** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

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

 

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

 

**Commission file number 0 - 20839**

 

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**DUPONTPHOTOMASKS, INC.**

 

(Exact name of registrant asspecified 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** |

 

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                Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý    No   o

 

                As of May 9, 2002,there were 17,863,787 shares of the registrant’s common stock, $.01 par value,outstanding.

 

 

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**TABLE OF CONTENTS**

 
| **Part I**  |     |                                                                                                                                                 |
|-------------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |     |                                                                                                                                                 |
|        | Item 1.  | Financial Statements                                                                                                                                 |
|        |     |
|        |     | Consolidated Income  Statement (unaudited) for the Three Months Ended March 31, 2001 and 2002 and  for the Nine Months Ended March 31, 2001 and 2002 |
|        |     | Consolidated Balance Sheet  at June 30, 2001 and March 31, 2002 (unaudited)                                                                     |
|        |     | Consolidated  Statement of Cash Flows (unaudited) for the Nine Months EndedMarch 31, 2001 and 2002                                                   |
|        |     | Consolidated Statement of Stockholders’ Equity for  the Twelve Months Ended June 30, 2001 and the Nine Months Ended March 31,  2002 (unaudited) |
|        |     | Notes to  Consolidated Financial Statements (unaudited)                                                                                              |
|        |     |
|        | Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                          |
|        |     |                                                                                                                                                 |
|        | Item 3.  | Quantitative  and Qualitative Disclosures About 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                                                                                                                                           |
|             |          |                                                                                                                                                      |  |

 

2

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**PART I**

 

**Item 1. Financial Statements**

 

**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED INCOME STATEMENT**

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

**(unaudited)**

 
|                                                                                                   |   | **Three  Months Ended  March 31,** |    | **Nine  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|
|                                                                                                   |   | **2001**                           |    | **2002**                          |   | **2001** |   | **2002** |   |
| Revenue, net                                                                                           |   | $                                  | 108,015 |                              | $      | 83,357 |   | $ | 315,109 |   | $ | 247,443 |   |
| Cost of goods sold                                                                                     |   | 71,116                             |    | 65,457                            |   | 204,987 |   | 200,143 |   |
| Selling, general and administrative expense                                                            |   | 11,579                             |    | 10,428                            |   | 36,940 |   | 29,995 |   |
| Research and development expense                                                                       |   | 8,340                              |    | 7,746                             |   | 23,921 |   | 21,074 |   |
| Special charges                                                                                        |   | 11,883                             |    | 7,393                             |   | 11,883 |   | 7,393 |   |
| Operating profit (loss)                                                                                |   | 5,097                              |    | (7,667                            | )      | 37,378 |   | (11,162 | ) |
| Gain (loss) on warrants, net                                                                           |   | 9,574                              |    | —                            |   | 9,574 |   | (238 | ) |
| Gain on sale of assets                                                                                 |   | —                             |    | 10,350                            |   | — |   | 10,350 |   |
| Other income (expense), net                                                                            |   | 406                                |    | (177                              | )      | 1,721 |   | 1,319 |   |
| Income before income taxes, minority interest and  cumulative effect of change in accounting principle |   | 15,077                             |    | 2,506                             |   | 48,673 |   | 269 |   |
| Provision for (benefit from) income taxes                                                              |   | 3,680                              |    | (3,408                            | )      | 12,393 |   | (7,021 | ) |
| Income before minority interest and cumulative effect  of change in accounting principle               |   | 11,397                             |    | 5,914                             |   | 36,280 |   | 7,290 |   |
| Minority interest in income of joint ventures                                                          |   | (2,358                             | )       | (1,009                            | )      | (4,833 | ) | (5,001 | ) |
| Income before cumulative effect of change in accounting  principle                                     |   | 9,039                              |    | 4,905                             |   | 31,447 |   | 2,289 |   |
| Cumulative effect of change in accounting principle                                                    |   | —                             |    | —                            |   | (481 | ) | — |   |
| Net income                                                                                             |   | $                                  | 9,039   |                              | $      | 4,905 |   | $ | 30,966 |   | $ | 2,289 |   |
|                                                                                                   |   |                               |    |                              |   |   |   |   |   |
| Basic earnings per share:                                                                              |   |                               |    |                              |   |   |   |   |   |
| Before cumulative effect of change in accounting  principle                                            |   | $                                  | 0.51    |                              | $      | 0.27 |   | $ | 1.82 |   | $ | 0.13 |   |
| After cumulative effect of change in accounting  principle                                             |   | $                                  | 0.51    |                              | $      | 0.27 |   | $ | 1.79 |   | $ | 0.13 |   |
| Weighted average shares outstanding                                                                    |   | 17,597,060                         |    | 17,893,028                        |   | 17,255,888 |   | 17,860,729 |   |
|                                                                                                   |   |                               |    |                              |   |   |   |   |   |
| Diluted earnings per share:                                                                            |   |                               |    |                              |   |   |   |   |   |
| Before cumulative effect of change in accounting  principle                                            |   | $                                  | 0.48    |                              | $      | 0.26 |   | $ | 1.69 |   | $ | 0.13 |   |
| After cumulative effect of change in accounting  principle                                             |   | $                                  | 0.48    |                              | $      | 0.26 |   | $ | 1.66 |   | $ | 0.13 |   |
| Weighted average shares outstanding                                                                    |   | 19,126,693                         |    | 19,203,065                        |   | 18,813,288 |   | 18,103,031 |   |

 

Theaccompanying notes are an integral part of this statement.

 

3

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**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEET**

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

 
|                                                                                                                         |   | **June 30,  2001** |    | **March 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                                                                                                         |   |                    |    | **(unaudited)**     |   |
| **ASSETS**                                                                                                                   |   |                    |    |                |   |
| Current assets:                                                                                                              |   |                    |    |                |   |
| Cash and cash equivalents                                                                                                    |   | $                       | 138,590 |                | $      | 103,406 |   |
| Accounts receivable, trade, net                                                                                              |   | 71,879                  |    | 55,588              |   |
| Accounts receivable, related parties                                                                                         |   | 1,212                   |    | 2,222               |   |
| Inventories, net                                                                                                             |   | 19,105                  |    | 9,857               |   |
| Deferred income taxes                                                                                                        |   | 19,414                  |    | 12,280              |   |
| Prepaid expenses and other current assets                                                                                    |   | 14,758                  |    | 51,002              |   |
| Total current assets                                                                                                         |   | 264,958                 |    | 234,355             |   |
| Assets held for sale                                                                                                         |   | 6,019                   |    | 4,870               |   |
| Property and equipment, net                                                                                                  |   | 456,095                 |    | 469,368             |   |
| Accounts receivable, related parties                                                                                         |   | 1,205                   |    | 1,083               |   |
| Deferred income taxes                                                                                                        |   | 10,805                  |    | 29,752              |   |
| Other assets, net                                                                                                            |   | 28,370                  |    | 26,999              |   |
| Total assets                                                                                                                 |   | $                       | 767,452 |                | $      | 766,427 |   |
|                                                                                                                         |   |                    |    |                |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                               |
| Current liabilities:                                                                                                         |   |                    |    |                |   |
| Accounts payable, trade                                                                                                      |   | $                       | 54,350  |                | $      | 41,030 |   |
| Accounts payable, related parties                                                                                            |   | 3,960                   |    | 4,452               |   |
| Short-term borrowings                                                                                                        |   | 6,490                   |    | 10,598              |   |
| Income taxes payable                                                                                                         |   | 2,262                   |    | 5,140               |   |
| Other accrued liabilities                                                                                                    |   | 58,667                  |    | 62,864              |   |
| Total current liabilities                                                                                                    |   | 125,729                 |    | 124,084             |   |
| Long-term borrowings                                                                                                         |   | 3,250                   |    | 2,874               |   |
| Long-term convertible notes                                                                                                  |   | 100,000                 |    | 100,000             |   |
| Deferred income taxes                                                                                                        |   | 21,458                  |    | 27,243              |   |
| Other liabilities                                                                                                            |   | 19,432                  |    | 4,226               |   |
| Minority interest in net assets of joint ventures                                                                            |   | 39,303                  |    | 44,471              |   |
| Total liabilities                                                                                                            |   | 309,172                 |    | 302,898             |   |
| Commitments and contingencies (Note 11)                                                                                      |   |                    |    |                |   |
| 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  17,921,089 issued and outstanding, respectively |   | 178                     |    | 179                 |   |
| Additional paid-in capital                                                                                                   |   | 310,763                 |    | 313,722             |   |
| Retained earnings                                                                                                            |   | 147,339                 |    | 149,628             |   |
| Total stockholders’ equity                                                                                              |   | 458,280                 |    | 463,529             |   |
| Total liabilities and stockholders’ equity                                                                              |   | $                       | 767,452 |                | $      | 766,427 |   |

