**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

**ý**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended December 31, 2004**

 

**or**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the transition periodfrom          to          **

 

**Commission file****number 0-20839**

 

**DUPONT PHOTOMASKS, INC.**

(Exact name of registrant as specified in our charter)

 
| **Delaware**                                                    | ** ** | **74-2238819**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  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**

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes ýNo o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).Yes ý No o

 

As of February01, 2005, 18,770,426 shares of common stock, $.01 par value, were outstanding.

 

 

----

 

**TABLE OF CONTENTS**

 
| **Part I**  |    |                                                                                                                                                       |
|-------------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |    |                                                                                                                                                       |
|        | Item 1. | Financial Statements                                                                                                                                       |
|        |    | Consolidated Income Statements (unaudited)  for the Three Months Ended December 31, 2003 and 2004 and for the Six Months  Ended December 31, 2003 and 2004 |
|        |    | Consolidated Balance Sheets as of June 30, 2004 and December 31, 2004  (unaudited)                                                                         |
|        |    | Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended December 31, 2003 and  2004                                                     |
|        |    | Consolidated Statements of Stockholders’  Equity for the Twelve Months Ended June 30, 2004 and the Six Months Ended  December 31, 2004 (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 4. | Submission of Matters to a Vote of Security  Holders                                                                                                       |
|        |    |                                                                                                                                                       |
|        | Item 6. | Exhibits                                                                                                                                                   |
|        |    | Signatures                                                                                                                                                 |

 

2

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## **PART I**

 

**Item 1.****Financial Statements**

 

**DUPONT PHOTOMASKS,INC. AND SUBSIDIARIES**

 

## **CONSOLIDATED INCOME STATEMENTS**

**(Dollars in thousands, except share data)**

**(unaudited)**

** **
| ** **                                            | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2003**                             | ** ** | **2004**                           | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Revenue, net                                          |       | $                                    | 85,964     |                               | $          | 99,192 |   | $ | 168,341 |   | $ | 194,039 |   |
| Cost of goods sold                                    |       | 77,153                               |       | 74,962                             |       | 152,802 |   | 148,739 |   |
| Selling, general and administrative expense           |       | 13,375                               |       | 16,782                             |       | 25,699 |   | 29,539 |   |
| Research and development expense                      |       | 7,566                                |       | 8,033                              |       | 14,617 |   | 15,173 |   |
| Special charges, net                                  |       | 361                                  |       | 2,172                              |       | 1,591 |   | 2,482 |   |
| Operating loss                                        |       | (12,491                              | )          | (2,757                             | )          | (26,368 | ) | (1,894 | ) |
| Other expense, net                                    |       | (457                                 | )          | (480                               | )          | (1,120 | ) | (1,165 | ) |
| Loss before income taxes and minority  interest       |       | (12,948                              | )          | (3,237                             | )          | (27,488 | ) | (3,059 | ) |
| Provision for income taxes                            |       | 800                                  |       | 2,400                              |       | 1,450 |   | 3,300 |   |
| Loss before minority interest                         |       | (13,748                              | )          | (5,637                             | )          | (28,938 | ) | (6,359 | ) |
| Minority interest in (income) loss of joint  ventures |       | 521                                  |       | (214                               | )          | 607 |   | (510 | ) |
| Net loss                                              |       | $                                    | (13,227    | )                                  | $          | (5,851 | ) | $ | (28,331 | ) | $ | (6,869 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Basic loss per share                                  |       | $                                    | (0.73      | )                                  | $          | (0.31 | ) | $ | (1.56 | ) | $ | (0.37 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding                   |       | 18,130,468                           |       | 18,594,175                         |       | 18,119,473 |   | 18,525,864 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Diluted loss per share                                |       | $                                    | (0.73      | )                                  | $          | (0.31 | ) | $ | (1.56 | ) | $ | (0.37 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding                   |       | 18,130,468                           |       | 18,594,175                         |       | 18,119,473 |   | 18,525,864 |   |

 

The accompanying notes are an integral partof these consolidated statements

 

3

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**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

## **CONSOLIDATEDBALANCE SHEETS**

**(Dollars in thousands, except share data)**

** **
| ** **                                                                                                                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                    | ** ** | ** **         | ** ** | **(unaudited)**        | ** ** |
| **ASSETS**                                                                                                                    |       |               |       |                   |       |
| Current assets:                                                                                                               |       |               |       |                   |       |
| Cash and cash equivalents                                                                                                     |       | $                  | 231,351    |                   | $          | 141,074 |   |
| Accounts receivable, trade, net                                                                                               |       | 75,094             |       | 66,953                 |       |
| Accounts receivable, related parties                                                                                          |       | 1,984              |       | 3,951                  |       |
| Other receivables                                                                                                             |       | 21,192             |       | 5,641                  |       |
| Inventories                                                                                                                   |       | 12,023             |       | 11,773                 |       |
| Deferred income taxes                                                                                                         |       | 416                |       | 625                    |       |
| Prepaid expenses and other current assets                                                                                     |       | 14,216             |       | 15,612                 |       |
| Total current assets                                                                                                          |       | 356,276            |       | 245,629                |       |
| Assets held for sale                                                                                                          |       | 8,926              |       | 7,399                  |       |
| Property and equipment, net                                                                                                   |       | 395,507            |       | 404,984                |       |
| Accounts receivable, related parties                                                                                          |       | 916                |       | 869                    |       |
| Deferred income taxes                                                                                                         |       | 887                |       | 822                    |       |
| Other assets, net                                                                                                             |       | 32,860             |       | 26,423                 |       |
| Total assets                                                                                                                  |       | $                  | 795,372    |                   | $          | 686,126 |   |
|                                                                                                                          |       |               |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                |       |               |       |                   |       |
| Current liabilities:                                                                                                          |       |               |       |                   |       |
| Accounts payable, trade                                                                                                       |       | $                  | 45,540     |                   | $          | 34,956 |   |
| Accounts payable, related parties                                                                                             |       | 5,098              |       | 3,474                  |       |
| Income taxes payable                                                                                                          |       | 3,396              |       | 3,261                  |       |
| Other accrued liabilities                                                                                                     |       | 70,093             |       | 63,314                 |       |
| Short-term borrowings                                                                                                         |       | 22,347             |       | 17,539                 |       |
| Convertible notes                                                                                                             |       | 100,000            |       | —                 |       |
| Total current liabilities                                                                                                     |       | 246,474            |       | 122,544                |       |
| Long-term borrowings                                                                                                          |       | 59,302             |       | 71,546                 |       |
| Long-term convertible notes                                                                                                   |       | 125,000            |       | 125,000                |       |
| Deferred income taxes                                                                                                         |       | 781                |       | 654                    |       |
| Other liabilities                                                                                                             |       | 9,764              |       | 10,615                 |       |
| Minority interest in net assets of joint  ventures                                                                            |       | 58,863             |       | 60,772                 |       |
| Total liabilities                                                                                                             |       | 500,184            |       | 391,131                |       |
|                                                                                                                          |       |               |       |                   |       |
| Commitments and contingencies                                                                                                 |       |               |       |                   |       |
| 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; 18,407,733 and 18,660,556 issued and outstanding,  respectively |       | 184                |       | 187                    |       |
| Additional paid-in capital                                                                                                    |       | 324,049            |       | 329,194                |       |
| Accumulated deficit                                                                                                           |       | (31,405            | )          | (38,274                | )          |
| Accumulated other comprehensive income                                                                                        |       | 2,360              |       | 3,888                  |       |
| Total stockholders’ equity                                                                                               |       | 295,188            |       | 294,995                |       |
| Total liabilities and stockholders’ equity                                                                               |       | $                  | 795,372    |                   | $          | 686,126 |   |

 

The accompanying notes are an integral partof these consolidated statements.

 

4

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**DUPONT PHOTOMASKS, INC.AND SUBSIDIARIES**

 

## **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(unaudited)**

** **
| ** **                                                                       | ** ** | **Six Months Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **2003**                           | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                            |       |                               |       |   |   |
| Net loss                                                                         |       | $                                  | (28,331    | ) | $ | (6,869 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                    |       | 46,600                             |       | 47,146 |   |
| Minority interest in income (loss) of joint  ventures                            |       | (607                               | )          | 510 |   |
| Deferred Income Taxes                                                            |       | 202                                |       | (271 | ) |
| Special charges, net                                                             |       | 1,591                              |       | 2,482 |   |
| Other                                                                            |       | 355                                |       | (1,007 | ) |
| Changes in assets and liabilities:                                               |       |                               |       |   |   |
| Accounts receivable, trade, net                                                  |       | (10,905                            | )          | 9,276 |   |
| Accounts receivable, related parties                                             |       | (570                               | )          | (1,902 | ) |
| Inventories                                                                      |       | 1,544                              |       | (151 | ) |
| Other assets, net                                                                |       | 4,413                              |       | (1,378 | ) |
| Accounts payable, trade                                                          |       | (4,255                             | )          | (12,539 | ) |
| Accounts payable, related parties                                                |       | 972                                |       | (887 | ) |
| Other liabilities                                                                |       | (9,081                             | )          | (2,659 | ) |
|                                                                             |       |                               |       |   |   |
| Net cash provided by operating activities                                        |       | 1,928                              |       | 31,751 |   |
|                                                                             |       |                               |       |   |   |
| Cash flows from investing activities:                                            |       |                               |       |   |   |
| Purchases of property and equipment                                              |       | (24,680                            | )          | (46,509 | ) |
| Proceeds from sale of assets                                                     |       | 2,000                              |       | — |   |
| Proceeds from investment subsidies                                               |       | —                             |       | 20,843 |   |
|                                                                             |       |                               |       |   |   |
| Net cash used in investing activities                                            |       | (22,680                            | )          | (25,666 | ) |
|                                                                             |       |                               |       |   |   |
| Cash flows from financing activities:                                            |       |                               |       |   |   |
| Proceeds from borrowings                                                         |       | 401                                |       | 11 |   |
| Payments on borrowings                                                           |       | (4,918                             | )          | (104,874 | ) |
| Proceeds from issuance of common stock  under employee plans                     |       | 1,158                              |       | 5,148 |   |
| Decrease in minority interest in net assets  of joint ventures                   |       | —                             |       | (150 | ) |
|                                                                             |       |                               |       |   |   |
| Net cash used in financing activities                                            |       | (3,359                             | )          | (99,865 | ) |
|                                                                             |       |                               |       |   |   |
| Effect of exchange rate changes on cash                                          |       | 539                                |       | 3,503 |   |
|                                                                             |       |                               |       |   |   |
| Net decrease in cash and cash equivalents                                        |       | (23,572                            | )          | (90,277 | ) |
| Cash and cash equivalents at beginning of  period                                |       | 250,355                            |       | 231,351 |   |
|                                                                             |       |                               |       |   |   |
| Cash and cash equivalents at end of period                                       |       | $                                  | 226,783    |   | $ | 141,074 |   |
|                                                                             |       |                               |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                               |       |                               |       |   |   |
| Cash paid for:                                                                   |       |                               |       |   |   |
| Interest                                                                         |       | $                                  | 1,147      |   | $ | 1,844 |   |
|                                                                             |       |                               |       |   |   |
| Taxes, net                                                                       |       | $                                  | 404        |   | $ | 3,907 |   |

 

The accompanying notes are an integral partof these consolidated statements.

