**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

----

 

**FORM 10-Q**

 

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

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September30, 2001**

** **

**Commission file number 0–20839**

** **

----

 

**DUPONT PHOTOMASKS, INC.**

 

 (Exact name of registrant as specified in ourcharter)

 

 

| **Delaware**                                                    |   | **74–2238819**                   |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction  of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

 

**131 OldSettlers Boulevard**

**RoundRock, Texas 78664**

(Addressof Principal Executive Offices)

Registrant'stelephone number, including area code: (512) 310–6500

 

----

 

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

 

                Asof October 19, 2001, there were 17,853,533 shares of the registrant's commonstock, $.01 par value, outstanding.

** **

 

### **TABLE OF CONTENTS**

 
| **Part I**                                                                                                                                                |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                      |   |
| Item 1.Financial  Statements                                                                                                                              |   |
|                                                                                                                                                      |   |
| Consolidated Income  Statement (unaudited) for the Three Months Ended September 30, 2000 and 2001                                                         |   |
| Consolidated Balance Sheet  at June 30, 2001 and September 30, 2001 (unaudited)                                                                      |   |
| Consolidated  Statement of Cash Flows (unaudited) for the Three Months Ended September 30,  2000 and 2001                                                 |   |
| Consolidated  Statement of Stockholders’ Equity for the Twelve Months Ended June 30, 2001  and the Three Months Ended September 30, 2001 (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                                                                                 |   |
|                                                                                                                                                      |   |
| **Part II**                                                                                                                                               |   |
|                                                                                                                                                      |   |
| Item  1.  Legal Proceedings                                                                                                                          |   |
|                                                                                                                                                      |   |
| Item 2.  Changes in Securities                                                                                                                       |   |
|                                                                                                                                                      |   |
| Item 3.  Defaults Upon Senior Securities                                                                                                             |   |
|                                                                                                                                                      |   |
| Item  4.  Submission of Matters to a Vote of  Security Holders                                                                                       |   |
|                                                                                                                                                      |   |
| Item 5.  Other Information                                                                                                                           |   |
|                                                                                                                                                      |   |
| Item  6.  Exhibits and Reports on Form 8–K                                                                                                      |   |
|                                                                                                                                                      |   |
| Signatures                                                                                                                                                |   |

 

**PART I**

 

**Item 1. Financial Statements**

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED INCOME STATEMENT**

**(Dollars in thousands, except per shareamounts)**

**(unaudited)**

 

 
|                                                                                                           |   | **Three Months Ended****September 30,** |    |
|----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                                                           |   | **2000**                                     |    | **2001** |   |
|                                                                                                           |   |                                         |    |   |   |
| Sales                                                                                                          |   | $                                            | 100,528 |   | $ | 77,461 |   |
| Cost of goods sold                                                                                             |   | 64,982                                       |    | 67,264 |   |
| Selling, general and  administrative expense                                                                   |   | 12,019                                       |    | 9,460 |   |
| Research and development  expense                                                                              |   | 7,658                                        |    | 6,460 |   |
|                                                                                                           |   |                                         |    |   |   |
| Operating profit (loss)                                                                                        |   | 15,869                                       |    | (5,723 | ) |
| Loss on warrants, net                                                                                          |   | -                                            |    | (1,101 | ) |
| Other income, net                                                                                              |   | 269                                          |    | 1,320 |   |
|                                                                                                           |   |                                         |    |   |   |
| Income (loss) before  income taxes, minority interest and cumulative effect of change in accounting  principle |   | 16,138                                       |    | (5,504 | ) |
| Provision for (benefit  from) income taxes                                                                     |   | 4,140                                        |    | (4,120 | ) |
|                                                                                                           |   |                                         |    |   |   |
| Income (loss) before  minority interest and cumulative effect of change in accounting principle                |   | 11,998                                       |    | (1,384 | ) |
| Minority interest in  income of joint ventures                                                                 |   | (1,354                                       | )       | (1,599 | ) |
| Income (loss) before  cumulative effect of change in accounting principle                                      |   | 10,644                                       |    | (2,983 | ) |
| Cumulative effect of  change in accounting principle                                                           |   | (481                                         | )       | - |   |
| Net income (loss)                                                                                              |   | $                                            | 10,163  |   | $ | (2,983 | ) |
|                                                                                                           |   |                                         |    |   |   |
| Basic earnings (loss) per  share:                                                                              |   |                                         |    |   |   |
| Before cumulative effect  of change in accountingprinciple                                                     |   | $                                            | 0.63    |   | $ | (0.17 | ) |
|                                                                                                           |   |                                         |    |   |   |
| After cumulative effect  of change in accountingprinciple                                                      |   | $                                            | 0.60    |   | $ | (0.17 | ) |
|                                                                                                           |   |                                         |    |   |   |
| Average shares  outstanding                                                                                    |   | 16,899,419                                   |    | 17,835,283 |   |
|                                                                                                           |   |                                         |    |   |   |
| Diluted earnings (loss)  per share:                                                                            |   |                                         |    |   |   |
| Before cumulative effect  of change in accountingPrinciple                                                     |   | $                                            | 0.58    |   | $ | (0.17 | ) |
|                                                                                                           |   |                                         |    |   |   |
| After cumulative effect  of change in accountingPrinciple                                                      |   | $                                            | 0.55    |   | $ | (0.17 | ) |
|                                                                                                           |   |                                         |    |   |   |
| Weighted average shares  outstanding                                                                           |   | 18,598,145                                   |    | 17,835,283 |   |
|                                                                                                                |        |                                              |         |  |  |  |  |  |

 

The accompanying notes are an integral part of thisstatement.

