<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-40148
PROSPECTUS
$100,000,000
DuPont Photomasks, Inc.
CONVERTIBLE SUBORDINATED NOTES DUE 2004
guaranteed by
E. I. du Pont de Nemours & Company
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Holders may convert the notes into common stock of DuPont Photomasks, Inc. at
any time on or before July 24, 2004 at a conversion price of $106.26 per
share, subject to adjustment in certain events.
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We will not pay any interest on the notes.
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The notes are not redeemable by us prior to July 24, 2004.
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For a more detailed description of the notes, see "Description of Notes"
beginning on page 44.
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Concurrent with this offering of notes, we and E. I. du Pont de Nemours and
Company are conducting a separate offering of 3,200,000 shares of our common
stock. The common stock offering will be made pursuant to a separate
prospectus. This offering of our notes is not conditioned on the completion of
the offering of our common stock.
----------------
Our common stock is quoted on the Nasdaq National Market under the symbol
"DPMI." On July 19, 2000, the reported last sale price for our common stock
was $77 per share.
----------------
Investing in the notes or our common stock involves risks. See "Risk Factors"
beginning on page 9.
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PRICE 100%
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions DuPont Photomasks, Inc.
------------ ------------- -----------------------
<S> <C> <C> <C>
Per Note..................... 100% 2% 98%
Total........................ $100,000,000 $2,000,000 $98,000,000
</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.
Morgan Stanley & Co. Incorporated expects to deliver the notes to purchasers
on July 24, 2000.
----------------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
July 19, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 9
Special Note Regarding Forward-
Looking Statements................. 17
Use of Proceeds..................... 17
Dividend Policy..................... 18
Price Range of Common Stock......... 18
Capitalization...................... 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................ 27
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Management.......................... 37
Transactions and Relationship
Between Us and E. I. du Pont de
Nemours and Company................ 40
Description of Notes................ 44
Description of Capital Stock........ 55
Material Federal Income Tax
Considerations..................... 59
Underwriters........................ 64
Legal Matters....................... 65
Experts............................. 65
Where You Can Find More
Information........................ 66
Index to Financial Statements....... F-1
</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. We are offering to sell, and seeking offers to buy, the
notes, only in jurisdictions where offers and sales are 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 notes.
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
tradenames 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. Our fiscal year ends June
30.
DUPONT PHOTOMASKS
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 typical 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, Agilent Technologies, Hewlett-Packard,
Hyundai, IBM, Lucent Technologies, Micron Technology, National Semiconductor,
Philips, Samsung, STMicroelectronics, Texas Instruments and UMC Group. We
operate globally from 13 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 facility 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 an
industry source, the worldwide market for photomasks totaled approximately $2.1
billion in 1999. We estimate that the photomask markets in North America,
Europe and non-Japan Asia, the regions in which we primarily compete,
represented approximately 60% of the worldwide market in 1999 and that merchant
photomask sales in these regions were over $700 million in 1999. Based on
sales, we believe 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. We believe that a number of recent trends are fueling growth in
photomask activity, including:
. Proliferation of semiconductor applications;
. Increasing customization of semiconductor designs;
. Growing complexity of semiconductor devices;
. Decreasing feature size of semiconductor designs; and
. Shorter product lifecycles.
We are continuing a significant global expansion to support the growth of
our business by acquiring existing photomask manufacturing operations, building
new manufacturing facilities and installing additional manufacturing capacity
in existing facilities. The photomask industry continues to shift from captive
operations to merchant production, and we have been a beneficiary of the
industry's consolidation. Our recent acquisitions of captive operations and
joint ventures include:
. In 2000, we acquired IBM's European photomask manufacturing assets
located in Corbeil-Essonnes, France, and entered into a multi-year,
global supply agreement, under which we will supply IBM with the
significant majority of its externally sourced photomasks.
3
<PAGE>
. In 1998, we established a joint venture with UMC Group to produce
photomasks in Taiwan and became a strategic supplier of photomasks to
UMC Group.
. In 1998, we acquired the photomask manufacturing organization of
Hewlett-Packard (now Agilent Technologies) and became its strategic
photomask supplier.
. In 1998, we acquired Hyundai's photomask manufacturing assets and
entered into a strategic alliance to be its principal photomask
supplier.
In addition, we have built new facilities to support future growth:
. We have begun construction of a new facility in Corbeil-Essonnes,
France, where we intend to relocate the manufacturing assets that we
acquired from IBM.
. In 2000, we completed the construction of and are presently equipping a
photomask production facility in Singapore, which is our fourth in the
Asia region. We are currently qualifying customers in this new facility.
. In 1998, we began construction on a new photomask production facility in
Gresham, Oregon, which we subsequently and indefinitely delayed. If
additional capacity is needed, we believe we could complete the Gresham
facility within approximately six months.
Also, during the last three fiscal years, we have invested aggressively in
both capacity and capability in our existing photomask production facilities in
all regions to enhance our growth prospects, especially in advanced photomask
products. 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 our strategic relationships with customers;
. Capitalize on our established global manufacturing and customer service
support network;
. Leverage strategic relationships with key suppliers;
. Leverage our vertically integrated position; and
. Pursue new business opportunities.
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.
4
<PAGE>
RELATIONSHIP WITH E. I. DU PONT DE NEMOURS AND COMPANY
We are approximately 49.8% owned by DuPont. If DuPont's concurrent offering
of our common stock is completed, DuPont will continue to indirectly own
approximately 35.3% of our outstanding common stock (or approximately 32.5% if
the underwriters exercise their over-allotment option in full). After the
common stock offering, DuPont will continue to have significant influence on
the vote on most matters submitted to our stockholders, including the election
of directors and the approval of extraordinary corporate transactions. DuPont
has advised us that it expects to continue 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.
We intend to use the net proceeds of this offering, together with a portion
of the net proceeds to us of the concurrent common stock offering, to repay all
outstanding indebtedness owed to DuPont and terminate one of our two $100
million credit facilities with DuPont. In consideration for DuPont's agreement
to guarantee our obligations under the notes, and in addition to the repayment
and termination of the credit facility described above, we intend to amend our
remaining $100 million credit facility with DuPont upon completion of this
offering to increase the interest 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.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered...... $100,000,000 principal amount of Convertible
Subordinated Notes due 2004. See "Description of
Notes."
No Interest............. We will not pay any interest on the notes. Thus, if you
hold your notes to maturity, we will pay you $1,000 for
each $1,000 principal amount of notes.
Conversion.............. You may convert each note into common stock at a
conversion price of $106.26 per share, subject to
adjustment upon certain events. See "Description of
Notes--Conversion of Notes."
Guarantee............... DuPont will unconditionally guarantee all obligations
on the notes. The guarantees are not subordinated and
will rank pari passu with all other unsecured and
unsubordinated debt of DuPont.
Subordination........... The notes are subordinated to all of our existing and
future senior indebtedness. As of March 31, 2000, we
had approximately $112.0 million of outstanding
indebtedness that would have constituted senior
indebtedness, and our subsidiaries had approximately
$23.3 million of indebtedness and other liabilities
outstanding to which the notes would have been
effectively subordinated. As of July 18, 2000, we had
incurred an additional approximately $43.0 million of
indebtedness that would constitute senior indebtedness.
Neither we nor our subsidiaries are limited from
incurring debt, including senior indebtedness, under
the indenture.
No Optional Redemption.. The notes are not redeemable by us prior to the final
maturity date.
Fundamental Change...... If a fundamental change (as described under
"Description of Notes--Redemption at Option of the
Holder") occurs on or before July 24, 2004, you may
require us to purchase all or part of your notes at a
redemption price equal to 100% of the outstanding
principal amount of the notes being redeemed.
Use of Proceeds......... We will use the proceeds of the sale of the notes to
repay outstanding borrowings under, and terminate one
of, our two $100 million credit facilities with DuPont.
See "Use of Proceeds."
NASDAQ National Market
Symbol for common
stock.................. DPMI
</TABLE>
6
<PAGE>
CONCURRENT OFFERING OF COMMON STOCK
Concurrent with this offering, we and DuPont are offering for sale through
another prospectus 3,200,000 shares of our common stock (plus DuPont has
granted the underwriters of that offering an over-allotment option to purchase
an additional 480,000 shares). The offering price and other specific terms will
be determined by market conditions. We cannot be certain that the common stock
offering will be completed. The proceeds to us of the anticipated common stock
offering will be used to repay approximately $57.4 million of existing
indebtedness owed to DuPont and for general corporate purposes, including
potential acquisitions, working capital and capital expenditures. The common
stock offering will be made pursuant to a separate prospectus. The closing of
this offering and the closing of the offering of common stock are not
contingent upon each other.
7
<PAGE>
SUMMARY FINANCIAL DATA
The following data relates to DuPont Photomasks, Inc. The data for the three
years ended June 30, 1999 has been derived from the audited financial
statements included elsewhere in this prospectus. The data for the nine months
ended March 31, 1999 and 2000 has been derived from the unaudited financial
statements included elsewhere in this prospectus. The as adjusted balance sheet
data below reflects the application of the anticipated net proceeds from:
. The sale of $100 million principal amount of notes by us in this
offering, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us; and
. Both the sale of notes in this offering by us and the sale of 1,422,222
shares of our common stock by us in the concurrent offering at a public
offering price of $77 per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
The pro forma ratio of earnings to fixed charges reflects the completion of
both this offering and the concurrent common stock offering and the application
of the anticipated net proceeds to repay all outstanding indebtedness owned to
DuPont. We cannot be certain that the common stock offering will be completed.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30, March 31,
------------------------------- --------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales................... $ 261,185 $ 271,591 $ 264,015 $ 190,031 $ 234,673
Cost of goods sold...... 163,319 179,369 187,427 135,897 163,866
Selling, general and
administrative
expense................ 31,611 29,509 33,944 24,552 28,143
Research and development
expense................ 12,372 12,714 16,835 12,306 16,497
--------- --------- --------- --------- ---------
Operating profit........ 53,883 49,999 25,809 17,276 26,167
Other income (expense).. 1,284 (27) (717) (1,691) 286
--------- --------- --------- --------- ---------
Income before income
taxes, minority
interest and
extraordinary item..... 55,167 49,972 25,092 15,585 26,453
Provision for income
taxes.................. 19,308 17,127 7,763 4,881 7,000
--------- --------- --------- --------- ---------
Income before minority
interest and
extraordinary item..... 35,859 32,845 17,329 10,704 19,453
Minority interest in
(income) loss of joint
ventures............... 903 687 (59) 158 (1,452)
--------- --------- --------- --------- ---------
Income before
extraordinary item..... 36,762 33,532 17,270 10,862 18,001
Extraordinary item...... (22,242) -- -- -- --
--------- --------- --------- --------- ---------
Net income.............. $ 59,004 $ 33,532 $ 17,270 $ 10,862 $ 18,001
========= ========= ========= ========= =========
Basic earnings per share
before extraordinary
item................... $ 2.44 $ 2.21 $ 1.13 $ 0.71 $ 1.16
Diluted earnings per
share before
extraordinary item..... $ 2.37 $ 2.15 $ 1.09 $ 0.69 $ 1.12
Basic weighted average
shares outstanding..... 15,101 15,180 15,299 15,293 15,493
Diluted weighted average
shares outstanding..... 15,520 15,612 15,780 15,734 16,143
Other Data:
Ratio of earnings to
fixed charges (income
before fixed
charges/fixed
charges)............... 25.8x 16.7x 6.2x 4.3x 10.5x
Pro forma ratio of
earnings to fixed
charges................ 5.4x 9.2x
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------------------
As Adjusted
-----------------------
This Offering Both
Actual Only Offerings
-------- ------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 29,588 $ 29,588 $119,001
Working capital........................... 33,452 33,452 122,865
Property and equipment.................... 392,781 392,781 392,781
Total assets.............................. 564,052 566,452 655,865
Long-term borrowings...................... 2,408 102,408 102,408
Long-term borrowings, related parties..... 112,000 14,400 --
Stockholders' equity...................... 302,826 302,826 406,639
</TABLE>
8
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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. 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.
9
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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 in order to keep
pace with rapidly changing technologies. 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,
increases and decreases in sales volume significantly affect our operating
profits when our production capacity is not fully utilized. We anticipate that
our operating costs will increase as we add capacity to position us for future
growth. Our results of operations could be adversely affected to the extent
that such capacity is not utilized.
We May Be Unable to Effectively Manage the Expansion of Our Manufacturing
Operations
We recently completed construction of, and are presently equipping, a
photomask production facility in Singapore, which is undergoing customer
qualification procedures, and we intend to relocate our recently acquired
operations in Corbeil-Essonnes, France to a new facility. In addition, we
regularly establish new production lines or move existing production lines
within a given plant or among different plants. If we do not adequately manage
these changes and improvements, the productivity of our plants will suffer,
which could cause us to lose sales or customers.
Rapid Technological Change Could Render Our Products Obsolete
Rapid technological change and new product introductions and enhancements
characterize the photomask and semiconductor industries. 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 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.
In addition, changes in semiconductor designs, such as field-programmable
gate arrays, application-specific standard products and other semiconductor
designs that displace application-specific integrated circuits, could reduce
photomask unit volumes in the future. Such a reduction in volumes could
decrease our revenues from photomask sales.
10
<PAGE>
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:
. Dai Nippon Printing;
. Hoya Corporation;
. Photronics, which recently acquired Align-Rite and PSMC; 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. In particular, recent
widespread consolidation in the photomask industry, particularly in Japan, has
enhanced the remaining companies' strength as competitors.
Our ability to compete in the photomask market is primarily based on:
. Product quality;
. Delivery to schedule performance;
. Pricing;
. Technical capabilities;
. Location and capacity of manufacturing facilities; and
. Technical service.
We recently announced the first general price increase on all of our
products in our history. We cannot assure you that the price increase will not
cause us to lose customers or market share to our competitors or otherwise
have a material adverse effect on our financial results.
Our International Operations Present Special Risks
Approximately 40% of our sales in fiscal 1999 and in the nine months ended
March 31, 2000 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 values of currencies;
. Restrictive governmental actions; and
. Difficulties in managing a global enterprise.
Changes in the relative values 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
11
<PAGE>
in non-U.S. currencies to U.S. dollars, our functional currency. We monitor
our exchange rate exposure and attempt to reduce this exposure by hedging
through forward contracts. We cannot be certain that these 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 these risks will not have a material adverse impact on our
liquidity and results of operations in the future.
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 21% of our sales in fiscal 1999 and approximately
22% in the nine months ended March 31, 2000 were derived from this region. Our
exposure to the business risks presented by Asian economies will increase to
the extent that we continue to expand our operations in that region.
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.
Our Production Facilities Could Be Damaged or Disrupted by a Natural Disaster,
Labor Strike, War or Political Unrest
A number of our facilities are in seismically active areas. Although we
have obtained property damage and business interruption insurance, a major
catastrophe such as an earthquake or other natural disaster at any of our
sites, or political unrest, war, labor strikes or work stoppages in any of the
areas where we conduct operations, could result in a prolonged interruption of
our business. Any disruption resulting from these events could cause
significant delays in shipments of our products and the loss of sales and
customers, and we do not know whether our insurance would adequately
compensate us for any of these events.
We Depend on a Few Significant Customers
Our ten largest customers, in the aggregate, accounted for more than 60% of
our sales in both fiscal 1999 and the nine months ended March 31, 2000. Our
two largest customers, in the aggregate, accounted for approximately 22% of
our sales in fiscal 1999. 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
12
<PAGE>
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 a
disruption, we cannot assure you that we could develop alternative sources
within reasonable time frames, or if developed, that these sources would
provide supplies or equipment at prices comparable with those charged by our
suppliers before the disruption.
We Depend on a Limited Number of Management and Technical Personnel
Our continued success depends, in part, upon key managerial, engineering
and technical personnel as well as our ability to continue to attract and
retain additional personnel. In the past, certain key personnel have left us
to pursue other opportunities. The loss of certain key personnel could have a
material adverse effect on our business or results of operations. There can be
no assurance that we can retain our key managerial, engineering and technical
employees. Our growth may be dependent on our ability to attract new highly
skilled and qualified personnel. There can be no assurance that our recruiting
efforts to attract and retain these personnel will be successful.
We Recently Hired New Chief Executive and Financial Officers, and Our Success
Depends on Their Ability to Learn Our Business and Integrate with the Existing
Management Team
We hired Peter S. Kirlin, our Chairman of the Board and Chief Executive
Officer, in May 2000, and Gerd Stoecker, our Executive Vice President--Finance
and Chief Financial Officer, in June 2000. Our business may suffer if these
new executives do not quickly learn our business and successfully integrate
with the existing members of our senior management.
E. I. du Pont de Nemours and Company Has Significant Influence on All
Stockholder Votes
If the common stock offering is completed, DuPont will own approximately
35.3% of our outstanding common stock, or approximately 32.5% if the
underwriters exercise their over-allotment option in full. As a result, DuPont
will continue to have significant influence on most matters submitted to our
stockholders, including proposals regarding:
. Any merger, consolidation or sale of all or substantially all of our
assets;
. Electing the members of our board of directors; and
. Preventing or causing 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 a joint venture with UMC Group to
manufacture photomasks, acquired IBM's European photomask manufacturing
operations and
13
<PAGE>
extended through 2002 the DPI Reticle Technology Center, our photomask
development joint venture with Advanced Micro Devices, Micron Technology and
Motorola. The success of these transactions will depend on our ability to:
. Integrate acquired production equipment with our operations;
. Attract, train and retain additional personnel;
. Utilize any resulting additional production capacity; and
. Cooperate with our joint venture partners.