 

5

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**DUPONT PHOTOMASKS, INC.AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

**(Dollars in thousands)**

** **
| ** **                                                 | ** ** | ** **       | ** ** | ** ** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained Earnings  (Accumulated  Deficit)** | ** ** | **Accumulated Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|------------|------------|----------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **Common Stock** | ** ** |
| ** **                                                 | ** ** | **Shares**       | ** ** | **Amount** | ** ** |
|                                                       |       |             |       |       |       |                             |       |                                          |       |                                         |       |                                  |       |
| Balance as of June 30, 2003                                |       | 18,064,964       |       | $          | 181        |                             | $          | 317,220                                       |       | $                                            | 41,544     |                                  | $          | — |   | $ | 358,945 |   |
|                                                       |       |             |       |       |       |                             |       |                                          |       |                                         |       |                                  |       |
| Issuance of common stock under employee plans              |       | 162,072          |       | 1          |       | 2,831                            |       | —                                        |       | —                                       |       | 2,832                                 |       |
| Issuance of common stock                                   |       | 180,697          |       | 2          |       | 3,998                            |       | —                                        |       | —                                       |       | 4,000                                 |       |
| Foreign currency translation adjustments                   |       | —           |       | —     |       | —                           |       | —                                        |       | 2,360                                        |       | 2,360                                 |       |
| Net loss                                                   |       | —           |       | —     |       | —                           |       | (72,949                                       | )          | —                                       |       | (72,949                               | )          |
|                                                       |       |             |       |       |       |                             |       |                                          |       |                                         |       |                                  |       |
| Balance as of June 30, 2004                                |       | 18,407,733       |       | 184        |       | 324,049                          |       | (31,405                                       | )          | 2,360                                        |       | 295,188                               |       |
| Issuance of common stock under employee  plans (unaudited) |       | 252,823          |       | 3          |       | 5,145                            |       | —                                        |       | —                                       |       | 5,148                                 |       |
| Foreign currency translation adjustments (unaudited)       |       | —           |       | —     |       | —                           |       | —                                        |       | 1,528                                        |       | 1,528                                 |       |
| Net loss (unaudited)                                       |       | —           |       | —     |       | —                           |       | (6,869                                        | )          | —                                       |       | (6,869                                | )          |
|                                                       |       |             |       |       |       |                             |       |                                          |       |                                         |       |                                  |       |
| Balance as of December 31, 2004 (unaudited)                |       | 18,660,556       |       | $          | 187        |                             | $          | 329,194                                       |       | $                                            | (38,274    | )                                     | $          | 3,888 |   | $ | 294,995 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

6

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**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

## **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars in thousands, except share data)**

**(unaudited)**

 

**1.****                                      Basisof Presentation**

 

The unauditedinterim consolidated financial statements presented in this report include theaccounts of DuPont Photomasks, Inc., ourcontrolled and wholly owned subsidiaries and a variable interest entity ofwhich we are the primary beneficiary. All significant inter-companytransactions and accounts have been eliminated in consolidation. These interimconsolidated financial statements have been prepared by us, without audit,pursuant to the rules and regulations of the Securities and Exchange Commission(“SEC”). All adjustments have been made to the accompanying interimconsolidated financial statements which are, in the opinion of management,necessary for a fair presentation of our operating results and include alladjustments of a normal recurring nature. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to the rules and regulations of theSEC.

 

It isrecommended that these unaudited interim consolidatedfinancial statements be read in conjunction with the audited consolidatedfinancial statements and the notes thereto included in our Annual Report onForm 10-K for the year ended June 30, 2004. The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires the use of estimates andassumptions by management in determining the reported amounts of assets andliabilities, disclosures of contingent liabilities as of the date of thefinancial statements and the reported amounts of revenue and expenses duringthe period. Actual results could differ from those estimates. The results ofoperations for any interim period are not necessarily indicative of the resultsof operations for the entire fiscal year.

 

On October 5, 2004, we enteredinto a definitive merger agreement to be acquired by Toppan Printing Co., Ltd.(“Toppan”).  Pursuant to the agreement,upon the closing, we will become a wholly owned subsidiary of Toppan.  The merger is conditioned upon, among otherthings, approval by our stockholders, clearance under applicable antitrust lawsand other customary closing conditions. We currently expect that the merger will be consummated in earlycalendar 2005.

 

**2.****                                      RecentAccounting Pronouncements**

 

In November2004, the Financial Accounting Standards Board (“FASB”)issued Statement No. 151 (“FASB No. 151”), *Inventory Costs, an amendment of APB No. 43, Chapter 4*. Theamendments made by FASB No. 151 are designed toimprove financial reporting by requiring that abnormal amounts of idle facilityexpense, freight, handling costs, and wasted materials (spoilage) be recognizedas current-period charges and by requiring the allocation of fixed productionoverhead to inventory based on the normal capacity of production facilities. FASB No. 151 is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning afterNovember 24, 2004. We are currently evaluating the impact that the adoption of FASB No. 151 may have on our financial position, results ofoperations and cash flows.

 

In December 2004, the FASB issued Statement No. 153, *Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.*  FASB Statement No. 153 is effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005, withearlier application permitted. We are currently evaluating the impact that theadoption of FASB Statement No. 153 may have on our financialposition, results of operations and cash flows.

 

In December2004, the Financial Accounting Standards Board (“FASB”)issued Statement No. 123 (revised 2004),  *Share**-Based Payment* (“FASB No. 123R”),which is a revision of FASB Statement No. 123, *Accounting for Stock-Based Compensation*. FASBNo. 123R supersedes Accounting Principal Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*, and amends FASB Statement No. 95, *Statement of Cash Flows*.Generally, FASB No. 123R requires that allshare-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on theirfair values. Currently we account for these payments under the intrinsic valueprovisions of APB No. 25 with no expense recognition included on ourconsolidated income statements. We are required to adopt FASBNo. 123R effective July 1, 2005. FASB No. 123R offersseveral alternatives for implementation. We are currently evaluating the impactthat the adoption of FASB No. 123R may have on ourfinancial position, results of operations and cash flows. See Note 9 of theNotes to the Consolidated Financial Statements for the proformaimpact of stock-based compensation on the three and six month periods ended December31, 2003 and December 31, 2004, respectively.

 

7

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**3.****                                      DerivativeInstruments and Hedging Activities**

 

Forward foreign exchange contracts are utilized to mitigate the risksassociated with currency fluctuations on certain foreign currency balance sheetexposures, and are, therefore, held primarily for purposes other than trading.These foreign exchange contracts do not qualify for hedge accounting under FASB Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended.Unrealized gains and losses resulting from the impact of currency exchange ratemovements on forward foreign exchange contracts designated to offset certainnon-U.S. dollar denominated assets and liabilitiesare recognized as other income or expense on the accompanying consolidatedincome statements in the period in which the exchange rates change. These gainsand losses substantially offset the foreign currency exchange gains and losseson the underlying exposures being hedged. An unrealized loss of $1,568 isrecorded in other expense, net on the accompanying consolidated incomestatement in relation to our forward exchange contracts outstanding at December31, 2004. These instruments may involve elements of credit and market risk inexcess of the amounts recognized on the consolidated financial statements. Wemonitor our positions and the credit quality of counterparties, consistingprimarily of major financial institutions, and do not anticipate nonperformanceby any counterparty, although nonperformance could occur.

 

**4.****                                      ComprehensiveIncome**

 

Our comprehensive income is comprised of net loss and foreign currency translation adjustmentsfor the three and six months ended December 31, 2003 and 2004, respectively.

 

**5.****                                      Earnings(Loss) Per Share**

 

Basic earnings (loss) per share, or basic EPS, iscomputed by dividing net income (loss) by the weighted number of common sharesoutstanding during each period. Diluted earnings (loss) per share, or dilutedEPS, is computed by dividing net income (loss) after adjustments for thedilutive effect of our convertible notes (if dilutive), by the weighted averagenumber of common shares and potentially dilutive shares outstanding (ifdilutive) during each period. Potentially dilutive shares include stock optionsand assumed conversion of the convertible notes. The number of potentiallydilutive shares outstanding relating to stock options is computed using the treasurystock method and the number of potentially dilutive shares outstanding relatingto the convertible notes is computed using the if-converted method.

 

Thereconciliation of the amounts used to calculate the basic EPS and diluted EPSis as follows:

 
| ** **                                         | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **2003**                             | ** ** | **2004**                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss for the period—basic                 |       | $                                    | (13,227    | )                                  | $          | (5,851 | ) | $ | (28,331 | ) | $ | (6,869 | ) |
| Dilutive effect of convertible notes               |       | —                               |       | —                             |       | — |   | — |   |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Net loss for the period—diluted               |       | $                                    | (13,227    | )                                  | $          | (5,851 | ) | $ | (28,331 | ) | $ | (6,869 | ) |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding—basic     |       | 18,130,468                           |       | 18,594,175                         |       | 18,119,473 |   | 18,525,864 |   |
| Plus: Potentially dilutive shares                  |       | —                               |       | —                             |       | — |   | — |   |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares  outstanding—dilutive |       | 18,130,468                           |       | 18,594,175                         |       | 18,119,473 |   | 18,525,864 |   |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Basic loss per share                               |       | $                                    | (0.73      | )                                  | $          | (0.31 | ) | $ | (1.56 | ) | $ | (0.37 | ) |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Diluted loss per share                             |       | $                                    | (0.73      | )                                  | $          | (0.31 | ) | $ | (1.56 | ) | $ | (0.37 | ) |

 

Stock optionsto acquire 4,860,628 shares for the three and six months ended December 31, 2003 and 5,134,741 for thethree and six months ended December 31,2004 were not included in potentially dilutive sharesbecause the effect of including these stock options would have beenanti-dilutive. Shares that would be issued upon the conversion of convertiblenotes that totaled 5,824,850 for the three and six months ended December 31, 2003 and 4,883,762 for thethree and six

 

8

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months ended December 31, 2004 were not included in the computations of dilutedEPS because the effect of including them would have been anti-dilutive. Theseoptions and convertible notes may become dilutive in the future.

 

**6.**                                      **Income Taxes**

 

The provisionfor income taxes differs from amounts computed by applying the federalstatutory rate of 35% to loss before income taxes and minority interest becauseof our inability to record deferred tax benefits for net operating lossesgenerated in certain tax jurisdictions, our reduced tax rates in certain Asianjurisdictions, and for other adjustments described below.

 

During thethree months ended December 31, 2003, our net tax provision included a $950benefit from the positive resolution of tax audits in multiple jurisdictionsand a provision of $1,250 for withholding taxes related to a planned dividenddistribution from within our group of foreign subsidiaries.

 

Our net taxprovision during the three months ended September 30, 2004 included a benefit of$225 from the positive resolution of a tax audit. On October 22, 2004, thePresident signed the American Jobs Creation Act of 2004 (the “Act”). The Actcreates a temporary incentive for U.S. corporations to repatriate accumulatedincome earned abroad by providing an 85 percent dividends received deductionfor certain dividends from controlled foreign corporations. Although thededuction is subject to a number of limitations and, as of today, someuncertainty remains as to how to interpret numerous provisions in the Act,  we believe that wehave the information necessary to make an informed decision on the impact ofthe Act on our repatriation plans. Based on that decision, we have repatriated$24,000 in extraordinary dividends, as defined in the Act, during the threemonths ended December 31, 2004 and accordingly have recorded a tax liability of$1,100 as of December 31, 2004.

 

**7.****                                      Propertyand Equipment**

 

Property andequipment are stated at cost. Property and equipment are depreciated using thestraight-line method over the estimated useful lives of the assets ranging fromthree to seven years for equipment and 10 to 20 years for buildings. Leaseholdimprovements are amortized using the straight-line method over the shorter ofthe estimated useful lives of the assets or the estimated remaining terms ofthe leases. Accumulated depreciation and amortization was $499,306 as ofJune 30, 2004 and $543,100 as of December31, 2004. Amounts accrued for equipment purchases were $35,710 as ofJune 30, 2004 and $29,240 as of December 31,2004 and are included in other accrued liabilities on the accompanyingconsolidated balance sheets. Assets held for sale relate primarily to ourGresham, Oregon and Danbury, Connecticut facilities. We are actively marketingthese assets and will sell the assets after appropriate evaluation of allproposals. During the three months ended December 31, 2004, we recorded aspecial charge of approximately $1,500 to write-down the carrying amount of ourDanbury facility as a result of the revision to the estimated fair value of ourformer pellicle production facility.

