<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1999
REGISTRATION NO. 333-72563
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
organization) Number)
</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:
RONALD G. SKLOSS, ESQ. ALAN DEAN, ESQ.
THOMAS R. NELSON, 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>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED FEBRUARY 24, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
2,000,000 SHARES
DUPONT PHOTOMASKS, INC.
COMMON STOCK
-----------------
E.I. DU PONT DE NEMOURS AND COMPANY IS OFFERING 2,000,000 SHARES OF OUR
COMMON STOCK.
WE WILL NOT RECEIVE ANY PART OF THE PROCEEDS FROM THE SALE OF OUR
COMMON STOCK.
WHEN THIS OFFERING IS COMPLETED, E.I. DU PONT DE NEMOURS
AND COMPANY
WILL OWN APPROXIMATELY 56% OF OUR COMMON STOCK.
-------------------
OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "DPMI."
ON FEBRUARY 23, 1999, THE REPORTED LAST SALE PRICE OF OUR COMMON
STOCK
ON THE NASDAQ NATIONAL MARKET WAS $43 7/8 PER SHARE.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS STOCKHOLDER
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
E.I. DU PONT DE NEMOURS AND COMPANY HAS GRANTED THE UNDERWRITERS THE RIGHT TO
PURCHASE UP TO AN ADDITIONAL 300,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN
STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON
, 1999.
-------------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
NATIONSBANC MONTGOMERY SECURITIES LLC
NEEDHAM & COMPANY, INC.
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Special Note Regarding Forward-Looking
Statements................................... 13
Use of Proceeds................................ 13
Dividend Policy................................ 13
Price Range of Common Stock.................... 13
Capitalization................................. 14
Selected Financial Data........................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................ 16
<CAPTION>
PAGE
----
<S> <C>
Business....................................... 23
Management..................................... 32
Selling Stockholder............................ 35
Transactions and Relationship Between
Us and E.I. du Pont de Nemours and Company... 36
Description of Capital Stock................... 40
Underwriters................................... 42
Legal Matters.................................. 43
Experts........................................ 43
Where You Can Find More Information............ 44
</TABLE>
------------------------
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in or incorporated by reference in
this prospectus. This prospectus is not an offer to sell the common stock and it
is not soliciting an offer to buy common stock in any state where the offer or
sale is not permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of the common stock.
Our principal executive offices are located at 131 Old Settlers Boulevard,
Round Rock, Texas 78664. Our telephone number at this location is (512)
310-6500.
We have licensed from E.I. du Pont de Nemours and Company 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.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND
OUR FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, "WE," "US" AND
"OUR" MEAN DUPONT PHOTOMASKS, INC. AND "DUPONT" MEANS 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 UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. OUR FISCAL YEAR ENDS JUNE 30.
DUPONT PHOTOMASKS
Based on worldwide sales, we are 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. We manufacture a broad range of
photomasks based on customer-supplied design data, including photomasks that
meet the tightest design specifications required by semiconductor manufacturers
today. We sell our products to over 200 customers in 20 different countries. We
believe that we are the principal merchant photomask supplier for many of our
customers, including Advanced Micro Devices, Hewlett-Packard, Hyundai, LG
Semicon, Lucent Technologies, Micron Technology, Motorola, National
Semiconductor, Philips, Samsung and STMicroelectronics. We operate globally from
eleven manufacturing facilities in North America, Europe and Asia, including two
joint venture facilities. We also operate the DPI Reticle Technology Center,
LLC, a joint venture dedicated to advanced photomask technology development and
fabrication of leading-edge photomasks.
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 and operated
by semiconductor manufacturers primarily for internal use. According to industry
sources, the worldwide market for photomasks totalled approximately $2.0 billion
in 1997. We estimate that the photomask markets in North America, Europe and
non-Japan Asia, the regions in which we primarily compete, 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, we are one of the two largest merchant suppliers in North
America and non-Japan Asia and the largest merchant supplier in Europe.
The demand for photomasks is driven primarily by semiconductor design
activity. A number of recent trends have fueled growth in design activity,
including:
- Increasing customization of semiconductor designs;
- Growing complexity of semiconductor devices;
- Decreasing feature size of semiconductor designs; and
- The proliferation of semiconductor applications.
These trends have increased the importance of photomask technology in the
semiconductor manufacturing process. We expect the importance of photomask
technology to continue to grow as semiconductor manufacturers design and produce
more complex and advanced devices.
We are undertaking a significant global expansion to support the future
growth of our business. In 1998, we entered into a strategic alliance with
Hyundai whereby we became its principal photomask supplier. We also acquired
Hewlett-Packard's photomask manufacturing organization and became its strategic
photomask supplier. In addition, we established a joint venture with United
Microelectronics Corporation to produce photomasks in Taiwan. We also began
construction on a new photomask
3
<PAGE>
production facility in Gresham, Oregon which we subsequently and indefinitely
delayed. If additional capacity were to be needed, we could complete the Gresham
facility within approximately six months. In addition, in February 1999 we
intend to begin construction of a photomask production facility in Singapore.
We are an industry leader in developing the most advanced photomasks and
believe we are the principal merchant supplier, outside Japan, of leading-edge
photomasks. Our objective is to be the world's premier global supplier of
photomasks by providing the finest service and most advanced technology to our
customers. To achieve this objective, we intend to advance our technological
leadership, expand strategic relationships with our customers, capitalize on our
established global manufacturing and customer service support network and
leverage our strategic relationships with key suppliers.
RELATIONSHIP WITH E.I. DU PONT DE NEMOURS AND COMPANY
We are approximately 69% owned by DuPont. After the offering, DuPont will
continue to indirectly own approximately 56% of our outstanding common stock.
After 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. DuPont has advised us that it expects
to reduce its ownership interest of our common stock over time, subject to
prevailing market and other conditions. Historically, we have derived various
tangible and intangible benefits from being affiliated with DuPont. We have
entered into a number of agreements with DuPont for the purpose of defining our
ongoing relationship. While these agreements will continue to provide us with
benefits, we are only entitled to the ongoing assistance of DuPont for a limited
time and we may not enjoy benefits from our relationship with DuPont beyond the
terms of the agreements.
THE OFFERING
The following information regarding shares outstanding is as of January 31,
1999 and excludes shares issuable under our stock performance plans.
<TABLE>
<S> <C>
Common stock offered by DuPont..................... 2,000,000 shares
Common stock to be outstanding after the
offering......................................... 15,300,525 shares
Use of Proceeds.................................... We will receive no proceeds from the
sale of common stock by DuPont
Nasdaq National Market symbol...................... DPMI
</TABLE>
CONCURRENT TRANSACTIONS
We intend to raise net proceeds of approximately $98 million through a
private offering to institutional investors of convertible subordinated notes
due 2003. The notes will be convertible into shares of our common stock. Our
obligations under the notes will be guaranteed by DuPont. The offering and other
specific terms of the notes will be determined by market conditions. We cannot
be certain that the note offering will be completed. The proceeds of the
anticipated note offering will be used to repay all outstanding indebtedness
owed under our credit agreement with DuPont and for general corporate purposes,
including potential acquisitions, working capital and capital expenditures. This
prospectus does not constitute an offer to sell or the solicitation of an offer
to buy the notes. Any offers of the notes will be made only by a private
offering memorandum. The closing of this offering of common stock and the
closing of the offering of notes are not contingent upon each other.
In consideration for DuPont's agreement to guarantee our obligations under
the proposed notes, we intend to amend our credit agreement with DuPont to
increase the interest rate charged on outstanding amounts from LIBOR plus 0.25%
per annum to LIBOR plus 1.875% per annum and terminate our ability to convert
outstanding amounts into term loans.
4
<PAGE>
SUMMARY FINANCIAL DATA
The data for the three years ended June 30, 1998 has been derived from the
audited financial statements appearing elsewhere in this prospectus. The data
for the six months ended December 31, 1997 and 1998 has been derived from the
unaudited financial statements appearing elsewhere in this prospectus. The as
adjusted balance sheet data below reflects the application of the anticipated
net proceeds from our concurrent offering of convertible subordinated notes to
repay all outstanding indebtedness owed under our credit agreement with DuPont.
Approximately $49 million was owed to DuPont under that credit agreement at
December 31, 1998, and an additional approximately $20 million was advanced to
us under the credit agreement subsequent to that date. We cannot be certain that
the note offering will be completed.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
---------------------------------- ----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................ $ 213,415 $ 261,185 $ 271,591 $ 136,137 $ 122,872
Cost of goods sold................................... 142,200 163,319 179,369 89,004 88,478
Selling, general and administrative expense.......... 25,167 31,611 29,509 15,623 15,895
Research and development expense..................... 9,162 12,372 12,714 6,331 7,732
---------- ---------- ---------- ---------- ----------
Operating profit..................................... 36,886 53,883 49,999 25,179 10,767
Other (income) expense............................... 7,964 (1,284) 27 (448) 1,482
---------- ---------- ---------- ---------- ----------
Income before income taxes, minority interest and
extraordinary item................................. 28,922 55,167 49,972 25,627 9,285
Provision for income taxes........................... 2,678 19,308 17,127 8,850 2,878
---------- ---------- ---------- ---------- ----------
Income before minority interest and extraordinary
item............................................... 26,244 35,859 32,845 16,777 6,407
Minority interest in loss of joint venture........... (660) (903) (687) (687)
---------- ---------- ---------- ---------- ----------
Income before extraordinary item..................... 26,904 36,762 33,532 17,464 6,407
Extraordinary item................................... (22,242)
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 26,904 $ 59,004 $ 33,532 $ 17,464 $ 6,407
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings per share before extraordinary item... $ 2.51 $ 2.44 $ 2.21 $ 1.15 $ 0.42
Diluted earnings per share before extraordinary
item............................................... $ 2.50 $ 2.37 $ 2.15 $ 1.12 $ 0.41
Basic weighted average shares outstanding............ 10,727 15,101 15,180 15,165 15,286
Diluted weighted average shares outstanding.......... 10,743 15,520 15,612 15,663 15,642
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 38,864 $ 67,864
Working capital........................................................................... 39,950 88,679
Property and equipment.................................................................... 277,656 277,656
Total assets.............................................................................. 426,122 457,122
Long-term borrowings...................................................................... 7,233 107,233
Long-term borrowings, related parties..................................................... 49,000
Stockholders' equity...................................................................... 260,263 260,263
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE
FACE. OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION COULD BE MATERIALLY
ADVERSELY AFFECTED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION INCLUDED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND RELATED NOTES.
OUR OPERATIONS ARE DEPENDENT ON THE ACTIVITIES OF SEMICONDUCTOR MANUFACTURERS
Substantially all of our sales are derived from semiconductor manufacturers.
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. Our investment in
new facilities and equipment is based, in part, on the announced expansion plans
of the semiconductor industry. From time to time, the semiconductor industry has
developed more slowly than originally anticipated. A lack of development in the
semiconductor industry in a location in which we operate or establish new
facilities could have a material adverse effect on our business.
The demand for photomasks may decrease, even when there is growth in the
demand for semiconductors, due to the following factors:
- Changes in semiconductor designs or applications, such as a reduction in
customization or an increase in standardization;
- A reduction in design complexity;
- Other technological and manufacturing advances; or
- A slowdown in the introduction of new semiconductor designs.
OUR FINANCIAL RESULTS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL
Our 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 our operating results. Since our business is
characterized by short-term orders and shipment schedules without a significant
backlog for products, substantially all of our sales in any quarter are
dependent upon orders received during that quarter, which limits our ability to
respond to a changing business environment. In addition, our operating results
could be affected by the following factors:
- Competitive and customer-driven pricing pressures;
- Changes in the mix of products sold;
- Volume of orders shipped;
- Market acceptance of our products and our customers' products;
- Our ability to meet increasing demand and delivery schedules;
- Fluctuations in manufacturing yields;
- Fluctuations in currency exchange rates;
- Cyclical semiconductor industry conditions;
- Our access to advanced process technologies; and
- The timing and extent of product and process development costs.
6
<PAGE>
Moreover, we are limited in our 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 factors, we may experience
material adverse fluctuations in our 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.
WE MAY NOT OBTAIN SUFFICIENT CAPITAL TO FUND OUR NEEDS
We will need to continue to make significant capital expenditures to expand
our operations and to enhance our manufacturing capability. Based on our current
operating plans, we will require external financing from time to time to fund
our capital expenditures. We cannot assure you that we will be able to obtain
the additional capital required on reasonable terms, or at all, or that any such
expansion or lack of capital will not have a material adverse effect on our
business and results of operations, particularly during the start-up phase of
new operations.
OUR OPERATING RESULTS WILL BE ADVERSELY AFFECTED BY UNDER-UTILIZED PRODUCTION
CAPACITY
Our operations require us to incur significant fixed costs. Accordingly, our
operating profits are significantly affected by increases and decreases in sales
volume when our production capacity is not fully utilized. We anticipate that
our operating costs will increase as we add capacity to position our company for
future growth. Our results of operations could be adversely affected to the
extent that such capacity is not utilized.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE
The photomask and semiconductor industries are characterized by rapid
technological change and new product introductions and enhancements. In
particular, as semiconductor pattern sizes continue to decrease, the demand for
more technologically advanced photomasks is likely to increase. We believe we
must continue to enhance our existing products and to develop and manufacture
new products and upgrades with improved capabilities in order to satisfy this
anticipated demand. Our inability to anticipate, respond to or utilize changing
technologies could have a material adverse effect on our business and results of
operations.