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEET**

**(Dollars in thousands, except per shareamounts)**

 

 

**ASSETS**
|                                                                                                                         |   | **June 30,****2001** |       | **September 30,  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|------------------------------|------------|
|                                                                                                                         |   |                      |       | **(unaudited)**              |       |
|                                                                                                                         |   |                      |       |
| Current  assets:                                                                                                             |   |                      |       |                         |       |
| Cash and cash equivalents                                                                                                    |   | $                         | 138,590    |                         | $          | 129,425 |   |
| Accounts receivable,  trade, net                                                                                             |   | 71,879                    |       | 57,586                       |       |
| Accounts receivable,  related parties                                                                                        |   | 1,212                     |       | 1,646                        |       |
| Inventories, net                                                                                                             |   | 19,105                    |       | 17,850                       |       |
| Deferred income taxes                                                                                                        |   | 19,414                    |       | 18,664                       |       |
| Prepaid expenses and  other current assets                                                                                   |   | 14,758                    |       | 16,995                       |       |
| Total current assets                                                                                                         |   | 264,958                   |       | 242,166                      |       |
| Assets held for sale                                                                                                         |   | 6,019                     |       | 5,947                        |       |
| Property and equipment,  net                                                                                                 |   | 456,095                   |       | 468,733                      |       |
| Accounts receivable,  related parties                                                                                        |   | 1,205                     |       | 1,189                        |       |
| Deferred income taxes                                                                                                        |   | 10,805                    |       | 17,146                       |       |
| Other assets, net                                                                                                            |   | 28,370                    |       | 25,640                       |       |
| Total assets                                                                                                                 |   | $                         | 767,452    |                         | $          | 760,821 |   |
|                                                                                                                         |   |                      |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                     |   |                      | ** ** |                         | ** ** |
| Current liabilities:                                                                                                         |   |                      |       |                         |       |
| Accounts payable, trade                                                                                                      |   | $                         | 54,350     |                         | $          | 45,320 |   |
| Accounts payable, related  parties                                                                                           |   | 3,960                     |       | 1,568                        |       |
| Short–term  borrowings                                                                                                  |   | 6,490                     |       | 12,389                       |       |
| Income taxes payable                                                                                                         |   | 2,262                     |       | 7,266                        |       |
| Other accrued liabilities                                                                                                    |   | 58,667                    |       | 63,469                       |       |
| Total current liabilities                                                                                                    |   | 125,729                   |       | 130,012                      |       |
| Long–term  borrowings                                                                                                   |   | 3,250                     |       | 3,168                        |       |
| Long-term convertible  notes                                                                                                 |   | 100,000                   |       | 100,000                      |       |
| Deferred income taxes                                                                                                        |   | 21,458                    |       | 22,206                       |       |
| Other liabilities                                                                                                            |   | 19,432                    |       | 7,686                        |       |
| Minority interest in net  assets of joint ventures                                                                           |   | 39,303                    |       | 41,030                       |       |
| Total liabilities                                                                                                            |   | 309,172                   |       | 304,102                      |       |
| Commitments and  contingencies (See Notes)                                                                                   |   |                      |       |                         |       |
| Stockholders' equity:                                                                                                        |   |                      |       |                         |       |
| Preferred stock, $.01 par  value; 5,000,000 shares authorized; none issued and outstanding                                   |   | -                         |       | -                            |       |
| Common stock, $.01 par  value; 100,000,000 shares authorized;17,806,897 and 17,850,581 issued and  outstanding, respectively |   | 178                       |       | 179                          |       |
| Additional paid–in  capital                                                                                             |   | 310,763                   |       | 312,184                      |       |
| Retained earnings                                                                                                            |   | 147,339                   |       | 144,356                      |       |
| Total stockholders'  equity                                                                                                  |   | 458,280                   |       | 456,719                      |       |
| Total liabilities and  stockholders' equity                                                                                  |   | $                         | 767,452    |                         | $          | 760,821 |   |
|                                                                                                                              |        |                           |            |                              |            |  |  |  |

 

The accompanying notes are an integral part of this statement.

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**(Dollars in thousands)**

** (unaudited)**

 
|                                                                                         |   | **Three Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                         |   | **2000**                                   |   | **2001** |   |
|                                                                                         |   |                                       |   |   |   |
| Cash  flows from operating activities:                                                       |   |                                       |   |   |   |
| Net income (loss)                                                                            |   | $                                          | 10,163 |   | $ | (2,983 | ) |
| Adjustments to reconcile  net income to net cash (used in) provided by operating activities: |   |                                       |   |   |   |
| Depreciation and  amortization                                                               |   | 17,243                                     |   | 22,108 |   |
| Tax benefit from employee  stock options                                                     |   | 1,080                                      |   | 36 |   |
| Loss on warrants, net                                                                        |   | -                                          |   | 1,101 |   |
| Minority interest in  income of joint ventures                                               |   | 1,354                                      |   | 1,599 |   |
| Deferred income tax  benefit                                                                 |   | (142                                       | )      | (4,843 | ) |
| Other                                                                                        |   | (208                                       | )      | (134 | ) |
| Cash provided by (used  in) changes in assets and liabilities:                               |   |                                       |   |   |   |
| Accounts receivable,  trade, net                                                             |   | (11,578                                    | )      | 7,092 |   |
| Accounts receivable,  related parties                                                        |   | (539                                       | )      | (434 | ) |
| Inventories, net                                                                             |   | (3,049                                     | )      | 1,255 |   |
| Prepaid expenses and  other current assets                                                   |   | (6,768                                     | )      | (3,895 | ) |
| Accounts payable, trade                                                                      |   | (18,758                                    | )      | (9,012 | ) |
| Accounts payable, related  parties                                                           |   | 240                                        |   | (2,392 | ) |
| Other accrued liabilities                                                                    |   | (957                                       | )      | 5,612 |   |
|                                                                                         |   |                                       |   |   |   |
| Net cash (used in)  provided by operating activities                                         |   | (11,919                                    | )      | 15,110 |   |
|                                                                                         |   |                                       |   |   |   |
| Cash flows from investing  activities:                                                       |   |                                       |   |   |   |
| Purchases of property and  equipment                                                         |   | (26,737                                    | )      | (33,483 | ) |
| Proceeds from sale of  property and equipment                                                |   | 10                                         |   | 2,416 |   |
| Proceeds from sale of  warrants and investments                                              |   | -                                          |   | 311 |   |
|                                                                                         |   |                                       |   |   |   |
| Net cash used in  investing activities                                                       |   | (26,727                                    | )      | (30,756 | ) |
|                                                                                         |   |                                       |   |   |   |
| Cash flows from financing  activities:                                                       |   |                                       |   |   |   |
| Proceeds from borrowings                                                                     |   | 973                                        |   | 6,400 |   |
| Payments of borrowings                                                                       |   | (1,958                                     | )      | (1,076 | ) |
| Proceeds from borrowings,  related parties                                                   |   | 25,000                                     |   | - |   |
| Payments of borrowings,  related parties                                                     |   | (175,000                                   | )      | - |   |
| Proceeds from issuance of  convertible notes, net                                            |   | 97,600                                     |   | - |   |
| Proceeds from issuance of  common stock under employee plans                                 |   | 910                                        |   | 1,386 |   |
| Proceeds from issuance of  common stock, net                                                 |   | 103,814                                    |   | - |   |
|                                                                                         |   |                                       |   |   |   |
| Net cash provided by  financing activities                                                   |   | 51,339                                     |   | 6,710 |   |
|                                                                                         |   |                                       |   |   |   |
| Effect of exchange rate  changes on cash                                                     |   | (51                                        | )      | (229 | ) |
|                                                                                         |   |                                       |   |   |   |
| Net increase (decrease)  in cash and cash equivalents                                        |   | 12,642                                     |   | (9,165 | ) |
| Cash and cash equivalents  at beginning of period                                            |   | 42,203                                     |   | 138,590 |   |
|                                                                                         |   |                                       |   |   |   |
| Cash and cash equivalents  at end of period                                                  |   | $                                          | 54,845 |   | $ | 129,425 |   |
|                                                                                         |   |                                       |   |   |   |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                           |   |                                       |   |   |   |
| Cash paid (received) for:                                                                    |   |                                       |   |   |   |
| Interest                                                                                     |   | $                                          | 503    |   | $ | 144 |   |
| Taxes                                                                                        |   | $                                          | 1,406  |   | $ | (4,157 | ) |

