<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 0-20839
----------------
DUPONT PHOTOMASKS, INC.
(Exact name of registrant as specified in our charter)
<TABLE>
<CAPTION>
Delaware 74-2238819
<S> <C>
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
131 Old Settlers Boulevard
Round Rock, Texas 78664
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 310-6500
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of October 31, 2000, there were 17,270,121 shares of the registrant's
common stock, $.01 par value, outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I
Item 1. Financial Statements
Consolidated Income Statement (unaudited) for the Three Months Ended
September 30, 1999 and 2000............................................ 3
Consolidated Balance Sheet (unaudited) at June 30, 2000 and September
30, 2000............................................................... 4
Consolidated Statement of Cash Flows (unaudited) for the Three Months
Ended September 30, 1999 and 2000...................................... 5
Consolidated Statement of Stockholders' Equity (unaudited) for the
Twelve Months Ended June 30, 2000 and the Three Months ended September
30, 2000............................................................... 6
Notes to Consolidated Financial Statements (unaudited).................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 15
Part II
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities and Use of Proceeds........................ 16
Item 3. Defaults Upon Senior Securities.................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 16
Signatures............................................................ 16
</TABLE>
2
<PAGE>
PART I
Item 1. Financial Statements
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1999 2000
----------- -----------
<S> <C> <C>
Sales................................................ $ 74,122 $ 100,589
Cost of goods sold................................... 50,894 64,969
Selling, general and administrative expense.......... 8,869 12,019
Research and development expense..................... 5,004 7,658
----------- -----------
Operating profit..................................... 9,355 15,943
Other expense (income), net.......................... 212 (269)
----------- -----------
Income before income taxes and minority interest..... 9,143 16,212
Provision for income taxes........................... 2,558 4,160
----------- -----------
Income before minority interest...................... 6,585 12,052
Minority interest in income of joint ventures........ (8) (1,354)
----------- -----------
Net income........................................... $ 6,577 $ 10,698
=========== ===========
Basic earnings per share............................. $ 0.43 $ 0.63
=========== ===========
Basic weighted average shares outstanding............ 15,364,005 16,899,419
=========== ===========
Diluted earnings per share........................... $ 0.41 $ 0.58
=========== ===========
Diluted weighted average shares outstanding.......... 16,003,505 18,598,145
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
-------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 42,203 $ 54,845
Accounts receivable, trade, net........................ 57,479 71,290
Accounts receivable, related parties................... 1,518 2,057
Inventories, net....................................... 15,569 17,159
Deferred income taxes.................................. 13,119 12,113
Prepaid expenses and other current assets.............. 16,077 23,185
-------- --------
Total current assets.................................. 145,965 180,649
Property and equipment, net............................. 452,827 463,982
Accounts receivable, related parties.................... 1,406 1,404
Deferred income taxes................................... 2,756 3,623
Intangible assets, net.................................. 40,263 38,593
Other assets............................................ 1,009 13,955
-------- --------
Total assets......................................... $644,226 $702,206
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................ $ 74,190 $ 55,147
Accounts payable, related parties...................... 1,054 1,294
Short-term borrowings.................................. 3,797 3,345
Income taxes payable................................... 6,252 4,543
Other accrued liabilities.............................. 30,459 28,459
-------- --------
Total current liabilities............................. 115,752 92,788
Long-term borrowings.................................... 2,350 1,467
Long-term borrowings, related parties................... 150,000 --
Long-term convertible notes............................. -- 100,000
Deferred income taxes................................... 15,804 21,585
Other liabilities....................................... 16,043 16,929
Minority interest in net assets of joint ventures....... 28,622 29,976
-------- --------
Total liabilities..................................... 328,571 262,745
======== ========
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares
authorized;
15,767,813 and 17,255,965 issued and outstanding,
respectively.......................................... 158 173
Additional paid-in capital............................. 179,591 286,244
Retained earnings...................................... 135,906 146,604
Accumulated other comprehensive income................. -- 6,440
-------- --------
Total stockholders' equity............................ 315,655 439,461