Technological advances achieved by a competitor or a customer could lead to
the commercial availability of alternate methods of transferring circuit designs
onto semiconductor wafers without the use of photomasks. These alternatives,
including direct-write lithography, could have a material adverse effect on our
results of operations or financial position. Direct-write lithography writes the
circuit pattern directly onto the semiconductor wafer without the use of a
photomask. Although this direct-write method is currently too slow for
high-volume, commercial device manufacturing, a significant advance in this
technology or other technologies which transfer circuit designs without the use
of photomasks would have a material adverse effect on our business and results
of operations.
OUR MARKET IS HIGHLY COMPETITIVE AND SUBJECT TO PRICING PRESSURES
The photomask industry is highly competitive and most of our customers use
more than one photomask supplier. Our significant competitors include other
merchant manufacturers of photomasks, including:
- Align-Rite;
- Compugraphics;
- Dai Nippon Printing;
- Hoya Corporation;
7
<PAGE>
- Photronics;
- P.K. Limited;
- Taiwan Mask Corporation; and
- Toppan Printing Company.
Our 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
our products or a reduction in our prices as a result of intensified price
competition. We also compete 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. We cannot assure you that
this trend will continue or that it will not reverse, thereby reducing the
demand for photomasks produced by merchant photomask suppliers like us 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, we
cannot be certain 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 our competitors may have
greater financial, technical, marketing and other resources, each of which could
provide them with a competitive advantage over us.
Our ability to compete in the photomask market is primarily based on:
- Product quality;
- Delivery to schedule performance;
- Pricing;
- Technical capabilities;
- The location and capacity of manufacturing facilities; and
- Technical service.
OUR INTERNATIONAL OPERATIONS PRESENT SPECIAL RISKS
Approximately 44% of our sales in fiscal 1998 were derived from sales in
non-U.S. markets. We expect sales from non-U.S. markets to continue to represent
a significant portion of our total sales. Our non-U.S. operations are subject to
certain risks inherent in conducting business abroad, including:
- Price and currency exchange controls;
- Fluctuations in the relative value of currencies;
- Restrictive governmental actions; and
- Difficulties in managing a global enterprise.
Changes in the relative value of currencies occur from time to time and may, in
certain instances, have a material effect on our results of operations. Our
financial statements reflect remeasurement of items denominated in non-U.S.
currencies to U.S. Dollars, our functional currency. We monitor our exchange
rate exposure and attempt to reduce such exposure by hedging through forward
contracts. We cannot be certain that such forward contracts or any other hedging
activity will be available or adequate to eliminate, or even mitigate, the
impact of our exchange rate exposure. Further, we cannot assure you that such
risks will not have a material adverse impact on our liquidity and results of
operations in the future.
8
<PAGE>
OUR OPERATING RESULTS ARE INFLUENCED BY THE PERFORMANCE OF ASIAN ECONOMIES
In recent years, Asian economies have been highly volatile and recessionary,
resulting in significant fluctuations in local currencies and other
instabilities. These instabilities may continue or worsen, which could have a
material adverse impact on our financial position and results of operations as
approximately 19% of our sales in fiscal 1998 were derived from this region. As
a result of conditions over the past 18 months, we have experienced a reduction
in revenue and net income from our operations in Asia, primarily in Korea. These
conditions may continue or worsen.
WE FACE RISKS ASSOCIATED WITH MANUFACTURING DIFFICULTIES
Our complex manufacturing processes require the use of expensive and
technologically sophisticated equipment and materials and are continuously
modified in an effort to improve manufacturing yields and product quality.
Minute impurities 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. We have, on occasion,
experienced manufacturing difficulties and capacity limitations that have
delayed our ability to deliver products within the time frames contracted for by
our customers. We cannot assure you that we will not experience these or other
manufacturing difficulties, or be subject to increased costs or production
capacity constraints in the future, any of which could result in a loss of
customers or could otherwise have a material adverse effect on our business and
results of operations.
WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS
In fiscal 1998, our ten largest customers, in the aggregate, accounted for
more than 60% of our sales. All of 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 our results of operations.
While we believe we have strategic relationships with a number of our customers,
our customers place orders on an as-needed basis and generally can change their
suppliers without penalty. In addition, recently there has been a trend toward
outsourcing semiconductor manufacturing to foundries. To the extent we do not
have a strategic relationship with these foundries, this trend could have a
material adverse effect on our business and results of operations.
WE DEPEND ON A LIMITED NUMBER OF EQUIPMENT MANUFACTURERS
We rely on a limited number of photomask equipment manufacturers to develop
and supply the equipment we use. These equipment manufacturers currently require
lead times of approximately 10 to 14 months between the order and the delivery
of certain photomask imaging and inspection equipment. The failure of such
manufacturers to develop or deliver such equipment on a timely basis could have
a material adverse effect on our business and results of operations. In
addition, the manufacturing equipment necessary to produce advanced photomasks
could become prohibitively expensive.
WE DEPEND ON A LIMITED NUMBER OF RAW MATERIALS SUPPLIERS
We have a limited number of long-term supply agreements with our raw
materials suppliers. In addition, we have 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 our supply relationships or increases in prices, particularly
related to quartz plates, could result in delays or reductions in product
shipments by us or increases in product costs that could have a material adverse
effect on our business and operating results. In the event of such disruption,
we cannot assure you that we could develop alternative sources within reasonable
time frames, or if developed, that
9
<PAGE>
these sources would provide supplies or equipment at prices comparable with
those charged by our suppliers prior to such disruption.
DUPONT CONTROLS ALL STOCKHOLDER VOTES
DuPont currently owns approximately 69% of our outstanding common stock, and
after the offering, DuPont will own approximately 56%. As a result, after the
offering, DuPont will be able to:
- Control the vote of most matters submitted to our stockholders, including
any merger, consolidation or sale of all or substantially all of our
assets;
- Elect the members of our board of directors; and
- Prevent or cause a change in control of our company.
WE MUST INTEGRATE AND MANAGE OUR RECENT ACQUISITIONS AND JOINT VENTURES
From time to time we have made various acquisitions and entered into joint
venture arrangements intended to complement or expand our business. For example,
we recently entered into transactions with Hyundai, United Microelectronics
Corporation and Hewlett-Packard. The success of these transactions will depend
on our ability to:
- Attract, train and retain additional personnel;
- Integrate acquired production equipment with our operations; and
- Utilize any resulting additional production capacity.
The success of any joint venture will also depend on our ability to achieve
cooperation with our joint venture partner. We may encounter difficulties in
integrating acquired assets with our operations and managing any joint ventures.
For example, our joint venture with United Microelectronics Corporation has not
yet received a required operating license. Furthermore, we may not realize the
benefits we anticipated when we entered into these transactions. Any of the
foregoing could have a material adverse effect on our business and results of
operations.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH FUTURE ACQUISITIONS OR JOINT VENTURES
We may in the future pursue acquisitions of businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. The negotiation of potential acquisitions or joint ventures
as well as the integration of an acquired business, product or technology could
require us to incur significant costs and cause diversion of management's time
and resources. Future acquisitions by us could result in the following
consequences:
- 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, we cannot be certain that any acquired business, product or technology
will be successfully integrated with our operations or that we will receive the
intended benefits of any acquisition or joint venture.
10
<PAGE>
WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY
TECHNOLOGY
We believe that the success of our business depends more on our proprietary
technology, information and processes and know-how than on patents or
trademarks. Much of our proprietary information and technology relating to
manufacturing processes is not patented and may not be patentable. We cannot
assure you:
- That we will be able to adequately protect our technology;
- That competitors will not be able to independently develop similar
technology;
- That the claims allowed on any patents we hold will be sufficiently broad
to protect our technology; or
- That foreign intellectual property laws will adequately protect our
intellectual property rights.
We may become the subject of infringement claims or legal proceedings by third
parties with respect to current or future products or processes. Any such claims
or litigation, with or without merit, to enforce or protect our intellectual
property rights or to defend our company against claimed infringement of the
rights of others could result in substantial costs and diversion of resources,
product shipment delays or force us to enter into royalty or license agreements
rather than dispute the merits of these claims. Any of the foregoing could have
a material adverse effect on our business, results of operations and financial
position.
WE MAY BE UNPREPARED FOR CHANGES IN ENVIRONMENTAL LAWS AND REGULATIONS
We are subject to numerous environmental laws and regulations which 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 our financial position and results of
operations. Any failure by us to adequately comply with such laws and
regulations could subject us to significant future liabilities.
YEAR 2000 ISSUES EXPOSE US TO LIABILITY
We recognize the need to reduce the extent to which our operations will be
adversely impacted by Year 2000 software failures and have established a project
team to assess Year 2000 risks. The project team has coordinated the
identification of and is coordinating the implementation of changes to computer
hardware and software applications that will attempt to ensure the availability
and integrity of our information systems and the reliability of our operational
systems and manufacturing processes. We are also assessing the potential overall
impact of the impending century change on our business, results of operations
and financial position.
The total cost of our Year 2000 compliance activities has not been, and is
not expected to be, material to our results of operations. Although we have used
our best estimates to project the time and expense associated with the
completion of our Year 2000 modification and testing processes, we cannot assure
you that we will identify and address all significant Year 2000 problems in a
prompt and cost-effective manner. Such Year 2000 problems, if not fixed, could
have a material adverse effect on our business, results of operations and
financial position.
We also face risk to the extent that suppliers of products, services and
systems purchased by us and others with whom we transact business on a worldwide
basis do not comply with Year 2000 requirements. In the event any such third
party cannot promptly provide us with products, services or systems that meet
the Year 2000 requirements, or in the event Year 2000 issues prevent such third
parties from prompt delivery of products or services required by us, our results
of operations could be materially adversely affected. In addition, Year 2000
issues could cause significant delays in, or cancellations of, decisions to
11
<PAGE>
purchase our products or services, which would have a material adverse effect on
our business, results of operations and financial position.
WE FACE UNCERTAINTY IMPLEMENTING A NEW GLOBAL INFORMATION SYSTEM
We are in the process of implementing a new enterprise-wide software system
that replaces our existing financial, human resources and manufacturing
information systems. We cannot assure you that this conversion will be
successful or that it will yield benefits to us.
OUR MARKET PRICE IS VOLATILE
The market price of our common stock has been and can be expected to be
significantly affected by factors such as:
- Quarterly variations in our results of operations;
- The announcement of new products or product enhancements by us or our
competitors;
- Technological innovations by us or our competitors;
- Changes in earnings estimates or buy/sell recommendations by analysts;
- The operating and stock price performance of other comparable companies;
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 our common stock.
OUR STOCK PRICE MAY BE AFFECTED WHEN ADDITIONAL SHARES ARE SOLD
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Such sales might make it more difficult for us to sell equity or
equity-related securities in the future at a time and place that we deem
appropriate. After this offering, DuPont will beneficially own 8,500,000 shares
of common stock. DuPont has advised us that it expects to continue to reduce its
ownership interest in our company over time, subject to prevailing market
conditions. We have granted DuPont certain rights with respect to the
registration of shares of our common stock held by DuPont, including the right
to require that we register under the Securities Act of 1933 the sale of all or
part of the shares it holds, and to include such shares in a registered offering
of securities by us for DuPont.
We, our directors and executive officers and DuPont have each entered into
certain lock-up restrictions in which each agrees that, in general, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, each will not, during the period ending 90 days after the date of
this prospectus, sell or agree to sell, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock,
other than the proposed convertible subordinated notes and pursuant to our stock
performance plans. Following the expiration of such lock-up agreements, all of
the shares held by those persons 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 of 1933.
12
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "should," "will" and "would" or similar words. You should read statements
that contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or of our financial
position or state other "forward-looking" information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control. The factors listed above in the section captioned "Risk Factors," as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in these risk factors and elsewhere in this prospectus could
have a material adverse effect on our business, results of operations and
financial position.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by DuPont.