 

**8.****                                      Transactionswith and Consolidation of Variable Interest Entity**

 

The Maskhouse Building Administration GmbH & Co. KG (“BAC”) is a state-of-the-art photomaskresearch and manufacturing facility and is a joint venture equally owned byAMD, Infineon Technologies AG and DuPont Photomasks, Inc. Based on the guidance in FASB Interpretation No. 46R (“FIN No. 46R”), we haveconcluded that we are the primary beneficiary of the BACand, therefore, we began consolidating the financial results of the BAC as of March 31, 2004. The consolidation of the BAC had no impact to our net loss for the three and sixmonths ended December 31, 2004 as wewould have otherwise continued to record our equity interest in the BAC under the equity method had we not consolidated the BAC. However, the consolidation of the BACdid increase our consolidated assets, as well as liabilities and stockholders’equity, as of December 31, 2004 byapproximately $92,700. AMD and Infineon’s combinedequity ownership in the net assets of the BAC as of December 31, 2004 was approximately$14,600 and was recorded as minority interest in net assets of joint ventureson our consolidated balance sheet. The consolidation has not altered theoperational agreements, guarantees and other commitments between the BAC, its partners and lenders.

 

We leaseapproximately 50% of the facility from the BAC foradvanced photomask manufacturing and the remainder isleased by the Advanced Mask Technology Center GmbH & Co. KG (“AMTC”). Both operating leases are for 10-year terms andcommenced July 2003. Future minimum lease payments to be received by the BAC during the remaining term of the non-cancelable leasewith the AMTC are estimated to be approximately$66,000. The BAC’s lease income from its lease withthe AMTC and the associated operating expenses arerecorded net in other expense, net on our accompanying consolidated incomestatement for the three and six months ended December 31, 2004.  Leaseincome of the BAC was approximately $2,400 and theassociated operating expenses were approximately $1,800 during the three monthsended

 

9

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December31, 2004. For the six months ended December 31, 2004, leaseincome of the BAC was approximately $4,600 and theassociated operating expenses were approximately $3,400.

 

As of December 31, 2004, the carrying value ofthe BAC property and equipment was approximately$79,700 and is included in property and equipment, net, on our accompanyingconsolidated balance sheet. In addition, a portion of the BAC’sfacility is subsidized by the German government. In July 2004, the BAC received approximately $17,100 in investment subsidypayments from the German government.

 

The BAC executed a term loan agreement for its research andmanufacturing facility in December 2002. The BAC termloan had approximately $75,900 (55,700 euro) outstanding as of December 31, 2004. Of this amount,approximately $10,100 (7,400 euro) is due within one year and is included inshort-term borrowings on our accompanying consolidated balance sheet as ofDecember 31, 2004. The BAC term loan matures in June2012 and principal and interest payments are due quarterly. The interest rateon the BAC term loan is EURIBORplus 1.5%. The BAC term loan is secured by the BAC property, other financial assets of the BAC, the assignment of rights from BACinsurance contracts, the tenant rent paymentguarantees and German government guarantees. Prior to the initial occupancy ofthe building and initiation of the lease rental payments, we had guaranteedone-third of the BAC’s indebtedness. Effective July2003, we were released from the guarantee except if the lenders become liableto return monies received in payment of the indebtedness as a result of anybankruptcy, composition or similar proceedings affecting the BAC.

 

**9.****              EmployeePlans**

 

We apply theintrinsic-value-based method of accounting prescribed by APB Opinion No. 25 andrelated interpretations including FASB InterpretationNo. 44, *Accounting for Certain Transactions involving StockCompensation, an interpretation of APB Opinion No. 25*, to accountfor our stock performance plans. Under this method, compensation expense isrecorded on the date of grant only if the current market price of theunderlying stock exceeded the exercise price. We also have an Employee StockPurchase Plan. FASB Statement No. 123 establishedaccounting and disclosure requirement alternatives which involve using adifferent accounting method for expensing the calculated value of optionawards. As allowed by FASB Statement No. 123, we haveelected to continue to apply the intrinsic-value-based method of accountingdescribed above, and have adopted only the disclosure requirements of FASB Statement No. 123. We use the Black-Scholes model to calculate pro forma expense for disclosurepurposes. The Black Scholes option valuation modelwas developed for use in estimating the fair value of traded options that haveno vesting restrictions and are fully transferable. Option valuation modelsrequire the input of highly subjective assumptions including the expected stockprice volatility. We use projected volatility rates which are based uponhistorical volatility rates. Because our employee stock options and EmployeeStock Purchase Plan shares have characteristics significantly different fromthose of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in our management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of our employee stock options and Employee StockPurchase Plan shares.

 

FASB Statement No. 148, *Accounting for Stock-Based Compensation—Transition and Disclosure, anamendment of FASB Statement No. 123*,amends the disclosure requirements of FASB StatementNo. 123. The following table illustrates the effect on net loss if thefair-value-based method had been applied to our stock-based employeecompensation plans in each period.

 
| ** **                                                                                                                              | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2003**                             | ** ** | **2004**                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net loss:                                                                                                                               |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                    | (13,227    | )                                  | $          | (5,851 | ) | $ | (28,331 | ) | $ | (6,869 | ) |
| Deduct total stock-based employee  compensation expense determined under the Black-Scholes  valuation method for all awards, net of tax |       | (3,507                               | )          | (2,713                             | )          | (7,087 | ) | (5,563 | ) |
|                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Pro forma net loss                                                                                                                      |       | $                                    | (16,734    | )                                  | $          | (8,564 | ) | $ | (35,418 | ) | $ | (12,432 | ) |
|                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Basic loss per share:                                                                                                                   |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                    | (0.73      | )                                  | $          | (0.31 | ) | $ | (1.56 | ) | $ | (0.37 | ) |
| Pro forma                                                                                                                               |       | $                                    | (0.92      | )                                  | $          | (0.46 | ) | $ | (1.95 | ) | $ | (0.67 | ) |
|                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Diluted loss per share:                                                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                    | (0.73      | )                                  | $          | (0.31 | ) | $ | (1.56 | ) | $ | (0.37 | ) |
| Pro forma                                                                                                                               |       | $                                    | (0.92      | )                                  | $          | (0.46 | ) | $ | (1.95 | ) | $ | (0.67 | ) |

 

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**10.****                               SpecialCharges**

 

We continuously evaluate the overall businessclimate in general and our industry in particular. During fiscal years 2003,2004 and 2005, we concluded that we had excess capacity that was unwarranted.Given the change in the business climate each period, we identified certainmanufacturing operations to be consolidated and certain equipment to be sold orabandoned.

 

During the six months ended December 31,2003, as part of our efforts to reduce costs, we signed a multi-year pelliclesupply agreement with Micro Lithography, Inc. (“MLI”),while concurrently deciding to close our pellicle production facility inDanbury. During the six months ended December 31, 2003, we recorded specialcharges of approximately $2,900 for employee severance and asset disposal costsand received proceeds of $1,200 from the sale of certain pellicle technology.

 

In relation to our fiscal 2003 Europeconsolidation initiatives, we reduced accrued liabilities for lease terminationand asset disposal related costs by approximately $400 and recorded specialcharges of approximately $800 which were not previously estimable and relatedto employee severance for our former employees at our Roussetfacility.  Furthermore, we recorded abenefit of approximately $600 as a result of terminating a capital leaseliability on December 31, 2003 for our Hamburg facility.

 

During fiscal 2004 and subsequent to the sixmonths ended December 31, 2003, we adopted additional initiatives to reduce costsin Europe that resulted in recording special charges in relation to employeeseverance. We recorded additional employee severance related special charges ofapproximately $400 during the six months ended December 31, 2004 in associationwith the fiscal 2004 Europe initiative.  We expect to substantially settlethe related Europe liabilities of approximately $1,000 by June 30, 2005.

 

During the three months ended December 31, 2004, we adopted an additional initiative to reduce costs in North America that resulted in recording special charges of approximately $500 in relation to employee severance.  The associated liabilities were settled as of December 31, 2004.  In addition, we recorded a special charge of approximately $1,500 to write-down the carrying amount of our former pellicle production facility which is held for sale in Danbury.

 

The charges, net of any sale proceeds, and any adjustments to the liability have beenrecorded as special charges, net on the accompanying consolidated incomestatements.

 

A summary ofthe related accrued liabilities associated with the plans is shown below:

** **
| ** **                                              | ** ** | **Employee  Severance** | ** ** | **Asset  Disposals and  Related  Costs** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|------------------------------------------|------------|-----------|------------|
| ** **                                              | ** ** | ** **              |
| ** **                                              | ** ** | ** **              |
| ** **                                              | ** ** | ** **              |
|                                                    |       |                    |       |                                     |       |      |       |
| Remaining liability as of June 30, 2004                 |       | $                       | 2,452      |                                     | $          | 151       |       | $ | 2,603 |   |
| Charges during the six months ended  December 31, 2004  |       | 920                     |       | 1,562                                    |       | 2,482     |       |
| Utilized during the six months ended  December 31, 2004 |       | (1,981                  | )          | (1,697                                   | )          | (3,678    | )          |
|                                                    |       |                    |       |                                     |       |      |       |
| Remaining liability as of December 31, 2004             |       | $                       | 1,391      |                                     | $          | 16        |       | $ | 1,407 |   |

 

**11.****                               SegmentInformation**

 

We conductoperations worldwide and are managed on a geographic basis, with thosegeographic segments being North America, Europe and Asia. The North Americasegment consists of the U. S. operations and BAC(assets only), the Europe segment includes France and Germany and the Asiasegment includes China, Japan, Korea, Taiwan and Singapore. We allocateresources to and evaluate the performance of our segments based on operatingincome (loss). Corporate expenses are included in our measure of segmentoperating income (loss) in North America for management reporting purposes.Expenses incurred by the BAC and paid by our Dresdenmanufacturing facility are included in our measure of segment operating income(loss) in Europe for management reporting purposes. The asset totals disclosedby geography are directly managed by these segments. Segment information is asfollows for the time period or date as noted:

 

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| ** **                               | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|--------------------|------------|------------|------------|----------|------------|-----------|------------|
|                                     |       |               |       |       |       |     |       |      |       |
| **Three Months Ended December 31, 2003** |       |               |       |       |       |     |       |      |       |
| External revenue                         |       | $                  | 37,428     |       | $          | 22,244   |       | $         | 26,292     |   | $ | 85,964 |   |
| Transfers between geographic segments    |       | 4,097              |       | (11,590    | )          | 7,493    |       | —    |       |
| Revenue, net                             |       | $                  | 41,525     |       | $          | 10,654   |       | $         | 33,785     |   | $ | 85,964 |   |
|                                     |       |               |       |       |       |     |       |      |       |
| Operating income (loss)                  |       | $                  | (4,261     | )          | $          | (13,155  | )          | $         | 4,925      |   | $ | (12,491 | ) |
|                                     |       |               |       |       |       |     |       |      |       |
| **Six Months Ended December 31, 2003**   |       |               |       |       |       |     |       |      |       |
| External revenue                         |       | $                  | 71,510     |       | $          | 41,936   |       | $         | 54,895     |   | $ | 168,341 |   |
| Transfers between geographic segments    |       | 5,440              |       | (18,887    | )          | 13,447   |       | —    |       |
| Revenue, net                             |       | $                  | 76,950     |       | $          | 23,049   |       | $         | 68,342     |   | $ | 168,341 |   |
|                                     |       |               |       |       |       |     |       |      |       |
| Operating income (loss)                  |       | $                  | (16,854    | )          | $          | (20,174  | )          | $         | 10,660     |   | $ | (26,368 | ) |
|                                     |       |               |       |       |       |     |       |      |       |
| **June 30, 2004**                        |       |               |       |       |       |     |       |      |       |
| Total assets                             |       | $                  | 373,901    |       | $          | 133,048  |       | $         | 288,423    |   | $ | 795,372 |   |
|                                     |       |               |       |       |       |     |       |      |       |
| **Three Months Ended December 31, 2004** |       |               |       |       |       |     |       |      |       |
| External revenue                         |       | $                  | 32,323     |       | $          | 35,167   |       | $         | 31,702     |   | $ | 99,192 |   |
| Transfers between geographic segments    |       | 8,034              |       | (16,904    | )          | 8,870    |       | —    |       |
| Revenue, net                             |       | $                  | 40,357     |       | $          | 18,263   |       | $         | 40,572     |   | $ | 99,192 |   |
|                                     |       |               |       |       |       |     |       |      |       |
| Operating income (loss)                  |       | $                  | (10,113    | )          | $          | (3,539   | )          | $         | 10,895     |   | $ | (2,757 | ) |
|                                     |       |               |       |       |       |     |       |      |       |
| **Six Months Ended December 31, 2004**   |       |               |       |       |       |     |       |      |       |
| External revenue                         |       | $                  | 65,037     |       | $          | 64,581   |       | $         | 64,421     |   | $ | 194,039 |   |
| Transfers between geographic segments    |       | 15,999             |       | (31,750    | )          | 15,751   |       | —    |       |
| Revenue, net                             |       | $                  | 81,036     |       | $          | 32,831   |       | $         | 80,172     |   | $ | 194,039 |   |
|                                     |       |               |       |       |       |     |       |      |       |
| Operating income (loss)                  |       | $                  | (15,159    | )          | $          | (9,046   | )          | $         | 22,311     |   | $ | (1,894 | ) |
|                                     |       |               |       |       |       |     |       |      |       |
| **December 31, 2004**                    |       |               |       |       |       |     |       |      |       |
| Total assets                             |       | $                  | 264,499    |       | $          | 145,805  |       | $         | 275,822    |   | $ | 686,126 |   |

 

Products aretransferred between geographic areas on a basis intended to approximate themarket value of such products.

