<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
REGISTRATION NO. 333-52439
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
DUPONT PHOTOMASKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-2238819
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
</TABLE>
131 OLD SETTLERS BOULEVARD
ROUND ROCK, TEXAS 78664
(512) 310-6500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
JOHN M. LYNN
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
DUPONT PHOTOMASKS, INC.
131 OLD SETTLERS BOULEVARD
ROUND ROCK, TEXAS 78664
(512) 310-6500
TELECOPY: (512) 310-6544
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
CARMELO M. GORDIAN, ESQ. ALAN DEAN, ESQ.
RONALD G. SKLOSS, ESQ. DAVIS POLK & WARDWELL
BROBECK, PHLEGER & HARRISON LLP 450 LEXINGTON AVENUE
301 CONGRESS AVENUE, SUITE 1200 NEW YORK, NEW YORK 10017
AUSTIN, TEXAS 78701 (212) 450-4000
(512) 477-5495 TELECOPY: (212) 450-4800
TELECOPY: (512) 477-5813
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration
Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- ---------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one for use in
connection with an offering of Shares initially in the United States and Canada
(the "Domestic Prospectus") and one for use in connection with an offering of
Shares initially outside the United States and Canada (the "International
Prospectus"). Both forms of prospectus are identical, except for the outside
front cover page of each prospectus. The form of Domestic Prospectus follows
this Explanatory Note and is immediately followed by the form of outside front
cover page of the International Prospectus which is labeled "Alternate Page for
International Prospectus." Final forms of each prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
ISSUED MAY 18, 1998
2,700,000 SHARES
DUPONT PHOTOMASKS, INC.
COMMON STOCK
-----------------
OF THE 2,700,000 SHARES OF COMMON STOCK OFFERED HEREBY, 2,160,000 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 540,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 2,700,000 SHARES OF COMMON STOCK BEING OFFERED,
700,000 SHARES ARE BEING SOLD BY THE COMPANY AND 2,000,000 SHARES
ARE BEING SOLD BY A WHOLLY OWNED SUBSIDIARY OF E.I. DU PONT DE
NEMOURS AND COMPANY ("DUPONT"). SEE "SELLING STOCKHOLDER." THE
COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES
BY DUPONT. THE COMPANY'S COMMON STOCK IS QUOTED ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DPMI." ON MAY
15, 1998, THE LAST SALE PRICE OF THE COMMON STOCK AS
REPORTED ON THE NASDAQ NATIONAL MARKET WAS $46 3/8
PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."
------------------------
UPON COMPLETION OF THE OFFERING, DUPONT WILL INDIRECTLY OWN APPROXIMATELY 54% OF
THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK AND WILL CONTINUE
TO CONTROL THE COMPANY. SEE "SELLING STOCKHOLDER" AND
"TRANSACTIONS AND RELATIONSHIP
BETWEEN THE COMPANY AND
DUPONT."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6 HEREOF.
-----------------
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.
-------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDER
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE........................... $ $ $ $
TOTAL(3)............................ $ $ $ $
</TABLE>
- ----------
(1) THE COMPANY AND DUPONT HAVE AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST
CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SEE "UNDERWRITERS."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $117,000.
(3) THE COMPANY AND DUPONT HAVE GRANTED THE U.S. UNDERWRITERS OPTIONS,
EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN
AGGREGATE OF 105,000 AND 300,000 ADDITIONAL SHARES, RESPECTIVELY, AT THE
PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE
PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS
EXERCISE SUCH OPTIONS IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING
DISCOUNTS AND COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING
STOCKHOLDER WILL BE $ , $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY DAVIS POLK & WARDWELL, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998, AT THE
OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT
THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER
DEUTSCHE MORGAN GRENFELL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
NEEDHAM & COMPANY, INC.
, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY
DUPONT OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF
COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
---------------------
FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE TAKEN
IN ANY JURISDICTION BY THE COMPANY, BY DUPONT OR BY ANY UNDERWRITER THAT WOULD
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED,
OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS
COMES ARE REQUIRED BY THE COMPANY, DUPONT AND THE UNDERWRITERS TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE
COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 6
Forward-Looking Statements........................... 12
Use of Proceeds...................................... 12
Dividend Policy...................................... 12
Price Range of Common Stock.......................... 13
Capitalization....................................... 13
Selected Financial Data.............................. 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 15
Business............................................. 22
<CAPTION>
PAGE
-----
<S> <C>
Management........................................... 31
Selling Stockholder.................................. 34
Transactions and Relationship Between the Company and
DuPont............................................. 35
Certain U.S. Federal Income Tax Considerations for
Non-U.S. Holders of Common Stock................... 39
Description of Capital Stock......................... 41
Underwriters......................................... 43
Legal Matters........................................ 46
Experts.............................................. 46
Available Information................................ 46
</TABLE>
---------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") by the Company are incorporated in this Prospectus by
reference: (1) the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997 (file no. 0-20839); (2) the Company's Quarterly Reports on
Form 10-Q for the quarters ended September 30, 1997, December 31, 1997 and March
31, 1998; and (3) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed under Section 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act").
All other documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Common Stock to be made
hereunder shall be deemed to be incorporated herein by reference and made a part
hereof from the date of filing of such documents.
Any statement contained herein or 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 any statement contained
herein, therein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owners, to whom a copy of the Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
which are incorporated herein by reference, other than exhibits to such
information (unless such exhibits are specifically incorporated by reference
into such documents). Requests should be submitted to DuPont Photomasks, Inc.,
Attention: Investor Relations, 131 Old Settlers Boulevard, Round Rock, Texas
78664, telephone: (512) 310-6559.
---------------------
The Company has licensed from DuPont use of the tradename "DuPont" and the
DuPont in Oval logo. All other trademarks or trade names referred to in this
Prospectus are the property of their respective owners.
References in this Prospectus to "$" or "dollars" are to United States
currency.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITERS."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND THE FINANCIAL STATEMENTS AND RELATED
NOTES, APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. ALL
REFERENCES HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, TO (I) THE "COMPANY"
MEAN DUPONT PHOTOMASKS, INC. AND (II) "DUPONT" OR "SELLING STOCKHOLDER" MEAN
E.I. DU PONT DE NEMOURS AND COMPANY OR ONE OF ITS WHOLLY OWNED SUBSIDIARIES.
EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT
THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED. SEE
"UNDERWRITERS." THE COMPANY'S FISCAL YEAR ENDS JUNE 30.
THE COMPANY
Based on worldwide sales, DuPont Photomasks, Inc. is one of the largest
photomask manufacturers in the world. Photomasks are high-purity quartz or glass
plates containing precision images of integrated circuits and are used as
masters by semiconductor manufacturers to optically transfer these images onto
semiconductor wafers. Photomasks are a necessary component in the production of
semiconductors, and advanced photomask technologies are critical to enabling the
manufacture of increasingly complex semiconductor devices. The Company
manufactures a broad range of photomasks based on customer-supplied design data,
including photomasks that meet the tightest design specifications required by
semiconductor manufacturers today. The Company sells its products to
approximately 200 customers in 20 different countries. The Company believes that
it is the principal merchant photomask supplier for many of its customers,
including Advanced Micro Devices, Hyundai, LG Semicon, Lucent Technologies,
Micron Technology, Motorola, National Semiconductor, Philips, Samsung, Seagate
and SGS-Thomson. The Company operates globally from ten established
manufacturing facilities in North America, Europe and Asia and numerous customer
service centers.
The market for photomasks consists primarily of semiconductor manufacturers
in North America, Europe and Asia. The photomask industry is comprised of both
independent merchant producers, which sell photomasks to multiple semiconductor
manufacturers, and captive operations, which are facilities owned by
semiconductor manufacturers primarily for internal use. According to industry
sources, the worldwide market for photomasks totalled approximately $2.0 billion
in 1997. The Company estimates that the photomask market in North America,
Europe and non-Japan Asia, the markets in which the Company primarily competes,
represented approximately 50% of the worldwide market over the last five years
and that merchant photomask sales in these regions were approximately $700
million in 1997. Based on sales, the Company is one of the two largest merchant
suppliers in North America and the largest merchant supplier in Europe and
non-Japan Asia.
The demand for photomasks is driven primarily by semiconductor design
activity. A number of recent trends have fueled growth in design activity,
including: (i) increasing customization of semiconductor designs; (ii) growing
complexity of semiconductor devices; (iii) decreasing feature size of
semiconductor designs; and (iv) the proliferation of semiconductor applications.
The impact of these trends has been to increase the importance of photomask
technology in the semiconductor manufacturing process. The Company expects the
importance of photomask technology to continue to grow as semiconductor
manufacturers design and produce more complex, advanced devices.
The Company is undertaking a significant global expansion to support the
future growth of its business. In 1997, the Company, in a joint venture with
some of the world's leading semiconductor manufacturers, began operation of the
DPI Reticle Technology Center, LLC, a facility dedicated to advanced photomask
technology development and pilot line fabrication of leading-edge photomasks.
The Company also opened a photomask production facility in Scotland to better
serve the European market. Currently, the Company is constructing a photomask
production facility near Portland, Oregon, a rapidly growing semiconductor
manufacturing region, and recently announced plans to build a photomask
production facility in Singapore, a developing semiconductor market.
3
<PAGE>
The Company is an industry leader in developing the most advanced photomasks
and believes it is the principal merchant supplier, outside Japan, of
leading-edge photomasks. The Company's objective is to be the world's premier
global supplier of photomasks by providing the finest service and most advanced
technology to its customers. To achieve this objective, the Company intends to
advance its technological leadership, expand strategic relationships with its
customers, capitalize on its established global manufacturing and support
network and leverage its strategic relationships with key suppliers.
RELATIONSHIP WITH DUPONT
The Company is approximately 69% owned by DuPont. Upon completion of the
offering, DuPont will continue to indirectly own approximately 54% (or
approximately 51% if the U.S. Underwriters' over-allotment options are exercised
in full) of the Company's outstanding Common Stock. See "Selling Stockholder."
Upon completion of the offering, DuPont will be able to control the vote on most
matters submitted to stockholders, including the election of directors and the
approval of extraordinary corporate transactions. See "Risk Factors--Control by
and Relationship with DuPont." DuPont has advised the Company that it expects to
reduce its ownership interest in the Company over time, subject to prevailing
market and other conditions. Historically, the Company has derived certain
tangible and intangible benefits from being affiliated with DuPont. The Company
and DuPont have entered into a number of agreements for the purpose of defining
their ongoing relationship. While these agreements will continue to provide the
Company with certain benefits, the Company is only entitled to the ongoing
assistance of DuPont for a limited time and it may not enjoy benefits from its
relationship with DuPont beyond the terms of the agreements. See "Transactions
and Relationship Between the Company and DuPont."
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by:
The Company....................... 700,000 Shares
DuPont............................ 2,000,000Shares
Total........................... 2,700,000Shares
Common stock offered in:
U.S. Offering..................... 2,160,000 Shares
International Offering............ 540,000Shares
Total........................... 2,700,000Shares
Common Stock to be outstanding after
the Offering...................... 15,868,766 Shares(1)
Use of Proceeds..................... To reduce certain outstanding indebtedness and, to
the extent available, for general corporate purposes,
including working capital, capital expenditures and
potential acquisitions. See "Use of Proceeds." The
Company will not receive any proceeds from the sale
of Shares by DuPont.
Nasdaq National Market symbol....... DPMI
</TABLE>
- ---------
(1) Based upon the number of shares outstanding on March 31, 1998. Excludes
shares of Common Stock issuable under the Company's stock performance plans.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales................................................... $ 161,514 $ 213,415 $ 261,185 $ 191,264 $ 203,700
Cost of goods sold...................................... 120,512 142,200 163,319 117,652 134,195
Selling, general and administrative expense............. 21,803 25,167 31,611 23,434 22,678
Research and development expense........................ 8,777 9,162 12,372 8,556 9,687
----------- ----------- ----------- ----------- -----------
Operating profit........................................ 10,422 36,886 53,883 41,622 37,140
Interest (income) expense............................... 6,957 7,078 (2,080) (1,341) (515)
Exchange (gain) loss.................................... (493) 886 796 613 233
----------- ----------- ----------- ----------- -----------
Income before income taxes, minority interest and
extraordinary item.................................... 3,958 28,922 55,167 42,350 37,422
Provision for income taxes.............................. 2,678 19,308 14,822 12,860
----------- ----------- ----------- ----------- -----------
Income before minority interest and extraordinary
item.................................................. 3,958 26,244 35,859 27,528 24,562
Minority interest in loss of majority owned joint
venture............................................... (161) (660) (903) (642) (687)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item........................ 4,119 26,904 36,762 28,170 25,249
Extraordinary item...................................... (22,242) (22,242)
----------- ----------- ----------- ----------- -----------
Net income.............................................. $ 4,119 $ 26,904 $ 59,004 $ 50,412 $ 25,249
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic earnings per share before extraordinary item...... $ .39 $ 2.51 $ 2.44 $ 1.87 $ 1.67
Diluted earnings per share before extraordinary item.... $ .39 $ 2.50 $ 2.37 $ 1.82 $ 1.62
<CAPTION>
MARCH 31, 1998
------------------------
AS
ACTUAL ADJUSTED(1)
----------- -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents...................................................................... $ 15,877 $ 22,599
Working capital................................................................................ 40,458 47,180
Property and equipment......................................................................... 237,175 237,175
Total assets................................................................................... 345,717 352,439
Long-term borrowings........................................................................... 8,007 8,007
Long-term borrowings, related parties.......................................................... 24,000
Stockholders' equity........................................................................... 243,117 273,839
</TABLE>
- ------------
(1) As adjusted to reflect the sale of 700,000 shares of Common Stock offered by
the Company hereby (at an assumed public offering price of $46 3/8 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED
CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN THE SECTIONS
ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS." SEE "FORWARD-LOOKING STATEMENTS."
CAPITAL INTENSIVE INDUSTRY; SIGNIFICANT FIXED COSTS. 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 the expansion of its operations. Based on its
current operating plans, the Company will require external financing from time
to time to fund its capital expenditures. There can be no assurance that the
Company will be able to obtain the 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. In
addition, due to the capital-intensive nature of photomask manufacturing
operations, at a given threshold of manufacturing capacity, a high proportion of
the Company's operating costs remain relatively constant as sales volume
increases or decreases. To the extent the Company has under-utilized production
capacity, operating profit increases or decreases significantly as sales volume
increases or decreases. The Company anticipates that operating costs will
increase as it adds capacity to position itself for future growth. A decrease in
capacity utilization could have a material adverse effect on the Company's
results of operations. See "Business--Industry Background."
RAPID TECHNOLOGICAL CHANGE. The photomask and semiconductor industries are
characterized by rapid technological change and new product introductions and
enhancements that require photomask manufacturers to make significant and
ongoing capital investments. In particular, as semiconductor pattern sizes
continue to decrease, the demand for more technologically advanced photomasks is
likely to increase, and the Company believes it must continue to enhance its
existing products and to develop and manufacture new products and upgrades with
improved capabilities in order to satisfy this anticipated demand. The Company's
inability to anticipate, respond to or utilize changing technologies could have
a material adverse effect on the Company's results of operations. Also, there
can be no assurance that additional research and development investments by the
Company will result in any technological innovations. See "Business--Products
and Technology" and "--Research and Development."
Technological advances achieved by a competitor or a customer leading to the
commercial availability of alternate methods of transferring circuit designs
onto semiconductor wafers without the use of photomasks, including direct-write
lithography, could have a material adverse effect on the Company's results of
operations or financial position. Direct-write lithography, an alternative to
photomask lithography, writes the circuit pattern directly onto the
semiconductor wafer without the use of a photomask. The direct-write method
generates patterns onto a wafer slowly and therefore is not currently useful for
high-volume, commercial device manufacturing. A significant advance in this
technology or other technologies which transfer circuit designs without the use
of photomasks, however, would have a material adverse effect on the Company's
business and results of operations. See "Business--Products and Technology" and
"--Competition."
RELATIONSHIP WITH AND DEPENDENCE ON SEMICONDUCTOR INDUSTRY. Substantially
all of the Company's sales are derived from semiconductor manufacturers. Growth
in the demand for semiconductors does not necessarily lead to an increase in the
demand for photomasks. Changes in semiconductor designs, or applications, such
as a reduction in customization, increased standardization, a reduction in
design complexity, other technological and manufacturing advances or a slowdown
in the introduction of new semiconductor designs, could reduce demand for
photomasks even if the demand for semiconductors increases. Technological and
manufacturing advances in the semiconductor industry could have a material
adverse effect on the demand for photomasks.
6
<PAGE>
In addition, contractions or downturns in the semiconductor industry could
lead to a decrease in the demand for photomasks. The semiconductor industry is
highly cyclical and has been subject to significant economic downturns at
various times. Future downturns in the semiconductor industry could have a
material adverse effect on the Company's results of operations. The Company's
investment in new sites and equipment is based, in part, on the announced
expansion plans of the semiconductor industry. From time to time, the
semiconductor industry has developed slower than originally anticipated. A lack
of development in the semiconductor industry in a location in which the Company
operates could have a material adverse impact on the Company's business. For
example, the semiconductor industry in China has developed more slowly than
originally anticipated and, as a result, the Company continues to experience
losses from its joint venture participation in China. In addition, there are
certain risks associated with new sites, including the risk that the Company's
revenue does not increase commensurate with the increases in capacity and
expenses. If revenue does not increase accordingly, the Company's business,
financial position and results of operations could be materially impacted. See
"Business--Industry Background."
FLUCTUATIONS IN QUARTERLY AND ANNUAL EARNINGS. The Company's quarterly and
annual operating results are affected by a wide variety of factors that could
adversely affect sales or profitability or lead to significant variability of
operating results. These factors include the volume, timing and product mix of
orders shipped. Since the Company's business is characterized by short-term
orders and shipment schedules without a significant backlog for products,
substantially all of the Company's sales in any quarter are dependent upon
orders received during that quarter, which limits the Company's ability to
respond to a changing business environment. In addition, changes in the mix of
products sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to meet increasing demand
and delivery schedules, fluctuations in manufacturing yields, fluctuations in
currency exchange rates, cyclical semiconductor industry conditions, the
Company's access to advanced process technologies and the timing and extent of
product and process development costs could also affect operating results.
Moreover, the Company is limited in its ability to reduce costs quickly in
response to any revenue shortfalls due to the need to make ongoing and
significant capital investments. As a result of the foregoing and other factors,
there can be no assurance that the Company will not experience material adverse
fluctuations in future operating results on a quarterly or annual basis. Results
of operations in any period, therefore, should not be considered indicative of
the results to be expected for any future period. See "--Capital Intensive
Industry; Significant Fixed Costs," "--Rapid Technological Change" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION. The photomask industry is highly competitive. The Company's
ability to compete in this market is primarily based on product quality,
delivery to schedule performance, pricing, technical capabilities, the location
and capacity of its manufacturing facilities and technical service. Significant
competitors include other merchant manufacturers of photomasks, including
Compugraphics International Limited, Dai Nippon Printing, Hoya Corporation,
Photronics, P.K. Limited, Taiwan Mask Corporation and Toppan Printing Company.
The Company's competitors can be expected to continue to develop and introduce
new and enhanced products, any of which could cause a decline in market
acceptance of the Company's products or a reduction in the Company's prices as a
result of intensified price competition. The Company also competes with captive
photomask operations. Beginning in the mid-1980's, a trend developed toward the
divestiture or closing of captive photomask operations by semiconductor
manufacturers. There can be no assurance that this trend will continue or that
it will not reverse, thereby reducing the demand for photomasks produced by
merchant photomask suppliers like the Company and increasing competition to the
extent excess capacity is used to supply non-captive needs. In particular, as
photomasks continue to reemerge as a critical and enabling technology in the
semiconductor manufacturing process, there can be no assurance that
semiconductor manufacturers will not form new captive operations to ensure that
their photomask needs are met, particularly for advanced and leading-edge
photomasks. Certain of the Company's competitors may have greater financial,
technical, marketing and other resources than the Company, each of which could
provide them with a competitive advantage over the Company. There can be no
assurance that competition will not have a material adverse effect on the
7
<PAGE>
Company's business, financial position or results of operations. See
"Business--Industry Background" and "--Competition."
SIGNIFICANT INTERNATIONAL OPERATIONS. Approximately 44% of the Company's
sales in fiscal 1997 were derived from sales in non-U.S. markets. The Company
expects sales from non-U.S. markets to continue to represent a significant
portion of total sales. The Company operates four manufacturing facilities as
well as sales and technical support service centers in Europe and Asia. In
addition, the Company is currently participating in the operation of a
manufacturing facility in Shanghai, China as part of a joint venture arrangement
with the Shanghai Institute of Metallurgy, is currently negotiating a joint
venture arrangement with United Microelectronics Corporation to produce
photomasks in Taiwan and recently announced plans to construct a manufacturing
facility in Singapore.
Non-U.S. operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuation in
the relative value of currencies and restrictive governmental actions. Changes
in the relative value of currencies occur from time to time and may, in certain
instances, have a material effect on the Company's results of operations. The
Company's financial statements reflect remeasurement of items denominated in
non-U.S. currencies to U.S. Dollars, the Company's functional currency. Exchange
gains or losses are included in income in the period in which they occur. The
Company monitors its exchange rate exposure and attempts to reduce such exposure
by hedging. The Company has entered into Korean Won and French Franc forward
contracts designed to reduce such exposure. There can be no assurance that such
forward contracts or any other hedging activity will be available or adequate to
eliminate, or even mitigate, the impact of the Company's exchange rate exposure.
There can be no assurance that such risks will not have a material adverse
impact on the Company's liquidity and results of operations in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Global Manufacturing and Operations."
