without the prior consent of Goldman, Sachs & Co., for a period of
90 days after the date of this Prospectus, except pursuant to the Company's
stock option or purchase plans existing as of the date of this Prospectus or
other options granted by the Company to employees. Certain directors and
executive officers of the Company have also agreed, subject to certain
exceptions, that they will not offer to sell, sell or otherwise dispose of
shares of Common Stock beneficially owned by them without the prior written
consent of Goldman, Sachs & Co. until the earlier of the 90th day after the
date of this Prospectus.
In connection with the Offering, the Underwriters may purchase and sell the
Notes and Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions, "passive" market making and
purchases to cover syndicate short positions created in connection with the
Offering. Stabilizing transactions consist of certain bids or purchases for
the purpose of preventing
U-1
<PAGE>
or retarding a decline in the market price of the Notes; and syndicate short
positions involve the sale by the Underwriters of a greater number of Notes
than they are required to purchase from the Company in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the Notes
sold in the Offering for their account may be reclaimed by the syndicate if
such Notes are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Notes and the Common Stock, which may be higher than the
price that might otherwise prevail in the open market; and these activities,
if commenced, may be discontinued at any time. These transactions may be
effected on the Nasdaq National Market (with respect to the Common Stock), in
the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, Underwriters or prospective
Underwriters that are market makers ("passive market makers") in the Common
Stock may make bids for or purchases of shares of Common Stock in The Nasdaq
National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (1) a passive
market maker's net daily purchases of the Common Stock may not exceed 30% of
its average daily trading volume in such securities for the two full
consecutive calendar months (or any 60 consecutive days ending within the 10
days) immediately preceding the filing date of the registration statement of
which this Prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the Common Stock at a price that exceeds the
highest independent bid for shares of Common Stock by persons who are not
passive market makers and (3) bids made by passive market makers must be
identified as such.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
[PHOTO OF GLOBAL MANUFACTURING NETWORK MAP APPEARS HERE]
Demand for photomasks is drive both by semiconductor design activity and
increase in complexity of intergrated circuits. As the complexity of intergrated
circuits has increased, the number of photomasks used in the manufacture of a
single circuit has also increased.
[CHART OF INCREASED HIGH-END COMPLEXITY APPEARS HERE]
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTA-TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-UNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Selected Consolidated Financial Data...................................... 15
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 16
Business.................................................................. 24
Management................................................................ 31
Principal Shareholders.................................................... 33
Description of Notes...................................................... 35
Description of Capital Stock.............................................. 46
Certain Federal Income Tax Considerations................................. 47
Legal Matters............................................................. 49
Experts................................................................... 49
Available Information..................................................... 49
Incorporation of Certain Documents by Reference........................... 50
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
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$90,000,000
PHOTRONICS, INC.
6.00% CONVERTIBLE SUBORDINATED NOTES
DUE JUNE 1, 2004
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[LOGO OF PHOTRONICS, INC.]
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GOLDMAN, SACHS & CO.
ROBERTSON, STEPHENS &
COMPANY
SMITH BARNEY INC.
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