**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(****d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended December 31, 2002**

** **

**Commission file number 0-20839**

 

----

 

**DUPONT PHOTOMASKS, INC.**

(Exact name of registrant asspecified in our charter)

 

 

| **Delaware**                                                                |   | **74-2238819**                        |
|-----------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdictionof Incorporation or Organization)               |   | (I.R.S. Employer  Identification No.) |
|                                                                        |   |                                  |
| **131 Old  Settlers Boulevard  Round Rock, Texas 78664**                    |
| (Address of Principal Executive Offices)                                    |
|                                                                        |
| Registrant’s telephone number, including area code: **(512) 310-6500** |

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes ý No o

 

Asof February 10, 2003, there were 18,060,913 shares of the registrant’s commonstock, $.01 par value, outstanding.

 

 

----

 

**TABLE OFCONTENTS**

 
| **Part I**  |
|-------------|
|        |
|        | Item 1.  Financial Statements |
|        |   |   |
|        |   | Consolidated Income  Statement (unaudited) for the Three Months Ended December 31, 2001 and 2002  and for the Six Months Ended December 31, 2001 and 2002 |
|        |   | Consolidated Balance Sheet  at June 30, 2002 and December 31, 2002 (unaudited) |
|        |   | Consolidated  Statement of Cash Flows (unaudited) for the Six Months Ended December 31,  2001 and 2002 |
|        |   | Consolidated  Statement of Stockholders’ Equity for the Twelve Months Ended June 30, 2002  and the Six Months Ended December 31, 2002 (unaudited) |
|        |   | Notes to  Consolidated Financial Statements (unaudited) |
|        |   |   |
|        | Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
|        |   |   |
|        | Item 3.  Quantitative and Qualitative Disclosures  About Market Risk |
|        |   |   |
|        | Item 4.   Controls and Procedures |
|        |   |   |
| **Part II** |
|        |   |   |
|        | Item  1.  Legal Proceedings |
|        |   |   |
|        | Item  2.  Changes in Securities and Use of  Proceeds |
|        |   |   |
|        | Item 3.  Defaults Upon Senior Securities |
|        |   |   |
|        | Item  4.  Submission of Matters to a Vote of  Security Holders |
|        |   |   |
|        | Item  5.  Other Information |
|        |   |   |
|        | Item 6.  Exhibits and Reports on Form 8-K |
|        |   |   |
|        |   | Signatures |
|        |   |   |
|        | Certification  of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange  Act of 1934, per Section 302 of the Sarbanes-Oxley Act of 2002 |
|        |   |   |
|        | Certification  of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange  Act of 1934, per Section 302 of the Sarbanes-Oxley Act of 2002 |
|        |   |   |
|        | Exhibit  10.29                  Certification of Chief Executive Officer and  Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, adopted  per Section 906 of the Sarbanes-Oxley Act of 2002 |
|        |   |   |
|        | Exhibit  11           Earnings (Loss) Per Share  Computation. |
|             |  |  |  |

 

2

----

 

**PART I**

 

**Item 1. Financial Statements**

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED INCOME STATEMENT**

**(Dollars inthousands, except share data)**

**(unaudited)**

 
|                                                    |   | **Three Months Ended  December 31,** |   | **Six Months Ended  December 31,** |   |
|---------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                    |   | **2001**                                  |   | **2002**                                |   | **2001** |   | **2002** |   |
| Revenue, net                                            |   | $                                         | 86,625 |                                    | $      | 80,969 |   | $ | 164,086 |   | $ | 165,209 |   |
| Cost of goods sold                                      |   | 67,422                                    |   | 71,000                                  |   | 134,686 |   | 141,734 |   |
| Selling, general and administrative expense             |   | 10,107                                    |   | 10,415                                  |   | 19,567 |   | 20,335 |   |
| Research and development expense                        |   | 6,868                                     |   | 7,592                                   |   | 13,328 |   | 15,166 |   |
| Special charges                                         |   | —                                    |   | 12,507                                  |   | — |   | 12,507 |   |
| Operating income (loss)                                 |   | 2,228                                     |   | (20,545                                 | )      | (3,495 | ) | (24,533 | ) |
| Income (loss) on warrants, net                          |   | 863                                       |   | —                                  |   | (238 | ) | — |   |
| Other income, net                                       |   | 176                                       |   | 236                                     |   | 1,496 |   | 110 |   |
| Income (loss) before income taxes and minority interest |   | 3,267                                     |   | (20,309                                 | )      | (2,237 | ) | (24,423 | ) |
| Provision for (benefit from) income taxes               |   | 507                                       |   | 1,769                                   |   | (3,613 | ) | 1,358 |   |
| Income (loss) before minority interest                  |   | 2,760                                     |   | (22,078                                 | )      | 1,376 |   | (25,781 | ) |
| Minority interest in income of joint ventures           |   | (2,393                                    | )      | (939                                    | )      | (3,992 | ) | (2,731 | ) |
| Net income (loss)                                       |   | $                                         | 367    |                                    | $      | (23,017 | ) | $ | (2,616 | ) | $ | (28,512 | ) |
|                                                    |   |                                      |   |                                    |   |   |   |   |   |
| Basic earnings (loss) per share                         |   | $                                         | 0.02   |                                    | $      | (1.28 | ) | $ | (0.15 | ) | $ | (1.59 | ) |
|                                                    |   |                                      |   |                                    |   |   |   |   |   |
| Weighted average shares outstanding                     |   | 17,854,578                                |   | 17,993,994                              |   | 17,844,930 |   | 17,982,365 |   |
|                                                    |   |                                      |   |                                    |   |   |   |   |   |
| Diluted earnings (loss) per share                       |   | $                                         | 0.02   |                                    | $      | (1.28 | ) | $ | (0.15 | ) | $ | (1.59 | ) |
|                                                    |   |                                      |   |                                    |   |   |   |   |   |
| Weighted average shares outstanding                     |   | 18,055,338                                |   | 17,993,994                              |   | 17,844,930 |   | 17,982,365 |   |

 

The accompanying notes are an integral part of this statement.

 

3

----

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEET**

**(Dollars inthousands, except share data)**

 

 

 
|                                                                                                                         |   | **June 30,  2002** |       | **December 31,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
|                                                                                                                         |   |                    |       | **(unaudited)**        |       |
| **ASSETS**                                                                                                                   |   |                    |       |                   |       |
| Current assets:                                                                                                              |   |                    |       |                   |       |
| Cash and cash equivalents                                                                                                    |   | $                       | 138,918    |                   | $          | 161,973 |   |
| Accounts receivable, trade, net                                                                                              |   | 62,498                  |       | 55,296                 |       |
| Accounts receivable, related parties                                                                                         |   | 4,013                   |       | 2,035                  |       |
| Inventories, net                                                                                                             |   | 11,633                  |       | 12,776                 |       |
| Deferred income taxes                                                                                                        |   | 5,416                   |       | 3,900                  |       |
| Prepaid expenses and other current assets                                                                                    |   | 15,521                  |       | 8,050                  |       |
| Total current assets                                                                                                         |   | 237,999                 |       | 244,030                |       |
| Assets held for sale                                                                                                         |   | 4,870                   |       | 5,087                  |       |
| Property and equipment, net                                                                                                  |   | 457,277                 |       | 436,523                |       |
| Accounts receivable, related parties                                                                                         |   | 1,164                   |       | 1,118                  |       |
| Deferred income taxes                                                                                                        |   | 38,241                  |       | 26,731                 |       |
| Other assets, net                                                                                                            |   | 33,244                  |       | 34,220                 |       |
| Total assets                                                                                                                 |   | $                       | 772,795    |                   | $          | 747,709 |   |
|                                                                                                                         |   |                    |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |   |                    | ** ** |                   | ** ** |
| Current liabilities:                                                                                                         |   |                    |       |                   |       |
| Accounts payable, trade                                                                                                      |   | $                       | 51,376     |                   | $          | 47,191 |   |
| Accounts payable, related parties                                                                                            |   | 5,163                   |       | 10,043                 |       |
| Short-term borrowings                                                                                                        |   | 11,795                  |       | 11,789                 |       |
| Income taxes payable                                                                                                         |   | 4,056                   |       | —                 |       |
| Other accrued liabilities                                                                                                    |   | 55,283                  |       | 50,671                 |       |
| Total current liabilities                                                                                                    |   | 127,673                 |       | 119,694                |       |
| Long-term borrowings                                                                                                         |   | 2,864                   |       | 2,246                  |       |
| Long-term convertible notes                                                                                                  |   | 100,000                 |       | 100,000                |       |
| Deferred income taxes                                                                                                        |   | 25,830                  |       | 33,285                 |       |
| Other liabilities                                                                                                            |   | 3,121                   |       | 3,354                  |       |
| Minority interest in net assets of joint ventures                                                                            |   | 43,644                  |       | 46,480                 |       |
| Total liabilities                                                                                                            |   | 303,132                 |       | 305,059                |       |
| Commitments and contingencies (see notes)                                                                                    |   |                    |       |                   |       |
| Stockholders’ equity:                                                                                                   |   |                    |       |                   |       |
| Preferred stock, $.01 par value; 5,000,000 shares  authorized; none issued and outstanding                                   |   | —                  |       | —                 |       |
| Common stock, $.01 par value; 100,000,000 shares  authorized;17,927,294 and  17,995,587 issued and outstanding, respectively |   | 179                     |       | 180                    |       |
| Additional paid-in capital                                                                                                   |   | 314,430                 |       | 315,928                |       |
| Retained earnings                                                                                                            |   | 155,054                 |       | 126,542                |       |
| Total stockholders’ equity                                                                                              |   | 469,663                 |       | 442,650                |       |
| Total liabilities and stockholders’ equity                                                                              |   | $                       | 772,795    |                   | $          | 747,709 |   |

 

The accompanying notes are an integral part of this statement.