 

The accompanying notes are an integral part of this statement.

4

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**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**(Dollars in thousands)**

**(unaudited)**

 
|                                                                               |   | **Nine Months Ended  March 31,** |    |
|------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                               |   | **2001**                         |    | **2002** |   |
| Cash flows from operating activities:                                              |   |                             |    |   |   |
| Net income                                                                         |   | $                                | 30,966  |   | $ | 2,289 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                             |    |   |   |
| Depreciation and amortization                                                      |   | 57,044                           |    | 67,890 |   |
| Special charges                                                                    |   | 11,883                           |    | 7,393 |   |
| Gain on sale of assets                                                             |   | —                           |    | (10,350 | ) |
| Tax benefit from employee stock options                                            |   | 10,722                           |    | 189 |   |
| (Gain) loss on warrants, net                                                       |   | (9,574                           | )       | 238 |   |
| Minority interest in income of joint ventures                                      |   | 4,833                            |    | 5,001 |   |
| Deferred income tax benefit                                                        |   | (1,155                           | )       | (6,783 | ) |
| Other                                                                              |   | 2,460                            |    | (821 | ) |
| Cash provided by changes in operating assets and  liabilities:                     |   |                             |    |   |   |
| Accounts receivable, trade, net                                                    |   | (15,794                          | )       | (3,697 | ) |
| Accounts receivable, related parties                                               |   | (1,023                           | )       | (1,035 | ) |
| Inventories, net                                                                   |   | (1,857                           | )       | 1,670 |   |
| Prepaid expenses and other current assets                                          |   | 4,709                            |    | (6,916 | ) |
| Accounts payable, trade                                                            |   | (21,323                          | )       | (12,772 | ) |
| Accounts payable, related parties                                                  |   | 149                              |    | 492 |   |
| Other accrued liabilities                                                          |   | 8,456                            |    | 2,780 |   |
| Other liabilities                                                                  |   | 22,500                           |    | — |   |
| Net cash provided by operating activities                                          |   | 102,996                          |    | 45,568 |   |
| Cash flows from investing activities:                                              |   |                             |    |   |   |
| Purchases of property and equipment                                                |   | (92,675                          | )       | (87,733 | ) |
| Acquisition of business                                                            |   | —                           |    | (4,800 | ) |
| Proceeds from sales of property and equipment                                      |   | 250                              |    | 2,684 |   |
| Proceeds from sales of warrants and investments                                    |   | 1,640                            |    | 1,611 |   |
| Net cash used in investing activities                                              |   | (90,785                          | )       | (88,238 | ) |
| Cash flows from financing activities:                                              |   |                             |    |   |   |
| Proceeds from borrowings                                                           |   | 1,290                            |    | 8,599 |   |
| Payments of borrowings                                                             |   | (3,773                           | )       | (4,407 | ) |
| 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                       |   | 14,215                           |    | 3,526 |   |
| Proceeds from issuance of common stock, net                                        |   | 103,813                          |    | — |   |
| Net cash provided by financing activities                                          |   | 63,145                           |    | 7,718 |   |
| Effect of exchange rate changes on cash                                            |   | (1,188                           | )       | (232 | ) |
| Net increase (decrease) in cash and cash equivalents                               |   | 74,168                           |    | (35,184 | ) |
| Cash and cash equivalents at beginning of period                                   |   | 42,203                           |    | 138,590 |   |
| Cash and cash equivalents at end of period                                         |   | $                                | 116,371 |   | $ | 103,406 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |   |                             |    |   |   |
| Cash paid for:                                                                     |   |                             |    |   |   |
| Interest                                                                           |   | $                                | 515     |   | $ | 421 |   |
| Taxes                                                                              |   | 2,500                            |    | 463 |   |

 

The accompanying notes are anintegral part of this statement.

 

5

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**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTOF STOCKHOLDERS’ EQUITY**

** **

**(Dollars in thousands)**

 
|                                               |   | **Common Stock** |   | **Additional****Paid-In Capital** |   | **Retained Earnings** |   | **Accumulated****OtherComprehensive Income** |   | **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, net                       |   | —           |   | —                            |   | 189                   |   | —                                       |   | —                                 |    | 189 |   |
| Issuance of common stockunder employee plans       |   | 114,192          |   | 1                                 |   | 2,770                 |   | —                                       |   | —                                 |    | 2,771 |   |
| Net income                                         |   | —           |   | —                            |   | —                |   | 2,289                                        |   | —                                 |    | 2,289 |   |
|                                               |   |             |   |                              |   |                  |   |                                         |   |                                   |    |   |   |
| Balance at March 31, 2002 (unaudited)              |   | 17,921,089       |   | $                                 | 179    |                  | $      | 313,722                                      |   | $                                      | 149,628 |   | $ | — |   | $ | 463,529 |   |

 

Theaccompanying notes are an integral part of this statement.

 

6

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**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

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

**(unaudited)**

 

**1.     Basis ofPresentation**

 

The interim consolidated financial statementspresented herein include the accounts of DuPont Photomasks, Inc. and ourmajority-owned, controlled and wholly-owned subsidiaries. All significantintercompany transactions and accounts have been eliminated in consolidation.These interim consolidated financial statements have been prepared by us,without audit, pursuant to the rules and regulations of the Securities andExchange Commission, or SEC. All adjustments have been made to the accompanyinginterim consolidated financial statements which are, in the opinion of ourmanagement, necessary for a fair presentation of our operating results andinclude all adjustments of a normal recurring nature. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations.  It is recommended thatthese interim consolidated financial statements be read in conjunction with theconsolidated financial statements and the notes thereto included in our AnnualReport on Form 10-K for the year ended June 30, 2001.  The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires the use of estimates and assumptions by management in determining thereported amounts of assets and liabilities, disclosures of contingentliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the period. Actual results could differ from those estimates.  The results of operations for any interimperiod are not necessarily indicative of the results of operations for theentire year. Certain reclassifications have been made in the prior periodfinancial statements to conform with the current period presentation.