DIVIDEND POLICY
We have not paid any dividends on our capital stock and do not intend to pay
any cash dividends on our common stock in the foreseeable future. We currently
intend to retain our earnings to finance future growth of our business. Future
dividends, if any, will be determined by our board of directors.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"DPMI." The following table sets forth, for the fiscal periods indicated, the
high and low sale prices per share of our common stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
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 ENDED 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............................................................. 58 28 7/8
YEAR ENDING JUNE 30, 1999:
First Quarter.............................................................. $ 38 1/2 $ 19 3/4
Second Quarter............................................................. 43 7/8 16 7/8
Third Quarter (through February 23, 1999).................................. 51 1/4 37 3/8
</TABLE>
On February 23, 1999, the reported last sale price of our common stock on
the Nasdaq National Market was $43 7/8 per share.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
on an actual basis, and as adjusted to give effect to the application of the
anticipated net proceeds from our concurrent offering of convertible
subordinated notes to repay all outstanding indebtedness owed under our credit
agreement with DuPont. At December 31, 1998, approximately $49 million was owed
to DuPont under that credit agreement. An additional approximately $20 million
was advanced to us under the credit agreement subsequent to that date. We cannot
be certain that the note offering will be completed. This table should be read
in conjunction with our financial statements and related notes and the other
financial information included or incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Other accrued liabilities.............................................. $ 47,317 $ 27,588
Short-term borrowings.................................................. 794 794
Long-term borrowings:
% convertible subordinated notes due 2003......................... $ 100,000
DuPont credit agreement.............................................. $ 49,000
Other................................................................ 7,233 7,233
--------- -----------
Total long-term borrowings............................................. 56,233 107,233
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized;
15,300,525 shares issued and outstanding........................... 153 153
Additional paid-in capital........................................... 161,167 161,167
Retained earnings.................................................... 98,943 98,943
--------- -----------
Total capitalization................................................... $ 316,496 $ 367,496
--------- -----------
--------- -----------
</TABLE>
14
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth our selected financial data. The data for the
three years ended June 30, 1998 has been derived from the audited financial
statements appearing elsewhere in this prospectus. The data for the years ended
June 30, 1994 and 1995 and as of June 30, 1996 has been derived from audited
financial statements not appearing in this prospectus. The data for the six
months ended December 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 six
months ended December 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 the financial statements and notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................................. $ 134,548 $ 161,514 $ 213,415 $ 261,185 $ 271,591 $ 136,137 $ 122,872
Cost of goods sold................................. 110,396 120,512 142,200 163,319 179,369 89,004 88,478
Selling, general and administrative expense........ 20,750 21,803 25,167 31,611 29,509 15,623 15,895
Research and development expense................... 8,131 8,777 9,162 12,372 12,714 6,331 7,732
--------- --------- --------- --------- --------- --------- ---------
Operating profit (loss)............................ (4,729) 10,422 36,886 53,883 49,999 25,179 10,767
Other (income) expense............................. 6,136 6,464 7,964 (1,284) 27 (448) 1,482
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes, minority
interest and extraordinary item.................. (10,865) 3,958 28,922 55,167 49,972 25,627 9,285
Provision for income taxes......................... 2,678 19,308 17,127 8,850 2,878
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interest and
extraordinary item............................... (10,865) 3,958 26,244 35,859 32,845 16,777 6,407
Minority interest in loss of joint venture......... (161) (660) (903) (687) (687)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item............ (10,865) 4,119 26,904 36,762 33,532 17,464 6,407
Extraordinary item................................. (22,242)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ (10,865) $ 4,119 $ 26,904 $ 59,004 $ 33,532 $ 17,464 $ 6,407
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic earnings (loss) per share before
extraordinary item............................... $ (1.03) $ .39 $ 2.51 $ 2.44 $ 2.21 $ 1.15 $ 0.42
Diluted earnings (loss) per share before
extraordinary item............................... $ (1.03) $ .39 $ 2.50 $ 2.37 $ 2.15 $ 1.12 $ 0.41
Basic weighted average shares outstanding.......... 10,500 10,500 10,727 15,101 15,180 15,165 15,286
Diluted weighted average shares outstanding........ 10,500 10,500 10,743 15,520 15,162 15,663 15,642
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 3,924 $ 8,412 $ 20,179 $ 51,351 $ 19,688 $ 28,999 $ 38,864
Working capital.................................... 22,853 16,405 34,458 66,082 33,152 47,987 39,950
Property and equipment............................. 112,043 113,124 123,048 162,310 244,650 198,705 277,656
Total assets....................................... 160,901 171,701 227,893 291,579 351,979 305,250 426,122
Long-term borrowings............................... 6,704 4,265 9,324 10,473 7,519 9,187 7,233
Long-term borrowings, related parties.............. 140,846 125,570 9,000 49,000
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Based on worldwide sales, we are one of the largest photomask manufacturers
in the world. We sell our products to over 200 customers in 20 different
countries. Essentially all of our sales are to customers in the semiconductor
manufacturing industry. We manufacture a broad range of photomasks based on
customer-supplied design data. We also manufacture photoblanks and pellicles,
the principal components of photomasks, primarily for internal consumption. We
operate globally with established manufacturing facilities in North America,
Europe and Asia.
Prior to our initial public offering on June 13, 1996, we were a wholly
owned subsidiary of DuPont. Therefore, our historical results prior to such date
are not necessarily indicative of the results that would have been achieved if
we had been independent. Results for interim periods are not necessarily
indicative of results for the full year.
The demand for photomasks is driven primarily by semiconductor design
activity. A number of recent trends have fueled growth in design activity,
including:
- Increasing customization of semiconductor designs;
- Growing complexity of semiconductor devices;
- Decreasing feature size of semiconductor designs; and
- The proliferation of semiconductor applications.
These trends have increased the importance of photomask technology in the
semiconductor manufacturing process. Primarily as a result of these trends, our
annual sales increased an average of 19.2% from 1994 to 1998.
Due to a downturn in the semiconductor industry and corresponding photomask
industry over-capacity, our sales decreased 9.7% from $136.1 million in the six
months ended December 31, 1997 to $122.9 million in the six months ended
December 31, 1998. Competitive pricing pressure and decreased unit volume were
the primary contributors to the overall decrease in sales during this period.
Photomask manufacturing operations are capital intensive. Accordingly, at a
given threshold of manufacturing capacity, a high proportion of our operating
costs are fixed and remain relatively constant as sales volume increases or
decreases. To the extent that we have under-utilized production capacity,
operating profit increases or decreases significantly as sales volume increases
or decreases. In the early 1990's, we had excess capacity. As sales increased
through 1997, costs associated with manufacturing remained relatively unchanged
and our operating margin over the period increased. In 1998, our operating costs
on an absolute basis increased more than our sales. As a result, our operating
margin declined. In 1999, we anticipate that our operating costs will continue
to increase as we add capacity to position ourself for future growth. If our
sales growth does not keep pace with increases in operating costs, our operating
margin will decline further.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected financial information expressed as a
percentage of sales for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales.................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................................... 66.6 62.6 66.0 65.4 72.0
Selling, general and administrative expense.............. 11.8 12.1 10.9 11.4 12.9
Research and development expense......................... 4.3 4.7 4.7 4.7 6.3
--------- --------- --------- --------- ---------
Operating profit......................................... 17.3 20.6 18.4 18.5 8.8
Other (income) expense................................... 3.7 (0.5) (0.3) 1.2
--------- --------- --------- --------- ---------
Income before income taxes, minority interest and
extraordinary item..................................... 13.6 21.1 18.4 18.8 7.6
Provision for income taxes............................... 1.3 7.4 6.3 6.5 2.4
--------- --------- --------- --------- ---------
Income before minority interest and extraordinary item... 12.3 13.7 12.1 12.3 5.2
Minority interest in loss of joint venture............... (0.3) (0.4) (0.2) (0.5)
--------- --------- --------- --------- ---------
Income before extraordinary item......................... 12.6 14.1 12.3 12.8 5.2
Extraordinary item....................................... (8.5)
--------- --------- --------- --------- ---------
Net income............................................... 12.6% 22.6% 12.3% 12.8% 5.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997
SALES. Sales are comprised primarily of photomask sales to semiconductor
manufacturers. Sales decreased 9.7% from $136.1 million in the six months ended
December 31, 1997 to $122.9 million in the six months ended December 31, 1998.
From the six months ended December 31, 1997 to the six months ended December 31,
1998, sales decreased in North America from $76.5 million to $71.1 million,
sales decreased in Europe from $31.3 million to $26.1 million and sales
decreased in Asia from $28.3 million to $25.7 million. Competitive pricing
pressure and decreased unit volume were the primary contributors to the overall
decrease in sales during this period. Average selling price decreases accounted
for approximately 80% of the revenue decrease in the six months ended December
31, 1998. The balance of the revenue decrease came from decreased unit volume.
However, we continue to experience an increase in demand for advanced
photomasks. This shift in demand reflects what we believe to be a continued
trend toward higher utilization of complex semiconductor devices with finer line
widths.
COST OF GOODS SOLD. Cost of goods sold consists of material, labor,
depreciation and overhead. Cost of goods sold decreased from $89.0 million in
the six months ended December 31, 1997 to $88.5 million in the six months ended
December 31, 1998. The decrease resulted primarily from lower costs associated
with decreased sales and ongoing cost containment initiatives offset in part by
higher costs associated with increased manufacturing capacity. As a percentage
of sales, cost of goods sold increased from 65.4% in the six months ended
December 31, 1997 to 72.0% in the six months ended December 31, 1998. The
percentage of sales increase was primarily due to margin compression as a result
of competitive pricing pressures, the strength of the U.S. Dollar, costs related
to new facilities and costs related to continued capacity expansions at existing
facilities. As we add capacity to position ourself for future growth, we 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
17
<PAGE>
distribution expense. Since January 1, 1996, selling, general and administrative
expense includes fees incurred by us under administrative service agreements
with DuPont and certain DuPont subsidiaries. Selling, general and administrative
expense as a percentage of sales increased from 11.4% in the six months ended
December 31, 1997 to 12.9% in the six months ended December 31, 1998. The
increase as a percentage of sales was primarily the result of lower sales.
Selling, general and administrative expense increased 1.7% from $15.6 million in
the six months ended December 31, 1997 to $15.9 million in the six months ended
December 31, 1998. We anticipate that selling, general and administrative
expense will increase in the future.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists
primarily of employee costs, cost of material consumed, depreciation,
engineering related costs and our share of costs of the DPI Reticle Technology
Center. Research and development expense increased from $6.3 million in the six
months ended December 31, 1997 to $7.7 million in the six months ended December
31, 1998. The increase was due primarily to increased focus on research and
development at our facility in Ichon and our joint venture participation with
Advanced Micro Devices, Micron Technology and Motorola in the DPI Reticle
Technology Center, which was formed to develop advanced photomask technology and
fabricate leading-edge photomasks. We believe that, through our participation in
the DPI Reticle Technology Center, we will be able to help meet the future
technology needs of the semiconductor industry for advanced photomasks. There
can be no assurance that the DPI Reticle Technology Center will yield results
favorable to us. We anticipate that research and development expense will
continue to increase in absolute dollars in the future reflecting our strategy
of advancing our technological leadership. However, there can be no assurance
that such expenditures will enable us to develop new technologies or to maintain
our technological leadership.
OTHER (INCOME) EXPENSE. Other (income) expense was ($0.4 million) in the
six months ended December 31, 1997 and $1.5 million in the six months ended
December 31, 1998. The increase relates primarily to increased interest expense
as a result of borrowings drawn on our credit agreement as discussed below.
PROVISION FOR INCOME TAXES. Our tax expense has been determined in
accordance with FAS 109 and is based on the statutory rates in effect in the
countries in which we operate. Our effective tax rate was 34% for the six months
ended December 31, 1997 and was 31% for the six months ended December 31, 1998.
Our operations in Korea are subject to a government granted tax exemption. We
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 JOINT VENTURE. The minority interest impact of
our joint venture manufacturing facility in China was ($0.7 million) in the six
months ended December 31, 1997. Minority interest reflects the partner's share
of losses from the joint venture.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
SALES. Sales increased 4.0% from $261.2 million in 1997 to $271.6 million
in 1998. Sales in North America and Europe increased from $145.6 million and
$63.0 million in 1997 to $152.2 million and $67.0 million in 1998. Sales in Asia
decreased from $52.6 million in 1997 to $52.4 million in 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 we believe 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 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 $15 million in 1998 and
thus adversely impacted sales growth in 1998 as compared to the previous year.
18
<PAGE>
COST OF GOODS SOLD. Cost of goods sold increased 9.8% from $163.3 million
in 1997 to $179.4 million in 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 62.6% in 1997 to 66.0% in 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense as a percentage of sales decreased from 12.1% in 1997 to
10.9% in 1998. Selling, general and administrative expense decreased 6.6% from
$31.6 million in 1997 to $29.5 million in 1998 as a result of reductions in
discretionary spending including reduced incentive compensation expense.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $12.4 million in 1997 to $12.7 million in 1998. The increase was
due primarily to expenses arising from our joint venture participation in the
DPI Reticle Technology Center.
OTHER (INCOME) EXPENSE. Interest income was $2.1 million in 1997 and $0.1
million in 1998. Interest income results from short-term investment of our cash
balances. Exchange loss consists of net gains and losses resulting from the
remeasurement of our accounts denominated in non-U.S. currencies into U.S.
Dollars, which is our functional currency. Exchange loss was $0.8 million in
1997 compared to $0.2 million in 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. Our tax expense has been determined in
accordance with FAS 109 and is based on the statutory rates in effect in the
countries in which we operate. Our effective tax rate was 35% in 1997 and was
34% in 1998.
MINORITY INTEREST IN LOSS OF JOINT VENTURE. The minority interest impact of
our joint venture manufacturing facility in China was ($0.9 million) in 1997
compared to ($0.7 million) in 1998, reflecting 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. The increase was attributable to a continued increase in
the demand for advanced photomasks. The increase in sales during this period
also reflects an overall increase in demand for photomasks.
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 62.6% 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 we had
been independent. 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.
19
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE. Our 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 primarily reflect our joint venture
participation in the DPI Reticle Technology Center.
OTHER (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 our master note arrangements with DuPont. On June 28, 1996, DuPont
contributed the $90.5 million balance outstanding on the master notes to us as a
capital contribution. Interest income results from short-term investment of our
cash balances. 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.
PROVISION FOR INCOME TAXES. Prior to our initial public offering, tax
expense was determined and allocated to us by applying the separate taxpayer
approach outlined in FAS 109. Under this approach, we had net operating loss
carry forwards in the U.S. and Europe, some of which became fully utilized
during 1996. In actuality, our 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 we operate.