The success of any joint venture will also depend on our ability to achieve
cooperation with each joint venture partner. We may encounter difficulties in
integrating acquired assets with our operations and managing any joint
ventures. 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;
. 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 acquisitions or joint ventures.
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;
. Competitors will not independently develop similar technology;
. The claims allowed on any patents we hold will be sufficiently broad to
protect our technology; or
. 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,
diversion of resources and product shipment delays or could 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.
14
<PAGE>
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.
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 manufacturing information systems. We cannot assure
you that this conversion will be successful or that it will yield benefits to
us. In addition, the implementation of this system could cause a short-term
disruption of our business processes.
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;
. Announcements of new products or product enhancements by us, our
competitors or our customers;
. Technological innovations by us or our competitors;
. Changes in earnings estimates or buy/sell recommendations by financial
analysts;
. The operating and stock price performance of 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 that have often been unrelated to the
operating performance of such companies. Such fluctuations may adversely
affect the market price of our common stock and any trading price of the
notes.
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, 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
the concurrent common stock offering, DuPont will beneficially own
approximately 6.1 million shares of our 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.
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 the common stock offering 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 with respect to this offering and
pursuant to our stock performance plans. Following the expiration of these
lock-up restrictions, 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.
Our Certificate of Incorporation and Bylaws Have Anti-Takeover Provisions
Provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. The combination of these provisions may
inhibit a non-negotiated merger or other business combination.
15
<PAGE>
A Public Market May Not Develop for the Notes
We do not intend to list the notes on any national securities exchange or
on the Nasdaq National Market. Prior to this offering, there has been no
trading market for the notes, and a public market may not develop for the
notes. Although the underwriters have advised us that they intend to make a
market in the notes, they are not obligated to do so and may discontinue this
market making at any time without notice. In addition, any market making
activity will be subject to the limits imposed by the federal securities laws
and governmental regulators. Accordingly, we cannot assure you that any market
for the notes will develop or, if one does develop, that it will be active or
sustained. If an active market for the notes fails to develop or be sustained,
the trading price of the notes could be materially adversely affected.
Our Notes May Not be Rated or May Receive a Lower Rating than Anticipated
We believe it is likely that one or more rating agencies may rate the
notes. However, our notes may not be rated by all rating agencies. If one or
more rating agencies assigns the notes a rating lower than that expected by
investors, the market price of the notes and our common stock could be
materially and adversely affected.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties, such as statements concerning:
. Industry trends;
. Customer demand for photomasks;
. Growth and future operating results;
. Developments in our markets and strategic focus;
. Expansion of and enhancements to our manufacturing facilities and
product offerings;
. Customer benefits attributable to our products;
. Potential acquisitions and joint ventures and the integration of
acquired businesses;
. Technologies and operations;
. Strategic relationships with third parties; and
. Future economic, business and regulatory conditions.
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 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 other 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 the notes, 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
The net proceeds to us from the sale of the notes are estimated to be $97.6
million, after deducting estimated offering expenses of $400,000 and
underwriting discounts and commissions payable by us. We currently intend to
use the net proceeds from this offering, together with approximately $2.4
million of the net proceeds to us from the concurrent common stock offering,
to repay outstanding borrowings under one of our two $100 million credit
facilities with DuPont. At March 31, 2000, approximately $100 million was
outstanding under that credit facility, bearing interest at 0.25% per annum
and maturing in March 2002.
17
<PAGE>
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, 1999:
First Quarter....................................... $38 1/2 $19 3/4
Second Quarter...................................... 43 7/8 16 7/8
Third Quarter....................................... 51 1/4 36 1/2
Fourth Quarter...................................... 50 3/4 36
Year Ended June 30, 2000:
First Quarter....................................... $56 1/2 $ 39
Second Quarter...................................... 70 15/16 40 9/16
Third Quarter....................................... 74 1/2 41 9/16
Fourth Quarter...................................... 81 1/4 45 1/16
Year Ending June 30, 2001:
First Quarter (through July 19, 2000)............... $80 3/4 $64 3/4
</TABLE>
On July 19, 2000, the reported last sale price of our common stock on the
Nasdaq National Market was $77 per share.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. On an actual basis;
. As adjusted to reflect the sale of $100 million principal amount of
notes by us in this offering, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, but excluding
the effect of any conversion of the notes into shares of our common
stock; and
. As adjusted to reflect both this offering and our concurrent offering of
1,422,222 shares of our common stock at a public offering price of $77
per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, but excluding the effect of
any conversion of the notes into shares of our common stock.
We cannot be certain that the common stock 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>
As of March 31, 2000
----------------------------
As Adjusted
-------------------
This
Offering Both
Actual Only Offerings
-------- -------- ----------
(in thousands, except share
data)
<S> <C> <C> <C>
Other accrued liabilities..................... $ 29,190 $ 29,190 $ 29,190
Short-term borrowings......................... 4,701 4,701 4,701
Long-term borrowings:
Convertible subordinated notes due 2004..... -- 100,000 100,000
DuPont credit facilities.................... 112,000 14,400 --
Other....................................... 2,408 2,408 2,408
-------- -------- --------
Total long-term borrowings.................... 114,408 116,808 102,408
-------- -------- --------
Stockholders' equity:
Common stock, $.01 par value; 100,000,000
shares authorized; 15,687,438 shares issued
and outstanding, actual and as adjusted for
this offering only; and 17,109,660 shares
issued and outstanding, as adjusted for
both offerings............................. 157 157 171
Additional paid-in capital.................. 174,862 174,862 278,661
Retained earnings........................... 127,807 127,807 127,807
-------- -------- --------
Total stockholders' equity.................... 302,826 302,826 406,639
-------- -------- --------
Total capitalization.......................... $417,234 $419,634 $509,047
======== ======== ========
</TABLE>
19
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth DuPont Photomasks, Inc.'s selected financial
data. The data for each of the years ended June 30, 1997, 1998 and 1999 and as
of June 30, 1998 and 1999 have been derived from audited financial statements
appearing elsewhere in this prospectus. The data for each of the years ended
June 30, 1995 and 1996 and as of June 30, 1995, 1996 and 1997 have been
derived from audited financial statements not included in this prospectus. The
data as of March 31, 2000 and for the nine months ended March 31, 1999 and
2000 have been derived from unaudited financial statements included elsewhere
in this prospectus. The unaudited financial statements include, in the opinion
of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the result for the
unaudited periods. The results for the nine months ended March 31, 2000 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. The pro forma ratio of earnings to fixed charges
reflects the completion of both this offering and the concurrent common stock
offering and the application of the estimated net proceeds to repay all
outstanding indebtedness owned to DuPont. Fixed charges include, as
applicable, interest expense, amortization of debt issuance costs and the
estimated interest component of rent expense.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30, March 31,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales................... $161,514 $213,415 $261,185 $271,591 $264,015 $190,031 $234,673
Cost of goods sold...... 120,512 142,200 163,319 179,369 187,427 135,897 163,866
Selling, general and
administrative
expense................ 21,803 25,167 31,611 29,509 33,944 24,552 28,143
Research and development
expense................ 8,777 9,162 12,372 12,714 16,835 12,306 16,497
-------- -------- -------- -------- -------- -------- --------
Operating profit
(loss)................. 10,422 36,886 53,883 49,999 25,809 17,276 26,167
Other income (expense).. (6,464) (7,964) 1,284 (27) (717) (1,691) 286
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes, minority
interest and
extraordinary item..... 3,958 28,922 55,167 49,972 25,092 15,585 26,453
Provision for income
taxes.................. -- 2,678 19,308 17,127 7,763 4,881 7,000
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
minority interest and
extraordinary item..... 3,958 26,244 35,859 32,845 17,329 10,704 19,453
Minority interest in
(income) loss of joint
ventures............... 161 660 903 687 (59) 158 (1,452)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... 4,119 26,904 36,762 33,532 17,270 10,862 18,001
Extraordinary item...... -- -- (22,242) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 4,119 $ 26,904 $ 59,004 $ 33,532 $ 17,270 $ 10,862 $ 18,001
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share before
extraordinary item..... $ 0.39 $ 2.51 $ 2.44 $ 2.21 $ 1.13 $ 0.71 $ 1.16
Diluted earnings (loss)
per share before
extraordinary item..... $ 0.39 $ 2.50 $ 2.37 $ 2.15 $ 1.09 $ 0.69 $ 1.12
Basic weighted average
shares outstanding..... 10,500 10,727 15,101 15,180 15,299 15,293 15,493
Diluted weighted average
shares outstanding..... 10,500 10,743 15,520 15,612 15,780 15,734 16,143
Other Data:
Ratio of earnings to
fixed charges (income
before fixed
charges/fixed
charges)............... 1.5x 4.5x 25.8x 16.7x 6.2x 4.3x 10.5x
Pro forma ratio of
earnings to fixed
charges................ 5.4x 9.2x
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of
-------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 8,412 $ 20,179 $ 51,351 $ 19,688 $ 61,311 $ 29,588
Working capital......... 16,405 34,458 66,082 33,052 71,134 33,452
Property and equipment.. 113,124 123,048 162,310 244,650 312,240 392,781
Total assets............ 171,701 227,893 291,579 351,979 480,406 564,052
Long-term borrowings.... 4,265 9,324 10,473 7,519 4,659 2,408
Long-term borrowings,
related parties........ 125,570 -- -- 9,000 100,000 112,000
Stockholders' equity.... -- 164,614 215,897 252,957 274,301 302,826
</TABLE>
20
<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
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.
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 fiscal 1998 and 1999, our operating costs on an absolute basis increased
more than our sales. During that period, the photomask industry was suffering
from the effects of the semiconductor industry's prolonged recession. At the
same time, we continued to invest aggressively in capability and capacity,
including investment in Asia as a way to solidify our position in the fastest
growing photomask region in the world. As a result, our operating margin
declined. 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 further. During the first three quarters of fiscal 2000, we
experienced an increase in photomask orders compared to the first three
quarters of fiscal 1999. In addition, the percentage of product orders
generated from leading edge design rules (0.25-micron and below) has increased
significantly during that same time. Also, we recently announced the first
general price increase on all of our products in our history. We cannot assure
you that the price increase will not cause us to lose customers or market
share to competitors or have a material adverse effect on our financial
results.
Results of Operations
The following table sets forth selected financial information expressed as
a percentage of sales for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Year Ended June Ended
30, March 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 62.6 66.0 71.0 71.5 69.8
Selling, general and administrative
expense................................... 12.1 10.9 12.8 12.9 12.1
Research and development expense........... 4.7 4.7 6.4 6.5 7.0
----- ----- ----- ----- -----
Operating profit........................... 20.6 18.4 9.8 9.1 11.1
Other income (expense)..................... 0.5 -- (0.3) (0.9) 0.1
----- ----- ----- ----- -----
Income before income taxes, minority
interest and extraordinary item........... 21.1 18.4 9.5 8.2 11.2
Provision for income taxes................. 7.4 6.3 3.0 2.6 3.0
----- ----- ----- ----- -----
Income before minority interest and
extraordinary item........................ 13.7 12.1 6.5 5.6 8.2
Minority interest in (income) loss of joint
ventures.................................. 0.4 0.2 -- 0.1 (0.6)
----- ----- ----- ----- -----
Income before extraordinary item........... 14.1 12.3 6.5 5.7 7.6
Extraordinary item......................... (8.5) -- -- -- --
----- ----- ----- ----- -----
Net income................................. 22.6% 12.3% 6.5% 5.7% 7.6%
===== ===== ===== ===== =====
</TABLE>
21
<PAGE>
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31,
1999
Sales. Sales are comprised primarily of photomask sales to semiconductor
manufacturers. Sales increased 23.5% from $190.0 million in the nine months
ended March 31, 1999 to $234.7 million in the nine months ended March 31,
2000. Sales in North America, Europe and Asia increased from $111.1 million,
$39.5 million and $39.4 million, respectively, in the nine months ended March
31, 1999 to $139.5 million, $42.6 million and $52.7 million, respectively, in
the nine months ended March 31, 2000. Fees of $2.5 million from the licensing
of intellectual property related to photomask technology represented 5.6% of
the increase in sales in the nine months ended March 31, 2000. Increased
average selling price and increased unit volume both also contributed to the
increase in sales during the nine months ended March 31, 2000. Unit volume
increases represented approximately 60% of the increase in sales in the nine
months ended March 31, 2000. Average selling price increases represented the
rest of the increase in sales in the nine months ended March 31, 2000. We
continue to experience an increase in demand for advanced photomasks, those
with design technology of 0.25 micron and below, which for the quarter ended
March 31, 2000, represented approximately 47% of our total 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.
Cost of Goods Sold. Cost of goods sold consists of material, labor,
depreciation and overhead. Cost of goods sold increased 20.6% from $135.9
million in the nine months ended March 31, 1999 to $163.9 million in the nine
months ended March 31, 2000. The increase resulted primarily from higher costs
associated with increased manufacturing capacity. As we add capacity to
position ourselves for future growth, we will incur additional costs related
to new facilities and costs related to capacity expansions at existing
facilities. As a percentage of sales, cost of goods sold decreased from 71.5%
in the nine months ended March 31, 1999 to 69.8% in the nine months ended
March 31, 2000, primarily due to improved utilization of capacity.
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 14.6% from $24.6 million
in the nine months ended March 31, 1999 to $28.1 million in the nine months
ended March 31, 2000. The increases are primarily the result of increased
costs related to new facilities and initiatives, partially offset by
regularized incentive compensation expense. Selling, general and
administrative expense as a percentage of sales decreased from 12.9% in the
nine months ended March 31, 1999 to 12.0% in the nine months ended March 31,
2000, primarily due to higher sales. We anticipate that selling, general and
administrative expense will increase in absolute dollars as we add personnel
in anticipation of additional growth in sales and our business generally.
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 34.1% from $12.3 million in
the nine months ended March 31, 1999 to $16.5 million in the nine months ended
March 31, 2000. Research and development expense as a percentage of sales
increased from 6.5% in the nine months ended March 31, 1999 to 7.0% in the
nine months ended March 31, 2000. The increase was due primarily to increased
focus on research and development at our facility in Ichon, Korea 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. 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) includes interest expense,
interest income and exchange gains and losses. Other income (expense) was
($1.7 million) in the nine months ended March 31, 1999
22
<PAGE>
and $0.3 million in the nine months ended March 31, 2000. The decrease relates
primarily to lower interest expense on our credit agreement discussed below.
Provision for Income Taxes. Our tax expense has been determined in
accordance with SFAS 109 and is based on the statutory rates in effect in the
countries in which we operate. Our effective tax rate was 31% for the nine
months ended March 31, 1999. Our effective tax rate was 28% for the nine
months ended March 31, 2000. Our effective tax rate varied from the maximum
statutory rate primarily because certain of our operations in Asia are subject
to government granted tax exemptions.
Minority Interest in (Income) Loss of Joint Ventures. The minority interest
impact of our joint ventures was ($1.5 million) for the nine months ended
March 31, 2000. Minority interest reflects the partners' share of the earnings
or loss of the joint venture operations. The minority interest impact of our
joint ventures increased from a loss of $0.2 million in the nine months ended
March 31, 1999 to income of ($1.5 million) in the nine months ended March 31,
2000. Minority interest reflects the partners' share of joint venture
operations of the Shanghai, China and Hsinchu, Taiwan facilities. The increase
relates to the impact of our Taiwan operations, which commenced in January
1999.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Sales. Sales decreased 2.8% from $271.6 million in 1998 to $264.0 million
in 1999. From 1998 to 1999, sales increased in North America from $152.2
million to $157.4 million, sales decreased in Europe from $67.0 million to
$51.8 million and sales increased in Asia from $52.4 million to $54.8 million.
Competitive pricing pressure was offset by increased unit volume during this
period. Europe's sales decrease was primarily due to significant price erosion
associated with competitive pricing pressure. We experienced average selling
price decreases of approximately 11% in 1999. Unit volume increased
approximately 6% in 1999.
Cost of Goods Sold. Cost of goods sold increased from $179.4 million in
1998 to $187.4 million in 1999. The increase resulted primarily from higher
costs associated with increased manufacturing capacity offset in part by lower
costs associated with decreased sales and cost containment initiatives. As a
percentage of sales, cost of goods sold increased from 66.0% in 1998 to 71.0%
in 1999. The percentage of sales increase was primarily due to margin
compression as a result of competitive pricing pressures, 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 increased from 10.9% in 1998
to 12.8% in 1999. In addition, selling, general and administrative expense
increased 15.0% from $29.5 million in 1998 to $33.9 million in 1999 as a
result of new facilities and initiatives and incentive compensation expense at
targeted levels.
Research and Development Expense. Research and development expense
increased from $12.7 million in 1998 to $16.8 million in 1999. The increase
was due primarily to increased focus on research and development at our
facility in Ichon, Korea and our joint venture participation in the DPI
Reticle Technology Center.
Other Income (Expense). Other income (expense) was negligible in 1998 and
($0.7 million) in 1999. 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 1998 and was
31% for 1999.