 

4

----

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**(Dollars inthousands)**

**(unaudited)**

 
|                                                                             |   | **Six Months Ended  December 31,** |    |
|----------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                             |   | **2001**                                |    | **2002** |   |
| Cash flows from operating activities:                                            |   |                                    |    |   |   |
| Net loss                                                                         |   | $                                       | (2,616  | ) | $ | (28,512 | ) |
| Adjustments to reconcile net loss to net cash provided  by operating activities: |   |                                    |    |   |   |
| Depreciation and amortization                                                    |   | 44,741                                  |    | 49,443 |   |
| Special charges                                                                  |   | —                                  |    | 12,507 |   |
| Tax benefit from employee stock options                                          |   | 77                                      |    | — |   |
| Loss on warrants, net                                                            |   | 238                                     |    | — |   |
| Minority interest in income of joint ventures                                    |   | 3,992                                   |    | 2,731 |   |
| Deferred income tax (benefit) provision                                          |   | (4,702                                  | )       | 2,048 |   |
| Other                                                                            |   | (90                                     | )       | (308 | ) |
| Cash provided by (used in) changes in assets and  liabilities:                   |   |                                    |    |   |   |
| Accounts receivable, trade, net                                                  |   | (2,346                                  | )       | 2,217 |   |
| Accounts receivable, related parties                                             |   | (1,388                                  | )       | 1,978 |   |
| Inventories, net                                                                 |   | 2,726                                   |    | (1,143 | ) |
| Prepaid expenses and other current assets                                        |   | (4,514                                  | )       | 26,270 |   |
| Accounts payable, trade                                                          |   | (13,408                                 | )       | (3,958 | ) |
| Accounts payable, related parties                                                |   | (2,242                                  | )       | 862 |   |
| Other accrued liabilities                                                        |   | 7,601                                   |    | (8,228 | ) |
| Other assets, net                                                                |   | —                                  |    | (2,180 | ) |
| Net cash provided by operating activities                                        |   | 28,069                                  |    | 53,727 |   |
| Cash flows from investing activities:                                            |   |                                    |    |   |   |
| Purchases of property and equipment                                              |   | (68,644                                 | )       | (32,082 | ) |
| Proceeds from sale of property and equipment                                     |   | 2,669                                   |    | 1,975 |   |
| Proceeds from sale of warrants and investments                                   |   | 1,573                                   |    | 105 |   |
| Purchases of investments                                                         |   | —                                  |    | (1,983 | ) |
| Net cash used in investing activities                                            |   | (64,402                                 | )       | (31,985 | ) |
| Cash flows from financing activities:                                            |   |                                    |    |   |   |
| Proceeds from borrowings                                                         |   | 7,670                                   |    | 2,006 |   |
| Payments of borrowings                                                           |   | (2,564                                  | )       | (2,779 | ) |
| Proceeds from issuance of common stock under employee  plans                     |   | 1,712                                   |    | 1,499 |   |
| Net cash provided by financing activities                                        |   | 6,818                                   |    | 726 |   |
| Effect of exchange rate changes on cash                                          |   | (214                                    | )       | 587 |   |
| Net (decrease) increase in cash and cash equivalents                             |   | (29,729                                 | )       | 23,055 |   |
| Cash and cash equivalents at beginning of period                                 |   | 138,590                                 |    | 138,918 |   |
| Cash and cash equivalents at end of period                                       |   | $                                       | 108,861 |   | $ | 161,973 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                |   |                                    |    |   |   |
| Cash paid (received) for:                                                        |   |                                    |    |   |   |
| Interest                                                                         |   | $                                       | 274     |   | $ | 279 |   |
| Income taxes                                                                     |   | $                                       | 231     |   | $ | (20,849 | ) |

 

The accompanying notes are an integral part of this statement.

 

5

----

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

 

**(Dollars inthousands)**

 
|                                          |   | **Common Stock** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |   | **Total  Stockholders’  Equity** |   |
|-----------------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------|--------|---------------------------------------|--------|
| **Shares**                                    |   | **Amount**       |
| Balance at June 30, 2001                      |   | 17,806,897       |   | $                                | 178    |                   | $      | 310,763                               |   | $ | 151,024 |   | $ | 461,965 |   |
|                                          |   |             |   |                             |   |                   |   |                                  |   |   |   |
| Contribution of capital                       |   | —           |   | —                           |   | 357                    |   | —                                |   | 357 |   |
| Issuance of common stock under employee plans |   | 120,397          |   | 1                                |   | 3,310                  |   | —                                |   | 3,311 |   |
| Net income                                    |   | —           |   | —                           |   | —                 |   | 4,030                                 |   | 4,030 |   |
|                                          |   |             |   |                             |   |                   |   |                                  |   |   |   |
| Balance at June 30, 2002                      |   | 17,927,294       |   | 179                              |   | 314,430                |   | 155,054                               |   | 469,663 |   |
|                                          |   |             |   |                             |   |                   |   |                                  |   |   |   |
| Issuance of common stock under employee plans |   | 68,293           |   | 1                                |   | 1,498                  |   | —                                |   | 1,499 |   |
| Net loss                                      |   | —           |   | —                           |   | —                 |   | (28,512                               | )      | (28,512 | ) |
|                                          |   |             |   |                             |   |                   |   |                                  |   |   |   |
| Balance at December 31, 2002 (unaudited)      |   | 17,995,587       |   | $                                | 180    |                   | $      | 315,928                               |   | $ | 126,542 |   | $ | 442,650 |   |

 

The accompanying notesare an integral part of this statement.

 

6

----

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars inthousands, except share data)**

**(unaudited)**

 

**1.****              Basis of Presentation**

 

Theinterim consolidated financial statements presented in this report include theaccounts of DuPont Photomasks, Inc. and our controlled and wholly-ownedsubsidiaries. All significant intercompany transactions and accounts have beeneliminated in consolidation. These interim consolidated financial statementshave been prepared by us, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission, or SEC. All adjustments have beenmade to the accompanying interim consolidated financial statements which are,in the opinion of our management, necessary for a fair presentation of ouroperating results and include all adjustments of a normal recurring nature. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted pursuant to the rules and regulations of the SEC. It isrecommended that these interim consolidated financial statements be read inconjunction with the consolidated financial statements and the notes theretoincluded in our Annual Report on Form 10-K for the year ended June 30,2002.  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires the use of estimates and assumptions bymanagement in determining the reported amounts of assets and liabilities,disclosures of contingent liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the period.  Actual results could differ from thoseestimates.  The results of operationsfor any interim period are not necessarily indicative of the results of operationsfor the entire year. Certain reclassifications have been made in the priorperiod financial statements to conform with the current period presentation.

 

**2.****              Property and Equipment**

 

Property and equipmentare stated at cost and are depreciated using the straight-line method over theestimated useful lives of the assets. Leasehold improvements aredepreciated using the straight-line method over the shorter of the estimateduseful lives of the assets or the remaining term of the lease.  Accumulated depreciation was $364,005 atJune 30, 2002 and $406,925 at December 31, 2002. Assets held for sale relate tothe Gresham, Oregon facility and certain other equipment. We are activelymarketing these assets and will sell the assets after appropriate evaluation ofall proposals.

 

**3.****              New Accounting Pronouncements**

 

In June 2002, the Financial Accounting StandardsBoard, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No.146, “Accounting for Costs Associated with Exit or Disposal Activities.” UnderSFAS No. 146, a liability for a cost that is associated with an exit ordisposal activity must be recognized at fair value in the period the liabilityis incurred. SFAS No. 146 nullifies the guidance of the Emerging Issues TaskForce, or EITF, Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” We are currently evaluating the impact ofSFAS No. 146, but do not expect that its adoption will have a material adverseimpact on either our current results of operations or financial position. Wewill adopt SFAS No. 146 for events initiated subsequent to December 31, 2002.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure an Amendment of FASB Statement No. 123.” SFAS No. 148 amendscertain provisions of SFAS No. 123 and is effective for financial statementsfor fiscal years ending after December 15, 2002. We are currently assessing theimpact of adoption of SFAS No. 148.

 

In November 2002, the FASB issued FinancialInterpretation Number, or FIN, 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” FIN 45 elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued. It also clarifies that a guarantor is requiredto recognize, at the inception of a guarantee, a liability for the fair valueof the obligation undertaken in issuing the guarantee. Certain provisions ofFIN 45 are effective December 15, 2002; others are effective December 31, 2002.All provisions are to be handled prospectively. We have adopted FIN 45 duringthe three months ended December 31, 2002. It had no impact on our results ofoperations or financial position.

 

In January 2003, the FASBissued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 clarifiesthe application of Accounting Research Bulletin No. 51 with regard toconsolidation of variable interest entities and applies immediately to anyvariable interest entities created after January 31, 2003 and to variableinterest entities in which an interest is obtained after that date. We arecurrently assessing the impact of adoption of FIN 46.