MINORITY INTEREST IN LOSS OF JOINT VENTURE. The minority interest impact of
our 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, we sold our entire investment in Etec
Systems common stock. Aggregate net proceeds from the sale of $39.2 million were
used in operations. We realized a $34.2 million gain on the sale. The related
provision for income taxes was $12.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $33.1 million at June 30, 1998 and $39.9 million at
December 31, 1998. The increase in working capital is due principally to higher
cash resulting from United Microelectronics Corporation funding of our joint
venture in Taiwan and lower accounts payable as offset by higher other accrued
liabilities resulting from our acquisition of Hewlett-Packard's photomask
manufacturing organization. Cash and cash equivalents were $19.7 million at June
30, 1998 and $38.9 million at December 31, 1998. Cash provided by operating
activities decreased from $46.4 million in the six months ended December 31,
1997 to $19.1 million in the six months ended December 31, 1998 primarily due to
lower net income.
Cash used in investing activities, including capital expenditures and
payment for acquisitions, was $68.4 million in the six months ended December 31,
1997 and $53.0 million in the six months ended December 31, 1998. Management
expects capital expenditures for the remainder of fiscal 1999 will be
approximately $60 million to $70 million. Capital expenditures have been and
will be used primarily to expand our manufacturing capacity and advance our
technical capability. We may in the future pursue additional acquisitions of
businesses, products and technologies, or enter into other joint venture
arrangements that could complement or expand our business. Any material
acquisition or joint venture could result in a decrease to our working capital
depending on the amount, timing and nature of the consideration to be paid.
Cash provided by financing activities was $0.9 million in the six months
ended December 31, 1997 and $55.1 million in the six months ended December 31,
1998 and, for the six months ended December 31, 1998, primarily reflects net
borrowings on our credit agreement. Pursuant to our credit agreement with
20
<PAGE>
DuPont, DuPont has agreed to provide a credit facility in an aggregate amount of
$100.0 million. The agreement expires in 2001 and any loans thereunder will bear
interest at LIBOR plus 0.25% per annum. At our option, advances under the
agreement are convertible into term loans with maturities up to seven years. We
have borrowed a maximum of approximately $69 million under the credit facility
and currently borrowings of approximately $69 million are outstanding under the
agreement. The agreement contains, among other things, covenants restricting our
ability to incur additional debt.
Our ongoing cash requirements will be for capital expenditures,
acquisitions, research and development and working capital. We have established
a joint venture with United Microelectronics Corporation to produce photomasks
in Taiwan; announced plans to build a new photomask production facility in
Singapore; begun construction on, and subsequently delayed completion of, a new
photomask production facility in Gresham, Oregon; and entered into an agreement
with Etec Systems to upgrade our existing 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 and the credit agreement will be sufficient to meet our
cash requirements for at least the next 12 months. Based on our current
operating plans, we will require external financing from time to time to fund
our capital expenditures. There can be no assurance that we will be able to
obtain the additional financing required to fund these capital investments on
reasonable terms, or at all.
We intend to raise net proceeds of approximately $98 million through a
private offering to institutional investors of $100 million principal amount of
convertible subordinated notes due 2003. The proceeds of the anticipated note
offering will be used to repay all outstanding indebtedness owed under our
credit agreement with DuPont and for general corporate purposes, including
potential acquisitions, working capital and capital expenditures. Our
obligations under the notes will be guaranteed by DuPont. For providing the
guarantee, we will pay DuPont a fee equal to approximately 0.08% of the
principal amount of the notes outstanding for each month during the last year of
the term of the notes. The offering and other specific terms of the notes will
be determined by market conditions. We cannot be certain that the note offering
will be completed. In consideration for DuPont's agreement to guarantee our
obligations under the notes, we intend to amend our credit agreement with DuPont
to increase the interest rate charged on outstanding amounts to LIBOR plus
1.875% per annum and terminate our ability to convert outstanding amounts into
term loans.
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 our borrowing requirements exceed the
facility. In addition, there can be no assurance that, even if funding is
available, the terms thereof will be attractive.
OTHER MATTERS
CHANGING ACCOUNTING STANDARDS. In June 1997, the Financial Accounting
Standards Board issued FAS 130 and FAS 131. Neither FAS is expected to have a
material impact on our results. In June 1998, the Financial Accounting Standards
Board issued FAS 133 which is also not expected to have a material impact on our
results.
FOREIGN CURRENCY EXPOSURE. 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 our
results of operations. Our financial statements reflect remeasurement of items
denominated in non-U.S. currencies to U.S. Dollars, our functional currency.
Exchange gains or losses are included in income in the period in which they
occur. We monitor our exchange rate exposure and attempt to reduce such exposure
by hedging. We have entered into Korean Won, French Franc and Japanese Yen
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
21
<PAGE>
adequate to eliminate, or even mitigate, the impact of our exchange rate
exposure. There can be no assurance that such risks will not have a material
adverse impact on our liquidity and results of operations in the future.
YEAR 2000 ISSUES. Many currently installed computer systems are not capable
of distinguishing 21st century dates from 20th century dates. As a result, in
less than one year, computer systems and/or software used by many companies in a
wide variety of applications will experience operating 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.
We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 software failures and have established a project team to
address Year 2000 risks. The project team has coordinated the identification of
and is coordinating the implementation of changes to computer hardware and
software applications that will attempt to ensure availability and integrity of
our information systems and the reliability of our operational systems and
manufacturing processes. We have also assessed the potential overall impact of
the impending century change on our business, results of operations and
financial position.
We have reviewed our information and operational systems and manufacturing
processes in order to identify those products, services or systems that are not
Year 2000 compliant. As a result of this review, we have determined that we will
be required to modify or replace certain information and operational systems so
they will be Year 2000 compliant. These modifications and replacements are
being, and will continue to be, made in conjunction with our overall systems
initiatives. As of February 1, 1999, we have spent approximately $0.7 million of
the currently estimated $2.0 million total cost of the Year 2000 compliance
program. Costs incurred and expected to be incurred consist of the costs of
programmers, including third-party consultants, utilized to write software
patches and to update applications and operating systems. Funds for the Year
2000 compliance program are expected to be provided from available working
capital. Our Year 2000 project is on schedule to be completed during 1999. Based
on available information, we do not believe any material exposure to significant
business interruption exist as a result of Year 2000 compliance issues.
Accordingly, we have not adopted any formal contingency plan in the event our
Year 2000 project is not promptly completed. These costs and the timing in which
our plans to complete our Year 2000 modification and testing processes are based
on management's best estimates. However, there can be no assurance that we will
sufficiently identify and remediate all significant Year 2000 problems, that
remediation efforts will not involve significant time and expense, or that such
problems will not have a material adverse effect on our business, results of
operations or financial position.
We also face risk to the extent that suppliers of products, services and
systems purchased by us and others with whom we transact business on a worldwide
basis do not comply with Year 2000 requirements. We have initiated formal
communications with significant suppliers and customers to determine the extent
to which we are vulnerable to failures by these third parties to remediate their
own Year 2000 issues. Areas being addressed include major third-party suppliers
as well as full reviews of our manufacturing equipment, telephone and voice mail
systems, security systems and other office support systems. Most of our
equipment suppliers are providing patches which will be tested and installed by
the end of fiscal 1999. In the event these third parties cannot promptly provide
us with products, services or systems that meet the Year 2000 requirements, or
in the event Year 2000 issues prevent such third parties from timely delivery of
products or services required by us, our results of operations could be
materially adversely affected. To the extent Year 2000 issues cause significant
delays in, or cancellation of, decisions to purchase our products or services,
our business, results of operations and financial position would be materially
adversely affected.
22
<PAGE>
BUSINESS
OVERVIEW
Based on worldwide sales, we are 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. We manufacture a broad range of
photomasks based on customer-supplied design data, including photomasks that
meet the tightest design specifications required by semiconductor manufacturers
today. We sell our products to over 200 customers in 20 different countries. We
believe that we are the principal merchant photomask supplier for many of our
customers, including Advanced Micro Devices, Hewlett-Packard, Hyundai, LG
Semicon, Lucent Technologies, Micron Technology, Motorola, National
Semiconductor, Philips, Samsung and STMicroelectronics. We operate globally from
eleven manufacturing facilities in North America, Europe and Asia, including two
joint ventures facilities. We also operate the DPI Reticle Technology Center,
LLC, a joint venture facility dedicated to advanced photomask technology
development and fabrication of leading-edge photomasks.
INDUSTRY BACKGROUND
The demand for photomasks is driven largely by increases in the number of
semiconductor designs and the complexity of integrated circuits. Integrated
circuit designs consist of a series of separate patterns, each of which must be
imaged onto a different photomask. The resulting series of photomasks is then
used to successively layer the circuit patterns onto the semiconductor wafer. As
a result, 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. 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. We
estimate 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 like us has
grown substantially. We estimate 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 that can reliably deliver advanced photomasks.
Consequently, many semiconductor manufacturers have developed strategic
23
<PAGE>
relationships with leading merchant photomask manufacturers in order to maintain
a consistent source of high quality photomasks.
We believe the demand for photomasks and the photomask industry's importance
in the semiconductor manufacturing process are increasing due to the following
trends:
- CUSTOMIZATION OF SEMICONDUCTOR DESIGNS. Growing demand for customized
semiconductors generates increased demand for photomasks as each new type
of semiconductor device requires additional new and often more advanced
photomasks. Examples of this customization include application specific
integrated circuits, application specific standard products,
system-on-a-chip and a growing variety of memory products.
- INCREASING DEVICE COMPLEXITY. Efforts to improve the performance and
functionality of semiconductor devices have resulted in more complex
devices. Complex devices require additional layers of patterns, and
additional photomasks on which the patterns are imaged, in order to be
manufactured. 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 ability to produce smaller
and more powerful semiconductor chips at lower costs drives the
semiconductor industry's growth. As semiconductor line widths become as
small and smaller than 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 products, including cellular
telephones, pagers, automobiles, medical products, household appliances
and other consumer electronic products. In addition, the demand for
semiconductor devices by 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. We believe that the proliferation of semiconductor
applications will lead to an increase in semiconductor design activity and
resulting demand for photomasks.
We believe that all of these trends in the semiconductor industry are
increasing the demand for photomasks and driving the need for the continuing
development of advanced photomasks.
OUR STRATEGY
Our objective is to be the world's premier global supplier of photomasks, by
providing the finest service and most advanced technology to our customers, by
implementing the following strategies:
- ADVANCE OUR TECHNOLOGICAL LEADERSHIP. We intend to continue to invest in
research and development and advanced equipment to enhance our
technological leadership position. We believe 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. We also believe that by providing leading-edge photomasks
we can position ourselves as the preferred provider of photomasks to our
customers. For example, we are partners with Advanced Micro Devices,
Micron Technology and Motorola in the DPI Reticle Technology Center, a
unique facility dedicated solely to developing advanced photomask
technology and fabrication processes for leading-edge
24
<PAGE>
photomasks. Generally, we can use the technological advancements developed
by the DPI Reticle Technology Center to develop and manufacture photomasks
and related products in our manufacturing facilities.
- EXPAND OUR STRATEGIC RELATIONSHIPS WITH CUSTOMERS. A key component of our
ongoing strategy is to continue to develop and expand our strategic
relationships with the world's leading semiconductor manufacturers. We
believe our joint development relationships, including our alliance with
Hyundai to jointly develop leading-edge photomasks and our participation
in the DPI Reticle Technology Center, will enable us to share the risks
and benefits of developing the next generation of photomasks. In addition,
we believe these relationships will help to solidify our position as, or
provide us the opportunity to become, the primary supplier of advanced
photomasks and key enabling technologies to our customers.
- CAPITALIZE ON OUR ESTABLISHED GLOBAL MANUFACTURING AND CUSTOMER SERVICE
SUPPORT NETWORK. Since 1991, we have operated globally with integrated
manufacturing facilities in North America, Europe and Asia. Our facilities
are strategically located close to our customers, many of whom have
multiple facilities located throughout the world and prefer global
suppliers to serve their photomasks needs. In addition, our 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. We believe the
ability to consistently deliver high quality products and superior
customer service, on a timely basis, to each customer's various facilities
around the world provides us with a competitive advantage.
- LEVERAGE STRATEGIC RELATIONSHIPS WITH KEY SUPPLIERS. We utilize 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, we have
a strategic alliance with Hoya Corporation to develop and produce advanced
photoblanks supporting the manufacture of semiconductor devices with
design rules of 0.18 micron and smaller. We also believe that our
strategic relationships with leading equipment suppliers help ensure our
ability to provide our customers with early access to the most advanced
photomasks. As an example, we have an exclusive lead-time agreement with
Etec Systems to significantly upgrade the capability and capacity of our
MEBES-Registered Trademark- electron-beam pattern generation tools, which
is expected to significantly expand our leading-edge photomask capability.
As a result of all of the foregoing measures, we believe we can rapidly
deliver to our customers the latest advances in photomask technologies.
OUR PRODUCTS AND TECHNOLOGY
PHOTOMASKS
Photomasks are high-purity quartz or glass plates containing precise,
microscopic images of integrated circuits that are used as masters -- similar to
negatives in a photographic process -- to optically transfer the image of
circuit patterns onto semiconductor wafers during the fabrication process. 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 has been 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.