 

**2.     Acquisition**

 

In March 2002, we acquired the assets and employees ofBindKey Technologies, Inc. a privately held electronic design automation, orEDA, company headquartered in Santa Clara, California and established a newwholly-owned subsidiary, BindKey Acquisition Corporation, or BindKey.  The acquisition was accounted for under thepurchase method of accounting.  Based onan independent third party valuation, the purchase price of approximately$4,800 was allocated to equipment, goodwill, other intangibles and in-processR&D. The results of operations of the business and the estimated fair valueof the assets acquired have been included in our consolidated financialstatements since the date of acquisition.

 

We have established a profit sharing plan with theBindKey employees, which will be paid out over the next four years, based onBindKey’s after-tax net income.

 

**3.     Property andEquipment**

 

Property and equipment are stated at cost and aredepreciated using the straight-line method over the estimated useful lives ofthe assets.  Leasehold improvements aredepreciated using the straight-line method over the shorter of the estimateduseful lives of the assets or the remaining duration of the lease.  Accumulated depreciation was $317,861 atJune 30, 2001 and $340,598 at March 31, 2002.

 

**4.     Disposition of Assets**

 

In March 2002, we sold ofall of the assets related to our photoblanks manufacturing business located inPoughkeepsie, New York to Schott Lithotec AG, or Schott, for approximately$31,578.  As of March 31, 2002, areceivable from Schott for the entire $31,578 is included in prepaid expensesand other current assets in the accompanying consolidated balance sheet.  Based on an independent third partyvaluation, this transaction resulted in a pre-tax gain of approximately $10,350which is included in gain on sale of assets in the accompanying consolidatedincome statement for the three months and nine months ended March 31,2002.  We have also entered into asupply contract for our future purchases of photoblanks with contingentearnouts of approximately $12,000 of Schott stock. Approximately 80 employeeswere affected by this transaction.

 

7

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**5.     Derivative Instruments and Hedging Activities**

 

Forward foreign exchange contracts are utilized tomitigate the risks associated with currency fluctuations on certaininternational revenue and balance sheet exposures, and are, therefore, heldprimarily for purposes other than trading. These foreign exchange contracts donot qualify for hedge accounting under Statement of Financial AccountingStandards, or SFAS, No. 133, “Accounting for Derivative Instruments and HedgingActivities”, as amended.  Unrealizedgains and losses resulting from the impact of currency exchange rate movementson forward foreign exchange contracts designated to offset certain non-U.S.dollar denominated assets and liabilities are recognized as other income orexpense in the period in which the exchange rates change.  They offset the foreign currency gains andlosses on the underlying exposures being hedged. The aggregate fair value ofour forward foreign exchange contracts outstanding was $ 13,585 with anunrealized loss recorded in the consolidated income statement of $9 as of andduring the quarter and nine months ended March 31, 2002. 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.

 

During the nine months ended March 31, 2002, we soldall of the warrants to purchase securities of a strategic partner resulting ina realized loss using the specific identification costing method of $238 in theaccompanying consolidated income statement. During the quarter ended March 31, 2001, we recognized unrealizedholding gains of $6,816 for vested and unvested warrants based on third-partybroker quotes and we sold warrants resulting in a realized gain of $2,758 inthe accompanying consolidated income statement.

 

**6.     Earnings PerShare**

 

Basic earnings per share, or EPS, is computed bydividing net income by the weighted average number of common shares outstandingduring each period.  Diluted EPS iscomputed by dividing net income after adjustments for the dilutive effect ofthe convertible notes by the weighted average number of common shares andcommon share equivalents outstanding (if dilutive) during each period.  Common share equivalents include stock optionsand assumed conversion of the convertible notes.  The number of common share equivalents outstanding relating tostock options is computed using the treasury stock method while the number ofcommon share equivalents relating to the convertible notes is computed usingthe if converted method.

 

The reconciliation of the amounts used to calculatebasic EPS and diluted EPS are as follows:

 
|                                                |   | **Three Months Ended  March 31,** |   | **Nine Months Ended  March 31,** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                |   | **2001**                          |   | **2002**                         |   | **2001** |   | **2002** |   |
|                                                |   |                              |   |                             |   |   |   |   |   |
| Net income — basic                             |   | $                                 | 9,039  |                             | $      | 4,905 |   | $ | 30,966 |   | $ | 2,289 |   |
| Dilutive effect of convertible notes                |   | 92                                |   | 92                               |   | 275 |   | — |   |
|                                                |   |                              |   |                             |   |   |   |   |   |
| Net income — diluted                           |   | $                                 | 9,131  |                             | $      | 4,997 |   | $ | 31,241 |   | $ | 2,289 |   |
|                                                |   |                              |   |                             |   |   |   |   |   |
| Weighted average shares outstanding — basic    |   | 17,597,060                        |   | 17,893,028                       |   | 17,255,888 |   | 17,860,729 |   |
| Plus: Common share equivalents                      |   | 1,529,633                         |   | 1,310,037                        |   | 1,557,400 |   | 242,302 |   |
| Weighted average shares outstanding — dilutive |   | 19,126,693                        |   | 19,203,065                       |   | 18,813,288 |   | 18,103,031 |   |

 

The dilution impact of outstanding stock options toacquire 35,850 shares and 1,189,221 shares for the quarters ended March 31,2001 and 2002, respectively, were not included in common share equivalentsbecause the effect of including these stock options would have beenanti-dilutive. The dilution impact of outstanding stock options to acquire49,775 shares and 2,049,062 shares for the nine months ended March 31, 2001 and2002, respectively, were not included in common share equivalents because theeffect of including these stock options would have been anti-dilutive.  These shares may become dilutive in thefuture.

 

8

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**7.     Comprehensive Income**

 

Our comprehensive income is comprised of net incomeand unrealized gains and losses on certain investments in debt and equitysecurities. The components of comprehensive income, net of tax, are as follows:

 
|                                                  |   | **Three Months Ended  March 31,** |   | **Nine Months Ended  March 31,** |   |
|-------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                  |   | **2001**                               |   | **2002**                              |   | **2001** |   | **2002** |   |
|                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Net income                                            |   | $                                      | 9,039  |                                  | $      | 4,905 |   | $ | 30,966 |   | $ | 2,289 |   |
| Other comprehensive income:                           |   |                                   |   |                                  |   |   |   |   |   |
| Unrealized gain on investments, net of tax of $5,341  |   | —                                 |   | —                                |   | 8,355 |   | — |   |
| Reclassification of gain on investments to net income |   | (8,355                                 | )      | —                                |   | (8,355 | ) | — |   |
|                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Total comprehensive income                            |   | $                                      | 684    |                                  | $      | 4,905 |   | $ | 30,966 |   | $ | 2,289 |   |

 

**8.     Segment Information**

 