ASIAN MARKET VOLATILITY. In recent months, Asian capital markets have been
highly volatile, resulting in significant fluctuations in local currencies and
other economic instabilities. These instabilities may continue or worsen, which
could have a material adverse impact on the Company's financial position or
results of operations as approximately 20% of the Company's sales in fiscal 1997
were derived from this region. As a result of this instability, the Company has
experienced a reduction in revenue and net income from its operations in Asia
during the two fiscal quarters ended March 31, 1998. There can be no assurance
that these reductions will not continue or worsen. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
MANUFACTURING RISKS. The Company's manufacturing processes are highly
complex, require the use of expensive and technologically sophisticated
equipment and materials and are continuously subject to modification in an
effort to improve manufacturing yields and product quality. Minute impurities or
other difficulties in the manufacturing process can lower manufacturing yields
and make products unmarketable. Moreover, manufacturing leading-edge photomasks
is relatively more complex and time-consuming than manufacturing high-volume,
less advanced photomasks, and may lead to general delays in the manufacturing of
all levels of photomasks. The Company has, on occasion, experienced
manufacturing difficulties and capacity limitations that have delayed the
Company's ability to deliver products within the time frames contracted for by
some or all of its customers. There can be no assurance that the Company will
not experience these or other manufacturing difficulties, increased costs or
production capacity constraints in the future, any of which could result in a
loss of customers or could otherwise have a material adverse effect on the
Company's business or results of operations. See "Business--Global Manufacturing
and Operations."
CONCENTRATION OF CUSTOMERS. In fiscal 1997, the Company's six largest
customers, in the aggregate, accounted for more than 50% of sales. All these
customers are in the semiconductor industry. The loss of, or a significant
reduction of orders from, any of these customers could have a material adverse
effect on the Company's results of operations. While the Company believes it has
strategic relationships with a number of its customers, its customers place
orders on an as-needed basis and can change their suppliers without penalty. See
"Business--Customers."
8
<PAGE>
CONCENTRATION OF AND 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. There are currently lead
times of approximately 10 to 14 months between the order and the delivery of
certain photomask imaging and inspection equipment, including electron beam and
laser beam photomask imaging systems. There can be no assurance that the
equipment manufacturers will successfully develop or deliver on a timely basis
such imaging and inspection equipment. Failure to develop on a timely basis such
equipment could have a material adverse effect on the Company's business or
results of operations. See "Business--Industry Background."
In addition, the Company has a limited number of long-term supply agreements
with its raw materials suppliers and it has historically relied primarily on a
limited number of suppliers for the quartz plates used in the manufacture of
photoblanks, which are a key component in the manufacture of photomasks. Any
disruption in the Company's supply relationships or any delays in the shipment
of supplies or equipment, particularly the supply of quartz plates, could result
in delays or reductions in product shipments by the Company or increases in
product costs that could have a material adverse effect on the Company's
operating results in any given period. In the event of such disruption, there
can be no assurance that the Company could develop alternative sources within
reasonable time frames, or if developed, that such sources would provide such
supplies or equipment at prices comparable with those charged by the Company's
suppliers prior to such disruption. See "Business--Products and
Technology--Photoblanks and Pellicles."
DEPENDENCE ON MANAGEMENT AND TECHNICAL PERSONNEL. The Company's continued
success depends, in part, upon key managerial, engineering and technical
personnel, as well as the Company's ability to continue to attract and retain
additional personnel. The loss of certain key personnel could have a material
adverse effect on the Company's business or results of operations. There can be
no assurance that the Company can retain its key managerial, engineering and
technical employees. The Company's growth may be dependent on its ability to
attract new highly skilled and qualified personnel. There can be no assurance
that its recruiting efforts to attract and retain such personnel will be
successful. See "Business-- Employees" and "Management."
CONTROL BY AND RELATIONSHIP WITH DUPONT. DuPont currently owns
approximately 69% of the outstanding Common Stock of the Company, and upon
completion of the offering, DuPont will own approximately 54%. As a result, upon
completion of the offering, DuPont will be able to control the vote of most
matters submitted to stockholders, including any merger, consolidation or sale
of all or substantially all of the assets of the Company, to elect the members
of the Board of Directors of the Company and to prevent or cause a change in
control of the Company. DuPont has advised the Company that it expects to
continue to reduce its ownership interest in the Company over time, subject to
prevailing market conditions. The Company has granted DuPont certain rights with
respect to the registration of shares of Common Stock of the Company held by
DuPont under the Securities Act of 1933, as amended (the "Securities Act"),
including the right to require that the Company register under the Securities
Act the sale of all or part of the shares it holds, and to include such shares
in a registered offering of securities by the Company for its own account. See
"Selling Stockholder."
Historically, the Company has derived certain tangible and intangible
benefits from being affiliated with DuPont. The current relationship between the
Company and DuPont is defined pursuant to several transitional agreements. While
these agreements will continue to provide the Company with certain benefits, the
Company is only entitled to the ongoing assistance of DuPont for a limited time
and it may not enjoy benefits from its relationship with DuPont beyond the term
of the agreements, including benefits derived from DuPont's reputation, research
and development, supply of raw materials, trade names and trademarks and credit
support. There can be no assurance that the Company, upon termination of such
assistance from DuPont, will be able to provide adequately such services
internally or obtain favorable arrangements from third parties to replace such
services. See "Transactions and Relationship Between the Company and DuPont."
9
<PAGE>
VOLATILITY OF MARKET PRICE. The market price of the Common Stock has been
and can be expected to be significantly affected by factors such as quarterly
variations in the Company's results of operations, the announcement of new
products or product enhancements by the Company or its competitors,
technological innovations by the Company or its competitors, changes in earnings
estimates or buy/sell recommendations by analysts, and general market conditions
or market conditions specific to particular industries. In particular, the stock
prices for many companies in the technology sector have experienced wide
fluctuations which have often been unrelated to the operating performance of
such companies. Such fluctuations may adversely affect the market price of the
Common Stock. See "Price Range of Common Stock."
POTENTIAL ACQUISITIONS. The Company has in the past and may in the future
pursue acquisitions of businesses, products and technologies, or enter into
joint venture arrangements, that could complement or expand the Company's
business. For example, the Company is currently negotiating an agreement with
United Microelectronics Corporation to establish a joint venture to produce
photomasks in Taiwan. The negotiation of potential acquisitions or joint
ventures as well as the integration of an acquired business, product or
technology could cause diversion of management's time and resources. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities,
amortization of goodwill and other intangibles, research and development
write-offs and other acquisition-related expenses. Further, no assurances can be
given that any acquired business will be successfully integrated with the
Company's operations. If any such acquisition were to occur, there can be no
assurance that the Company would receive the intended benefits of the
acquisition. Future acquisitions, whether or not consummated, could have a
material adverse effect on the Company's business, results of operations or
financial position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
INTELLECTUAL PROPERTY. The Company believes that the success of its
business depends primarily on its proprietary technology, information and
processes and know-how, rather than on patents or trademarks. Much of the
Company's proprietary information and technology relating to manufacturing
processes is not patented and may not be patentable. There can be no assurance
that the Company will be able to adequately protect its technology, that
competitors will not be able to develop similar technology independently, that
the claims allowed on any patents held by the Company will be sufficiently broad
to protect the Company's technology or that foreign intellectual property laws
will adequately protect the Company's intellectual property rights. The Company
may receive notices claiming that it is infringing the proprietary rights of
third parties, and there can be no assurance that the Company will not become
the subject of infringement claims or legal proceedings by third parties with
respect to current or future products or processes. Any such claims or
litigation, with or without merit, to enforce patents issued to the Company, to
protect trade secrets or know-how possessed by the Company or to defend the
Company against claimed infringement of the rights of others could result in
substantial costs and diversion of resources, or could result in product
shipment delays or force the Company to enter into royalty or license agreements
rather than dispute the merits of such claims, any of which could have a
material adverse effect on the Company's business, results of operations or
financial position. See "Business--Patents, Copyrights, Trademarks and
Licenses--Intellectual Property."
CHANGES IN GOVERNMENTAL LAWS AND REGULATIONS. The Company is subject to
numerous governmental laws and regulations including, for example, tax,
occupational safety and health, and environmental laws and regulations.
Environmental laws and regulations impose various environmental controls on,
among other things, the discharge of pollutants into the air and water and the
handling, use, storage, disposal and clean-up of solid and hazardous wastes.
Changes in these laws and regulations may have a material adverse effect on the
Company's financial position and results of operations. Any failure by the
Company to adequately comply with such laws and regulations could subject the
Company to significant future liabilities. See "Business--Environmental
Matters."
YEAR 2000 COMPLIANCE. Many currently installed computer systems are not
capable of distinguishing 21st century dates from 20th century dates. As a
result, in less than two years, computer systems and/or software used by many
companies in a very wide variety of applications will experience operating
10
<PAGE>
difficulties unless they are modified or upgraded to adequately process
information involving, related to or dependent upon the century change.
Significant uncertainty exists concerning the scope and magnitude of problems
associated with the century change. The Company recognizes the need to ensure
its operations will not be adversely impacted by Year 2000 software failures and
has established a project team to assess Year 2000 risks. The project team will
coordinate the identification and implementation of changes to computer hardware
and software applications that will attempt to ensure availability and integrity
of the Company's information systems and the reliability of its operational
systems and manufacturing processes. The Company is also assessing the potential
overall impact of the impending century change on its business, results of
operations and financial position.
The Company is currently reviewing its information and operational systems
and manufacturing processes in order to identify and modify those products,
services or systems that are not Year 2000 compliant. The total cost of these
Year 2000 compliance activities has not been, and is not anticipated to be,
material to the Company's financial position or its results of operations. These
costs and the timing in which the Company plans to complete its Year 2000
modification and testing processes are based on management's best estimates.
However, there can be no assurance that the Company will timely identify and
remediate all significant Year 2000 problems, that remedial efforts will not
involve significant time and expense, or that such problems will not have a
material adverse effect on the Company's business, results of operations or
financial position.
The Company also faces risk to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business on a worldwide basis do not comply with Year 2000
requirements. In the event any such third parties cannot provide the Company
with products, services or systems that meet the Year 2000 requirements on a
timely basis, or in the event Year 2000 issues prevent such third parties from
timely delivery of products or services required by the Company, the Company's
results of operations could be materially adversely affected. To the extent Year
2000 issues cause significant delays in, or cancellation of, decisions to
purchase the Company's products or services, the Company's business, results of
operations and financial position would be materially adversely affected. See
"Risk Factors--Concentration and Dependence on Suppliers."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION
RIGHTS. Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon completion of this offering, DuPont will beneficially own
8,500,000 shares of Common Stock (8,200,000 shares if the U.S. Underwriters'
over-allotment options are exercised in full). Each of the Company, its
directors and executive officers and DuPont has agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 90 days after the date of
this Prospectus, subject to certain exceptions, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise. Following the expirations of such lock-up agreements, all of such
shares will be eligible for immediate sale in the public market, subject in some
cases to compliance with the volume and manner of sale requirements of Rule 144
under the Securities Act. The Company has granted DuPont certain rights with
respect to the registration under the Securities Act of shares of Common Stock
of the Company held by DuPont, including the right to require that the Company
register under the Securities Act the sale of all or part of the shares it
holds, and to include such shares in a registered offering of securities by the
Company for its own account. See "Transactions and Relationship Between the
Company and DuPont--Registration Rights."
11
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Prospectus
that are not historical facts, including, but not limited to, statements found
in "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," are
"forward-looking statements," as that term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act, that involve a number of
risks and uncertainties. Such forward-looking statements may concern growth and
future operating results, potential acquisitions and joint ventures, new
manufacturing facilities, capital expenditures, new products and product
enhancements, the future importance of photomask technology, the demand for
products, competitive factors, research and development activities and
expenditures, strategic relationships with third parties, liquidity and the
Company's strategy. Such forward-looking statements are generally accompanied by
words such as "plan," "estimate," "expect," "believe," "should," "would,"
"could," "anticipate" or other words that convey uncertainty of future events or
outcomes. Such forward-looking statements are based upon management's current
plans, expectations, estimates and assumptions and are subject to a number of
risks and uncertainties that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's business,
financial position and results of operations. As a consequence, actual results
may differ materially from expectations, estimates or assumptions expressed in
or implied by any forward-looking statements made by or on behalf of the
Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 700,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$30.7 million (approximately $35.3 million if the U.S. Underwriters'
over-allotment options are exercised in full) at an assumed public offering
price $46 3/8 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company. The Company
will not receive any proceeds from the sale of shares of Common Stock by DuPont.
The Company intends to use approximately $24 million of the net proceeds to
the Company to repay indebtedness outstanding under its credit agreement with
DuPont (the "Credit Agreement"). The Company intends to use the balance of the
net proceeds of the offering for working capital and other general corporate
purposes, including financing the Company's growth and capital expenditures made
in the ordinary course of its business. The Company may also apply a portion of
the net proceeds of the offering to acquire businesses, products and
technologies and to fund joint ventures that complement or expand the Company's
business. While there are no current agreements or negotiations with respect to
any such transactions other than the proposed joint venture with United
Microelectronics Corporation, the Company from time to time evaluates such
opportunities. Pending such uses, the net proceeds will be invested in
government securities or other short-term, investment-grade instruments.
At March 31, 1998, approximately $24 million was outstanding under the
Credit Agreement, substantially all of which was incurred to fund a porton of
the cost of selected photomask manufacturing equipment purchased from Hyundai
Electronics Industries Co., Ltd. in March 1998. The Credit Agreement expires in
2001 and loans thereunder bear interest at LIBOR plus 25 basis points, adjusted
monthly (approximately 5.88% at March 31, 1998). At the Company's option,
advances under the Credit Agreement are convertible into term loans with
maturities up to seven years.
DIVIDEND POLICY
The Company has not paid any dividends. The Company currently intends to
retain its earnings to finance future growth and therefore does not anticipate
paying any cash dividends in the foreseeable future. The declaration and payment
of dividends, if any, will be subject to the discretion of the Company's Board
of Directors and will depend on the Company's earnings, capital requirements,
financial position, statutory restrictions and other factors deemed to be
relevant by the Board of Directors.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "DPMI" since June 14, 1996. The following table sets forth, for the
fiscal periods indicated, the high and low sale prices per share of the
Company's Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
YEAR ENDED JUNE 30, 1996:
Fourth Quarter (from June 14)................... $ 23 1/2 $19 1/4
YEAR ENDED JUNE 30, 1997:
First Quarter................................... $ 29 1/4 $17 7/8
Second Quarter.................................. 47 1/2 26 3/4
Third Quarter................................... 63 36 1/4
Fourth Quarter.................................. 59 1/2 36 3/4
YEAR ENDING JUNE 30, 1998:
First Quarter................................... $ 74 1/8 $46 3/4
Second Quarter.................................. 72 7/8 27 3/4
Third Quarter................................... 47 7/8 25 3/8
Fourth Quarter (through May 15)................. 58 40 1/4
</TABLE>
On May 15, 1998, the last reported sale price of the Company's Common Stock
on the Nasdaq National Market was $46 3/8 per share.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, and as adjusted to give effect to the receipt and application by the
Company of the estimated net proceeds from the sale of 700,000 shares of Common
Stock offered by the Company hereby (at an assumed public offering price of
$46 3/8 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company). See "Use of
Proceeds." This table should be read in conjunction with the Company's financial
statements and related notes and the other financial information included or
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term borrowings.......................................................... $ 1,701 $ 1,701
---------- -----------
---------- -----------
Long-term borrowings........................................................... $ 8,007 $ 8,007
Long-term borrowings, related parties.......................................... 24,000
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 15,168,766 shares
issued and outstanding (1)................................................. 152 159
Additional paid-in capital................................................... 158,712 189,427
Retained earnings............................................................ 84,253 84,253
---------- -----------
Total capitalization....................................................... $ 275,124 $ 281,846
---------- -----------
---------- -----------
</TABLE>
- ---------
(1) Excludes shares of Common Stock issuable under the Company's stock
performance plans. As adjusted to reflect the offering, there will be
15,868,766 shares of Common Stock issued and outstanding.
13
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company. The
data for the three years ended June 30, 1997 has been derived from the audited
financial statements appearing elsewhere in this Prospectus. The data for the
years ended June 30, 1993 and 1994 has been derived from audited financial
statements not appearing in this Prospectus. The data for the nine months ended
March 31, 1997 and 1998 has been derived from the unaudited financial statements
appearing elsewhere in this Prospectus. The unaudited financial statements, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the result for the
unaudited periods. The results for the nine months ended March 31, 1998 are not
necessarily indicative of results to be expected for the full fiscal year. The
following data should be read in conjunction with, and are qualified by
reference to, the financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
The following amounts are expressed in thousands except per share amounts.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales......................................................... $ 161,514 $ 213,415 $ 261,185 $ 191,264 $ 203,700
Cost of goods sold............................................ 120,512 142,200 163,319 117,652 134,195
Selling, general and administrative expense................... 21,803 25,167 31,611 23,434 22,678
Research and development expense.............................. 8,777 9,162 12,372 8,556 9,687
--------- --------- --------- --------- ---------
Operating profit.............................................. 10,422 36,886 53,883 41,622 37,140
Interest (income) expense..................................... 6,957 7,078 (2,080) (1,341) (515)
Exchange (gain) loss.......................................... (493) 886 796 613 233
--------- --------- --------- --------- ---------
Income before income taxes, minority interest and
extraordinary item.......................................... 3,958 28,922 55,167 42,350 37,422
Provision for income taxes.................................... 2,678 19,308 14,822 12,860
--------- --------- --------- --------- ---------
Income before minority interest and extraordinary item........ 3,958 26,244 35,859 27,528 24,562
Minority interest in loss of majority owned joint venture..... (161) (660) (903) (642) (687)
--------- --------- --------- --------- ---------
Income before extraordinary item.............................. 4,119 26,904 36,762 28,170 25,249
Extraordinary item............................................ (22,242) (22,242)
--------- --------- --------- --------- ---------
Net income.................................................... $ 4,119 $ 26,904 $ 59,004 $ 50,412 $ 25,249
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share before extraordinary item............ $ .39 $ 2.51 $ 2.44 $ 1.87 $ 1.67
Diluted earnings per share before extraordinary item.......... $ .39 $ 2.50 $ 2.37 $ 1.82 $ 1.62
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
Cash and cash equivalents.............................................................................. $ 15,877
Working capital........................................................................................ 40,458
Property and equipment................................................................................. 237,175
Total assets........................................................................................... 345,717
Long-term borrowings................................................................................... 8,007
Long-term borrowings, related parties.................................................................. 24,000
Stockholders' equity................................................................................... 243,117
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales......................................................... $ 118,896 $ 134,548 $ 161,514 $ 213,415 $ 261,185
Income (loss) before extraordinary item....................... (37,558) (10,865) 4,119 26,904 36,762
Total assets.................................................. 176,953 160,901 171,701 227,893 291,579
Long-term borrowings.......................................... 3,352 6,704 4,265 9,324 10,473
Long-term borrowings, related parties......................... 142,841 140,846 125,570
Basic earnings (loss) per share before extraordinary item..... $ (3.58) $ (1.03) $ .39 $ 2.51 $ 2.44
Diluted earnings (loss) per share before extraordinary item... $ (3.58) $ (1.03) $ .39 $ 2.50 $ 2.37
Basic weighted average shares outstanding..................... 10,500 10,500 10,500 10,727 15,101
Diluted weighted average shares outstanding................... 10,500 10,500 10,500 10,743 15,520
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the Company's financial
statements and related notes included elsewhere in this Prospectus.
OVERVIEW
Based on worldwide sales, the Company is one of the largest photomask
manufacturers in the world. The Company sells its products to approximately 200
customers in 20 different countries. Essentially all of the Company's sales are
to customers in the semiconductor manufacturing industry. The Company
manufactures a broad range of photomasks based on customer-supplied design data.
The Company also manufactures photoblanks and pellicles, the principal
components of photomasks, primarily for internal consumption. The Company
operates globally with established manufacturing facilities in North America,
Europe and Asia.
Prior to the Company's initial public offering on June 13, 1996, it was a
wholly owned subsidiary of DuPont. Therefore, the Company's historical results
prior to such date are not necessarily indicative of the results that would have
been achieved if the Company had been independent. Results for interim periods
are not necessarily indicative of results for the year.
The Company's sales increased from $161.5 million in 1995 to $261.2 million
in 1997. The increase of over 61% was primarily the result of a number of recent
trends in the semiconductor industry which have fueled growth in design
activity, including: (i) increasing customization of semiconductor designs; (ii)
growing complexity of semiconductor devices; (iii) decreasing feature size of
semiconductor designs; and (iv) the proliferation of semiconductor applications.
The impact of these trends has been to increase the importance of photomask
technology in the semiconductor manufacturing process. Sales increased 6.5% from
$191.3 million in the nine months ended March 31, 1997 to $203.7 million in the
nine months ended March 31, 1998. The strength of the U.S. Dollar against the
Korean Won, and to a lesser extent, the German Mark and French Franc, adversely
impacted sales by approximately $10.5 million in the nine months ended March 31,
1998 and thus adversely impacted sales growth in the nine months ended March 31,
1998 as compared to the same period in the previous year.
Due to the capital intensive nature of photomask manufacturing operations,
at a given threshold of manufacturing capacity, a high proportion of the
Company's operating costs remain relatively constant as sales volume increases
or decreases. To the extent that the Company has under-utilized production
capacity, operating profit increases or decreases significantly as sales volume
increases or decreases. In the early 1990's, the Company had excess capacity.