 

7

----

 

**4.****              Derivative Instruments and Hedging Activities**

 

Forward foreign exchange contracts are utilized tomitigate the risks associated with currency fluctuations on certain balancesheet exposures, and are, therefore, held primarily for purposes other thantrading. These foreign exchange contracts do not qualify for hedge accountingunder SFAS No. 133. Unrealized gains and losses resulting from the impact ofcurrency exchange rate movements on forward foreign exchange contracts used tooffset certain non-U.S. dollar denominated assets and liabilities arerecognized as other income or expense in the period in which the exchange rateschange. These gains and losses are intended to offset the foreign currencygains and losses on the underlying exposures being hedged. The aggregate fairvalue of our forward foreign exchange contracts outstanding was $16,810 as ofDecember 31, 2002 with an unrealized loss recorded in other income, net in theconsolidated income statement of $146 for the quarter and six months endedDecember 31, 2002. These instruments may involve elements of credit and marketrisk in excess of the amounts recognized in the financial statements. Wemonitor our positions and the credit quality of counterparties, consisting ofmajor financial institutions, and do not anticipate nonperformance by anycounterparty.

 

**5.****              Earnings Per Share**

 

Basic earnings per share, or EPS, is computed bydividing net income (loss) by the weighted number of common shares outstandingduring each period. Diluted EPS is computed by dividing net income (loss) afteradjustments for the dilutive effect of the convertible notes by the weightedaverage number of common shares and common share equivalents outstanding (ifdilutive) during each period. Common share equivalents include stock optionsand assume conversion of the convertible notes. The number of common shareequivalents outstanding relating to stock options is computed using thetreasury stock method while the number of common share equivalents relating tothe convertible notes is computed using the if converted method.

 

The reconciliation of the amounts used to calculatethe basic EPS and diluted EPS is as follows:

 
|                                                |   | **Three Months Ended  December 31,** |   | **Six Months Ended  December 31,** |   |
|-----------------------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|                                                |   | **2001**                             |   | **2002**                           |   | **2001** |   | **2002** |   |
| Net income (loss) for the period – basic       |   | $                                    | 367    |                               | $      | (23,017 | ) | $ | (2,616 | ) | $ | (28,512 | ) |
| Dilutive effect of convertible notes                |   | —                               |   | —                             |   | — |   | — |   |
|                                                |   |                                 |   |                               |   |   |   |   |   |
| Net income (loss) for the period – diluted     |   | $                                    | 367    |                               | $      | (23,017 | ) | $ | (2,616 | ) | $ | (28,512 | ) |
|                                                |   |                                 |   |                               |   |   |   |   |   |
| Weighted average shares outstanding – basic    |   | 17,854,578                           |   | 17,993,994                         |   | 17,844,930 |   | 17,982,365 |   |
| Plus: Common share equivalents                      |   | 200,760                              |   | —                             |   | — |   | — |   |
|                                                |   |                                 |   |                               |   |   |   |   |   |
| Weighted average shares outstanding – dilutive |   | 18,055,338                           |   | 17,993,994                         |   | 17,844,930 |   | 17,982,365 |   |

 

Stock options to acquire 2,828,444 and 4,392,116shares for the three months ended December 31, 2001 and 2002, respectively, werenot included in common share equivalents because the effect of including thesestock options would have been anti-dilutive. Stock options to acquire 3,710,633and 4,392,116 shares for the six months ended December 31, 2001 and 2002,respectively, were not included in common share equivalents because the effectof including these stock options would have been anti-dilutive.  For the three and six months ended December31, 2001 and 2002, 941,088 shares for the effect of the convertible notes werenot included in the computations of diluted EPS because the effect of includingthe convertible notes would have been anti-dilutive.  These options and the convertible notes may become dilutive inthe future.

 

**6.****              Comprehensive Income**

 

We have adopted SFAS No. 130, “Reporting ComprehensiveIncome.” Our comprehensive income is comprised of net loss and unrealized gainsand losses on certain investments in debt and equity securities. We had noitems of comprehensive income other than net loss for the six months ended December31, 2001 and 2002.

 

8

----

 

**7.****              Segment Information**

 

In accordance with SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” segment information is asfollows: 

 
|                                      |   | **North  America** |    | **Europe** |   | **Asia** |   | **Eliminations** |    | **Total** |   |
|-------------------------------------------|--------|--------------------|---------|------------|--------|----------|--------|------------------|---------|-----------|--------|
| **Three  Months Ended December 31, 2001** |   |               |    |       |   |     |   |             |    |      |   |
| Revenue, net                              |   | $                  | 43,500  |       | $      | 14,714   |   | $                | 28,411  |      | $      | — |   | $ | 86,625 |   |
| Transfers  between geographic segments    |   | 6,653              |    | 775        |   | 7,629    |   | (15,057          | )       | —    |   |
|                                      |   | $                  | 50,153  |       | $      | 15,489   |   | $                | 36,040  |      | $      | (15,057 | ) | $ | 86,625 |   |
| Net (loss)  income                        |   | $                  | (9,812  | )          | $      | 1,424    |   | $                | 8,755   |      | $      | — |   | $ | 367 |   |
|                                      |   |               |    |       |   |     |   |             |    |      |   |
| **Six  Months Ended December 31, 2001**   |   |               |    |       |   |     |   |             |    |      |   |
| Revenue, net                              |   | $                  | 82,963  |       | $      | 28,589   |   | $                | 52,534  |      | $      | — |   | $ | 164,086 |   |
| Transfers  between geographic segments    |   | 12,044             |    | 992        |   | 14,926   |   | (27,962          | )       | —    |   |
|                                      |   | $                  | 95,007  |       | $      | 29,581   |   | $                | 67,460  |      | $      | (27,962 | ) | $ | 164,086 |   |
| Net (loss)  income                        |   | $                  | (12,558 | )          | $      | (4,844   | )      | $                | 14,786  |      | $      | — |   | $ | (2,616 | ) |
|                                      |   |               |    |       |   |     |   |             |    |      |   |
| **June 30, 2002**                         |   |               |    |       |   |     |   |             |    |      |   |
| Identifiable assets                       |   | $                  | 338,314 |       | $      | 102,883  |   | $                | 331,598 |      | $      | — |   | $ | 772,795 |   |
|                                      |   |               |    |       |   |     |   |             |    |      |   |
| **Three  Months Ended December 31, 2002** |   |               |    |       |   |     |   |             |    |      |   |
| Revenue, net                              |   | $                  | 38,609  |       | $      | 15,877   |   | $                | 26,483  |      | $      | — |   | $ | 80,969 |   |
| Transfers  between geographic segments    |   | 1,690              |    | 227        |   | 5,479    |   | (7,396           | )       | —    |   |
|                                      |   | $                  | 40,299  |       | $      | 16,104   |   | $                | 31,962  |      | $      | (7,396 | ) | $ | 80,969 |   |
| Net (loss)  income                        |   | $                  | (16,493 | )          | $      | (12,286  | )      | $                | 5,762   |      | $      | — |   | $ | (23,017 | )  |
|                                      |   |               |    |       |   |     |   |             |    |      |   |
| **Six  Months Ended December 31, 2002**   |   |               |    |       |   |     |   |             |    |      |   |
| Revenue, net                              |   | $                  | 77,948  |       | $      | 29,873   |   | $                | 57,388  |      | $      | — |   | $ | 165,209 |   |
| Transfers  between geographic segments    |   | 3,331              |    | 270        |   | 10,302   |   | (13,903          | )       | —    |   |
|                                      |   | $                  | 81,279  |       | $      | 30,143   |   | $                | 67,690  |      | $      | (13,903 | ) | $ | 165,209 |   |
| Net (loss)  income                        |   | $                  | (28,441 | )          | $      | (15,044  | )      | $                | 14,973  |      | $      | — |   | $ | (28,512 | )  |
|                                      |   |               |    |       |   |     |   |             |    |      |   |
| **December  31, 2002**                    |   |               |    |       |   |     |   |             |    |      |   |
| Identifiable  assets                      |   | $                  | 288,840 |       | $      | 96,958   |   | $                | 361,911 |      | $      | — |   | $ | 747,709 |   |

 

Products are transferred between geographic areas on abasis intended to approximate the market value of such products.

 

**8.****              Provision For (Benefit From) Income Taxes**

 

The provision for income taxesdiffers from the benefit amount computed by applying the federal statutory rateof 35 percent to consolidated loss before income taxes and minority interest asa result of our reduced tax rates in certain Asian jurisdictions, our inabilityto record deferred tax benefits for net operating losses generated in certaintax jurisdictions and our need to place a valuation allowance on certain otherdeferred tax assets as discussed below.

 

During the six months endedDecember 31, 2002, we recorded valuation allowances against our net deferredtax assets in the U.S. and in Europe (primarily related to net operating losscarryforwards). The restructuring in Germany (see note 9 below), also resultedin a charge for a valuation allowance of $1,812 during the three months endedDecember 31, 2002. The valuation allowances were recorded under the provisionsof SFAS No. 109, “Accounting forIncome Taxes,” which requires an assessment of positive and negative evidencewhen determining the need for a valuation allowance. Historical evidence, suchas the operating results in the U.S. and Europe during the most recentthree-year period, is weighted more heavily in this assessment as compared tofuture expected results because of the uncertainty of actually achievingforecasted results. Our cumulative U.S. losses and European losses in the mostrecent three-year period represent sufficient negative evidence to require avaluation allowance against our U.S. and European net deferred tax assets. Weintend to maintain valuation allowances until sufficient positive evidenceexists to support their reversal.

 

Additionally, we received anincome tax refund of $18,636 by carrying U.S. net operating losses back toprior years.