 

**12.****                               Commitmentsand Contingencies**

 

#### *AMTC*

 

We, along withInfineon and AMD, have established the AMTC, a joint venture in Dresden, Germany which conductsleading edge photomask research and pilotmanufacturing. The AMTC leases approximately 50% ofthe BAC’s facility.

 

We arecommitted to funding a portion of the operating cash requirements of the AMTC under research and development reimbursement andcapacity utilization obligations through June 30, 2007. We expect our portionof these operating cash requirements, which is estimated to be approximately$42,100 exclusive of rent due by the AMTC to the

 

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BAC,to vary between approximately 22% to 26% through June 30,2007. Research and development costs for services rendered by the AMTC joint venture were approximately $1,700 and $3,700 forthe three and six months ended December 31, 2003 and approximately $3,100 and$5,500 for the three and six months ended December 31, 2004.

 

The AMTC has executed a 120,000 euro revolving credit facility,which has a final maturity date of December 19, 2007, to be used for equipmentpurchases. The revolving credit facility had approximately $80,600 (59,200euro) outstanding as of December 31,2004. Each of the partners of the joint venture has executed one-thirdguarantees for up to 32,000 euro and certain additional costs as defined in therevolving credit facility agreement for as long as any obligation remainsoutstanding under the revolving credit facility. We will be required to honorour guarantee if the AMTC fails to make timely paymentsunder the revolving credit facility; breaches certain financial covenants;becomes insolvent; or in any other way defaults under the revolving creditfacility. We will also be required to honor our guarantee if any of the ownersof the AMTC 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 50,000 euro or otherwise experiencean event constituting a default under the revolving credit facility.

 

#### *Infineon*

 

In fiscal2002, we entered into an agreement (“Fiscal 2002 Agreement”)toacquire photomask production equipment from Infineon’s internal photomaskmanufacturing operations in Munich, Germany and became Infineon’sstrategic photomask supplier. In consideration forthe acquisition of certain photomask productionassets and the agreement to supply Infineon with photomasks over a 10 year term, we agreed to pay Infineon $53,500 over a seven-year period ending in March2009. As part of the Fiscal 2002 Agreement, we also agreed to purchase from Infineon additional photomaskproduction equipment for approximately $28,100 payable over a five-year periodending in December 2006. As of June 30, 2004, we had made aggregate purchasesof approximately $26,600 pursuant to the Fiscal 2002 Agreement. Effective July1, 2004, the Fiscal 2002 Agreement was superseded by a new agreement (“Fiscal2005 Agreement”). As a result, our previous commitment to acquire certain photomask production assets in the approximate amount of$28,100 was reduced to $23,345 due to a change in the equipment to be acquiredfrom Infineon. In addition, we are now committed topay Infineon a total of $1,750 in three equalinstallments over a three-year period ending December 31, 2007, for the use ofcertain photomask production assets owned by Infineon. We do not expect that the changes to the Fiscal2002 Agreement terms will be material to our financial condition, results ofoperations or cash flows. Per the terms of the Fiscal 2005 Agreement, weretained the right originally provided in the Fiscal 2002 Agreement to elect tosatisfy a portion of certain amounts payable by issuing shares of our commonstock.  Our decision as to the form ofeach such payment (cash only or cash and shares of our common stock) will bemade at least thirty days prior to the due date for each payment. Each paymentis considered independently and the payment in shares of our common stock maynot exceed 40% of the total of any single payment. As of December 31, 2004, wehave made aggregate purchases of approximately $43,400 in association with thetwo aforementioned agreements. The maximum value of our common stock that wecould issue to Infineon if we choose to fullyexercise our rights for future payments, approximated $14,600 as of December 31, 2004.

 

#### *Other*

 

In fiscal 2002, we sold all of our photoblankmanufacturing assets to Schott Lithotec AG (“Schott”).We also entered into a supply agreement with Schott for a significant portionof our future purchases of photoblanks, as needed. InApril 2004, the asset purchase agreement associated with the 2002 sale wasamended to allow us to be paid additional amounts contingent upon theoccurrence of certain future performance and specified purchase level basedevents.  We do not expect any contingentamounts that may be received under this amended agreement would be material toour consolidated financial condition, results of operations or cash flows.

 

In fiscal2004, we signed a multi-year pellicle supply agreement with MLIfor a significant portion of our future purchases of pellicles, as needed.

 

#### *General*

 

As of December 31, 2004, minimum lease paymentsfor non-cancelable operating lease obligations are estimated to beapproximately $3,300, $2,300, $2,300, $2,000, and $300 for annual periodsending December 31, 2005 through2009, respectively, and $6,200 in the aggregate thereafter.

 

We havevarious purchase commitments incidental to the normal course of business,including non-refundable deposits to purchase equipment. In the aggregate, suchcommitments are not at prices in excess of current market.

 

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On October 7,2004, a lawsuit (*Carpenter vs. DupontPhotomasks, Inc. et. al*) was filed in theDistrict Court of Travis County, Texas against us and each member of our boardof directors by a purported stockholder of ours on behalf of a putative classof stockholders. The plaintiff claims, among other matters, breaches of thefiduciary duties of loyalty, due care, independence, good faith and fairdealing in connection with the announced agreement between us and Toppanpursuant to which we would become a wholly owned subsidiary of Toppan and eachoutstanding share of our common stock would be converted into the right toreceive $27.00 in cash (the “Merger Agreement”). The plaintiff seeks injunctiverelief, including rescinding, to the extent already implemented, theacquisition or any of the terms thereof, and attorneys’ fees.  We have been served with a discovery requestand are working with the plaintiff’s counsel to define the scope of ourresponse, under an agreed protective order. We believe that the plaintiff’sclaims are without merit and intend to vigorously defend this lawsuit. As withany litigation, we are unable at this early stage to predict the outcome of thelawsuit or the impact of its pendency on us and theconsummation of the Merger Agreement.

 

We are subjectto other litigation in the normal course of business. We believe the effect, ifany, of an unfavorable settlement of such litigation would not have a materialadverse impact on our financial position, results of operations or cash flows.

 

Our operationsand our ownership of real property are subject to various environmental lawsand regulations that govern, among other things, the discharge of pollutantsinto the air and water and the handling, use, storage, disposal and clean-up ofsolid and hazardous wastes. Compliance with such laws and regulations requiresthat we incur capital expenditures and operating costs in connection with ourongoing operations. In addition, such laws and regulations may imposeliabilities on owners and operators of businesses and real property withoutregard to fault and such liabilities may be joint and several with otherparties. More stringent environmental laws and regulations may be enacted inthe future, which may require us to expend additional amounts on environmentalcompliance or may require modifications in our operations. Although we areunable to predict the extent of our future liability with respect to anyenvironmental matters, we believe, based upon current information, thatenvironmental liabilities will not be material to our financial condition or resultsof operations. E. I. du Pont de Nemours and Companyhas agreed to generally indemnify us against substantially all liabilitiesrelating to any environmental contamination present on our manufacturing sitesas of June 13, 1996, the date of our initial public offering, or presentat any such site due to the generation, use, treatment, storage, release,emission, discharge or disposal of hazardous waste or hazardous materialsbefore such date. The Environmental Protection Agency and Connecticut Department of Environmental Protection are reviewinga groundwater contamination issue at our Danbury, Connecticut site undervoluntary corrective action. Any such contamination is believed to be offsiteor historical, and, if that is the case, any environmental liabilities would becovered by the indemnification agreement with E. I. duPont de Nemours and Company.

 

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**Item 2****. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The followingdiscussion and analysis of the financial condition and results of operationsshould be read in conjunction with our consolidated financial statements andrelated notes included elsewhere in this document. All references to years areto our fiscal years, which end on June 30, unless otherwise noted. Results forinterim periods are not necessarily indicative of results for the full year.Due to rounding, some columns may not total and some calculations may notrecalculate within the financial tables. Statements in this report that relate to future results and events arebased on our current expectations. Actual results in future periods may differmaterially from those currently expected or desired because of a number ofrisks and uncertainties. For a discussion of factors affecting our business,see “Item 1-Business” in our Annual Report on Form 10-K for the fiscal yearended June 30, 2004.

 

# **Overview**

 

We are a leading global provider of microimaging solutions. We developand produce photomasks, a key enabling technology used in the manufacture ofsemiconductor and other microelectronic devices. We also develop and marketelectronic design automation (“EDA”) software. Our current EDA softwareproducts enable chip designers to ensure manufacturability earlier in thedesign cycle and are targeted at the design for manufacture (“DFM”) market.

 

Virtually all of our revenue is derived from the semiconductor industry.Our customers include integrated device manufacturers (“IDMs”) (companies thatdesign, build and market semiconductor chips), semiconductor foundries(companies that provide sub-contract manufacturing of semiconductor chips) andfabless semiconductor companies (companies that design and market semiconductorchips and sub-contract manufacturing to foundries or IDMs).

 

The photomask is a template used to transfer circuit images ontosemiconductor wafers. Photomask industry revenue more closely correlates withnew chip design activity rather than the volume of semiconductor wafersprocessed or the resultant chip revenue because in most instances a photomaskdoes not degrade with use. However, photomask demand is affected by thecyclical nature of the semiconductor industry. Based on data published byindustry analysts, annual worldwide semiconductor revenue increased by twopercent in calendar 2002, by 14% in calendar 2003, and increased by 26% incalendar 2004. Industry forecasters believe that the photomask industryrealized no growth in calendar years 2002 and 2003, but increased approximately14% in calendar 2004.

 

In the future, the size of the photomask market may be adverselyaffected by a variety of factors, including, but not limited to, overallsemiconductor industry conditions, pricing pressures, a decrease in unitvolumes caused by increasing chip design costs or the usage of multi-projectwafers and multi-layer reticles.

 

During the second quarter of fiscal 2005, leading edge revenue, definedas products supporting 130-nanometer and below design rules, represented 36% ofour total revenue, as compared to 25% a year ago. Our leading edge revenue inabsolute terms has increased significantly over the last year. We believe thistrend is important as it reflects improved conditions across the semiconductorindustry and is an indication that our customers’ ability to manage complexdesign issues and achieve acceptable wafer fab yields have improved.Additionally, we believe this trend reflects the recognition by our customersof our strong and improving technology position.

 

Certain sales and expenses in Europe and Asia are denominated in localcurrencies, and accordingly, the U.S. dollar equivalent of these sales andexpenses are affected by changes in foreign currency exchange rates. Ourlargest net exposure is to the euro. The weakening of the U.S. dollar inrelation to the euro decreased our net loss by approximately $0.8 million and approximately$1.5 million for the three month and six month periods ended December 31,2004, respectively, as compared to the same periods in the prior year.