Segment information is asfollows:

 
|                                   |   | **North  America** |    | **Europe** |   | **Asia** |   | **Eliminations** |    | **Total** |   |
|----------------------------------------|--------|--------------------|---------|------------|--------|----------|--------|------------------|---------|-----------|--------|
|                                   |   |               |    |       |   |     |   |             |    |      |   |
| **Nine  Months Ended March 31, 2001**  |   |               |    |       |   |     |   |             |    |      |   |
| Revenue, net                           |   | $                  | 186,133 |       | $      | 62,301   |   | $                | 66,675  |      | $      | — |   | $ | 315,109 |   |
| Transfers  between geographic segments |   | 17,770             |    | 9,914      |   | 19,425   |   | (47,109          | )       | —    |   |
|                                   |   | $                  | 203,903 |       | $      | 72,215   |   | $                | 86,100  |      | $      | (47,109 | ) | $ | 315,109 |   |
| Net income                             |   | $                  | 6,826   |       | $      | 7,632    |   | $                | 16,508  |      | $      | — |   | $ | 30,966 |   |
|                                   |   |               |    |       |   |     |   |             |    |      |   |
| **June 30, 2001**                      |   |               |    |       |   |     |   |             |    |      |   |
| Identifiable  assets                   |   | $                  | 366,832 |       | $      | 113,944  |   | $                | 286,676 |      | $      | — |   | $ | 767,452 |   |
|                                   |   |               |    |       |   |     |   |             |    |      |   |
| **Nine  Months Ended March 31, 2002**  |   |               |    |       |   |     |   |             |    |      |   |
| Revenue, net                           |   | $                  | 125,348 |       | $      | 43,812   |   | $                | 78,283  |      | $      | — |   | $ | 247,443 |   |
| Transfers  between geographic segments |   | 18,062             |    | 1,780      |   | 20,690   |   | (40,532          | )       | —    |   |
|                                   |   | $                  | 143,410 |       | $      | 45,592   |   | $                | 98,973  |      | $      | (40,532 | ) | $ | 247,443 |   |
| Net income  (loss)                     |   | $                  | (11,969 | )          | $      | (6,033   | )      | $                | 20,291  |      | $      | — |   | $ | 2,289 |   |
|                                   |   |               |    |       |   |     |   |             |    |      |   |
| **March  31, 2002**                    |   |               |    |       |   |     |   |             |    |      |   |
| Identifiable  assets                   |   | $                  | 341,028 |       | $      | 103,226  |   | $                | 322,173 |      | $      | — |   | $ | 766,427 |   |

 

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

 

**9.     Deferred Income Taxes**

 

During the current fiscal year, we have recordeddeferred income tax benefits associated with our operating loss for the ninemonths ended March 31, 2002.  Recentchanges in United States income tax laws allow substantially all of thedeferred income tax benefits from these losses to be realized through tax refundsunder special carryback rules available during the current fiscal year.  Additionally, during the quarter ended March31, 2002, we reduced our valuation allowance provided in prior periods oncertain capital losses which became realizable upon recognition of the capitalgain on the sale of our photoblanks operating unit.

 

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**10.                   SpecialCharges**

 

In the quarter endedMarch 31, 2002, we recorded pre-tax special charges totaling $7,393 related tocost reduction programs and acquired in-process research and development. Thecost reduction programs and related special charges consisted of the following:

 

1.                   Assetabandonments relating primarily to trailing-edge production equipment that wasremoved from service.

 

2.                   Employeeseverance expenses relating to workforce reductions in the United States andEurope.  Of the approximately 68employees severed, 64 employees left our company by March 31, 2002.  The employee severances were primarilymanufacturing positions and some administrative personnel.

 

3.                   In connectionwith the acquisition of the assets of BindKey in March 2002, approximately $300of the purchase price was allocated to purchased in-process research anddevelopment, or IPR&D, based on an independent third party appraisal.  The amount attributed to IPR&D wasexpensed at the date of acquisition as the projects had not reachedtechnological feasibility nor had any alternative future use.

 

A summary of thespecial charges is shown below:

 
|                                  |   | **Asset  Abandonments** |   | **Employee  Severance** |   | **IPR&D** |   | **Total** |   |
|---------------------------------------|--------|-------------------------|--------|-------------------------|--------|---------------|--------|-----------|--------|
|                                  |   |                    |   |                    |   |          |   |      |   |
| Quarter ended March 31, 2002 charges  |   | $                       | 5,112  |                    | $      | 1,981         |   | $         | 300    |   | $ | 7,393 |   |
| Utilized as of March 31, 2002         |   | (5,020                  | )      | (1,635                  | )      | (300          | )      | (6,955    | )      |
|                                  |   |                    |   |                    |   |          |   |      |   |
| Remaining liability at March 31, 2002 |   | $                       | 92     |                    | $      | 346           |   | $         | — |   | $ | 438 |   |

 

The $438 accrued liabilitywill be completely paid out during the quarter ending June 30, 2002.  No additional expenditures relating to thesespecial charges are expected.  Specialcharges of $11,883 recorded in the quarter ended March 31, 2001, related to ourplan to dispose of our facility in Gresham, Oregon along with related assets.

 

**11.                   Commitmentsand Contingencies**

 

We have various purchasecommitments incidental to the normal course of business includingnon-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 RTC amounting toapproximately $13,400.  Such leases aregenerally for four years and provide for payments not in excess of currentmarket.

 

We are subject tolitigation in the normal course of business. We believe the effect, if any, ofan unfavorable settlement of such litigation would not have a material adverseimpact on our financial position, results of operations, cash flows orliquidity.

 

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Our operations and our ownership of real property aresubject to various environmental laws and regulations that govern, among otherthings, the discharge of pollutants into the air and water and the handling,use, storage, disposal and clean-up of solid and hazardous wastes. Compliancewith such laws and regulations requires that we incur capital expenditures andoperating costs in connection with our ongoing operations. In addition, suchlaws and regulations may impose liabilities on owners and operators ofbusinesses and real property without regard to fault and such liabilities maybe joint and several with other parties. More stringent environmental laws andregulations may be enacted in the future, which may require us to expendadditional amounts on environmental compliance or may require modifications inour operations. Although we are unable to predict the extent of our futureliability with respect to any environmental matters, we believe, based uponcurrent information, that environmental liabilities will not be material to ourfinancial position or results of operations. E.I. du Pont De Nemours andCompany, or duPont, has agreed to indemnify us for any environmental contaminationpresent on our manufacturing sites at June 13, 1996, the date of our initialpublic offering, or present at any such site due to the generation, use,treatment, storage, release, emission, discharge or disposal of hazardous wasteor hazardous materials before such date. The Environmental Protection Agency isreviewing a groundwater contamination issue at our Danbury, Connecticut siteunder voluntary corrective action. Any such contamination is believed to beoffsite or historical, and, if that is the case, any environmental liabilitieswould be covered by the indemnification agreement with DuPont.