Minority Interest in (Income) Loss of Joint Ventures. The minority interest
impact of our joint venture manufacturing facilities was $0.7 million in 1998
and was negligible in 1999.
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. From 1997 to 1998, sales increased in North America from $145.6
million to $152.2 million, sales increased in Europe from $63.0
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million to $67.0 million and sales decreased in Asia from $52.6 million to
$52.4 million. 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.
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 (Income) Loss of Joint Ventures. The minority interest
impact of our joint venture manufacturing facilities was $0.9 million in 1997
compared to $0.7 million in 1998, reflecting the partners' share of losses
from the joint ventures.
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 pre-tax gain on the sale.
The related provision for income taxes was $12.0 million.
Liquidity and Capital Resources
Our working capital was $71.1 million at June 30, 1999 and $33.5 million as
of March 31, 2000. The decrease in working capital was due principally to
lower cash balances resulting from capital expenditures and the December 1999
acquisition from IBM. Cash and cash equivalents were $61.3 million as of June
30, 1999 and $29.6 million as of March 31, 2000. Cash provided by operating
activities increased from $31.9 million in the nine months ended March 31,
1999 to $57.2 million in the nine months ended March 31, 2000.
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Cash used in investing activities (capital expenditures and payments for
acquisitions) was $104.3 million in the nine months ended March 31, 1999 and
$117.0 million in the nine months ended March 31, 2000. Management expects
capital expenditures for the remainder of fiscal 2000 to be approximately $50
to $70 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 $105.5 million in the nine months
ended March 31, 1999 and $28.8 million in the nine months ended March 31,
2000. Pursuant to our credit agreement with DuPont, DuPont originally agreed
to provide a credit facility in an aggregate amount of $100.0 million. This
credit facility expires in September 2001, and any loans thereunder bear
interest at LIBOR plus 0.25% per annum. At our option, advances under this
credit facility are convertible into term loans with maturities up to seven
years. We have borrowed a maximum of approximately $70.0 million under this
credit facility. As of March 31, 2000, borrowings of $12 million were
outstanding under the facility, and borrowings of approximately $55 million
were outstanding as of July 18, 2000. In March 1999, we amended our credit
agreement with DuPont to add a second credit facility with an additional
borrowing capacity of $100.0 million. The second credit facility has a term of
three years, and outstanding amounts bear interest at 0.25% per annum for the
first two years and LIBOR plus 0.25% per annum for the third year. We have
borrowed a maximum of $100.0 million under this second credit facility and, as
of March 31 and July 18, 2000, borrowings of $100.0 million were outstanding.
The amended credit agreement contains, among other things, covenants
restricting our ability to incur additional debt. We intend to use a portion
of the net proceeds to us from the common stock offering to repay all amounts
borrowed under the first credit facility. In addition, we intend to use
approximately $2.4 million of the net proceeds to us from the common stock
offering, together with all of the net proceeds of this offering, to repay all
amounts borrowed under and terminate the second credit facility. In
consideration for DuPont's agreement to guarantee our obligations under the
notes, and in addition to the repayment and termination of the second credit
facility, we will amend the first credit facility to increase the interest
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. If this offering is not completed, both credit facilities will
remain in place unamended and we do not intend to use any portion of the net
proceeds to us of the common stock offering to repay indebtedness under the
second credit 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 equipping 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 provided by operations, the DuPont
credit agreement and the common stock offering 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. If the concurrent common stock
offering is not completed, we may be required to reduce our planned capital
expenditures until alternative financing is obtained. Furthermore, there can
be no assurance that alternative sources of financing will be available upon
expiration of the DuPont credit facilities or if our capital requirements
exceed the facilities 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.
Other Matters
Changing Accounting Standards. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards, or SFAS,
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for
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hedging activities. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, with earlier application
encouraged. We do not expect that the adoption of SFAS No. 133 will have a
material adverse impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 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 the financial position or results of operations.
In April 2000, the Financial Accounting Standards Board issued Financial
Interpretation Number 44, or FIN 44, "Accounting for Certain Transactions
involving stock compensation--an interpretation of Accounting Principles Board
Opinion No. 25." FIN 44 clarifies the application of Opinion No. 25. We do not
expect that the adoption of FIN 44 will have a material adverse impact on our
financial position or results of operations.
Foreign Currency Exposure. Non-U.S. operations are subject to various risks
inherent in conducting business abroad, including price and currency exchange
controls, fluctuation in the relative values of currencies and restrictive
governmental actions. Changes in the relative values 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.
As of March 31, 2000, we held forward contracts with a notional amount of
approximately $9.6 million, a carrying amount of approximately $9.4 million
and an unrealized gain of approximately $0.2 million. There can be no
assurance that these 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 these risks will not
have a material adverse impact on our liquidity and results of operations in
the future.
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BUSINESS
Overview
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, Agilent
Technologies, Hewlett-Packard, Hyundai, IBM, Lucent Technologies, Micron
Technology, National Semiconductor, Philips, Samsung, STMicroelectronics,
Texas Instruments and UMC Group. We operate globally from 13 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 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 typical
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 an industry source, the total worldwide
market for photomasks has grown from approximately $1.3 billion in 1995 to
approximately $2.1 billion in 1999. We estimate that the photomask market in
North America, Europe and non-Japan Asia represented approximately 60% of the
worldwide market in 1999.
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 1999 merchant
photomask sales in North America, Europe and non-Japan Asia were over $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. Some other semiconductor manufacturers who have retained
captive photomask operations have 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 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
relationships with leading merchant photomask manufacturers to maintain a
consistent source of high quality photomasks.
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We believe the demand for photomasks in the semiconductor manufacturing
process is increasing due to the following trends:
. Proliferation of Semiconductor Applications. Semiconductor devices of
all types are continuing to proliferate into products, including
cellular telephones, pagers, automobiles, medical products, household
appliances, Internet and communications infrastructure, personal digital
assistants 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.
. 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, 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 as 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 semiconductor 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 smaller design features is likely to
generate increased demand for advanced photomasks that can accurately
and reliably replicate intricate design features.
. Shorter Product Lifecycles. Product lifecycles have been decreasing for
many types of electronic products, including cellular telephones,
Internet-capable devices and other consumer electronic products. Each
new product generation tends to require design changes to semiconductor
content. We believe that this trend will continue to increase
semiconductor design activity and the resulting demand for photomasks.
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, such as advanced binary masks, phase shift masks and optical
proximity correction masks, 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 to developing
advanced photomask
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technology and fabrication processes for leading-edge photomasks.
Generally, we can use the technological advancements developed by the
DPI Reticle Technology Center and our advanced facility in Ichon, Korea
to improve the capability and efficiency of 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,
including Agilent Technologies, Hewlett-Packard, Hyundai, IBM, Texas
Instruments and UMC Group. 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. In addition, we believe that our participation in the DPI
Reticle Technology Center will allow us to leverage the combined
strength and insights of the participating companies to accelerate the
development of advanced photomasks, and enable us to provide the
benefits of technological leadership 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, we
believe our recently completed Singapore facility, which we are
presently equipping, will further strengthen our competitive position in
Asia. Furthermore, a global data transmission network 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. In addition, we benefit
from beta-testing advanced production equipment and materials in the DPI
Reticle Technology Center. We also believe that our strategic
relationships with leading equipment suppliers, such as Etec Systems (an
Applied Materials company) and KLA-Tencor, help ensure our ability to
provide our customers with early access to the most advanced photomasks.
As a result of all of the foregoing measures, we believe we can rapidly
deliver to our customers the latest advances in photomask technologies.
. Leverage Our Vertically Integrated Position. We are the only photomask
manufacturer in the world that also manufactures photoblanks and
pellicles, the principal components of photomasks. As a result, we
believe we have a competitive advantage because of our ability to manage
the supply, quality and costs of these component materials. In addition,
we intend to use this capability to develop the advanced photoblanks and
pellicles necessary for the production of the next generation of
photomasks. For example, we are currently developing numerous component
material enhancements, including photoblanks for phase shift masks and
improved deep ultraviolet pellicles, for 193 nanometer and 157 nanometer
lithography, as part of an integrated effort to develop more advanced
photomasks.
. Pursue New Business Opportunities. We believe that the dynamics of the
semiconductor and microelectronics industries, and the growing
importance of precision imaging in emerging technologies, are providing
us with new business opportunities. These opportunities include
expanding our photomask design services offering and marketing our
photomask products and services into emerging markets such as biochips
and microelectromechanical systems. We will continue to evaluate our
core competencies and apply resources accordingly, including
acquisitions or joint venture partnerships with other companies, in
markets that we believe can benefit our customers and develop into
profitable growth initiatives.
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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 typically 15 to 25 separate
photomasks. 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. Chemical developers dissolve the
exposed areas 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 that 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
semiconductor 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.
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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 of photoblanks and pellicles gives us a competitive advantage in
managing the supply, quality and cost of our principal component materials. We
also sell a limited number of pellicles to third parties.
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 that have been repolished to reduce
cost and dependence on external suppliers. We manufacture approximately 70% 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.
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 purchased approximately 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. In fiscal 1999, approximately
60% of our sales were in North America, approximately 19% were in Europe and
approximately 21% were in Asia. In the nine months ended March 31, 2000,
approximately 60% of our sales were in North America, approximately 18% were
in Europe and approximately 22% were in 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 is needed, we believe we could
complete the Gresham facility within approximately six months. In Europe, our
manufacturing facilities are located in Corbeil-Essonnes, France, Rousset,
France, Hamburg, Germany and Hamilton, Scotland. In Asia, we operate a
manufacturing facility in Ichon, Korea, operate joint venture facilities in
Shanghai, China and Hsinchu, Taiwan and recently completed construction of a
new photomask production facility in Singapore, which is undergoing equipment
installation and customer qualification testing. We serve semiconductor
manufacturers in Japan through our support office in Tokyo, Japan and our
manufacturing facilities in Ichon, Korea and Shanghai, China.
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 attempt to optimize
resource allocation, thereby lowering production costs while providing
effective customer service on a local level.
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Each of our manufacturing sites is ISO 9002 or QS9000TE and ISO 14001
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.
Customers
We are a principal photomask supplier to many of the leading global
semiconductor manufacturers. Substantially all of our sales are to customers
in the semiconductor manufacturing industry. Our largest customers include the
following:
Advanced Micro Devices Hyundai Philips
Agilent Technologies IBM Samsung
AMI LSI Logic Silicon Valley Group
Atmel Lucent Technologies STMicroelectronics
Delphi Technologies Maxim Integrated Products Texas Instruments
Fujitsu Micron Technology UMC Group
Hewlett-Packard Motorola
Hexfet National Semiconductor
Our two largest customers, Lucent Technologies and STMicroelectronics, in
the aggregate, accounted for approximately 22% of our sales in fiscal 1999,
28% of our sales in fiscal 1998 and 22% of our sales in fiscal 1997, and each
individually accounted for over 10% of our sales in each of these fiscal
years. Our ten largest customers, in the aggregate, accounted for more than
60% of our sales in fiscal 1999, fiscal 1998, fiscal 1997 and the nine months
ended March 31, 2000.
We and our subsidiaries have entered into multi-year, non-exclusive supply
agreements with some of our customers, including Agilent Technologies,
Hewlett-Packard, Hyundai, IBM, Lucent Technologies and UMC Group. These
agreements generally provide us for a given period of time with a minimum
volume or percentage of purchases, subject to various conditions such as
quality of our service and timeliness of delivery.
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 semiconductor 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 customers' orders receive 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.
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 Photronics (which recently
acquired Align-Rite and PSMC) and, to a lesser extent, with other
smaller merchant photomask suppliers.
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. In Europe, we compete with Compugraphics and Photronics.
. In Asia, we compete with Dai Nippon Printing, Hoya Corporation,
Photronics, P.K. Limited, Taiwan Mask Corporation, Toppan Printing
Company and, to a lesser extent, with other smaller merchant photomask
suppliers.
. Dai Nippon Printing, Hoya Corporation and Toppan Printing Company, as
well as capitive Japanese suppliers, are the predominant suppliers to
the Japanese market.
We expect that some of our competitors will expand operations to better
meet the needs of customers and take advantage of new growth opportunities. In
addition, recent widespread consolidation in the photomask industry,
particularly in Japan, has enhanced the remaining companies' strength as
competitors. Also, captive photomask operations sometimes 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.
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 to improve our
technological leadership. 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 begun in 1997 for
developing advanced photomask technology and the fabrication of leading-edge
photomasks. The DPI Reticle Technology Center is located in a fully equipped,
freestanding 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. We recently
extended the joint venture, which is now scheduled to terminate in December
2002 but can be renewed at the discretion of the members.
We, independently and through our participation in the DPI Reticle
Technology Center, intend to continue to invest in research and development 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 binary
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, 0.15 micron and 0.13 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
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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,
pellicles that can withstand deep ultraviolet radiation 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 until
2001 pursuant to a research, development and consulting agreement with DuPont,
which will provide us with a supplement to our core research and development
program.
We recently entered into a short-term funded development agreement with
International Sematech, Inc., whereby International Sematech agreed to
partially fund the development of 157 nanometer pellicle technology, and we
agreed to develop a commercialization plan for 157 nanometer pellicles if we
determine that such development is commercially viable. Funds we receive under
this agreement are used to defray our costs under our research agreement with
DuPont.
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. However,
aspects of our photoblanks and pellicles technologies are 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.
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Facilities
We conduct manufacturing operations throughout the world. Our operations
are ISO 9002 or QS9000TE and ISO 14001 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 Type of
Location in Square 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
Corbeil-Essonnes, France........ 20,000 Leased Photomasks
Rousset, France................. 24,000 Leased Photomasks
Hamburg, Germany................ 22,000 Leased Photomasks
Hamilton, Scotland.............. 15,000 Owned Photomasks
Asia
Ichon, Korea.................... 102,000 Owned Photomasks
Shanghai, China................. 16,000 Jointly Leased Photomasks
Singapore (in qualification
testing)....................... 50,000 Owned Photomasks
Hsinchu, Taiwan................. 6,000 Jointly Leased Photomasks
</TABLE>
We own most of the manufacturing equipment in our facilities. The research
facility in Round Rock is leased to the DPI Reticle Technology Center and
primarily contains manufacturing equipment leased by the DPI
Reticle Technology Center from a third party. Facilities and property located
in Santa Clara, Corbeil-Essonnes, Rousset and Hamburg are leased under leases
that expire in 2001, 2009, December 2000 and 2022. We also maintain customer
service data centers in leased facilities in Mesa, Arizona, Colorado Springs,
Colorado, Melbourne, Florida, Hillsboro, Oregon, Allentown, Pennsylvania,
Dallas, Texas and Tokyo, Japan.
A number of our facilities are in seismically active areas. Although we
have obtained property damage and 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 March 31, 2000, we employed approximately 1,750 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
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and regulations may be enacted in the future, which may 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
before such date. The Environmental Protection Agency is reviewing a
groundwater contamination issue at our Danbury, Connecticut site under
voluntary corrective action. Any such contamination is believed to be
historical and therefore any environmental liabilities would be covered by the
indemnification agreement with DuPont.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age as of March 31, 2000 and
position with DuPont Photomasks of each person who is an executive officer or
director of DuPont Photomasks.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- ----------
<C> <C> <S>
Peter S. Kirlin................ 39 Chairman of the Board and Chief Executive
Officer
Preston M. Adcox............... 56 President, Chief Operating Officer and
Director
Paul S. Chipman................ 43 Executive Vice President--Technology and
Chief Technology Officer
Gerard Cognie.................. 56 Executive Vice President--European
Operations
John M. Lynn................... 42 Executive Vice President, General Counsel
and Secretary
Kenneth A. Rygler.............. 56 Executive Vice President--Worldwide
Marketing and Strategic Planning
Gerd Stoecker.................. 57 Executive Vice President--Finance and
Chief Financial Officer
John L. Doyle.................. 68 Director
John W. Himes.................. 55 Director
John C. Hodgson................ 56 Director
Gary W. Pankonien.............. 49 Director
Susan Vladuchick Sam........... 52 Director
John C. Sargent................ 62 Director
Marshall C. Turner............. 58 Director
</TABLE>
Peter S. Kirlin is our Chairman of the Board and Chief Executive Officer.
From 1986 to 1988, he worked at American Cyanamid Corporation as a project
leader and conducted post-graduate research projects at the University of
Munich's Institute of Physical Chemistry. From 1988 until joining us in May
2000, he held various positions with ATMI, Inc., a supplier of materials,
equipment and services used in the manufacture of semiconductors, most
recently as Group Vice President, Technologies and Services.
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 from 1990 to early 1995. From 1988 to 1999, he served on the
Board of Directors of Semiconductor Industry Suppliers Association (formerly
Semi-Sematech), an organization representing U.S. equipment and material
suppliers to the semiconductor manufacturing industry. He has been one of our
directors since May 2000.
Paul S. Chipman is our Executive Vice President--Technology and Chief
Technology Officer, a position he has held since March 1999. He joined us as a
result of our acquisition of Perkin Elmer's photomask operations in 1990 and
has held a number of manufacturing and technology management positions. He is
also General Manager of the DPI Reticle Technology Center, LLC.
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.
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
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DuPont as a lawyer in 1985. He held a number of legal advisory positions with
DuPont before joining us in 1997.