 

Over the longer term, we expect the photomask industry’s revenue growthwill be driven by leading edge products supporting design rules of130-nanometer and below. To improve our competitive position in these products,we have co-invested in the AMTC, a unique joint venture research anddevelopment initiative with AMD and Infineon. The AMTC operates in a new,state-of-the-art facility in Dresden, Germany and is focused on developing nextgeneration photomask products and processes supporting 65-nanometer and belowdesign rules.

 

Since December2002, we have ceased manufacturing operations in three manufacturing facilitiesand reduced headcount by over 200 employees, while at the same time staffingour new advanced development and manufacturing facility in Dresden. We havebeen executing these plans to increase revenue, reduce our breakeven level andadvance our technology position. On January 18,2005, we announcedthat production in our Kokomo, Indiana facility will begin to ramp-down, withfull site closure targeted during the fourth quarter of fiscal 2005. Toaccount for the cost of this consolidation plan, we

 

15

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estimate we will record pre-tax charges in the third and fourthquarters of fiscal 2005 totaling between approximately $11.0 million and $13.0million. The charges will consist of employee severance, facility closure costsand asset disposition charges. We expect we will continue to evaluatethe most efficient deployment of our operating assets and improvements in theutilization of our manufacturing operations.

 

On October 5, 2004, we entered into a definitive merger agreement to beacquired by Toppan Printing Co., Ltd (“Toppan”). Pursuant to the agreement,upon the closing, we will become a wholly owned subsidiary of Toppan and eachoutstanding share of our common stock will be converted into the right toreceive $27.00 in cash without interest. The merger is conditioned upon, amongother things, approval by our stockholders, clearance under applicableantitrust laws and other customary closing conditions. We currently expect thatthe merger will be consummated in early calendar 2005.

 

**Results of Operations**

 

**Financial Summary**

**(Dollars in millions)**

 
| ** **                                  | ** ** | **Three Months Ended  December 31,** | ** ** | ** ** | ** ** | **Six Months Ended  December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **2003**                             | ** ** | **2004**   | ** ** | **% Change**                       | ** ** | **2003**   | ** ** | **2004** | ** ** | **% Change** | ** ** |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Revenue, net                                |       | $                                    | 86.0       |       | $          | 99.2                               |       | 15.4       | %          | $ | 168.3 |   | $ | 194.0 |   | 15.3 | % |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Cost of goods sold                          |       | 77.2                                 |       | 75.0       |       | (2.8                               | )%         | 152.8      |       | 148.7 |   | (2.7 | )% |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Gross profit                                |       | 8.8                                  |       | 24.2       |       | 175.0                              | %          | 15.5       |       | 45.3 |   | 191.5 | % |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Selling, general and administrative expense |       | 13.4                                 |       | 16.8       |       | 25.5                               | %          | 25.7       |       | 29.5 |   | 14.9 | % |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Research and development expense            |       | 7.6                                  |       | 8.0        |       | 6.2                                | %          | 14.6       |       | 15.2 |   | 3.8 | % |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Special charges, net                        |       | 0.4                                  |       | 2.2        | * *   | *NM*                               |       | 1.6        |       | 2.5 | * * | *NM* | * * |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Operating loss                              |       | $                                    | (12.5      | )          | $          | (2.8                               | *)*        | *NM*       |       | $ | (26.4 | ) | $ | (1.9 | *)* | *NM* | * * |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| As a percentage of Revenue                  |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Cost of goods sold                          |       | 89.8                                 | %          | 75.6       | %          |                               |       | 90.8       | %          | 76.7 | % |   |   |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Gross profit                                |       | 10.2                                 | %          | 24.4       | %          |                               |       | 9.2        | %          | 23.3 | % |   |   |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Selling, general and administrative expense |       | 15.6                                 | %          | 16.9       | %          |                               |       | 15.3       | %          | 15.2 | % |   |   |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Research and development expense            |       | 8.8                                  | %          | 8.1        | %          |                               |       | 8.7        | %          | 7.8 | % |   |   |
|                                        |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Operating margin                            |       | (14.5                                | )%         | (2.8       | )%         |                               |       | (15.7      | )%         | (1.0 | )% |   |   |

----

*NM – notmeaningful*

 
| ***(Dollars in Millions)***            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| **For the Period Ended December  31:** | ** ** | **2003**               | ** ** | **2004**   | ** ** | **Delta**            | ** ** | **2003**   | ** ** | **2004** | ** ** | **Delta** | ** ** |
|                                   |       |                   |       |       |       |                 |       |       |       |   |   |   |   |
| Revenue, net                           |       | $                      | 86.0       |       | $          | 99.2                 |       | 15.4       | %          | $ | 168.3 |   | $ | 194.0 |   | 15.3 | % |
|                                        |            |                        |            |            |            |                      |            |            |            |  |  |  |  |  |  |  |  |

 

Revenue, netis comprised primarily of photomask sales to semiconductor manufacturers.Revenue, net increased 15.4% for the three months ended December 31, 2004compared with the same period in the prior year. The increase was primarilyattributable to an improvement in mix driven by leading edge revenue. Leadingedge revenue represented 36% of our total revenue. During the three monthsended December 31, 2004, we set another company record for revenue from phaseshift masks. Revenue, net also increased for the three months ended December31, 2004 due to the strengthening of the euro in relation to the U.S. dollar.For the six months ended December 31, 2004 compared with the same period in theprior year revenue, net increased 15.3%, largely driven by leading edge revenuegrowth which increased more than 84% and the strengthening of the euro inrelation to the U.S. dollar.

 

16

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| ***(Dollars in Millions)***            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| **For the Period Ended December  31:** | ** ** | **2003**               | ** ** | **2004**   | ** ** | **Delta**            | ** ** | **2003**   | ** ** | **2004** | ** ** | **Delta** | ** ** |
|                                   |       |                   |       |       |       |                 |       |       |       |   |   |   |   |
| Cost of goods sold                     |       | $                      | 77.2       |       | $          | 75.0                 |       | (2.8)      | %          | $ | 152.8 |   | $ | 148.7 |   | (2.7) | % |
| As a percent of revenue, net           |       | 89.8                   | %          | 75.6       | %          |                 |       | 90.8       | %          | 76.7 | % |   |   |
|                                        |            |                        |            |            |            |                      |            |            |            |  |  |  |  |  |  |  |  |

 

Cost of goodssold consists of materials, labor, depreciation, and overhead. Cost of goodssold decreased 2.8% for the 2004 three-month period compared with the samethree-month period in the prior year. The decrease was due primarily to lowerdepreciation expense resulting from the impairment of certain long-lived assetsin June 2004 and the renegotiation of a prior operating lease expense. Thesedecreases were partially offset by the ramp-up of our advanced productionfacility in Dresden, equipment related costs and the strengthening of the euroin relation to the U.S. dollar. For the six months ended December 31, 2004compared with the same period in the prior year, cost of goods sold decreased2.7%. Similarly, this decrease was due primarily to lower depreciation expenseresulting from the impairment of certain long-lived assets in June 2004, therenegotiation of a prior operating lease expense and savings from the closureof our former pellicle production facility in Danbury in September 2003. Thesedecreases were partially offset by the ramp-up of our advanced productionfacility in Dresden, equipment related costs and the strengthening of the euroin relation to the U.S. dollar.

 
| ***(Dollars in Millions)***                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| **For the Period Ended December  31:**      | ** ** | **2003**               | ** ** | **2004**   | ** ** | **Delta**            | ** ** | **2003**   | ** ** | **2004** | ** ** | **Delta** | ** ** |
|                                        |       |                   |       |       |       |                 |       |       |       |   |   |   |   |
| Selling, general and administrative expense |       | $                      | 13.4       |       | $          | 16.8                 |       | 25.5       | %          | $ | 25.7 |   | $ | 29.5 |   | 14.9 | % |
| As a percent of revenue, net                |       | 15.6                   | %          | 16.9       | %          |                 |       | 15.3       | %          | 15.2 | % |   |   |
|                                             |            |                        |            |            |            |                      |            |            |            |  |  |  |  |  |  |  |  |

 

Selling,general and administrative expense includes salaries of sales andadministrative personnel, marketing expense, general and administrative expenseand product distribution expense. Selling, general and administrative expenseincreased 25.5% for the 2004 three-month period compared with the prior year.The increase in expense during the 2004 three-month period was primarilyrelated to professional fees supporting our previously announced definitivemerger agreement with Toppan, higher freight expense and higher personnelrelated cost. We expect to pay additional fees related to our pending merger inthe second half of fiscal 2005. Selling, general and administrative expenseincreased 14.9% for the six months ended December31, 2004 compared to the prior year. This increase was also related toprofessional fees supporting our previously announced definitive mergeragreement with Toppan, fees incurred in complying with the requirements of theSarbanes-Oxley Act of 2002, other personnel related costs and higher freightexpense.

 
| ***(Dollars in Millions)***            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| **For the Period Ended December  31:** | ** ** | **2003**               | ** ** | **2004**   | ** ** | **Delta**            | ** ** | **2003**   | ** ** | **2004** | ** ** | **Delta** | ** ** |
| ** **                             | ** ** | ** **             | ** ** | ** ** | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research & development expense     |       | $                      | 7.6        |       | $          | 8.0                  |       | 6.2        | %          | $ | 14.6 |   | $ | 15.2 |   | 3.8 | % |
| As a percent of revenue, net           |       | 8.8                    | %          | 8.1        | %          |                 |       | 8.7        | %          | 7.8 | % |   |   |
|                                        |            |                        |            |            |            |                      |            |            |            |  |  |  |  |  |  |  |  |

 

Research anddevelopment expense consists primarily of employee costs, cost of consumedmaterials, depreciation, engineering related costs and costs related to ourAMTC joint venture. Research and development expense increased 6.2% for the2004 three month period compared with the same three month period in the prioryear. This was the result of an increase in expense for the AMTC as itcontinues to increase its operating activities. Research and developmentexpense increased 3.8% for the 2004 six month period compared with the same sixmonth period in the prior year. This increase was also the result of anincrease in expense for the AMTC as it continues to increase its operatingactivities.

 

17

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| ***(Dollars in Millions)***            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| **For the Period Ended December  31:** | ** ** | **2003**               | ** ** | **2004**   | ** ** | **Delta**            | ** ** | **2003**   | ** ** | **2004** | ** ** | **Delta** | ** ** |
|                                   |       |                   |       |       |       |                 |       |       |       |   |   |   |   |
| Special charges, net                   |       | $                      | 0.4        |       | $          | 2.2                  |       | NM         |       | $ | 1.6 |   | $ | 2.5 |   | NM |   |
|                                        |            |                        |            |            |            |                      |            |            |            |  |  |  |  |  |  |  |  |

 

During the six months ended December 31,2003, as part of our efforts to reduce costs, we signed a multi-year pelliclesupply agreement with Micro Lithography, Inc. (“MLI”), while concurrentlydeciding to close our pellicle production facility in Danbury. During the sixmonths ended December 31, 2003, we recorded special charges of approximately$2.9 million for employee severance and asset disposal costs and receivedproceeds of $1.2 million from the sale of certain pellicle technology.  Inrelation to our fiscal 2003 Europe consolidation initiatives, we reducedaccrued liabilities for lease termination and asset disposal related costs byapproximately $0.4 million and recorded special charges of approximately $0.8million which were not previously estimable and related to employee severancefor our former employees at our Rousset facility.  Furthermore, we recorded a benefit ofapproximately $0.6 million as a result of terminating a capital lease liabilityon December 31, 2003 for our Hamburg facility.

 

During fiscal 2004 and subsequent to the sixmonths ended December 31, 2003, we adopted additional initiatives to reducecosts in Europe that resulted in recording special charges in relation toemployee severance. We recorded additional employee severance related specialcharges of approximately $0.4 million during the six months ended December 31,2004 in association with the fiscal 2004 Europe initiative.