Therefore, as sales increased from 1995 to 1997, costs associated with
manufacturing remained relatively unchanged and the Company's operating profit
over the period benefited. As occurred during the nine months ended March 31,
1998, the Company anticipates that operating costs will continue to increase as
it adds capacity to position itself for future growth.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected financial information expressed as a
percentage of sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales............................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................................. 74.7 66.6 62.6 61.5 65.9
Selling, general and administrative expense......................... 13.5 11.8 12.1 12.3 11.1
Research and development expense.................................... 5.4 4.3 4.7 4.5 4.8
--------- --------- --------- --------- ---------
Operating profit.................................................... 6.4 17.3 20.6 21.7 18.2
Interest (income) expense........................................... 4.2 3.3 (0.8) (0.7) (0.3)
Exchange (gain) loss................................................ (0.3) 0.4 0.3 0.3 0.1
--------- --------- --------- --------- ---------
Income before income taxes, minority interest and extraordinary
item.............................................................. 2.5 13.6 21.1 22.1 18.4
Provision for income taxes.......................................... 1.3 7.4 7.7 6.3
--------- --------- --------- --------- ---------
Income before minority interest and extraordinary item.............. 2.5 12.3 13.7 14.4 12.1
Minority interest in loss of majority owned joint venture........... (0.3) (0.4) (0.4) (0.3)
--------- --------- --------- --------- ---------
Income before extraordinary item.................................... 2.5 12.6 14.1 14.8 12.4
Extraordinary item.................................................. (8.5) (11.6)
--------- --------- --------- --------- ---------
Net income........................................................ 2.5% 12.6% 22.6% 26.4% 12.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
SALES. Sales are comprised primarily of photomask sales to semiconductor
manufacturers. Sales increased 6.5% from $191.3 million in the nine months ended
March 31, 1997 to $203.7 million in the nine months ended March 31, 1998. Sales
in North America, Europe and Asia increased from $107.0 million, $46.2 million
and $38.1 million in the nine months ended March 31, 1997 to $114.4 million,
$49.6 million and $39.7 million in the nine months ended March 31, 1998. A
continued increase in the demand for advanced photomasks, which have higher
average selling prices, was a primary contributor to the overall increase in
sales during these periods. This shift in demand reflects what the Company
believes to be a continued trend toward higher utilization of complex
semiconductor devices with finer line widths. Product mix related average
selling price increases contributed approximately one half of the revenue growth
in the nine months ended March 31, 1998. The balance of the revenue growth came
from increased unit volume. The strength of the U.S. Dollar against the Korean
Won, and to a lesser extent, the German Mark and French Franc, adversely
impacted sales by approximately $10.5 million in the nine months ended March 31,
1998 and thus adversely impacted sales growth in the nine months ended March 31,
1998 as compared to the same period in the previous year.
COST OF GOODS SOLD. Cost of goods sold consists of material, labor,
depreciation and overhead. Cost of goods sold increased 14.1% from $117.7
million in the nine months ended March 31, 1997 to $134.2 million in the nine
months ended March 31, 1998 resulting primarily from higher costs associated
with increased sales, costs related to new facilities and costs related to
continued capacity expansions at existing facilities. As a percentage of sales,
cost of goods sold increased from 61.5% in the nine months ended March 31, 1997
to 65.9% in the nine months ended March 31, 1998. The percentage of sales
increase was primarily due to margin compression as a result of the strength of
the U.S. Dollar, costs related to new facilities and costs related to continued
capacity expansions at existing facilities. As the Company adds capacity to
position itself for future growth, it will incur additional costs related to new
facilities and costs related to capacity expansions at existing facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense includes salaries of sales personnel, marketing expense,
general and administrative expense and product distribution expense. Since
January 1, 1996, general and administrative expense includes fees incurred by
the Company under administrative services agreements with DuPont, the Company's
majority stockholder,
16
<PAGE>
and certain DuPont subsidiaries. Selling, general and administrative expense as
a percentage of sales decreased from 12.3% in the nine months ended March 31,
1997 to 11.1% in the nine months ended March 31, 1998. Selling, general and
administrative expense decreased 3.2% from $23.4 million in the nine months
ended March 31, 1997 to $22.7 million in the nine months ended March 31, 1998 as
a result of reductions in discretionary spending.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists
primarily of employee costs, cost of material consumed, depreciation,
engineering related costs and the Company's share of costs of the limited
liability company discussed below. Research and development expense increased
from $8.6 million in the nine months ended March 31, 1997 to $9.7 million in the
nine months ended March 31, 1998. The increase was due primarily to the
Company's joint venture participation with Advanced Micro Devices, Micron
Technology and Motorola in a limited liability company called the DPI Reticle
Technology Center, LLC ("RTC") which was formed to develop advanced photomask
technology and pilot line fabricate leading-edge photomasks. The Company
believes that, through its participation in the RTC, it will be able to help
meet the future technology needs of the semiconductor industry for advanced
photomasks. There can be no assurance that the RTC will yield results that are
favorable to the Company.
The Company anticipates that research and development expense will continue
to increase in absolute terms in the future reflecting the Company's strategy of
advancing its technological leadership. However, there can be no assurance that
such expenditures will enable the Company to develop new technologies or to
maintain its technological leadership.
INTEREST INCOME. Interest income was $1.3 million in the nine months ended
March 31, 1997 and $0.5 million in the nine months ended March 31, 1998.
Interest income results from short-term investment of the Company's cash
balances.
EXCHANGE LOSS. Exchange loss consists of net gains and losses resulting
from the remeasurement of the Company's accounts denominated in non-U.S.
currencies into U.S. Dollars, which is the Company's functional currency.
Exchange loss was $0.6 million in the nine months ended March 31, 1997 compared
to $0.2 million in the nine months ended March 31, 1998 primarily due to
fluctuations of the U.S. Dollar against the Korean Won, German Mark and French
Franc. Exchange loss is net of the impact of hedging activities designed to
reduce exchange rate exposure.
PROVISION FOR INCOME TAXES. The Company's tax expense has been determined
in accordance with FAS 109 and is based on the statutory rates in effect in the
countries in which the Company operates. The Company's operations in Korea are
subject to a government granted tax exemption. The Company will continue to
enjoy the full benefits of the tax exemption in Korea until 2001 and a partial
benefit thereafter until the tax exemption terminates in 2003.
MINORITY INTEREST IN LOSS OF MAJORITY OWNED JOINT VENTURE. The minority
interest impact of the Company's joint venture in China was ($0.6 million) in
the nine months ended March 31, 1997 compared to ($0.7 million) in the nine
months ended March 31, 1998. Minority interest reflects the partner's share of
losses from the joint venture.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
SALES. Sales increased 22.4% from $213.4 million in 1996 to $261.2 million
in 1997. Sales in North America, Europe and Asia increased from $121.6 million,
$52.9 million and $38.9 million in 1996 to $145.6 million, $63.0 million and
$52.6 million in 1997. A continued increase in the demand for advanced
photomasks, which have higher average selling prices, was a primary contributor
to the increase in sales during this period. This shift in demand reflects what
the Company believes to be a continued trend toward higher utilization of
complex semiconductor devices with finer linewidths. The increase in sales
during this period also reflects the overall increase in demand for photomasks.
17
<PAGE>
COST OF GOODS SOLD. Cost of goods sold increased 14.9% from $142.2 million
in 1996 to $163.3 million in 1997 resulting primarily from higher costs
associated with increased sales. As a percentage of sales, cost of goods sold
decreased from 66.6% in 1996 to 62.5% in 1997. The decrease was primarily due to
continued improvements in capacity utilization including increased use of
internally sourced photoblanks and pellicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Prior to January 1, 1996,
general and administrative expense principally included allocated costs for
services provided by centralized DuPont organizations. These allocated costs are
not necessarily indicative of the costs that would have been incurred if the
Company had been independent. Since January 1, 1996, general and administrative
expense includes fees incurred by the Company under administrative services
agreements with DuPont, the Company's majority stockholder, and certain DuPont
subsidiaries. Selling, general and administrative expense as a percentage of
sales increased from 11.8% in 1996 to 12.1% in 1997. Selling, general and
administrative expense increased 25.6% from $25.2 million in 1996 to $31.6
million in 1997. The increases were due largely to increases in selling expenses
corresponding to increased sales and increases in incentive compensation
expenses corresponding to increases in earnings.
RESEARCH AND DEVELOPMENT EXPENSE. The Company's allocated share of DuPont's
central research and development was $1.1 million in 1996. Such allocations
terminated December 31, 1995. Research and development expense, excluding DuPont
allocations, increased from $8.1 million in 1996 to $12.4 million in 1997. As a
percentage of sales, research and development expense increased slightly
compared to the prior year. These increases reflect the Company's joint venture
participation in the RTC.
INTEREST (INCOME) EXPENSE. Interest expense was $7.1 million in 1996 and
interest income was $2.1 million in 1997. The primary source of interest expense
in 1996 was the Company's master note arrangements with DuPont. On June 28,
1996, DuPont contributed the $90.5 million balance outstanding on the master
notes to the Company as a capital contribution. Interest income results from
short-term investment of the Company's cash balances.
EXCHANGE (GAIN) LOSS. Exchange loss was $0.9 million in 1996 and $0.8
million in 1997. The loss is primarily due to fluctuations of the U.S. Dollar
against the German Mark, French Franc and Korean Won. Exchange (gain) loss is
net of the impact of hedging activities designed to reduce exchange rate
exposure.
PROVISION FOR INCOME TAXES. Prior to the initial public offering, tax
expense was determined and allocated to the Company by applying the separate
taxpayer approach outlined in FAS 109. Under this approach, the Company had net
operating loss carry forwards in the U.S. and Europe, some of which became fully
utilized during the year ended June 30, 1996. The Company's operations in Korea
are subject to a government granted tax exemption. The Company will continue to
enjoy the full benefits of the tax exemption in Korea until 2001 and a partial
benefit thereafter until the tax exemption terminates in 2003. In actuality, the
Company's results prior to the initial public offering were included in
consolidated tax returns filed by DuPont and the tax benefit of prior year
losses was realized by DuPont. Since the initial public offering, tax expense
has been determined in accordance with FAS 109 and is based on the statutory
rates in effect in the countries in which the Company operates.
MINORITY INTEREST IN LOSS OF MAJORITY OWNED JOINT VENTURE. The minority
interest impact of the Company's joint venture in China was ($0.7 million) in
1996 compared to ($0.9 million) in 1997, reflecting increased pre-operating
losses from, and partner funding of, the joint venture.
EXTRAORDINARY ITEM. In January 1997, the Company sold its entire investment
in Etec Systems, Inc. ("Etec") common stock. Aggregate net proceeds from the
sale of $39.2 million will be used in operations. The Company realized a $34.2
million gain on the sale. The related provision for income taxes was $12.0
million.
18
<PAGE>
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
SALES. Sales increased 32.1% from $161.5 million in 1995 to $213.4 million
in 1996. Sales in North America, Europe and Asia increased from $90.1 million,
$42.0 million and $29.5 million in 1995 to $121.6 million, $52.9 million and
$38.9 million in 1996. A continued increase in the demand for advanced
photomasks, which have higher average selling prices, was a primary contributor
to the increase in sales during this period. This shift in demand reflects what
the Company believes to be a continued trend toward higher utilization of
complex semiconductor devices with finer linewidths. The increase in sales
during this period also reflects the overall increase in demand for photomasks.
In addition, approximately $13 million of photomask sales to Lucent Technologies
were generated during 1996 under a five-year supply agreement executed in
connection with the April 1995 purchase of selected photomask manufacturing
equipment from an affiliate of AT&T. Under the terms of the supply agreement,
Lucent Technologies has agreed to purchase certain minimum quantities of
photomasks from the Company.
COST OF GOODS SOLD. Cost of goods sold increased 18.0% from $120.5 million
in 1995 to $142.2 million in 1996 resulting primarily from higher costs
associated with increased sales. As a percentage of sales, cost of goods sold
decreased from 74.6% in 1995 to 66.6% in 1996. The decrease was primarily due to
continued improvements in capacity utilization including increased use of
internally sourced photoblanks and pellicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Prior to January 1, 1996,
general and administrative expense principally included allocated costs for
services provided by centralized DuPont organizations. These allocated costs are
not necessarily indicative of the costs that would have been incurred if the
Company had been independent. Since January 1, 1996, general and administrative
expense includes fees incurred by the Company under administrative service
agreements. Selling, general and administrative expense as a percentage of sales
declined from 13.5% in 1995 to 11.8% in 1996. Selling, general and
administrative expense increased 15.4% from $21.8 million in 1995 to $25.2
million in 1996. The increase was due largely to increases in selling expenses
corresponding to increased sales.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists
primarily of employee costs, cost of material consumed, depreciation of
equipment, engineering related costs and the Company's allocated share of
DuPont's central research and development. These allocations were $2.0 million
and $1.1 million in 1995 and 1996. Such allocations terminated December 31,
1995. Research and development expense, excluding DuPont allocations, increased
from $6.8 million in 1995 to $8.1 million in 1996. However, as a percentage of
sales, research and development expense declined slightly compared to the prior
year, reflecting increased sales.
INTEREST EXPENSE. Interest expense was essentially flat at approximately $7
million for both 1995 and 1996.
EXCHANGE (GAIN) LOSS. Exchange gain was $0.5 million in 1995 compared to an
exchange loss of $0.9 million in 1996. The loss in 1996 was primarily
attributable to the fluctuation of the U.S. Dollar against the German Mark,
French Franc and Korean Won.
PROVISION FOR INCOME TAXES. Tax expense has been determined and allocated
to the Company by applying the separate taxpayer approach outlined in FAS 109.
Under this approach, the Company had net operating loss carryforwards in the
U.S. and Europe, some of which became fully utilized during the year ended June
30, 1996. The Company's operations in Korea are subject to a government granted
tax exemption. The Company will continue to enjoy the full benefits of the tax
exemption in Korea until 2001 and a partial benefit thereafter until the tax
exemption terminates in 2003. In actuality, the Company's results were included
in consolidated tax returns filed by DuPont and the tax benefit of prior year
losses was realized by DuPont.
19
<PAGE>
MINORITY INTEREST IN LOSS OF MAJORITY OWNED JOINT VENTURE. The minority
interest impact of the Company's joint venture in China was ($0.2 million) in
1995 compared to ($0.7 million) in 1996, reflecting increased pre-operating
losses from, and partner funding of, the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $66.1 million at June 30, 1997 and $40.5
million at March 31, 1998. The decrease in working capital is due principally to
lower cash balances, as partially offset by higher accounts receivable and
inventory balances, and higher accrued liabilities.
Cash and cash equivalents were $51.4 million at June 30, 1997 and $15.9
million at March 31, 1998. Cash provided by operations was $48.4 million in the
nine months ended March 31, 1997 and $53.2 million in the nine months ended
March 31, 1998.
Cash provided by investing activities was $2.1 million in the nine months
ended March 31, 1997 while cash used in investing activities was $112.6 million
in the nine months ended March 31, 1998. The cash provided by investing
activities in the nine months ended March 31, 1997 is the net of cash proceeds
from the sale of the Company's investment in Etec common stock and capital
expenditures. The cash used in investing activities in the nine months ended
March 31, 1998 is a combination of capital expenditures and payment for the
Company's strategic alliance with Hyundai Electronics Industries Co., Ltd.
("Hyundai") whereby the Company purchased selected photomask manufacturing
equipment located at Hyundai's captive photomask manufacturing facility in
Kanam, Korea and entered into a five-year sales and supply agreement with
Hyundai. The Company acquired, through its Korean subsidiary, approximately $29
million of equipment and approximately $1 million in inventory. Consideration
for the assets included $28.3 million in cash, and was partially financed by
$24.0 million in borrowings on the Company's credit facility with DuPont. In
recent periods, the Company's most significant use of cash in investing
activities has been capital expenditures. Management expects capital
expenditures for the remainder of the year ending June 30, 1998 will be
approximately $20 million. Capital expenditures have been and will be used
primarily to expand the Company's manufacturing capacity and advance the
Company's technical capability. The Company may in the future pursue additional
acquisitions of businesses, products and technologies, or enter into other joint
venture arrangements that could complement or expand the Company's business. Any
material acquisition or joint venture could result in a decrease to the
Company's working capital depending on the amount, timing and nature of the
consideration to be paid.
Cash provided by financing activities was $0.7 million in the nine months
ended March 31, 1997 and was $24.9 million in the nine months ended March 31,
1998 and, for 1998, primarily reflects borrowings on the Company's credit
agreement. The Company and DuPont have entered into a credit agreement (the
"Credit Agreement") pursuant to which DuPont has agreed to provide a credit
facility to the Company in an aggregate amount of $100.0 million. The Credit
Agreement expires in 2001 and any loans thereunder will bear interest at LIBOR
plus 25 basis points. At the Company's option, advances under the Credit
Agreement are convertible into term loans with maturities up to seven years. To
date, the Company has borrowed a maximum of $35.0 million under the credit
facility and at March 31, 1998 borrowings of $24.0 million were outstanding
under the Credit Agreement. The Credit Agreement contains, among other things,
covenants restricting the Company's ability to incur additional debt.
The Company intends to use approximately $24 million of the net proceeds to
the Company to repay indebtedness outstanding under the Credit Agreement. The
Company intends to use the balance of the net proceeds of the offering for
working capital and other general corporate purposes, including financing the
Company's growth and capital expenditures made in the ordinary course of its
business. The Company may also apply a portion of the net proceeds of the
offering to acquire businesses, products and technologies and to fund joint
ventures that complement or expand the Company's business.
The Company's ongoing cash requirements will be for capital expenditures,
acquisitions, research and development and working capital. The Company is
currently negotiating an agreement with United
20
<PAGE>
Microelectronics Corporation to establish a joint venture to produce photomasks
in Taiwan, has announced that it plans to build a new photomask production
facility in Singapore, has begun construction on a new photomask production
facility in Gresham, Oregon and has announced that it has entered into an
agreement with Etec to upgrade its MEBES-Registered Trademark- electron-beam
pattern generation tools. These plans reflect a significant capital investment
over the next five years. Management believes that cash provided by operations,
the Credit Agreement and the offering of Common Stock described herein will be
sufficient to meet the Company's cash requirements for at least the next 12
months. Based on its current operating plans, the Company will require external
financing from time to time to fund its capital expenditures. There can be no
assurance that the Company will be able to obtain the additional financing
required to fund these capital investments on reasonable terms, or at all.
Furthermore, there can be no assurance that alternative sources of financing
will be available upon expiration of the Credit Agreement or that alternative
sources of funding will be available if the Company's borrowing requirements
exceed the facility. In addition, there can be no assurance that, even if
funding is available, the terms thereof will be attractive to the Company.
OTHER MATTERS
In June 1997, the Financial Accounting Standards Board issued FAS 130 and
FAS 131. Neither FAS will have a material impact on the Company.
The Company is currently reviewing its information and operational systems
and manufacturing processes in order to identify and modify those products,
services or systems that are not Year 2000 compliant. The total cost of these
Year 2000 compliance activities has not been, and is not anticipated to be,
material to the Company's financial position or its results of operations.
21
<PAGE>
BUSINESS
THE COMPANY
Based on worldwide sales, the Company is one of the largest photomask
manufacturers in the world. The Company sells its products to approximately 200
customers in 20 different countries. Essentially all of the Company's sales are
to customers in the semiconductor manufacturing industry. The Company
manufactures a broad range of photomasks based on customer-supplied design data.
The Company also manufactures photoblanks and pellicles, the principal
components of photomasks, primarily for internal consumption. The Company
operates globally from ten established manufacturing facilities in North
America, Europe and Asia and numerous customer service centers.
INDUSTRY BACKGROUND
Photomasks are high purity quartz or glass plates containing precision
images of integrated circuits and are used as masters by semiconductor
manufacturers to optically transfer these precision images onto semiconductor
wafers. 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 is then used to successively layer the circuit patterns
onto the semiconductor wafer. Photomasks are a necessary component in the
production of semiconductors, and advanced photomask technologies are critical
to enabling the manufacture of increasingly complex semiconductor devices. In
addition, advanced photomask technologies such as phase shift masks and optical
proximity correction masks can extend the optical resolution of existing
photolithography equipment, thereby delaying the otherwise significant
investment required for new semiconductor manufacturing equipment. The demand
for photomasks is driven largely by increases in the number of semiconductor
designs and the complexity of integrated circuits. Growth in the photomask
market has not always correlated with increases in semiconductor sales.
According to industry sources, the total worldwide market for photomasks has
grown from approximately $1.3 billion in 1995 to approximately $2.0 billion in
1997. The Company estimates that the photomask market in North America, Europe
and non-Japan Asia represented approximately 50% of the worldwide market over
the last five years.
Historically, photomasks were generally designed and manufactured internally
by semiconductor manufacturers in captive production facilities. Since the
mid-1980s, however, the market for merchant photomask manufacturers has grown
substantially. The Company estimates that during 1997 merchant photomask sales
in North America, Europe and non-Japan Asia were approximately $700 million. As
a result of a number of factors, including the increasing complexity and pace of
technological change in the photomask industry, the emergence of reliable
merchant photomask manufacturers and a trend by semiconductor manufacturers to
focus capital resources on their core business, a number of semiconductor
manufacturers have divested their captive photomask operations and chosen to
rely on merchant photomask manufacturers for their photomask needs. Other
semiconductor manufacturers who have retained captive photomask operations have
increasingly turned to merchant manufacturers to produce more technically
advanced photomasks rather than invest in new capital equipment. Finally, the
increasing capital requirements and competitive pressures in the photomask
market have contributed to a significant consolidation among merchant photomask
manufacturers.
As the share of the photomask market served by merchant manufacturers has
increased, semiconductor manufacturers have become increasingly reliant on
global manufacturers which can reliably deliver advanced photomasks.
Consequently, many semiconductor manufacturers have developed strategic
relationships with leading merchant photomask manufacturers in order to maintain
a consistent source of high quality photomasks.