-------- --------
Total liabilities and stockholders' equity........... $644,226 $702,206
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
-----------------
1999 2000
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 6,577 $ 10,698
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 13,063 17,243
Other..................................................... 1,086 (350)
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable, net................................. (2,215) (13,780)
Accounts receivable, related parties..................... (26) (539)
Inventories, net......................................... 667 (1,589)
Prepaid expenses and other current assets................ (526) (6,768)
Accounts payable......................................... 8,312 (18,758)
Accounts payable, related parties........................ 480 240
Other accrued liabilities................................ (3,489) 330
------- --------
Net cash provided by (used in) operating activities..... 23,929 (13,273)
------- --------
Cash flows from investing activities:
Additions of property and equipment, net................... (34,663) (26,727)
------- --------
Net cash used in investing activities................... (34,663) (26,727)
------- --------
Cash flows from financing activities:
Proceeds from borrowings................................... 582 973
Payments of borrowings..................................... (1,737) (1,958)
Proceeds from borrowings, related parties.................. -- 25,000
Payments of borrowings, related parties.................... -- (175,000)
Proceeds from issuance of convertible notes, net........... -- 97,600
Proceeds from issuance of common stock under employee
plans..................................................... 1,970 910
Proceeds from issuance of common stock, net................ -- 103,814
Increase in minority interest in net assets of joint
ventures.................................................. -- 1,354
------- --------
Net cash provided by financing activities............... 815 52,693
------- --------
Effect of exchange rate changes on cash..................... (701) (51)
------- --------
Net increase (decrease) in cash and cash equivalents........ (10,620) 12,642
Cash and cash equivalents at beginning of period............ 61,311 42,203
------- --------
Cash and cash equivalents at end of period.................. $50,691 $ 54,845
------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................. $ 212 $ 503
Taxes..................................................... 687 1,406
Non-cash items:
Contributions of capital.................................. $ 1,429 $ 1,080
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
----------------- Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
---------- ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1999.................. 15,332,282 $153 $164,342 $109,806 $ -- $274,301
Contribution of
capital................ -- -- 5,716 -- -- 5,716
Issuance of common
stock.................. 435,531 5 9,533 -- -- 9,538
Net income.............. -- -- -- 26,100 -- 26,100
---------- ---- -------- -------- ------ --------
Balance at June 30,
2000.................. 15,767,813 158 179,591 135,906 -- 315,655
Contribution of
capital................ -- -- 1,080 -- -- 1,080
Issuance of common stock
under employee plans... 65,930 1 1,774 1,775
Issuance of common
stock.................. 1,422,222 14 103,799 -- -- 103,813
Net income.............. -- -- -- 10,698 -- 10,698
Unrealized gain on
investments............ -- -- -- -- 6,440 6,440
---------- ---- -------- -------- ------ --------
Balance at September
30, 2000.............. 17,255,965 $173 $286,244 $146,604 $6,440 $439,461
========== ==== ======== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The interim consolidated financial statements presented herein include the
accounts of DuPont Photomasks, Inc. and its wholly-owned subsidiaries.
References to the "Company" mean DuPont Photomasks, Inc. and, unless the
context indicates otherwise, its consolidated subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
These interim consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). All adjustments have been made to the
accompanying interim consolidated financial statements which are, in the
opinion of the Company's management, necessary for a fair presentation of the
Company's operating results and include all adjustments of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is recommended that these interim consolidated financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2000. The results of operations for any interim period
are not necessarily indicative of the results of operations for the entire
year. Certain reclassifications have been made in the prior period financial
statements to conform with the current period presentation.
2. Accounts Receivable, Trade, net
We provide an allowance for doubtful accounts based upon an estimate of
uncollectible accounts. Accounts receivable, trade is net of allowances for
doubtful accounts of $2,482 and $1,317 at June 30, and September 30, 2000,
respectively.
3. Property and Equipment, net
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are depreciated using the straight-line method over the shorter of
the estimated useful lives of the assets or the duration of the lease. 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. Accumulated depreciation at June 30, and September
30, 2000 are $277,766 and $290,659, respectively.