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.
Gerd Stoecker is our Executive Vice President--Finance and Chief Financial
Officer, a position he has held since June 2000. From 1981 to 1984, he was
Vice President of International Finance for Atari Inc., a producer of
computers and electronic games. From 1984 to 1998, he held various positions
with Tandem Computers Incorporated, a provider of computer systems and
client/server solutions, most recently as Vice President and Treasurer.
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 has been one of our directors since April 1996.
John W. Himes is Senior 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 DuPont. He has been one of our directors since January 1998.
John C. Hodgson is Group Vice President and General Manager of DuPont
iTechnologies with additional responsibility for Advanced Fiber Systems,
Nonwovens and Corian, a position he assumed in February 2000. He has been with
DuPont for over 30 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 1996 until assuming his current position, Mr.
Hodgson served as Vice President and General Manager of the Photopolymer and
Electronic Materials business unit. He has been one of our directors since
April 1996.
Gary W. Pankonien is the President and Chief Operating Officer and serves
on the board of directors of CALEB Technologies, Corp. He was previously
Chairman and Chief Executive Officer of 1st TECH Molding and a private
investor. He served 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 offshore operations. He
has been one of our directors since April 1996.
Susan Vladuchick Sam is a private consultant, having retired from DuPont in
1999. She joined DuPont in 1969 and 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, Director of Human Development and Personnel Relations from
1995 to 1997 and Director of Operations--U.S. Region and Vice Chair of the
Operations Network from 1997 to 1999. Ms. Sam currently serves on the College
of Engineering & Science Advisory Board for Clemson University and is a past
Alumni Trustee for Grove City College. She has been one of our directors since
January 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
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DuPont. He assumed the position of Vice President and Treasurer of DuPont in
1992. He has been one of our directors since December 1995.
Marshall C. Turner is an independent consultant and investor in technology
companies. Mr. Turner is a director of the Alliance Technology Fund, five
privately held, early stage companies, and two private investment companies.
He is also the Vice-Chairman of the Board of the Smithsonian's National Museum
of Natural History, and a director of PBS Enterprises, Inc., and of The George
Lucas Educational Foundation. From 1981 through 1998, he was a founding
general partner of Taylor & Turner Associates, Ltd., the general partner of
several venture partnerships. He has been one of our directors since April
1996. He served on an interim basis from June 1999 to May 2000 as the Chairman
of our Board of Directors and Chief Executive Officer.
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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.
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,
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.
We and DuPont may enter into additional or modified arrangements and
transactions in the future. Any such future arrangements and transactions will
be determined through negotiation between DuPont and us. We have adopted a
policy that all future agreements between us and DuPont 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 DuPont and us.
Administrative Service Agreements
Prior to May 2000, we and DuPont were parties to several transitional
administrative service agreements, pursuant to which DuPont provided various
services to us, including tax compliance, information systems support and
workers' compensation administration. We anticipate that DuPont may continue
to provide us with these or similar administrative services in future periods.
We paid DuPont $2.4 million for services provided under the administrative
service agreements in fiscal 1999 and $1.8 million in the nine months ended
March 31, 2000. With the exception of the administrative service agreement
entered into by the respective subsidiaries of DuPont and our company in
Ichon, 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 was limited to
payments made to DuPont thereunder. With respect to the administrative service
agreement covering the operations in Ichon, Korea, DuPont's subsidiary was not
required to provide any guarantee or warranty of any nature and could not be
held liable for any claims, damages or liabilities of any kind resulting from
the furnishing of the services thereunder.
Research Agreements
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 and general consulting services, 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
the agreement will automatically renew until terminated by either DuPont or us
pursuant to certain procedures set forth in the research, development and
consulting agreement.
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On May 1, 2000, we entered into a research agreement with DuPont, subject
to the terms and conditions of the research, development and consulting
agreement described above. In the new agreement, DuPont agreed to undertake a
research project involving research and materials development in the area of
advanced photomask technology. DuPont granted us a royalty-bearing, exclusive
license to the technology developed under the research agreement for 157
nanometer pellicles. We will provide DuPont with a right of first refusal to
supply us with materials produced using the technology, and we will pay DuPont
a royalty on the sale of 157 nanometer pellicles manufactured using those
materials. In consideration for DuPont's prior work in the field of pellicles,
we paid DuPont $250,000 at the commencement of the research agreement, and we
will pay DuPont a total of approximately $2.5 million for the services
provided by DuPont, payable in equal quarterly installments over the term of
the research agreement. In addition, we will pay approximately $138,000 to
DuPont for equipment leasing and approximately $175,000 for materials
synthesis. The new research agreement terminates on December 31, 2001.
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. We are required to pay DuPont an
amount equal to the tax benefit to us, when realized, of any loss we incurred
in connection with the sale of our 31% equity interest in DuPont Korea, Ltd.
to DuPont.
The tax indemnification agreement requires 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
schedule based on when the claim is filed: DuPont bears 100% of the liability
associated with claims filed by us with regard to such contamination on or
prior to June 13, 1997; DuPont's liability for claims filed following June 13,
1997 declines at the rate of 20% per year; and DuPont has no liability for
such claims filed following June 13, 2001.
The environmental indemnification agreement includes procedures for notice
and payment of indemnification claims and generally provides that the party
bearing the majority of the liability will assume the defense of such claim
and will control any negotiation or remediation activities.
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Credit Agreement
We have entered into a credit agreement with DuPont. Pursuant to this
credit agreement, DuPont originally agreed to provide a credit facility in an
aggregate amount of $100 million. This credit facility expires in September
2001 and any loans thereunder bear interest at LIBOR plus 0.25% per annum. At
our option, advances under this credit facility are convertible into term
loans with maturities up to seven years. We have borrowed a maximum of
approximately $70 million under this credit facility. As of March 31, 2000,
borrowings of approximately $12 million were outstanding, and borrowings of
approximately $55 million were outstanding as of July 18, 2000. In March 1999,
we amended our credit agreement with DuPont to add a second credit facility
with an additional borrowing capacity of $100 million. The second credit
facility has a term of three years, and outstanding amounts bear interest at
0.25% per annum for the first two years and LIBOR plus 0.25% per annum for the
third year. As of March 31 and July 18, 2000, borrowings of $100 million were
outstanding under this credit facility. The amounts loaned under the amended
credit agreement are unsecured, and the amended credit agreement contains
various representations, covenants and events of default. For example, the
amended 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 then-
existing indebtedness, and the indebtedness under the amended credit
agreement.
We intend to use a portion of the net proceeds to us of the common stock
offering to repay all amounts borrowed under the first credit facility with
DuPont. We intend to use the net proceeds of this offering, along with
approximately $2.4 million of the net proceeds to us from the common stock
offering, to repay all amounts borrowed under and terminate the second credit
facility. In consideration for DuPont's agreement to guarantee our obligations
under the notes, and in addition to the repayment and termination of the
second credit facility, we will amend the first credit facility to increase
the interest 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.
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.
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 at least 20% of our total outstanding
common stock; or
. upon 90 days' written notice if we purport to assign or otherwise
transfer the corporate tradename and trademark agreement without
DuPont's written consent, if we use the tradename "DuPont" other than
under the terms of the corporate tradename and trademark agreement or if
DuPont ceases to be the largest holder of our common stock.
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,
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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 of 1933. 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 of 1933. DuPont and its
assignees are 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.
Teflon AF Agreement
In June 2000, DuPont entered into an agreement with us to supply us with
all of our requirements for Teflon AF fluoropolymer resins for use in making
pellicles. The agreement has an initial term of three years, and is
automatically renewed for an additional year on each anniversary date of the
agreement unless we or DuPont decline to renew, in which case the agreement
will terminate upon the expiration of the remaining term. The agreement also
provides us with a license to use the patent underlying Teflon AF if DuPont
ceases to make Teflon AF, terminates the agreement or sells its Teflon AF
business.
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DESCRIPTION OF NOTES
We will issue the notes under an indenture among DuPont Photomasks, Inc.,
E. I. du Pont de Nemours and Company and Chase Bank of Texas, N.A., as
trustee. We have filed the form of the indenture as an exhibit to the
registration statement. You may request a copy of the form of the indenture
from the trustee.
We have summarized portions of the indenture below. The summary is not
complete. We urge you to read the indenture because it defines your rights as
a holder of the notes. In this section, "DuPont Photomasks", "our", "we" and
"us" each refers only to DuPont Photomasks, Inc. and not to any of our
subsidiaries.
General
The notes are unsecured general obligations of DuPont Photomasks
subordinate in right of payment to certain other obligations of DuPont
Photomasks and convertible into common stock as described below. The notes
will be limited to $100 million aggregate principal amount and will mature on
July 24, 2004 unless earlier redeemed at your option upon a fundamental
change, as defined below under "--Redemption at Your Option."
The indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness, as defined
below under "--Subordination of Notes", or the issuance or repurchase of
securities by DuPont Photomasks. The indenture contains no covenants or other
provisions to protect holders of the notes in the event of a highly leveraged
transaction or a change in control, except to the extent described below under
"--Redemption at Your Option."
We will not pay any interest on the notes. Thus, if you hold your notes to
maturity, we will pay you $1,000 for each $1,000 principal amount of notes.
Guarantee
Under the indenture, DuPont will irrevocably and unconditionally guarantee
the due and punctual payment of the principal of, and all other amounts
payable under, the notes when and as the same shall become due and payable,
whether on the stated maturity, upon acceleration, or redemptions in
connection with a fundamental change, as defined below. DuPont has:
. Agreed that its obligations under the guarantee will be as if it were
principal obligor and not merely surety, and will be enforceable
irrespective of any invalidity, irregularity or unenforceability of the
notes or the indenture; and
. Waived its right to require the trustee to pursue or exhaust its legal
or equitable remedies against us prior to exercising its rights under
the guarantee.
The guarantee will not be discharged with respect to any note except by
payment in full of the principal and all other amounts payable on the notes.
Moreover, if at any time any amount paid under a note is rescinded or must
otherwise be restored, the rights of the holders of notes under the guarantee
will be reinstated with respect to such payments as though such payments had
not been made.
The guarantee is not subordinated and will rank pari passu with all other
unsecured and unsubordinated debt of DuPont.
DuPont is not guaranteeing our obligation to provide common stock upon
conversion of the notes.
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Form, Denomination and Registration
We will issue the notes in fully registered form, without coupons, in
denominations of $1,000 principal amount and $1,000 multiples.
Global Note, Book-Entry Form. The notes will be represented by one or more
global notes, which will be deposited with, or on behalf of, DTC and
registered in the name of Cede & Co. as DTC's nominee. Except as set forth
below, the global note may be transferred, in whole or in part, only to
another nominee of DTC or to a successor of DTC or its nominee.
You may hold your interests in the global note directly through DTC if you
are a participant in DTC, or indirectly through organizations which are
participants in DTC. Transfers between participants will be effected in the
ordinary way in accordance with DTC rules and will be settled in clearing
house funds. The laws of some states require that certain persons take
physical delivery of securities in definitive form. Consequently, the ability
to transfer beneficial interests in the global note to such persons may be
limited.
If you are not a DTC participant, you may beneficially own interests in the
global note held by DTC only through participants, or certain banks, brokers,
dealers, trust companies and other parties that clear through or maintain a
custodial relationship with a participant, either directly or indirectly,
which we refer to as indirect participants. So long as Cede & Co., as the
nominee of DTC, is the registered owner of the global note, Cede for all
purposes will be considered the sole holder of the global note. Except as
provided in limited circumstances described in the indenture, owners of
beneficial interests in the global note will not be entitled to have
certificates registered in their names and will not be considered the holders
of the global note.
We will pay the redemption price of the global note to Cede & Co. by wire
transfer of immediately available funds on the redemption date. Neither DuPont
Photomasks, DuPont, the trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Payments by participants to owners of beneficial interests in the principal
amount represented by the global note held through such participants will be
the responsibility of such participants, as is now the case with securities
held for the accounts of customers registered in "street name."
Because you cannot hold a physical certificate representing your interest
in the global note and because DTC can only act on behalf of participants,
your ability to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the absence of a physical certificate
representing your interest in the global note.
None of DuPont Photomasks, DuPont, the trustee or any registrar, paying
agent or conversion agent under the indenture will have any responsibility for
the performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised DuPont Photomasks and DuPont that it will take any
action permitted to be taken by a holder of notes, including, without
limitation, the presentation of notes for exchange as described below, only at
the direction of one or more participants to whose account with DTC interests
in the global note are credited, and only in respect of the principal amount
of the notes represented by the global note as to which such participant or
participants has or have given such direction.
DTC has advised us that it is a limited purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the
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Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC was
created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust companies
and clearing corporations and may include other organizations such as the
initial purchasers of the notes. Certain of such participants or their
representatives, together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global note among participants, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed
within 90 days, we will cause notes to be issued in definitive registered form
in exchange for the global note.
Conversion of Notes
You may convert your notes into common stock at any time after the original
issuance of the notes through the close of business on the final maturity date
of the notes unless earlier redeemed at your option upon a fundamental change,
as described below. You may convert the principal amount of any notes, in
whole or in part, only in denominations of $1,000 or $1,000 multiples at the
conversion price, subject to adjustment as described below. No payment or
other adjustment will be made on conversion of any notes for dividends on any
common stock issued upon conversion. We are not required to issue fractional
shares of common stock upon conversion of notes and, instead, will pay a cash
adjustment based upon the market price of common stock on the last business
day prior to the date of conversion. You may convert a note which you have
elected to be redeemed upon a fundamental change, as defined below, only if
you withdraw your election to redeem in accordance with the terms of the
indenture.
The initial conversion price of $106.26 per share of common stock is
subject to adjustment upon certain events, as set forth in the indenture,
including:
(1) The issuance of common stock as a dividend or distribution on the
common stock;
(2) The issuance to all holders of common stock of rights or warrants to
purchase common stock at less than the current market price of the common
stock;
(3) Subdivisions and combinations of the common stock;
(4) The distribution to all holders of common stock of capital stock,
other than common stock, or evidences of indebtedness of DuPont Photomasks
or of assets, including securities, but excluding those rights, warrants,
dividends and distributions referred to in (1), (2) or (3) above or those
paid in cash;
(5) Distributions consisting of cash, excluding any quarterly cash
dividend on the common stock to the extent that the aggregate cash dividend
per share of common stock in any quarter does not exceed the greater of:
(x) The amount per share of common stock of the next preceding
quarterly cash dividend on the common stock to the extent that such
preceding quarterly dividend did not require an adjustment of the
conversion price pursuant to this clause (5), as adjusted to reflect
subdivisions or combinations of the common stock, and
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(y) 3.75% of the average of the last reported sale price of the
common stock during the ten trading days immediately prior to the date
of declaration of such dividend,
and excluding any dividend or distribution in connection with the
liquidation, dissolution or winding up of DuPont Photomasks. If an
adjustment is required to be made as set forth in this clause (5) as a
result of a distribution that is a quarterly dividend, such adjustment
would be based upon the amount by which such distribution exceeds the
amount of the quarterly cash dividend permitted to be excluded pursuant to
this clause (5). If an adjustment is required to be made as set forth in
this clause (5) as a result of a distribution that is not a quarterly
dividend, such adjustment would be based upon the full amount of the
distribution;
(6) Payment relating to a tender offer or exchange offer by DuPont
Photomasks or any subsidiary of DuPont Photomasks for the common stock to
the extent that the cash and value of any other consideration included in
such payment per share of common stock exceeds the current market price per
share of common stock on the trading day next succeeding the last date on
which tenders or exchanges may be made pursuant to such tender or exchange
offer; and
(7) Payment relating to a tender offer or exchange offer by a person
other than DuPont Photomasks or any subsidiary of DuPont Photomasks or
DuPont or any subsidiary of DuPont in which, as of the closing date of the
offer, the board of directors is not recommending rejection of the offer.
This adjustment will only be made if:
. The tender offer or exchange offer is for an amount that increases
the offeror's ownership of common stock to more than 25% of the
total shares of common stock outstanding; and
. The cash and value of any other consideration included in such
payment per share of common stock exceeds the current market price
per share of common stock on the business day next succeeding the
last date on which tenders or exchanges may be made pursuant to such
tender or exchange offer.
This adjustment will generally not be made, however, if, as of the closing
of the offer, the offering documents with respect to such offer disclose a
plan or an intention to cause DuPont Photomasks to consolidate or merge, or
a sell all or substantially all of its assets.
The indenture will provide that if we implement a stockholders' rights
plan, the rights plan must provide that, subject to customary exceptions, upon
conversion of the notes you will receive, in addition to the common stock
issuable upon conversion, the rights whether or not such rights have separated
from the common stock at the time of such conversion.
In the case of:
. Any reclassification of the common stock; or
. A consolidation, merger or combination involving DuPont Photomasks or a
sale or conveyance to another person of the property and assets of
DuPont Photomasks as an entirety or substantially as an entirety,
in each case as a result of which holders of common stock shall be entitled to
receive stock, other securities, other property or assets, including cash,
with respect to or in exchange for such common stock, the holders of the notes
then outstanding will generally be entitled after the reclassification,
consolidation, merger, combination, sale or conveyance to convert such notes
into the kind and amount of shares of stock, other securities or other
property or assets, including cash, which they would have owned or been
entitled to receive upon the reclassification, consolidation, merger,
combination, sale or conveyance had such notes been converted into common
stock immediately prior to such reclassification, consolidation, merger,
combination, sale or conveyance assuming that a holder of notes would not have
exercised any rights of election as to the stock, other securities or other
property or assets, including cash, receivable in connection with such
transaction.
