Item 9A. Controls and Procedures
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2020. We have established and currently maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on an evaluation of our disclosure controls and procedures as of October 31, 2020, and due to a material weakness in our internal control (see discussion below), our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective.
Notwithstanding this material weakness, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the internal control over financial reporting based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of October 31, 2020, based on the criteria set forth by the COSO. Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was not effective as of October 31, 2020, due to the material weakness in our internal control over financial reporting relating to the accuracy and completeness of information used in the monitoring compliance with covenants stipulated by the Company’s debt agreements. The Company has instituted new processes to ensure compliance with covenants in all material agreements.
The Company's independent registered public accounting firm, Deloitte & Touche LLP, has audited the effectiveness of the Company's internal control over financial reporting as of October 31, 2020, as stated in their report on page 72 of this Form 10-K.
Changes in Internal Control over Financial Reporting
Other than the material weakness discussed above, there have been no other changes in our internal control over financial reporting during the fiscal quarter ended October 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Photronics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Photronics, Inc. and subsidiaries (the “Company”) as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO .
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended October 31, 2020, of the Company and our report dated January 14, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: the Company did not properly design and operate adequate internal control over accuracy and completeness of information used in the monitoring compliance with covenants stipulated by the Company’s debt agreements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended October 31, 2020, of the Company, and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
January 14, 2021
ITEM 9B.
OTHER INFORMATION
None.
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information as to Directors required by Items 401, 405 and 407(c)(3)(d)(4) and (d)(5) of Regulation S-K is set forth in our 2021 Definitive Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Exchange Act within 120 days after the end of the fiscal year covered by this Form 10-K under the caption "PROPOSAL 1 - ELECTION OF DIRECTORS," "SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and in the third paragraph under the caption "MEETINGS AND COMMITTEES OF THE BOARD," and is incorporated in this report by reference. The information as to Executive Officers is included in our 2021 Definitive Proxy Statement under the caption "EXECUTIVE OFFICERS" and is incorporated in this report by reference.
We have adopted a code of ethics that applies to our principal executive officer, chief financial officer or principal financial officer and principal accounting officer. A copy of the code of ethics may be obtained, free of charge, by writing to the executive vice president, general counsel of Photronics, Inc. at 15 Secor Road, Brookfield, Connecticut 06804.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K and paragraph (e)(4) and (e)(5) of Item 407 is set forth in our 2021 Definitive Proxy Statement under the captions "EXECUTIVE COMPENSATION", "CERTAIN AGREEMENTS", "DIRECTORS' COMPENSATION", "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" and "COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION", respectively, and is incorporated in this report by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 201(d) of Regulation S-K is set forth in our 2021 Definitive Proxy Statement under the caption “EQUITY COMPENSATION PLAN INFORMATION”, and is incorporated in this report by reference. The information required by Item 403 of Regulation S-K is set forth in our 2021 Definitive Proxy Statement under the caption "OWNERSHIP OF COMMON STOCK BY DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS", and is incorporated in this report by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Items 404 and Item 407(a) of Regulation S-K is set forth in our 2021 Definitive Proxy Statement under the captions "MEETINGS AND COMMITTEES OF THE BOARD" and "RELATED PARTY TRANSACTIONS", respectively, and is incorporated in this report by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 9(e) of Rule 14a-101 of the Exchange Act is set forth in our 2021 Definitive Proxy Statement under the captions "Independent Registered Public Accounting Firm Fees" and "AUDIT COMMITTEE REPORT", and is incorporated in this report by reference.
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PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
Page
No.
1.
Financial Statements: See "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS" in Part II, Item 8 of this Form 10-K for a list of financial statements filed as part of this report.
36
2.
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended October 31, 2020, October 31, 2019 and October 31, 2018
76
All other schedules are omitted because they are not applicable.
3.
Exhibits
77
75
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Schedule II
Valuation and Qualifying Accounts
for the Years Ended October 31, 2020, October 31, 2019
and October 31, 2018
(in $ thousands)
Balance at
Beginning of
Year
Charged to
Costs and
Expenses
Deductions
Balance at
End of
Year
Allowance for Doubtful Accounts
Year-ended October 31, 2020
$
1,334
$
( 22
)
$
12
(a)
$
1,324
Year-ended October 31, 2019
$
1,526
$
( 18
)
$
( 174
)(a)
$
1,334
Year ended October 31, 2018
$
2,319
$
( 809
)
$
16
(a)
$
1,526
_________________
(a)
Uncollectible accounts written off, net, and impact of foreign currency translation.