We manufacture photomasks in accordance with semiconductor design and
specification data provided on a confidential basis by our customers. The final
design of each integrated circuit results in a set of precise individual circuit
patterns to be imaged onto a series of separate photomasks of typically 10
25
<PAGE>
to 25 separate masks. The complete set of patterned photomasks is required to
manufacture the customer's integrated circuit design. Upon receipt of a
customer's circuit design, we convert the design to pattern data, which controls
an electron beam or laser beam that exposes the circuit pattern onto a thin
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.
We manufacture a broad range of photomasks for varying customer
applications, including applications requiring the use of leading-edge
photomasks. We manufacture these products using multiple production techniques,
including electron beam and laser beam exposure as well as lower cost optical
exposure techniques.
We have developed advanced photomask products for customers using
leading-edge lithography technologies in three categories:
- ADVANCED BINARY MASKS. Advanced binary photomasks are high quality
photomasks manufactured with tight tolerances which permit our customers
to use a variety of lithography technologies.
- PHASE SHIFT MASKS. Phase shift masks alter the phase of the light passing
through the photomask, permitting improved depth of focus and resolution
on the wafer, and have additional unique characteristics.
- OPTICAL PROXIMITY CORRECTION MASKS. Optical proximity correction masks
contain submicron features that help minimize optical distortions on the
wafer and therefore permit improved image fidelity, and also typically
require extremely tight specifications.
The demand for these products has grown during the past two years as
customers search for more 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, we expect these advanced photomasks 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. We manufacture both photoblanks and pellicles and we believe
that our knowledge of materials used in the production photoblanks and pellicles
gives us a competitive advantage in managing the supply, quality and cost of our
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.
We purchase virgin quartz substrates from a limited number of suppliers. In
addition, we recycle quartz substrates which have been repolished in order to
reduce cost and dependence on external suppliers. We manufacture approximately
60% of our requirement for photoblanks and purchase the remainder from Hoya
Corporation. We have 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 smaller. We believe that this alliance,
coupled with our internally developed knowledge of photoblank technology,
enhances our ability to develop and deliver advanced photomasks.
26
<PAGE>
Pellicles are produced from nitrocellulose or other polymer solutions that
we prepare or purchase. The ultra-thin film is typically precision-coated with
an anti-reflective layer to improve optical performance characteristics. We have
introduced proprietary pellicle films that are specifically designed to
withstand the powerful radiation found in the emerging generation of advanced
steppers. We hold several patents covering various aspects of pellicle
technology and from time to time may have various patents pending. Historically,
we purchase approximately 20% to 30% of the pellicles we use to manufacture
photomasks from third-party suppliers.
GLOBAL MANUFACTURING AND OPERATIONS
Since 1991, we have operated globally with established manufacturing
facilities in North America, Europe and Asia. Approximately 56%, 25% and 19% of
our sales in fiscal 1998 were in the U.S., Europe and Asia. In North America, we
operate photomask manufacturing facilities in Round Rock, Texas, Santa Clara,
California, and Kokomo, Indiana. Additionally, we began construction on a new
photomask manufacturing facility in Gresham, Oregon, which we subsequently and
indefinitely delayed. If additional capacity were to be needed, we could
complete the Gresham facility within approximately six months. In Europe, our
manufacturing facilities are located in Rousset, France, Hamburg, Germany and
Hamilton, Scotland. In Asia, we operate a manufacturing facility in Ichon,
Korea, operate a joint venture facility in Shanghai, China, have plans to build
a new photomask production facility in Singapore and have a joint venture to
produce photomasks in Taiwan with United Microelectronics Corporation. We serve
semiconductor manufacturers in Japan through our support office in Tokyo, Japan
and our manufacturing facility in Ichon, Korea.
We believe that our global presence is important for meeting the supply
needs of multi-national customers 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 our
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 our other facilities. By being able to transfer information throughout the
world with this network, we can optimize resource allocation, thereby lowering
production costs while providing effective customer service on a local level.
Each of our wholly owned manufacturing sites is ISO 9002 qualified. We
manufacture 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. Our 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.
OUR CUSTOMERS
We are a principal photomask supplier to many of the leading global
semiconductor manufacturers. Essentially all of our sales are to customers in
the semiconductor manufacturing industry. Our largest customers include the
following:
<TABLE>
<S> <C> <C>
Advanced Micro Devices LSI Logic Samsung
AMI Lucent Technologies Silicon Valley Group
Atmel Maxim STMicroelectonics
Hewlett-Packard Micron Technology Texas Instruments
Hexfet Motorola United Microelectronics
Corporation
Hyundai National Semiconductor VLSI Technology
LG Semicon Philips
</TABLE>
27
<PAGE>
In fiscal 1998, our two largest customers, Lucent Technologies and
STMicroelectronics, in the aggregate, accounted for approximately 27% of our
sales and each individually accounted for over 10% of our sales. Our ten largest
customers, in the aggregate, accounted for more than 60% of our sales.
We have entered into multi-year, non-exclusive supply agreements with some
of our customers, including Hewlett-Packard, Hyundai, Lucent Technologies,
Philips, STMicroelectronics and United Microelectronics Corporation. Each
agreement is separately negotiated and therefore specific terms vary.
WORLDWIDE SALES AND SUPPORT
Because each photomask is unique, we work closely with each customer to
define and communicate precisely the specifications required by the customer. We
sell and service our products principally through our employees based at our
manufacturing sites throughout the world.
We have established customer service centers inside several of our
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. We believe that these centers located in
customers' facilities reduce errors and returns and improve on-time delivery,
each of which improves customer satisfaction.
OUR COMPETITION
The photomask industry is highly competitive and most of our customers
utilize more than one photomask supplier. Because of our global presence, we
compete with various merchant manufacturers in each local geographic region in
which we operate. In North America, we compete primarily with Align-Rite and
Photronics and, to a lesser extent, with other smaller merchant photomask
suppliers. In Europe, we compete with Align-Rite, Compugraphics and Photronics.
In Asia, we compete with Dai Nippon Printing, Hoya Corporation, Photronics, P.K.
Limited, Taiwan Mask Corporation and Toppan Printing Company. The Japanese
market is predominantly served by captive Japanese suppliers and three
significant local independent suppliers. We expect that some of our 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.
We believe 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 our industry. We also believe
that our ability to develop the most advanced photomasks provides a more
cost-effective alternative to the formation of captive operations, which
requires significant capital investments and operating costs to develop the
requisite manufacturing expertise.
OUR RESEARCH AND DEVELOPMENT INITIATIVES
The photomask industry has been and is expected to continue to be
characterized by rapid technological change. We have historically made
significant investments in research and development in order to improve our
technological leadership. In order to maintain our technological leadership, we
expect to be required to anticipate, respond to and utilize changing
technologies.
We, along with Advanced Micro Devices, Micron Technology and Motorola,
operate the DPI Reticle Technology Center, a joint venture for developing
advanced photomask technology and the fabrication of leading-edge photomasks.
The DPI Reticle Technology Center is located in a fully equipped, free-standing
facility adjacent to our photomask manufacturing facility in Round Rock, Texas.
We believe that the collaborative effort underway at the DPI Reticle Technology
Center leverages the combined strength and insights of global leaders in memory,
microprocessors and advanced logic design and fabrication to accelerate the
development of advanced photomasks. The joint venture is scheduled to terminate
in June 2000 but can be renewed at the discretion of the members.
28
<PAGE>
We, independently and through our participation in the DPI Reticle
Technology Center, intend to continue to invest in research and development in
order to ensure our technological capabilities. We focus our research and
development in three areas:
- The enhancement of existing products by improving manufacturing techniques
and technologies;
- The development of leading-edge photomask products such as phase shift
masks, masks with optical proximity correction and advanced specification
masks; and
- The development of advanced materials needed for the manufacture of
leading-edge photomasks.
We are enhancing our 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 0.25 micron
semiconductor lithography. This technology is providing the platform for the
development of manufacturing technologies consistent with 0.18 micron
semiconductor lithography at high yields and rapid cycle times. We have been a
leader in the development of leading-edge photomasks products, such as phase
shift, optical proximity and advanced binary masks. Our 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.
We have 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.
Elements of DuPont's material science expertise and its analytical capabilities
are relevant to photomask research and development. We will continue to have
access to DuPont's corporate science and engineering through 2000 pursuant to a
research, development and consulting agreement with DuPont, which will provide
us with a supplement to our core research and development program.
INTELLECTUAL PROPERTY
We believe that the success of our business depends more on our proprietary
technology, information, processes and know-how than on patents or trademarks.
Much of our proprietary information and technology relating to our manufacturing
processes is not patented and may not be patentable. Aspects of our photoblanks
and pellicles technologies are, however, protected by a number of patents and
patent applications. They include product patents for some types of attenuated,
embedded phase shift blanks and deep ultra violet pellicles. While we consider
our patents to be valuable assets, we do not believe that our competitive
position is dependent on patent protection or that our operations are dependent
on any individual patent. Instead, we believe that the success of our business
depends primarily on our ability to maintain a lead over our competitors in
developing our proprietary technology, information, processes and know-how.
Nevertheless, we attempt to protect our intellectual property rights with
respect to our products and manufacturing processes through patents and trade
secrets when appropriate as part of our ongoing research, development and
manufacturing activities. We also rely on non-disclosure agreements with
employees and vendors to protect our proprietary processes.
29
<PAGE>
FACILITIES
We conduct manufacturing operations throughout the world. Each of our wholly
owned operations is ISO 9002 qualified. We believe that our facilities are
adequate and suitable for their respective uses. The table below presents
certain information relating to our manufacturing and support facilities.
<TABLE>
<CAPTION>
FLOOR SPACE
IN SQUARE TYPE OF
LOCATION FEET 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
Gresham, Oregon (delayed completion)........... 70,000 Owned Photomasks
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
Jointly
Shanghai, China................................ 16,000 Leased Photomasks
Singapore (planned)............................ 50,000 Owned Photomasks
Jointly
Hsin Chu City, Taiwan.......................... 6,000 Leased Photomasks
Tokyo, Japan................................... 1,000 Leased Support
</TABLE>
The research facility in Round Rock is leased to the DPI Reticle Technology
Center and contains primarily manufacturing equipment leased by the DPI Reticle
Technology Center from a third party. Facilities and property located in Santa
Clara and Hamburg are leased under leases that expire in 2001 and 2022,
respectively. We also maintain customer service data centers in leased
facilities in Mesa, Arizona, Beaverton, Oregon and Dallas, Texas.
A number of our facilities are in seismically active areas. Although we have
obtained business interruption insurance, a major catastrophe such as an
earthquake or other natural disaster at any of our sites could result in a
prolonged interruption of our business.
EMPLOYEES
As of December 31, 1998, we employed approximately 1,500 people worldwide.
There are no employees who are represented by a union. Our 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. We believe we have a good relationship with our employees.
ENVIRONMENTAL MATTERS
Our operations and our 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 that we incur capital expenditures and operating costs
in connection with our 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 such liabilities may be joint and
several with other parties. More stringent environmental laws and regulations
may be enacted in the future, which may
30
<PAGE>
require us to expend additional amounts on environmental compliance or may
require modifications in our operations. Although we are unable to predict the
extent of our future liability with respect to any environmental matters, we
believe, based upon current information, that environmental liabilities will not
be material to our financial position or results of operations. DuPont has
agreed to indemnify us for any environmental contamination present on our
manufacturing sites at June 13, 1996, the date of our initial public offering,
or present at any such site due to the generation, use, treatment, storage,
release, emission, discharge or disposal of hazardous waste or hazardous
materials prior to such date. A potential groundwater contamination issue at our
Danbury, Connecticut site is being reviewed under voluntary corrective action by
the Environmental Protection Agency. Any such contamination is believed to be
historical and therefore any environmental liabilities would be covered by the
indemnification agreement with DuPont.
31
<PAGE>
MANAGEMENT
The following table sets forth the name, age as of December 31, 1998 and
position with DuPont Photomasks of each person who is an executive officer or
director of DuPont Photomasks.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------ --- -------------------------------------------------
<S> <C> <C>
J. Michael Hardinger.......... 52 Chairman of the Board and Chief Executive Officer
Preston M. Adcox.............. 55 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
John M. Lynn.................. 40 Executive Vice President, General Counsel and
Secretary
Kenneth A. Rygler............. 55 Executive Vice President--Worldwide Marketing and
Strategic Planning
Chulwoo Won................... 46 Executive Vice President--Asia Pacific Operations
John L. Doyle................. 67 Director
John W. Himes................. 54 Director
John C. Hodgson............... 55 Director
Gary W. Pankonien............. 48 Director
John C. Sargent............... 60 Director
Marshall C. Turner............ 57 Director
Susan A. Vladuchick........... 51 Director
</TABLE>
J. MICHAEL HARDINGER is our Chairman of the Board of Directors and Chief
Executive Officer, positions he assumed as a part of the global realignment of
DuPont's 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 us. 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 is our President and Chief Operating Officer. 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 is our Executive Vice President--European Operations 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 is our Executive Vice President--Finance and Chief Financial
Officer. Prior to assuming his position with us, he was Chief Financial Officer
and Controller of Master Images, Inc., a photomask manufacturer, 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.
32
<PAGE>
JOHN M. LYNN is our Executive Vice President and General Counsel. 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 us in
1996.
KENNETH A. RYGLER is our Executive Vice President--Worldwide Marketing and
Strategic Planning. He joined DuPont in 1964 and held numerous sales, marketing,
planning and business development management positions.