 

**12.                   NewAccounting Pronouncements**

 

In July 2001, the Financial Accounting StandardsBoard, or FASB, issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142, discontinues amortization ofacquired goodwill and instead requires annual impairment testing.  Separable intangible assets will beamortized 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.  For goodwill andindefinite-lived assets acquired subsequent to July 1, 2001, no amortizationwill occur and impairment testing will begin with the adoption of SFAS No.142.  We are currently evaluating theimpact of SFAS No. 142, but do not expect that its adoption will have amaterial adverse impact on our future results of operations and financialposition.  We will adopt SFAS No. 142 byJuly 1, 2002.

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” SFAS No. 143 supersedes previousguidance for financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  The statement appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development and/or the normaloperation of a long-lived asset.  We arecurrently evaluating the impact of SFAS No. 143, but do not expect that itsadoption will have a material adverse impact on our future results ofoperations and financial position.  Wewill adopt SFAS No. 143 by July 1, 2002.

 

In October 2001, the FASB issued SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedesprevious guidance for financial accounting and reporting for the impairment ordisposal of long-lived assets and for segments of a business to be disposed of.  We are currently evaluating the impact ofSFAS No. 144, but do not expect that its adoption will have a material adverseimpact on our future results of operations and financial position.  We will adopt SFAS No. 144 by July 1, 2002.

 

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In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections.” SFAS No. 145 rescinds certain guidance for reporting extinguishments ofdebt and provides guidance to determine if the transactions are part ofrecurring operations or if they meet the criteria for classification as anextraordinary item.  Additionally, SFASNo. 145 requires that certain lease modifications be accounted for in the samemanner as sale-leaseback transactions. We are currently evaluating the impact of SFAS No. 145, but do notexpect that its adoption will have a material adverse impact on our futureresults of operations and financial position. We will adopt SFAS No. 145 by July 1, 2002.

 

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**Item 2.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

The following discussion and analysis of the financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements 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**

 

Based on worldwiderevenues, we believe we are one of the largest photomask manufacturers in theworld. We sell our products to over 300 customers in over 20 differentcountries. Essentially all of our sales are to customers in the semiconductormanufacturing industry. We manufacture a broad range of photomasks based oncustomer–supplied design data. We also manufacture pellicles, a principalcomponent of photomasks, primarily for internal consumption. We operateglobally with established manufacturing facilities in North America, Europe andAsia.

 

We believe that over the long-term, demand for photomasks in thesemiconductor manufacturing process will increase due to the following trends:

 

### **•**                       Proliferation of semiconductor applications;

### **•**                       Customization of semiconductor designs;

### **•**                       Increasing semiconductor device complexity;

### **•**                       Decreasing size of semiconductor designs; and

### **•**                       Shorter product lifecycles.

 

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

 

Photomask manufacturing operations are capital intensive. Accordingly,at a given threshold of manufacturing capacity, a high proportion of ouroperating costs are fixed and remain relatively constant as revenue increasesor decreases. To the extent that we have underutilized production capacity,operating profit increases or decreases significantly as revenue increases ordecreases.

 

**Results of Operations**

 

*Revenue, net.*  Revenue,net is comprised primarily of photomask revenues to semiconductor manufacturersnet of discounts, rebates and product returns. Revenue, net decreased 22.8 percent from $108.0 million in thequarter ended March 31, 2001 to $83.4 million in the quarter ended March31, 2002. Revenue, net decreased 21.5 percent from $315.1 million in thenine months ended March 31, 2001 to $247.4 million in the nine monthsended March 31, 2002.  Revenue, net producedin North America and Europe decreased from $186.1 million and $62.3 million,respectively, in the nine months ended March 31, 2001 to $125.3 million and$43.8 million, respectively, in the nine months ended March 31, 2002.  Revenue, net produced in Asia increased from$66.7 million in the nine months ended March 31, 2001 to $78.3 million in ninemonths ended March 31, 2002.  We haveexperienced a falloff in unit demand and price at the trailing edge from the quarterand nine months ended March 31, 2001 to the quarter and nine months ended March31, 2002.  Additionally our strategicpartners with internal photomask operations have significantly reducedoutsourcing, with the bulk of the impact at the leading edge.  However, the latter was partially offset bygrowth in the leading edge business at other customers.  Increased customer demand in Asia andproduction transferred from North America and Europe accounted for the increasein revenue, net produced in Asia. Overall pricing weakened because of product mix and competitivepressures during the quarter and nine months ended March 31, 2001 compared withthe quarter and nine months ended March 31, 2002, respectively.  We continue to experience an increase indemand for advanced photomasks, those with design technology of 0.18 micron andbelow, which for the quarter and 

 

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nine months ended March 31, 2002, represented approximately 45 percentand 38 percent, respectively, of our revenues. This trend in demand reflectswhat we believe to be a continued movement toward greater utilization by theindustry of more complex semiconductor devices which we are positioned toprovide.

 

For the quarter ending June 30, 2002, we expect revenue to be in therange of $87.0 million to $92.0 million.

 

*Cost of GoodsSold.*  Cost of goods sold consists of materials,labor, depreciation and overhead.  Costof goods sold decreased 8.0 percent from $71.1 million to $65.5 millionfor the three months ended March 31, 2001 and 2002, respectively, and decreased2.4 percent from $205.0 million to $200.1 million for the nine months endedMarch 31, 2001 and 2002, respectively. The decrease for the three months and the nine months ended March 31, 2001and 2002 resulted primarily from decreased production volumes, benefitsrealized from our cost reduction programs and the overall efficiencies gainedthrough the global reorganization of our manufacturing organization implementedin the quarter ended June 30, 2001. Gross profit decreased from 34.2 percent in the quarter ended March 31,2001 to 21.5 percent for the quarter ended March 31, 2002 and from 34.9 percentin the nine months ended March 31, 2001 to 19.1 percent for the nine monthsended March 31, 2002.  The decrease ingross profit was primarily due to lower revenues that accentuate our highproportion of fixed costs.  Weanticipate that, unless revenues increase in the short term, gross margin rateswill continue to be under pressure due to the effect of our fixed costs,however, this will be partially offset by the effect of the cost reductionprogram implemented in the quarter ended March 31, 2002.

 

*Selling,General and Administrative Expense.*  Selling, general andadministrative expense includes salaries of sales and administrative personnel,marketing expense, general and administrative expense and product distributionexpense. Selling, general and administrative expense decreased 9.9 percent from$11.6 million for the quarter ended March 31, 2001 to $10.4 millionfor the quarter ended March 31, 2002. Selling, general and administrativeexpense decreased 18.8 percent from $36.9 million for the nine monthsended March 31, 2001 to $30.0 million for the nine months ended March 31,2002.  The decreases for both thequarter and the nine months ended March 31, 2002 were primarily a result of thecost reduction programs implemented in the quarter ended June 30, 2001.  Selling, general and administrative expenseas a percentage of revenue, net increased from 11.7 percent for the nine monthsended March 31, 2001 to 12.1 percent for the nine months ended March 31, 2002as a result of lower revenues partially offset by the benefits realized fromthe cost reduction programs.

