**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

----

 

**FORM 10–Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(****d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly period ended December 31, 2001

 

Commission file number 0–20839

 

 

**DUPONTPHOTOMASKS, INC.**

 

(Exact name of registrant asspecified in our charter)

 

 
| **Delaware**                                                   |   | **74–2238819**                 |
|----------------------------------------------------------------|--------|-------------------------------------|
| (State or Other Jurisdictionof Incorporation  or Organization) |   | (I.R.S. EmployerIdentification No.) |

 

 

**131 Old Settlers Boulevard**

**Round Rock, Texas 78664**

(Address of Principal ExecutiveOffices)

Registrant’s telephone number,including area code: (512) 310–6500

 

----

 

                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 January 31,2002, there were 17,863,787 shares of the registrant’s common stock, $.01 parvalue, outstanding.

 

 

**TABLE OF CONTENTS**

 
| **Part I**                                                                                                                                                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                      |
| Item 1.Financial  Statements                                                                                                                              |
|                                                                                                                                                      |
| Consolidated Income  Statement (unaudited) for the Three Months Ended December 31, 2000 and 2001  and for the Six Months Ended December 31, 2000 and 2001 |
| Consolidated Balance Sheet  at June 30, 2001 and December 31, 2001 (unaudited)                                                                       |
| Consolidated  Statement of Cash Flows (unaudited) for the Six Months Ended December 31,  2000 and2001                                                     |
| Consolidated  Statement of Stockholders’ Equity for the Twelve Months Ended June 30, 2001  and the Six Months Ended December 31, 2001 (unaudited)    |
| Notes to  Consolidated Financial Statements (unaudited)                                                                                                   |
|                                                                                                                                                      |
| Item 2.  Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                 |
|                                                                                                                                                      |
| Item  3.  Quantitative and Qualitative  Disclosures About Market Risk                                                                                |
|                                                                                                                                                      |
| **Part II**                                                                                                                                               |
|                                                                                                                                                      |
| Item 1.  Legal Proceedings                                                                                                                           |
|                                                                                                                                                      |
| Item 2.  Changes in Securities                                                                                                                       |
|                                                                                                                                                      |
| Item 3.  Defaults Upon Senior Securities                                                                                                             |
|                                                                                                                                                      |
| Item  4.  Submission of Matters to a Vote of  Security Holders                                                                                       |
|                                                                                                                                                      |
| Item 5.  Other Information                                                                                                                           |
|                                                                                                                                                      |
| Item 6.  Exhibits and Reports on Form 8-K                                                                                                            |
|                                                                                                                                                      |
| Signatures                                                                                                                                                |

 

**PART I**

 

**Item 1. Financial Statements**

 

**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED INCOME STATEMENT**

**(Dollars inthousands, except per share amounts)**

**(unaudited)**

** **
|                                                                                                          |   | **Three Months Ended****December 31,** |    | **Six Months Ended****December 31,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|--------------------------------------|--------|
|                                                                                                          |   | **2000**                               |    | **2001**                             |   | **2000** |   | **2001** |   |
| Revenue, net                                                                                                  |   | $                                      | 106,566 |                                 | $      | 86,625 |   | $ | 207,094 |   | $ | 164,086 |   |
| Cost of goods sold                                                                                            |   | 68,888                                 |    | 67,422                               |   | 133,871 |   | 134,686 |   |
| Selling, general and administrative expense                                                                   |   | 13,342                                 |    | 10,107                               |   | 25,361 |   | 19,567 |   |
| Research and development expense                                                                              |   | 7,923                                  |    | 6,868                                |   | 15,581 |   | 13,328 |   |
| Operating profit (loss)                                                                                       |   | 16,413                                 |    | 2,228                                |   | 32,281 |   | (3,495 | ) |
| Gain (loss) on warrants, net                                                                                  |   | —                                 |    | 863                                  |   | — |   | (238 | ) |
| Other income, net                                                                                             |   | 1,046                                  |    | 176                                  |   | 1,315 |   | 1,496 |   |
| Income (loss) before income taxes, minority interest  and cumulative effect of change in accounting principle |   | 17,459                                 |    | 3,267                                |   | 33,596 |   | (2,237 | ) |
| Provision for (benefit from) income taxes                                                                     |   | 4,574                                  |    | 507                                  |   | 8,713 |   | (3,613 | ) |
| Income before minority interest and cumulative effect  of change in accounting principle                      |   | 12,885                                 |    | 2,760                                |   | 24,883 |   | 1,376 |   |
| Minority interest in income of joint ventures                                                                 |   | (1,121                                 | )       | (2,393                               | )      | (2,475 | ) | (3,992 | ) |
| Income (loss) before cumulative effect of change in  accounting principle                                     |   | 11,764                                 |    | 367                                  |   | 22,408 |   | (2,616 | ) |
| Cumulative effect of change in accounting principle                                                           |   | —                                 |    | —                               |   | (481 | ) | — |   |
| Net income (loss)                                                                                             |   | $                                      | 11,764  |                                 | $      | 367 |   | $ | 21,927 |   | $ | (2,616 | ) |
|                                                                                                          |   |                                   |    |                                 |   |   |   |   |   |
| Basic earnings (loss) per share:                                                                              |   |                                   |    |                                 |   |   |   |   |   |
| Before cumulative effect of change in accounting  principle                                                   |   | $                                      | 0.68    |                                 | $      | 0.02 |   | $ | 1.31 |   | $ | (0.15 | ) |
| After cumulative effect of change in accounting  principle                                                    |   | $                                      | 0.68    |                                 | $      | 0.02 |   | $ | 1.28 |   | $ | (0.15 | ) |
| Weighted average shares outstanding                                                                           |   | 17,271,186                             |    | 17,854,578                           |   | 17,085,303 |   | 17,844,930 |   |
|                                                                                                          |   |                                   |    |                                 |   |   |   |   |   |
| Diluted earnings (loss) per share:                                                                            |   |                                   |    |                                 |   |   |   |   |   |
| Before cumulative effect of change in accounting  principle                                                   |   | $                                      | 0.63    |                                 | $      | 0.02 |   | $ | 1.21 |   | $ | (0.15 | ) |
| After cumulative effect of change in accounting  principle                                                    |   | $                                      | 0.63    |                                 | $      | 0.02 |   | $ | 1.19 |   | $ | (0.15 | ) |
| Weighted average shares outstanding                                                                           |   | 18,712,825                             |    | 18,055,338                           |   | 18,649,598 |   | 17,844,930 |   |