CHULWOO WON is our Executive Vice President--Asia Pacific Operations. 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 one of our executive officers in 1997.
JOHN L. 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. He is currently a director of Xilinx, Inc. and Analog
Devices, Inc. He became one of our directors in April 1996.
JOHN W. HIMES is Vice President of Corporate Plans, Investor Relations and
Financial Communications for DuPont. He joined DuPont in 1966 and has served in
a variety of business management positions, including leadership of Dacron
polyester, Advanced Composites and Industrial Polymers. Mr. Himes was
responsible for Human Resources and later Business Development in Asia for the
corporation. He became one of our directors in January 1998.
JOHN C. HODGSON is the Vice President/General Manager 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 one of
our directors in April 1996.
GARY W. 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 one of our directors in April 1996.
JOHN C. SARGENT is a private consultant, having retired from DuPont in 1998.
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 the position of Vice President and Treasurer
of DuPont in 1992. He became one of our directors in December 1995.
MARSHALL C. TURNER is an independent consultant and technology venture
investor. 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. From its inception in 1981 through 1998, he
was a general partner of Taylor & Turner Associates, Ltd., the general partner
of several venture capital partnerships. 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 one of our directors in April 1996.
33
<PAGE>
SUSAN A. 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 one of our directors in January 1996.
34
<PAGE>
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 PERCENT OF SHARES SHARES PERCENT OF
BENEFICIALLY SHARES BEING BENEFICIALLY SHARES
NAME AND ADDRESS OWNED OUTSTANDING OFFERED(2) OWNED OUTSTANDING
- -------------------------------- -------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
E.I. du Pont de Nemours and
Company
1007 Market Street
Wilmington, DE 19898............ 10,500,000(1) 68.6% 2,000,000 8,500,000 55.6%
</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 and
Hodgson and Ms. Vladuchick, each of whom is one of our directors, share the
right to vote such shares.
(2) DuPont has granted to the underwriters an option to purchase up to 300,000
additional shares of common stock 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 53.6% of the outstanding
common stock.
35
<PAGE>
TRANSACTIONS AND RELATIONSHIP BETWEEN US AND
E.I. DU PONT DE NEMOURS AND COMPANY
We have entered into a number of agreements with DuPont for the purpose of
defining certain past, present and prospective arrangements and transactions
between us. 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 our intention and the intention of 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 various mutually beneficial joint arrangements.
However, because of the complexity of the various relationships between us and
DuPont, including their respective subsidiaries, we cannot assure you that all
of these agreements, or the transactions provided for therein, were effected on
terms at least as favorable to us as could have been obtained from unaffiliated
third parties. We are only entitled to the ongoing assistance of DuPont for a
limited time.
Additional or modified arrangements and transactions may be entered into by
us, DuPont and our respective subsidiaries in the future. Any such future
arrangements and transactions will be determined through negotiation between us
and DuPont or our respective subsidiaries, as the case may be. We have adopted a
policy that all future agreements between us and DuPont and our subsidiaries
will be on terms that we believe are no less favorable to us than the terms we
believe would be available from unaffiliated parties. In that regard, we intend
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 our
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 us and DuPont.
HISTORICAL TRANSACTIONS AND REALIGNMENT OF PHOTOMASK BUSINESS
Prior to the realignment described 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
our 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 our wholly owned subsidiaries.
DuPont provided significant management functions and services, including
cash management, tax administration, accounting, legal, data processing, benefit
administration and other support services. We were 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 we
would have incurred to obtain these services had we been a separate entity. We
have 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.
We participated in DuPont's centralized cash management system prior to the
realignment. In general, our cash funding requirements were met by, and all cash
generated by us was transferred to, DuPont. In the U.S. and France, this was
accomplished under the terms of interest-bearing loan arrangements between us
and DuPont. We borrowed funds for acquisitions, capital expenditures and working
capital from DuPont.
36
<PAGE>
ADMINISTRATIVE SERVICE AGREEMENTS
Our company and our subsidiaries, on the one hand, and DuPont and certain
DuPont subsidiaries, on the other hand, have entered into several transitional
administrative service agreements, pursuant to which DuPont will continue to
provide various services to us, including tax administration, computer and
information systems, telecommunications and workers' compensation
administration.
Each service under the administrative service agreements is provided for a
specified time period, ranging from one to two years. However, our company and
our subsidiaries may terminate any or all services that we receive under an
administrative service agreement at any time upon 45 days' prior written notice.
Each administrative service agreement shall terminate on the date upon which
DuPont owns less than 50% of our outstanding common stock. We and our
subsidiaries are obligated to take all steps necessary to obtain our own
administrative and support services prior to the termination of the
administrative service agreements.
Our company and our subsidiaries will be obligated to pay fees established
in the administrative service agreements based upon the type and amount of
services rendered. In addition, our company and our subsidiaries will reimburse
DuPont for any out-of-pocket expenses it incurs in connection with providing the
services. We paid DuPont $3.1 million for services provided under the
administrative service agreements in fiscal 1998. With the exception of the
administrative service agreement entered into by the respective subsidiaries of
DuPont and our company in Korea, in the absence of gross negligence or willful
or reckless misconduct, DuPont's liability for damages to us 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
We have entered into a research, development and consulting agreement with
DuPont whereby DuPont will provide to us supplemental technical assistance and
consulting with respect to analytical support and consulting on an as-needed
basis and research projects addressing our specific needs. In exchange for the
analytical support, we will pay DuPont $100,000 per calendar year. In the event
the costs of these services are estimated to exceed $100,000, we 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 us pursuant to certain procedures set forth in
the research, development and consulting agreement.
TAX INDEMNIFICATION AGREEMENT
We have entered into a tax indemnification agreement with DuPont pursuant to
which we will pay DuPont, or DuPont will pay us, as appropriate, amounts in
respect of taxes shown as due attributable to our operations for the period
ending on the date on which we cease to be a member of the DuPont consolidated
group. DuPont will indemnify us and our subsidiaries from liability for certain
matters, net of corresponding tax benefits, including any federal, state or
local taxes attributable to any affiliated or combined group of which we were a
member at any time prior to June 13, 1996 and any federal, state or local income
or other tax for any period up to and including June 13, 1996. We will indemnify
DuPont and its subsidiaries from liability for certain matters, including any
federal, state or local income or other taxes attributable to our operations
following June 13, 1996. In connection with the sale of our 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
beneficially owns 50% or less of us.
37
<PAGE>
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 an
accounting firm selected jointly by the parties.
ENVIRONMENTAL INDEMNIFICATION AGREEMENT
We have entered into an environmental indemnification agreement with DuPont
pursuant to which DuPont will generally indemnify us against substantially all
liabilities relating to any environmental contamination present on our
manufacturing sites and those of our subsidiaries as of June 13, 1996 or present
on any other site as a result of our manufacturing operations and those of our
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 us with regard to
such contamination prior to June 13, 1996; DuPont's liability for claims filed
following June 13, 1996 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 AGREEMENT
We have entered into a credit agreement with DuPont pursuant to which DuPont
has agreed to provide a credit facility to us in an aggregate amount of $100
million. The credit agreement expires in 2001 and any loans thereunder will bear
interest at LIBOR plus 0.25% per annum. At our 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. For example,
the credit agreement provides that, without DuPont's prior written consent, we
will not incur, create, assume or permit to exist any indebtedness, including
guarantees on indebtedness, in addition to the indebtedness under the credit
facility and the proposed convertible subordinated notes in excess of $50
million in the aggregate. To date, we have borrowed a maximum of $69 million
under the credit agreement.
In consideration for DuPont's agreement to guarantee our obligations under
the proposed notes, we intend to amend our credit agreement with DuPont to
increase the interest rate charged on outstanding amounts to LIBOR plus 1.875%
per annum and terminate our ability to convert outstanding amounts into term
loans.
CORPORATE TRADENAME AND TRADEMARK AGREEMENT
We have entered into a corporate tradename and trademark agreement with
DuPont whereby DuPont licenses to us the following:
- Use of the tradename "DuPont" as part of our corporate name;
- Use of the tradename "DuPont" as part of the name of our affiliated
companies; and
- Use of the trademark DuPont in Oval as part of our corporate logo.
38
<PAGE>
DuPont may terminate the corporate tradename and trademark agreement upon
two years' prior written notice in the event that DuPont and/or its affiliates
cease to hold 20% of our total outstanding common stock and upon 90 days'
written notice in the event that:
- DuPont ceases to be the largest holder of our common stock;
- We purport to assign or otherwise transfer the corporate tradename and
trademark agreement without DuPont's written consent; or
- We use the tradename "DuPont" other than under the terms of the corporate
tradename and trademark agreement.
In addition, DuPont may terminate the corporate tradename and trademark
agreement upon 90 days' written notice for any reason after January 1, 2008. In
the corporate tradename and trademark agreement, we grant DuPont the right to
inspect and test products manufactured by or for us and intended to be sold
bearing the DuPont in Oval logo to determine uniform quality and compliance with
quality standards of DuPont and agree to hold DuPont harmless from any and all
liabilities arising from the manufacture, sale, transportation, storage or use
of products manufactured by or for us bearing the DuPont in Oval logo. Upon
termination of the corporate tradename and trademark agreement, we will be
obligated to:
- Change our name so that the tradename "DuPont" is omitted;
- Cease to use the tradename "DuPont" or any similar tradename as part of
our corporate name or in any other manner whatsoever; and
- Cease to use the DuPont in Oval logo.
REGISTRATION RIGHTS AGREEMENT
Under a registration rights agreement between DuPont and us, DuPont and its
assignees are entitled to certain rights with respect to the registration of
shares they hold under the Securities Act. Subject to limitations, including a
minimum registration of over 1,000,000 shares, DuPont and its assignees have the
right to require us to register the sale of all or part of the shares they hold
under the Securities Act. Following the offering, DuPont and its assignees will
be entitled to request up to an aggregate of four demand registrations. DuPont
and its assignees are also entitled to include the shares of common stock they
hold in a registered offering of securities by us for their own account, subject
to conditions and restrictions. In addition, the registration rights agreement
contains certain indemnification provisions by us for the benefit of DuPont and
its assignees as well as any potential underwriter and by DuPont and its
assignees for the benefit of us and related persons. DuPont and its assignees
may transfer its registration rights under the registration rights agreement
without our prior approval. The registration rights agreement also provides that
while DuPont owns 50% or more of our common stock, we may not grant registration
rights to any other person without DuPont's prior consent.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to our certificate of incorporation, we are 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. As of January 31, 1999, 15,300,525 shares of
common stock and no shares of preferred stock were issued and outstanding. All
outstanding shares of common stock offered are validly issued, fully paid and
nonassessable.
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 our stockholders, including the
election of directors and approval of extraordinary corporate transactions. In
the event of a liquidation, dissolution or winding-up of our company, the
holders of common stock are entitled to share equally and ratably in the assets
of our company, if any, remaining after the payment of all debts and liabilities
of our company and the liquidation preference of any outstanding preferred
stock. The common stock has no preemptive rights and no redemption, 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 First Chicago Trust Company of New York.
Holders of common stock are entitled to such dividends as may be declared
from time to time by our board of directors out of funds legally available
therefor, subject to the dividend and liquidation rights of any preferred stock
that may be issued.
PREFERRED STOCK
Our certificate of incorporation authorizes our board to provide for the
issuance, from time to time, of classes or series of 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 our 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. We currently have no intention to issue
any shares of preferred stock.
CERTAIN DELAWARE GENERAL CORPORATION LAW, CERTIFICATE AND BYLAWS PROVISIONS
The Delaware General Corporation Law 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 Delaware corporation law, directors are accountable to corporations and their
stockholders for monetary damages for conduct constituting gross negligence in
the exercise of their duty of care. Delaware corporation law enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. Our certificate of incorporation limits the liability of our
directors to us or our stockholders, in their capacity as directors but not in
their capacity as officers, to the fullest extent permitted by Delaware
corporation law. Specifically, our directors 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
40
<PAGE>
violation of law, violations under Section 174 of the Delaware General
Corporation Law or any transaction from which the director derived an improper
personal benefit. The inclusion of these provisions in our certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against our directors and may discourage or deter stockholders or
management from bringing a lawsuit against our directors for breach of their
duty of care, even though such an action, if successful, might otherwise have
benefited us and our stockholders. These provisions do not limit or affect a
stockholder's ability to seek and obtain relief under the federal securities
laws.
In addition, our bylaws require us 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 our company and, with respect to any criminal third-party proceeding, had no
reasonable cause to believe such conduct was unlawful. In addition, we have
entered into agreements to indemnify each director to the fullest extent
permitted by Delaware corporation law 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 our company.
In addition, we maintain directors' and officers' liability insurance which
insures against liabilities that directors and officers may incur in such
capacities. We believe that these provisions are necessary to attract and retain
qualified persons as directors and officers.
Our certificate of incorporation contains a provision expressly electing not
to be governed by Section 203 of the Delaware General Corporation Law. In
general, Section 203 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. Because of such election, Section 203 will not apply to us.
41
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation,
Credit Suisse First Boston Corporation, NationsBanc Montgomery Securities LLC
and Needham & Company, Inc. are acting as representatives have severally agreed
to purchase, and DuPont has 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>
Morgan Stanley & Co. Incorporated................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
Credit Suisse First Boston Corporation...........................................
NationsBanc Montgomery Securities LLC............................................
Neeedham & Company, Inc..........................................................