 

*Research andDevelopment Expense.*  Research and development expense consistsprimarily of employee costs, cost of material consumed, depreciation,engineering related costs and our share of costs of the DPI Reticle TechnologyCenter, or RTC, our joint venture with Advanced Micro Devices, MicronTechnology and Motorola, whose primary focus is to develop advanced photomasktechnology and manufacture leading edge photomasks.  Research and development expense decreased 7.1 percent from$8.3 million for the quarter ended March 31, 2001 to $7.7 million for thequarter ended March 31, 2002. Research and development expense decreased 11.9percent from $23.9 million for the nine months ended March 31, 2001 to$21.1 million for the nine months ended March 31, 2002. The decreases in boththe quarter and nine months ended March 31, 2002 were primarily as a result ofthe cost reduction programs implemented in the quarter ended June 30, 2001 andsynergies realized by virtue of the recent reorganization of our technicalgroup.  Research and development expenseas a percentage of revenue, net increased from 7.6 percent for the nine monthsended March 31, 2001 to 8.5 percent for the nine months ended March 31,2002.  The increase was due primarily tolower revenues.  We continue to focus onresearch and development in all of our advanced production facilities, in theRTC and in BindKey, our recently acquired EDA company. We believe that, becauseof our continued focus on research and development, we will be able to helpmeet the future technology needs of the semiconductor industry for advanced photomasks.

 

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*SpecialCharges.*  In the quarter ended March 31, 2002,we recorded pre-tax special charges totaling $7.4 million related to costreduction programs and acquired in-process research and development. The costreduction programs and related special charges consisted of the following:

 

•                                          Assetabandonments of approximately $5.1 million relating primarily to trailing-edgeproduction equipment that was removed from service.

 

•                                          Employeeseverance expenses of approximately $2.0 million relating to workforcereductions in the United States and Europe. Of the approximately 68 employees severed, 64 employees left our companyby March 31, 2002.  The employeeseverances were primarily manufacturing positions and some administrativepersonnel.

 

•                                          Inconnection with the acquisition of the assets of BindKey in March 2002,approximately $0.3 million of the purchase price was allocated to IPR&Dbased on an independent third party appraisal. The amount attributed to IPR&D was expensed at the date ofacquisition as the projects had not reached technological feasibility nor hadany alternative future use.

 

Accrued liabilities relating to these special charges ofapproximately $0.4 million remaining at March 31, 2002, will be completely paid out during the quarter ending June 30,2002.  No additional expenditures relating to these special charges areexpected.  Special charges of $11.9million recorded in the quarter ended March 31, 2001, related to our plan todispose of our facility in Gresham, Oregon along with related assets.

 

*Gain* (*Loss) on Warrants, net*. For the ninemonths ended March 31, 2002, we realized losses of $0.2 million upon the saleof all remaining warrants to purchase securities of a strategic partner.  During the quarter and nine months endedMarch 31, 2001, we recognized unrealized holding gains of $6.8 million forvested and unvested warrants and sold warrants resulting in a realized gain of$2.8 million.

 

*Gain on Sale ofAssets.*  Gain on sale of assets represents the gainrecognized upon the sale of all the assets related to our photoblanksmanufacturing operations located in Poughkeepsie, New York to Schott forapproximately $31.6 million.  Concurrentwith the sale, we entered into a supply agreement with Schott for futurepurchases of photoblanks.  This supplyagreement contains provisions for contingent earnouts of approximately $12.0million of Schott stock.

 

*Other Income(Expense), net.*  Other income (expense), net includesinterest income, interest expense and exchange gains and losses.  Other income (expense), net was$0.4 million for the quarter ended March 31, 2001 and $(0.2) million forthe quarter ended March 31, 2002.  Thedecrease is primarily due to lower exchange losses combined with lower interestincome as a result of lower interest rates. Other income, net was $1.7 million for the nine months ended March 31,2001 and $1.3 million in the nine months ended March 31, 2002.  The decrease is primarily due to lowerinterest expense as a result of the refinancing of long-term debt in July 2000and lower interest income as a result of lower interest rates partially offsetby a nominal decrease in exchange gains.

 

*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 aremet.  Our effective tax rate was 29percent and (228) percent for the quarters ended March 31, 2001 and 2002,respectively.  Our effective tax ratevaried from the prior year and the maximum statutory rate because of shifts inthe geographic distribution of earnings and losses between high and low taxrate countries partially due to the special charges recorded in the UnitedStates in the quarter ended March 31, 2002. Additionally, the tax rate for the quarter ended March 31, 2002 wasimpacted by an adjustment to the valuation allowance provided in prior periodson certain capital losses which became realizable upon recognition of thecapital gain on the sale of our photoblanks operating unit, thus offsetting aportion of the tax on this gain.

 

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During the current fiscal year, we have recorded deferred income taxbenefits associated with our operating loss for the nine months ended March 31,2002.  Recent changes in United Statesincome tax laws allow substantially all of the deferred income tax benefitsfrom these losses to be realized through tax refunds under special carrybackrules available during the current fiscal year.

 

*MinorityInterest in Income of Joint Ventures.*  Minority interest incomereflects our partners’ share of the joint venture operations.  The minority interest impact of our jointventures was $2.4 million for the quarter ended March 31, 2001 and $1.0 millionfor the quarter ended ended March 31, 2002. The decrease was primarily a result of a shift from leading-edge totrailing-edge products resulting in lower revenues.  The minority interest impact of our joint ventures was $4.8million for the nine months ended March 31, 2001 and $5.0 million for the ninemonths ended March 31, 2002.  Theincrease was the result of higher revenues in Shanghai partially offset byincreased operating costs in Taiwan and Shanghai.

 

**Liquidity and Capital Resources**

 

Our working capital was $139.2 million at June 30, 2001 and $110.3million at March 31, 2002. The decrease in working capital was primarily due toa decrease in revenues resulting in lower accounts receivable reflecting thecontinued downturn in the semiconductor industry.  Cash and cash equivalents were $138.6 million at June 30,2001 and $103.4 million at March 31, 2002. The principal source of our cash is from our operating activities thatgenerated $45.6 million during the nine months ended March 31, 2002 primarilyas a result of our net income as adjusted for non-cash income and expenses.

 

Cash used in investing activities was $90.8 million and $88.2 millionfor the nine months ended March 31, 2001 and 2002, respectively.  Cash used for capital expenditures was$92.7 million and $87.7 million for the nine months ended March 31,2001 and 2002, respectively. Additionally $4.8 million was used to acquire the assets of BindKey inthe nine months ended March 31, 2002. We expect capital expenditures for the remainder of fiscal year 2002 tobe approximately $15.0 million.  Capitalexpenditures have been and will continue to be used primarily to advance ourtechnical capability.  In addition, wemay in the future pursue additional acquisitions of businesses, products andtechnologies, or enter into other joint venture arrangements that couldcomplement or expand our business.  Anymaterial acquisition or joint venture could result in a decrease to our workingcapital depending on the amount, timing and nature of the consideration to bepaid.

 

Cash provided byfinancing activities was $63.1 million and $7.7 million for the nine months ended March 31, 2001 and 2002,respectively.  For the nine months ended March 31, 2002, net short-term borrowingsincreased $4.1 million primarily as a result of working capital requirements inAsia.  Additionally, our employeespurchased $3.5 million of common stock under our employee plans.