4. Intangible Assets, net
Intangible assets are amortized using the straight-line method over their
estimated useful lives ranging from five to eight years. Accumulated
amortization was $7,009 and $8,679 at June 30, and September 30, 2000,
respectively.
5. Investments
The Company's investments are classified as available-for-sale securities
and are reported at fair value in non-current other assets. Unrealized gains
and losses are excluded from income and reported, net of taxes, as a separate
component of stockholders' equity in other comprehensive income. Unrealized
losses are charged against income when a decline in fair value is determined to
be other than temporary. Gains and losses on investments are included in other
income when realized. The specific identification method is used to determine
the cost of securities sold. As of September 30, 2000 we held approximately
450,000 vested warrants from a vendor.
7
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Debt
In July 2000, we issued an aggregate principal amount of $100,000 of
convertible subordinated notes. The notes were sold at par less an underwriting
discount of 2 percent and we received net proceeds of $97,600. The notes are
due in July 2004, with no stated interest, a conversion price of $106.26 per
share, an unconditional guarantee by E. I. du Pont de Nemours and Company
("DuPont,") and no optional redemption by us. Debt issue costs of $2,400
related to these notes are included in non-current other assets and are
amortized to interest expense over the scheduled maturity period.
At June 30, 2000, we had a credit agreement with DuPont, which was comprised
of two separate facilities for $100 million each. The first facility expires in
2001 and any advances bear an interest rate at LIBOR plus 0.25 percent per
annum. In July 2000, the outstanding balance was repaid and this credit
facility was amended to increase the interest charged on outstanding amounts
from LIBOR plus 0.25 percent per annum to LIBOR plus 1.875 percent per annum
and to terminate our ability to convert outstanding amounts into term loans.
The second facility had a term of three years and outstanding amounts bore
interest at 0.25 percent per annum for the first two years and LIBOR plus 0.25
percent per annum for the third year. In July 2000, we repaid all outstanding
balances and terminated this facility.
7. Equity
In July 2000, we completed a public offering of 3.2 million shares of our
common stock, of which 1.4 million shares represented original issuance by our
Company and 1.8 million shares represented registration of outstanding shares
held by DuPont. The stock was offered to the public at $77 per share net
offering proceeds to us of approximately $103,800 for the original issuance.
8. Derivatives and Hedging Activities
Derivative financial instruments are used to mitigate risk of certain
international revenue and balance sheet exposures, and are, therefore, held
primarily for purposes other than trading. These instruments may involve
elements of credit and market risk in excess of the amounts recognized in the
financial statements. The Company monitors its positions and the credit quality
of counter-parties, consisting primarily of major financial institutions, and
does not anticipate nonperformance by any counter-party.
Effective July 1, 2000 we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement
No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. The derivatives held at September 30, 2000 do not qualify for
hedge accounting treatment and all of the changes in fair value are included in
income in the period in which they occur. Adoption of these new accounting
standards had a negligible impact on our financial position and results of
operations.
9. Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted number of common shares outstanding during each period. Diluted EPS is
computed by dividing net income after adjustments for the dilutive effect of
the convertible notes by the weighted average number of common shares and
common share equivalents outstanding (if dilutive) during each period. Common
share equivalents include
8
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock options and assumed conversion of the convertible notes. The number of
common share equivalents outstanding relating to stock options is computed
using the treasury stock method while the number of common share equivalents
relating to the convertible notes is computed using the if converted method.
The reconciliation of the amounts used to calculate the basic EPS and
diluted EPS for the three months ended September 30, are as follows:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Net income for the period--basic................... $ 6,577 $ 10,698
Dilutive effect of convertible notes............... -- 92
----------- -----------
Net income for the period--diluted................. $ 6,577 $ 10,790
=========== ===========
Weighted average shares outstanding--basic......... 15,364,005 16,899,419
Plus: Common share equivalents..................... 639,500 1,698,726
----------- -----------
Weighted average shares outstanding--dilutive...... 16,003,505 18,598,145
=========== ===========
Stock options to acquire 96,650 and 17,950 shares for the quarters ended
September 30, 1999 and 2000, respectively, were not included in common share
equivalents because the effect of including these stock options would have been
anti-dilutive.
10. Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." Our
comprehensive income is comprised of net income and unrealized gains and losses
on certain investments in debt and equity securities. The components of
comprehensive income, net of tax for the three months ended September 30, are
as follows:
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Net income for the period.......................... $ 6,577 $ 10,698
Other comprehensive income:
Unrealized gain on investments, net of tax
$4,118.......................................... -- 6,440
----------- -----------
Total comprehensive income......................... $ 6,577 $ 17,138
=========== ===========
</TABLE>
9
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," segment information is as follows:
<TABLE>
<CAPTION>
North
America Europe Asia Eliminations Total
-------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Three Months Ended September
30, 1999
----------------------------
Sales....................... $ 43,357 $ 13,717 $ 17,048 $ -- $ 74,122
Transfers between geographic
segments................... 5,669 365 2,704 (8,738) --
-------- -------- -------- -------- --------
$ 49,026 $ 14,082 $ 19,752 $ (8,738) $ 74,122
======== ======== ======== ======== ========
Net income (loss)........... $ 4,113 $ (1,652) $ 4,116 $ -- $ 6,577
June 30, 2000
-------------
Identifiable assets......... $278,066 $110,531 $255,629 $ -- $644,226
Three Months Ended September
30, 2000
----------------------------
Sales....................... $ 58,549 $ 20,484 $ 21,556 $ -- $100,589
Transfers between geographic
segments................... 5,760 3,111 4,946 (13,817) --
-------- -------- -------- -------- --------
$ 64,309 $ 23,595 $ 26,502 $(13,817) $100,589
======== ======== ======== ======== ========
Net income.................. $ 3,241 $ 3,113 $ 4,344 $ -- $ 10,698
September 30, 2000
------------------
Identifiable assets......... $317,159 $118,979 $266,068 $ -- $702,206
</TABLE>
Products are transferred between geographic areas on a basis intended to
approximate the market value of such products.
12. Commitments and Contingencies
We are undertaking a significant global expansion to support the future
growth of our business. We have established a joint venture with UMC Group to
produce photomasks in Taiwan. We have a photomask production facility in
Gresham, Oregon, but we have indefinitely delayed completion of the
construction of that facility. If additional capacity were to be needed, we
could complete the Gresham facility within approximately six months. Currently
we are evaluating the potential opportunities for the Gresham facility. In
addition, we are in the customer qualification phase of our photomask
production facility in Singapore.
We have various purchase commitments incidental 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. We
also have guaranteed a portion of certain equipment leases of the DPI Reticle
Technology Center. Such leases are generally for four years and provide for
payments not in excess of current market.
We are subject to litigation in the normal course of business. We believe
the effect, if any, of an unfavorable settlement of such litigation would not
have a material adverse impact on our financial position, results of
operations, cash flows or liquidity.
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with our financial statements and
related notes thereto. References to years are to fiscal years ended June 30.
Results for interim periods are not necessarily indicative of results for the
full year.
Overview
Based on worldwide sales, we believe we are one of the largest photomask
manufacturers in the world. We sell our products to over 300 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.
The demand for photomasks is driven primarily by semiconductor design
activity. A number of recent trends have fueled growth in photomasks,
including:
. Proliferation of semiconductor applications;
. Customization of semiconductor designs;
. Increasing semiconductor device complexity;
. Decreasing size of semiconductor designs; and
. Shorter product lifecycles.
These trends have increased the importance of photomask technology in the
semiconductor manufacturing process.
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 utilized production capacity, operating
profit increases or decreases significantly as sales volume increases or
decreases. We anticipate that our operating costs will continue to increase as
we add capacity to position ourselves for future growth. If our sales growth
does not keep pace with increases in operating costs, our operating margin will
decline.