 

The accompanying notes are an integral part of thisstatement.

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

 

**(Dollars in thousands)**

 

 
|                                                |   | **Common Stock** |   | **Additional  Paid-InCapital** |   | **RetainedEarnings** |   | **Accumulated  Other****ComprehensiveIncome** |   | **Total****Stockholders’Equity** |    |
|-----------------------------------------------------|--------|------------------|--------|--------------------------------|--------|----------------------|--------|-----------------------------------------------|--------|---------------------------------------|---------|
|                                                |   | **Shares**       |   | **Amount**                     |   |
|                                                |   |             |   |                           |   |                 |   |                                          |   |                                  |    |   |   |
| Balance at June 30, 2000                            |   | 15,767,813       |   | $                              | 158    |                 | $      | 179,591                                       |   | $                                     | 135,906 |   | $ | - |   | $ | 315,655 |   |
| Contribution of capital                             |   | -                |   | -                              |   | 11,121               |   | -                                             |   | -                                     |    | 11,121 |   |
| Issuance of common stock  under employee plans      |   | 616,862          |   | 6                              |   | 16,252               |   | -                                             |   | -                                     |    | 16,258 |   |
| Issuance of common stock                            |   | 1,422,222        |   | 14                             |   | 103,799              |   | -                                             |   | -                                     |    | 103,813 |   |
| Net income                                          |   | -                |   | -                              |   | -                    |   | 15,118                                        |   | -                                     |    | 15,118 |   |
| Dividends to minority  interest in joint venture    |   | -                |   | -                              |   | -                    |   | (3,685                                        | )      | -                                     |    | (3,685 | ) |
| Unrealized gain on  warrants                        |   | -                |   | -                              |   | -                    |   | -                                             |   | 8,355                                 |    | 8,355 |   |
| Reclassification of gain  on warrants to net income |   | -                |   | -                              |   | -                    |   | -                                             |   | (8,355                                | )       | (8,355 | ) |
|                                                |   |             |   |                           |   |                 |   |                                          |   |                                  |    |   |   |
|                                                |   |             |   |                           |   |                 |   |                                          |   |                                  |    |   |   |
| Balance at June 30, 2001                            |   | 17,806,897       |   | 178                            |   | 310,763              |   | 147,339                                       |   | -                                     |    | 458,280 |   |
|                                                |   |             |   |                           |   |                 |   |                                          |   |                                  |    |   |   |
| Contribution of capital                             |   | -                |   | -                              |   | 36                   |   | -                                             |   | -                                     |    | 36 |   |
| Issuance of common stockunder employee plans        |   | 43,684           |   | 1                              |   | 1,385                |   | -                                             |   | -                                     |    | 1,386 |   |
| Net (loss)                                          |   | -                |   | -                              |   | -                    |   | (2,983                                        | )      | -                                     |    | (2,983 | ) |
|                                                |   |             |   |                           |   |                 |   |                                          |   |                                  |    |   |   |
| Balance at September 30,  2001 (unaudited)          |   | 17,850,581       |   | $                              | 179    |                 | $      | 312,184                                       |   | $                                     | 144,356 |   | $ | - |   | $ | 456,719 |   |

 

The accompanying notes are an integral part of thisstatement.

 

**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (Dollars in thousands, except per share amounts)**

** (unaudited)**

 

**1.             Basisof Presentation**

 

                Theinterim consolidated financial statements presented herein include the accountsof DuPont Photomasks, Inc. and our majority-owned and wholly-ownedsubsidiaries. All significant intercompany transactions and accounts have beeneliminated in consolidation. These interim consolidated financial statementshave been prepared by us, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission, or SEC. All adjustments have beenmade to the accompanying interim consolidated financial statements which are,in the opinion of our management, necessary for a fair presentation of ouroperating results and include all adjustments of a normal recurring nature.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. It is recommended that these interim consolidatedfinancial statements be read in conjunction with the consolidated financialstatements and the notes thereto included in our Annual Report on Form 10-K forthe year ended June 30, 2001.  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the use ofestimates and assumptions by management in determining the reported amounts ofassets and liabilities, disclosures of contingent liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the period.  Actual results coulddiffer from those estimates.  Theresults of operations for any interim period are not necessarily indicative ofthe results of operations for the entire year. Certain reclassifications havebeen made in the prior period financial statements to conform with the currentperiod presentation.