The Company believes that the following trends are increasing the demand for
photomasks and the photomask industry's importance in the semiconductor
manufacturing process:
22
<PAGE>
CUSTOMIZATION OF SEMICONDUCTOR DESIGNS. Growing demand for
semiconductors, including application specific integrated circuits (ASICs),
application specific standard products (ASSPs), embedded microcontrollers
and a growing variety of memory products, has generated increasing demand
for photomasks as each new type of semiconductor device requires additional
new and often more advanced photomasks.
INCREASING DEVICE COMPLEXITY. As the complexity of semiconductor
devices has increased in response to continued efforts to improve the
performance and functionality of these devices through greater transistor
densities and smaller feature sizes, the number of successive layers of
patterns required to manufacture an integrated circuit has increased,
resulting in an increase in the number of photomasks used to manufacture
that circuit. For example, the number of photomasks typically required for
the manufacture of microprocessors in 1991 was 14 as compared to 25
photomasks now required for the most advanced generation of microprocessors.
DECREASING SIZE OF SEMICONDUCTOR DESIGNS. The semiconductor industry's
growth is driven by its ability to produce smaller and more powerful
semiconductor chips at lower costs. As semiconductor line widths become as
small as the wavelength of the illumination sources in optical lithography,
the semiconductor manufacturing process becomes increasingly dependent upon
high precision photomasks to deliver process results to more demanding
specifications and tolerances. Future generations of wafer lithography
equipment are expected to increase the need for high precision photomasks,
thereby further increasing demand for advanced photomasks with tighter
specifications. Development of increasingly small design features is likely
to generate increased demand for advanced photomasks that can accurately and
reliably replicate intricate design features.
PROLIFERATION OF SEMICONDUCTOR APPLICATIONS. Semiconductor devices of
all types are continuing to proliferate into new products, including
cellular telephones, pagers, automobiles, medical products, household
appliances and other consumer electronic products. In addition, the demand
for semiconductor devices from traditional markets such as personal
computers is growing significantly as semiconductor content in electronic
systems increases and as personal computers expand further into homes and
other new market segments. The Company believes that the proliferation of
semiconductor applications will lead to an increase in semiconductor design
activity and resulting demand for photomasks.
The Company believes that all of these changes in the semiconductor industry
are increasing the demand for, and the already important role of, photomasks,
and driving the need for the continuing development of advanced photomasks.
STRATEGY
The Company's objective is to be the world's premier supplier of photomasks,
providing superior service and advanced technology, by implementing the
following strategies:
ADVANCE TECHNOLOGICAL LEADERSHIP. The Company intends to continue to invest
in research and development and advanced equipment to enhance its technological
leadership position. The Company believes this strategy is essential to
continuing to develop and deliver leading-edge photomasks, which are required to
meet the demands of the leading global semiconductor manufacturers. The Company
also believes that by providing leading-edge photomasks it can position itself
as the preferred provider of photomasks to its customers. For example, the
Company has partnered with Advanced Micro Devices, Micron Technology and
Motorola in the formation and ongoing operation of the RTC, a unique facility
dedicated solely to advanced photomask technology development and pilot line
fabrication of leading-edge photomasks. The technological advancements developed
by the RTC are generally available to the Company for the development and
manufacture of photomasks and related products in its manufacturing facilities.
23
<PAGE>
EXPAND STRATEGIC RELATIONSHIPS WITH CUSTOMERS. A key component of the
Company's ongoing strategy is to continue to develop and expand its strategic
relationships with the world's leading semiconductor manufacturers. The Company
believes that these joint development relationships, such as its alliance with
Hyundai to jointly develop leading-edge photomasks and its participation in the
RTC, will enable it to share the risks and benefits of developing the next
generation of photomasks. In addition, the Company believes these relationships
will help to solidify its position as, or provide it with the opportunity to
become, the primary supplier of advanced photomasks and key enabling
technologies to its customers.
CAPITALIZE ON ESTABLISHED GLOBAL MANUFACTURING AND SUPPORT NETWORK. Since
1991, the Company has operated globally with integrated manufacturing facilities
in North America, Europe and Asia. The Company's facilities are strategically
located in proximity to its customers, many of whom have multiple facilities
located throughout the world and prefer global suppliers to serve their
photomasks needs. In addition, the Company's facilities are linked by a global
data transmission network that integrates the manufacturing and delivery
capabilities of these facilities, enabling efficient resource allocation and
information sharing. The Company believes these factors provide it with a
competitive advantage by enabling it to consistently deliver high quality
products and services, on a timely basis, to each customer's various facilities
around the world.
LEVERAGE STRATEGIC RELATIONSHIPS WITH KEY SUPPLIERS. The Company draws on
its internal skills and capabilities to develop advanced photoblanks, a critical
component of photomasks, and to identify suppliers of products and materials
critical to improving photomask technology. For example, the Company has entered
into a strategic alliance with Hoya Corporation to develop and produce advanced
photoblanks supporting the manufacture of semiconductor devices with 0.18 micron
design rules and below. The Company also believes that its strategic
relationships with leading equipment suppliers help ensure that it can provide
its customers with early access to the most advanced photomasks. In this regard,
the Company has entered into an exclusive agreement with Etec to significantly
upgrade the capability and capacity of the Company's MEBES-Registered Trademark-
electron-beam pattern generation tools, which is expected to significantly
expand the Company's leading-edge photomask capability. As a result of all of
the foregoing measures, the Company believes that it can rapidly deliver to
customers the latest advances in photomask technologies.
PRODUCTS AND TECHNOLOGY
PHOTOMASKS
Photomasks are high-purity quartz or glass plates containing precision,
microscopic images of integrated circuits that are used as masters (similar to
negatives in a photographic process) to optically transfer such microscopic
images of circuit patterns onto semiconductor wafers during the fabrication of
semiconductor integrated circuits and discrete devices. In producing a
semiconductor, a photomask is usually placed in a photolithography tool, called
a stepper, to make numerous reproductions of the pattern image on semiconductor
wafers. This reproduction is typically accomplished by passing light through the
photomask onto a photoresist that was spin-coated onto the surface of the
semiconductor wafer. The areas of the photoresist that have been exposed to
light are then dissolved by chemical developers and subjected to further
processing, such as etching, ion implantation and metal deposition. Successive
steps of lithography, deposition and processing gradually create the multiple
layers of conducting, semiconducting and insulating patterns that make up the
millions of transistors found in a modern semiconductor device.
Photomasks are manufactured by the Company in accordance with semiconductor
design data provided on a confidential basis by its customers. The final design
of each integrated circuit results in a set of precise individual circuit
patterns to be imaged onto a series of typically 10 to 25 separate photomask
levels. The complete set of patterned photomasks is required to manufacture the
customer's integrated circuit design. Upon receipt of a customer's circuit
design, the Company converts the design to pattern data, which are used to
control an electron beam or laser beam that exposes the circuit pattern onto a
thin
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<PAGE>
layer of photosensitive polymer, called a photoresist, covering the opaque
chrome layer of the photoblank. The exposed areas are dissolved by chemical
developers and the thin chrome layer of the photoblank is etched to replicate
the customer design pattern on the photomask. Subsequently, the photomask is
inspected for defects, its critical dimensions are confirmed and any defects are
repaired. Pellicles are then mounted onto the masks and the masks are delivered
to the customer.
The Company manufactures a broad range of photomasks for varying customer
applications, including applications requiring the use of leading-edge
photomasks. The Company manufactures these products using multiple production
techniques, including electron beam and laser beam exposure as well as lower
cost optical exposure techniques.
The Company has developed advanced photomask products for customers using
leading-edge lithography technologies in three categories: (i) masks with
extremely tight specifications, (ii) phase shift masks and (iii) masks with
optical proximity correction. Advanced specification photomasks permit the
customer to use a variety of lithography technologies since the high quality and
tight tolerances of the photomask permit greater flexibility in the
semiconductor manufacturing process. Phase shift masks and masks with optical
proximity correction typically require extremely tight specifications coupled
with additional unique characteristics. Phase shift masks are photomasks that
alter the phase of the light passing through the photomask permitting improved
depth of focus and resolution on the wafer. Optical proximity correction masks
are photomasks with submicron features that help minimize optical distortions on
the wafer and therefore permit improved image fidelity. The demand for these
products has grown during the past two years as customers search for
cost-effective, less capital intensive methods for improving current
semiconductor fabrication yields and shrinking feature sizes. All three of these
product categories provide opportunities for semiconductor manufacturers to
produce more advanced products with existing lithography equipment. Therefore,
these advanced photomasks are expected by the Company to enable semiconductor
manufacturers to delay significant capital investment in new generation
steppers.
PHOTOBLANKS AND PELLICLES
Photomasks are manufactured from photoblanks, which are highly polished
quartz or glass plates coated with ultra-thin layers of chrome and photoresist.
The photomask is protected from particle contamination by an ultra-thin,
frame-mounted transparent film called a pellicle. The pellicle, when mounted on
the photomask, creates a sealed contamination-free environment for the photomask
pattern. The Company manufactures both photoblanks and pellicles and it believes
that its materials knowledge gives it a competitive advantage in managing the
supply, quality and cost of its principal component materials.
The production of photoblanks requires ultra-pure chrome deposition on
highly polished and extremely flat quartz or glass substrates. The quality and
properties of photoblanks strongly affect the yield and quality of photomasks.
The Company purchases virgin quartz substrates from a limited number of
suppliers. In addition, the Company recycles quartz substrates which have been
repolished in order to reduce cost and dependence on external suppliers.
Historically, the Company has purchased between 20% and 30% of the photoblanks
it uses to manufacture photomasks from Hoya Corporation. The Company has entered
into a strategic alliance with Hoya Corporation to develop and produce advanced
photoblanks supporting the manufacture of semiconductor devices with 0.18 micron
design rules and below. The Company believes that this alliance, coupled with
the Company's internally developed knowledge of photoblank technology, enhances
the Company's ability to develop and deliver advanced photomasks.
Pellicles are produced from nitrocellulose or other polymer solutions that
the Company prepares or purchases. The ultra-thin film is typically
precision-coated with an anti-reflective layer to improve optical performance
characteristics. The Company has introduced proprietary pellicle films that are
specifically designed to withstand the powerful DUV radiation found in the
emerging generation of advanced steppers. The Company holds several patents
covering various aspects of pellicle technology and from time
25
<PAGE>
to time may have various patents pending. Historically, the Company has
purchased approximately 20% to 30% of the pellicles it uses to manufacture
photomasks from third-party suppliers. See "Risk Factors-- Concentration of and
Dependence on Suppliers."
GLOBAL MANUFACTURING AND OPERATIONS
Since 1991, the Company has operated globally with established manufacturing
facilities in North America, Europe and Asia. Approximately 56%, 24% and 20% of
the Company's sales in fiscal 1997 were in the U.S., Europe and Asia. In North
America, the Company operates photomask manufacturing facilities in Round Rock,
Texas, Santa Clara, California, and Kokomo, Indiana. Additionally, the Company
has begun construction on a photomask manufacturing facility in Gresham, Oregon.
In Europe, the Company's manufacturing facilities are located in Rousset,
France, Hamburg, Germany and Hamilton, Scotland. In Asia, the Company currently
operates a manufacturing facility in Ichon, Korea, is participating in the
operation of a facility with its joint venture partner in Shanghai, China, has
plans to build a new photomask production facility in Singapore and is currently
negotiating an agreement with United Microelectronics Corporation to establish a
joint venture to produce photomasks in Taiwan. The Company is serving
semiconductor manufacturers in Japan through its facility in Ichon, Korea. The
Japanese market is predominantly served by captive Japanese suppliers and three
significant local independent suppliers.
The Company believes that its global presence is important for meeting the
supply needs of multi-national customers as it facilitates the Company's ability
to supply quality products to its customers' worldwide locations on a timely
basis. Close proximity to customers is important because of rapid delivery
requirements and the need for frequent personal interactions. As a result, each
manufacturing facility primarily supplies local semiconductor manufacturers.
Moreover, each of the Company's manufacturing facilities is connected by a
global data transmission network, which allows these facilities to transfer
confidential customer design data and manufacturing instructions rapidly and
coordinate manufacturing responsibility with the Company's other facilities. By
being able to transfer information throughout the world with this network, the
Company is able to optimize resource allocation, thereby lowering production
costs while providing effective customer service on a local level.
Each of the Company's wholly owned manufacturing sites is ISO 9002
qualified. The Company manufactures photomasks in clean rooms designed to
provide a contamination-free, temperature and humidity controlled environment.
These clean rooms are similar to those used in the manufacture of
semiconductors. The Company's historical emphasis on product research and
development has carried over to process technology and has resulted in the
development of production facilities equipped with state-of-the-art
manufacturing equipment. See "Risk Factors--Significant International
Operations."
CUSTOMERS
The Company is a principal photomask supplier to many of the leading global
semiconductor manufacturers. Essentially all the Company's sales are to
customers in the semiconductor manufacturing industry. The Company's largest
customers during the fiscal year ended June 30, 1997 included the following:
<TABLE>
<S> <C> <C>
Advanced Micro Devices LSI Logic Samsung
AMI Lucent Technologies Seagate
Atmel Maxim SGS-Thomson
Delco/General Motors Micron Technology Silicon Valley Group
Hexfet Motorola Texas Instruments
Hyundai National Semiconductor VLSI Technology
LG Semicon Philips
</TABLE>
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<PAGE>
In fiscal 1997, the Company's largest customer, SGS-Thomson, accounted for
approximately 12% of the Company's sales, and the Company's six largest
customers, in the aggregate, accounted for more than 50% of sales.
The Company has entered into multi-year, non-exclusive supply agreements
with some of its customers, including Lucent Technologies, Philips, SGS-Thomson
and Hyundai. Each agreement is separately negotiated and therefore specific
terms vary.
WORLDWIDE SALES AND SUPPORT
Because each photomask is unique, the Company works closely with each
customer to define and communicate precisely the specifications required by the
customer. The Company sells and services its products principally through its
own employees based at its manufacturing sites throughout the world.
The Company has established customer service centers inside several of its
customers' design centers and wafer fabrication facilities. Employees located at
these centers routinely interact with customer engineers to improve the accuracy
of the customers' design data and documentation and ensure that the customers'
order receives the appropriate priority at the manufacturing facility and that
routine problems are resolved promptly. The Company believes that these centers
located in customers' facilities reduce errors and returns and improve on time
delivery, each of which improves customer satisfaction.
COMPETITION
The photomask industry is highly competitive and most of the Company's
customers utilize more than one photomask supplier. Because of its global
presence, the Company competes with various merchant manufacturers in each local
geographic region in which it operates. In North America, the Company competes
primarily with Photronics and, to a lesser extent, with other smaller merchant
photomask suppliers. In Europe, the Company competes primarily with
Compugraphics International Limited and Photronics. In Asia, the Company
primarily competes with Dai Nippon Printing, Hoya Corporation, Photronics, P.K.
Limited, Taiwan Mask Corporation and Toppan Printing Company. The Company
expects that some of its competitors will expand operations in order to better
meet the needs of customers and take advantage of new growth opportunities. In
addition, captive photomask operations can, and sometimes do, sell into the
merchant market.
The Company believes that with the increasing importance of leading-edge
photomask technology in the semiconductor manufacturing process, the ability to
manufacture these advanced photomasks will be an important competitive factor.
On time delivery of defect-free photomasks at competitive prices historically
has also been an important competitive factor in the industry. The Company also
believes that its ability to develop the most advanced photomasks provides a
more cost-effective alternative to the formation of captive operations, which
require significant capital investments and operating costs to develop the
requisite manufacturing expertise.
RESEARCH AND DEVELOPMENT
The photomask industry has been and is expected to continue to be
characterized by rapid technological change. The Company has historically made
significant investments in research and development in order to improve its
technological leadership. In order to maintain its technological leadership, the
Company expects that it will be required to anticipate, respond to and utilize
changing technologies.
The Company, along with Advanced Micro Devices, Micron Technology and
Motorola, has begun operation of the RTC, a joint venture for advanced photomask
technology development and pilot line fabrication of leading-edge photomasks.
The RTC is located in a fully equipped, free-standing facility adjacent to the
photomask manufacturing facility the Company operates in Round Rock, Texas. The
Company believes that the collaborative effort under way at the RTC leverages
the combined strength and
27
<PAGE>
insights of global leaders in memory, microprocessors and advanced logic design
and fabrication to accelerate the development of advanced photomasks.
The Company, independently and through its participation in the RTC, intends
to continue to invest in research and development in order to ensure its
technological capabilities. The Company is focusing its research and development
in three areas: (i) the enhancement of existing products by improving
manufacturing techniques and technologies; (ii) the development of leading-edge
photomask products such as phase shift masks, masks with optical proximity
correction and advanced specification masks; and (iii) the development of
advanced materials needed for the manufacture of leading-edge photomasks.
The Company is enhancing its existing products through worldwide integrated
engineering, capital investment for improved capability and beta testing of
leading-edge equipment. Product enhancements in the past led to the development
of technology currently used to produce photomasks compatible with 0.35 micron
semiconductor lithography. This technology is providing the platform for the
development of manufacturing technologies consistent with 0.25 micron
semiconductor lithography at high yields and rapid cycle times. The Company has
been a leader in the development of leading-edge photomasks products, such as
phase shift, optical proximity and advanced specification masks. In addition to
its internal development efforts, the Company has participated in several
development programs supported by SEMATECH Inc. in the United States and the
Joint European Submicron Strategic Initiative in Europe with respect to advanced
products. The Company's research and development of photomask component
materials is also responding to the technology demands of semiconductor
manufacturers through the development of improved materials needed to produce
advanced photomasks. Recent examples of such materials developments include low
stress chrome blanks, pellicles with contamination-control features and
attenuated embedded chrome blanks for phase shift masks.
The Company has established a research and development group that consists
of trained and experienced personnel. The capabilities of this group have been
augmented by its access to DuPont's corporate science and engineering resources.
There are certain elements of DuPont's material science expertise and its
analytical capabilities that are relevant to photomask research and development.
The Company will continue to have access to DuPont's corporate science and
engineering through 2000 pursuant to a research, development and consulting
agreement between the Company and DuPont, which will provide the Company with a
supplement to its core research and development program. See "Risk
Factors--Rapid Technological Change" and "--Manufacturing Risks."
PATENTS, COPYRIGHTS, TRADEMARKS AND LICENSES
INTELLECTUAL PROPERTY
The Company believes that the success of its business depends primarily on
its proprietary technology, information, processes and know-how, rather than on
patents or trademarks. Much of the Company's proprietary information and
technology relating to manufacturing processes is not patented and may not be
patentable. Certain aspects of the Company's photoblanks and pellicles
technologies are, however, protected by a number of patents and patent
applications. They include product patents for certain types of attenuated,
embedded phase shift blanks and DUV pellicles. While the Company considers its
patents to be valuable assets, it does not believe that its competitive position
is dependent on patent protection or that its operations are dependent on any
individual patent. The Company believes instead that the success of its business
depends primarily on its ability to maintain lead time in developing its
proprietary technology, information, processes and know-how. Nevertheless, the
Company attempts to protect its intellectual property rights with respect to its
products and manufacturing processes through patents and trade secrets when
appropriate as part of its ongoing research, development and manufacturing
activities. The Company also relies on non-disclosure agreements with employees
and vendors to protect its proprietary processes.
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CORPORATE TRADENAME AND TRADEMARK AGREEMENT
The Company and DuPont have entered into a corporate tradename and trademark
agreement (the "Corporate Tradename Agreement") whereby DuPont licenses to
Company (i) use of the tradename "DuPont" as part of the Company's corporate
name, (ii) use of the tradename "DuPont" as part of the name of an affiliated
company of the Company and (iii) use of the trademark DuPont in Oval as part of
the Company's corporate logo. DuPont may terminate the Corporate Tradename
Agreement upon two years prior written notice in the event that DuPont and/or
its affiliates cease to hold 20% of the total outstanding Common Stock of the
Company and upon 90 days written notice in the event that (i) DuPont ceases to
be the largest holder of Common Stock of the Company, (ii) the Company purports
to assign or otherwise transfer the Corporate Tradename Agreement without
DuPont's written consent, or (iii) the Company uses the tradename "DuPont" other
than under the terms of the Corporate Tradename Agreement. In addition, DuPont
may terminate the Corporate Tradename Agreement upon 90 days written notice for
any reason after January 1, 2008. In the Corporate Tradename Agreement, the
Company grants DuPont the right to inspect and test products manufactured by or
for the Company and intended to be sold bearing the DuPont in Oval logo to
determine uniform quality and compliance with quality standards of DuPont and
agrees to hold DuPont harmless from any and all liabilities arising from the
manufacture, sale, transportation, storage or use of products manufactured by or
for the Company bearing the DuPont in Oval logo. Upon termination of the
Corporate Tradename Agreement, the Company will be obligated to: (i) change its
name so that the tradename "DuPont" is omitted therefrom; (ii) cease to use the
tradename "DuPont" or any similar tradename as part of its corporate name or in
any other manner whatsoever; and (iii) cease to use the DuPont in Oval logo.
FACILITIES
The Company conducts manufacturing operations throughout the world. Each of
the Company's wholly owned operations is ISO 9002 qualified. The Company
believes that its facilities are adequate and suitable for their respective
uses. The table below presents certain information relating to the Company's
principal manufacturing and support facilities.
<TABLE>
<CAPTION>
FLOOR SPACE
LOCATION IN SQUARE FEET TYPE OF INTEREST USE
- -------------------------------- ----------------------- ---------------- -----------------
<S> <C> <C> <C>
NORTH AMERICA
Round Rock, Texas 54,000 Owned Photomasks
Kokomo, Indiana 42,000 Owned Photomasks
Santa Clara, California 38,000 Leased Photomasks
<CAPTION>
Gresham, Oregon (under construction) Owned Photomasks
<S> <C> <C> <C>
Poughkeepsie, New York 23,000 Owned Photoblanks
Danbury, Connecticut 55,000 Owned Pellicles
Round Rock, Texas 17,000 Owned Research
Round Rock, Texas 27,000 Owned Administration
EUROPE
Rousset, France 24,000 Leased Photomasks
Hamburg, Germany 22,000 Leased Photomasks
Hamilton, Scotland 15,000 Owned Photomasks
ASIA
Ichon, Korea 102,000 Owned Photomasks
Shanghai, China 16,000 Jointly Owned Photomasks
</TABLE>
The research facility in Round Rock is leased to the RTC and contains
primarily RTC manufacturing equipment leased by the RTC from a third party.