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If we make a taxable distribution to holders of common stock or in certain
other circumstances requiring an adjustment to the conversion price, the
holders of notes may, in certain circumstances, be deemed to have received a
distribution subject to U.S. income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of common stock. See "Material Federal Income Tax
Considerations."
We may, from time to time and to the extent permitted by law, reduce the
conversion price by any amount for any period of at least 20 days, in which
case we shall give at least 15 days' notice of such reduction, if our board of
directors has made a determination that such reduction would be in the best
interests of DuPont Photomasks, which determination shall be conclusive. We
may, at our option, make such reductions in the conversion price, in addition
to those set forth above, as our Board of Directors deems advisable to avoid
or diminish any income tax to holders of common stock resulting from any
dividend or distribution of stock or rights to acquire stock or from any event
treated as such for income tax purposes. See "Material Federal Income Tax
Considerations."
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then
in effect; provided that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. Except as stated above, the conversion price will not be adjusted
for the issuance of common stock or any securities convertible into or
exchangeable for common stock or carrying the right to purchase any of the
foregoing.
The indenture will require us to provide sufficient shares of our common
stock for issuance upon conversion of the notes. If any of these shares
require registration with or approval of any governmental authority under any
federal or state law before the shares may be validly issued upon conversion,
we must in good faith and as expeditiously as possible endeavor to secure the
registration or approval. In addition, to the extent that our common stock is
listed on a national securities exchange or automated quotation system, we
must list all common stock issuable upon conversion of the notes on the same
exchange or system.
No Optional Redemption by DuPont Photomasks
We may not redeem the notes prior to the final maturity date.
Redemption at Your Option
If a fundamental change, as defined below, occurs at any time prior to July
24, 2004, each holder of notes shall have the right, at the holder's option,
to require DuPont Photomasks to redeem any or all of such holder's notes on
the date that is 30 days after the date of our notice of such fundamental
change, which we will refer to as the repurchase date. The notes will be
redeemable in $1,000 multiples of the principal amount. We shall redeem such
notes at a price equal to 100% of the principal amount to be redeemed.
We will mail to all holders of record of the notes a notice of the
occurrence of a fundamental change and of the redemption right arising as a
result of the fundamental change on or before the tenth day after the
occurrence of such fundamental change. We are also required to deliver the
trustee a copy of such notice. To exercise the redemption right, a holder of
notes must deliver, on or before the 30th day after the date of our notice of
a fundamental change (the "fundamental change expiration time"), written
notice of the holder's exercise of such right, together with the notes to be
so redeemed, duly endorsed for transfer, to us or an agent designated by us
for such purpose. Payment for notes surrendered for redemption, and not
withdrawn, prior to the fundamental change expiration time will be made
promptly following the repurchase date.
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The term "fundamental change" means the occurrence of any transaction or
event in connection with which all or substantially all common stock shall be
exchanged for, converted into, acquired for or constitute the right to
receive, consideration which is not all or substantially all common stock
listed, or, upon consummation of or immediately following such transaction or
event, which will be listed, on a U.S. national securities exchange or
approved for quotation on the Nasdaq National Market or any similar U.S.
system of automated dissemination of quotations of securities prices, whether
by means of an exchange offer, liquidation, tender offer, consolidation,
merger, combination, reclassification, recapitalization or otherwise.
We will comply with the provisions of Rule 13e-4 and any other tender offer
rules under the Exchange Act to the extent then applicable in connection with
the redemption rights of the holders of notes in the event of a fundamental
change.
The redemption rights of the holders of notes upon a fundamental change
could discourage a potential acquiror of DuPont Photomasks. The term
"fundamental change" is limited to certain specified transactions and may not
include other events that might adversely affect our financial condition, nor
would the requirement that we offer to redeem the notes upon a fundamental
change necessarily afford the holders of the notes protection in the event of
a highly leveraged transaction, reorganization, merger or similar transaction
involving DuPont Photomasks.
If a fundamental change were to occur, we cannot assure you that we will
have sufficient funds to pay the redemption price for all the notes tendered
by the holders, although DuPont would be required to pay the redemption price
under its guarantee. In addition, any credit agreements or other agreements
relating to other indebtedness to which we are or become a party may contain
restrictions or prohibitions on our ability to redeem notes or may provide
that a fundamental change constitutes an event of default under such
agreement. If a fundamental change occurs at a time when we are prohibited
from redeeming the notes, we could seek the consent of our then lenders to the
redemption of the notes or could attempt to refinance the borrowings that
contain such prohibition. If we do not obtain such a consent or repay such
borrowings, we would remain prohibited from redeeming the notes, although
DuPont would be required to pay the redemption price under the guarantee. In
that case, our failure to redeem tendered notes would constitute an event of
default under the indenture, and may constitute a default under the terms of
other indebtedness that we may enter into from time to time. In these
circumstances or if the occurrence of a fundamental change itself constitutes
an event of default under senior indebtedness, the subordination provisions in
the indenture would restrict or prohibit payments to the holders of notes by
us, although DuPont would be required to pay the redemption price under the
guarantee.
Subordination of Notes
The payment of the principal of, and all other amounts payable under, the
notes is subordinated, other than amounts payable on or with respect to the
DuPont guarantee, to the extent provided in the indenture, to the prior
payment in full of all senior indebtedness. This subordination will not
prevent the occurrence of any event of default. The notes are also effectively
subordinated to all indebtedness and other liabilities, including trade
payables and lease obligations, if any, of our subsidiaries.
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Upon any distribution of assets of DuPont Photomasks upon:
. Any dissolution, winding up, bankruptcy, insolvency, liquidation,
reorganization, receivership or similar proceeding relating to DuPont
Photomasks or its property;
. An assignment for the benefit of creditors; or
. Any marshaling of the assets or liabilities of DuPont Photomasks;
the holders of senior indebtedness will be entitled to receive payment in
full, in cash or other payment satisfactory to the holders of senior
indebtedness, of all obligations due in respect of such senior indebtedness
before the holders of the notes will be entitled to receive any payment of the
principal or any other amounts payable in respect of the notes, other than
amounts payable on or with respect to the DuPont guarantee. Until all
obligations with respect to senior indebtedness are paid in full in cash or
other payment is made satisfactory to the holders of senior indebtedness, any
payment on the notes to which the holders of notes would be entitled, other
than amounts payable on or with respect to the DuPont guarantee, shall be made
to the holders of senior indebtedness. By reason of the subordination, in the
event of our dissolution, winding up, bankruptcy, insolvency, liquidation,
reorganization, receivership or similar proceeding relating to DuPont
Photomasks or its property, an assignment for the benefit of creditors or any
marshaling of the assets or liabilities of DuPont Photomasks, holders of
senior indebtedness may receive more, ratably, and the holders of notes may
receive less, ratably, than the other creditors of DuPont Photomasks.
In the event of any acceleration of the notes because of an event of
default, the holders of any senior indebtedness then outstanding would be
entitled to payment in full in cash or other payment satisfactory to the
holders of senior indebtedness of all obligations in respect of such senior
indebtedness before the holders of the notes are entitled to receive any
payment or distribution in respect thereof, other than amounts payable on or
with respect to the DuPont guarantee. The indenture will require that we
promptly notify holders of senior indebtedness if payment of the notes is
accelerated because of an event of default.
We also may not make any payment upon or in respect of the notes, including
upon redemptions in connection with a fundamental change, if:
. A default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of senior indebtedness occurs and
is continuing beyond any applicable period of grace (a "payment
default"); or
. Any other default occurs and is continuing with respect to designated
senior indebtedness that permits holders of such designated senior
indebtedness as to which the default relates to accelerate its maturity
and the trustee receives a notice of such default (a "payment blockage
notice") from us or other person permitted to give such notice under the
indenture (a "non-payment default").
Payments on the notes may and shall be resumed:
. In case of a payment default, upon the date on which such default is
cured or waived or ceases to exist; and
. In case of a non-payment default, the earlier of the date on which such
non-payment default is cured or waived or ceases to exist or 179 days
after the date on which the applicable payment blockage notice is
received.
No new period of payment blockage may be commenced pursuant to a payment
blockage notice unless and until 365 days have elapsed since the initial
effectiveness of the immediately prior payment blockage notice and all
scheduled payments of principal on the notes that have come due have been paid
in full in cash. No non-payment default that existed or was continuing on the
date of delivery of any payment blockage notice to the trustee shall be, or
shall be made, the basis for a subsequent payment blockage notice.
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If notwithstanding the foregoing, the trustee or any holder of the notes
receives any payment or distribution of assets of DuPont Photomasks of any
kind in contravention of any of the subordination provisions of the indenture,
whether in cash, property or securities, including, without limitation, by way
of set-off or otherwise, in respect of the notes before all senior
indebtedness is paid in full in cash or other payment satisfactory to holders
of senior indebtedness, then such payment or distribution will be held by the
recipient in trust for the benefit of holders of senior indebtedness or their
representatives to the extent necessary to make payment in full in cash or
payment satisfactory to the holders of senior indebtedness of all senior
indebtedness remaining unpaid, after giving effect to any concurrent payment
or distribution, or provision therefor, to or for the holders of senior
indebtedness.
The term "senior indebtedness" means the principal of, premium, if any,
interest, including all interest accruing subsequent to the commencement of
any bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding, and rent payable on
or in connection with, and all fees, costs, expenses and other amounts accrued
or due on or in connection with, indebtedness of DuPont Photomasks, whether
outstanding on the date of the indenture or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by us, including all deferrals,
renewals, extensions or refundings of, or amendments, modifications or
supplements to, the foregoing, unless in the case of any particular
indebtedness the instrument creating or evidencing the same or the assumption
or guarantee thereof expressly provides that such indebtedness shall not be
senior in right of payment to the notes or expressly provides that such
indebtedness is pari passu or junior to the notes. Notwithstanding the
foregoing, the term senior indebtedness shall not include indebtedness of
DuPont Photomasks to any of its subsidiaries, a majority of the voting stock
of which is owned, directly or indirectly, by DuPont Photomasks.
The term "indebtedness" means, with respect to any person, and without
duplication:
(a) All indebtedness, obligations and other liabilities, contingent or
otherwise, of such person for borrowed money, including obligations in
respect of overdrafts, foreign exchange contracts, currency exchange
agreements, interest rate protection agreements, and any loans or advances
from banks, whether or not evidenced by notes or similar instruments, or
evidenced by bonds, debentures, notes or similar instruments, whether or
not the recourse of the lender is to the whole of the assets of such person
or to only a portion thereof, other than any account payable or other
accrued current liability or obligation incurred in the ordinary course of
business in connection with the obtaining of materials or services;
(b) All reimbursement obligations and other liabilities, contingent or
otherwise, of such person with respect to letters of credit, bank
guarantees or bankers' acceptances;
(c) All obligations and liabilities, contingent or otherwise, in respect
of leases of such person required, in conformity with generally accepted
accounting principles, to be accounted for as capitalized lease obligations
on the balance sheet of such person and all obligations and other
liabilities, contingent or otherwise, under any lease or related document,
including a purchase agreement, in connection with the lease of real
property which provides that such person is contractually obligated to
purchase or cause a third party to purchase the leased property and thereby
guarantee a minimum residual value of the leased property to the lessor and
the obligations of such person under such lease or related document to
purchase or to cause a third party to purchase such leased property;
(d) All obligations of such person, contingent or otherwise, with
respect to an interest rate or other swap, cap or collar agreement or other
similar instrument or agreement or foreign currency hedge, exchange,
purchase or similar instrument or agreement;
(e) All direct or indirect guarantees or similar agreements by such
person in respect of, and obligations or liabilities, contingent or
otherwise, of such person to purchase or otherwise acquire or otherwise
assure a creditor against loss in respect of, indebtedness, obligations or
liabilities of another person of the kind described in clauses (a) through
(d);
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(f) Any indebtedness or other obligations described in clauses (a)
through (d) secured by any mortgage, pledge, lien or other encumbrance
existing on property which is owned or held by such person, regardless of
whether the indebtedness or other obligation secured thereby shall have
been assumed by such person; and
(g) Any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation
or liability of the kind described in clauses (a) through (f).
The term "designated senior indebtedness" means our obligations under any
senior indebtedness with respect to which the instrument creating or
evidencing the same or the assumption or guarantee thereof (or related
agreements or documents to which we are a party) expressly provides that such
senior indebtedness shall be "designated senior indebtedness" for purposes of
the indenture; provided that such instrument, agreement or other document may
place limitations and conditions on the right of such senior indebtedness to
exercise the rights of designated senior indebtedness.
As of March 31, 2000, we had approximately $112.0 million of indebtedness
outstanding that would have constituted senior indebtedness, and our
subsidiaries had approximately $23.3 million of indebtedness and other
liabilities (including trade and other payables) outstanding to which the
notes would have been effectively subordinated. As of July 18, 2000, we had
incurred an additional approximately $43.0 million of indebtedness under our
credit agreement with DuPont that would constitute senior indebtedness. The
indenture will not limit the amount of additional indebtedness, including
senior indebtedness, which we can create, incur, assume or guarantee, nor will
the indenture limit the amount of indebtedness or other liabilities that any
subsidiary can create, incur, assume or guarantee.
We are obligated to pay reasonable compensation to the trustee and to
indemnify the trustee against certain losses, liabilities or expenses incurred
by it in connection with its duties relating to the notes. The trustee's
claims for such payments will generally be senior to those of the holders of
the notes in respect of all funds collected or held by the trustee.
Events of Default; Notice and Waiver
An event of default is defined in the indenture to include:
. A default in payment of the principal amount of the notes at maturity or
otherwise;
. The failure of DuPont Photomasks or DuPont continuing for 60 days after
notice, to observe or perform any other covenants in the indenture; or
. Certain events involving bankruptcy, insolvency or reorganization of
DuPont Photomasks, DuPont or any of their significant subsidiaries.
The indenture provides that the trustee may withhold notice to the holders
of the notes of any default, except in payment of principal with respect to
the notes, if the trustee considers it in the interest of the holders of the
notes to do so.
The indenture provides that if an event of default shall have occurred and
be continuing, the trustee or the holders of not less than 25% in principal
amount of the notes then outstanding may declare the principal of the notes to
be due and payable immediately. In the case of certain events of bankruptcy or
insolvency of DuPont Photomasks or DuPont, the principal of the notes shall
automatically become and be immediately due and payable. However, if we cure
all defaults (except the nonpayment of principal of any of the notes which
shall have become due by acceleration) and certain other conditions are met,
with certain exceptions, such declaration may be canceled and past defaults
may be waived by the holders of a majority of the principal amount of the
notes then outstanding.
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The indenture provides that any payment of principal that is not made when
due (whether or not such payment is permitted to be made under the
subordination provisions described above) will accrue interest, to the extent
legally permissible, at a rate of 2% per year from the date on which such
payment was required under the terms of the indenture until the date of
payment.
The holders of a majority in principal amount of the notes then outstanding
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee, subject to certain
limitations specified in the indenture.
The indenture provides that no holder of the notes may pursue any remedy
under the indenture, except for a default in the payment of principal on the
notes, unless such holder shall have previously given to the trustee written
notice of a continuing event of default, and the holders of at least 25% in
principal amount of the outstanding notes shall have made a written request,
and offered reasonable indemnity, to the trustee to pursue the remedy, and the
trustee shall not have received from the holders of a majority in principal
amount of the outstanding notes a direction inconsistent with such request and
shall have failed to comply with such request within 60 days after receipt of
such request.
Modification of the Indenture
The indenture contains provisions permitting DuPont Photomasks, DuPont and
the trustee, with the consent of the holders of a majority in principal amount
of the notes at the time outstanding, to modify the indenture or any
supplemental indenture or the rights of the holders of the notes, except that
no such modification shall:
. Extend the fixed maturity of any note;
. Reduce the principal amount of the notes or premium, if any, on the
notes;
. Change the obligation of DuPont Photomasks to redeem any note upon the
happening of any fundamental change in a manner adverse to the holders
of the notes;
. Impair the right of a holder to institute suit for the payment of the
notes;
. Change the currency in which the notes are payable;
. Impair the right to convert the notes into common stock subject to the
terms set forth in the indenture;
. Modify the provisions of the indenture with respect to the subordination
of the notes in a manner adverse to the holders of the notes; or
. Modify the provisions of the indenture relating to the obligations of
DuPont in respect of the due and punctual payment of the principal of
and all other amounts payable under the notes in a manner adverse to the
holders of the notes;
without the consent of each holder of a note so affected or reduce the
percentage of notes whose holders are required to consent to any modification
of the indenture or any supplemental indenture, in each case without the
consent of the holders of all of the notes then outstanding. The indenture
also provides for certain modifications of its terms without the consent of
the holders of the notes.
Information Concerning the Trustee
We have appointed Chase Bank of Texas, N.A., as trustee under the indenture
and paying agent, conversion agent, note registrar and custodian with regard
to the notes. The trustee or its affiliates may from time to time in the
future provide banking and other services to us in the ordinary course of
their business.