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ITEM 16.
FORM 10-K SUMMARY
Not applicable.
EXHIBITS INDEX
Incorporated by Reference
Filed or
Furnished
Herewith
Exhibit
Number
Description
Form
Exhibit
Filing
Date
3.1
Certificate of Incorporation as amended July 9, 1986, April 9, 1990, March 16, 1995, November 13, 1997, April 15, 2002 and June 20, 2005.
10-K
3.1
12/20/2019
3.2
Amended and Restated By-laws of the Company dated as of September 7, 2016.
8-K
3.2
9/13/2016
4.1
Description of Securities of the Company
10-K
4.1
12/20/2019
4.2
Certificate of Amendment with Respect to Series A Preferred Stock, dated September 24, 2019
8-K
3.1
9/24/2019
4.4
Indenture dated January 22, 2015, by and between the Company and the Bank of New York Mellon Trust Company, N.A., as trustee.
8-K
4.2
1/28/2015
10.1
The Company’s 1992 Employee Stock Purchase Plan
10-K
10.1
12/20/2017
10.2
Amendment to the Employee Stock Purchase Plan as of March 24, 2004. +
10-K
10.2
1/6/2017
10.3
Amendment to the Employee Stock Purchase Plan as of April 8, 2010. +
10-K
10.4
1/7/2016
10.4
Amendment to the Employee Stock Purchase Plan as of March 28, 2012. +
10-K
10.4
12/21/2018
10.5
Amendment to the Employee Stock Plan as of December 18, 2019*
10-K
10.5
12/23/2019
10.6
2016 Equity Incentive Compensation Plan. +
DEF 14A
2/29/2016
10.7
The Company’s 2007 Long-Term Equity Incentive Plan. +
DEF 14A
2/23/2007
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Table of Contents
10.8
Amendment to the 2007 Long-Term Equity Incentive Plan as of April 8, 2010. +
10-K
10.7
1/7/2016
10.9
Amendment to the 2007 Long Term Equity Incentive Plan as of April 11, 2014. +
10-K
10.7
12/23/2019
10.10
2011 Executive Incentive Compensation Plan effective as of November 1, 2010. +
10-K
10.9
1/6/2015
10.11
Joint Venture Framework Agreement dated November 20, 2013, between the Company and Dai Nippon Printing Co., Ltd. #
10-K/A
10.19
7/8/2015
10.12
Joint Venture Operating Agreement dated November 20, 2013, between the Company and Dai Nippon Printing Co., Ltd. #
10-K/A
10.20
7/8/2015
10.13
Outsourcing Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation. #
10-K/A
10.21
7/8/2015
10.14
License Agreement dated November 20, 2013, between the Company and Photronics Semiconductor Mask Corporation. #
10-K/A
10.22
7/8/2015
10.15
License Agreement dated November 20, 2013, between Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation. #
10-K/A
10.23
7/8/2015
10.16
Margin Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation.#
10-K/A
10.24
7/8/2015
10.17
Merger Agreement dated January 16, 2014, between Photronics Semiconductor Mask Corporation and DNP Photomask Technology Taiwan Co., Ltd. #
10-K/A
10.25
7/8/2015
10.18
Executive Employment Agreement between the Company and Christopher J. Progler, Vice President, Chief Technology Officer dated September 10, 2007. +
10-K
10.18
12/23/2019
10.19
Executive Employment Agreement between the Company and Peter S. Kirlin dated May 4, 2015. +
10-Q
10.28
9/9/2015
10.20
Executive Employment Agreement between the Company and Richelle E. Burr dated May 21, 2010. +
10-K
10.30
1/7/2016
10.21
Executive Employment Agreement between the Company and John P. Jordan dated September 5, 2017. +
10-K
10.31
12/20/2017
10.22
Executive Employment Agreement between Photronics Dai Nippon Mask Corporation and Frank Lee dated March 9, 2020
10-Q
10.36
3/11/2020
10.23
Consulting Agreement between the Company and DEMA Associates, LLC dated January 20, 2018.