Facilities and property located in Santa Clara and
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<PAGE>
Hamburg are leased under leases that expire in 2001 and October 2022,
respectively. The facility at Rousset is leased under a lease which provides the
Company to take ownership of the facility upon payment of taxes and expenses
relating to the conveyance. The Company also maintains customer service data
centers in leased facilities in Mesa, Arizona, Beaverton, Oregon and Dallas,
Texas.
The Company's Santa Clara facility is in a seismically active area. Although
the Company has obtained business interruption insurance, a major catastrophe
(such as an earthquake or other natural disaster) at any of its sites could
result in a prolonged interruption of the Company's business.
EMPLOYEES
As of March 31, 1998, the Company had approximately 1,500 employees
worldwide. The Company has no employees who are represented by a union. The
Company's German subsidiary, however, is subject to German law, which binds it,
as a member of a selected industry group, to agreements reached by industry
management and employee representatives. The Company believes that it has a good
relationship with its employees. See "Risk Factors--Dependence on Management and
Technical Personnel."
ENVIRONMENTAL MATTERS
The operations of the Company and its ownership of real property are subject
to various environmental laws and regulations that govern, among other things,
the discharge of pollutants into the air and water and the handling, use,
storage, disposal and clean-up of solid and hazardous wastes. Compliance with
such laws and regulations requires the Company to incur capital expenditures and
operating costs in connection with its ongoing operations. In addition, such
laws and regulations may impose liabilities on owners and operators of
businesses and real property without regard to fault and may be joint and
several with other parties. More stringent environmental laws and regulations
may be enacted in the future, which may require the Company to expend additional
amounts on environmental compliance or may require modifications in the
Company's operations. A potential groundwater contamination issue at the
Company's Danbury, Connecticut site is being reviewed under voluntary corrective
action by the Environmental Protection Agency. Although the Company is unable to
predict the extent of its future liability with respect to any environmental
matters, the Company believes, based upon current information, that
environmental liabilities will not be material to its financial position or
results of operations. See "Risk Factors--Changes in Governmental Laws and
Regulations." With respect to any environmental contamination present on the
Company's manufacturing sites at June 13, 1996, the date of the Company's
initial public offering, or present at any such site due to the generation, use,
treatment, storage, release, emission, discharge or disposal of hazardous waste
of hazardous materials prior to such date, the Company is indemnified by DuPont
pursuant to an agreement between DuPont and the Company. See "Transactions and
Relationship Between the Company and Dupont--Environmental Indemnification
Agreement."
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<PAGE>
MANAGEMENT
The following table sets forth the name, age (as of April 30, 1998) and
position with the Company of each person who is an executive officer or director
of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------ --- ---------------------------------------------------------------------------------
<S> <C> <C>
J. Michael Hardinger 51 Chairman of the Board and Chief Executive Officer
Preston M. Adcox 54 President and Chief Operating Officer
Gerard Cognie 54 Executive Vice President--European Operations
David S. Gino 40 Executive Vice President--Finance and Chief Financial Officer
Arthur W. Launder 58 Executive Vice President--North American Photomask Operations
John M. Lynn 40 Executive Vice President, General Counsel and Secretary
Kenneth A. Rygler 54 Executive Vice President--Worldwide Marketing and Strategic Planning
Chulwoo Won 45 Executive Vice President--Asia Pacific Operations
John L. Doyle 66 Director
John W. Himes 53 Director
John C. Hodgson 54 Director
Gary W. Pankonien 48 Director
John C. Sargent 60 Director
Marshall C. Turner 56 Director
Susan A. Vladuchick 50 Director
</TABLE>
J. MICHAEL HARDINGER. Mr. Hardinger is Chairman of the Board of Directors
and Chief Executive Officer of the Company, positions he assumed as a part of
the global realignment of the photomask business. He joined DuPont in 1970 and
has served in a number of management positions with DuPont, including Vice
President and General Manager of DuPont's Acrylics and Consumer Products
Business from 1990 until 1993. He was Vice President--DuPont Corporate Sourcing
prior to assuming his position with the Company. Mr. Hardinger is a member of
the Chase Bank of Texas Austin Advisory Board of Directors and a member of the
Board of Directors of the Capital of Texas Public Telecommunications Council.
PRESTON M. ADCOX. Mr. Adcox is President and Chief Operating Officer of the
Company. He joined DuPont in 1967 and has held a number of manufacturing and
technology management positions. He became a Managing Director in DuPont's
semiconductor materials business in 1988 and had global responsibility for
DuPont's photomask operations until 1996. He was a member of the Board of
Directors of Etec Systems Inc. from 1990 to early 1995. Since 1988, he has
served on the Board of Directors of Semi-Sematech, an organization representing
U.S. equipment and material suppliers to the semiconductor manufacturing
industry.
GERARD COGNIE. Mr. Cognie is Executive Vice President--European Operations
of the Company and the Chairman of the Board of DuPont Photomasks (France) S.A.
He joined DuPont in 1968 and from 1988 to 1996 served as the Director of
DuPont's European photomask operations and from 1985 to 1996 served as the
Director of Electronics for DuPont France.
DAVID S. GINO. Mr. Gino is Executive Vice President--Finance and Chief
Financial Officer of the Company. Prior to assuming his position with the
Company, he was Chief Financial Officer and Controller of Master Images, Inc.
until it was acquired by DuPont in 1987. He held a number of financial and
business management positions with DuPont's semiconductor materials, imaging
systems and printing and publishing businesses.
ARTHUR W. LAUNDER. Mr. Launder is Executive Vice President--North American
Photomask Operations. He joined the Company in 1996 after serving as President
of ASM America, Inc. Prior to joining
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ASM America, Inc. in 1994, he had been President and Chief Operating Officer of
Photronics, Inc. from 1987 to 1994 and Senior Vice President and General Manager
of Micro Mask, Inc. from 1983 to 1987.
JOHN M. LYNN. Mr. Lynn is Executive Vice President and General Counsel of
the Company. He also serves as Corporate Secretary. He joined DuPont in 1980 as
a chemical engineer and then, after a departure for law school, rejoined DuPont
as a lawyer in 1985. He held a number of legal advisory positions with DuPont
prior to joining the Company in 1996.
KENNETH A. RYGLER. Mr. Rygler is Executive Vice President--Worldwide
Marketing and Strategic Planning of the Company. He joined DuPont in 1964 and
held numerous sales, marketing, planning and business development management
positions.
CHULWOO WON. Mr. Won is Executive Vice President--Asia Pacific Operations.
He became involved with the Company while it was still a business unit of
DuPont. Mr. Won joined DuPont in 1980 and became actively engaged with the
photomask business in 1989. He was named vice president of the Asia Pacific
region in 1995 until his appointment as an executive officer of the Company in
1997.
JOHN L. DOYLE. Mr. Doyle is a private consultant, having retired from the
Hewlett-Packard Company in 1991. At the time of his retirement, he was Executive
Vice President, Business Development with responsibility for Hewlett-Packard's
integrated circuit facilities as well as acquisitions, mergers, planning,
corporate purchasing, manufacturing and engineering. He was also a member of the
Executive Committee. Mr. Doyle was Co-Chief Executive Officer of Hexcel Corp., a
manufacturer of advanced composite materials, from July 1993 to December 1993.
Hexcel Corp. filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code in December 1993. He is currently a director of Xilinx, Inc.,
and Analog Devices, Inc. He became a director of the Company in April 1996.
JOHN W. HIMES. Mr. Himes is Vice President of Investor Relations for
DuPont. He joined DuPont in 1966 and has served in a variety of business
management positions, including leadership of Dacron-Registered Trademark-
polyester, Advanced Composites and Industrial Polymers. Mr. Himes was
responsible for Human Resources and later Business Development in Asia for the
corporation. He became a director of the Company in January 1998.
JOHN C. HODGSON. Mr. Hodgson is the Vice President/Managing Director of the
Photopolymer and Electronic Materials Strategic Business Unit of DuPont, a
position he assumed in 1996. He has been with DuPont for 32 years and has served
in a variety of management positions in the X-Ray, Electronics and Diagnostic
businesses in the United States and in Geneva, Switzerland. From 1994 until
assuming his current position, Mr. Hodgson served as Managing Director/General
Manager of the Electronic Materials Strategic Business Unit. He became a
director of the Company in April 1996.
GARY W. PANKONIEN. Mr. Pankonien is the Chairman and Chief Executive
Officer of 1st TECH Molding and a private investor. He serves as a director of
Tanisys Technology, a manufacturer of memory modules, 1st TECH Molding and
MagRabbit. Mr. Pankonien spent seven years at Compaq Computer Corporation where
he served as the Notebook Computer Design and Operations Manager for three
years. He co-developed and currently holds the patent for the first notebook
computer as well as several other patents. Mr. Pankonien has over 20 years of
management experience in the electronics industry and has extensive experience
in off-shore operations. He became a director of the Company in April 1996.
JOHN C. SARGENT. Mr. Sargent is the Vice President and Treasurer of DuPont.
He joined the Treasury Department of Conoco in 1964 and worked in a number of
financial management positions with Conoco both in the United States and Europe.
He became Vice President and Treasurer of Conoco in 1981 and also in 1981 became
Assistant Treasurer and Director of the Treasury Division of DuPont after Conoco
was acquired by DuPont. He assumed his present position at DuPont in 1992. He
became a director of the company in December 1995.
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<PAGE>
MARSHALL C. TURNER. Mr. Turner is an independent consultant and technology
venture investor. He has also been a general partner of Taylor & Turner
Associates, Ltd., the general partner of venture capital partnerships, since its
inception in 1981. He has been a venture capital principal or operating
executive in technology industries for 25 years, and is a former director of ten
venture-backed technology companies. Mr. Turner is Vice-Chairman of the Board of
the Public Broadcasting Service, and serves as a director of the Alliance
Technology Fund, three privately-held companies, the George Lucas Educational
Foundation, and the Smithsonian National Museum of Natural History. He became a
director in April, 1996.
SUSAN A. VLADUCHICK. Ms. Vladuchick is the Director of Operations--U.S.
Region and Vice Chair of the Operations Network for DuPont. She joined DuPont in
1969 and has held a variety of management positions in research and development,
human resources, and manufacturing during the course of her career, including
Director of Operations for DuPont Medical Products from 1993 to 1995 and
Director of Human Development and Personnel Relations from 1995 to 1997. Ms.
Vladuchick currently serves on the College of Engineering & Science Advisory
Board for Clemson University and is a past Alumni Trustee for Grove City
College. She became a director of the Company in January 1996.
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SELLING STOCKHOLDER
The following table provides certain information with respect to DuPont and
the number of shares of Common Stock currently owned, offered hereby and to be
owned by DuPont after this offering.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING(2)
-------------------------------- SHARES ----------------------------
SHARES PERCENT OF BEING SHARES PERCENT OF
BENEFICIALLY SHARES OFFERED BENEFICIALLY SHARES
NAME AND ADDRESS OWNED OUTSTANDING (2) OWNED OUTSTANDING
- ------------------------------------------- --------------- --------------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
E.I. du Pont de Nemours and
Company.................................. 10,500,000(1) 69.2% 2,000,000 8,500,000 53.6%
1007 Market Street
Wilmington, DE 19898
</TABLE>
- ---------
(1) All of such shares are owned of record by DuPont Chemical and Energy
Operations, Inc., a wholly owned subsidiary of DuPont. Messrs. Himes,
Hodgson and Sargent and Ms. Vladuchick, each of whom is a director of the
Company, share the right to vote such shares. See "Management."
(2) DuPont has granted to the U.S. Underwriters an option to purchase up to
300,000 additional shares to cover over-allotments, if any. If such option
is exercised in full, after the offering DuPont will beneficially own
8,200,000 shares of Common Stock representing 51.3% of the outstanding
Common Stock. See "Underwriters."
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TRANSACTIONS AND RELATIONSHIP BETWEEN THE COMPANY AND DUPONT
The Company and DuPont have entered into a number of agreements for the
purpose of defining certain past, present and prospective arrangements and
transactions between them. These agreements were negotiated in the context of a
parent-subsidiary relationship and therefore are not the result of negotiations
between independent parties. It is the intention of the Company and DuPont that
such agreements and the transactions provided for therein, taken as a whole,
should accommodate the parties' interests in a manner that is fair to both
parties, while continuing certain mutually beneficial joint arrangements.
However, because of the complexity of the various relationships between the
Company and DuPont (including their subsidiaries), there can be no assurance
that each of such agreements, or the transactions provided for therein, were
effected on terms at least as favorable to the Company as could have been
obtained from unaffiliated third parties. The Company is only entitled to the
ongoing assistance of DuPont for a limited time.
Additional or modified arrangements and transactions may be entered into by
the Company, DuPont and their respective subsidiaries in the future. Any such
future arrangements and transactions will be determined through negotiation
between the Company and DuPont or their respective subsidiaries, as the case may
be. The Company has adopted a policy that all future agreements between the
Company and DuPont and their subsidiaries will be on terms that the Company
believes are no less favorable to the Company than the terms the Company
believes would be available from unaffiliated parties. In that regard, the
Company intends to follow the procedures provided by the Delaware General
Corporation Law, which includes a vote to affirm any such future agreements by a
majority of the Company's directors who are not employees of DuPont (even though
such directors may be less than a quorum).
The following is a summary of certain past, present and prospective
arrangements and transactions between the Company and DuPont.
HISTORICAL TRANSACTIONS AND REALIGNMENT OF PHOTOMASK BUSINESS
Prior to the Realignment (as defined below), DuPont's U.S. photomask
operations were conducted by DuPont Photomasks, Inc., a Texas corporation.
European photomask operations were conducted by separate, wholly owned
subsidiaries of DuPont in their respective countries. Photomask operations in
Korea were conducted by DuPont Korea, Ltd., which was 31% owned by DuPont
Photomasks, Inc. and 69% owned by DuPont and which also conducted DuPont's other
non-photomask business. In connection with the consummation of the initial
public offering of the Company's Common Stock, DuPont realigned its global
photomask business, pursuant to which certain transactions were undertaken so
that DuPont's foreign photomask operations would reside in wholly owned
subsidiaries of the Company (the "Realignment").
DuPont provided significant management functions and services, including
cash management, tax administration, accounting, legal, data processing, benefit
administration and other support services. The Company was charged and/or
allocated expenses for the years ended June 30, 1995 and 1996 of approximately
$13.1 million and $7.3 million. The costs of these services have been directly
charged and/or allocated using methods that DuPont management believed were
reasonable. Such charges and allocations are not necessarily indicative of the
costs the Company would have incurred to obtain these services had it been a
separate entity. The Company has not made a study or any attempt to obtain
estimates from third parties to determine what the cost of obtaining such
services from such parties may have been.
The Company participated in DuPont's centralized cash management system
prior to the Realignment. In general, the cash funding requirements of the
Company were met by, and all cash generated by the Company was transferred to,
DuPont. In the U.S. and France, this was accomplished under the terms of
interest-bearing loan arrangements between the Company and DuPont (collectively,
the "Master Notes"). The Company borrowed funds for acquisitions, capital
expenditures and working capital from DuPont pursuant to the Master Notes. The
interest rate charged was equal to the rate DuPont paid for its commercial paper
borrowings.
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ADMINISTRATIVE SERVICE AGREEMENTS
The Company and its subsidiaries, on the one hand, and DuPont and certain
DuPont subsidiaries, on the other hand, have entered into several transitional
administrative service agreements (collectively, the "Administrative Service
Agreements"), pursuant to which DuPont will continue to provide various services
to the Company, including tax administration, computer and information systems,
telecommunications and employee benefits administration.
Each service under the Administrative Service Agreements is provided for a
specified time period, ranging from one to two years. However, the Company and
its subsidiaries may terminate any or all services that it receives under an
Administrative Service Agreement at any time upon 45 days' prior written notice.
Each Administrative Service Agreement shall terminate upon the later of (i)
January 1, 1999 or (ii) the date upon which DuPont owns less than 50% of the
outstanding Common Stock of the Company. The Company and its subsidiaries are
obligated to take all steps necessary to obtain their own administrative and
support services prior to the termination of the Administrative Service
Agreements.
The Company and its subsidiaries will be obligated to pay fees established
in the Administrative Service Agreements based upon the type and amount of
services rendered. It is estimated that DuPont will charge an annual fee of
approximately $4 million for all of the services that it will provide under the
Administrative Service Agreements. In addition, the Company and its subsidiaries
will reimburse DuPont for any out-of-pocket expenses it incurs in connection
with providing the services. The Company paid DuPont $3.9 million for services
provided under the Administrative Service Agreements in fiscal 1997. With the
exception of the Administrative Service Agreement entered into by the respective
subsidiaries of DuPont and the Company in Korea, in the absence of gross
negligence or willful or reckless misconduct, DuPont's liability for damages to
the Company for any breach of DuPont's obligations under the Administrative
Service Agreements is limited to payments made to DuPont thereunder. With
respect to the Administrative Service Agreement covering the operations in
Korea, DuPont's subsidiary is not required to provide any guarantee or warranty
of any nature and cannot be held liable for any claims, damages or liabilities
of any kind resulting from the furnishing of the services thereunder.
RESEARCH, DEVELOPMENT AND CONSULTING AGREEMENT
The Company and DuPont have entered into a research, development and
consulting agreement (the "Research, Development and Consulting Agreement")
whereby DuPont will provide to the Company supplemental technical assistance and
consulting with respect to: (i) analytical support and consulting on an as
needed basis ("Analytical Support"), and (ii) research projects addressing
specific Company needs ("Research Project Support"). In exchange for the
Analytical Support, the Company will pay DuPont $100,000 per calendar year. In
the event the costs of these services are estimated to exceed $100,000, the
Company can either agree to pay additional projected costs or elect not to have
DuPont provide these additional services. Compensation for Research Project
Support will be determined at the time each specific project relating thereto is
undertaken. The initial term of the Research, Development and Consulting
Agreement expires on January 1, 2001 and automatically renews for successive
one-year terms until terminated by either DuPont or the Company pursuant to
certain procedures set forth in the Research, Development and Consulting
Agreement.
TAX INDEMNIFICATION AGREEMENT
The Company and DuPont have entered into a tax indemnification agreement
(the "Tax Indemnification Agreement") pursuant to which the Company will pay
DuPont, or DuPont will pay the Company, as appropriate, amounts in respect of
taxes shown as due attributable to the operations of the Company for the period
ending on the date on which the Company ceases to be a member of the DuPont
consolidated group. DuPont will indemnify the Company and its subsidiaries from
liability for certain matters (net of corresponding tax benefits), including (i)
any federal, state or local taxes attributable to any affiliated or combined
group of which the Company was a member at any time prior to June 13, 1996 and
(ii) any
36
<PAGE>
federal, state or local income or other tax for any period up to and including
June 13, 1996. The Company will indemnify DuPont and its subsidiaries from
liability for certain matters, including any federal, state or local income or
other taxes attributable to the operations of the Company following June 13,
1996. In connection with the Company's sale of its 31% equity interest in DuPont
Korea, Ltd. to DuPont, to the extent there is a loss, any tax benefit
attributable to such loss will be for DuPont's benefit at such time as DuPont's
beneficial ownership of the Company falls below 50%.
The Tax Indemnification Agreement will require payments of claims to be made
within 30 days of the date a written demand for the claim is delivered. Interest
accrues on payments that are not made within 10 days of the final due date at
the rate applicable to the underpayments of the applicable tax. Any disputes
concerning the calculation or basis of determination of any payment provided
under the Tax Indemnification Agreement will be resolved by a law firm or a "big
six" accounting firm selected jointly by the parties.
ENVIRONMENTAL INDEMNIFICATION AGREEMENT
The Company and DuPont have entered into an environmental indemnification
agreement (the "Environmental Indemnification Agreement") pursuant to which
DuPont will generally indemnify the Company against substantially all
liabilities relating to any environmental contamination present on the
manufacturing sites of the Company and its subsidiaries as of June 13, 1996 or
present on any other site as a result of the manufacturing operations of the
Company and its subsidiaries prior to June 13, 1996.
In the event that the parties cannot determine with reasonable certainty,
following good faith negotiations, whether the contamination was caused by
activities occurring before or after June 13, 1996, the Environmental
Indemnification Agreement provides for a mechanism whereby the liability
associated with any such claim is allocated according to the following: DuPont
bears 100% of the liability associated with claims filed by the Company with
regard to such contamination prior to June 13, 1997; DuPont's liability for
claims filed following June 13, 1997 declines at the rate of 20% per year; and
DuPont has no liability for such claims filed following June 13, 2001.
The Environmental Indemnification Agreement includes procedures for notice
and payment of indemnification claims and generally provides that the party
bearing the majority of the liability will assume the defense of such claim and
will control any negotiation or remediation activities.
CREDIT FACILITY
The Company and DuPont have entered into a credit agreement (the "Credit
Agreement"), pursuant to which DuPont has agreed to provide a credit facility to
the Company in an aggregate amount of $100 million. The Credit Agreement expires
in 2001 and any loans thereunder will bear interest at LIBOR plus 25 basis
points. At the Company's option, advances under the Credit Agreement are
convertible into term loans with maturities up to seven years. The amounts
loaned under the Credit Agreement are unsecured and the Credit Agreement
contains various representations, covenants and events of default typical for
financings of a similar size and nature. For example, the Credit Agreement
provides that, without DuPont's prior written consent, the Company will not
incur, create, assume or permit to exist any indebtedness, including guarantees
on indebtedness, (in addition to the indebtedness under the Credit Facility) in
excess of $50 million in the aggregate. To date, the Company has borrowed a
maximum of $35 million under the Credit Agreement and at March 31, 1998
borrowings of $24 million were outstanding.