----------
Total.......................................................................... 2,000,000
----------
----------
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from DuPont and subject to prior sale. 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 over-allotment
option described below) if any such shares are taken.
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.
DuPont has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of 300,000
additional shares of common stock, at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The 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. To the
extent the option is exercised, each 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
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 underwriters in the preceding
table. If the underwriters' option is exercised in full, the total price to the
public would be $ , the total underwriting discounts and
commissions would be $ , and total proceeds to DuPont would be $ .
42
<PAGE>
We, DuPont and our directors and executive officers have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the underwriters, we or they will not, during the period ending 90 days after
the date of this prospectus, (1) 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 (2) 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 notes or common
stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of common stock or other securities, in cash or
otherwise, other than (a) the proposed convertible subordinated notes, (b) the
common stock issuable upon conversion of the notes, (c) options granted or stock
issued upon the exercise of outstanding stock options or otherwise pursuant to
our stock option or employee purchase plans and (d) this offering.
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, certain of the underwriters have provided, and may
continue to provide, investment banking services to us and DuPont.
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 us by Brobeck,
Phleger & Harrison LLP, Austin, Texas. Certain legal matters in connection with
the offering will be passed upon for the underwriters by Davis Polk & Wardwell,
New York, New York.
EXPERTS
The financial statements as of June 30, 1997 and 1998 and for each of the
three years in the period ended June 30, 1998 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given the authority of said firm as experts in auditing
and accounting.
43
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any document we file at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public at the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference in this
prospectus is considered to be part of this prospectus, and later information
filed with the SEC or contained in this prospectus updates and supersedes this
information. We incorporate by reference the documents listed below and any
future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until our offering is completed:
- Our Annual Report on Form 10-K for the fiscal year ended June 30, 1998;
- Our Quarterly Reports on Form 10-Q for the quarters ended September 30,
1998 and December 31, 1998;
- Our Current Reports on Form 8-K dated November 6, 1998 and February 16,
1999; and
- The description of the common stock contained in our registration
statement on Form 8-A (file no. 0-20839), filed under Section 12(g) of the
Securities Exchange Act of 1934.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
DuPont Photomasks, Inc.
Attention: Investor Relations
131 Old Settlers Boulevard
Round Rock, Texas 78664
Telephone: (512) 310-6559
44
<PAGE>
DUPONT PHOTOMASKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants........................................................................... F-2
Income Statement for the three years ended June 30, 1998.................................................... F-3
Balance Sheet at June 30, 1997 and 1998..................................................................... F-4
Statement of Cash Flows for the three years ended June 30, 1998............................................. F-5
Notes to Financial Statements............................................................................... F-6
Income Statement for the six months ended December 31, 1997 and 1998 (unaudited)............................ F-19
Balance Sheet at December 31, 1998 (unaudited).............................................................. F-20
Statement of Cash Flows for the six months ended December 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, 1997 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1998, 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.
PricewaterhouseCoopers LLP
Austin, Texas
July 27, 1998
F-2
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
INCOME STATEMENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Sales............................................................... $ 213,415 $ 261,185 $ 271,591
Cost of goods sold.................................................. 142,200 163,319 179,369
Selling, general and administrative expense......................... 25,167 31,611 29,509
Research and development expense.................................... 9,162 12,372 12,714
------------- ------------- -------------
Operating profit.................................................... 36,886 53,883 49,999
Other (income) expense.............................................. 7,964 (1,284) 27
------------- ------------- -------------
Income before income taxes, minority interest and extraordinary
item.............................................................. 28,922 55,167 49,972
Provision for income taxes.......................................... 2,678 19,308 17,127
------------- ------------- -------------
Income before minority interest and extraordinary item.............. 26,244 35,859 32,845
Minority interest in loss of joint venture.......................... (660) (903) (687)
------------- ------------- -------------
Income before extraordinary item.................................... 26,904 36,762 33,532
Extraordinary item.................................................. (22,242)
------------- ------------- -------------
Net income.......................................................... $ 26,904 $ 59,004 $ 33,532
------------- ------------- -------------
------------- ------------- -------------
Basic earnings per share before extraordinary item.................. $ 2.51 $ 2.44 $ 2.21
Extraordinary item.................................................. (1.47)
------------- ------------- -------------
Basic earnings per share............................................ $ 2.51 $ 3.91 $ 2.21
------------- ------------- -------------
------------- ------------- -------------
Basic weighted average shares outstanding........................... 10,726,849 15,100,521 15,179,596
Diluted earnings per share before extraordinary item................ $ 2.50 $ 2.37 $ 2.15
Extraordinary item.................................................. (1.43)
------------- ------------- -------------
Diluted earnings per share.......................................... $ 2.50 $ 3.80 $ 2.15
------------- ------------- -------------
------------- ------------- -------------
Diluted weighted average shares outstanding......................... 10,743,006 15,520,239 15,612,234
</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,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 51,351 $ 19,688
Accounts receivable, trade............................................ 38,973 47,471
Accounts receivable, related parties.................................. 3,670 3,349
Inventories........................................................... 15,651 18,236
Deferred income taxes................................................. 3,351 6,389
Prepaid expenses and other current assets............................. 8,711 6,574
--------- ---------
Total current assets................................................ 121,707 101,707
Property and equipment.................................................. 162,310 244,650
Accounts receivable, related parties.................................... 1,746 1,106
Deferred income taxes................................................... 2,386 2,221
Other assets............................................................ 3,430 2,295
--------- ---------
Total assets........................................................ $ 291,579 $ 351,979
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade............................................... $ 27,207 $ 30,197
Accounts payable, related parties..................................... 4,889 10,391
Short-term borrowings................................................. 1,845 2,143
Income taxes payable.................................................. 1,295 1,828
Other accrued liabilities............................................. 20,389 24,096
--------- ---------
Total current liabilities........................................... 55,625 68,655
Long-term borrowings.................................................... 10,473 7,519
Long-term borrowings, related parties................................... 9,000
Deferred income taxes................................................... 6,300 12,048
Other liabilities....................................................... 2,597 1,800
Minority interest in net assets of joint venture........................ 687
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 15,104,568
and 15,258,722 issued and outstanding............................... 151 152
Additional paid-in capital............................................ 156,742 160,269
Retained earnings..................................................... 59,004 92,536
--------- ---------
Total liabilities and stockholders' equity............................ $ 291,579 $ 351,979
--------- ---------
--------- ---------
</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,
--------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 26,904 $ 59,004 $ 33,532
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization............................................... 26,882 26,593 31,869
Other....................................................................... (2,028) (494) 1,764
Gain........................................................................ (34,219)
Cash provided (used) by changes in assets and liabilities:
Accounts receivable....................................................... (7,706) (6,945) (10,309)
Inventories............................................................... (3,399) (5,444) (1,747)
Prepaid expenses and other current assets................................. (1,021) (5,038) 2,641
Accounts payable.......................................................... (4,190) 2,470 27,336
Other accrued liabilities................................................. 14,989 5,814 2,828
--------- --------- ----------
Net cash provided by operating activities................................. 50,431 41,741 87,914
--------- --------- ----------
Cash flows from investing activities:
Capital expenditures.......................................................... (24,294) (51,057) (100,200)
Payments for acquisitions..................................................... (6,000) (28,344)
Other......................................................................... 920
Proceeds from sale of investment.............................................. 39,219
--------- --------- ----------
Net cash used in investing activities....................................... (29,374) (11,838) (128,544)
--------- --------- ----------
Cash flows from financing activities:
Increase (decrease) in borrowings............................................. (1,666) 2,394 8,739
Net proceeds from issuance of common stock.................................... 72,066 61 1,174
Net cash paid to DuPont....................................................... (78,908)
--------- --------- ----------
Net cash (used in) provided by financing activities........................... (8,508) 2,455 9,913
--------- --------- ----------
Effect of exchange rate changes on cash......................................... (782) (1,186) (946)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents............................ 11,767 31,172 (31,663)
Cash and cash equivalents at beginning of year.................................. 8,412 20,179 51,351
--------- --------- ----------
Cash and cash equivalents at end of year........................................ $ 20,179 $ 51,351 $ 19,688
--------- --------- ----------
--------- --------- ----------
</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. du Pont 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. The future economic benefit of
long-lived assets is reviewed periodically through an undiscounted cash flow
analysis to determine if an impairment has occurred.
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over their estimated useful lives. Net intangible assets, primarily
supply agreements, were $2,750 and $1,750 at June 30, 1997 and 1998 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
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. Exchange gains
and losses are recorded net of the impact of hedging activities designed to
reduce exchange rate exposure. The Company has entered into Korean Won and
French Franc forward contracts designed to reduce such exchange rate exposure.
At June 30, 1998, the Company held forward contracts with a notional amount of
approximately $12,000, a carrying amount of approximately $10,500 and an
unrealized loss of approximately $1,500.
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.
Income tax expense was determined and allocated to the Company by applying the
separate taxpayer approach outlined in FAS 109.
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)
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
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: 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 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, 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 was principally cash, and was
partially financed by $24,000 in borrowings under the Company's credit facility
with DuPont.
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 $7,251 for the period July 1, 1995 to December 31, 1995. Effective January
1, 1996, the Company entered into 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 1997 and
$3,072 for 1998. 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. In January 1997, the Company sold the entire
investment. Aggregate net proceeds from the sale of $39,219 were 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 $1,836 (Current $90, Non-Current $1,746) and $1,154 (Current $48,
Non-Current $1,106) at June 30, 1997 and 1998 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
F-8
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Agreements. Sales to related parties, principally various DuPont entities who
serve as resellers for the Company, were $8,214, $8,764 and $10,933 for the
years ended June 30, 1996, 1997 and 1998.
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. Two of the Company's customers
each represented more than ten percent of sales in 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 1997. Two of the Company's customers each represented more
than ten percent of sales in 1998 and, in the aggregate, these two customers
represented approximately twenty-seven percent of sales in the year.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Raw materials and supplies................................ $ 13,122 $ 14,843
Work-in-process........................................... 902 1,090
Finished product.......................................... 1,627 2,303
--------- ---------
Inventories............................................... $ 15,651 $ 18,236
--------- ---------
--------- ---------
</TABLE>
F-9
<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>
ESTIMATED JUNE 30,
USEFUL --------------------
LIVES 1997 1998
------------- --------- ---------
<S> <C> <C> <C>
Construction-in-progress................ $ 30,873 $ 64,221
Land.................................... 5,627 5,932
10 to 20
Buildings............................... years 51,899 76,775
Equipment............................... 3 to 7 years 259,114 313,010
--------- ---------
347,513 459,938
Less: accumulated depreciation.......... (185,203) (215,288)
--------- ---------
Property and equipment.................. $ 162,310 $ 244,650
--------- ---------
--------- ---------
</TABLE>
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Accrued vacation pay...................................... $ 3,454 $ 3,180
Accrued compensation and benefits......................... 11,815 7,483
Other..................................................... 5,120 13,433
--------- ---------
Other accrued liabilities................................. $ 20,389 $ 24,096
--------- ---------
--------- ---------
</TABLE>
8. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Capital lease obligations................................. $ 5,073 $ 2,374
6% bank borrowings due 2000 through 2007.................. 4,500 4,500
10% bank borrowings due 1998 through 2001................. 2,745 2,788
--------- ---------
12,318 9,662
Less: short-term borrowings............................. (1,845) (2,143)
--------- ---------
Long-term borrowings...................................... $ 10,473 $ 7,519
--------- ---------
--------- ---------
</TABLE>
F-10
<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>
1999...................................................... $ 289 $ 432
2000...................................................... 289 446
2001...................................................... 289 460
2002...................................................... 289 207
2003...................................................... 254 156
Thereafter................................................ 2,336 1,560
--------- -----------
Minimum lease payments.................................. 3,746 $ 3,261
-----------
-----------
Less: interest........................................ (1,372)
---------
Present value of minimum lease payments................... $ 2,374
---------
---------
</TABLE>
10. MASTER NOTES AND CREDIT AGREEMENT
Interest expense includes $7,016 paid to DuPont under the master notes in
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 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. Through June 30, 1998, the Company has borrowed a
maximum of $35.0 million under the credit facility and at June 30, 1998
borrowings of $9.0 million were outstanding under the Credit Agreement.