 

9

----

 

**9.****              Special Charges**

 

During the three months ended December 31, 2002, werecorded pre-tax special charges totaling $12,507 related to our decision toconsolidate certain facilities and the related employee severance costs,facility closure costs and equipment lease termination costs. These specialcharges were the result of programs that were implemented to reduce costs,improve productivity and enhance customer service.

 

In Europe, we plan to streamline our operations byconsolidating photomask production in Rousset, France and Hamburg, Germany intoour manufacturing facility in Corbeil, France resulting in the decommissioningof several production lines and the relocation of other equipment within ourglobal network. As a result of the decommissioning of certain assets, werecorded an impairment charge related to assets to be sold, and recorded $217as assets held for sale. The Rousset and Hamburg facilities will continue toserve as regional centers for technical and sales support. These initiativesare expected to reduce the global workforce by approximately 8 percent, or 140positions, primarily in manufacturing, once fully implemented. Ourconsolidation plans for our facilities in Europe are subject to compliance withlocal laws and regulations, including consultations and negotiations with therelevant works councils. The special charges exclude severance and otheremployee related costs that may be incurred and reported in future periods as aresult of those negotiations. We plan to vacate the leased manufacturingfacility in Hamburg and complete the consolidation initiatives in Europe withinapproximately 10 months. The special charges recorded in Europe in the threemonths that ended December 31, 2002 totaled $6,307.

 

In the United States, we modified and extended our DPIReticle Technology Center, LLC, or RTC, research and development joint ventureagreement through June 2004. As part of this modification and extension, weintegrated our employees from the RTC into our Round Rock, Texas commercialproduction facility and terminated approximately 2 percent of our globalworkforce, or 30 positions, primarily in manufacturing. Also, in connectionwith this modification and extension of the RTC joint venture agreement, theRTC terminated a majority of its equipment leases. Our share of the RTCequipment lease termination costs was $3,782. Additionally, we recorded acharge for asset impairments at our Round Rock facility. The integration andconsolidation initiatives in the United States were completed as of December31, 2002 and resulted in special charges in the three months that endedDecember 31, 2002 of $6,200.

 

A summary of the special charges is shown below:

 
|                                     |   | **Asset  Impairments** |   | **Employee  Severance** |   | **Lease  Terminations  and Other  Costs** |   | **Total** |   |
|------------------------------------------|--------|------------------------|--------|-------------------------|--------|-------------------------------------------|--------|-----------|--------|
| Quarter ended December 31, 2002 charges  |   | $                      | 8,754  |                    | $      | 1,527                                     |   | $         | 2,226  |   | $ | 12,507 |   |
| Utilized as of December 31, 2002         |   | (3,816                 | )      | (322                    | )      | —                                    |   | (4,138    | )      |
|                                     |   |                   |   |                    |   |                                      |   |      |   |
| Remaining liability at December 31, 2002 |   | $                      | 4,938  |                    | $      | 1,205                                     |   | $         | 2,226  |   | $ | 8,369 |   |

 

We expect the accrued liability will be completelypaid out by December 31, 2003.

 

**10.****       Warranties**

 

Provision is made for an estimate of product warrantyclaims based on historical experience and is recorded as an increase to cost ofgoods sold.

 

Changes in our warranty liability were as follows:

 
|                               |   | **Balance at  Beginning  of Period** |   | **Accruals  for  Warranties  Issued** |   | **Settlements  Made in Kind** |   | **Balance at  End of  Period** |   |
|------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|-------------------------------|--------|--------------------------------|--------|
| Six Months ended December 31, 2002 |   | $                                    | 250    |                                  | $      | 546                           |   | $                              | (546   | ) | $ | 250 |   |
|                                    |        |                                      |        |                                       |        |                               |        |                                |        |  |  |  |  |

 

**11.****       Commitments and Contingencies**

 

We have various purchase commitments incidental to thenormal course of business, including non-refundable deposits to purchaseequipment. In the aggregate, such commitments are not at prices in excess ofcurrent market.

 

We guarantee a portion of certain equipment leases ofthe RTC. Our portion of the future minimum lease payments of the RTC 

 

10

----

 

aggregated approximately $3,800 as of December 31, 2002. We are alsocommitted to fund approximately 25 percent of the costs related to themaintenance and overhead of the leased equipment through June 2004.

 

We, along with Infineon and AMD, have establishedjoint ventures in Dresden, Germany to conduct leading edge photomask researchand pilot manufacturing. The ventures consist of the Advanced Mask TechnologyCenter GmbH & Co. KG, or AMTC, and the Maskhouse Building AdministrationGmbH & Co. KG, or BAC. The AMTC will conduct photomask research and pilotmanufacturing. The BAC is the owner of a state-of-the-art photomask researchand manufacturing facility that is currently under construction. We will leaseapproximately 50 percent of the facility from the BAC for advanced photomaskmanufacturing and the remainder will be leased by the AMTC. Both leases will befor 10-year terms. In addition, we are committed to funding a portion of theoperating cash requirements of the AMTC under the research and developmentreimbursement and capacity utilization obligations. We expect our portion to beapproximately 33 percent during the next year and to vary between approximately22 percent to 26 percent thereafter.

 

We have also guaranteed one-third of the BAC’s 75.0million Euro ($78,113 at December 31, 2002) construction bridge loan, which had40.2 million Euro ($41,851 at December 31, 2002) outstanding at December 31,2002. The construction bridge loan provides for interest at Euribor plus 1.5percent over the term of the loan. The maturity date is the earlier of theinitial draw down under the term loan discussed below or June 2003. Each of thepartners of the joint venture executed guarantees for one-third of the totaloutstanding debt, up to 25.0 million Euro ($26,038 at December 31, 2002) andcertain additional costs as defined in the loan agreement for as long as anyobligation remains outstanding on the loan. We will be required to honor ourguarantee if the BAC fails to make timely payments under the bridge loan;breaches certain financial covenants; fails to construct the facility as planned;becomes insolvent; or in any other way defaults under the loan agreement. Wewill also be required to honor our guarantee if any of the owners of the BACbreach certain terms of the joint venture agreement, become insolvent or ceasedoing business, experience a material adverse change affecting theirobligations under the guarantee, fail to pay their respective indebtedness inexcess of 50.0 million Euro ($52,075 at December 31, 2002), or otherwiseexperience an event constituting a default under the loan agreement.

 

In December 2002, the BAC executed a 75.0 million Euro($78,113 at December 31, 2002) term loan agreement for the repayment of theconstruction bridge loan. There was no outstanding balance on this loan atDecember 31, 2002. The term loan provides for interest at Euribor plus 1.5percent over the term of the loan. Repayment of the loan is scheduled forapproximately equal quarterly payments beginning in the quarter following thefirst utilization date and continuing through June 2012. Each of the partnersof the joint venture executed guarantees for one-third of the total outstandingdebt, or 25.0 million Euro ($26,038 at December 31, 2002) and certainadditional costs as defined in the loan agreement until the occupancy of thebuilding and rental payments begin. Thereafter, we have no guarantee related tothe term loan unless the lenders become liable to return monies received inpayment of the indebtedness as a result of any bankruptcy, composition orsimilar proceedings affecting the BAC. We will be required to honor ourguarantee if the BAC fails to make timely payments under the term loan;breaches certain financial covenants; becomes insolvent; or in any other waydefaults under the loan agreement. We will also be required to honor our guaranteeif any of the owners of the BAC breach certain terms of the joint ventureagreement, become insolvent or cease doing business, experience a materialadverse change affecting their obligations under the guarantee, fail to paytheir respective indebtedness in excess of 50.0 million Euro ($52,075 atDecember 31, 2002), or otherwise experience an event constituting a defaultunder the loan agreement.

 

Also in December 2002, the AMTC executed a 120.0million Euro ($124,980 at December 31, 2002) revolving credit loan for thepurchase of equipment. There was no outstanding balance on this loan atDecember 31, 2002. The loan provides for interest at Euribor plus 1.2 percentover the term of the loan. Repayment of each revolving credit loan must be madeon its maturity date. The maturity date of the revolving credit loan is theearlier of December 2007 or the termination of the joint venture agreementresulting from a change in ownership for the AMTC. Each of the partners of thejoint venture executed guarantees for 32.0 million Euro ($33,328 at December31, 2002) and certain additional costs as defined in the loan agreement for aslong as any obligation remains outstanding on the loan. We will be required tohonor our guarantee if the AMTC fails to make timely payments under therevolving credit loan; breaches certain financial covenants; becomes insolvent;or in any other way defaults under the loan agreement. We will also be requiredto honor our guarantee if any of the owners of the AMTC breach certain terms ofthe joint venture agreement, become insolvent or cease doing business,experience a material adverse change affecting their obligations under theguarantee, fail to pay their respective indebtedness in excess of 50.0 millionEuro ($52,075 at December 31, 2002), or otherwise experience an eventconstituting a default under the loan agreement.

 

We have established a profit sharing plan with theBindKey employees, which will be paid out over the next four years, based onBindKey’s after-tax net income. Subject to future milestones, the employees mayearn as much as $165,000, which will be expensed in the period earned.

 

In May 2002, we entered into an agreement to acquirephotomask production equipment from Infineon’s internal photomask manufacturingoperations in Munich, Germany and become Infineon’s strategic photomasksupplier.  In consideration for theacquisition of certain photomask production assets and the agreement to supplyInfineon with photomasks over the 10-year term of the agreement, we will pay Infineon$53,500 over a seven-year period ending in March 2009.