CORPORATE TRADENAME AND TRADEMARK AGREEMENT
The Company and DuPont have entered into a corporate tradename and trademark
agreement (the "Corporate Tradename Agreement") whereby DuPont licenses to
Company (i) use of the tradename "DuPont" as part of the Company's corporate
name, (ii) use of the tradename "DuPont" as part of the name of an affiliated
company of the Company and (iii) use of the trademark DuPont in Oval as part of
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<PAGE>
the Company's corporate logo. DuPont may terminate the Corporate Tradename
Agreement upon two years prior written notice in the event that DuPont and/or
its affiliates cease to hold 20% of the total outstanding Common Stock of the
Company and upon 90 days written notice in the event that (i) DuPont ceases to
be the largest holder of Common Stock of the Company, (ii) the Company purports
to assign or otherwise transfer the Corporate Tradename Agreement without
DuPont's written consent, or (iii) the Company uses the tradename "DuPont" other
than under the terms of the Corporate Tradename Agreement. In addition, DuPont
may terminate the Corporate Tradename Agreement upon 90 days written notice for
any reason after January 1, 2008. In the Corporate Tradename Agreement, the
Company grants DuPont the right to inspect and test products manufactured by or
for the Company and intended to be sold bearing the DuPont in Oval logo to
determine uniform quality and compliance with quality standards of DuPont and
agrees to hold DuPont harmless from any and all liabilities arising from the
manufacture, sale, transportation, storage or use of products manufactured by or
for the Company bearing the DuPont in Oval logo. Upon termination of the
Corporate Tradename Agreement, the Company will be obligated to: (i) change its
name so that the tradename "DuPont" is omitted therefrom; (ii) cease to use the
tradename "DuPont" or any similar tradename as part of its corporate name or in
any other manner whatsoever; and (iii) cease to use the DuPont in Oval logo.
DISTRIBUTOR AGREEMENTS
The Company has entered into separate distributor agreements, each effective
as of January 1, 1996 (the "Distributor Agreements") with DuPont K.K., a
Japanese subsidiary of DuPont, and DuPont Taiwan Limited, a Taiwanese subsidiary
of DuPont (collectively, the "Distributors"). Pursuant to the Distributor
Agreements, the Company has appointed the Distributors to sell the Company's
products in their respective countries. The products will be sold to the
Distributors at a discount, which shall permit the Distributors to earn a
pre-tax profit between 2% and 4%.
REGISTRATION RIGHTS
Under a Registration Rights Agreement (the "Registration Rights Agreement")
between DuPont and the Company, DuPont and its assignees ("Holders") are
entitled to certain rights with respect to the registration of shares they hold
under the Securities Act. Subject to certain limitations (including a minimum
registration of over 1,000,000 shares), each Holder has the right to require the
Company to register the sale of all or part of the shares it holds under the
Securities Act (a "demand registration"). Following the offering, the Holders
will be entitled to request up to an aggregate of four demand registrations.
Each Holder is also entitled to include the shares of Common Stock it holds in a
registered offering of securities by the Company for its own account, subject to
certain conditions and restrictions. The Company will pay all expenses
associated with a registration of shares of Common Stock by a Holder pursuant to
the Registration Rights Agreement, other than underwriting discounts and
commissions, Holders' out-of-pocket expenses or underwriters' counsel fees and
disbursements, if any, relating to such shares. In addition, the Registration
Rights Agreement contains certain indemnification provisions (i) by the Company
for the benefit of Holders as well as any potential underwriter and (ii) by
Holders for the benefit of the Company and related persons, DuPont and its
assignees may transfer its registration rights under the Registration rights
Agreement without the prior approval of the Company. The Registration Rights
Agreement also provides that while DuPont owns 50% or more of the Company's
Common Stock, the Company may not grant registration rights to any other person
without DuPont's prior consent.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATION
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain anticipated United States
federal income tax consequences of the purchase, ownership and disposition of
the Common Stock by a "Non-U.S. Holder." A Non-U.S. Holder is a person that, for
United States federal income tax purposes, (i) is not a "United States person,"
(ii) is not, and has not been, engaged in a United States trade of business,
(iii) is not subject to tax pursuant to provisions of U.S. tax laws applicable
to certain former U.S. citizens or residents and (iv) in the case of an
individual, is not present in the United States for 183 days or more during the
relevant tax year of the ownership and disposition of the Common Stock. A United
States person means a citizen or resident of the United States for United States
federal income tax purposes, a corporation, partnership or other entity created
or organized in or under the laws of the United States or any state thereof, an
estate the income of which is subject to U.S. federal income taxation regardless
of its source, or a trust that meets the following two tests: (A) a U.S. court
is able to exercise primary supervision over the administration of the trust,
and (B) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust.
The following discussion does not consider specific facts and circumstances
that may be relevant to the taxation of a particular Non-U.S. Holder.
Specifically, this discussion does not address the United States tax
consequences to any person who might own, or be considered as owning under
certain attribution rules, 5% or more of the outstanding shares of the Common
Stock or who acquired or holds Common Stock other than for investment. In
addition, the following discussion assumes that the investment in the Common
Stock will be characterized for United States federal income tax purposes in a
manner consistent with such investment. While counsel believes that such
characterization should be given such investment, there can be no assurance that
the United States Internal Revenue Service ("IRS") will not assert that a
different characterization should apply.
The discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), judicial decisions, administrative pronouncements, and existing
and proposed United States Treasury Regulations issued by the U.S. Department of
the Treasury now in effect. Each prospective investor should understand that
future legislative, administrative and judicial changes could modify the tax
consequences described below, possibly with retroactive effect. The following
discussion is limited to United States federal income tax consequences and does
not address any state, local or non-U.S. consequences of the purchase, ownership
and disposition of the Common Stock.
EACH NON-U.S. HOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMMON STOCK, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL AND NON-U.S. TAX LAWS, ESTATE TAX LAWS AND
PROPOSED CHANGES IN APPLICABLE LAWS.
DIVIDENDS
The Company does not anticipate paying a dividend to stockholders in the
foreseeable future. In the event a dividend is paid by the Company, the payment
will be a taxable dividend for United States federal income tax purposes to the
extent of the current or accumulated earnings and profits of the payor. Each
Non-U.S. Holder who receives a taxable dividend will be subject to withholding
of United States federal income tax equal to 30% of the taxable dividend unless
such Non-U.S. Holder is eligible for a reduced tax rate or tax exemption under
an applicable income tax treaty. Satisfaction of certain certification
requirements may be necessary in order to claim the benefit of any applicable
treaty.
GAIN ON DISPOSITIONS
Non-U.S. Holders may recognize gain on the sale or other disposition of the
Common Stock. However, a Non-U.S. Holder will not be subject to United States
federal income tax (and no tax will
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generally be withheld) with respect to such gain unless the Company is or has
been a "U.S. real property holding corporation" as defined by U.S. tax law at
any time during the five-year period ending on the date of sale. The Company
does not believe it is or is likely to become a U.S. real property holding
corporation.
FEDERAL ESTATE TAXES
Common Stock held by an individual Non-U.S. Holder at the date of his or her
death will be included in his or her gross estate for United States federal
estate tax purposes unless an applicable estate tax treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING
DIVIDENDS. The Company must report annually to the IRS and to each Non-U.S.
Holder the amount of dividends paid to and the tax withheld, if any, with
respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced by an applicable tax treaty.
Copies of these information returns may also be available under the provisions
of a specific treaty or agreement with the tax authorities in the country in
which the Non-U.S. Holder resides. Dividends are subject to U.S. withholding tax
at the 30% statutory rate or at a reduced tax treaty rate.
DISPOSITIONS OF COMMON STOCK. The payment of the proceeds from the
disposition of shares of Common Stock through the U.S. office of a broker will
be subject to information reporting and backup withholding unless the holder,
under penalties of perjury, certifies, among other things, its status as a Non-
U.S. Holder, or otherwise establishes an exemption. Generally, the payment of
the proceeds from the disposition of shares of Common Stock to or through a
non-U.S. office of a broker will not be subject to backup withholding and will
not be subject to information reporting. In the case of the payment of proceeds
from the disposition of shares of Common Stock through a non-U.S. office of a
broker that is a U.S. person or a U.S.-related person (as defined by U.S. tax
laws) information reporting (but not backup withholding) is required on the
payment unless the certain certification requirements are satisfied.
Any amounts withheld from a payment to a Non-U.S. Holder under the backup
withholding rules will be allowed as a credit against such holder's U.S. federal
income tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the IRS. Non-U.S. Holders should consult
their tax advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom and the procedures for
obtaining such an exemption, if available.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to the Company's Certificate of Incorporation (the "Certificate"),
the Company is authorized to issue 25,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock, each with a par value of $.01 per share, of
which 15,168,766 shares of Common Stock and no shares of Preferred Stock were
issued and outstanding as of March 31, 1998. The Common Stock offered hereby,
when issued and sold as contemplated by this Prospectus, will be validly issued,
fully paid and nonasessable. Upon completion of the offering, there will be
15,868,766 shares of Common Stock outstanding (assuming no exercise of stock
options after March 31, 1998).
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote is
generally required for all actions to be taken by stockholders. Because holders
of Common Stock do not have cumulative voting rights, holders of a majority of
the shares of Common Stock represented at a meeting in person or by proxy can
elect all of the directors. Accordingly, after the Offering, DuPont will be able
to control the vote on most matters submitted to stockholders, including the
election of directors and approval of extraordinary corporate transactions. See
"Risk Factors--Control by and Relationship with DuPont." In the event of a
liquidation, dissolution or winding-up of the Company, the holders of Common
Stock are entitled to share equally and ratably in the assets of the Company, if
any, remaining after the payment of all debts and liabilities of the Company and
the liquidation preference of any outstanding Preferred Stock. The Common Stock
has no preemptive rights and no redemptions, sinking fund or conversion
provisions.
The Common Stock is listed on the Nasdaq National Market. The transfer agent
and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C.
Holders of Common Stock are entitled to such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation rights of any preferred stock
that may be issued. See "Dividend Policy."
PREFERRED STOCK
The Certificate authorizes the Board to provide for the issuance, from time
to time, of classes or series of the Preferred Stock, to establish the number of
shares to be included in any such class or series and to fix the designations,
voting powers, preferences and rights of the shares of each such class or series
and any qualifications, limitations or restrictions thereof. Because the Board
has the power to establish the preferences and rights of the shares of any such
class or series of the Preferred Stock, it may afford holders of any Preferred
Stock preferences, powers and rights (including voting rights), senior to the
holders of Common Stock, which could adversely affect the rights of the holders
of Common Stock. The Company currently has no intention to issue any shares of
Preferred Stock.
CERTAIN DELAWARE GENERAL CORPORATION LAW, CERTIFICATE AND BYLAWS PROVISIONS
The Delaware General Corporation Law (the "DGCL") authorizes corporations to
limit or eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations now authorized
by the DGCL, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting gross negligence in the exercise
of their duty of care. The DGCL enables corporations to limit available relief
to equitable remedies such an injunction or rescission. The Certificate limits
the liability of directors of the Company to the Company or its stockholders (in
their capacity as directors but not in their capacity as officers) to the
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fullest extent permitted by the DGCL. Specifically, directors of the Company
will not be personally liable for monetary damages for breach of a director's
fiduciary duty other than liability for breaches of the duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the DGCL, or any transaction
from which the director derived an improper personal benefit. The inclusion of
these provisions in the Certificate may have the effect of reducing the
likelihood of derivative litigation against the Company's directors and may
discourage or deter stockholders or management from bringing a lawsuit against
the Company's directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders. Such provisions do not limit or affect a stockholder's ability to
seek and obtain relief under the federal securities laws.
In addition, Article VII of the Bylaws requires the Company to indemnify any
current or former director or officer against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any third party proceeding if such person acted in good faith
and in a manner such person reasonably believed to be in, or not opposed to, the
best interests of the Company and, with respect to any criminal third party
proceeding, had no reasonable cause to believe such conduct was unlawful. In
addition, the Company has agreed to indemnify each director to the fullest
extent permitted by the DGCL pursuant to an Indemnification Agreement from and
against any and all expenses, losses, claims, damages and liabilities incurred
by such director for or as a result of actions taken or not taken while such
director or officer was acting in his or her capacity as a director, officer,
employee or agent of the Company. In addition, the Company maintains directors'
and officers' liability insurance which insures against liabilities that
directors and officers of the Company may incur in such capacities. The Company
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. See "Risk Factors--Dependence on Management
and Technical Personnel."
The Certificate contains a provision expressly electing not to be governed
by Section 203 of DGCL. In general, Section 203 of the DGCL restricts certain
business combinations involving interested stockholders (defined as any person
or entity that is the beneficial owner of at least 15% of a corporation's voting
stock or is an affiliate or associate of the corporation and was the owner of
15% or more of the outstanding voting stock of the corporation at any time in
the past three years) or their affiliates (as defined). Because of such
election, Section 203 will not apply to the Company.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Deutsche
Morgan Grenfell Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
NationsBanc Montgomery Securities LLC and Needham & Company, Inc. are acting as
U.S. Representatives, and the International Underwriters named below for whom
Morgan Stanley & Co. International Limited, Deutsche Bank AG London, Donaldson,
Lufkin & Jenrette International, NationsBanc Montgomery Securities LLC and
Needham & Company, Inc. are acting as International Representatives, have
severally agreed to purchase, and the Company and DuPont have agreed to sell to
them, severally, the respective number of shares of Common Stock set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.....................................................
Deutsche Morgan Grenfell Inc..........................................................
Donaldson, Lufkin & Jenrette Securities Corporation...................................
NationsBanc Montgomery Securities LLC.................................................
Needham & Company, Inc................................................................
----------
Subtotal............................................................................ 2,160,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited............................................
Deutsche Bank AG London...............................................................
Donaldson, Lufkin & Jenrette International............................................
NationsBanc Montgomery Securities LLC.................................................
Needham & Company, Inc................................................................
----------
Subtotal............................................................................ 540,000
----------
Total............................................................................. 2,700,000
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives", respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby (other than those covered by the U.S.
Underwriters' overallotment option described below) if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to the Shares outside the United
States or Canada or to anyone other than a United States or
43
<PAGE>
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any Shares for the account of
any United States or Canadian Person and (ii) it has not offered or sold, and
will not offer or sell, directly or indirectly, any Shares or distribute any
prospectus relating to the Shares in the United States or Canada or to any
United States or Canadian Person. With respect to any Underwriter that is a U.S.
Underwriter and an International Underwriter, the foregoing representations and
agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it
in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreement are referred to herein as the "Shares".
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of any
number of Shares as may be mutually agreed. The per share price of any Shares so
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind
44
<PAGE>
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such Shares a
notice containing substantially the same statement as is contained in this
sentence.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other Underwriters or to certain dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Representatives.
The Company and DuPont have granted to the U.S. Underwriters options,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 105,000 and 300,000 additional shares of Common Stock,
respectively, at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The U.S. Underwriters may exercise
such option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of Common Stock offered hereby. To
the extent such options are exercised, each U.S. Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such U.S. Underwriter's name in the preceding table bears to the total
number of shares of Common Stock set forth next to the names of all U.S.
Underwriters in the preceding table.
Each of the Company, DuPont and the directors and executive officers of the
Company has agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the Underwriters, it will not, during the period
ending 90 days after the date of this Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The restrictions described in this paragraph do not apply to
(x) the sale of Shares to the Underwriters, (y) the issuance by the Company of
shares of Common Stock upon the exercise of an option or a warrant or the
conversion of a security outstanding on the date of this Prospectus of which the
Underwriters have been advised in writing or (z) transactions by any person
other than the Company relating to shares of Common Stock or other securities
acquired in open market transactions after the completion of the offering of the
Shares.
45
<PAGE>
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission. In general, a passive
market maker may not bid for, or purchase, the Common Stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the Common Stock during a specified two month prior period, or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Common Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to DuPont.
The Company, DuPont and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock will be passed upon for the Company by
Brobeck, Phleger & Harrison LLP, Austin, Texas. Certain legal matters in
connection with the offering will be passed upon by for the Underwriters by
Davis Polk & Wardwell, New York, New York.
EXPERTS
The financial statements as of June 30, 1996 and 1997 and for each of the
three years in the period ended June 30, 1997 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 and, in connection therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the Commission's Regional Offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and at 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
these materials can also
46
<PAGE>
be obtained at prescribed rates from the Public Reference Section of the
Commission at the principal offices of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, copies of such materials filed
electronically by the Company with the Commission may be obtained from the web
site that the Commission maintains at http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain portions of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
the Prospectus concerning the contents of any documents referred to herein are
not necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description, and each such statement shall be deemed
qualified in its entirety by such reference.
47
<PAGE>
DUPONT PHOTOMASKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Income Statement for the years Ended June 30, 1995, 1996 and 1997.......................................... F-3
Balance Sheet at June 30, 1996 and 1997.................................................................... F-4
Statement of Cash Flows for the years ended June 30, 1995, 1996 and 1997................................... F-5
Notes to Financial Statements.............................................................................. F-6
Income Statement for the nine months ended March 31, 1997 and 1998 (unaudited)............................. F-19
Balance Sheet of March 31, 1998 (unaudited)................................................................ F-20
Statement of Cash Flows for the nine months ended March 31, 1997 and 1998 (unaudited)...................... F-21
Notes to Financial Statements (unaudited).................................................................. F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DuPont Photomasks, Inc.
In our opinion, the accompanying balance sheet and the related income
statement and statement of cash flows present fairly, in all material respects,
the financial position of DuPont Photomasks, Inc. and its subsidiaries at June
30, 1996 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Austin, Texas
July 29, 1997, except as to Note 17
which is as of May 12, 1998
F-2
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
INCOME STATEMENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------
1995 1996 1997
------------ ------------ PRO FORMA ------------
1996 (NOTE
1)
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales.................................................... $ 161,514 $ 213,415 $ 213,415 $ 261,185
Cost of goods sold....................................... 120,512 142,200 140,741 163,319
Selling, general and administrative expense.............. 21,803 25,167 26,229 31,611
Research and development expense......................... 8,777 9,162 8,290 12,372
------------ ------------ ------------ ------------
Operating profit......................................... 10,422 36,886 38,155 53,883
Interest (income) expense................................ 6,957 7,078 62 (2,080)
Exchange (gain) loss..................................... (493) 886 590 796
------------ ------------ ------------ ------------
Income before income taxes, minority interest and
extraordinary item..................................... 3,958 28,922 37,503 55,167
Provision for income taxes............................... 2,678 13,126 19,308
------------ ------------ ------------ ------------
Income before minority interest and extraordinary item... 3,958 26,244 24,377 35,859
Minority interest in loss of majority owned joint
venture................................................ (161) (660) (660) (903)
------------ ------------ ------------ ------------
Income before extraordinary item......................... 4,119 26,904 25,037 36,762
Extraordinary item....................................... (22,242)
------------ ------------ ------------ ------------
Net income............................................... $ 4,119 $ 26,904 $ 25,037 $ 59,004
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings per share before extraordinary item....... $ 0.39 $ 2.51 $ 1.66 $ 2.44
Extraordinary item....................................... (1.47)
------------ ------------ ------------ ------------
Basic earnings per share................................. $ 0.39 $ 2.51 $ 1.66 $ 3.91
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic weighted average shares outstanding................ 10,500,000 10,726,849 15,100,000 15,100,521
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings per share before extraordinary item..... $ 0.39 $ 2.50 $ 1.65 $ 2.37
Extraordinary item....................................... (1.43)
------------ ------------ ------------ ------------
Diluted earnings per share............................... $ 0.39 $ 2.50 $ 1.65 $ 3.80
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted weighted average shares outstanding.............. 10,500,000 10,743,006 15,194,913 15,520,239
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 20,179 $ 51,351
Accounts receivable, trade.............................................................. 32,293 38,973
Accounts receivable, related parties...................................................... 4,726 3,670
Inventories............................................................................. 10,227 15,651
Deferred income taxes................................................................... 1,543 3,351
Prepaid expenses and other current assets............................................... 3,238 8,711
---------- ----------
Total current assets.................................................................. 72,206 121,707
---------- ----------
Property and equipment.................................................................... 123,048 162,310
Accounts receivable, related parties...................................................... 1,928 1,746
Deferred income taxes..................................................................... 3,245 2,386
Other assets.............................................................................. 27,466 3,430
---------- ----------
Total assets.......................................................................... $ 227,893 $ 291,579
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................................................. $ 10,382 $ 27,207
Accounts payable, related parties....................................................... 5,885 4,889
Short-term borrowings................................................................... 1,454 1,845
Income taxes payable.................................................................... 2,333 1,295
Other accrued liabilities............................................................... 17,694 20,389
---------- ----------
Total current liabilities............................................................. 37,748 55,625
Long-term borrowings...................................................................... 9,324 10,473
Deferred income taxes..................................................................... 11,588 6,300
Other liabilities......................................................................... 3,747 2,597
Minority interest in net assets of majority owned joint venture........................... 872 687
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized;
15,100,000 and 15,104,568 issued and outstanding...................................... 151 151
Additional paid-in capital.............................................................. 152,880 156,742
Unrealized holding gain................................................................. 11,583
Retained earnings....................................................................... 59,004
---------- ----------
Total liabilities and stockholders' equity............................................ $ 227,893 $ 291,579
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 4,119 $ 26,904 $ 59,004
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization............................................. 25,543 26,882 26,593
Other..................................................................... 42 (2,028) (494)
Gain...................................................................... (34,219)
Cash provided (used) by changes in assets and liabilities
Accounts receivable..................................................... (1,471) (7,706) (6,945)
Inventories............................................................. (296) (3,399) (5,444)
Prepaid expenses and other current assets............................... 2,253 (1,021) (5,038)
Accounts payable........................................................ (2,360) (4,190) 2,470
Other accrued liabilities............................................... 1,201 14,989 5,814
---------- ---------- ----------
Net cash provided by operating activities............................. 29,031 50,431 41,741
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures........................................................ (14,853) (24,294) (51,057)
Payments for acquisitions................................................... (4,000) (6,000)
Other....................................................................... 272 920
Proceeds from sale of investment............................................ 39,219
---------- ---------- ----------
Net cash used in investing activities................................. (18,581) (29,374) (11,838)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in borrowings........................................... (1,591) (1,666) 2,394
Net proceeds from issuance of common stock.................................. 72,066 61
Net cash paid to DuPont..................................................... (5,432) (78,908)
---------- ---------- ----------
Net cash (used in) provided by financing activities................... (7,023) (8,508) 2,455
---------- ---------- ----------
Effect of exchange rate changes on cash....................................... 1,061 (782) (1,186)
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... 4,488 11,767 31,172
Cash and cash equivalents at beginning of year................................ 3,924 8,412 20,179
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 8,412 $ 20,179 $ 51,351
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements include the
accounts of DuPont Photomasks, Inc. and its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated. The
Company's principal business is the manufacture and sale of photomasks,
high-purity quartz or glass plates containing precision microscopic images of
integrated circuits, to semiconductor manufacturers.