 

**2.             Propertyand Equipment**

 

                Propertyand equipment are stated at cost and are depreciated using the straight-linemethod over the estimated useful lives of the assets.  Leasehold improvements are depreciated using the straight-linemethod over the shorter of the estimated useful lives of the assets or theremaining duration of the lease. Accumulated depreciation was $317,861 at June 30, 2001 and $332,893 atSeptember 30, 2001.

 

**3.             NewAccounting Pronouncements**

 

                InJuly 2001, the Financial Accounting Standards Board, or FASB, issued Statementof Financial Accounting Standard, or SFAS, No. 141, “BusinessCombinations.”  SFAS No. 141 eliminatesthe pooling-of-interests method of accounting for business combinations exceptfor qualifying business combinations that were initiated prior to July 1,2001.  The purchase method of accountingis required to be used for all business combinations initiated after June 30,2001.  SFAS No. 141 also defines thecriteria for identifying intangible assets for recognition apart fromgoodwill.  We have adopted SFAS No. 141effective July 1, 2001.  Adoption ofthis accounting standard had no impact on our current results of operations orfinancial position.

 

                Alsoin July 2001, the FASB issued SFAS No. 142, “Goodwill and Other IntangibleAssets.”  SFAS No. 142, discontinuesamortization of acquired goodwill and instead requires annual impairmenttesting.  Separable intangible assetswill be amortized over their useful economic lives and tested for impairment inaccordance with SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets to be Disposed of.”  Intangibleassets with an indefinite useful economic life will not be amortized until thelife of the asset is determined to be finite. For goodwill and indefinite-lived intangible assets acquired prior toJuly 1, 2001, amortization will continue until adoption of SFAS No. 142 atwhich time amortization will cease and a transitional impairment test will beperformed. Any impairment charges resulting from the initial application of thenew rules will be classified as a cumulative effect of change in accountingprinciple.  We are currently evaluatingthe impact of SFAS No. 142 on our future results of operations and financialposition.  We must adopt SFAS No. 142 byJuly 1, 2002.

 

                In October 2001, the FASB issuedSFAS No. 144, "Accounting for the Impairment or Disposal of Long-LivedAssets." SFAS No. 144 supersedes previous guidance for financial accounting and reporting for theimpairment or disposal of long-lived assets and for segments of a business tobe disposed of.  We are currentlyevaluating the impact of SFAS No. 144 on our future results of operations andfinancial position.  We must adopt SFASNo. 144 by July 1, 2002.

 

**4.             RevenueRecognition**

 

                Productrevenue is recognized when both title and risk of loss transfers to thecustomer, provided that no significant obligations remain. Provision is madefor an estimate of product returns and doubtful accounts, based on historicalexperience.

 

                EffectiveJuly 1, 2000, the Company changed its accounting for revenue recognition inaccordance with the Securities and Exchange Commission's Staff AccountingBulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements.”Previously, the Company had recognized revenue at the date of shipment. Underthe new accounting method adopted retroactive to July 1, 2000, the Company nowrecognizes product revenue when both title and risk of loss transfers to thecustomer, provided that no significant obligations remain. The cumulativeeffect of the change on prior years' retained earnings resulted in a charge toincome for the year ended June 30, 2001 of $481 (net of income taxes of $187).

 

**5.             SpecialCharges**

 

                Inthe year ended June 30, 2001, we recorded pre-tax special charges totaling$36,101 consisting of the following:

 

•      Building costs and assetwrite-downs related to the closing of our Gresham, Oregon facility.  We determined that our estimated recoverablevalue was $5,300 based on an appraisal and we have reclassified this amount toassets held for sale.

 

•      Asset write-downs relatedprimarily to trailing-edge production equipment and leasehold improvements thatwere removed from service and disposed of or are being held for sale. Theassets had an estimated salvage value of approximately $719 based on appraisalswhich was reclassified to assets held for sale.  As of September 30, 2001, $647 remains in assets held for sale.

 

•      Employee severance expensesrelated to the closure and sale of our Hamilton, Scotland facility andworkforce reductions in the United States related to the decommissioning oftrailing edge production lines. The employee terminations were primarilymanufacturing positions.

 

Asummary of accrued liabilities relating to the special charges is shown below:

 
|                                             |   | **Employee   Severance** |   |
|--------------------------------------------------|--------|--------------------------|--------|
|                                             |   |                     |   |
| Liabilities at June 30, 2001                     |   | $                        | 1,667  |   |
| Utilized in the quarter ended September 30, 2001 |   | (1,667                   | )      |
|                                             |   |                     |   |
| Remaining liabilities at September 30, 2001      |   | $                        | -      |   |

 

**6.             Derivative Instruments and HedgingActivities**

 

                Forwardforeign exchange contracts are utilized to mitigate the risks associated withcurrency fluctuations on certain international revenue and balance sheetexposures, and are, therefore, held primarily for purposes other thantrading.  Unrealized gains and lossesresulting from the impact of currency exchange rate movements on forwardforeign exchange contracts designated to offset certain non-U.S. dollar denominatedassets and liabilities are recognized as other income or expense in the periodin which the exchange rates change. They offset the foreign currency gains and losses on the underlyingexposures being hedged.  The aggregatefair value of our forward foreign exchange contracts outstanding was $21,322with an unrealized gain recorded in the consolidated income statement of $845as of and during the quarter ended September 30, 2001. These instruments mayinvolve elements of credit and market risk in excess of the amounts recognizedin the financial statements.  We monitorour positions and the credit quality of counter-parties, consisting primarilyof major financial institutions, and do not anticipate nonperformance by anycounter-party.

 

                Inaddition, we have sold and still hold warrants to purchase securities of astrategic partner.  During the quarterended September 30, 2001, we sold warrants resulting in a realized gain usingthe specific identification costing method of $183 in the accompanyingconsolidated income statement.  Additionally,unrealized holding losses of $1,284 for vested warrants were recorded in theaccompanying consolidated income statement during the quarter ended September30, 2001.  The estimated fair value ofthe warrants is based on third-party broker quotes.