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The indenture contains certain limitations on the rights of the trustee,
should it or any of its affiliates become a creditor of DuPont Photomasks or
DuPont, to obtain payment of claims in certain cases or to realize on certain
property received in respect of any such claim as security or otherwise. The
trustee and its affiliates will be permitted to engage in other transactions
with DuPont Photomasks and DuPont; provided if it or any such affiliate
continues to have any conflicting interest as defined in the indenture and a
default occurs with respect to the notes, the trustee must eliminate such
conflict or resign.
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DESCRIPTION OF CAPITAL STOCK
General
Pursuant to our certificate of incorporation, we are authorized to issue
100,000,000 shares of common stock and 5,000,000 shares of preferred stock,
each with a par value of $.01 per share. As of June 30, 2000, 15,767,813
shares of common stock and no shares of preferred stock were issued and
outstanding.
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
required for most 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 to be elected at that meeting. After the offering,
DuPont will continue to have significant influence on 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. All outstanding shares of common stock are, and all
shares issued upon conversion of the notes will be, validly issued, fully paid
and nonassessable.
The common stock is quoted on the Nasdaq National Market under the symbol
"DPMI." 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 Anti-Takeover, Limited Liability and Indemnification Provisions
Classified Board of Directors Removable Only for Cause. Our certificate of
incorporation divides our Board of Directors into three classes of directors,
with each class serving staggered, three-year terms. In addition, our
directors may be removed from office only for cause by a vote of at least 66
2/3% in voting power of the then-outstanding shares of our voting stock
entitled to vote in the election of directors, voting together as a single
group. The classification of our Board of Directors means that, unless
directors are removed for cause, it will require at least two annual meetings
of stockholders for a majority of stockholders to make a change in control of
the Board of Directors, since only a portion of the directors will be elected
at each meeting. A significant effect of a classified Board of Directors may
be to deter hostile takeover attempts, because an acquiror would experience
delay in replacing a majority of the directors. However, a classified Board of
Directors also makes it more difficult for stockholders to effect a change in
control of the Board of Directors, even if such a change in control is sought
due to dissatisfaction with the performance of our company's directors. During
any period when
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the holders of any series of preferred stock have the right to elect
additional directors pursuant to our certificate of incorporation, the then
otherwise total authorized number of directors shall automatically be
increased by the specified number of directors. Whenever the holders of any
series of preferred stock having the right to elect additional directors are
divested of that right, the terms of office of all additional directors
elected by those holders shall terminate. As a consequence, directors elected
by the holders of our preferred stock would not become part of our classified
Board of Directors.
Supermajority Voting. Our certificate of incorporation requires the
approval of the holders of at least 66 2/3% of the then outstanding shares of
our common stock for the stockholders to adopt, amend or repeal any provision
of:
. Our certificate of incorporation governing the election and removal of
directors;
. Our bylaws; and
. Our certificate of incorporation prohibiting stockholder actions by
written consent.
Authorized but Unissued or Undesignated Capital Stock. Our certificate of
incorporation grants our Board of Directors broad power to establish the
rights, preferences and privileges of authorized and unissued shares of
preferred stock and to issue the shares in one or more transactions. The
issuance of shares of preferred stock pursuant to the Board of Directors'
authority described above may have the effect of delaying, deferring or
preventing a change in control of our company and could decrease the amount of
earnings and assets available for distribution to the holders of our common
stock. In addition, the issuance of large blocks of common stock may have the
effect of delaying, deferring or preventing a change in control of our
company. Our Board of Directors does not currently intend to seek stockholder
approval prior to any issuance of common or preferred stock, unless otherwise
required by law.
Limitation of Director Liability. Our certificate of incorporation limits
the liability of directors (in their capacity as directors but not in their
capacity as officers) to our company and our stockholders to the fullest
extent permitted by Delaware law. Specifically, directors will not be
personally liable for monetary damages for breach of his or her fiduciary duty
as a director, except for liability for:
. Any breach of the director's duty of loyalty to our company or our
stockholders;
. Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. Violations under Section 174 of the Delaware General Corporation Law,
which relates to unlawful payments of dividends or unlawful stock
repurchases or redemptions; or
. Any transaction from which the director derived an improper personal
benefit.
These provisions in our certificate of incorporation may have the effect of
reducing the likelihood of derivative litigation against our company's
directors and may discourage or deter stockholders or management from bringing
a lawsuit against our company's directors for breach of their duty of care,
even though such an action, if successful, might otherwise have benefited our
company and its stockholders. These provisions do not limit or affect a
stockholder's ability to seek and obtain relief under the Federal securities
laws.
No Stockholder Action by Written Consent. Our certificate of incorporation
provides that any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only at a duly called annual or
special meeting of stockholders and may not be effected by any written consent
of stockholders in lieu of a meeting of stockholders. This prevents
stockholders from initiating or effecting any action by written consent,
thereby limiting the ability of stockholders to take actions opposed by our
Board of Directors.
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Special Meetings of Stockholders. Our bylaws provide that special meetings
of stockholders may be called only by our Board of Directors.
Stockholder Meeting Protocol. Our bylaws allow our Board of Directors to
adopt rules, regulations and procedures for the conduct of the meeting of
stockholders, including:
. Establishment of an agenda or order of business for the meeting;
. Rules and procedures for maintaining order at the meeting and the safety
of those present;
. Limitations on attendance at or participation in the meeting to
stockholders of record of the corporation or their duly authorized and
constituted proxies;
. Restrictions on entry after the time fixed for the commencement of the
meeting; and
. Limitations on the time allotted to questions or comments by
participants.
This stockholder meeting protocol could have the effect of deterring a hostile
takeover of our company by restricting the nomination and election of
candidates to our Board of Directors.
Advance Notice Requirements. Our bylaws establish advance notice
requirements with regard to all stockholder proposals, including:
. For nominations or other business to be properly brought before an
annual meeting, timely notice must be given so that the notice is
delivered to us at least 90 days, but no more than 120 days, prior to
the meeting;
. Any notice of nomination shall set forth the person proposed for
election to our Board of Directors;
. Any notice of business shall set forth a brief description of the
business to be brought before the meeting, the text of the proposal and
the beneficial owner, if any, on whose behalf the proposal is made; and
. Except as otherwise provided by law, the chairman of the meeting shall
have the power to determine whether a nomination or any business
proposed to be brought before a meeting was made in accordance with
these procedures.
The advance notice requirements, by prescribing the types of business that
could be presented to stockholders during annual meetings, could discourage
takeover bids initiated by hostile tender offer, proxy contest or the removal
of the existing Board of Directors and management.
Indemnification Arrangements. Our bylaws provide that current and former
directors and executive officers shall be indemnified against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising out
of their status as directors and executive officers, to the fullest extent
permitted by Delaware law. In addition, we have agreed to indemnify each
director to the fullest extent permitted by the Delaware law pursuant to an
indemnification agreement from and against any and all expenses, losses,
claims, damages and liabilities incurred by that director for or as a result
of actions taken or not taken while that director was acting in his or her
capacity as our director, or agent. In addition, we maintain directors' and
officers' liability insurance which insures against liabilities that our
directors and officers may incur in these capacities.
Delaware Anti-Takeover Statute. Our certificate of incorporation contains a
provision expressly electing not to be governed by the provisions of Section
203 of the Delaware General Corporation Law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an
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"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale, or other
transaction resulting in a financial benefit to the interested stockholder,
and an "interested stockholder" is a person who, together with affiliates and
associates, owns or, within three years previously, did own 15% or more of the
corporation's voting stock. Because of this election, Section 203 will not
apply to our company.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of material U.S. federal income tax
considerations relating to the purchase, ownership and disposition of the
notes and of common stock into which notes may be converted, but does not
purport to be a complete analysis of all the potential tax considerations
relating thereto. This discussion is based on laws, regulations, rulings and
decisions now in effect, all of which are subject to change. Except as
specifically discussed below with regard to Non-U.S. Holders, as defined
below, this summary applies only to holders that will hold notes and common
stock into which notes may be converted as "capital assets" (within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code")) and who, for U.S. federal income tax purposes, are:
. Individual citizens or residents of the U.S.;
. Corporations created or organized in or under the laws of the U.S. or of
any political subdivision thereof;
. Estates, the income of which are subject to U.S. federal income taxation
regardless of the source of such income; or
. Trusts subject to the primary supervision of a U.S. court and the
control of one or more U.S. persons ("U.S. Holders").
Holders of notes or common stock into which the notes may be converted that
are entities treated as partnerships for U.S. federal tax purposes should
consult their own tax advisors as to their particular situations. Persons
other than U.S. Holders ("Non-U.S. Holders") are subject to special U.S.
federal income tax considerations that are discussed below. This discussion
does not address tax considerations applicable to an investor's particular
circumstances or to investors that may be subject to special tax rules, such
as:
. Banks;
. Holders subject to the alternative minimum tax;
. Tax-exempt organizations;
. Insurance companies;
. Foreign persons or entities (except to the extent specifically set forth
below);
. Dealers in securities or currencies, persons that will hold notes as a
position in a hedging transaction, "straddle" or "conversion
transaction" for tax purposes; or
. Persons deemed to sell notes or common stock under the constructive sale
provisions of the Code.
This discussion addresses the tax considerations applicable to the initial
purchasers of the notes who purchase the notes at their stated principal
amount, which is expected to be their "issue price" as defined in Section 1273
of the Code assuming such notes constitute indebtedness for U.S. federal
income tax purposes and does not discuss the tax considerations applicable to
initial purchasers of the notes who purchase the notes at a price other than
their "issue price" as defined in Section 1273 of the Code or to subsequent
purchasers of the notes and of common stock issuable upon conversion of the
notes. We have not sought any ruling from the Internal Revenue Service (the
"IRS") or an opinion of counsel with respect to the statements made and the
conclusions reached in the following discussion, and there can be no assurance
that the IRS will agree with such statements and conclusions. In addition, the
IRS is not precluded from successfully adopting a contrary position. Because
the notes are convertible into stock and do not bear interest and are expected
to be issued at their stated principal amount, it is possible that the IRS may
determine that the notes do not constitute indebtedness for U.S. federal
income tax purposes. Prospective investors are urged to consult their own tax
advisors regarding the tax consequences to them of the purchase, ownership or
disposition of the notes in the event the notes are not treated as
indebtedness for U.S. federal income tax purposes. This discussion does not
consider the effect of the federal estate or gift tax laws (except as set
forth below with respect to Non-U.S. Holders) or the tax laws of any
applicable foreign, state, local or other jurisdiction.
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INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME
TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY
STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
Taxation of Interest
Interest will not be paid on the notes, and thus no amount received in
respect of the notes will be included in the income of a holder as interest
income.
Sale, Exchange or Redemption of the Notes
Upon the sale, exchange (other than a conversion) or redemption of a note,
a holder generally will recognize capital gain or loss equal to the difference
between:
. The amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption; and
. Such holder's adjusted tax basis in the note.
A holder's adjusted tax basis in a note generally will equal the cost of the
note to such holder. Such capital gain or loss will be long-term capital gain
or loss if the holder's holding period in the note is more than one year at
the time of sale, exchange or redemption. Long-term capital gains recognized
by a holder who is an individual will generally be subject to a maximum rate
of tax of 20%.
Conversion of the Notes
A holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock except with respect to cash received in
lieu of a fractional share of common stock. A holder's tax basis in the common
stock received on conversion of a note will be the same as such holder's
adjusted tax basis in the note at the time of conversion (reduced by any basis
allocable to a fractional share interest), and the holding period for the
common stock received on conversion will generally include the holding period
of the note converted.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of
common stock generally will result in capital gain or loss (measured by the
difference between the cash received for the fractional share and the holder's
adjusted tax basis in the fractional share).
Dividends
Dividends, if any, paid on the common stock after a conversion generally
will be included in the income of a holder as ordinary income to the extent of
our current or accumulated earnings and profits.
Holders of convertible debt instruments such as the notes may, in certain
circumstances, be deemed to have received constructive distributions where the
conversion ratio of such instruments is adjusted. Adjustments to the
conversion price made pursuant to a bona fide reasonable adjustment formula
which has the effect of preventing the dilution of the interest of the holders
of the debt instruments, however, will generally not be considered to result
in a constructive distribution of stock. Certain of the possible adjustments
provided in the notes (including, without limitation, adjustments in respect
of taxable dividends to our stockholders) will not qualify as being pursuant
to a bona fide reasonable adjustment formula. If such adjustments are made,
holders of notes will be deemed to have received constructive distributions
taxable as dividends to the extent of our current or accumulated earnings and
profits even though they have not received any cash or property as a result of
such
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adjustments. The failure of the notes to provide for an adjustment to the
conversion rate to reflect a stock dividend or other event increasing the
proportionate interest of the holders of outstanding common stock may, in
certain circumstances, result in taxable dividend income to the holders of
common stock.
Sale, Exchange or Redemption of Common Stock
Upon the sale, exchange or redemption of common stock, a holder generally
will recognize capital gain or loss equal to the difference between:
. The amount of cash and the fair market value of any property received
upon the sale, exchange or redemption; and
. Such holder's adjusted tax basis in the common stock.
Such capital gain or loss will be long-term capital gain or loss if the
holder's holding period in the common stock is more than one year at the time
of the sale, exchange or redemption. Long-term capital gains recognized by an
individual will generally be subject to a maximum rate of tax of 20%. A
holder's basis and holding period in common stock received upon conversion of
a note are determined as discussed above under "Conversion of the Notes."
Special Tax Rules Applicable to Non-U.S. Holders
In general, subject to the discussion below concerning backup withholding:
(a) Payments of principal on the notes by DuPont Photomasks or any
paying agent, and payments under the guarantee by DuPont, to a beneficial
owner of a note that is a Non-U.S. Holder will not be subject to U.S.
withholding tax;
(b) A Non-U.S. Holder of a note or common stock will not be subject to
U.S. federal income tax on gains realized on the sale, exchange or other
disposition of such note or common stock unless:
. Such Non-U.S. Holder is an individual who is present in the U.S. for
183 days or more in the taxable year of sale, exchange or other
disposition, and certain conditions are met;
. Such gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the U.S. and, if certain tax
treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder;
. The Non-U.S. Holder is subject to Code provisions applicable to
certain U.S. expatriates; or
. In the case of common stock held by a person who holds more than 5%
of such stock, we are or have been, at any time within the shorter
of the five-year period preceding such sale or other disposition or
the period such Non-U.S. Holder held the common stock, a U.S. real
property holding corporation (a "USRPHC") for U.S. federal income
tax purposes;
We do not believe that we are currently a USRPHC or that we will become one
in the future; and
(c) Dividends on common stock after conversion generally will be subject
to U.S. withholding tax at a 30% rate, except where an applicable tax
treaty provides for the reduction or elimination of such withholding tax.
If a Non-U.S. Holder of a note or common stock is engaged in a trade or
business in the U.S. and if dividends on the common stock, or gain realized on
the sale, exchange or other disposition of the note or common stock, is
effectively connected with the conduct of such trade or business (and, if
certain tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder in the U.S.), the Non-U.S. Holder, although
exempt from U.S. withholding tax (provided that the certification requirements
discussed in the next sentence are met), will generally be subject to regular
U.S. federal income tax on such dividends or gain in the same manner as if it
were a U.S. Holder. Such a Non-U.S. Holder will be required,
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under currently effective Treasury Regulations, to provide us with a properly
executed IRS Form 4224 (IRS Form W-8ECI under the New Regulations, as defined
below) in order to claim an exemption from withholding tax. In addition, if
such Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% (or such lower rate provided by an applicable treaty)
of its effectively connected earnings and profits for the taxable year,
subject to certain adjustments. For purposes of the branch profits tax,
dividends on the common stock and any gain recognized on the sale, exchange or
other disposition of a note or common stock will be included in the earnings
and profits of such Non-U.S. Holder if such dividends or gain is effectively
connected with the conduct by a Non-U.S. Holder of a trade or business in the
U.S.
Treasury Regulations released on October 6, 1997, as modified (the "New
Regulations") and effective for payments made after December 31, 2000, subject
to certain grandfathering provisions, will change certain of the withholding
reporting and certification requirements described above. The New Regulations
also would require, in the case of notes held by a foreign partnership, that
the certification be provided by the partners rather than by the foreign
partnership and that the partnership provide certain information, including a
TIN. A look-through rule will apply in the case of tiered partnerships.
U.S. Federal Estate Tax. A note held by an individual who at the time of
death is not a citizen or resident of the U.S. (as specially defined for U.S.
federal estate tax purposes) will not be subject to U.S. federal estate tax if
the individual did not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock and, at the time of the
individual's death, payments with respect to such note would not have been
effectively connected with the conduct by such individual of a trade or
business in the U.S. Common stock held by an individual who at the time of
death is not a citizen or resident of the U.S. (as specially defined for U.S.
federal estate tax purposes) will be included in such individual's estate for
U.S. federal estate tax purposes, unless an applicable estate tax treaty
otherwise applies.
Non-U.S. Holders should consult with their tax advisors regarding the U.S.
federal, state and local and foreign tax consequences to them of purchasing,
holding and disposing of the notes and common stock.