 

During the three months ended December 31, 2004, we adopted an additional initiative to reduce costs in North America that resulted in recording special charges of approximately $0.5 million in relation to employee severance. In addition, we recorded a special charge of approximately $1.5 million to write-down the carrying amount of our former pellicle production facility held for sale in Danbury.

 

A summary ofthe related accrued liabilities associated with the plans is shown below(dollars in millions):

 
| ** **                                              | ** ** | **Employee  Severance** | ** ** | **Asset  Disposals and  Related  Costs** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|------------------------------------------|------------|-----------|------------|
| ** **                                              | ** ** | ** **              | ** ** | ** **                               |
| ** **                                              | ** ** | ** **              | ** ** | ** **                               |
|                                                    |       |                    |       |                                     |       |      |       |
| Remaining liability as of June 30, 2004                 |       | $                       | 2.5        |                                     | $          | 0.2       |       | $ | 2.6 |   |
| Charges during the six months ended  December 31, 2004  |       | 0.9                     |       | 1.6                                      |       | 2.5       |       |
| Utilized during the six months ended  December 31, 2004 |       | (2.0                    | )          | (1.7                                     | )          | (3.7      | )          |
|                                                    |       |                    |       |                                     |       |      |       |
| Remaining liability as of December 31, 2004             |       | $                       | 1.4        |                                     | $          | 0.0       |       | $ | 1.4 |   |

 

*Otherexpense, net*. Other expense, net includes interest income, interest expense, ourequity in earnings of our equity method investees, foreign currency exchangegains and losses and the lease income and associated operating expenses of theBAC. Although other expense, net in total remained consistent, for the threemonths ended December 31, 2003 and 2004, respectively, there was an increase ininterest expense associated with the BAC’s term loan agreement which was offsetby the excess of lease income over associated operating expenses of the BACfrom its lease with the AMTC. Lease income of the BAC was approximately $2.4million and the associated operating expenses were approximately $1.8 millionduring the three months ended December 31, 2004. Other expense, net in totalalso remained consistent for the six months ended December 31, 2003 and 2004,respectively. Similarly the six months ended December 31, 2004, an increase ininterest expense associated with the BAC’s term loan agreement was offset bythe excess of lease income over associated operating expenses of the BAC fromits lease with the AMTC. Lease income of the BAC was approximately $4.6 millionand the associated operating expenses were approximately $3.4 million duringthe six months ended December 31, 2004. We began consolidating the financialresults of the BAC effective March 31, 2004.

 

18

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*Provision for Income Taxes*.  Theprovision for income taxes differs from amounts computed by applying thefederal statutory rate of 35% to loss before income taxes and minority interestbecause of our inability to record deferred tax benefits for net operatinglosses generated in certain tax jurisdictions, our reduced tax rates in certainAsian jurisdictions and for other adjustments described below. During the threemonths ended December 31, 2003, our net tax provision included a $1.0 millionbenefit from the positive resolution of tax audits in multiple jurisdictionsand a provision of $1.3 million for withholding taxes related to a planneddividend distribution from within our group of foreign subsidiaries. Our nettax provision during the three months ended September 30, 2004 included abenefit of $0.2 million from the positive resolution of a tax audit. On October22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”).The Act creates a temporary incentive for U.S. corporations to repatriateaccumulated income earned abroad by providing an 85 percent dividends receiveddeduction for certain dividends from controlled foreign corporations. Althoughthe deduction is subject to a number of limitations and, as of today, someuncertainty remains as to how to interpret numerous provisions in the Act,  we believe that we have the informationnecessary to make an informed decision on the impact of the Act on ourrepatriation plans. Based on that decision, we have repatriated $24.0 millionin extraordinary dividends, as defined in the Act, during the three monthsended December 31, 2004 and accordingly have recorded a tax liability of $1.1million as of December 31, 2004.

 

*MinorityInterest in (Income) Loss of Joint Ventures*.  Minority interest reflects our partners’share of the earnings or losses of our consolidated joint venture operations,which included our Shanghai, China and Hsinchu, Taiwan operations during thethree and six months ended December 31, 2003 and additionally the BACoperations during the three and six months ended December 31, 2004. Theminority interest impact of our joint ventures was a decrease of $0.5 millionto our net loss for the three months ended December31, 2003 and an increase of $0.2 million to our net loss for the threemonths ended December 31, 2004. For the six months ended December 31, 2003, theminority interest impact of our joint ventures was a decrease of $0.6 millionto our net loss while the minority interest impact for the six months endedDecember 31, 2004 was an increase of $0.5 million to our net loss.

 

**Liquidity and Capital Resources**

 

Our workingcapital was $109.8 million as of June 30, 2004 and$123.1 million as of December 31, 2004. The increase in working capitalwas due principally to net cash provided by operating activities and collectionof investment subsidies from the German government by our Dresden manufacturingfacility and the BAC in the amounts of $3.7 million and approximately $17.1million, respectively. Cash and cash equivalents were $231.4 million as ofJune 30, 2004 and $141.1 million as of December  31, 2004.

 

Cash providedby operating activities was $1.9 million and $31.8 million for thesix months ended December 31, 2003 and 2004, respectively. The increase in cashprovided by operating activities is primarily the result of our betteroperating results and collections of outstanding trade accounts receivable.

 

Cash used ininvesting activities was $22.7 million and $25.7 million for the sixmonths ended December 31, 2003 and 2004, respectively. The increase in cashused in investing activities was due to an increase in capital expendituresoffset by the receipt of the German investment subsidies. Capital expenditureshave been and will in the future be used primarily to advance our technicalcapability at the 90, 65 and sub 65-nanometer nodes. Additionally, in thefuture we may pursue acquisitions of businesses, products and technologies, orenter into joint venture arrangements, that could complement or expand ourbusiness. Any material acquisition or joint venture could result in a decreaseto our working capital depending on the amount, timing and nature of theconsideration to be paid.

 

Cash used in financing activities was $3.4 million and$99.9 million for the six months ended December 31, 2003 and 2004,respectively. The change in cash used in financing activities was primarily dueto our repayment of the $100.0 million convertible subordinated notes whichwere issued in July 2000 and due in July 2004, and repayment of approximately$4.8 million by the BAC on its term loan which was offset by our payments madeon borrowings in China during the six months ended December 31, 2003. The$100.0 million convertible notes were repaid using our existing cash balances.We expect the remainder of the BAC’s term loan will be repaid by the BAC usingproceeds from the BAC’s investment subsidies and lease payments received fromus and the AMTC for use of the BAC’s facility. Prior to the consolidation ofthe BAC, we recorded our rent payments to the BAC in our cash flows fromoperating activities.

 

On May 5, 2003, we issued and sold $125.0 million aggregateprincipal amount of convertible subordinated notes in a private placement. Thenotes were sold at face value less an underwriting discount of2.625 percent and we received net proceeds of $121.2 million. Thenotes are due May 15, 2008, accrue interest at an annual rate of1.25 percent and are convertible at any time into shares of our commonstock at a conversion price of $25.595 per share. Interest on the notes is

 

19

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payable semi-annually on May 15 and November 15 of each year.We have reserved 4,883,762 shares of our common stock for conversion of theconvertible subordinated notes. If a change of control occurs, each holder ofnotes will have the right to require us to redeem, in cash, any or all of suchholder’s notes at a price equal to 100% of the principal amount to be redeemed.A change of control is any transaction in which a person or group becomes thebeneficial owner of 50% or more of our common stock or has the power to elect amajority of our board of directors, any consolidation, merger or similartransaction in which our stockholders immediately prior to the transaction holdless than a majority of the outstanding voting stock of the survivingcorporation and the consideration in the merger or consolidation is not commonstock listed on a national securities exchange or approved for quotation on theNASDAQ National Market, or the holders of our capital stock approve any plan orproposal for our liquidation or dissolution. Our merger with Toppan mayconstitute a change of control under the notes. A change of control will not bedeemed to have occurred if the last sale price of our common stock for any fivetrading days during the ten trading days immediately preceding the change ofcontrol is at least equal to 105% of the conversion price of the notes. If achange of control were to occur, we cannot assure you that we will havesufficient funds to pay the redemption price for all the notes tendered by theholders. In that case, our failure to redeem tendered notes would constitute anevent of default under the indenture for the notes, and may constitute adefault under the terms of other indebtedness that we may enter into from timeto time. Debt issue costs of $3.8 million related to these notes areincluded in non-current other assets on the accompanying consolidated balancesheets and are being amortized using the straight-line method, whichapproximates the interest method, to interest expense over the scheduledmaturity period. In connection with the issuance of the notes, we entered intoa Registration Rights Agreement and filed a shelf registration statementcovering resales of the notes and the common stock issuable upon conversion ofthe notes. If we fail to comply with certain of our obligations under theRegistration Rights Agreement, additional interest will accrue on the affectednotes at an annual rate of 0.5 percent. Also in connection with theissuance of the notes, we amended our Rights Agreement dated January 30,2001, to provide that the issuance of the notes to the initial purchasers wouldnot cause the initial purchasers to be Acquiring Persons (as defined in theRights Agreement) under the Rights Agreement and therefore no Distribution Date(as defined in the Rights Agreement) under the Rights Agreement would occur asa result of the issuance of the notes to the initial purchasers.

 

Our ongoingcash requirements will be for capital expenditures, acquisitions, research anddevelopment, working capital and the repayment of convertible notes and otherindebtedness. 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. However, based on our current operating plans, we may seekexternal financing from time to time to fund our capital expenditures, workingcapital requirements and other growth initiatives. Sources of externalfinancing could include issuances of equity, convertible debt and short-term orlong-term borrowings. There can be no assurance that alternative sources offinancing will be available if our capital requirements exceed cash flow fromoperations or that we will be able to obtain any additional financing requiredto fund our capital needs on reasonable terms, or at all.

 

Our consolidated cashand cash equivalents balances as of December 31, 2004, were $141.1 million, ofwhich $22.7 million was attributable to minority shareholders based on theirownership interests in our consolidated joint ventures. As of December 31,2004, we have pledged $7.5 million of our cash and cash equivalents balances ascollateral security for a portion of our short term borrowings.

 

The followingsummarizes our contractual cash obligations as of December 31, 2004 (dollars in millions):

 
| ** **                                            | ** ** | **Payments Due for the Periods ending December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **Total**                                            | ** ** | **Year  2005** | ** ** | **Two Years  2006-2007** | ** ** | **Two Years  2008-2009** | ** ** | **Beyond** | ** ** |
|                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| Short-term and long-term borrowings                   |       | $                                                    | 89.1       |   | $ | 17.5 |   | $ | 26.0 |   | $ | 20.2 |   | $ | 25.3 |   |
| Convertible notes                                     |       | 125.0                                                |       | — |   | — |   | 125.0 |   | — |   |
| Operating leases                                      |       | 16.4                                                 |       | 3.3 |   | 4.6 |   | 2.3 |   | 6.2 |   |
| Purchase obligations                                  |       | 32.9                                                 |       | 29.9 |   | 3.0 |   | — |   | — |   |
| Other long-term obligations (AMTC amounts  estimated) |       | 47.3                                                 |       | 16.5 |   | 25.6 |   | — |   | 5.2 |   |
|                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total contractual cash obligations                    |       | $                                                    | 310.7      |   | $ | 67.2 |   | $ | 59.2 |   | $ | 147.5 |   | $ | 36.7 |   |

 

We arecommitted to funding a portion of the operating requirements of the AMTC underresearch and development reimbursement and capacity utilization obligationsthrough June 30, 2007. We expect our portion of these cash requirements to varybetween approximately 22% to 26% of the AMTC’s operating costs through June 30,2007.

 

20

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As of December 31, 2004, we are contractuallyobligated to fulfill the remaining amount on a portion of our existing purchaseorders. The purchase orders that we are contractually obligated to fulfill areprimarily related to purchases of equipment and equipment service contracts.