 

7.             EarningsPer Share

 

                Basicearnings per share, or EPS, is computed by dividing net income by the weightednumber of common shares outstanding during each period.  Diluted EPS is computed by dividing netincome after adjustments for the dilutive effect of the convertible notes bythe weighted average number of common shares and common share equivalentsoutstanding (if dilutive) during each period. Common share equivalents include stock options and assumed conversion ofthe convertible notes.  The number ofcommon share equivalents outstanding relating to stock options is computedusing the treasury stock method while the number of common share equivalentsrelating to the convertible notes is computed using the if converted method.

 

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

 
|                                                 |   | **Three Months Ended**

**September 30,** |   |
|------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                 |   | **2000**                                       |   | **2001** |   |
|                                                 |   |                                           |   |   |   |
| Net income for the period  – basic              |   | $                                              | 10,163 |   | $ | (2,983 | ) |
| Dilutive effect of  convertible notes                |   | 92                                             |   | - |   |
|                                                 |   |                                           |   |   |   |
| Net income for the period  – diluted            |   | $                                              | 10,255 |   | $ | (2,983 | ) |
|                                                 |   |                                           |   |   |   |
| Weighted average shares  outstanding – basic    |   | 16,899,419                                     |   | 17,835,283 |   |
| Plus: Common share  equivalents                      |   | 1,698,726                                      |   | - |   |
|                                                 |   |                                           |   |   |   |
| Weighted average shares  outstanding – dilutive |   | 18,598,145                                     |   | 17,835,283 |   |

 

                Stockoptions to acquire 17,950 shares for the quarter ended September 30, 2000 and3,644,011 shares for the quarter ended September 30, 2001 were not included incommon share equivalents because the effect of including these stock options wouldhave been anti-dilutive.

 

**8.             Comprehensive Income**

 

                Wehave adopted SFAS No. 130, "Reporting Comprehensive Income."  Our comprehensive income is comprised of netincome and unrealized gains and losses on certain investments in debt andequity securities. The components of comprehensive income, net of tax, are asfollows:

 
|                                               |   | **Three Months Ended****September 30,** |   |
|----------------------------------------------------|--------|----------------------------------------------|--------|
|                                               |   | **2000**                                     |   | **2001** |   |
|                                               |   |                                         |   |   |   |
| Net income (loss) for the  period                  |   | $                                            | 10,163 |   | $ | (2,983 | ) |
| Other comprehensive  income:                       |   |                                         |   |   |   |
| Unrealized gain on  warrants, net of tax of $4,118 |   | 6,440                                        |   | - |   |
|                                               |   |                                         |   |   |   |
| Total comprehensive  income                        |   | $                                            | 16,603 |   | $ | (2,983 | ) |

** **

**9.             Segment Information**

 

                Inaccordance with SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” segment information is as follows:

 
|                                      |   | **North  America** |       | **Europe** |       | **Asia** |       | **Eliminations** |       | **Total** |       |
|-------------------------------------------|--------|--------------------|------------|------------|------------|----------|------------|------------------|------------|-----------|------------|
|                                      |   |               | ** ** |       | ** ** |     | ** ** |             | ** ** |      | ** ** |
| **Three Months Ended September 30, 2000** |   |               |       |       |       |     |       |             |       |      |       |
| Sales                                     |   | $                  | 58,513     |       | $          | 20,472   |       | $                | 21,543     |      | $          | - |   | $ | 100,528 |   |
| Transfers  between geographic segments    |   | 5,760              |       | 3,111      |       | 4,946    |       | (13,817          | )          | -         |       |
|                                      |   | $                  | 64,273     |       | $          | 23,583   |       | $                | 26,489     |      | $          | (13,817 | ) | $ | 100,528 |   |
| Net  income (loss)                        |   | $                  | 3,079      |       | $          | 2,957    |       | $                | 4,127      |      | $          | - |   | $ | 10,163 |   |
|                                      |   |               |       |       |       |     |       |             |       |      |       |
| **June  30, 2001**                        |   |               |       |       |       |     |       |             |       |      |       |
| Identifiable  assets                      |   | $                  | 366,832    |       | $          | 113,944  |       | $                | 286,676    |      | $          | - |   | $ | 767,452 |   |
|                                      |   |               |       |       |       |     |       |             |       |      |       |
| **Three Months Ended September 30, 2001** |   |               |       |       |       |     |       |             |       |      |       |
| Sales                                     |   | $                  | 39,463     |       | $          | 13,875   |       | $                | 24,123     |      | $          | - |   | $ | 77,461 |   |
| Transfers  between geographic segments    |   | 5,391              |       | 217        |       | 7,297    |       | (12,905          | )          | -         |       |
|                                      |   | $                  | 44,854     |       | $          | 14,092   |       | $                | 31,420     |      | $          | (12,905 | ) | $ | 77,461 |   |
| Net  income                               |   | $                  | (2,746     | )          | $          | (6,268   | )          | $                | 6,031      |      | $          | - |   | $ | (2,983 | ) |
|                                      |   |               |       |       |       |     |       |             |       |      |       |
| **September 30, 2001**                    |   |               |       |       |       |     |       |             |       |      |       |
| Identifiable  assets                      |   | $                  | 342,050    |       | $          | 114,511  |       | $                | 304,260    |      | $          | - |   | $ | 760,821 |   |

 

                Products are transferred betweengeographic areas on a basis intended to approximate the market value of suchproducts.

 

**10.          Provision For (Benefit From) IncomeTaxes**

 

                As aresult of our loss from operations in the quarter ended September 30, 2001, wehave recorded a tax benefit of $4,120 resulting in an increase in related nettax assets of $4,843. While we have taxable income for U.S. federal purposes inthe applicable carryback periods to apply against a portion of the currentperiod loss, realizability of the recorded tax assets is dependent primarily onfuture taxable income. We believe that sufficient future taxable income will begenerated in order to utilize the future deductible amounts arising duringfiscal 2002 and that these tax assets are realizable, although there can be noassurance that this will be the case.

** **

**11.          Commitments and Contingencies**

 

                Wehave various purchase commitments incidental to the normal course of businessincluding non-refundable deposits to purchase equipment. In the aggregate, suchcommitments are not at prices in excess of current market. We also haveguaranteed a portion of certain equipment leases of the DPI Reticle TechnologyCenter, or RTC.  Such leases aregenerally for four years and provide for payments not in excess of currentmarket.