Backup Withholding and Information Reporting
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments made in respect of common stock to a holder that is not an "exempt
recipient" and that fails to provide certain identifying information (such as
the holder's TIN) in the manner required. Generally, individuals are not
exempt recipients, whereas corporations and certain other entities are exempt
recipients. Payments made in respect of common stock must be reported to the
IRS, unless the holder is an exempt recipient or otherwise establishes an
exemption.
Dividends on the common stock paid to Non-U.S. Holders that are subject to
U.S. withholding tax, as described above, generally will be exempt from U.S.
backup withholding tax but will be subject to certain information reporting.
Payments of the proceeds of the sale of a note or common stock to or
through a foreign office of a broker that is a U.S. person, a "controlled
foreign corporation" (within the meaning of the Code) or a foreign person, 50%
or more of whose gross income from all sources for the three-year period
ending with the close of its taxable year preceding the payment was
effectively connected with the conduct of a trade or business within the U.S.,
are currently subject to certain information reporting requirements, unless
the payee is an exempt recipient or such broker has evidence in its records
that the payee is a Non-U.S. Holder and no actual knowledge that such evidence
is false and certain other conditions are met. Temporary Treasury Regulations
indicate that such payments are not currently subject to backup withholding.
Under current Treasury Regulations, payments of the proceeds of a sale of a
note or common stock to or through the U.S. office of a broker will be subject
to information reporting and backup withholding unless the payee certifies
under penalties of perjury as to his or her status as a Non-U.S. Holder and
satisfies certain other qualifications (and no agent or broker who is
responsible for receiving or reviewing such statement has actual knowledge
that it is incorrect) and provides his or her name and address or the payee
otherwise establishes an exemption.
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Any amounts withheld under the backup withholding rules from a payment to a
holder of a note or common stock will be allowed as a refund or credit against
such holder's U.S. federal income tax provided that the required information
is furnished to the IRS.
As noted above, the New Regulations will generally be applicable to
payments made after December 31, 2000. In general, the New Regulations do not
significantly alter the substantive withholding and information reporting
requirements but unify current certification procedures and forms and clarify
reliance standards. Under the New Regulations, special rules apply which
permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. A holder of a
note or common stock should consult with its tax advisor regarding the
application of the backup withholding rules to its particular situation, the
availability of an exemption therefrom, the procedure for obtaining such an
exemption, if available, and the impact of the New Regulations on payments
made with respect to notes or common stock after December 31, 2000.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH
PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR
U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING OF THE NOTES AND OUR COMMON STOCK. TAX ADVISORS SHOULD ALSO BE
CONSULTED AS TO THE U.S. ESTATE AND GIFT TAX CONSEQUENCES AND THE FOREIGN TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND OUR COMMON
STOCK, AS WELL AS THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
63
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, Morgan Stanley & Co. Incorporated
and Credit Suisse First Boston Corporation have severally agreed to purchase,
and we have agreed to sell to them, the respective principal amount of notes
set forth opposite their names below:
<TABLE>
<CAPTION>
Principal
Name Amount
---- ------------
<S> <C>
Morgan Stanley & Co. Incorporated............................. $50,000,000
Credit Suisse First Boston Corporation........................ 50,000,000
------------
Total....................................................... $100,000,000
============
</TABLE>
The underwriters are offering the notes subject to their acceptance of the
notes from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the notes offered by this prospectus are subject to the delivery
of legal opinions by their counsel as well as other conditions. The
underwriters are obligated to take and pay for all of the notes offered by
this prospectus if any are taken.
The underwriters initially propose to offer part of the notes directly to
the public at the public offering price set forth on the cover page of this
prospectus and part to certain dealers at a price that represents a concession
not in excess of 1.2% of the principal amount of the notes. After the initial
offering of the notes, the offering price and other selling terms may from
time to time be varied by the underwriters.
We do not intend to list the notes on any national securities exchange or
seek quotation of the notes on the Nasdaq National Market. The underwriters
have advised us that they presently intend to make a market in the notes as
permitted by applicable laws and regulations. The underwriters are not
obligated, however, to make a market in the notes and any such market making
may be discontinued at any time at the sole discretion of the underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the notes.
We, our directors and executive officers and DuPont have each agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the underwriters, during the period ending 90 days after the date of
this prospectus, each of us will not, directly or indirectly:
. 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
. Enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions in the previous paragraph do not apply to:
. The sale of the notes to the underwriters;
64
<PAGE>
. The common stock issuable upon conversion of the notes;
. The sale of the shares in the concurrent common stock offering; and
. Options granted or stock issued upon the exercise of outstanding stock
options or otherwise pursuant to our stock incentive or employee stock
purchase plans.
In order to facilitate the offering of the notes, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the notes or the common stock. Specifically, the underwriters may over-
allot in connection with the offering, creating a short position in the notes
for their own account. In addition, to cover over-allotments or to stabilize
the price of the notes or the common stock, the underwriters may bid for, and
purchase, the notes or 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 notes in the offering, if the
syndicate repurchases previously distributed notes 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 notes or
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.
From time to time, certain of the underwriters have provided, and may
continue to provide, investment banking services to us and DuPont.
We, 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 notes and common stock into which the notes are
convertible will be passed upon for us by Brobeck, Phleger & Harrison LLP,
Austin, Texas. The validity of the guarantees will be passed upon for DuPont
by its Senior Counsel. Certain legal matters in connection with this offering
will be passed upon for the underwriters by Davis Polk & Wardwell, New York,
New York.
EXPERTS
The financial statements of Dupont Photomasks as of June 30, 1998 and 1999,
and for each of the three years in the period ended June 30, 1999, included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in accounting and auditing.
The financial statements of DuPont incorporated in this prospectus by
reference to DuPont's Annual Report on Form 10-K for the year ended December
31, 1999, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting.
65
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
DuPont Photomasks and DuPont file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission, or SEC. You may read this information at the SEC's public
reference rooms at the following locations:
Public Reference Room North East Regional Midwest Regional Office
450 Fifth Street, N.W. Office 500 West Madison Street
Room 1024 7 World Trade Center Suite 1400
Washington, D.C. 20549 Suite 1300 Chicago, Illinois 60661
New York, New York 10048
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. You may also obtain copies of this information by mail from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room
1024,Washington, D.C. 20549, at prescribed rates. Filings are also available
to the public at the SEC's web site at http://www.sec.gov.
You may also inspect reports, proxy statements and other information about
DuPont Photomasks at the offices of The Nasdaq Stock Market, Inc. National
Market System, 1735 K Street, N.W., Washington, D.C. 20006-1500, and about
DuPont at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
The SEC allows DuPont Photomasks and DuPont to "incorporate by reference"
information into this prospectus. This means that companies can disclose
important information to you by referring you to those documents filed
separately with the SEC. 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. This prospectus incorporates 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:
DuPont Photomasks SEC Filings
. Our Annual Report on Form 10-K for the fiscal year ended June 30,
1999;
. Our Quarterly Reports on Form 10-Q for the quarters ended September
30, 1999, December 31, 1999 and March 31, 2000;
. Our Current Reports on Form 8-K dated May 2, 2000 and June 5, 2000;
and
. The description of the common stock contained in our Form 8-A/A
(file no. 0-20839), filed on June 23, 2000 under Section 12(g) of
the Securities Exchange Act of 1934.
DuPont SEC Filings
. DuPont's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999;
. DuPont's Quarterly Report on Form 10-Q for the quarter ended March
31, 2000; and
. DuPont's Current Reports on Form 8-K dated April 25, 2000, April 26,
2000 and June 29, 2000.
Documents incorporated by reference are available from the companies
without charge, excluding any exhibits to those documents, unless the exhibit
is specifically incorporated by reference as an exhibit in this prospectus.
You can obtain documents incorporated by reference in this prospectus by
requesting them in writing or by telephone from the appropriate company at the
following addresses:
DUPONT PHOTOMASKS, INC. E. I. DU PONT DE NEMOURS & COMPANY
Attention: Investor Relations Attention: Treasury
131 Old Settlers Boulevard 1007 Market Street
Round Rock, Texas 78664 Wilmington, DE 19898
Telephone: (512) 310-6559 Telephone: (302) 774-1000
66
<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, 1999................. F-3
Balance Sheet at June 30, 1998 and 1999.................................. F-4
Statement of Cash Flows for the three years ended June 30, 1999.......... F-5
Notes to Financial Statements............................................ F-6
Income Statement for the nine months ended March 31, 1999 and 2000 F-16
(unaudited).............................................................
Balance Sheet at June 30, 1999 and March 31, 2000 (unaudited)............ F-17
Statement of Cash Flows for the nine months ended March 31, 1999 and 2000 F-18
(unaudited).............................................................
Notes to Financial Statements (unaudited)................................ F-19
</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, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, 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, 1999
F-2
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
INCOME STATEMENT
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Sales..................................... $ 261,185 $ 271,591 $ 264,015
Cost of goods sold........................ 163,319 179,369 187,427
Selling, general and administrative
expense.................................. 31,611 29,509 33,944
Research and development expense.......... 12,372 12,714 16,835
---------- ---------- ----------
Operating profit.......................... 53,883 49,999 25,809
Other income (expense).................... 1,284 (27) (717)
---------- ---------- ----------
Income before income taxes, minority
interest and extraordinary item.......... 55,167 49,972 25,092
Provision for income taxes................ 19,308 17,127 7,763
---------- ---------- ----------
Income before minority interest and
extraordinary item....................... 35,859 32,845 17,329
Minority interest in (income) loss of
joint ventures........................... 903 687 (59)
---------- ---------- ----------
Income before extraordinary item.......... 36,762 33,532 17,270
Extraordinary item........................ (22,242) -- --
---------- ---------- ----------
Net income................................ $ 59,004 $ 33,532 $ 17,270
========== ========== ==========
Basic earnings per share before
extraordinary item....................... $ 2.44 $ 2.21 $ 1.13
Extraordinary item........................ (1.47) -- --
---------- ---------- ----------
Basic earnings per share.................. $ 3.91 $ 2.21 $ 1.13
========== ========== ==========
Basic weighted average shares
outstanding.............................. 15,100,521 15,179,596 15,299,339
========== ========== ==========
Diluted earnings per share before
extraordinary item....................... $ 2.37 $ 2.15 $ 1.09
Extraordinary item........................ (1.43) -- --
---------- ---------- ----------
Diluted earnings per share................ $ 3.80 $ 2.15 $ 1.09
========== ========== ==========
Diluted weighted average shares
outstanding.............................. 15,520,239 15,612,234 15,780,181
========== ========== ==========
</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,
-----------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 19,688 $ 61,311
Accounts receivable, trade................................. 47,471 45,272
Accounts receivable, related parties....................... 3,349 1,388
Inventories................................................ 18,236 12,707
Deferred income taxes...................................... 6,389 9,547
Prepaid expenses and other current assets.................. 6,574 9,421
-------- --------
Total current assets..................................... 101,707 139,646
Property and equipment....................................... 244,650 312,240
Accounts receivable, related parties......................... 1,106 1,324
Deferred income taxes........................................ 2,221 3,596
Other assets, net............................................ 2,295 23,600
-------- --------
Total assets............................................. $351,979 $480,406
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade.................................... $ 30,197 $ 34,563
Accounts payable, related parties.......................... 10,391 1,742
Short-term borrowings...................................... 2,143 2,702
Income taxes payable....................................... 1,828 5,179
Other accrued liabilities.................................. 24,096 24,326
-------- --------
Total current liabilities................................ 68,655 68,512
Long-term borrowings......................................... 7,519 4,659
Long-term borrowings, related parties........................ 9,000 100,000
Deferred income taxes........................................ 12,048 13,644
Other liabilities............................................ 1,800 2,837
Minority interest in net assets of joint ventures............ -- 16,453
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized;
15,258,722 and 15,332,282 issued and outstanding.......... 152 153
Additional paid-in capital................................. 160,269 164,342
Retained earnings.......................................... 92,536 109,806
-------- --------
Total liabilities and stockholders' equity............... $351,979 $480,406
======== ========
</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,
--------------------------------
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 59,004 $ 33,532 $ 17,270
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization............................ 26,593 31,869 41,784
Other.................................................... (494) 1,764 (926)
Gain..................................................... (34,219) -- --
Cash provided (used) by changes in assets and liabilities
Accounts receivable.................................... (6,945) (10,309) 5,048
Inventories............................................ (5,444) (1,747) 6,370
Prepaid expenses and other current assets.............. (5,038) 2,641 (1,785)
Accounts payable....................................... 2,470 27,336 (3,226)
Other accrued liabilities.............................. 5,814 2,828 510
-------- ---------- ----------
Net cash provided by operating activities............ 41,741 87,914 65,045
-------- ---------- ----------
Cash flows from investing activities:
Capital expenditures....................................... (51,057) (100,200) (87,772)
Payments for acquisitions.................................. -- (28,344) (40,355)
Proceeds from sale of investment........................... 39,219 -- --
-------- ---------- ----------
Net cash used in investing activities................ (11,838) (128,544) (128,127)
-------- ---------- ----------
Cash flows from financing activities:
Increase in borrowings..................................... 2,394 8,739 88,650
Net proceeds from issuance of common stock................. 61 1,174 1,202
Increase in minority interest in net assets of joint
ventures.................................................. -- -- 16,394
-------- ---------- ----------
Net cash provided by financing activities............ 2,455 9,913 106,246
-------- ---------- ----------
Effect of exchange rate changes on cash...................... (1,186) (946) (1,541)
-------- ---------- ----------
Net increase (decrease) in cash and cash equivalents......... 31,172 (31,663) 41,623
Cash and cash equivalents at beginning of year............... 20,179 51,351 19,688
-------- ---------- ----------
Cash and cash equivalents at end of year..................... $ 51,351 $ 19,688 $ 61,311
======== ========== ==========
</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: Our financial statements include the accounts of
DuPont Photomasks, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Our 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.
Revenue Recognition: Sales and related costs of goods sold are included in
income when goods are shipped to our customers. 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, primarily raw materials, are valued at the lower
of average cost or market.
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
property and equipment 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 of five to seven years. Net
intangible assets were $1,750 and $22,409 at June 30, 1998 and 1999 and are
included in other assets. The future economic benefit of intangible assets is
reviewed periodically through an undiscounted cash flow analysis to determine
if an impairment has occurred.
Research and Development: Research and development costs are expensed as
incurred. Further, we participate in the DPI Reticle Technology Center, a
joint venture for advanced photomask development and fabrication of leading-
edge photomasks. Our share of the results of this equity method investee are
reflected as research and development expense.
Non-U.S. Currencies: We have determined that the U.S. Dollar is the
functional currency of our 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. We have entered into Korean Won, French
Franc, German Mark, Japanese Yen and Singapore Dollar forward contracts
designed to reduce our exchange rate exposure. At June 30, 1999, we held
forward contracts with a notional amount of approximately $2,300, a carrying
amount of approximately $2,500 and an unrealized loss of approximately $200.
Income Taxes: We account 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 our 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.
Certain of our operations in Asia are subject to government granted tax
exemptions.
F-6
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires us 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: Certain prior year balances have been reclassified to
conform to 1999 presentation.
New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards, or SFAS,
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000, with earlier application encouraged. We do not expect
that the adoption of SFAS No. 133 will have a material adverse impact on our
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 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.
In April 2000, the Financial Accounting Standards Board issued Financial
Interpretation Number 44, or FIN 44, "Accounting for Certain Transactions
involving stock compensation--an interpretation of Accounting Principles Board
No. 25." FIN 44 clarifies the application of Opinion No. 25. We do not expect
that the adoption of FIN 44 will have a material adverse impact on our
financial position or results of operations.
2. Acquisitions
In March 1998, we entered into a strategic alliance with Hyundai whereby we
purchased selected photomask manufacturing equipment located at Hyundai's
captive photomask manufacturing facility in Korea and entered into a five-year
supply agreement. We acquired, through our 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 our credit facility with DuPont.
In November 1998, we completed the acquisition of Hewlett-Packard's
photomask manufacturing organization. The acquisition included the purchase of
equipment, the purchase of inventory, the execution of a supply agreement, 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 cash payments
were funded with borrowings under our credit facility with DuPont.
Approximately $23,600 has been assigned to intangible assets.
3. Related Party Transactions
Effective January 1996, we entered into several transitional agreements
with DuPont. Charges for services under these agreements were $3,944 for 1997,
$3,072 for 1998 and $2,375 for 1999. Amounts charged to us for functions and
services provided by DuPont are principally included in general and
administrative expense.
F-7
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
We owned 1,025,640 shares of Etec Systems common stock until January 1997.
Etec Systems is our principal supplier of electron beam and laser beam
systems. In January 1997, we sold the entire investment. Aggregate net
proceeds from the sale of $39,219 were used in operations. We realized a
$34,219 gain on the sale. The related provision for income taxes was $11,977.
Accounts receivable, related parties includes receivables from our
employees of $1,154 (Current $48, Non-Current $1,106) and $1,384 (Current $60,
Non-Current $1,324) at June 30, 1998 and 1999 which relate principally to
housing and automobile loans to our non-U.S. employees. The remainder
represents receivables for goods sold to various DuPont entities and other
related parties and amounts due us under our tax indemnification agreement
with DuPont and the transitional agreements with DuPont. Sales to related
parties, including the DPI Reticle Technology Center and various DuPont
entities who serve as resellers for us, were $8,764, $10,933 and $7,056 for
the years ended June 30, 1997, 1998 and 1999.