 

The followingsummarizes our commercial commitments as of December31, 2004 (dollars in millions):

 
| ** **                   | ** ** | **Amounts of Commitment Expiration by Periods Ending December 31,** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                                           | ** ** | **Year  2005** | ** ** | **Two Years  2006-2007** | ** ** | **Two Years  2008-2009** | ** ** | **Beyond** | ** ** |
|                         |       |                                                                |       |   |   |   |   |   |   |   |   |
| Guarantees                   |       | $                                                                   | 26.9       |   | $ | 26.9 |   | $ | — |   | $ | — |   | $ | — |   |
| Other commercial commitments |       | 35.3                                                                |       | 10.6 |   | 21.2 |   | 3.5 |   | — |   |
|                         |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total commercial commitments |       | $                                                                   | 62.2       |   | $ | 37.5 |   | $ | 21.2 |   | $ | 3.5 |   | $ | — |   |

 

We haveexecuted a one-third guarantee for up to 32.0 million euro of the AMTC’s 120.0million euro revolving credit facility. The revolving credit facility had 59.2million euro (approximately $80.6 million) outstanding as of December 31, 2004.

 

In fiscal2002, we entered into an agreement (“Fiscal 2002 Agreement”) to acquirephotomask production equipment from Infineon’s internal photomask manufacturingoperations in Munich, Germany and became Infineon’s strategic photomasksupplier. In consideration for the acquisition of certain photomask productionassets and the agreement to supply Infineon with photomasks over a 10 yearterm, we agreed to pay Infineon $53.5 million over a seven-year period endingin March 2009. As part of the Fiscal 2002 Agreement, we also agreed to purchasefrom Infineon additional photomask production equipment for approximately $28.1million payable over a five-year period ending in December 2006. As of June 30,2004, we had made aggregate purchases of approximately $26.6 million pursuantto the Fiscal 2002 Agreement. Effective July 1, 2004, the Fiscal 2002 Agreementwas superseded by a new agreement (“Fiscal 2005 Agreement”). As a result, ourprevious commitment to acquire certain photomask production assets in the approximateamount of $28.1 million was reduced to $23.3 million due to a change in theequipment to be acquired from Infineon. In addition, we are now committed topay Infineon a total of $1.8 million in three equal installments over athree-year period ending December 31, 2007, for the use of certain photomaskproduction assets owned by Infineon. We do not expect that the changes to theFiscal 2002 Agreement terms will be material to our financial condition,results of operations or cash flows. Per the terms of the Fiscal 2005Agreement, we retained the right originally provided in the Fiscal 2002Agreement to elect to satisfy a portion of certain amounts payable by issuingshares of our common stock.  Our decisionas to the form of each such payment (cash only or cash and shares of our commonstock) will be made at least thirty days prior to the due date for eachpayment. Each payment is considered independently and the payment in shares ofour common stock may not exceed 40% of the total of any single payment. As ofDecember 31, 2004, we have made aggregate purchases of approximately $43.4million in association with the two aforementioned agreements.  The maximum value of our common stock that wecould issue to Infineon if we choose to fully exercise our rights for futurepayments, approximated $14.6 million as of December31, 2004.

 

In addition tothe commitments in the tables above, the following commitments andcontingencies exist:

 

•                    In fiscal2002, we sold all of our photoblank manufacturing assets to Schott.  We also entered into a supply agreement withSchott for a significant portion of our future purchases of photoblanks, asneeded. In April 2004, the asset purchase agreement associated with the 2002sale was amended which will allow us to be paid additional amounts contingentupon the occurrence of certain future performance and specified purchase levelbased events.  We do not expect anycontingent amounts that may be received under this amended agreement would bematerial to our consolidated financial condition, results of operations or cashflows.

 

•                  In fiscal 2004,we signed a multi-year pellicle supply agreement with MLI for a significantportion of our future purchases of pellicles, as needed.

 

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**Critical Accounting Policies**

 

Our critical accounting policies are as follows:

 

•                  Revenuerecognition

 

Revenue is recognized, net of an allowance for estimated returns, whenboth title and risk of loss transfer to the customer, provided that nosignificant obligations remain. In connection with each transaction involvingour products, we must evaluate whether: persuasive evidence of an arrangementexists, delivery has occurred, pricing is fixed or determinable, andcollectibility is probable. We recognize revenue on transactions involvingmultiple elements based on the relative fair values of the elements. Discountsand rebates are recorded as a reduction of revenue during the period they areearned by our customers and periodically must be estimated.

 

•                  Estimates,specifically sales return allowances, the allowance for doubtful accountsreceivable, inventory valuation and depreciation expense. The preparation ofconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amount of assets and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenue and expenses during the reported period.

 

•              We must makeestimates of potential future product returns related to current period productrevenue. We analyze historical returns 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.

 

•               We must makeestimates of the collectibility of our accounts receivable. We consider trendsof historical bad debts, customer concentrations, customer credit-worthinessand changes in our customer payment terms when evaluating the adequacy of theallowance for doubtful accounts. If circumstances change or if our originalestimates are otherwise incorrect, we may have to reduce our estimates of therecoverability of amounts due us by a material amount.

 

•               Inventories arestated at the lower of cost or market. Estimates of market value are based onassumptions of future demands and market conditions. If actual marketconditions are materially less favorable than those projected by management, orif our estimates of market value are later determined to have been materiallyincorrect, future inventory write-downs may be required.

 

•               Property and equipmentare depreciated using the straight-line method over the estimated useful livesof the assets ranging from three to seven years for equipment and 10 to 20years for buildings. Leasehold improvements are amortized using thestraight-line method over the shorter of the estimated useful lives of theassets or the estimated remaining terms of the leases.

 

•      Valuation of identifiable intangibles andother long-lived assets

 

We assess the possible impairment of identifiable intangibles subjectto amortization and other long-lived assets whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Factorsconsidered important which could trigger an impairment review include thefollowing:

 

•               Significantunderperformance relative to expected historical or projected future operatingresults;

 

•               Significant changesin the manner of our use of the acquired assets or the strategy for our overallbusiness;

 

•               Significantnegative industry or economic trends; and

 

•               Our marketcapitalization relative to net book value.

 

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When it is determined that the carrying valueof intangibles subject to amortization and other long-lived assets may not berecoverable based upon the existence of one or more of the above indicators ofimpairment, the measurement of any impairment is determined and the carryingvalue is reduced as appropriate.

 

•      Accounting for income taxes

 

We arerequired to consider our income taxes in each of the tax jurisdictions in whichwe operate in computing our effective income tax rate. This process involvesestimating our current tax exposure together with assessing temporarydifferences resulting from differing treatment of items for tax and financialreporting purposes. These differences result in deferred tax assets andliabilities, which are included on our consolidated balance sheets. Further,the actual annual amount of taxable income in each tax jurisdiction may differfrom the estimates we use to compute the effective tax rate during our first,second and third quarters. Additionally, we evaluate the recoverability of thedeferred tax assets from future taxable income and establish valuationallowances if recovery is not more likely than not. Our income tax provision onthe consolidated income statements are impacted by changes in the valuationallowance. This process is complex and involves significant management judgmentin determining our provision for income taxes, deferred tax assets andliabilities and any valuation allowance recorded against our net deferred taxassets.

 

•      Consolidation

 

The consolidated financial statements include the accounts of DuPontPhotomasks, Inc and our controlled and wholly owned subsidiaries, and avariable interest entity of which we are the primary beneficiary. Allsignificant intercompany transactions and accounts are eliminated inconsolidation. The minority interest impact is reflected in minority interestin income of joint ventures and is the partners’ share of consolidated jointventure operations. We consolidate our Hsinchu, Taiwan and Shanghai, Chinaoperations as well as the financial results of the BAC.

 

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**ForwardLooking Statements**

 

This reportcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934, that involve a number of risks and uncertainties. Although we believethat the expectations reflected in such forward-looking statements arereasonable, such forward-looking statements are subject to risks anduncertainties that could cause actual results to differ materially from thoseindicated by the forward looking statements. Such risks and uncertaintiesinclude, without limitation, the following:

 

•                    The proposedmerger with Toppan may divert the attention and resources of management, mayaffect our relationships with customers and employees, and, if not consummated,may adversely affect our business and stock price. With respect to the lawsuitfiled in connection with the proposed merger with Toppan by a purportedstockholder on behalf of a putative class of stockholders, we are unable atthis early stage to predict the outcome of the lawsuit or the impact of itspendency on our financial results or the consummation of the proposed mergerwith Toppan;

 

•                    A downturn inthe semiconductor industry could lead to a decrease in the demand for ourphotomask 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 meetinvestors’ expectations, which could negatively impact the price of our stock;

 

•                    Lack ofvisibility and short turn around time of orders may impact our ability torespond to a changing business environment;

 

•                    We may notobtain sufficient capital to fund our needs;

 

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

 

•                    A significantportion of our revenue is derived from Asia and Europe, and therefore, ourbusiness, financial condition and results of operations are to a significantdegree subject to economic, political and social events in these regions;

 

•                    Macroeconomicconditions may have effects on the semiconductor industry;

 

•                    We may beunable to enhance our existing products and 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;

 

•                    We may beunable to successfully develop or market our EDA software;

 

•                    E.I. du Pontde Nemours and Company has influence on all stockholder votes;

 

•                    Our successdepends, in part, upon key managerial, engineering and technical personnel aswell as our ability to continue to attract and retain additional personnel andintegrate new personnel into key positions; and

 

•                    Other risksindicated in our other filings with the SEC, including but not limited to thosefactors which are fully discussed under the caption “Risk Factors” in ourAnnual Report on Form 10-K filed with the SEC on September 9, 2004.

 

These risksand uncertainties are beyond our control and, in many cases, we cannot predictthe risks and uncertainties that could cause our actual results to differmaterially from those indicated by the forward-looking statements.

 

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The forward-looking statements are made as of the release date hereof,and we disclaim any intention or obligation to update or revise anyforward-looking statements or to update the reasons why the actual resultscould differ materially from those projected in the forward-looking statements,whether as a result of new information, future events or otherwise.

 

**Item 3****.   Quantitative and QualitativeDisclosures About Market Risk**

 

**Market Risk**

 

Market risksrelating to our operations result primarily from changes in interest rates andchanges in foreign currency exchange rates. 

 

As of December 31, 2004, we had$125.0 million in 1.25% convertible subordinated notes and $89.1 millionin interest bearing borrowings of which $17.5 million were short-termborrowings. Of this amount, approximately $75.9 million is related to the BACterm loan which matures in June 2012. As a result of our interest bearingborrowings, changes in the interest rate market would change the estimated fairvalue of our long-term convertible notes and other interest bearing borrowings.We believe that a 10% change in interest rates would not have a material effecton our business, financial condition, results of operations or cash flows.

 

Foreign currency exposures are primarily due to non-North Americaoperations which are subject to certain risks inherent in conducting businessabroad, including price and currency exchange controls, fluctuation in the relativevalue of currencies and restrictive governmental actions. Changes in therelative value of currencies occur from time to time and may, in certaininstances, have a material effect on our results of operations. Any exchangerate fluctuations can affect our margins since we may have imbalances betweensome foreign currency denominated revenue and expenses. Our largest netexposure is to the euro. The weakening of the U.S. dollar in relation to theeuro decreased our net loss by approximately $0.8 million and approximately $1.5million for the three month and six month periods ended December 31, 2004,respectively as compared to the same periods in the prior year.