Results of Operations
Sales. Sales are comprised primarily of photomask sales to semiconductor
manufacturers. Sales increased 35.7 percent from $74.1 million in the quarter
ended September 30, 1999 to $100.6 million in the quarter ended September 30,
2000. Sales in North America, Europe and Asia increased from $43.4 million,
$13.7 million and $17.0 million, respectively, in the quarter ended September
30, 1999 to $58.5 million, $20.5 million and $21.6 million, respectively, in
the quarter ended September 30, 2000. Increased average selling price and
increased unit volume both contributed to the increase in sales during the
quarter ended ended September 30, 2000. Unit volume increases represented
approximately half of the increase and average selling price increases
represented the other half of the increase in sales in the quarter ended
September 30, 2000. We continue to experience an increase in demand for
advanced photomasks, those with design technology of 0.18 micron and below,
which for the quarter ended September 30, 2000, represented approximately 25
percent of our sales. This shift in demand reflects what we believe to be a
continued trend toward higher utilization of complex semiconductor devices with
finer line widths. We anticipate that our sales will continue to grow next
quarter.
11
<PAGE>
Cost of Goods Sold. Cost of goods sold consists of material, labor,
depreciation and overhead. Cost of goods sold increased from $50.9 million in
the quarter ended September 30, 1999 to $65.0 million in the quarter ended
September 30, 2000. The increase resulted primarily from higher costs
associated with increased revenues. The gross profit increased from 31.3
percent in the quarter ended September 30, 1999 to 35.4 percent for the quarter
ended September 30, 2000. The increase in gross profit was due to changes in
the product mix and the impact of price increases which went into effect over
the quarter. For the second quarter of fiscal year 2001 we expect approximately
the same gross profit margin. Commencement of depreciation expense for our
Singapore facility will be offset by the incremental benefit of the price
increase. For the second half of fiscal year 2001 we expect the gross profit
margin to increase, driven by higher unit volume and product mix driven higher
average selling prices.
Selling, General and Administrative Expense. Selling, general and
administrative expense includes salaries of sales personnel, marketing expense,
general and administrative expense and product distribution expense. Selling,
general and administrative expense increased 35.5 percent from $8.9 million in
the quarter ended September 30, 1999 to $12.0 million in the quarter ended
September 30, 2000. The increases are primarily the result of increased costs
related to higher sales. Selling, general and administrative expense as a
percentage of sales remained constant at 12.0 percent in the quarters ended
September 30, 1999 and 2000. In the next quarter we expect selling, general and
administrative expenses to remain constant, and in the long term, we should see
economies of scale as our new facilities in Singapore and France increase
production.
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 53.0 percent from $5.0
million in the quarter ended September 30, 1999 to $7.7 million in the quarter
ended September 30, 2000. Research and development expense as a percentage of
sales increased from 6.8 percent in the quarter ended September 30, 1999 to 7.6
percent in the quarter ended September 30, 2000. The increases were due
primarily to increased focus on research and development in all of our
facilities 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 manufacture 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. We continue to invest
aggressively in mask technology and expect research and development expense to
increase.
Other (Income) Expense, net. Other (income) expense, net includes interest
expense, interest income and exchange gains and losses. Other (income) expense,
net was $0.2 million in the quarter ended September 30, 1999 and ($0.3 million)
in the quarter ended September 30, 2000. The decrease relates primarily to
lower interest expense due to repayment of our outstanding credit agreements
with DuPont with the proceeds from our separate issuance of convertible debt
and common stock which were completed in July 2000.
Provision for Income Taxes. Our tax expense has been determined in
accordance with SFAS No. 109, "Accounting for Income Taxes," and is based on
the statutory rates in effect in the countries in which we operate. Our
effective tax rate was 28 percent for the quarters ended September 30, 1999 and
2000. Our effective tax rate varied from the maximum statutory rate primarily
because certain of our operations in Asia are subject to various tax holidays
which expire in whole or in part during fiscal years 2003 through 2010. Certain
tax holidays may be extended if specific conditions are met. We expect the
effective tax rate to remain stable for fiscal year 2001.
Minority Interest in Income of Joint Ventures. The minority interest impact
of our joint ventures was negligible for the quarter ended September 30, 1999
and $1.4 million for the quarter ended September 30, 2000. Minority interest
reflects the partners' share of the joint venture operations.