Accounts payable, related parties represents payables to DuPont for payroll
and benefits paid by DuPont on our behalf and billed on a one-month-lag basis
and amounts payable under the transitional agreements with DuPont. In August
1996, we 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 us as an equity contribution.
4. Accounts Receivable, Trade
Essentially all of our sales are to customers in the semiconductor
manufacturing industry. We assess the financial strength of our customers
before extending credit to reduce the risk of loss as we generally do not
require collateral. Two of our customers each represented more than 10% of our
sales in 1997, and, in the aggregate, these two customers represented
approximately twenty-two percent of sales in the year. Two of our 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. Two of our customers each represented more than ten percent of sales
in 1999 and, in the aggregate, these two customers represented approximately
twenty-two percent of sales in the year.
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
Estimated Useful --------------------
Lives 1998 1999
---------------- --------- ---------
<S> <C> <C> <C>
Construction-in-progress........... $ 64,221 $ 80,140
Land............................... 5,932 5,932
Buildings.......................... 10 to 20 years 76,775 85,735
Equipment.......................... 3 to 7 years 313,010 384,037
--------- ---------
459,938 555,844
Less: accumulated depreciation..... (215,288) (243,604)
--------- ---------
Property and equipment............. $ 244,650 $ 312,240
========= =========
</TABLE>
F-8
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
6. Other Accrued Liabilities
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------
1998 1999
------- ---------
<S> <C> <C>
Accrued vacation pay..................................... $ 3,180 $ 3,409
Accrued compensation and benefits........................ 7,483 11,122
Other.................................................... 13,433 9,795
------- -------
Other accrued liabilities................................ $24,096 $24,326
======= =======
7. Borrowings
Borrowings consist of the following:
<CAPTION>
June 30,
------------------
1998 1999
------- ---------
<S> <C> <C>
Capital lease obligations................................ $ 2,374 $ 2,162
5.625% bank borrowings due 1999 through 2001............. 4,500 3,750
Other bank borrowings due 1999 through 2000.............. 2,788 1,449
------- -------
9,662 7,361
Less: short-term borrowings............................ (2,143) (2,702)
------- -------
Long-term borrowings..................................... $ 7,519 $ 4,659
======= =======
8. Leases
Minimum lease payments for years ending June 30 are as follows:
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2000..................................................... $ 277 $ 1,111
2001..................................................... 277 1,125
2002..................................................... 277 465
2003..................................................... 243 281
2004..................................................... 224 281
Thereafter............................................... 2,034 1,654
------- -------
Minimum lease payments................................. 3,332 $ 4,917
=======
Less: interest....................................... (1,170)
-------
Present value of minimum lease payments.................. $ 2,162
=======
</TABLE>
9. Credit Agreement
We have entered into a credit agreement with DuPont pursuant to which
DuPont originally agreed to provide a credit facility to us in an aggregate
amount of $100,000. This credit facility expires in 2001 and any loans
thereunder will bear interest at LIBOR plus 0.25% per annum. At our option,
advances under this credit facility are convertible into term loans with
maturities up to seven years. We had borrowed a maximum of $69,000 under
F-9
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
this credit facility and, at June 30, 1999, no borrowings were outstanding
under this credit facility. We have amended our credit agreement with DuPont
to add a second credit facility with an additional borrowing capacity of
$100,000. The new credit facility has a term of three years and outstanding
amounts bear interest at 0.25% per annum for the first two years and LIBOR
plus 0.25% per annum for the third year. We have borrowed a maximum of
$100,000 under this credit facility and, at June 30, 1999, borrowings of
$100,000 were outstanding under this credit facility. The amounts loaned under
the amended credit agreement are unsecured and the amended credit agreement
contains various representations, covenants and events of default. For
example, the amended 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 amended credit agreement.
10. Stockholders' Equity
Stockholders' equity at June 30 is as follows:
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Comprehensive Retained
Stock Capital Income Earnings
------ ---------- ------------- --------
<S> <C> <C> <C> <C>
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
Contribution of capital............ -- 2,442 -- --
Issuance of common stock........... 1 1,631 -- --
Net income......................... -- -- -- 17,270
---- -------- -------- --------
Balance at 1999.................. $153 $164,342 $ -- $109,806
==== ======== ======== ========
</TABLE>
F-10
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
11. Stock Plans
We have 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. Additionally, we maintain a qualified
employee stock purchase plan that permits substantially all of our U.S.
employees to purchase shares of our common stock. A summary of stock option
activity is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------- --------------------
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 1,403,514 $30.27
Options granted......... 86,976 $29.21 507,983 $52.10 1,722,485 $28.45
Options forfeited....... (46,640) $17.00 (26,930) $27.67 (1,053,047) $39.69
Options exercised....... (3,576) $17.00 (68,083) $17.24 (68,816) $17.47
------- --------- ----------
Balance at end of year.. 990,544 $18.07 1,403,514 $30.27 2,004,136 $24.19
======= ========= ==========
Exercisable at end of
year................... 223,210 $17.00 396,063 $17.64 578,504 $18.89
</TABLE>
Additional information related to stock options at June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Life Number of Exercise
Exercise Price Range Shares Price (Years) Shares Price
-------------------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$17.00........................ 761,113 $17.00 7.0 543,841 $17.00
$23.25 to $33.69.............. 971,673 $23.77 9.2 -- --
$35.37 to $49.37.............. 179,700 $41.81 9.4 11,750 $39.05
$52.75 to $71.56.............. 91,650 $53.47 8.1 22,913 $53.47
</TABLE>
A summary of restricted stock grant activity is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
Market Market Market
Number of Value Number of Value Number of Value
Shares Per Share Shares Per Share Shares Per Share
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year................... 94,913 $17.00 89,060 $17.54 4,744 $27.16
Restricted stock
granted................ 4,744 $27.16 1,755 $17.00 1,709 $35.12
Restricted stock
forfeited.............. (9,605) $17.00 -- -- -- --
Restricted stock
issued................. (992) $17.00 (86,071) $17.00 (4,744) $27.16
------ ------- ------
Balance at end of year.. 89,060 $17.54 4,744 $27.16 1,709 $35.12
====== ======= ======
</TABLE>
On September 21, 1998, our Board of Directors approved a resolution
authorizing the re-pricing of substantially all of our then outstanding
employee stock options, both vested and unvested, issued under our various
stock performance plans with an exercise price in excess of $23.25. As part of
the re-pricing, the ten year term of the options and the four year vesting
period were restarted as of September 21, 1998 and the exercise price on the
options was revised to $23.25. This resolution resulted in the re-pricing of
968,993 options.
F-11
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
At June 30, 1999, there were 3,699,177 shares reserved for future grant or
issuance under our stock plans. We apply APB 25 and its related
interpretations in accounting for our stock plans. The weighted average fair
values of stock options granted in 1997, 1998 and 1999 were $16.16, $31.65 and
$21.16. 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 1997, a risk-free interest rate of 5.5% for 1998 and
a risk free rate of interest of 5.0% for 1999; no dividend yield; expected
term of five years and volatility of 58% for 1997, volatility of 68% for 1998
and volatility of 67% for 1999. 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 $57,456, $29,577 and $10,739
($3.76, $1.94 and $0.71) in 1997, 1998 and 1999.
12. Provision for Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $25,819 $ 8,909 $ 5,809
State....................................... 787 1,023 1,410
Non-U.S..................................... 4,679 4,320 904
Deferred:
Federal..................................... (1,039) 1,353 (443)
State....................................... (59) 155 (106)
Non-U.S..................................... 1,098 1,367 189
------- ------- -------
Provision for income taxes.................... $31,285 $17,127 $ 7,763
======= ======= =======
The provision for income taxes differs from the amount computed by applying
the federal statutory rate as a result of the following:
<CAPTION>
Year Ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Tax at 35% statutory federal tax rate......... $31,285 $17,490 $ 8,762
Higher effective tax rate on non-U.S.
operations................................... 2,158 1,752 1,460
Tax exemptions................................ (4,809) (5,870) (4,987)
Change in valuation allowance................. (243) -- 1,997
State taxes, net of federal................... 633 1,258 675
Other......................................... 2,261 2,497 (144)
------- ------- -------
Provision for income taxes.................... $31,285 $17,127 $ 7,763
======= ======= =======
</TABLE>
F-12
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
June 30,
1999
--------
<S> <C>
Deferred tax assets:
Inventories................................................... $ 980
Depreciation.................................................. 1,948
Accrued liabilities........................................... 4,753
Credit facility............................................... 2,442
Other......................................................... 5,070
--------
Deferred tax assets......................................... 15,193
--------
Deferred tax liabilities:
Depreciation.................................................. (8,015)
Other......................................................... (5,682)
--------
Deferred tax liabilities.................................... (13,697)
--------
Valuation allowance......................................... (1,997)
--------
Deferred income taxes....................................... $ (501)
========
</TABLE>
We have entered into a tax indemnification agreement with DuPont. The
amount due from DuPont under the tax indemnification agreement was $571 at
June 30, 1998. We have a capital loss carryforward of $18,513. Benefit from
this carryforward, if and when realized, is payable to DuPont under the tax
indemnification agreement.
We recorded the deferred tax benefit arising from our second credit
facility with DuPont as a contribution of capital. Undistributed earnings of
certain subsidiaries are considered indefinitely reinvested. We have not
provided deferred tax liabilities for additional income taxes that would
result from repatriation of these earnings.
F-13
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
13. Segment Information
In accordance with FAS 131, segment 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>
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
1999
Sales............................. $157,401 $51,783 $ 54,831 $264,015
Transfers between geographic
areas............................ 20,429 2,615 6,482 --
-------- ------- -------- --------
177,830 54,398 61,313 264,015
======== ======= ======== ========
Net income (loss)................. 7,322 (1,861) 11,809 17,270
Identifiable assets............... 257,953 74,365 148,088 480,406
</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.
14. 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 also began construction on a new photomask
production facility in Gresham, Oregon that we subsequently and indefinitely
delayed. If additional capacity were to be needed, we could complete the
Gresham facility within approximately six months. In addition, we began
construction of a photomask production facility in Singapore.
We have entered into an agreement with Etec Systems to upgrade our existing
MEBES(R) 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
Systems purchased the use of technology developed by us. The tools to be
upgraded currently reside throughout our integrated network of production
facilities.
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
F-14
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
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 effect on our financial position, results of
operations, cash flows or liquidity.
15. Unaudited Quarterly Financial Data
Unaudited quarterly financial data for 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Quarter
-------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
1999
Sales.......................... $ 60,995 $ 61,877 $ 67,159 $ 73,984
Operating profit............... 5,200 5,567 6,509 8,533
Net income..................... 3,280 3,127 4,455 6,408
Basic earnings per share....... 0.21 0.20 0.29 0.42
Diluted earnings per share..... 0.21 0.20 0.28 0.40
Basic weighted average shares
outstanding................... 15,275,126 15,296,222 15,307,852 15,318,156
Diluted weighted average shares
outstanding................... 15,613,591 15,669,911 15,918,677 15,918,672
</TABLE>
F-15
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
INCOME STATEMENT
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------
1999 2000
---------- ----------
<S> <C> <C>
Sales.................................................. $ 190,031 $ 234,673
Cost of goods sold..................................... 135,897 163,866
Selling, general and administrative expense............ 24,552 28,143
Research and development expense....................... 12,306 16,497
---------- ----------
Operating profit....................................... 17,276 26,167
Other income (expense)................................. (1,691) 286
---------- ----------
Income before income taxes and minority interest....... 15,585 26,453
Provision for income taxes............................. 4,881 7,000
---------- ----------
Income before minority interest........................ 10,704 19,453
Minority interest in (income) loss of joint ventures... 158 (1,452)
---------- ----------
Net income............................................. $ 10,862 $ 18,001
========== ==========
Basic earnings per share............................... $0.71 $1.16
========== ==========
Basic weighted average shares outstanding.............. 15,293,067 15,493,481
========== ==========
Diluted earnings per share............................. $0.69 $1.12
========== ==========
Diluted weighted average shares outstanding............ 15,734,017 16,143,336
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
BALANCE SHEET
(Dollars in thousands, except par value amounts)
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
-------- ----------
ASSETS (audited) (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 61,311 $ 29,588
Accounts receivable, trade............................. 45,272 56,773
Accounts receivable, related parties................... 1,388 2,273
Inventories............................................ 12,707 14,960
Deferred income taxes.................................. 9,547 9,054
Prepaid expenses and other current assets.............. 9,421 10,624
-------- --------
Total current assets................................. 139,646 123,272
Property and equipment................................. 312,240 392,781
Accounts receivable, related parties................... 1,324 1,341
Deferred income taxes.................................. 3,596 4,657
Other assets........................................... 23,600 42,001
-------- --------
Total assets......................................... $480,406 $564,052
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................ $ 34,563 $ 49,618
Accounts payable, related parties...................... 1,742 1,864
Short-term borrowings.................................. 2,702 4,701
Income taxes payable................................... 5,179 4,447
Other accrued liabilities.............................. 24,326 29,190
-------- --------
Total current liabilities............................ 68,512 89,820
Long-term borrowings..................................... 4,659 2,408
Long-term borrowings, related parties.................... 100,000 112,000
Deferred income taxes.................................... 13,644 14,166
Other liabilities........................................ 2,837 15,483
Minority interest in net assets of joint ventures........ 16,453 27,349
-------- --------
Total liabilities........................................ 206,105 261,226
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares
authorized;
15,332,282 and 15,687,438 issued and outstanding...... 153 157
Additional paid-in capital............................. 164,342 174,862
Retained earnings...................................... 109,806 127,807
-------- --------
Total stockholders' equity........................... 274,301 302,826
-------- --------
Total liabilities and stockholders' equity........... $480,406 $564,052
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-17
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 10,862 $ 18,001
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 29,284 42,259
Other............................................... (1,505) 1,145
Cash provided (used) by changes in assets and
liabilities:
Accounts receivable............................... 3,578 (11,750)
Inventories....................................... 4,198 (1,635)
Prepaid expenses and other current assets......... (4,264) (1,707)
Accounts payable.................................. (12,757) 8,394
Other accrued liabilities......................... 2,518 2,542
--------- ---------
Net cash provided by operating activities....... 31,914 57,249
--------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (63,926) (106,970)
Payments for acquisitions............................. (40,355) (10,025)
--------- ---------
Net cash used in investing activities........... (104,281) (116,995)
--------- ---------
Cash flows from financing activities:
Increase in borrowings................................ 88,253 11,813
Proceeds from issuance of common stock................ 876 7,495
Increase in minority interest in net assets of joint
ventures............................................. 16,394 9,442
--------- ---------
Net cash provided by financing activities....... 105,523 28,750
--------- ---------
Effect of exchange rate changes on cash................. (1,669) (727)
--------- ---------
Net increase (decrease) in cash and cash equivalents.... 31,487 (31,723)
Cash and cash equivalents at beginning of period........ 19,688 61,311
--------- ---------
Cash and cash equivalents at end of period.............. $ 51,175 $ 29,588
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-18
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
Note 1--Basis of Presentation
Our accompanying unaudited interim financial statements 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 our audited financial statements
and accompanying notes thereto included in our 1999 Annual Report on Form 10-
K. Our unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, which our management
considers necessary for the fair presentation of the interim periods. Results
for interim periods are not necessarily indicative of results for the year.
Note 2--Inventories
Inventories consist primarily of raw materials.
Note 3--Segment Information
In accordance with SFAS 131, segment information as of or for the nine
months ended March 31 is as follows:
<TABLE>
<CAPTION>
United
States Europe Asia Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Sales...................................... $111,086 $ 39,525 $ 39,420 $190,031
Transfers between geographic areas....... 14,574 1,967 1,202 --
-------- -------- -------- --------
$125,660 $ 41,492 $ 40,622 $190,031
======== ======== ======== ========
Net income (loss)........................ $ 6,237 $ (2,406) $ 7,031 $ 10,862
Identifiable assets...................... 242,514 75,265 144,447 462,226
2000
Sales...................................... $139,457 $ 42,560 $ 52,656 $234,673
Transfers between geographic areas....... 17,182 2,135 11,181 --
-------- -------- -------- --------
$156,639 $ 44,695 $ 63,837 $234,673
======== ======== ======== ========
Net income (loss)........................ $ 4,782 $ (583) $ 13,802 $ 18,001
Identifiable assets...................... 237,190 100,400 226,462 564,052
</TABLE>
Products are transferred between geographic areas on a basis intended to
approximate the market value of such products.
Note 4--Commitments and Contingencies
We are constructing new photomask production facilities in Singapore and
Corbeil-Essonnes, France. Additionally, construction of our photomask
production facility in Gresham, Oregon has been delayed indefinitely. If
additional capacity is needed, we can complete the Gresham facility within
approximately six months.
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
F-19
<PAGE>
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(unaudited)
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.
Note 5--Acquisition
In December 1999, we acquired the photomask production equipment of IBM
located in Corbeil-Essones, France. The acquisition included the purchase of
equipment, the purchase of inventory, the execution of a supply agreement with
IBM and the hiring of employees in the photomask manufacturing organization.
Consideration for the acquisition was approximately $40 million. Approximately
$23 million has been assigned to intangible assets.
F-20
<PAGE>
DuPont Photomasks, Inc.