 

We are subject to litigation in the normal course ofbusiness. We believe the effect, if any, of an unfavorable resolution of such 

 

11

----

 

litigation would not have a material adverse impact on our financialposition, results of operations, cash flows or liquidity.

 

Our operations and our ownership of real property aresubject 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 withsuch laws and regulations requires that we incur capital expenditures andoperating costs in connection with our ongoing operations. In addition, suchlaws and regulations may impose liabilities on owners and operators ofbusinesses and real property without regard to fault and such liabilities maybe joint and several with other parties. More stringent environmental laws andregulations may be enacted in the future, which may require us to expendadditional amounts on environmental compliance or may require modifications toour operations. Although we are unable to predict the extent of our future liabilitywith respect to any environmental matters, we believe, based upon currentinformation, that environmental liabilities will not be material to ourfinancial position or results of operations. E.I. duPont de Nemours &Company, or DuPont, has agreed to indemnify us for any environmentalcontamination present on our manufacturing sites at June 13, 1996, the date ofour initial public offering, or present at any such site due to the generation,use, treatment, storage, release, emission, discharge or disposal of hazardouswaste or hazardous materials before such date. The Environmental ProtectionAgency is reviewing a groundwater contamination issue at our Danbury,Connecticut site under voluntary corrective action. Any such contamination isbelieved to be offsite or historical, and, if that is the case, anyenvironmental liabilities would be covered by the indemnification agreementwith DuPont.

 

12

----

 

**Item 2.**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis of the financialcondition and results of operations should be read in conjunction with ourconsolidated financial statements and related notes thereto. References toyears are to fiscal years ended June 30. Results for interim periods are notnecessarily indicative of results for the full year.

 

**Overview**

 

Based on worldwide revenue, we are one of the largestphotomask manufacturers in the world. We sell our products to over 300 customersand customer sites in over 17 different countries. Essentially all of our salesare to customers in the semiconductor manufacturing industry. We manufacture abroad range of photomasks based on customer-supplied design data. We alsomanufacture pellicles, primarily for internal consumption.  Pellicles are one of the principalcomponents of photomasks, and protect the photomask from particlecontamination. We operate globally with established manufacturing facilities inNorth America, Europe and Asia.

 

We believe that, over the long-term, the market forphotomasks in the semiconductor manufacturing process will increase due to thefollowing trends:

 

•  Proliferation of semiconductor applications;

•  Customization of semiconductor designs;

•  Increasing semiconductor device complexity;and

•  Decreasing size of semiconductor designs.

 

These trends have increased the importance ofphotomask technology in the semiconductor manufacturing process. As a result ofthese trends, coupled with our acquisitions of captive photomask operations,our annual revenue increased at an average annual compounded rate of 9 percentfrom 1999 to 2002.

 

Photomask manufacturing operations are capitalintensive. Accordingly, at a given threshold of manufacturing capacity, a high proportionof our operating costs are fixed and remain relatively constant as sales volumeincreases or decreases. To the extent that we have under-utilized productioncapacity, operating profit increases or decreases disproportionately as salesvolume increases or decreases.

 

**Resultsof Operations**

 

*Revenue,net.*  Revenue, net iscomprised primarily of photomask sales to semiconductor manufacturers. Revenue,net decreased 6.5 percent from $86.6 million in the three months ended December31, 2001 to $81.0 million in the three months ended December 31, 2002. Revenue,net increased 0.7 percent from $164.1 million in the six months ended December31, 2001 to $165.2 million in the six months ended December 31, 2002. Revenue,net produced in North America decreased from $83.0 million in the six monthsended December 31, 2001 to $77.9 million in the six months ended December 31,2002 while revenue, net produced in Europe and Asia increased from $28.6million and $52.5 million, respectively, in the six months ended December 31,2001 as compared to $29.9 million and $57.4 million, respectively, in the sixmonths ended December 31, 2002. We experienced an increase in unit demand fromthe three months and six months ended December 31, 2001 as compared to thethree months and six months ended December 31, 2002, respectively. Overallaverage selling prices decreased from the three months and six months endedDecember 31, 2001 to the three months and six months ended December 31, 2002,respectively. Given the recent photomask demand pattern and our customers’forecasts, we expect revenues to be between $77.0 million and $85.0 million forthe three months ending March 31, 2003.

 

*Costof Goods Sold.*  Costof goods sold consists of materials, labor, depreciation and overhead.  Cost of goods sold increased 5.3 percentfrom $67.4 million to $71.0 million for the three months ended December 31,2001 and 2002, respectively. Cost of goods sold increased 5.2 percent from$134.7 million to $141.7 million for the six months ended December 31, 2001 and2002, respectively. The increases were primarily as a result of increasedunits, increased costs associated with customer qualifications at advancednodes and increased depreciation expense from new equipment. Gross profitmargin decreased from 22.2 percent for the three months ended December 31, 2001to 12.3 percent for the three months ended December 31, 2002. Gross profitmargin decreased from 17.9 percent for the six months ended December 31, 2001to 14.2 percent for the six months ended December 31, 2002. The decreases ingross profit margin resulted primarily from increased costs associated withcustomer qualifications at advanced nodes and increased depreciation. We expectthat gross profit margins will experience near term pressure primarily as aresult of the transition of certain assets and related employees of the RTCinto our Round Rock facility, the start-up costs for our Dresden, Germanymanufacturing facility and consolidation costs in Europe.

 

13

----

 

*Selling,General and Administrative Expense.*  Selling, general and administrative expense includes salaries ofsales and administrative personnel, marketing expense, general andadministrative expense and product distribution expense. Selling, general andadministrative expense increased 3.0 percent from $10.1 million for thethree months ended December 31, 2001 to $10.4 million for the three monthsended December 31, 2002. Selling, general and administrative expense as a percentageof revenue increased from 11.7 percent for the three months ended December 31,2001 to 12.9 percent for the three months ended December 31, 2002. Selling,general and administrative expense increased 3.9 percent from$19.6 million for the six months ended December 31, 2001 to$20.3 million for the six months ended December 31, 2002. Selling, generaland administrative expense as a percentage of revenue increased from 11.9percent for the six months ended December 31, 2001 to 12.3 percent for the sixmonths ended December 31, 2002. The increases in selling, general andadministrative expense as a percentage of revenue were primarily a result ofthe staffing of BindKey and the initial staffing of the Dresden facility. Weexpect selling, general and administrative expense will be at or near thecurrent levels in the three months ending March 31, 2003.

 

*Researchand Development Expense.* Research and development expense consists primarily of employee costs,cost of consumed materials, depreciation, engineering related costs and ourshare of costs of the RTC and AMTC. Research and development expense increased10.5 percent from $6.9 million for the three months ended December 31,2001 to $7.6 million for the three months ended December 31, 2002.  As a percentage of revenue it increased from7.9 percent for the three months ended September 30, 2001 to 9.4 percent forthe three months ended December 31, 2002. BindKey’s electronic designautomation, or EDA, software development expenses and startup expenses of theAMTC contributed to the increase. Research and development expense increased13.8 percent from $13.3 million for the six months ended December 31, 2001to $15.2 million for the six months ended December 31, 2002.  As a percentage of revenue it increased from8.1 percent for the six months ended December 31, 2001 to 9.2 percent for thesix months ended December 31, 2002. We believe that, because of our continuedfocus on research and development and through collaboration with our customerson joint development projects, we will be able to help meet the futuretechnology needs of the semiconductor industry for advanced photomasks. Weexpect that research and development expense will be at or near the currentlevels in the three months ending March 31, 2003.

 

*SpecialCharges*. During the three months ended December 31, 2002, werecorded pre-tax special charges totaling $12.5 million related to our decisionto consolidate certain facilities and the related employee severance costs,facility closure costs and equipment lease termination costs. These specialcharges were the result of programs implemented to reduce costs, improveproductivity and enhance customer service.

 

In Europe, we plan to streamline our operations byconsolidating photomask production in Rousset, France and Hamburg, Germany intoour manufacturing facility in Corbeil, France resulting in the decommissioningof several production lines and the relocation of other equipment within ourglobal network. As a result of the decommissioning of certain assets, we recordedan impairment charge related to assets to be sold, and recorded $0.2 million asassets held for sale. The Rousset and Hamburg facilities will continue to serveas regional centers for technical and sales support. These initiatives areexpected to reduce the global workforce by approximately 8 percent, or 140positions, primarily in manufacturing, once fully implemented. Ourconsolidation plans for our facilities in Europe are subject to compliance withlocal laws and regulations, including consultations and negotiations with therelevant works councils. The special charges exclude severance and otheremployee related costs that may be incurred and reported in future periods as aresult of those negotiations. We plan to vacate the leased manufacturingfacility in Hamburg and complete the consolidation initiatives in Europe withinapproximately 10 months. The special charges recorded in Europe in the threemonths ended December 31, 2002 totaled $6.3 million.

 

In the United States, we modified and extended our DPIReticle Technology Center, LLC, or RTC, research and development joint ventureagreement through June 2004. As part of this modification and extension, weintegrated our employees from the RTC into our Round Rock, Texas commercialproduction facility and terminated approximately 2 percent of our globalworkforce, or 30 positions, primarily in manufacturing. Also, in connectionwith the modification and extension of the RTC joint venture agreement, the RTCterminated a majority of its equipment leases. Our share of the RTC equipmentlease termination costs was $3.8 million. Additionally, we recorded a chargefor asset impairments at our Round Rock facility. The integration andconsolidation initiatives in the United States were completed as of December31, 2002 and resulted in special charges in the three months that endedDecember 31, 2002 of $6.2 million.