10-K
10.21
12/21/2018
10.24
Amendment dated March 9, 2020 between DEMA Associates, LLC and the Company
10-Q
10.37
3/11/2020
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Table of Contents
10.25
Form of Amendment to Executive Employment Agreement dated March 16, 2012. +
10-K
10.23
12/23/2019
10.26
Fourth Amended and Restated Credit Agreement dated as of September 27, 2018 among Photronics, Inc. the Foreign Subsidiary Borrower Party Thereto, the Lender Party Thereto, JPMorgan Chase Bank, N.A. as Administrative and Collateral Agent and Bank of America, N.A. as syndication agent
10-K
10.24
12/21/2018
10.27
Third Amended and Restated Security Agreement entered into as of September 27, 2018 by and among Photronics, Inc., the subsidiaries of the Company and JPMorgan Chase Bank N.A.
10-K
10.25
12/21/2018
10.28
Fixed Asset Loan Agreement between Photronics DNP Mask Corporation Xiamen and Industrial and Commercial Bank China Limited Xiamen Xiang’an Branch
10-K
10.26
12/21/2018
10.29
Working Capital Loan Agreement between Industrial and Commercial Bank China Limited Xiamen Xiang’an Branch and Photronics DNP Mask Corporation Xiamen effective as of November 7, 2018.
10-K
10.27
12/21/2018
10.30
Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte. Ltd.
10-Q
10.35
9/2/2016
10.31
Amendment No. 1 to the Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte, Ltd
10-K
10.29
12/23/2019
10.32
Contribution Agreement dated May 16, 2017 among Dai Nippon Printing Co., Ltd. (“DNP), DNP Asia Pacific Pte. Ltd. (“DNP Asia Pacific”), Photronics, Inc. (“Photronics”), Photronics Singapore Pte. Ltd., (“Photronics Singapore”), and Xiamen American Japan Photronics Mask Co., Ltd. (“PDMCX”). #
10-Q/A
10.26
12/19/2017
10.33
Joint Venture Operating Agreement dated May 16, 2017 among Photronics, Photronics Singapore, DNP and DNP Asia Pacific. #
10-Q/A
10.27
12/19/2017
10.34
Outsourcing Agreement dated May 16, 2017 among Photronics, DNP, Photronics DNP Photomask Corporation (“PDMC”), and PDMCX. #
10-Q/A
10.28
12/19/2017
10.35
Amended and Restated License Agreement dated May 16, 2017 between DNP and PDMC. #
10-Q/A
10.29
12/19/2017
10.36
Investment Cooperation Agreement between Hefei State Hi-tech Industry Development Zone and Photronics UK, Ltd.
10-K
10.42
12/20/2017
10.37
Section 382 Rights Agreement, dated as September 23, 2019, between Photronics, Inc. and Computershare Trust Company, N.A. as rights agent.
8-K
4.1
9/24/2019
10.38
Master Lease Agreement dated October 12, 2020 between TD Equipment Finance and the Company
X
10.39
Fixed Asset Loan Contract dated October 1, 2020 between TD Equipment Finance,Inc. and the Company
X
10.40
Maximum Mortgage Contract dated October 1, 2020 between Photronics Mask Corporation Hefei and China Construction Bank Corporation Hefei Shusshan Branch
X
21
List of Subsidiaries of the Company.
X
23.1
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
X
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
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101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extension Schema Document
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
+
Represents a management contract or compensatory plan or arrangement.
#
Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.
The Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Company’s general counsel at the address of the Company’s principal executive offices.
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PHOTRONICS, INC.
(Registrant)
By
/s/ John P. Jordan
By
/s/ Eric Rivera
John P. Jordan
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
Eric Rivera
Vice President, Corporate Controller
(Principal Accounting Officer)
January 14, 2021
January 14, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By
/s/ Peter S. Kirlin
January 14, 2021
Peter S. Kirlin
Chief Executive Officer
Director
(Principal Executive Officer)
By
/s/ John P. Jordan
January 14, 2021
John P. Jordan
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
By
/s/ Eric Rivera
January 14, 2021
Eric Rivera
Vice President, Corporate Controller
(Principal Accounting Officer)
By
/s/ Constantine S. Macricostas
January 14, 2021
Constantine S. Macricostas
Chairman of the Board
By
/s/ Walter M. Fiederowicz
January 14, 2021
Walter M. Fiederowicz
Director
By
/s/ Daniel Liao
January 14, 2021
Daniel Liao
Director
By
/s/ George Macricostas
January 14, 2021
George Macricostas
Director
By
/s/ Mary Paladino
January 14, 2021
Mary Paladino
Director
By
/s/ Mitchell G. Tyson
January 14, 2021
Mitchell G. Tyson
Director
81