Prior to the Company's initial public offering (the "IPO") on June 13, 1996,
the Company was a wholly owned subsidiary of E.I. duPont de Nemours and Company
("DuPont"). DuPont, through its wholly owned subsidiary, DuPont Chemical and
Energy Operations, Inc. ("DCEO"), owns 10,500,000 shares of the Company's common
stock. On the IPO date, 4,000,000 shares of the Company's common stock were sold
to the public. An additional 600,000 shares of common stock were sold to the
public on June 14, 1996 pursuant to an over-allotment option. Retained earnings
are shown assuming that the IPO occurred on June 30, 1996, the Company's year
end.
DuPont's photomask business was realigned (the "Realignment") during the
year preceding the IPO so that photomask operations in Germany, France, the
Republic of Korea ("Korea") and the Peoples Republic of China ("China") which
were previously owned by various DuPont subsidiaries are owned by wholly owned
subsidiaries of the Company. Income and expenses related to the Realignment have
been eliminated and are not presented in the financial statements.
The historical financial statements of the Company prior to the IPO have
been derived from the accounting records of DuPont and reflect all sales and
costs directly attributable to DuPont's photomask business during the periods
presented as well as certain charges and allocations from DuPont which were
based primarily on usage. For purposes of the historical financial statements
prior to the IPO, charges and allocations between the Company and DuPont are
deemed to have been settled in the period in which they originated.
REVENUE RECOGNITION: Sales and related costs of goods sold are included in
income when goods are shipped to the customer. Provision is made for estimated
sales returns.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly liquid
investments with original maturities of three months or less.
INVENTORIES: Inventories are valued at the lower of cost or market, with
cost being determined using the average cost method.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the assets. The gross value of property and equipment and related accumulated
depreciation are eliminated at the date of disposal and the resulting gain or
loss is included in income. Maintenance and repairs are charged to operations;
replacements and betterments are capitalized.
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over their estimated useful lives. Net intangible assets, primarily
supply agreements, were $3,883 and $2,750 at June 30, 1996 and 1997 and are
included in other assets. The future economic benefit of long-lived assets is
reviewed periodically through an undiscounted cash flow analysis to determine if
an impairment has occurred.
F-6
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSIONS, OTHER POST RETIREMENT BENEFITS AND PROFIT SHARING: Through June
30, 1996, the Company's active U.S. employees were covered by DuPont defined
benefit pension and other postretirement benefit plans. The cost of these plans
was determined and allocated on an actuarial basis in accordance with Statement
of Financial Accounting Standards No. ("FAS") 87 and FAS 106 and is principally
included in cost of goods sold. Effective July 1, 1996, the Company eliminated
the DuPont plans and implemented a defined contribution retirement plan covering
substantially all of the active U.S. employees. The defined contribution
retirement plan provided for the Company to contribute three to five percent of
an employee's compensation into a participant directed investment account.
Effective July 1, 1997, the Company suspended the defined contribution
retirement plan and implemented a profit sharing plan covering substantially all
of the active U.S. employees.
Pension coverage for non-U.S. employees is provided through separate plans.
Obligations under these plans are systematically provided for principally by
establishing book reserves. Certain non-U.S. employees are covered by separate
profit sharing plans.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred. The Company is party to certain contracts which provide for partial
funding of its research and development costs. Funding under these contracts has
been recognized as an offset to research and development expense. The Company
participates in a joint venture for advanced photomask development and pilot
line fabrication of leading-edge photomasks.
NON-U.S. CURRENCIES: The Company has determined that the U.S. Dollar is the
functional currency of its worldwide operations. Accounts denominated in
non-U.S. currencies are remeasured into U.S. Dollars and the resulting exchange
gains and losses are included in income in the period they occur.
INCOME TAXES: The Company accounts for income taxes using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, all expected future events are considered other than
enactments of changes in tax laws or rates. Valuation allowances are established
as necessary to reduce deferred tax assets to their expected realizable value.
Prior to the IPO, the taxable income (loss) of the Company was included in
the consolidated tax returns of the DuPont entities of which it was a part. As
such, separate income tax returns were not prepared or filed for the Company.
Deferred income taxes and tax expense were determined and allocated to the
Company by applying the separate taxpayer approach outlined in FAS 109.
Deferred income taxes at June 30, 1996 differ from amounts allocated to the
Company under the separate taxpayer approach. The difference arises from the
fact that, since the IPO, the Company's tax return has not been consolidated
with DuPont. As a result, deferred tax assets arising from net operating losses
prior to the IPO date, deemed to be carried forward and available to offset
future tax liabilities under the separate taxpayer approach, have been
eliminated, reflecting the fact that these losses were previously utilized by
DuPont in its consolidated returns. In addition, deferred income taxes were
established related to the Realignment.
The Company's operations in Korea operate under a government granted tax
exemption which expires in 2003.
F-7
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA INFORMATION (UNAUDITED): The pro forma income statement for the
year ended June 30, 1996 has been prepared by the Company to illustrate the
estimated effects of the IPO, the Realignment and the related transactions
described below as if they had occurred July 1, 1995. The pro forma income
statement does not purport to represent what the results of operations would
actually have been if the IPO, the Realignment and the related transactions had
in fact occurred July 1, 1995 or to project what the results of operations will
be for any future period.
Pro forma cost of goods sold reflects a $1,181 reduction of cost resulting
from (i) changes in employee benefit plans implemented in conjunction with the
IPO and (ii) the elimination of DuPont allocated expenses partially offset by
the addition of contracted services (including services contracted under
administrative services agreements with DuPont and certain DuPont subsidiaries
("Administrative Service Agreements")) and employees to perform these functions.
Pro forma selling, general and administrative expense reflects a net $1,062
increase in cost resulting from (i) changes in employee benefit plans
implemented in conjunction with the IPO, (ii) the elimination of DuPont
allocated expenses offset by the addition of contracted services (including
services contracted under Administrative Service Agreements) and employees to
perform these functions and (iii) compensation expense resulting from restricted
stock grants under a stock performance plan.
Pro forma research and development expense reflects an $872 reduction of
cost resulting from (i) changes in employee benefit plans implemented in
conjunction with the IPO and (ii) the elimination of DuPont allocated expenses
partially offset by the addition of contracted services (including services
contracted under a research, development and consulting agreement with DuPont)
and employees to perform these functions.
Pro forma other operating expense reflects a $278 reduction of cost
resulting from the elimination of DuPont allocated expenses partially offset by
the addition of contracted services (including services contracted under
Administrative Service Agreements) and employees to perform these functions.
Pro forma interest expense reflects a $7,016 reduction of cost resulting
from the elimination of interest expense relating to the Company's master notes
with DuPont.
Pro forma exchange (gain) loss reflects a $296 gain resulting from the
elimination of certain non-U.S. currency balances as a result of the
Realignment.
The pro forma provision for income taxes reflects a $10,448 increase in cost
resulting principally from the elimination of deferred tax benefits associated
with prior period losses that were deemed to be available to reduce tax expense
allocated to the Company under the separate taxpayer approach in FAS 109, but
which, in actuality, were utilized by DuPont in its consolidated tax returns.
Pro forma earnings per share was computed based on 15,194,913 shares
outstanding, reflecting the effects of the Realignment, the IPO and the dilutive
effect of grants under the Company's stock performance plans.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions, based upon all known facts and circumstances, that
affect the reported amounts of assets and liabilities, disclosure of contingent
F-8
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS: Certain prior year balances have been reclassified to
conform to the 1997 presentation. In addition, the Company adopted FAS 128 in
the quarter ended December 31, 1997. Earnings per share have been restated for
all periods presented to conform to the requirements of FAS 128.
2. ACQUISITIONS
On April 7, 1995, the Company purchased, from an affiliate of AT&T, selected
photomask manufacturing equipment at AT&T's captive photomask manufacturing
facility located in Allentown, Pennsylvania and entered into a five-year supply
agreement with Lucent Technologies ("Lucent"). Consideration for the equipment
was $10,000 and consideration for the supply agreement was $5,000. Under the
terms of the supply agreement, Lucent agreed to purchase certain minimum
quantities of photomasks from the Company each year during the term of the
agreement or to refund a portion of the purchase price if such minimum
quantities were not purchased during a given year. The supply agreement also
calls for the Company to grant price discounts to Lucent in the event that
purchases by Lucent during a given year exceed specified limits.
3. RELATED PARTY TRANSACTIONS
The financial statements include significant transactions with other DuPont
business units involving functions and services (such as cash management, tax
administration, accounting, legal and data processing) that were provided by
centralized DuPont organizations outside the photomask business. Prior to the
IPO, the costs of these functions and services were directly charged and/or
allocated to the photomask business using methods that DuPont management
believes were reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if the Company had been a
separate entity. Amounts charged and allocated for these functions and services
were $13,106 for the year ended June 30, 1995 and $7,251 for the period July 1,
1995 to December 31, 1995. Effective January 1, 1996, the Company entered
several transitional agreements which set forth services to be provided to the
Company and the fees to be paid by the Company for such services. Charges to the
Company under these agreements were $1,661 for the period January 1, 1996 to
June 30, 1996 and $3,944 for the year ended June 30, 1997. Amounts charged and
allocated to the Company for functions and services provided by DuPont are
principally included in general and administrative expense.
The Company owned 1,025,640 shares of Etec Systems, Inc. ("Etec") common
stock until January 1997. Etec is the Company's principal supplier of electron
beam and laser beam systems. At June 30, 1996, the investment in Etec was
classified as an available for sale security and the $22,820 estimated fair
value (based on the June 28, 1996 closing market price of Etec common stock) of
this investment was included in other assets. The associated unrealized holding
gain was reported as a separate component of stockholders' equity, net of tax
liabilities. In January 1997, the Company sold the entire investment. Aggregate
net proceeds from the sale of $39,219 will be used in operations. The Company
realized a $34,219 gain on the sale. The related provision for income taxes was
$11,977.
Accounts receivable, related parties includes receivables from employees of
the Company of $2,149 (Current $221, Non-Current $1,928) and $1,836 (Current
$90, Non-Current $1,746) at June 30, 1996 and
F-9
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
1997 which relate principally to housing and automobile loans to non-U.S.
employees. The remainder represents receivables for goods sold to various DuPont
entities and other related parties and amounts due to the Company under the tax
indemnification agreement with DuPont and the Administrative Service Agreements.
Sales to related parties, principally various DuPont entities who serve as
resellers for the Company, were $6,368, $8,214 and $8,764 for the years ended
June 30, 1995, 1996 and 1997.
Accounts payable, related parties represents payables to DuPont for payroll
and benefits and vendor payments paid by DuPont on behalf of the Company and
billed on a one-month-lag basis and amounts payable under Administrative Service
Agreements. In August 1996, the Company paid $1,785 in settlement of certain
amounts payable to DuPont at June 30, 1996 and DuPont contributed $3,745 of its
remaining outstanding receivable to the Company as an equity contribution.
4. ACCOUNTS RECEIVABLE, TRADE
Essentially all of the Company's sales are to customers in the semiconductor
manufacturing industry. The Company assesses the financial strength of its
customers prior to extending credit in order to reduce the risk of loss as the
Company generally does not require collateral. Four of the Company's customers
each represented more than ten percent of sales in the year ended June 30, 1995
and, in the aggregate, these four customers represented approximately forty-two
percent of sales in the year. Two of the Company's customers each represented
more than ten percent of sales in the year ended June 30, 1996 and, in the
aggregate, these two customers represented approximately twenty-five percent of
sales in the year. One of the Company's customers represented approximately
twelve percent of sales in the year ended June 30, 1997.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Raw materials and supplies.............................................. $ 7,006 $ 13,122
Work-in-process......................................................... 785 902
Finished product........................................................ 2,436 1,627
--------- ---------
Inventories............................................................. $ 10,227 $ 15,651
--------- ---------
</TABLE>
F-10
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
ESTIMATED USEFUL ----------------------
LIVES 1996 1997
---------------- ---------- ----------
<S> <C> <C> <C>
Construction-in-progress........................... $ 21,829 $ 30,873
Land............................................... 5,328 5,627
Buildings.......................................... 10 to 20 years 50,701 51,899
Equipment.......................................... 3 to 7 years 206,739 259,114
---------- ----------
284,597 347,513
Less: accumulated depreciation..................... (161,549) (185,203)
---------- ----------
Property and equipment............................. $ 123,048 $ 162,310
---------- ----------
</TABLE>
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Accrued vacation pay.................................................... $ 3,185 $ 3,454
Accrued compensation and benefits....................................... 5,761 11,815
Lucent supply agreement................................................. 1,500
Other................................................................... 7,248 5,120
--------- ---------
Other accrued liabilities............................................... $ 17,694 $ 20,389
--------- ---------
</TABLE>
8. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Non-interest bearing notes payable to customers due 1997................. $ 560
Capital lease obligations................................................ 5,889 $ 5,073
6% bank borrowings due 2000 through 2007................................. 2,500 4,500
10% bank borrowings due 1997 through 2001................................ 1,829 2,745
--------- ---------
10,778 12,318
Less: short-term borrowings............................................ (1,454) (1,845)
--------- ---------
Long-term borrowings..................................................... $ 9,324 $ 10,473
--------- ---------
</TABLE>
F-11
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. LEASES
Minimum lease payments for years ending June 30 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1998.................................................................... $ 789 $ 433
1999.................................................................... 744 349
2000.................................................................... 744 305
2001.................................................................... 744 304
2002.................................................................... 744 51
Thereafter.............................................................. 3,190
--------- -----------
Minimum lease payments................................................ 6,955 $ 1,442
--------- -----------
Less: interest...................................................... (1,882)
---------
Present value of minimum lease payments................................. $ 5,073
---------
</TABLE>
10. MASTER NOTES AND CREDIT AGREEMENT
Interest expense includes amounts paid to DuPont under the master notes of
$6,898 and $7,016 for the years ended June 30, 1995 and 1996. The interest rate
charged on the notes was generally equivalent to the rate DuPont paid for its
commercial paper borrowings. In conjunction with the IPO, DuPont, on June 28,
1996, contributed the $90,453 balance outstanding on the master notes to the
Company as a capital contribution.
The Company and DCEO have entered into a credit agreement (the "Credit
Agreement") pursuant to which DCEO has agreed to provide a credit facility to
the Company in an aggregate amount of $100,000. The Credit Agreement has a term
of 48 months and any loans thereunder will bear interest at LIBOR plus 25 basis
points. At the Company's option, advances under the Credit Agreement are
convertible into term loans with maturities up to seven years. The amounts
loaned under the Credit Agreement are unsecured and the Credit Agreement
contains various representations, covenants and events of default typical for
financings of a similar size and nature. No amounts have been borrowed or are
outstanding under the Credit Agreement.
F-12
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCKHOLDERS' EQUITY
Stockholders' equity at June 30 is as follows:
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN HOLDING RETAINED
STOCK CAPITAL GAIN EARNINGS
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Realignment and contribution of capital................... $ 105 $ 80,860
Issuance of common stock.................................. 46 72,020
Unrealized holding gain................................... $ 11,583
----- ---------- -----------
Balance at June 30, 1996................................ 151 152,880 11,583
Contribution of capital................................... 3,745
Issuance of common stock.................................. 117
Unrealized holding gain................................... 10,659
Sale of investment........................................ (22,242)
Net income................................................ $ 59,004
----- ---------- ----------- ---------
Balance at June 30, 1997................................ $ 151 $ 156,742 $ -- $ 59,004
----- ---------- ----------- ---------
</TABLE>
12. STOCK PERFORMANCE PLANS
The Company has several stock performance plans whereby options to purchase
shares of common stock or shares of restricted stock have been or can be granted
to directors, officers, employees and consultants. Generally, option exercise
prices are equal to the fair market value at the date of grant. Restricted stock
grants do not require the payment of any cash consideration by the recipient.
Matters such as vesting periods and expirations are determined on a plan-by-plan
or grant-by-grant basis. A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of year.............................. 953,784 $ 17.00
Options granted........................................... 953,784 $ 17.00 86,976 $ 29.21
Options forfeited......................................... (46,640) $ 17.00
Options exercised......................................... (3,576) $ 17.00
----------- -----------
Balance at end of year.................................... 953,784 $ 17.00 990,544 $ 18.07
----------- -----------
Exercisable at end of year................................ -- 223,210 $ 17.00
----------- -----------
</TABLE>
F-13
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. STOCK PERFORMANCE PLANS (CONTINUED)
Additional information related to stock options at June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
NUMBER OF EXERCISE AVERAGE LIFE NUMBER OF EXERCISE
EXERCISE PRICE RANGE SHARES PRICE (YEARS) SHARES PRICE
- ------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$17.00 to $18.50..................... 946,812 $ 17.07 9.0 223,210 $ 17.00
$25.87 to $35.56..................... 17,698 $ 31.65 9.3
$37.28 to $53.19..................... 26,034 $ 45.34 9.7
</TABLE>
A summary of restricted stock grant activity is as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------------- ----------------------------------
NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE PER
SHARES PER SHARE SHARES SHARE
----------- ------------- ----------- ---------------------
<S> <C> <C> <C> <C>
Balance at beginning of year... 94,913 $17.00
Restricted stock granted....... 94,913 $ 17.00 4,744 $18.50 to $45.88
Restricted stock forfeited..... (9,605) $17.00
Restricted stock issued........ (992) $17.00
----------- ------ -----------
Balance at end of year......... 94,913 $ 17.00 89,060 $17.54
----------- ------ -----------
</TABLE>
At June 30, 1997, there were 3,338,336 shares reserved for future grants
under existing stock performance plans. The Company applies APB 25 and its
related interpretations in accounting for its stock performance plans. The
weighted average fair values of stock options granted in 1996 and 1997 were
$9.41 and $16.16. The weighted average fair values were determined using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 6.5%, no dividend yield, expected term of five years and
volatility of 58%. Had compensation cost been determined based on the fair value
of stock option awards at the date of grant, net income (earnings per share)
would have been $26,904 and $57,456 ($3.73) in 1996 and 1997.
F-14
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................... $ 10,706 $ 25,819
State...................................................... 1,738 787
Non-U.S.................................................... $ 1,554 4,572 4,679
--------- ---------- ---------
Deferred:
Federal.................................................... (10,706) (1,039)
State...................................................... (1,738) (59)
Non-U.S.................................................... (1,554) (1,894) 1,098
--------- ---------- ---------
Provision for income taxes................................... $ -- $ 2,678 $ 31,285
--------- ---------- ---------
</TABLE>
The provision for income taxes differs from the amount computed by applying
the federal statutory rate as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax at 35% statutory federal tax rate........................ $ 1,385 $ 10,123 $ 31,285
Higher effective tax rate on non-U.S. operations............. 485 2,657 2,158
Tax exemption................................................ (2,340) (3,081) (4,809)
Change in valuation allowance................................ 574 (7,808) (243)
State taxes, net of federal.................................. (161) 586 633
Other........................................................ 57 201 2,261
--------- --------- ---------
Provision for income taxes................................... $ -- $ 2,678 $ 31,285
--------- --------- ---------
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
---------
<S> <C>
Deferred tax assets:
Inventories....................................................................... $ 953
Depreciation...................................................................... 3,071
Accrued liabilities............................................................... 1,955
Other............................................................................. 466
---------
Deferred tax assets............................................................. 6,445
---------
Deferred tax liabilities:
Depreciation...................................................................... (3,805)
Other............................................................................. (3,203)
---------
Deferred tax liabilities........................................................ (7,008)
---------
Deferred income taxes........................................................... $ (563)
---------
</TABLE>
F-15
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. PROVISION FOR INCOME TAXES (CONTINUED)
Prior to the IPO, DuPont utilized various tax planning strategies and
elections to minimize its total income tax expense. It is not practicable to
identify the effects of these strategies and elections on the results of
operations of the Company.
In conjunction with the IPO, the Company, DuPont and DCEO entered into a tax
indemnification agreement pursuant to which the Company will make payments to
DuPont and/or DuPont will make payments to the Company, as appropriate, of taxes
payable or receivable at the IPO date. The amount due from DuPont under the tax
indemnification agreement was $2,073 and $256 at June 30, 1996 and 1997. The
Company has a capital loss carryforward of $18,513 arising from the Realignment.