 

                Weare subject to litigation in the normal course of business. We believe theeffect, if any, of an unfavorable settlement of such litigation would not havea material adverse impact on our financial position, results of operations,cash flows or liquidity.

 

                Ouroperations and our ownership of real property are subject to variousenvironmental laws and regulations that govern, among other things, thedischarge of pollutants into the air and water and the handling, use, storage,disposal and clean-up of solid and hazardous wastes.  Compliance with such laws and regulations requires that we incurcapital expenditures and operating costs in connection with our ongoingoperations.  In addition, such laws andregulations may impose liabilities on owners and operators of businesses andreal property without regard to fault and such liabilities may be joint andseveral with other parties.    Morestringent environmental laws and regulations may be enacted in the future,which may require us to expend additional amounts on environmental complianceor may require modifications in our operations. Although we are unable topredict the extent of our future liability with respect to any environmentalmatters, we believe, based upon current information, that environmentalliabilities will not be material to our financial position or results ofoperations. E.I. duPont de Nemours & Company, or DuPont, has agreed toindemnify us for any environmental contamination present on our manufacturingsites at June 13, 1996, the date of our initial public offering, or present atany 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 is reviewing agroundwater 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 DuPont.

 

**Item 2.**

 

**MANAGEMENT'SDISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

                Thefollowing discussion and analysis of the financial condition and results ofoperations should be read in conjunction with our consolidated financialstatements and related notes thereto. References to years are to fiscal years ended June 30.  Results for interim periods are notnecessarily indicative of results for the full year.

 

# **Overview**

 

                Basedon worldwide sales, we believe we are one of the largest photomaskmanufacturers in the world. We sell our products to over 300 customers in over20 different countries. Essentially all of our sales are to customers in thesemiconductor manufacturing industry. We manufacture a broad range of photomasksbased on customer–supplied design data. We also manufacture photoblanksand pellicles, the principal components of photomasks, primarily for internalconsumption. We operate globally with established manufacturing facilities inNorth America, Europe and Asia.

 

                Webelieve that over the long-term demand for photomasks in the semiconductormanufacturing process will increase due to the following trends:

 

 

                •               Proliferationof semiconductor applications;

                •               Customizationof semiconductor designs;

                •               Increasingsemiconductor device complexity;

                •               Decreasing sizeof semiconductor designs; and

                •               Shorter productlifecycles.

 

 

                These trends have increased the importance of photomasktechnology in the semiconductor manufacturing process. The current downturn inthe semiconductor industry has decreased demand for photomask products,especially at the trailing edge.

 

                Photomaskmanufacturing operations are capital intensive. Accordingly, at a giventhreshold of manufacturing capacity, a high proportion of our operating costsare fixed and remain relatively constant as sales volume increases ordecreases. To the extent that we have underutilized production capacity,operating profit increases or decreases significantly as sales volume increasesor decreases.

 

**Results of Operations**

 

                *Sales.*  Sales are comprised primarily of photomasksales to semiconductor manufacturers. Sales decreased 22.9 percent from $100.5million in the quarter ended September 30, 2000 to $77.5 million in the quarterended September 30, 2001. Sales produced in North America and Europe decreasedfrom $58.5 million and $20.5 million, respectively, in the three months endedSeptember 30, 2000 to $39.5 million and $13.9 million, respectively, in thethree months ended September 30, 2001 while sales produced in Asia increasedfrom $21.5 million in the three months ended September 30, 2000 to $24.1million in the three months ended September 30, 2001.  We continue to feel the effect of the steep drop in the globalsemiconductor market that began in the third quarter of fiscal 2001.  We have experienced a falloff in unit demandat the trailing edge from the quarter ended September 30, 2000 to the quarterended September 30, 2001.  Additionallyour strategic partners with internal photomask operations have significantlyreduced outsourcing, with the bulk of the impact at the leading edge.  However, the latter was offset by growth inthe leading edge business from other customers.  Increased sales in our joint ventures accounted for the increasein sales produced in Asia.  Overallpricing held firm during the quarter ended September 30, 2000 to the quarterended September 30, 2001.  For thequarter ending December 31, 2001, we expect sales to be in the $70.0 million to$80.0 million range.

 

*                Cost of Goods Sold.*  Cost of goods sold consists ofmaterials, labor, depreciation and overhead. Cost of goods sold increased 3.5 percent from $65.0 million to $67.3million for the quarter ended September 30, 2000 and 2001, respectively.  The increase resulted primarily from anincrease in depreciation costs of approximately $4.1 million, partially offsetby the positive results of the restructuring programs implemented during thethird and fourth quarters of fiscal 2001. Gross profit margin decreased from 35.5 percent for the quarter endedSeptember 30, 2000 to 13.2 percent for the quarter ended September 30,2001.  The decrease in gross profitmargin resulted from decreased production volumes reflecting decreased sales.  The impact of fixed costs on gross profit marginsis magnified during periods of decreasing sales.  We anticipate that, unless revenues increase in the short term,gross margin rates will be under pressure due to the effect of our fixed costs.

 

*                Selling, General andAdministrative Expense.*  Selling, general and administrative expenseincludes salaries of sales and administrative personnel, marketing expense,general and administrative expense and product distribution expense. Selling,general and administrative expense decreased 21.3 percent from $12.0 millionfor the quarter ended September 30, 2000 to $9.5 million for the quarterended September 30, 2001 primarily as a result of the cost containmentprocedures initiated during the fourth quarter of fiscal 2001.   Selling, general and administrative expenseas a percentage of sales increased from 12.0 percent for the three months endedSeptember 30, 2000 to 12.2 percent for the three months ended September 30,2001 as a result of decreased sales reflecting the effect of fixed expenses asa percentage of decreasing revenues.