 

Our ongoing cashrequirements will be primarily for capital expenditures, acquisitions, researchand development and working capital.  Webelieve that cash on hand and cash provided by operations will be sufficient tomeet our cash requirements for at least the next 12 months. Thereafter, basedon our current operating plans, we may require external financing from time totime to fund our capital expenditure requirements.  There can be no assurance that sources of financing will beavailable if our capital requirements exceed the facility and cash flow fromoperations. There can be no assurance that we will be able to obtain anyadditional financing required to fund our capital needs on reasonable terms, orat all.

 

**OtherMatters**

 

In the ordinary course of business, we engage in transactions withrelated parties including DuPont, RTC and certain of our non-United Statesemployees.  Transactions with DuPontrelate primarily to agreements entered into in 1996 for transitionalservices.  We conduct a portion of ourresearch and development projects by funding our proportionate share of theresearch efforts of the RTC joint venture. In the management of this joint venture, we enter into certaintransactions in order to obtain cost benefits for the joint venture.  Additionally, we have receivables fromcertain of our non-United States employees related primarily to housing andautomobile loans.

 

In July 2001, the Financial Accounting Standards Board, or FASB, issuedSFAS No. 142, “Goodwill 

 

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and Other Intangible Assets.” SFAS No. 142, discontinues amortization of acquired goodwill and insteadrequires annual impairment testing.  Separableintangible assets will be amortized over their useful economic lives and testedfor impairment in accordance with SFAS No. 121, “Accounting for the Impairmentof Long-Lived Assets to be Disposed of.” Intangible assets with an indefinite useful economic life will not beamortized until the life of the asset is determined to be finite.  For goodwill and indefinite-lived intangibleassets acquired prior to July 1, 2001, amortization will continue untiladoption 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.  For goodwill and indefinite-lived assets acquired subsequent toJuly 1, 2001, no amortization will occur and impairment testing will begin withthe adoption of SFAS No. 142.  We arecurrently evaluating the impact of SFAS No. 142, but do not expect that itsadoption will have a material impact on our future results of operations andfinancial position.  We will adopt SFASNo. 142 by July 1, 2002.

 

In June 2001, theFASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFASNo. 143 supersedes previous guidance for financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. The statement applies to legal obligations associated with the retirementof long-lived assets that result from the acquisition, construction,development and/or the normal operation of a long-lived asset. We are currentlyevaluating the impact of SFAS No. 143, butdo not expect that its adoption will have a material impact on ourfuture results of operations and financial position.  We will adopt SFAS No. 143 by July 1, 2002.

 

In October 2001,the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.” SFAS No. 144 supersedes previous guidance for financialaccounting and reporting for the impairment or disposal of long-lived assetsand for segments of a business to be disposed of. We are currently evaluatingthe impact of SFAS No. 144, but do not expect that its adoption will have amaterial impact on our future results of operations and financialposition.  We will adopt SFAS No. 144 byJuly 1, 2002.

 

In April 2002, theFASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  SFAS No. 145 rescinds certain guidance forreporting extinguishments of debt and provides guidance to determine if thetransactions are part of recurring operations or if they meet the criteria forclassification as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease modifications beaccounted for in the same manner as sale-leaseback transactions.  We are currently evaluating the impact ofSFAS No. 145, but do not expect that its adoption will have a material impacton our future results of operations and financial position.  We will adopt SFAS No. 145 by July 1, 2002.

 

**Forward Looking Statements**

### ** **

This report contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, that involve a number ofrisks and uncertainties.  Suchforward-looking statements may concern growth and future operating results,forecasts, projections, pricing pressures, potential acquisitions and jointventures, new manufacturing facilities, capital expenditures, the globaleconomic climate, management change, new products and product enhancements, thefuture importance of photomask technology, the demand for products, competitivefactors, research and development activities and expenditures, strategicrelationships with third parties, liquidity, financing and the company’sstrategy. Such forward-looking statements are generally accompanied by wordssuch 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 semiconductor industry could lead to adecrease in the demand for our photomask products.  The semiconductor industry is highly cyclical and has beensubject to

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### **17**

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### **significant economic downturns at various times;**

### **•**                  Our financial results may vary significantly fromquarter to quarter or we may fail to meet investor expectations, which wouldnegatively impact the price of our stock;

### **•**                  The photomask industry is capital intensive.  We may be unable to fund significant capital expenditures toexpand our operations and to enhance our manufacturing capability in order tokeep pace with rapidly changing technologies;

### **•**                  We have significant fixed costs. Our operating results could be adversely affected by under-utilizedproduction capacity;

### **•**                  Macroeconomics effects on the semiconductor industry;

### **•**                  Our company must be able to respond to rapid technology changes withinthe semiconductor industry.  We may beunable to enhance our existing products and to develop and manufacture newproducts and upgrades with improved capabilities to satisfy anticipated demandfor more technologically advanced photomasks;

### **•**                  We acquired a business whose focus is outside our core expertise.  We may be unable to successfully integratethe personnel and operations of that business into our existing businessculture and environment.  We may beunable to penetrate the market for the products being developed by the newbusiness.

### **•**                  We may not remain competitive and increased competition could seriouslyharm our business;

### **•**                  If a fundamental change in our business were to occur, we cannot assureyou that we will have sufficient funds to pay the redemption price for all thenotes tendered by the holders of the subordinated convertible notes, althoughDuPont would be required to pay the redemption price under its guarantee.  In that case, our failure to redeem tenderednotes would constitute an event of default under the indenture for the notes,and may constitute a default under the terms of other indebtedness that we mayenter into from time to time.;

### **•**                  E.I. duPont de Nemours & Company has influence on all stockholdervotes;

### **•**                  Our success depends, in part, upon key managerial, engineering andtechnical personnel as well as our ability to continue to attract and retainadditional personnel and integrate new personnel into 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 “Risk Factors” inour Annual Report on Form 10-K filed with the SEC on September 17, 2001 andForm 10-Q dated October 29, 2001 and February 8, 2002.

 

These risks anduncertainties are beyond our control and, in many cases, we cannot predict therisks and uncertainties that could cause our actual results to differ materiallyfrom those indicated by the forward-looking statements.

 

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**.**

 

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**Item3.**

 

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT RISK**

 

**Market Risk**

 

Market risks relating to our operations result primarily from changes ininterest rates and changes in foreign currency exchange rates.  As of March 31, 2002, we had $100.0 millionin non-interest bearing convertible notes and approximately $13.5 million ininterest bearing debt of which approximately $10.6 million was short-term debt.As a result, changes in the interest rate market would change the estimatedfair value of our long-term debt. We believe that a 10 percent change in theinterest rate would not have a material effect on our business, financialcondition, results of operations or cash flows.