 

14

----

 

A summary of the special charges is shown below:

 
|                                     |   | **Asset  Impairments** |   | **Employee  Severance** |   | **Lease  Terminations  and OtherCosts** |   | **Total** |   |
|------------------------------------------|--------|------------------------|--------|-------------------------|--------|-----------------------------------------|--------|-----------|--------|
|                                     |   |                   |   |                    |   |                                    |   |      |   |
| Quarter ended December 31, 2002 charges  |   | $                      | 8.8    |                    | $      | 1.5                                     |   | $         | 2.2    |   | $ | 12.5 |   |
| Utilized as of December 31, 2002         |   | (3.8                   | )      | (0.3                    | )      | —                                  |   | (4.1      | )      |
|                                     |   |                   |   |                    |   |                                    |   |      |   |
| Remaining liability at December 31, 2002 |   | $                      | 5.0    |                    | $      | 1.2                                     |   | $         | 2.2    |   | $ | 8.4 |   |

 

We expect the accrued liability will be completelypaid out by December 31, 2003.

 

*Income(Loss) on Warrants, net*. During the three months and six months ended December 31, 2001, werecognized realized gains of $0.9 million and realized losses of $0.2 million,respectively, upon the exercise of warrants of a strategic partner and sale ofthe underlying securities. There were no such holdings in the three months andsix months ended December 31, 2002.

 

*OtherIncome, net.*  Otherincome, net includes interest expense, interest income and exchange gains andlosses.  Other income, net was unchangedat $0.2 million for the three months ended December 31, 2001 and 2002.Other income, net was $1.5 million and $0.1 million for the six monthsended December 31, 2001 and 2002, respectively. The decrease was primarily dueto lower interest income reflecting lower interest rates and exchange lossesfrom foreign currency movements.

 

*ProvisionFor (Benefit From) Income Taxes.*  The provision for income taxes differs from the benefit amount computedby applying the federal statutory rate of 35 percent to consolidated lossbefore income taxes and minority interest as a result of our reduced tax ratesin certain Asian jurisdictions, our inability to record deferred tax benefitsfor net operating losses generated in certain tax jurisdictions and our need toplace a valuation allowance on certain other deferred tax assets as discussedbelow.

 

During the six months endedDecember 31, 2002, we recorded valuation allowances against our net deferredtax assets in the U.S. and Europe (primarily related to net operating losscarryforwards). The restructuring in Germany also resulted in a charge for avaluation allowance of $1.8 million during the three months ended December 31,2002. The valuation allowances were recorded under the provisions of SFAS No.109, “Accounting for Income Taxes,”which requires an assessment of positive and negative evidence when determiningthe need for a valuation allowance. Historical evidence, such as the operatingresults in the U.S. and Europe during the most recent three-year period, isweighted more heavily in this assessment as compared to future expected resultsbecause of the uncertainty of actually achieving forecasted results. Ourcumulative U.S. losses and European losses in the most recent three-year periodrepresent sufficient negative evidence to require a valuation allowance againstour U.S. and European net deferred tax assets. We intend to maintain valuationallowances until sufficient positive evidence exists to support their reversal.

 

Additionally, we received anincome tax refund of $18.6 million by carrying U.S. net operating losses backto prior years.

 

*MinorityInterest in Income of Joint Ventures.*  The minority interest impact of our jointventures was $2.4 million for the three months ended December 31, 2001 and $0.9million for the three months ended December 31, 2002. The minority interestimpact of our joint ventures was $4.0 million for the six months ended December31, 2001 and $2.7 million for the six months ended December 31, 2002. Thedecreases were a result of a reduction in the tapeout of new designs at onemajor customer. Minority interest in income of joint ventures reflects ourpartners’ share of the earnings of our consolidated joint venture operations.

 

**Liquidityand Capital Resources**

 

Our working capital was$110.3 million at June 30, 2002 and $124.3 million at December 31, 2002.The increase in working capital was primarily due to our operating cashflows.  Cash and cash equivalents were$138.9 million at June 30, 2002 and $162.0 million at December 31,2002.  Cash provided by operatingactivities of $53.7 million for the six months ended December 31, 2002 wasprimarily a result of our net loss adjusted for non-cash charges and thereceipt of an income tax refund of approximately $18.6 million.

 

Cash used in investingactivities was $64.4 million and $32.0 million for the six months endedDecember 31, 2001 and 2002, respectively. Cash used for capital expenditures was $68.6 million and$32.1 million for the six months ended December 31, 2001 and 2002,respectively. We also made a $2.0 million capital contribution to the BAC inthe six months ended December 31, 2002. Management expects capital expendituresfor fiscal 2003 to be approximately $60.0 million. Capital expenditures havebeen and will be used primarily to expand and to advance our manufacturing andtechnical capabilities.  In addition, wemay in the future pursue additional acquisitions of businesses, products andtechnologies, or enter into other joint venture arrangements that couldcomplement 

 

15

----

 

or expand our business.  Anymaterial acquisition or joint venture could result in a decrease to our workingcapital depending on the amount, timing and nature of the consideration to bepaid.

 

Cash provided byfinancing activities was $6.8 million and $0.7 million for the six monthsended December 31, 2001 and 2002, respectively.  For the six months ended December 31, 2002, our employeespurchased $1.5 million of common stock under our employee plans.

 

Our ongoing cashrequirements will be for capital expenditures, acquisitions, research anddevelopment and working capital. Management believes that cash on hand and any cash provided byoperations will be sufficient to meet our cash requirements for at least thenext 12 months. Thereafter, based on our current operating plans, we mayrequire external financing from time to time to fund our capital expenditurerequirements.  There can be no assurancethat alternative sources of financing will be available if our capitalrequirements exceed cash flow from operations. There can be no assurance thatwe will be able to obtain any additional financing required to fund our capitalneeds on reasonable terms, or at all.

 

The following summarizesour contractual cash obligations as of December 31, 2002 (in millions):

 

|                               |   |      |   | **Payments Due for the Periods ending December 31,** |   |
|------------------------------------|--------|-----------|--------|------------------------------------------------------|--------|
|                               |   | **Total** |   | **Year  2003**                                       |   | **Two Years  2004-2005** |   | **Two Years  2006-2007** |   | **Beyond** |   |
| Long-term debt                     |   | $         | 111.1  |                                                 | $      | 10.7 |   | $ | 100.0 |   | $ | 0.4 |   | $ | — |   |
| Capital lease obligations          |   | 2.9       |   | 0.9                                                  |   | 0.6 |   | 0.3 |   | 1.1 |   |
| Operating leases                   |   | 14.0      |   | 3.4                                                  |   | 3.5 |   | 2.7 |   | 4.4 |   |
| Other long-term obligations        |   | 3.4       |   | —                                               |   | — |   | — |   | 3.4 |   |
| Total contractual cash obligations |   | $         | 131.4  |                                                 | $      | 15.0 |   | $ | 104.1 |   | $ | 3.4 |   | $ | 8.9 |   |

 

The following summarizesour other commercial commitments as of December 31, 2002 (in millions):

 

|                         |   |      |   | **Amount of Commitment Expiration by Periods Ending  December 31,** |   |
|------------------------------|--------|-----------|--------|---------------------------------------------------------------------|--------|
|                         |   | **Total** |   | **Year  2003**                                                      |   | **Two Years  2004-2005** |   | **Two Years  2006-2007** |   | **Beyond** |   |
| Guarantees                   |   | $         | 17.8   |                                                                | $      | 17.8 |   | $ | — |   | $ | — |   | $ | — |   |
| Other commercial commitments |   | 81.6      |   | 28.1                                                                |   | 23.9 |   | 26.1 |   | 3.5 |   |
| Total commercial commitments |   | $         | 99.4   |                                                                | $      | 45.9 |   | $ | 23.9 |   | $ | 26.1 |   | $ | 3.5 |   |

 

Guarantees include ourportion of certain equipment leases of the RTC with future minimum leasepayments aggregating approximately $3.8 million as of December 31, 2002. Wehave also guaranteed one-third of the BAC’s 75.0 million Euro ($78.1 million atDecember 31, 2002) construction bridge loan, which had 40.2 million Euro ($41.9million at December 31, 2002) outstanding at December 31, 2002. During December2002, the BAC and AMTC executed a loan agreement that included a term loan of75.0 million Euro ($78.1 million at December 31, 2002) and a revolving creditloan of 120.0 million Euro ($125.0 million). As of December 31, 2002, therewere no outstanding balances under either loan. The term loan will be used torepay the construction bridge loan and the revolving credit loan will be usedfor equipment acquisitions. We expect the term loan to be funded in the fourthquarter of fiscal 2003. We have guaranteed one-third of the term loan until theBAC building is occupied and lease payments begin. We have guaranteed 32.0million Euro ($33.3 million at December 31, 2002) of the revolving credit loan.Each of these guarantees include certain other costs as defined in the loanagreement. We will be required to honor our guarantees upon the occurrence ofan event of default as defined in the loan agreement.

 

Other commercialcommitments include our equipment purchase commitments to Infineon ofapproximately $28.1 million payable through December 2006 and our approximately$53.5 million long-term supply contract and equipment purchase commitment withInfineon that requires payments through March 2009. We may, at our discretion,pay approximately $30.2 million of the commitments to Infineon in shares of ourcommon stock. The number of shares required to satisfy this commitment will bebased on the fair value of our common stock at the time of payment.