12
<PAGE>
Liquidity and Capital Resources
Our working capital was $30.2 million at June 30, 2000 and $87.9 million at
September 30, 2000. The increase in working capital was principally due to our
separate issuance of convertible notes and common stock which were completed in
July 2000. The offering proceeds increased cash balances and decreased our
accounts payable and other accrued liabilities balances. Cash and cash
equivalents were $42.2 million at June 30, 2000 and $54.8 million at September
30, 2000. Cash used in operating activities of $13.3 million in the quarter
ended September 30, 2000 was due to the decrease in accounts payable from the
balances which increased in the quarter ended June 30, 2000 and the increase in
accounts receivable balances which resulted from the increase in sales in the
quarter ended September 30, 2000.
Cash used in investing activities related to capital expenditures of $34.7
million and $26.7 million in the quarters ended September 30, 1999 and 2000,
respectively. Management expects capital expenditures for the remainder of
fiscal year 2001 to be approximately $125 million. Capital expenditures have
been and will be used primarily to expand our manufacturing capacity and
advance our technical capability. In addition, 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 $0.8 million and $52.7 million in
the quarters ended September 30, 1999 and 2000, respectively. In July 2000, we
completed two public offerings of common stock and convertible notes with net
proceeds of $201.4 million. A portion of the proceeds was used to repay all of
the outstanding borrowings from DuPont, and we are using the remaining proceeds
for general corporate purposes, including potential acquisitions, working
capital and capital expenditures. The first offering was the sale of 1.4
million shares of our common stock. The stock was offered to the public at $77
per share with net proceeds to us of $103.8 million after deducting
underwriting discounts and offering expenses of $12.8 million paid by us. We
also issued an aggregate principal amount of $100 million of convertible
subordinated notes. The notes were sold at par less an underwriting discount of
2 percent and we received net proceeds of $97.6 million. The notes are due in
July 2004, with no stated interest, a conversion price of $106.26 per share, an
unconditional guarantee by DuPont, and no optional redemption by us.
At June 30, 2000, we had a credit agreement with DuPont, which was comprised
of two separate facilities for $100 million each. The first facility expires in
2001 and any advances bear an interest rate at LIBOR plus 0.25 percent per
annum. In July 2000, the outstanding balance was repaid and this credit
facility was amended to increase the interest charged on outstanding amounts
from LIBOR plus 0.25 percent per annum to LIBOR plus 1.875 percent per annum
and to terminate our ability to convert outstanding amounts into term loans.
The second facility had a term of three years and outstanding amounts bore
interest at 0.25 percent per annum for the first two years and LIBOR plus 0.25
percent per annum for the third year. In July 2000, we repaid all outstanding
balances and terminated this facility.
Our ongoing cash requirements will be for capital expenditures,
acquisitions, research and development and working capital. We are constructing
a new photomask production facility in Corbeil-Essonnes, France. Additionally,
we are qualifying our new photomask production facility in Singapore, and
construction of our photomask production facility in Gresham, Oregon has been
delayed indefinitely. If additional capacity is needed, we believe we could
complete the Gresham facility within approximately six months. Management
believes that cash on hand, cash provided by operations and our existing credit
facility will be sufficient to meet our cash requirements for at least the next
12 months. Thereafter, based on our current operating plans, we may require
external financing from time to time to fund our capital expenditure
requirements. There can be no assurance that alternative sources of financing
will be available upon expiration of our credit facility or if our capital
requirements exceed the facility and cash flow from operations. There can be no
assurance that we will be able to obtain any additional financing required to
fund our capital needs on reasonable terms, or at all.
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Other Matters
Changing Accounting Standards. In June 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement amends
the accounting and reporting standards of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," for certain instruments and
certain hedging activities. SFAS No. 138 also amends SFAS No. 133 for decisions
made by the FASB relating to the Derivative Implementation Group (DIG) process.