F-11
<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 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 1997................... 151 156,742 59,004
Issuance of common stock............ 1 3,527
Net income.......................... 33,532
----- --------- ----------- ---------
Balance at 1998................... $ 152 $ 160,269 $ -- $ 92,536
----- --------- ----------- ---------
----- --------- ----------- ---------
</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 1998
------------------------ ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year.............. 953,784 $ 17.00 990,544 $ 18.07
Options granted........................... 953,784 $ 17.00 86,976 $ 29.21 507,983 $ 52.10
Options forfeited......................... (46,640) $ 17.00 (26,930) $ 27.67
Options exercised......................... (3,576) $ 17.00 (68,083) $ 17.24
----------- ----------- ---------
Balance at end of year.................... 953,784 $ 17.00 990,544 $ 18.07 1,403,514 $ 30.27
----------- ----------- ---------
----------- ----------- ---------
Exercisable at end of year................ 223,210 $ 17.00 396,063 $ 17.64
----------- ---------
----------- ---------
</TABLE>
F-12
<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, 1998 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.......................... 865,013 $ 17.07 8.0 386,716 $ 17.04
$27.31 to $32.50.......................... 8,413 $ 30.77 8.9 476 $ 31.56
$35.37 to $45.88.......................... 59,904 $ 42.33 8.9 8,753 $ 42.72
$52.75 to $71.56.......................... 470,184 $ 52.92 9.1 118 $ 53.19
</TABLE>
A summary of restricted stock grant activity is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ -------------------------------- ------------------------
MARKET MARKET VALUE MARKET
NUMBER OF VALUE PER NUMBER OF PER NUMBER OF VALUE PER
SHARES SHARE SHARES SHARE SHARES SHARE
----------- ----------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year........................ 94,913 $17.00 89,060 $ 17.54
$18.50 to
Restricted stock granted...... 94,913 $ 17.00 4,744 $45.88 1,755 $ 17.00
Restricted stock forfeited.... (9,605) $17.00
Restricted stock issued....... (992) $17.00 (86,071) $ 17.00
----------- ------- -----------
Balance at end of year........ 94,913 $ 17.00 89,060 $17.54 4,744 $ 27.16
----------- ------- -----------
----------- ------- -----------
</TABLE>
At June 30, 1998, there were 2,853,443 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, 1997 and 1998
were $9.41, $16.16 and $31.65. The weighted average fair values were determined
using the Black-Scholes option-pricing model with the following assumptions: a
risk-free interest rate of 6.5% for 1996 and 1997 and a risk free rate of
interest of 5.5% for 1998, no dividend yield, expected term of five years and
volatility of 58% for 1996 and 1997 and volatility of 68% for 1998. Had
compensation cost been determined based on the fair value of stock option awards
at the date of grant, net income (diluted earnings per share) would have been
$26,904, $57,456 and $29,577 ($2.50, $3.76 and $1.94) in 1996, 1997 and 1998.
F-13
<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,
--------------------------------
1996 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal....................................................................... $ 10,706 $ 25,819 $ 8,909
State......................................................................... 1,738 787 1,023
Non-U.S....................................................................... 4,572 4,679 4,320
Deferred:
Federal....................................................................... (10,706) (1,039) 1,353
State......................................................................... (1,738) (59) 155
Non-U.S....................................................................... (1,894) 1,098 1,367
---------- --------- ---------
Provision for income taxes...................................................... $ 2,678 $ 31,285 $ 17,127
---------- --------- ---------
---------- --------- ---------
</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,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax at 35% statutory federal tax rate............................................ $ 10,123 $ 31,285 $ 17,490
Higher effective tax rate on non-U.S. operations................................. 2,657 2,158 1,752
Tax exemption.................................................................... (3,081) (4,809) (5,870)
Change in valuation allowance.................................................... (7,808) (243)
State taxes, net of federal...................................................... 586 633 1,258
Other............................................................................ 201 2,261 2,497
--------- --------- ---------
Provision for income taxes....................................................... $ 2,678 $ 31,285 $ 17,127
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. PROVISION FOR INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
Deferred tax assets:
Inventories......................................................................................... $ 971
Depreciation........................................................................................ 2,218
Accrued liabilities................................................................................. 4,051
Other............................................................................................... 1,922
----------
Deferred tax assets............................................................................... 9,162
----------
Deferred tax liabilities:
Depreciation........................................................................................ (7,579)
Other............................................................................................... (5,021)
----------
Deferred tax liabilities.......................................................................... (12,600)
----------
Deferred income taxes............................................................................. $ (3,438)
----------
----------
</TABLE>
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 $256 and $571 at June 30, 1997 and 1998. 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.
F-15
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. GEOGRAPHIC INFORMATION
The Company operates within a single industry segment. Geographic
information as of or for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ASIA TOTAL
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
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
1998
Sales........................................................... $ 152,213 $ 66,953 $ 52,425 $ 271,591
Transfers between geographic areas.............................. 22,654 2,002 603
------------ --------- ---------- ----------
174,867 68,955 53,028 271,591
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Net income...................................................... 13,808 5,702 14,022 33,532
Identifiable assets............................................. 164,699 71,618 115,662 351,979
</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.
15. COMMITMENTS AND CONTINGENCIES
The Company has executed an agreement with United Microelectronics
Corporation to establish a joint venture to produce photomasks in Taiwan. There
can be no assurance that the joint venture will yield results that are favorable
to the Company.
In 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 $50,000 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 the northwest United States. Current plans are to
invest $75,000 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.
F-16
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In 1998, the Company announced that it had entered into an agreement with
Etec to upgrade its existing 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 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 in 1998, the Company announced the formation of a strategic alliance
with Hoya Corporation ("Hoya") 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.
F-17
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
16. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
1998
Sales............................................... $ 68,809 $ 67,328 $ 67,563 $ 67,891
Operating profit.................................... 13,488 11,691 11,961 12,859
Net income.......................................... 9,203 8,261 7,785 8,283
Basic earnings per share............................ 0.61 0.54 0.51 0.54
Diluted earnings per share.......................... 0.59 0.53 0.50 0.53
Basic weighted average shares outstanding........... 15,129,611 15,165,132 15,167,645 15,255,996
Diluted weighted average shares outstanding......... 15,684,990 15,605,359 15,554,304 15,604,281
</TABLE>
F-18
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
INCOME STATEMENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Sales........................................................... $ 136,137 $ 122,872
Cost of goods sold.............................................. 89,004 88,478
Selling, general and administrative expense..................... 15,623 15,895
Research and development expense................................ 6,331 7,732
---------- ----------
Operating profit................................................ 25,179 10,767
Other (income) expense.......................................... (448) 1,482
---------- ----------
Income before income taxes and minority interest................ 25,627 9,285
Provision for income taxes...................................... 8,850 2,878
---------- ----------
Income before minority interest................................. 16,777 6,407
Minority interest in loss of joint venture...................... (687)
---------- ----------
Net income...................................................... $ 17,464 $ 6,407
---------- ----------
---------- ----------
Basic earnings per share........................................ $ 1.15 $ 0.42
Basic weighted average shares outstanding....................... 15,165,132 15,285,674
Diluted earnings per share...................................... $ 1.12 $ 0.41
Diluted weighted average shares outstanding..................... 15,662,657 15,641,751
</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)
<TABLE>
<CAPTION>
DECEMBER
31,
1998
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 38,864
Accounts receivable, trade.................................................... 44,457
Accounts receivable, related parties.......................................... 2,313
Inventories................................................................... 17,504
Deferred income taxes......................................................... 6,992
Prepaid expenses and other current assets..................................... 8,924
-----------
Total current assets........................................................ 119,054
Property and equipment.......................................................... 277,656
Accounts receivable, related parties............................................ 1,300
Deferred income taxes........................................................... 2,935
Other assets.................................................................... 25,177
-----------
Total assets................................................................ $ 426,122
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade....................................................... $ 18,075
Accounts payable, related parties............................................. 9,793
Short-term borrowings......................................................... 794
Income taxes payable.......................................................... 3,125
Other accrued liabilities..................................................... 47,317
-----------
Total current liabilities................................................... 79,104
Long-term borrowings............................................................ 7,233
Long-term borrowings, related parties........................................... 49,000
Deferred income taxes........................................................... 11,972
Other liabilities............................................................... 2,156
Minority interest in net assets of joint venture................................ 16,394
Commitments and contingencies...................................................
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 15,300,525 issued
and outstanding............................................................. 153
Additional paid-in capital.................................................... 161,167
Retained earnings............................................................. 98,943
-----------
Total liabilities and stockholders' equity.................................. $ 426,122
-----------
-----------
</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>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................................. $ 17,464 $ 6,407
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 15,375 18,780
Other................................................................................. (1,200) (1,107)
Cash provided (used) by changes in assets and liabilities:
Accounts receivable................................................................. (2,898) 5,535
Inventories......................................................................... (349) 1,573
Prepaid expenses and other current assets........................................... (984) (1,244)
Accounts payable.................................................................... 20,386 (12,596)
Other accrued liabilities........................................................... (1,408) 1,755
---------- ----------
Net cash provided by operating activities......................................... 46,386 19,103
---------- ----------
Cash flows from investing activities:
Capital expenditures.................................................................... (68,414) (32,417)
Payment for acquisitions................................................................ (20,547)
---------- ----------
Net cash used in investing activities............................................. (68,414) (52,964)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in borrowings....................................................... (160) 38,049
Proceeds from issuance of common stock.................................................. 1,055 687
Increase in minority interest in net assets of joint venture............................ 16,394
---------- ----------
Net cash provided by financing activities......................................... 895 55,130
---------- ----------
Effect of exchange rate changes on cash................................................... (1,219) (2,093)
---------- ----------
Net increase (decrease) in cash and cash equivalents...................................... (22,352) 19,176
Cash and cash equivalents at beginning of period.......................................... 51,351 19,688
---------- ----------
Cash and cash equivalents at end of period................................................ $ 28,999 $ 38,864
---------- ----------
---------- ----------
</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)
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 1998 Annual Report on Form 10-K and the
prospectus. 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.
2. INVENTORIES
Inventories consist primarily of raw materials.
3. ACQUISITION
On November 2, 1998, the Company completed the acquisition of
Hewlett-Packard Company's photomask manufacturing organization, which was
previously part of Hewlett-Packard's Integrated Circuit Business Division. The
acquisition included the purchase of photomask production equipment, the
purchase of inventory, the execution of an agreement whereby the Company becomes
Hewlett-Packard's strategic photomask supplier, the execution of a technology
license agreement and the hiring of employees in the Hewlett-Packard photomask
manufacturing organization. Consideration for the acquisition was approximately
$39,000 in cash, one half of which was paid at closing and one half of which was
paid in February 1999. The transaction was funded with a draw on the Company's
existing credit agreement. Approximately $20,000 has been assigned to intangible
assets and will be amortized over the estimated useful life of seven years.
There can be no assurance that the acquisition will yield results that are
favorable to the Company.
4. COMMITMENTS AND CONTINGENCIES
The Company and United Microelectronics Corporation have established a joint
venture to produce photomasks in Taiwan. There can be no assurance that the
joint venture will yield results that are favorable to the Company. Furthermore,
the Company announced that it plans to build a new photomask production facility
in Singapore designed to service the growing number of semiconductor
manufacturers in Southeast Asia. Plans are to invest $50,000. The Company began
construction on, and subsequently announced a delay in completion of, a new
photomask production facility in Gresham, Oregon designed to service the growing
number of semiconductor manufacturers in the northwest United States. Plans are
to invest $75,000. 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.
The Company entered into an agreement with Etec to upgrade its existing
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 purchased the use of technology developed by the Company. The
tools to be upgraded currently reside throughout
F-22
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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.
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.
5. RECLASSIFICATIONS AND RESTATEMENTS
Certain prior year balances have been reclassified to conform to 1999
presentation.
F-23
<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 of common stock under the
Securities Act of 1933. All amounts are estimates except the Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Commission registration fee....................................... $ 29,693
NASD filing fee................................................... 11,239
Legal fees and expenses........................................... 100,000
Accounting fees and expenses...................................... 100,000
Printing expenses................................................. 125,000
Miscellaneous..................................................... 34,068
---------
Total......................................................... $ 400,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the Delaware General Corporation Law
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 believed 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:
- For any breach of the director's duty of loyalty to the corporation or its
stockholders;
- For acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- Under Section 174 of the DGCL; or
- 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 of 1933 against certain liabilities.
II-2
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Certificate of Incorporation, 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 PricewaterhouseCoopers 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.
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 24th day of
February, 1999.
<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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board and
/s/ J. MICHAEL HARDINGER* Chief Executive Officer
- ------------------------------ and Director (Principal February 24, 1999
J. Michael Hardinger executive officer)
Executive Vice President--
/s/ DAVID S. GINO* Finance and Chief
- ------------------------------ Financial Officer February 24, 1999
David S. Gino (Principal financial and
accounting officer)
/s/ JOHN L. DOYLE*
- ------------------------------ Director February 24, 1999
John L. Doyle
/s/ JOHN W. HIMES*
- ------------------------------ Director February 24, 1999
John W. Himes
/s/ JOHN C. HODGSON*
- ------------------------------ Director February 24, 1999
John C. Hodgson
/s/ GARY W. PANKONIEN*
- ------------------------------ Director February 24, 1999
Gary W. Pankonien
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JOHN C. SARGENT*
- ------------------------------ Director February 24, 1999
John C. Sargent
/s/ MARSHALL C. TURNER*
- ------------------------------ Director February 24, 1999
Marshall C. Turner
/s/ SUSAN A. VLADUCHICK*
- ------------------------------ Director February 24, 1999
Susan A. Vladuchick
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JOHN M. LYNN
-------------------------
John M. Lynn
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1* ... Form of Underwriting Agreement.
3.1** Certificate of Incorporation, 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 PricewaterhouseCoopers 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
Brobeck, Phleger & Harrison LLP
301 Congress Avenue, Suite 1200
Austin, Texas 78761
February 24, 1999
DuPont Photomasks, Inc.
131 Old Settlers Boulevard
Round Rock, Texas 78664
Re: DuPont Photomasks, Inc. Registration Statement on
Form S-3 for 2,300,000 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 sale by a
stockholder of the Company of up to 2,300,000 shares of the Company's
Common Stock (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.
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.
<PAGE>
DuPont Photomasks, Inc. February 24, 1999
Page 2
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,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated July 27, 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.
PricewaterhouseCoopers LLP
Austin, Texas
February 24, 1999