Benefit from this carryforward, if and when realized, is payable to DuPont under
the tax indemnification agreement.
14. GEOGRAPHIC INFORMATION
The Company operates within a single industry segment. Geographic
information as of and for the years ended June 30, 1995, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
UNITED ASIA
STATES EUROPE PACIFIC TOTAL
------------ --------- ----------- ----------
<S> <C> <C> <C> <C>
1995
Sales...................................... $ 90,095 $ 41,958 $ 29,461 $ 161,514
Transfers between geographic areas......... 9,710 4,130 187
------------ --------- ----------- ----------
99,805 46,088 29,648 161,514
------------ --------- ----------- ----------
Net income (loss).......................... (5,518) 3,426 6,167 4,119
Identifiable assets........................ 84,107 37,685 49,909 171,701
1996
Sales...................................... $ 121,620 $ 52,910 $ 38,885 $ 213,415
Transfers between geographic areas......... 14,613 2,278 79
------------ --------- ----------- ----------
136,233 55,188 38,964 213,415
------------ --------- ----------- ----------
Net income................................. 14,987 7,154 4,479 26,904
Identifiable assets........................ 126,540 36,214 65,139 227,893
1997
Sales...................................... $ 145,621 $ 62,988 $ 52,576 $ 261,185
Transfers between geographic areas......... 21,973 1,019 649
------------ --------- ----------- ----------
167,594 64,007 53,225 261,185
------------ --------- ----------- ----------
Net income................................. 38,836 9,037 11,131 59,004
Identifiable assets........................ 151,293 50,877 89,409 291,579
</TABLE>
Sales outside the United States of products manufactured in and exported
from the United States are not significant. Products are transferred between
geographic areas on a basis intended to approximate the market value of such
products.
F-16
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
15. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments incident to the normal course
of business including non-refundable deposits to purchase equipment aggregating
$12,679 at June 30, 1997. In the aggregate, such commitments are not at prices
in excess of current market. The Company is subject to litigation in the normal
course of business. Management believes the effect, if any, of an unfavorable
settlement of such litigation would not have a material adverse effect on the
financial position, results of operations, cash flows or liquidity of the
Company.
16. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the years ended June 30, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1996
Sales..................................... $ 46,039 $ 50,279 $ 55,874 $ 61,223
Operating profit.......................... 4,887 8,748 11,502 11,749
Net income................................ 2,426 6,564 9,412 8,502
Basic earnings per share.................. 0.23 0.63 0.90 0.75
Diluted earnings per share................ 0.23 0.63 0.90 0.74
Basic weighted average shares
outstanding............................. 10,500,000 10,500,000 10,500,000 11,407,396
Diluted weighted average shares
outstanding............................. 10,500,000 10,500,000 10,500,000 11,472,024
1997
Sales..................................... $ 64,244 $ 64,260 $ 62,760 $ 69,921
Operating profit.......................... 13,740 13,962 13,920 12,261
Income before extraordinary item.......... 9,015 9,433 9,722 8,592
Net income................................ 9,015 9,433 31,964 8,592
Basic earnings per share before
extraordinary item...................... 0.60 0.62 0.64 0.57
Diluted earnings per share before
extraordinary item...................... 0.59 0.61 0.62 0.55
Basic earnings per share.................. 0.60 0.62 2.12 0.57
Diluted earnings per share................ 0.59 0.61 2.05 0.55
Basic weighted average shares
outstanding............................. 15,100,000 15,100,000 15,100,000 15,100,521
Diluted weighted average shares
outstanding............................. 15,346,912 15,539,182 15,596,131 15,597,064
</TABLE>
F-17
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
17. SUBSEQUENT EVENT--EARNINGS PER SHARE
The Company adopted FAS 128 in the quarter ending December 31, 1997.
Earnings per share amounts for all periods presented have been restated to
conform to the requirements of SFAS 128. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income................................................ $ 4,119 $ 26,904 $ 59,004
------------- ------------- -------------
------------- ------------- -------------
Basic weighted average shares outstanding................. 10,500,000 10,726,849 15,100,521
------------- ------------- -------------
Dilutive effect of stock performance plans................ 16,157 419,718
------------- ------------- -------------
Diluted weighted average shares outstanding............... 10,500,000 10,743,006 15,520,239
------------- ------------- -------------
------------- ------------- -------------
Basic earnings per share.................................. $ 0.39 $ 2.51 $ 3.91
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings per share................................ $ 0.39 $ 2.50 $ 3.80
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-18
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
INCOME STATEMENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Sales................................................................................. $ 191,264 $ 203,700
Costs of goods sold................................................................... 117,652 134,195
Selling, general and administrative expense........................................... 23,434 22,678
Research and development expense...................................................... 8,556 9,687
------------ ------------
Operating profit...................................................................... 41,622 37,140
Interest income....................................................................... (1,341) (515)
Exchange loss......................................................................... 613 233
------------ ------------
Income before income taxes, minority interest and extraordinary item.................. 42,350 37,422
Provision for income taxes............................................................ 14,822 12,860
------------ ------------
Income before minority interest and extraordinary item................................ 27,528 24,562
Minority interest in loss of majority owned joint venture............................. (642) (687)
------------ ------------
Income before extraordinary item...................................................... 28,170 25,249
Extraordinary item.................................................................... (22,242)
------------ ------------
Net income............................................................................ $ 50,412 $ 25,249
------------ ------------
------------ ------------
Basic earnings per share before extraordinary item.................................... $ 1.87 $ 1.67
Extraordinary item.................................................................... (1.47)
------------ ------------
Basic earnings per share.............................................................. $ 3.34 $ 1.67
------------ ------------
------------ ------------
Basic weighted average shares outstanding............................................. 15,100,000 15,154,129
------------ ------------
------------ ------------
Diluted earnings per share before extraordinary item.................................. $ 1.82 $ 1.62
Extraordinary item.................................................................... (1.43)
------------ ------------
Diluted earnings per share............................................................ $ 3.25 $ 1.62
------------ ------------
------------ ------------
Diluted weighted average shares outstanding........................................... 15,494,075 15,628,215
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1998
----------
<S> <C>
Current assets:
Cash and cash equivalents........................................................................... $ 15,877
Accounts receivable, trade.......................................................................... 49,273
Accounts receivable, related parties................................................................ 3,110
Inventories......................................................................................... 17,228
Deferred income taxes............................................................................... 3,874
Prepaid expenses and other current assets........................................................... 13,030
----------
Total current assets.............................................................................. 102,392
Property and equipment................................................................................ 237,175
Accounts receivable, related parties.................................................................. 1,104
Deferred income taxes................................................................................. 2,525
Other assets.......................................................................................... 2,521
----------
Total assets...................................................................................... $ 345,717
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade............................................................................. $ 25,539
Accounts payable, related parties................................................................... 4,626
Short-term borrowings............................................................................... 1,701
Income taxes payable................................................................................ 1,824
Other accrued liabilities........................................................................... 28,244
----------
Total current liabilities......................................................................... 61,934
Long-term borrowings.................................................................................. 8,007
Long-term borrowings, related parties................................................................. 24,000
Deferred income taxes................................................................................. 6,962
Other liabilities..................................................................................... 1,697
Minority interest in net assets of majority owned joint venture.......................................
Commitments and contingencies.........................................................................
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized;
15,104,568 and 15,168,766 issued and outstanding.................................................. 152
Additional paid-in capital.......................................................................... 158,712
Retained earnings................................................................................... 84,253
----------
Total liabilities and stockholders' equity........................................................ $ 345,717
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 50,412 $ 25,249
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization........................................................ 19,305 23,159
Other................................................................................ (779) (1,035)
Gain................................................................................. (34,219)
Cash provided (used) by changes in assets and liabilities:
Accounts receivable................................................................ (1,035) (13,446)
Inventories........................................................................ (5,581) 569
Prepaid expenses and other current assets.......................................... (2,970) (3,939)
Accounts payable................................................................... 7,277 17,648
Other accrued liabilities.......................................................... 16,000 5,027
---------- -----------
Net cash provided by operating activities........................................ 48,410 53,232
---------- -----------
Cash flows from investing activities:
Capital expenditures................................................................... (37,153) (84,266)
Proceeds from sale of investment....................................................... 39,219
Payment for acquisition................................................................ (28,344)
---------- -----------
Net cash provided by (used in) investing activities.............................. 2,066 (112,610)
---------- -----------
Cash flows from financing activities:
Increase in borrowings................................................................. 699 23,769
Net proceeds from issuance of common stock............................................. 1,098
---------- -----------
Net cash provided by financing activities........................................ 699 24,867
---------- -----------
Effect of exchange rate changes on cash.................................................. (1,154) (963)
---------- -----------
Net increase (decrease) in cash and cash equivalents..................................... 50,021 (35,474)
Cash and cash equivalents at beginning of period......................................... 20,179 51,351
---------- -----------
Cash and cash equivalents at end of period............................................... $ 70,200 $ 15,877
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-21
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of DuPont
Photomasks, Inc. and its subsidiaries (the Company) have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the audited financial statements and accompanying notes
thereto included in the Company's 1997 Annual Report on Form 10-K. The unaudited
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for the fair
presentation of the interim periods. Results for interim periods are not
necessarily indicative of results for the year.
NOTE 2--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
Raw materials and supplies..................................... $ 13,988
Work-in-process................................................ 1,156
Finished product............................................... 2,084
-----------
Inventories.................................................. $ 17,228
-----------
-----------
</TABLE>
NOTE 3--ACQUISITION
On March 16, 1998, the Company entered into a strategic alliance with
Hyundai Electronics Industries Co., Ltd. ("Hyundai") whereby the Company
purchased selected photomask manufacturing equipment located at Hyundai's
captive photomask manufacturing facility in Kanam, Republic of Korea ("Korea")
and entered into a five-year sales and supply agreement with Hyundai. The
Company acquired, through its Korean subsidiary, approximately $28,800 of
equipment and approximately $1,000 in inventory. Consideration for the assets
included $28,344 in cash, and was partially financed by $24,000 in borrowings
under the Company's credit facility with DuPont.
NOTE 4--EXTRAORDINARY ITEM
Between January 20 and 23, 1997, the Company sold its entire investment in
Etec Systems, Inc. common stock. Aggregate net proceeds from the sale were
$39,219 and the Company realized a $34,219 gain on the sale. The related
provision for income taxes was $11,977.
NOTE 5--COMMITMENTS AND CONTINGENCIES
The Company is currently negotiating an agreement with United
Microelectronics Corporation to establish a joint venture to produce photomasks
in Taiwan. There can be no assurance that final agreements will be executed or
that, if executed, the resultant joint venture will yield results that are
favorable to the Company.
F-22
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
On April 14, 1998, the Company announced that it plans to build a new
photomask production facility in Singapore. The site will service the growing
number of semiconductor manufacturers in Singapore and the rest of Southeast
Asia. Current plans are to invest $50 million over the next five years. The
Company previously announced plans for, and has begun construction on, a new
photomask production facility in Gresham, Oregon. The site will service the
growing number of semiconductor manufacturers in northwest United States.
Current plans are to invest $75 million over the next four years. There can be
no assurance that construction on either facility will be completed or that, if
completed, either facility will yield results that are favorable to the Company.
On April 22, 1998, the Company announced that it had entered into an
agreement with Etec to upgrade its MEBES-Registered Trademark- electron-beam
pattern generation tools. The hardware and software upgrades will enhance the
capability of the tools while simultaneously increasing the speed at which they
operate. As part of the agreement, Etec has purchased the use of technology
developed by the Company. The tools to be upgraded currently reside throughout
the Company's integrated network of production facilities. As part of the
agreement, Etec is scheduled to deliver, and the Company is committed to
purchase, the initial upgraded MEBES-Registered Trademark- tool in early 1999,
with additional tools scheduled for upgrades over the course of the next four
years. There can be no assurance that the Company will be successful in
upgrading its tools or that such upgraded tools will yield results that are
favorable to the Company.
Also on April 22, 1998, the Company announced the formation of a strategic
alliance with Hoya Corporation to develop and produce advanced photoblanks. A
primary goal of the alliance will be the development of advanced photoblanks
used in the production of binary and phase shift photomasks supporting the
manufacture of semiconductor devices with 0.18 micron design rules and below.
The companies have also agreed to exchange technical information related to the
production of photoblanks. The relationship calls for Hoya to supply the Company
with developmental photoblanks based on agreed-upon design and performance
specifications. As part of the agreement, the Company will have exclusive rights
to use photoblanks and technology developed under the relationship.
Additionally, the Company has agreed to utilize Hoya's photoblanks in its
photomask manufacturing operations, supplementing its internal supply. There can
be no assurance that the alliance will yield results that are favorable to the
Company.
The Company has various purchase commitments incident to the normal course
of business including non-refundable deposits to purchase equipment. In the
aggregate, such commitments are not at prices in excess of current market. The
Company is subject to litigation in the normal course of business. Management
believes the effect, if any, of an unfavorable settlement of such litigation
would not have a material adverse effect on the financial position, results of
operations, cash flows or liquidity of the Company.
NOTE 6--RECLASSIFICATIONS AND RESTATEMENTS
Certain prior year balances have been reclassified to conform to the 1998
presentation. In addition, the Company adopted FAS 128 in the quarter ended
December 31, 1997. Earnings per share have been restated for all periods
presented to conform to the requirements of FAS 128.
F-23
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (SUBJECT TO COMPLETION)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
ISSUED MAY 18, 1998
2,700,000 SHARES
DUPONT PHOTOMASKS, INC.
COMMON STOCK
-----------------
OF THE 2,700,000 SHARES OF COMMON STOCK OFFERED HEREBY, 540,000 SHARES ARE BEING
OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 2,160,000 SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 2,700,000 SHARES OF COMMON STOCK BEING OFFERED,
700,000 SHARES ARE BEING SOLD BY THE COMPANY AND 2,000,000 SHARES
ARE BEING SOLD BY A WHOLLY OWNED SUBSIDIARY OF E.I. DU PONT DE
NEMOURS AND COMPANY ("DUPONT"). SEE "SELLING STOCKHOLDER." THE
COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES
BY DUPONT. THE COMPANY'S COMMON STOCK IS QUOTED ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DPMI." ON MAY
15, 1998, THE LAST SALE PRICE OF THE COMMON STOCK AS
REPORTED ON THE NASDAQ NATIONAL MARKET WAS $46 3/8
PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."
------------------------
UPON COMPLETION OF THE OFFERING, DUPONT WILL INDIRECTLY OWN APPROXIMATELY 54% OF
THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK AND WILL CONTINUE
TO CONTROL THE COMPANY. SEE "SELLING STOCKHOLDER" AND
"TRANSACTIONS AND RELATIONSHIP
BETWEEN THE COMPANY AND
DUPONT."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6 HEREOF.
-----------------
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.
-------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDER
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE........................... $ $ $ $
TOTAL(3)............................ $ $ $ $
</TABLE>
- ----------
(1) THE COMPANY AND DUPONT HAVE AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST
CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SEE "UNDERWRITERS."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $117,000.
(3) THE COMPANY AND DUPONT HAVE GRANTED THE U.S. UNDERWRITERS OPTIONS,
EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN
AGGREGATE OF 105,000 AND 300,000 ADDITIONAL SHARES, RESPECTIVELY, AT THE
PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE
PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS
EXERCISE SUCH OPTIONS IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING
DISCOUNTS AND COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING
STOCKHOLDER WILL BE $ , $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY DAVIS POLK & WARDWELL, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998, AT THE
OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT
THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER
DEUTSCHE BANK
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
NATIONSBANC MONTGOMERY SECURITIES LLC
NEEDHAM & COMPANY, INC.
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used but not defined in this Part II to the Registration
Statement shall have the respective meanings assigned to such terms in the
Prospectus which forms a part of this Registration Statement.
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant and DuPont in
connection with the registration of the Shares under the Securities Act. All
amounts are estimates except the Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee. Such expenses will be borne pro
rata by the registrant and DuPont based upon the respective numbers of Shares to
be sold by each.
<TABLE>
<S> <C>
Commission registration fee....................................... $ 47,059
NASD filing fee................................................... 16,452
Nasdaq National Market listing fee................................ 16,100
Legal fees and expenses........................................... 100,000
Accounting fees and expenses...................................... 100,000
Printing expenses................................................. 130,000
Miscellaneous..................................................... 40,389
---------
Total........................................................... $ 450,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fee), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believes to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
such action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 or in the defense of any claim, issue or matter therein, he shall be
II-1
<PAGE>
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that the indemnification provided for
by Section 145 shall not be deemed exclusive of any other rights which the
indemnified party may be entitled; that indemnification provided by Section 145
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of such person's heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of the director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Ninth of the registrant's Certificate of Incorporation, as amended
and restated, provides that, to the fullest extent permitted by the DGCL, no
director of the registrant shall be personally liable to the registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Article VII of the registrant's Bylaws, as amended, further provides that
the registrant shall indemnify each of its directors and officers against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with any third party proceeding
if such person acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the registrant and,
with respect to any criminal third party proceeding, had no reasonable cause to
believe such conduct was unlawful.
The registrant has entered into indemnification agreements with each of its
directors and executive officers.
The registrant maintains officers' and directors' liability insurance.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 hereto, the
Underwriters agree to indemnify, under certain conditions, the registrant, its
officers and directors and persons who control the registrant within the meaning
of the Securities Act against certain liabilities.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Certificate of Incorporation of the Company, as amended and restated on April 3, 1996.
3.2** Bylaws, as amended.
4.1** Specimen Certificate for Common Stock.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in the opinion filed herewith as Exhibit
5.1).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
24.1*** A power of attorney pursuant to which amendments to this Registration Statement may be filed
(included on the signature page contained in Part II of this Registration Statement).
</TABLE>
- ---------
* To be filed by amendment.
** Previously filed with the Securities and Exchange Commission as an exhibit
to registrant's Registration Statement on Form S-1 (Registration Statement
No. 333-3386).
*** Previously filed as an exhibit to this Registration Statement.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act), that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation, as amended, or the Bylaws, as amended, of the registrant, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Round Rock, State of Texas, on this 18th day of May,
1998.
<TABLE>
<S> <C> <C>
DUPONT PHOTOMASKS, INC.
By: /s/ JOHN M. LYNN
-----------------------------------------
John M. Lynn
EXECUTIVE VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board and
J. MICHAEL HARDINGER* Chief Executive Officer
- ------------------------------ and Director (Principal May 18, 1998
J. Michael Hardinger executive officer)
Executive Vice
President--Finance and
DAVID S. GINO* Chief Financial Officer
- ------------------------------ (Principal financial May 18, 1998
David S. Gino officer and accounting
officer)
JOHN L. DOYLE*
- ------------------------------ Director May 18, 1998
John L. Doyle
JOHN W. HIMES*
- ------------------------------ Director May 18, 1998
John W. Himes
JOHN C. HODGSON*
- ------------------------------ Director May 18, 1998
John C. Hodgson
GARY W. PANKONIEN*
- ------------------------------ Director May 18, 1998
Gary W. Pankonien
II-4
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
JOHN C. SARGENT*
- ------------------------------ Director May 18, 1998
John C. Sargent
MARSHALL C. TURNER*
- ------------------------------ Director May 18, 1998
Marshall C. Turner
SUSAN A. VLADUCHICK*
- ------------------------------ Director May 18, 1998
Susan A. Vladuchick
*By: /s/ JOHN M. LYNN
-------------------------
John M. Lynn
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Certificate of Incorporation of the Company, as amended and restated on April 3, 1996.
3.2** Bylaws, as amended.
4.1** Specimen Certificate for Common Stock.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in the opinion filed herewith as Exhibit
5.1).
24.1*** A power of attorney pursuant to which amendments to this Registration Statement may be filed
(included on the signature page contained in Part II of this Registration Statement).
</TABLE>
- ---------
* To be filed by amendment.
** Previously filed with the Securities and Exchange Commission as an exhibit
to registrant's Registration Statement on Form S-1 (Registration Statement
No. 333-3386).
*** Previously filed as an exhibit to this Registration Statement.
<PAGE>
EXHIBIT 5.1
<TABLE>
<S> <C> <C>
BROBECK
PHLEGER &
HARRISON
LLP 301 CONGRESS AVENUE
TELEPHONE: (512) 477-5495 ATTORNEYS AT SUITE 1200
FACSIMILE: (512) 477-5813 LAW AUSTIN, TEXAS 78701
</TABLE>
May 15, 1998
DuPont Photomasks, Inc.
131 Old Settlers Boulevard
Round Rock, Texas 78664
Re: DuPont Photomasks, Inc. Registration Statement on
Form S-3 for 3,105,000 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to DuPont Photomasks, Inc., a Delaware corporation
(the "Company"), in connection with the proposed issuance and sale by the
Company of up to 805,000 shares of the Company's Common Stock and the sale by a
stockholder of the Company of up to 2,300,000 shares of the Company's Common
Stock (collectively, the "Shares"), pursuant to the Company's Registration
Statement on Form S-3 (the "Registration Statement") filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act").
This opinion is being furnished in accordance with the requirements of Item
16 of Form S-3 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares to be sold
by a stockholder of the Company have been duly authorized, were legally issued
and are fully paid and nonassessable, and the Shares to be issued and sold by
the Company have been duly authorized, and if, as and when issued in accordance
with the Registration Statement and the related prospectus (as amended and
supplemented through the date of issuance) will be legally issued, fully paid
and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written above and we
disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
--------------------------------------
Brobeck, Phleger & Harrision
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-3 (No. 333-52439) of our
report dated July 29, 1997, except as to Note 17 which is as of May 12, 1998,
relating to the financial statements of DuPont Photomasks, Inc., which appears
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Austin, Texas
May 18, 1998