 

Our consolidated financial statements reflect remeasurement andtranslation of items denominated in non-U.S. currencies to U.S. dollars, ourreporting currency. Exchange gains or losses are included in comprehensiveincome in the period in which they occur. We monitor our exchange rate exposureand attempt to reduce such exposure by hedging. We have entered into forwardcontracts in currencies of the countries in which we conduct business in orderto reduce such exposure. The net unrealized loss related to our forwardexchange contracts outstanding at December 31, 2004 was $1.6 million. In relationto foreign currency translation adjustments, an unrealized gain of $3.9 millionis recorded in accumulated other comprehensive income on the accompanyingconsolidated balance sheet and statement of stockholders’ equity as of December31, 2004. Forward exchange contracts may involve elements of credit and marketrisk in excess of the amounts recognized on the consolidated financialstatements. We monitor our positions and the credit quality of counterparties,consisting primarily of major financial institutions, and do not anticipatenonperformance by any counterparty, although nonperformance could occur. Wehave performed a sensitivity analysis as of December31, 2004  using a modelingtechnique that measures the change in the fair values arising from ahypothetical 10% adverse movement in the levels of foreign currency exchangerates relative to the U.S. dollar with all other variables held constant. Theanalysis covers all of our foreign currency contracts offset by the underlyingexposures. The foreign currency exchange rates used were based on market ratesin effect as of December  31, 2004. The sensitivity analysis indicatedthat a hypothetical 10% adverse movement in foreign currency exchange rateswould not have a material effect on our business, financial condition, resultsof operations or cash flows. There can be no assurance that such forwardcontracts or any other hedging activity will be available or adequate toeliminate, or even mitigate, the impact of our exchange rate exposure. Therecan be no assurance that such risks will not have a material adverse impact onour liquidity, financial condition and results of operations in the future.

 

**Financial Risk Management**

 

Ourinternational revenue is subject to inherent risks, including fluctuations inlocal economies; difficulties in staffing and managing foreign operations;greater difficulty in accounts receivable collection; costs and risks oflocalizing products for foreign countries; unexpected changes in regulatoryrequirements, tariffs and other trade barriers; difficulties in therepatriation of earnings; and burdens of complying with a wide variety offoreign laws. Some of our sales outside of North America are denominated inlocal currencies, and accordingly, we are subject to the risks associated withfluctuations in currency rates. In general, increases in the value of thedollar against foreign currencies decrease the U.S. dollar value of foreigncurrency denominated sales requiring us either to increase our price in thelocal currency, which could render our product prices noncompetitive, or tosuffer reduced revenue and gross margins as measured in U.S. dollars. Ourforeign currency hedging program is not designed to hedge the margin risksassociated with exchange rate changes. Our hedging is comprised of foreigncurrency forward contracts utilized to mitigate the risks associated withforeign currency fluctuations on certain balance sheet exposures. However, thehedging program will not eliminate all of our foreign exchange risks.

 

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Themarketplace for our products dictates that we maintain inventories of rawmaterials. Therefore, inventory obsolescence is a risk for us due to frequentengineering changes, shifting customer demand, the emergence of new industrystandards and rapid technological advances including the introduction by ourcompetitors or us of products embodying new technology. While we regularlyreview our inventory valuation estimates to ensure approximation of fair marketvalue of the inventory on hand, there can be no guarantees that futureinventory write downs will not be required.

 

As of December 31, 2004, we had outstandingforeign short-term borrowings, totaling $17.5 million, of whichapproximately $10.1 million is related to the BAC term loan. As of December 31, 2004, we had no relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. Accordingly, we are notexposed to any financing, liquidity, market or credit risk that could arise ifwe were engaged in such relationships.

 

In addition,we issued and sold $125.0 million aggregate principal amount ofconvertible subordinated notes in a private placement in May 2003. Thenotes are due May 15, 2008, accrue interest at an annual rate of1.25 percent and are convertible at any time into shares of our commonstock at a conversion price of $25.595 per share. Interest on the notes ispayable semi-annually on May 15 and November 15 of each yearbeginning November 15, 2003. If a change of control occurs, each holder ofnotes will have the right to require us to redeem, in cash, any or all of suchholder’s notes at a price equal to 100% of the principal amount to be redeemed.A change of control is any transaction in which a person or group becomes thebeneficial owner of 50% or more of our common stock or has the power to elect amajority of our board of directors, any consolidation, merger or similartransaction in which our stockholders immediately prior to the transaction holdless than a majority of the outstanding voting stock of the survivingcorporation and the consideration in the merger or consolidation is not commonstock listed on a national securities exchange or approved for quotation on theNASDAQ National Market, or the holders of our capital stock approve any plan orproposal for our liquidation or dissolution. Our merger with Toppan mayconstitute a change of control under the notes. If a change of control were tooccur, we cannot assure you that we will have sufficient funds to pay theredemption price for all the notes tendered by the holders. In that case, ourfailure to redeem tendered notes would constitute an event of default under theindenture for the notes, and may constitute a default under the terms of otherindebtedness that we may enter into from time to time. In connection with theissuance of the notes, we entered into a Registration Rights Agreement andfiled a shelf registration statement covering resales of the notes and thecommon stock issuable upon conversion of the notes. If we fail to comply withcertain of our obligations under the Registration Rights Agreement, additionalinterest will accrue on the affected notes at an annual rate of 0.5%.

 

### **Item 4.**  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-15(e) and 15d -15(e) under the Securities and Exchange Act of 1934)as of the end of the period covered by this report on Form 10-Q of DuPontPhotomasks, Inc., have concluded that our disclosure controls and procedureswere effective. There were no changes in internal control over financialreporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the SecuritiesExchange Act of 1934) during our most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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## **PART II**

 

# **Item 1**. Legal Proceedings

 

On October 7,2004, a lawsuit (*Carpenter vs. Dupont Photomasks, Inc. et. al*)was filed in the District Court of Travis County, Texas against us and eachmember of our board of directors by a purported stockholder of ours on behalfof a putative class of stockholders. The plaintiff claims, among other matters,breaches of the fiduciary duties of loyalty, due care, independence, good faithand fair dealing in connection with the announced agreement between us andToppan Printing Co., Ltd. (“Toppan”) pursuant to which we would become a whollyowned subsidiary of Toppan and each outstanding share of our common stock wouldbe converted into the right to receive $27.00 in cash (the “Merger Agreement”).The plaintiff seeks injunctive relief, including rescinding, to the extentalready implemented, the acquisition or any of the terms thereof, and attorneys’fees.  We have been served with adiscovery request and are working with the plaintiff’s counsel to define thescope of our response, under an agreed protective order. We believe that the plaintiff’sclaims are without merit and intend to vigorously defend this lawsuit. As withany litigation, we are unable at this early stage to predict the outcome of thelawsuit or the impact of its pendency on us and the consummation of the MergerAgreement.

 

**Item 4****. Submission of Matters to a Vote of Security Holders**

 

Our AnnualMeeting of Stockholders was held October 26, 2004 (the “Annual Meeting”). Atthe Annual Meeting, (i) our stockholders elected Preston M. Adcox, IsabellaC.M. Cunningham and Susan Vladuchick Sam as Class II directors to our Board ofDirectors to serve until our 2007 annual meeting or until their successors areelected and qualified, subject to their death, resignation or removal, (ii) ourstockholders ratified the appointment of PricewaterhouseCoopers LLP as ourindependent public accountants for the fiscal year ending June 30, 2005 and(iii) our stockholders approved an amendment to our Second Amended and RestatedNon-employee Directors Stock Option Plan to increase the number of shares ofour common stock authorized for issuance under that plan by 100,000, to350,000. Votes cast at the Annual Meeting are as follows:

 

(i) Electionof Class II Directors

 
| ** **               | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|--------------------------|------------|------------|------------|--------------|------------|
| Preston M. Adcox         |       | 15,262,878 |       | 2,119,165    |       |
| Isabella C.M. Cunningham |       | 15,392,927 |       | 1,989,116    |       |
| Susan Vladuchick Sam     |       | 14,535,107 |       | 2,846,936    |       |

 

(ii) Ratification of the appointment of PricewaterhouseCoopers LLP

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **NON-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------|------------|
| 16,737,612 |       | 590,336     |       | 54,095      |       | 0            |       |

 

(iii)Amendment of our Seconded Amended and Restated Non-employee Directors StockOption Plan

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **NON-VOTE** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|--------------|------------|
| 9,182,663 |       | 6,244,179   |       | 57,565      |       | 1,897,636    |       |

 

**Item 6****. Exhibits**

 
| (A)    | Exhibits |                                                                                                                                                                                                      |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                      |
|   | 3.1.1    | Certificate of Incorporation of the Company, as amended and restated  on April 3, 1996. (A)                                                                                                               |
|   | 3.1.2    | Amendment to the Certificate of Incorporation of the Company. (B)                                                                                                                                         |
|   | 3.2      | Bylaws, as amended on October 26, 1999. (B)                                                                                                                                                               |
|   | 3.2.1    | Amendments to the Bylaws Of DuPont Photomasks, Inc. as approved by  the Board Of Directors on June 23, 2003. (E)                                                                                          |
|   | 4.1      | Specimen Certificate for Common Stock. (A)                                                                                                                                                                |
|   | 4.2      | Form of Indenture, between DuPont Photomasks, Inc. and Chase Bank of  Texas, N.A., as trustee, including the form of Convertible Subordinated Notes  due July 24, 2004 attached as Exhibit A thereto. (F) |

 

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|   | 4.3  | Indenture, between DuPont Photomasks, Inc. and JPMorgan Chase Bank,  as trustee, including Form of 1.25% Convertible Subordinated Notes due 2008  (144A Global Note and Reg S. Global Note). (C)                                                                                                                                                                                                                                                       |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 4.4  | Rights Agreement, dated as of January 30, 2001, between DuPont  Photomasks, Inc. and EquiServe Trust Company, N.A., as Rights Agent, together  with the following exhibits thereto: Exhibit A-Form of Certificate of  Designation of Series A Junior Participating Preferred Stock of DuPont  Photomasks, Inc.; Exhibit B-Form of Right Certificate; Exhibit C-Summary of  Rights to Purchase Shares of Preferred Stock of DuPont Photomasks, Inc. (D) |
|   | 4.5  | Amendment No. 1 to Rights Agreement, between DuPont Photomasks, Inc.  and EquiServe Trust Company, N.A., as Rights Agent, dated as of April 29,  2003. (C)                                                                                                                                                                                                                                                                                             |
|   | 4.6  | Registration Rights Agreement among DuPont Photomasks, Inc., Credit  Suisse First Boston LLC and Lehman Brothers Inc. dated as of May 5, 2003. (C)                                                                                                                                                                                                                                                                                                     |
|   | 4.7  | Amendment No. 2 to Rights Agreement between DuPont Photomasks, Inc.  and EquiServe Trust Company, N.A., as Rights Agent, dated as of October 5,  2004. (G)                                                                                                                                                                                                                                                                                             |
|   | 4.8  | October 30, 2001 Amendment to Non-Employee  Directors Stock Option Plan (G)                                                                                                                                                                                                                                                                                                                                                                            |
|   | 10.0 | First Amendment to Second Amended and Restated Non-employee Directors  Stock Option Plan (H)                                                                                                                                                                                                                                                                                                                                                           |
|   | 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14 of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                       |
|   | 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14 of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                       |
|   | 32   | Certifications of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                      |

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| **Letter** | ** ** | **Definition**                                                                    |
|------------|------------|-----------------------------------------------------------------------------------|
| (A)        |       | Registration Statement on Form S-1, Registration No. 333-33869.                   |
| (B)        |       | Form 8-A12 G/A on June 23, 2000.                                                  |
| (C)        |       | Quarterly Report on Form 10-Q for the quarterly period ended March  31, 2003.     |
| (D)        |       | Form 8-A12B on January 30, 2001.                                                  |
| (E)        |       | Annual Report on Form 10-K for the fiscal year ended June 30, 2003.               |
| (F)        |       | Amendment No. 2 to Form S-3 filed on July 19, 2000.                               |
| (G)        |       | Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 2004. |
| (H)        |       | Schedule 14A filed on September 9, 2004.                                          |

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                   | DUPONT PHOTOMASKS, INC.  (Registrant) |                                                                                                               |
|------------------------|---------------------------------------|--------------------------------------------------------------------------------------------------------------------|
|                   |                                  |
|                   | By:                                   | /s/ SATISH RISHI                                                                                                   |   |
|                   |                                  | Satish Rishi                                                                                                       |
| Date: February 8, 2005 |                                  | *Executive Vice President—Finance and Chief  Financial  Officer (Principal Financial and Accounting Officer)* |
|                        |                                       |                                                                                                                    |  |  |

 

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