 

Foreign currency exposures are due to non-U.S. operations which aresubject to certain risks inherent in conducting business abroad, includingprice and currency exchange controls, fluctuation in the relative value ofcurrencies and restrictive governmental actions. Changes in the relative valueof currencies occur from time to time and may, in certain instances, have amaterial effect on our results of operations. Any exchange rate fluctuations can affect our margins since we may haveimbalances between some foreign currency denominated revenues and expenses, andwe may be unable to hedge them completely.  Our financial statements reflectremeasurement of items denominated in non-U.S. currencies to U.S. dollars, ourfunctional currency. Exchange gains or losses are included in income in theperiod in which they occur. We monitor our exchange rate exposure and attempt toreduce such exposure by hedging. We have entered into forward contracts incurrencies of the countries in which we conduct business in order to reducesuch exposure.  At March 31, 2002, thefair value of our forward foreign exchange contracts outstanding was $13.6million with a negligible unrealized gain recorded in the consolidated incomestatement as of and during the quarter and nine months ended March 31, 2002.These instruments may involve elements of credit and market risk in excess ofthe amounts recognized in the financial statements.  We monitor our positions and the credit quality ofcounter-parties, consisting primarily of major financial institutions, and donot anticipate nonperformance by any counter-party.  There can be no assurance that such forward contracts or anyother hedging activity will be available or adequate to eliminate, or evenmitigate, the impact of our exchange rate exposure. There can be no assurancethat such risks will not have a material adverse impact on our liquidity andresults of operations in the future.

 

**Financial Risk Management**

 

Our international revenues are subject to inherent risks, includingfluctuations in local economies; difficulties in staffing and managing foreignoperations; greater difficulty in accounts receivable collection; costs andrisks of localizing products for foreign countries; unexpected changes inregulatory requirements, tariffs and other trade barriers; difficulties in therepatriation of earnings and burdens of complying with a wide variety offoreign laws.  Some of our sales outsideof North America are denominated in local currencies, and accordingly, we aresubject to the risks associated with fluctuations in currency rates.  In particular, increases in the value of thedollar against foreign currencies decrease the U.S. dollar value of foreignsales requiring us either to increase our price in the local currency, whichcould render our product prices noncompetitive, or to suffer reduced revenuesand gross margins as measured in U.S. dollars. These dynamics have adversely affected revenue growth in internationalmarkets in 2002 and in previous years. Our foreign currency hedging program is comprised of foreign currencyforwards contracts to reduce the effect of exchange rate fluctuations.  However, the hedging program will noteliminate all of our foreign exchange risks.

 

The marketplace for our products dictates that we maintaininventories.  Therefore, inventoryobsolescence is a risk for us due to frequent engineering changes, shiftingcustomer demand, the emergence of new industry standards and rapidtechnological advances including the introduction by us or our competitors ofproducts embodying new technology. While we maintain valuation allowances for excess and obsolete inventoryand management continues to monitor the adequacy of such valuation allowances,there can be no assurance that such valuation allowances will be sufficient.

 

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As of March 31, 2002, we had outstanding guarantees for payment offoreign short-term debt totaling approximately $9.6 million.  At March 31, 2002, we did not have anyrelationships with any unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes.  Accordingly, we are notexposed to any financing, liquidity, market or credit risk that could arise ifwe were engaged in such relationships.

 

At March 31, 2002 we had $100.0 million of subordinatedconvertible debt outstanding.  The notesare due in July 2004, with no stated interest, are convertible at any time intoshares of our common stock at a conversion price of $106.26 per share, areunconditionally guaranteed by du Pont and are not callable by us.  In the event of a fundamental change in ourcompany, each holder of notes will have the right to require us to redeem, incash, any or all of such holder’s notes at a price equal to 100 percent of theprincipal amount to be redeemed.  Afundamental change generally is any transaction in which all or substantiallyall of our common stock is exchanged for, converted into, acquired for orconstitutes the right to receive, consideration which is not all orsubstantially all common stock listed on a national securities exchange orapproved for quotation on the NASDAQ National Market.  If a fundamental change were to occur, we cannot assure you thatwe will have sufficient funds to pay the redemption price for all the notestendered by the holders, 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.

 

**Critical Accounting Policies**

 

Our critical accounting policies are as follows:

 

•                                          Consolidation

 

The consolidatedfinancial statements presented herein include the accounts of DuPont Photomasks, Inc. and our majority-owned,controlled and wholly-owned subsidiaries. All significant intercompanytransactions and accounts have been eliminated in consolidation.  Entities that are not controlled but forwhich we can significantly influence are recorded under the equity method ofaccounting.

 

•                                          Revenue recognition

 

Product revenue is recognized when both title and risk of loss transfersto the customer and when the products are received by our customer, providedthat no significant obligations remain.

 

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

 

The preparation of financial statements requires us to make estimatesand assumptions that affect the reported amount of assets and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reported period.

 

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

 

•                                Similarly, we must make estimates of theuncollectability of our accounts receivable. We consider trends of historical bad debts, customer concentrations,customer credit-worthiness,

 

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currenteconomic trends and changes in our customer payment terms when evaluating theadequacy of the allowance for doubtful accounts.  If circumstances change, our estimates of the recoverability ofamounts due us could be reduced by a material amount.

 

•                                We write down our inventory for estimatedobsolescence or unmarketable inventory equal to the difference between the costof inventory and estimated market value based on assumptions on future demandsand market conditions. If actual market conditions are less favorable thanthose projected by management, additional inventory writedowns may be required.

 

•                                          Valuation of long-lived and intangible assets

 

We assess the impairment of identifiable intangibles, long-lived assetsand related goodwill whenever events or changes in circumstances indicate thatthe carrying value may not be recoverable. Factors considered important which could trigger an impairment reviewinclude the following:

 

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

 

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

 

•                                Significant negative industry or economic trends;

 

•                                Our market capitalization relative to net bookvalue.

 

When it is determined that the carrying value of intangibles, long-livedassets and related goodwill may not be recoverable based upon the existence ofone or more of the above indicators of impairment, the measurement of anyimpairment is determined and the carrying value is reduced as appropriate.

 

•                                          Accounting for income taxes

 

We are required to estimate our income taxes in each of thejurisdictions in which we operate.  Thisprocess involves estimating our current tax exposure together with assessingtemporary differences resulting from differing treatment of items for tax andfinancial reporting purposes.  Thesedifferences result in deferred tax assets and liabilities, which are includedin our consolidated balance sheet.  Weevaluate the recoverability of the deferred tax assets from future taxableincome and establish valuation allowances if recovery is not likely.  Our income tax provision in the consolidatedincome statement is impacted by changes in the valuation allowance.

 

This process is complex and involves significant management judgment indetermining our provision for income taxes, deferred tax assets and liabilitiesand any valuation allowance recorded against our net deferred tax assets

 

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**PART II**

 

**Item1. Legal Proceedings**

 

We arenot 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 SecurityHolders**

 

None

 

**Item 5. OtherInformation**

 

None

 

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

 

(A) Exhibits

 

             (11) Statement reEarnings Per Share Computation

 

(B) Reportson Form 8-K

 

 

Our report on Form 8K, dated April 22, 2002, announcingthat Schott Lithotec AG (“Schott”) has acquired DPI’s photoblank business unitand that Schott and DPI have entered into a long-term supply agreement toprovide DPI continued reliable access to commercial photoblanks.  Portions of this exhibit have been omittedpursuant to a request for confidential treatment.

 

 

**SIGNATURES**

 

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

 
|                | Dupont Photomasks, Inc. |
|---------------------|------------------------------|
|                | (Registrant)                 |   |
|                |                         |   |
| Date:  May 14, 2002 |                         | /s/ Satish Rishi |   |
|                |                         | Satish Rishi |
|                |                         | *Executive Vice President* — *Financeand Chief Financial Officer  (Principal Financial Officer)* |

 

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