 

*                Research and DevelopmentExpense.* Research and development expense consists primarily of employee costs,cost of material consumed, depreciation, engineering related costs and ourshare of costs of the RTC. Research and development expense decreased 15.6percent from $7.7 million for the quarter ended September 30, 2000 to $6.5million for the quarter ended September 30, 2001 primarily as a result of thecost containment procedures initiated during the fourth quarter of fiscal 2001and synergies realized by virtue of the recent reorganization of our technicalgroup.  Research and development expenseas a percentage of sales increased from 7.6 percent for the quarter endedSeptember 30, 2000 to 8.3 percent for the quarter ended September 30,2001.  The increase was due primarily todecreased sales.  We continue to focuson research and development in all of our advanced production facilities and inthe RTC, our joint venture with Advanced Micro Devices, Micron Technology andMotorola, whose primary focus is to develop advanced photomask technology andmanufacture leading edge photomasks. We believe that, because of our continuedfocus on research and development, we will be able to help meet the futuretechnology needs of the semiconductor industry for advanced photomasks.

 

                *Loss onWarrants, net*. During the quarter ended September 30, 2001, werecognized realized gains of $0.2 million and unrealized losses of $1.3 millionon warrants.  As of September 30, 2001,we held 132,280 vested warrants with a market value of $0.4 million.  There can be no assurance that we will beable to realize the current market value of the remaining warrants.

 

*                Other Income, net.*  Other income, net includesinterest expense, interest income and exchange gains and losses.  Other income, net was $0.3 million forthe quarter ended September 30, 2000 and $1.3 million for the quarter endedSeptember 30, 2001.  The increase is primarilydue to higher interest income from larger cash balances, combined with lower interestexpense as a result of the refinancing of long-term debt completed in thequarter ended September 30, 2000.

 

*                Provision For (Benefit From)Income Taxes.*  Our tax expense is based on the statutoryrates in effect in the countries in which we operate. Certain of our operationsin Asia are subject to various tax holidays which expire in whole or in partduring fiscal years 2003 through 2010. Certain tax holidays may be extended if specific conditions are met.  Our effective tax rate was 28 percent and 58percent for the quarters ended September 30, 2000 and 2001, respectively.  Our effective tax rate varied from themaximum statutory rate primarily because of shifts in the geographicdistribution of earnings and losses between high and low tax rate countries.

 

                As a result of our loss fromoperations in the quarter ended September 30, 2001, we have recorded a taxbenefit of $4.1 million resulting in an increase in related net tax assets of$4.8 million. While we have taxable income for U.S. federal purposes in theapplicable carryback periods to apply against a portion of the current periodloss, realizability of the recorded tax assets is dependent primarily on futuretaxable income. We believe that sufficient future taxable income will begenerated in order to utilize the future deductible amounts arising duringfiscal 2002 and that these tax assets are realizable, although there can be noassurance that this will be the case.

 

                *MinorityInterest in Income of Joint Ventures.*  The minority interest impact of our joint ventures was $1.4million for the quarter ended September 30, 2000 and $1.6 million for thequarter ended September 30, 2001. Minority interest income reflects our partners’ share of the joint ventureoperations.  Minority interest income increasedprimarily because of higher sales volumes and improved profitability of ourjoint ventures in Asia.

 

## **Liquidity and Capital Resources**

 

                Ourworking capital was $139.2 million at June 30, 2001 and $112.2 million atSeptember 30, 2001. The decrease in working capital was primarily due to ourcapital expenditures of $33.5 million coupled with our net loss of $3.0 millionfor the quarter partially offset by additional borrowings of $6.4 million.  Cash and cash equivalents were $138.6million at June 30, 2001 and $129.4 million at September 30, 2001.  Cash provided by operating activities of$15.1 million for the three months ended September 30, 2001 was dueprincipally to adjustments to the net loss of $3.0 million for depreciation andamortization of $22.1 million.

 

                Cashused in investing activities was $26.7 million and $30.8 million for the threemonths ended September 30, 2000 and 2001, respectively.  Cash used for capital expenditures was$26.7 million and $33.5 million for the three months ended September30, 2000 and 2001, respectively. Management expects capital expenditures for the remainder of fiscal 2002to be approximately $65 million with a future capital expenditure rate ofspending of approximately 20 to 30 percent of sales.  Capital expenditures have been and will be used primarily toadvance our technical capability.  Inaddition, we may in the future pursue additional acquisitions of businesses,products and technologies, or enter into other joint venture arrangements thatcould complement or expand our business. Any material acquisition or joint venture could result in a decrease toour working capital depending on the amount, timing and nature of theconsideration to be paid.

 

                Cash provided by financingactivities was $51.3 million and $6.7 million for the three months endedSeptember 30, 2000 and 2001, respectively. For the quarter ended September 30,2001, net short-term borrowings increased $5.9 million primarily as a result ofworking capital requirements in Asia. Additionally, our employees purchased $1.4 million of common stock underour employee plans.

 

                Our ongoing cash requirementswill be for capital expenditures, acquisitions, research and development andworking capital.  Management believesthat cash on hand and cash provided by operations will be sufficient to meetour cash requirements for at least the next 12 months. Thereafter, based on our current operating plans, we may requireexternal financing from time to time to fund our capital expenditurerequirements.  There can be no assurancethat sources of financing will be available if our capital requirements exceedthe facility and cash flow from operations. There can be no assurance that wewill be able to obtain any additional financing required to fund our capital needson reasonable terms, or at all.

 

**Other****Matters**

 

                InJuly 2001, the FASB issued SFAS No. 141, “Business Combinations.”  SFAS No. 141 eliminates thepooling-of-interests method of accounting for business combinations except forqualifying business combinations that were initiated prior to July 1,2001.  The purchase method of accountingis required to be used for all business combinations initiated after June 30,2001.  SFAS No. 141 also defines thecriteria for identifying intangible assets for recognition apart fromgoodwill.  We have adopted SFAS No. 141effective July 1, 2001.  Adoption ofthis new accounting standard had no impact on our current results of operationsor financial position.