 

In addition to thecommitments in the tables above, we are also committed to fund approximately 25percent of the costs related to the maintenance and overhead of the leasedequipment of the RTC through June 2004. Additionally, we are committed to funda portion of the operating cash requirements of the AMTC. We expect our portionto be approximately 33 percent in the next year and to vary betweenapproximately 22 percent to 26 percent thereafter. We will lease approximately50 percent of the BAC’s photomask research and manufacturing facility for aterm of 10 years.

 

We have also established a profit sharing plan with the BindKey employees,which will be paid out over the next four years, based on BindKey’s after-taxnet income. Subject to future milestones, the employees may earn as much as$165.0 million, which will be expensed in the period earned.

 

16

----

 

**Critical Accounting Policies**

 

Ourcritical accounting policies are asfollows:

 

•Revenuerecognition

 

Productrevenue is recognized when both titleand risk of loss transfers to the customer, provided that no significantobligations remain.  Discountsand rebates are recorded as a reduction of revenue during the period they areearned by the customer.  Provision ismade for an estimate of product returns based on historical experience and isrecorded as a reduction in revenue. Customarily, our shipping terms are FOB shipping point; however, ourfinal terms depend upon the negotiations with our customers.

 

•Estimatingallowances, specifically sales returns, the allowance for doubtful accounts andallowance for excess and obsolete inventory

 

Thepreparation of financial statementsrequires us to make estimates and assumptions that affect the reported amount of assets anddisclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period.

 

•  We must make estimates of potential future productreturns related to current period product revenue. We analyze historicalreturns, current economic trends, and changes in customer demand and acceptanceof our products when evaluating the adequacy of the sales returns and otherallowances. Significant management judgments and estimates must be made andused in connection with establishing the sales returns and other allowances inany accounting period. Material differences may result in the amount and timingof our revenue for any period if management made different judgments orutilized different estimates.

•  Similarly, we must make estimates of theuncollectability of our accounts receivable. We consider trends of historical bad debts, customer concentrations,customer credit-worthiness, current economic trends and changes in our customerpayment terms when evaluating the adequacy of the allowance for doubtfulaccounts.  If circumstances change or ifour original estimates are otherwise incorrect, we may have to reduce ourestimates of the recoverability of amounts due us by a material amount.

•  We write down our inventory for estimatedobsolescence or unmarketable inventory equal to the difference between the costof inventory and estimated market value based on assumptions on future demandsand market conditions. If actual market conditions are materially lessfavorable than those projected by management, or if our estimates of marketvalue are later determined to have been materially incorrect, additionalinventory writedowns may be required.

 

•Valuationof intangible and other long-lived assets

 

Weassess the impairment of identifiable intangibles, other long-lived assets andrelated goodwill whenever events or changes in circumstances indicate that the carrying value may not berecoverable.  Factors consideredimportant which could trigger an impairment review include the following:

 

•  Significant underperformance relative to expectedhistorical or projected future operating results;

•  Significant changes in the manner of our use ofthe acquired assets or the strategy for our overall business;

•  Significant negative industry or economic trends;and

•  Our market capitalization relative to net bookvalue.

 

Whenit is determined that the carrying value of intangibles, long-lived assets andrelated goodwill may not be recoverable based upon the existence of one or moreof the above indicators of impairment, the measurement of any impairment isdetermined and the carrying value is reduced as appropriate.

 

•Accountingfor income taxes

 

Weare required to consider our income taxes in each of the tax jurisdictions inwhich we operate in computing our effective income tax rate.  This process involves estimating our currenttax exposure together with assessing temporary differences resulting from differing treatment of items fortax and financial reporting purposes. These differences result in deferred tax assets and liabilities, whichare included in our consolidated balance sheet.  Further, the actual annual amount of taxable income in each taxjurisdiction may differ from the estimates we use to compute the effective taxrate during our first, second and third quarters.  Additionally, we evaluate the recoverability of the deferred taxassets from future taxable income and establish valuation 

 

17

----

 

allowances if recovery is notmore likely than not.  Our income taxprovision in the consolidated income statement is impacted by changes in thevaluation allowance.  This process iscomplex and involves significant management judgment in determining ourprovision for income taxes, deferred tax assets and liabilities and anyvaluation allowance recorded against our net deferred tax assets.

 

•Consolidation

 

The consolidatedfinancial statements presented herein include the accounts of DuPont Photomasks, Inc. and our controlled andwholly-owned subsidiaries. Allsignificant intercompany transactions and accounts are eliminated inconsolidation.  Entities that are notcontrolled but on which we can exercise significantinfluence are recorded under the equity method of accounting.

 

**Other****Matters**

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” Under SFAS No. 146, a liability for a cost that is associated withan exit or disposal activity must be recognized at fair value in the period theliability is incurred. SFAS No. 146nullifies the guidance of EITF, Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” We are currentlyevaluating the impact of SFAS No. 146, but do not expect that its adoption willhave a material adverse impact on either our current results of operations orfinancial position. We will adopt SFAS No. 146 for events initiated subsequentto December 31, 2002.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure an Amendment of FASB Statement No. 123.” SFAS No. 148 amendscertain provisions of SFAS No. 123 and is effective for financial statementsfor fiscal years ending after December 15, 2002. We are currently assessing theimpact of adoption of SFAS No. 148.

 

In November 2002, theFASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45elaborates on the disclosures to be made by a guarantor in its interim and annualfinancial statements about its obligations under certain guarantees that it hasissued. It also clarifies that a guarantor is required to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. Certain provisions of FIN 45 are effectiveDecember 15, 2002; others are effective December 31, 2002. All provisions areto be handled prospectively. We have adopted FIN 45 as of December 31, 2002. Ithad no impact on our results of operation or financial position.

 

In January 2003, the FASBissued FIN 46, “Consolidation of Variable Interest Entities. “ FIN 46 clarifiesthe application of Accounting Research Bulletin No. 51 with regard toconsolidation of variable interest entities and applies immediately to anyvariable interest entities created after January 31, 2003 and to variableinterest entities in which an interest is obtained after that date. We arecurrently assessing the impact of adoption of FIN 46.

 

**Forward Looking Statements**

 

This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, that involve a number of risks anduncertainties. Such forward-looking statements are generally accompanied bywords such as “intend,” “may,” “plan,” “expect,” “believe,” “should,” “would,”“could,” “anticipate,” or other words that convey uncertainty of future eventsor outcomes.  Although we believe thatthe expectations reflected in such forward-looking statements are reasonable,such forward-looking statements are subject to risks and uncertainties thatcould cause actual results to differ materially from these expectations.  Such risks and uncertainties include,without limitation, the following:

 

•           Thecurrent downturn in the semiconductor industry could lead to a decrease in thedemand for our photomask products;

•                                          Thesemiconductor industry is highly cyclical and has been subject to significanteconomic downturns at various times;

•                                          Our financialresults may vary significantly from quarter to quarter or we may fail to meetinvestor expectations, which would negatively impact the price of our stock;

•                                          We may beunable to fund significant capital expenditures to expand our operations and toenhance our manufacturing capability in order to keep pace with rapidlychanging technologies;

•                                          Our operatingresults could be adversely affected by under-utilized production capacity;

•                                          Macroeconomicconditions may have effects on the semiconductor industry;

•                                          We may beunable to enhance our existing products and to develop and manufacture newproducts and upgrades with improved capabilities to satisfy anticipated demandfor more technologically advanced photomasks;

•                                          Rapidtechnological change could render our products obsolete or our manufacturingprocesses ineffective;

•                                          We may notremain competitive and increased competition could seriously harm our business;

•                                          Ifa fundamental change in our business were to occur the holders of theconvertible subordinated notes would have the right to require us to redeemthose notes, and we cannot assure you that we will have sufficient funds to paythe 

 

18

----

 

redemption price for all the notes tendered by theholders of the subordinated convertible notes, although DuPont would berequired to pay the redemption price under its guarantee.  In that case, our failure to redeem tenderednotes would constitute an event of default under the indenture for the notes,and may constitute a default under the terms of other indebtedness that we mayenter into from time to time;

•                                          Wemay  be unable to successfully developor market our EDA software;

•                                          DuPonthas influence on all stockholder votes;

•                                          Oursuccess depends, in part, upon key managerial, engineering and technicalpersonnel as well as our ability to continue to attract and retain additionalpersonnel and integrate new personnel into key positions; and

•                                          Otherrisks indicated in our other filings with the Securities and ExchangeCommission, including but not limited to those factors which are fullydiscussed under the caption “Risk Factors” in our Annual Report on Form 10-Kfiled with the SEC on September 10, 2002.

 

These risks and uncertainties are beyond our controland, in many cases, we cannot predict the risks and uncertainties that couldcause our actual results to differ materially from those indicated by theforward-looking statements.

 

The forward-looking statements are made as of therelease date hereof, and we disclaim any intention or obligation to update orrevise any forward-looking statements or to update the reasons why the actualresults could differ materially from those projected in the forward-lookingstatements, whether as a result of new information, future events or otherwise**.**

 

19

----

 

**Item 3.**

 

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Market Risk**

 

Market risks relating toour operations result primarily from changes in interest rates and changes inforeign currency exchange rates.  As of December31, 2002, we had $100.0 million in non-interest bearing convertiblenotes and approximately $14.0 million in interest bearing debt of whichapproximately $11.8 million was short-term debt. As a result, changes in theinterest rate market would change the estimated fair value of our long-termdebt. We believe that a 10 percent change in interest rates would not have amaterial effect on our business, financial condition, results of operations orcash flows.