Certain decisions arising from the DIG process that required specific
amendments to SFAS No. 133 are incorporated in SFAS No. 138. The statement is
effective concurrently with SFAS No. 133. The Company adopted the standard in
the first quarter of fiscal year 2001 along with SFAS No. 133. The adoption of
these standards had a negligible impact on our financial position and results
of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We
anticipate that adoption will be no later than the fiscal quarter ending June
30, 2001. We are currently evaluating the impact of this bulletin, but do not
expect that its adoption will have a material adverse impact on our financial
position or results of operations.
Forward Looking Statements
Certain statements contained in this document that are not historical facts,
are "forward-looking statements," as that term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
that involve a number of risks and uncertainties. Such forward-looking
statements may concern growth and future operating results, forecasts,
projections, pricing pressures, potential acquisitions and joint ventures, new
manufacturing facilities, capital expenditures, the global economic climate,
the continued successful integration of the company's new executives into the
business, new products and product enhancements, the future importance of
photomask technology, the demand for products, competitive factors, research
and development activities and expenditures, strategic relationships with third
parties, liquidity, and financing and the company's strategy. Such forward-
looking statements are generally accompanied by words such as "intend," "may,"
"plan," "expect," "believe," "should," "would," "could," "anticipate," or other
words that convey uncertainty of future events or outcomes. Such forward-
looking statements are based upon management's current plans, expectations,
estimates and assumptions and are subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the company's business, financial
position and results of operations. As a consequence, actual results may differ
materially from expectations, estimates or assumptions expressed in or implied
by any forward-looking statements made by or on behalf of the company. Factors
which could cause or contribute to such differences include, but are not
limited to, those factors set forth below which are fully discussed under the
caption "Risk Factors" in the company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission dated September 15, 2000, the 10-Q dated
May 11, 2000, and the S-3 most recently amended on September 11, 2000, as well
as cautionary statements and other factors set forth as Risk Factors: capital
intensive industry, significant fixed costs, rapid technological change
relationship with and dependence on semiconductor industry, fluctuations in
quarterly and annual earnings, competition, significant international
operations, Asian market volatility, manufacturing risks, concentration of
customers, concentration of and dependence on suppliers, dependence on
management and technical personnel, relationship with E.I. du Pont de Nemours &
Company, volatility of market price, potential acquisitions, technology
challenges in the manufacture of advanced photomasks, intellectual property,
changes in governmental laws and regulations, potential effect of shares
eligible for future sales and registration rights. Results for the interim
period are not necessarily indicative of the results for the year. The forward-
looking statements are made as of the release date hereof and the company
disclaims any intention or obligation to update or revise any forward-looking
statements or to update the reasons why the actual results could differ
materially from those projected in the forward-looking statements, whether as a
result of new information, future events or otherwise.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and changes in foreign currency exchange rates. As of September
30, 2000, we had $100.0 million in non-interest bearing convertible notes and
approximately $4.8 million in interest bearing debt of which approximately $3.3
million was short-term debt. As a result, changes in the interest rate market
would change the estimated fair value of our long-term debt. We believe that a
10% change in the interest rate would not have a material effect on our
business, financial condition, results of operations or cash flows.
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 forward contracts in currencies of
the countries in which we conduct business in order to reduce such exposure. At
September 30, 2000, we held forward contracts with a carrying amount of
approximately $11.3 million and an unrealized gain recorded in the income
statement of approximately $0.1 million. There can be no assurance that such
forward contracts or any other hedging activity will be available or adequate
to eliminate, or even mitigate, the impact of 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. We do not hold or issue
derivative financial instruments for trading or speculative purposes.
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<PAGE>
PART II
Item 1. Legal Proceedings
We are not currently involved in any material legal proceedings.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(11) Statement re Earnings Per Share Computation
(27) Financial Data Schedule
(B) Reports on Form 8-K
We filed a Form 8-K on October 12, 2000, announcing the implementation of
stock selling plans in accordance with the recently adopted Rule 10b5-1 of the
Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dupont Photomasks, Inc.
(Registrant)
/s/ Gerd Stoecker
By:__________________________________
Gerd Stoecker
Executive Vice President--Finance
andChief Financial
Officer(Principal Financial
Officer)
Date: October 31, 2000
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