 

      Also in July 2001, the FASB issued SFASNo. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142, discontinues amortization of acquired goodwill andinstead requires annual impairment testing. Separable intangible assets will be amortized over their useful economiclives and tested for impairment in accordance with SFAS No. 121 “Accounting forthe Impairment of Long-Lived Assets to be Disposed of.”  Intangible assets with an indefinite usefuleconomic life will not be amortized until the life of the asset is determinedto be finite.  For goodwill and indefinite-livedintangible assets acquired prior to July 1, 2001, amortization will continueuntil adoption of SFAS No. 142 at which time amortization will cease and atransitional impairment test will be performed. Any impairment chargesresulting from the initial application of the new rules will be classified as acumulative effect of change in accounting principle.  We are currently evaluating the impact of SFAS No. 142 on ourfuture results of operations and financial position.  We must adopt SFAS No. 142 by July 1, 2002.

 

                InOctober 2001, the FASB issued SFAS No. 144, "Accounting for the Impairmentor Disposal of Long-Lived Assets." SFAS No. 144 supersedes previousguidance for financial accounting and reporting for the impairment or disposalof long-lived assets and for segments of a business to be disposed of.  We are currently evaluating the impact ofSFAS No. 144 on our future results of operations and financial position.  We must adopt SFAS No. 144 by July 1, 2002.

 

## **Forward Looking Statements**

### ** **

                Thisreport contains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934, that involve a number of risks and uncertainties. Such forward-lookingstatements are generally accompanied by words such as "intend,""may," "plan," "expect," "believe,""should," "would," "could,""anticipate," or other words that convey uncertainty of future eventsor outcomes.  Although we believe thatthe expectations reflected in such forward-looking statements are reasonable,such forward-looking statements are subject to risks and uncertainties thatcould cause actual results to differ materially from these expectations.  Such risks and uncertainties include,without limitation, the following:

### ** **

### **•**      The current downturn in the semiconductorindustry could lead to a decrease in the demand for our photomaskproducts.  The semiconductor industry ishighly cyclical and has been subject to significant economic downturns atvarious times;

### **•**      Ourfinancial results may vary significantly from quarter to quarter or we may failto meet investor expectations, which would negatively impact the price of ourstock;

### **•**      We may be unable to fund significantcapital expenditures to expand our operations and to enhance our manufacturingcapability in order to keep pace with rapidly changing technologies;

### **•**      Our operating results could be adverselyaffected by under-utilized production capacity;

### **•**      Macroeconomic effects on the semiconductorindustry;

### **•**      We may be unable to enhance our existingproducts and to develop and manufacture new products and upgrades with improvedcapabilities to satisfy anticipated demand for more technologically advancedphotomasks;

### **•**      We may not remain competitive andincreased competition could seriously harm our business;

### **•**      If a fundamental change in our businesswere to occur, we cannot assure you that we will have sufficient funds to paythe redemption price for all the notes tendered by the holders of thesubordinated convertible notes, although DuPont would be required to pay theredemption price under its guarantee. 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;

### **•**      E.I. duPont de Nemours & Company hasinfluence on all stockholder votes;

### **•**      Our success depends, in part, upon keymanagerial, engineering and technical personnel as well as our ability tocontinue to attract and retain additional personnel and integrate new personnelinto key positions; and

### **•**      Other risks indicated in our other filings with the Securities andExchange Commission, including but not limited to those factors which are fully discussed under the caption "RiskFactors" in our Annual Report on Form 10-K filed with the SEC on September17, 2001.

 

                Theserisks and uncertainties are beyond our control and, in many cases, we cannotpredict the risks and uncertainties that could cause our actual results todiffer materially from those indicated by the forward-looking statements.

 

                The forward-looking statementsare made as of the release date hereof, and we disclaim any intention orobligation to update or revise any forward-looking statements or to update thereasons why the actual results could differ materially from those projected inthe forward-looking statements, whether as a result of new information, futureevents or otherwise**.**

 

**Item 3.**

# **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

# ** **

# **                Market risks relating to ouroperations result primarily from changes in interest rates and changes inforeign currency exchange rates.  As ofSeptember 30, 2001, we had $100.0 million in non-interest bearing convertiblenotes and approximately $15.6 million in interest bearing debt of whichapproximately $12.4 million was short-term debt. As a result, changes in theinterest rate market would change the estimated fair value of our long-termdebt. We believe that a 10 percent change in the interest rate would not have amaterial effect on our business, financial condition, results of operations orcash flows.**

# ** **

# **                *Foreign Currency Exposure*.   Non-U.S. operations are subject to certainrisks inherent in conducting business abroad, including price and currencyexchange controls, fluctuation in the relative value of currencies andrestrictive governmental actions. Changes in the relative value of currenciesoccur from time to time and may, in certain instances, have a material effecton our results of operations.  Anyexchange rate fluctuations can affect our margins since we may have imbalancesbetween some foreign currency denominated revenues and expenses, and we may beunable to hedge them completely.**  Our financialstatements reflect remeasurement of items denominated in non-U.S. currencies toU.S. dollars, our functional currency. Exchange gains or losses are included inincome 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.  At September30, 2001, the fair value of our forward foreign exchange contracts outstandingwas $21.3 million with an unrealized gain recorded in the consolidated incomestatement of $0.8 million as of and during the quarter ended September 30,2001. These instruments may involve elements of credit and market risk inexcess of the amounts recognized in the financial statements.  We monitor our positions and the creditquality of counter-parties, consisting primarily of major financialinstitutions, and do not anticipate nonperformance by any counter-party.  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 and results of operations in the future.

 

**PART II**

 

## **Item 1. LegalProceedings**

 

                Weare not currently involved in any material legal proceedings.

 

**Item 2. Changes in Securities**

 

**               **None

 

**Item 3. Defaults Upon Senior Securities**

 

                Notapplicable

 

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

 

**               **None

 

**Item 5. Other Information**

 

                None

 

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

 

                (A) Exhibits

 

                (11)Statement re Earnings Per Share Computation

 

                (B) Reportson Form 8–K

 

                None

**SIGNATURES**

 

                Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                   | Dupont Photomasks, Inc.(Registrant) |
|------------------------|------------------------------------------|
|                   |                                     |   |
|                   |                                     |   |
| Date: October 29, 2001 | By:                                      | */s/ *Gerd Stoecker |
|                   |                                     | Gerd Stoecker*Executive Vice President – Finance*

*and Chief Financial Officer**(Principal Financial Officer)* |