 

Foreign currencyexposures are primarily due to non-U.S. operations which are subject to certainrisks inherent in conducting business abroad, including price and currencyexchange controls, fluctuation in the relative value of currencies andrestrictive governmental actions. Changes in the relative value of currenciesoccur from time to time and may, in certain instances, have a material effecton our results of operations.  Anyexchange rate fluctuations can affect our margins since we may have imbalancesbetween some foreign currency denominated revenues and expenses.  Our financial statements reflectremeasurement of items denominated in non-U.S. currencies to U.S. dollars, ourfunctional currency. Exchange gains or losses are included in income in the periodin which they occur. We monitor our exchange rate exposure and attempt toreduce such exposure by hedging. We have entered into forward contracts incurrencies of the countries in which we conduct business in order to reducesuch exposure. Therefore, these contracts are held primarily for purposes otherthan trading. At December 31, 2002, the fair value of our forward foreignexchange contracts outstanding was $16.8 million with an unrealized lossrecorded in the consolidated income statement of $0.1 million for the three andsix months ended December 31, 2002. These instruments may involve elements ofcredit and market risk in excess of the amounts recognized in the financialstatements.  We believe that a tenpercent change in exchange rates would not have a material effect on ourbusiness, financial condition, results of operations or cash flows.  We monitor our positions and the creditquality of counter-parties, consisting primarily of major financial institutions,and do not anticipate nonperformance by any counterparty, althoughnonperformance could occur.  There canbe no assurance that such forward contracts or any other hedging activity willbe available or adequate to eliminate, or even mitigate, the impact of ourexchange rate exposure.  There can be noassurance that such risks will not have a material adverse impact on ourliquidity and results of operations in the future.

 

**Financial Risk Management**

 

Our international revenues are subject to inherent risks, includingfluctuations in local economies; difficulties in staffing and managing foreign operations; greater difficulty in accountsreceivable collection; costs and risks of localizing products for foreigncountries; unexpected changes in regulatory requirements, tariffs and othertrade barriers; difficulties in the repatriation of earnings; and burdens ofcomplying with a wide variety of foreign laws. Some of our sales outside of North America are denominated in local currencies, and accordingly, we are subject to the risksassociated with fluctuations in currency rates.  In general, increases in the value of the dollar against foreigncurrencies decrease the U.S. dollar value of foreign sales requiring us eitherto increase our price in the local currency, which could render our product pricesnoncompetitive, or to suffer reduced revenues and gross margins as measured inU.S. dollars. Our foreign currency hedging program is not designed to hedge themargin risks associated with foreign exchange rate changes. Our hedging iscomprised of foreign currency forward exchange contracts utilized to mitigatethe risks associated with foreign currency fluctuations on certain balancesheet exposures.  However, the hedgingprogram will not eliminate all of our foreign exchange risks.

 

Themarketplace for our products dictates that we maintain inventories.  Therefore, inventory obsolescence is a riskfor us due to frequentengineering changes, shifting customer demand, the emergenceof new industry standards and rapid technological advances including theintroduction by our competitors or us of products embodying newtechnology.  While we maintain valuationallowances for excess and obsolete inventory and management continues tomonitor the adequacy of such valuation allowances, there can be no assurancethat such valuation allowances will be sufficient.

 

Asof December 31, 2002, we hadoutstanding foreign short-term debt totaling approximately $11.8 million.  At December 31, 2002, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred toas structured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes.  Accordingly, we are not exposed to any financing, liquidity,market or credit risk that could arise if we were engaged in suchrelationships.

 

At December31, 2002 we had $100.0 million of subordinatedconvertible debt outstanding.  The notesare due in July 2004, with no stated interest, are convertible at any time intoshares of our common stock at a conversion price of $106.26 per share, areunconditionally guaranteed by DuPont and are not callable by us.  In the event of a fundamental change in ourcompany, each holder of notes will have the right to require us to redeem, incash, any or all of such holder’s notes at a price equal to 100 percent of the 

 

20

----

 

principal amount to be redeemed. A fundamental change generally is any transaction in which all orsubstantially all of our common stock is exchanged for, converted into,acquired for or constitutes the right to receive, consideration which is notall or substantially all common stock listed on a national securities exchangeor approved for quotation on the NASDAQ National Market.  If a fundamental change were to occur, wecannot assure you that we will have sufficient funds to pay the redemptionprice for all the notes tendered by the holders, although DuPont would berequired to pay the redemption price under its guarantee and would then besubrogated to the noteholders’ rights against us.  In that case, our failure to redeem tendered notes wouldconstitute an event of default under the indenture for the notes, and mayconstitute a default under the terms of other indebtedness that we may enterinto from time to time.

 

**Item 4.**

 

**CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

Our chiefexecutive officer and our chief financial officer, based on their evaluation ofthe effectiveness of our disclosure controls and procedures (as defined inRules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as ofa date within 90 days of our filing of this quarterly report on Form 10-Q, orthe Evaluation Date, believe that, as of the Evaluation Date, our disclosurecontrols and procedures were effective.

 

**Changes in Internal Controls**

 

Therewere no significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of their mostrecent evaluation.

 

**PART II**

 

**Item 1. Legal Proceedings**

 

                We are not currently involved inany material legal proceedings.

 

**Item 2. Changes in Securities and Use of Proceeds**

 

**               **None

 

**Item 3. Defaults Upon Senior Securities**

 

                None

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

TheCompany’s Annual Meeting of Stockholders was held October 29, 2002 (the “AnnualMeeting”).  At the Annual Meeting, (i)the Company elected Class III directors to the Board of Directors to serveuntil our 2005 annual meeting or until their successors are elected andqualified, subject to their death, resignation or removal, and (ii) theselection of PricewaterhouseCoopers LLP as the Company’s independent accountantsfor the year ended June 30, 2003 was ratified. Votes cast at the Annual Meeting are as follows:

 
| (i)            Election of Class III Directors         |   |       |   |         |
|---------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------------|
|                                                                                                          |   |       |   |         |
|                                                                                                          |   | **FOR**    |   | **WITHHELD** |
|                 Peter Kirlin       |   | 14,910,876 |   | 1,114,974    |
|                 John C. Sargent    |   | 15,326,521 |   | 699,329      |
|                 Marshall C. Turner |   | 15,171,122 |   | 854,728      |

 
| (ii)           Ratification of the selection of  PricewaterhouseCoopers LLP |   |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|------------|
|                                                                                                                          |   |       |
|                                                                                                                          |   | **FOR**    |   | **AGAINST** |   | **ABSTAIN** |   | **NON-VOTE** |   |   |
|                                                                                                                          |   | 15,451,275 |   | 569,583 |   | 4,992 |   | 0 |   |   |
|                                                                                                                               |        |            |  |  |  |  |  |  |  |  |  |  |

 

21

----

 

**Item5. Other Information**

 

                None

 

**Item 6. Exhibits and Reports****on Form 8-K**

 
| (A) Exhibits             |    |   |
|-------------------------------|---------|--------|
|                          |    |   |
|                          | (10.29) |   | Certification  of Chief Executive Officer and Certification of Chief Financial Officer  pursuant to 18 U.S.C. Section1350, adopted per Section 906 of the  Sarbanes-Oxley Act of 2002 |
|                          | (11)    |   | Statement  re Earnings (Loss) Per Share Computation |
|                          |    |   |
| (B) Reports  on Form 8-K |
|                          |    |   |
|                          | None    |

 

**SIGNATURES**

 

                Pursuant to the requirements ofthe Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                     | Dupont Photomasks, Inc. |
|--------------------------|------------------------------|
|                     | (Registrant)                 |
|                     |                         |
|                     |                         |   |
| Date:  February 13, 2003 | By:                          | /s/  SATISH RISHI |   |
|                     |                         | Satish Rishi |
|                     |                         | *Executive  Vice President – Finance**and Chief Financial Officer  (Principal Financial Officer)* |

 

22

----

 

**CERTIFICATION OFCHIEF EXECUTIVE OFFICERDUPONT PHOTOMASKS, INC.**

 

**CERTIFICATION**

 

# **I, Peter S. Kirlin, certifythat:**

 

1.     I havereviewed this quarterly report on Form 10-Q of DuPont Photomasks, Inc;

 

2.     Based onmy knowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this quarterly report;

 

3.     Based onmy knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.     Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

                a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

                b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

                c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.     Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

                a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

                b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.     Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: February 13, 2003     |
|-----------------------------|
|                        |
|                        |
|   /s/ PETER  S. KIRLIN |   |
| Peter S. Kirlin             |
| Chief Executive Officer     |

 

23

----

 

**CERTIFICATIONOFCHIEF FINANCIAL OFFICERDUPONT PHOTOMASKS, INC.**

 

**CERTIFICATION**

 

# **I, Satish Rishi, certifythat:**

 

1.     I havereviewed this quarterly report on Form 10-Q of DuPont Photomasks, Inc;

 

2.     Based onmy knowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.     Based onmy knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.     Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

                a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

                b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

                c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.     Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

                a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

                b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.     Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: February 13, 2003  |
|--------------------------|
|                     |
|                     |
|   /s/ SATISH  RISHI |   |
| Satish Rishi             |
| Chief Financial Officer  |

 

24

----