 

Theaccompanying notes are an integral part of this statement.

 

**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEET**

**(Dollars in thousands, except sharedata)**

 

 

**ASSETS**
|                                                                                                                         |   | **June 30,****2001** |    | **December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|------------------------|--------|
|                                                                                                                         |   |                      |    | **(unaudited)**        |   |
| Current assets:                                                                                                              |   |                      |    |                   |   |
| Cash and cash equivalents                                                                                                    |   | $                         | 138,590 |                   | $      | 108,861 |   |
| Accounts receivable, trade, net                                                                                              |   | 71,879                    |    | 58,609                 |   |
| Accounts receivable, related parties                                                                                         |   | 1,212                     |    | 2,575                  |   |
| Inventories, net                                                                                                             |   | 19,105                    |    | 16,379                 |   |
| Deferred income taxes                                                                                                        |   | 19,414                    |    | 11,370                 |   |
| Prepaid expenses and other current assets                                                                                    |   | 14,758                    |    | 17,080                 |   |
| Total current assets                                                                                                         |   | 264,958                   |    | 214,874                |   |
| Assets held for sale                                                                                                         |   | 6,019                     |    | 7,552                  |   |
| Property and equipment, net                                                                                                  |   | 456,095                   |    | 480,817                |   |
| Accounts receivable, related parties                                                                                         |   | 1,205                     |    | 1,130                  |   |
| Deferred income taxes                                                                                                        |   | 10,805                    |    | 27,814                 |   |
| Other assets, net                                                                                                            |   | 28,370                    |    | 23,833                 |   |
| Total assets                                                                                                                 |   | $                         | 767,452 |                   | $      | 756,020 |   |
|                                                                                                                         |   |                      |    |                   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                               |
| Current liabilities:                                                                                                         |   |                      |    |                   |   |
| Accounts payable, trade                                                                                                      |   | $                         | 54,350  |                   | $      | 40,593 |   |
| Accounts payable, related parties                                                                                            |   | 3,960                     |    | 1,718                  |   |
| Short-term borrowings                                                                                                        |   | 6,490                     |    | 11,340                 |   |
| Income taxes payable                                                                                                         |   | 2,262                     |    | 7,322                  |   |
| Other accrued liabilities                                                                                                    |   | 58,667                    |    | 61,604                 |   |
| Total current liabilities                                                                                                    |   | 125,729                   |    | 122,577                |   |
| Long-term borrowings                                                                                                         |   | 3,250                     |    | 3,123                  |   |
| Long-term convertible notes                                                                                                  |   | 100,000                   |    | 100,000                |   |
| Deferred income taxes                                                                                                        |   | 21,458                    |    | 25,721                 |   |
| Other liabilities                                                                                                            |   | 19,432                    |    | 3,723                  |   |
| Minority interest in net assets of joint ventures                                                                            |   | 39,303                    |    | 43,423                 |   |
| Total liabilities                                                                                                            |   | 309,172                   |    | 298,567                |   |
| Commitments and contingencies (Note 9)                                                                                       |   |                      |    |                   |   |
| 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 17,857,726 issued and  outstanding, respectively |   | 178                       |    | 179                    |   |
| Additional paid-in capital                                                                                                   |   | 310,763                   |    | 312,551                |   |
| Retained earnings                                                                                                            |   | 147,339                   |    | 144,723                |   |
| Total stockholders’ equity                                                                                              |   | 458,280                   |    | 457,453                |   |
| Total liabilities and stockholders’ equity                                                                              |   | $                         | 767,452 |                   | $      | 756,020 |   |

 

Theaccompanying notes are an integral part of this statement.

 

**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**(Dollars in thousands)**

**(unaudited)**

 
|                                                                               |   | **Six Months Ended****December 31,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                               |   | **2000**                             |   | **2001** |   |
| Cash flows from operating activities:                                              |   |                                 |   |   |   |
| Net income (loss)                                                                  |   | $                                    | 21,927 |   | $ | (2,616 | ) |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                 |   |   |   |
| Depreciation and amortization                                                      |   | 36,452                               |   | 44,741 |   |
| Tax benefit from employee stock options                                            |   | 1,628                                |   | 77 |   |
| Loss on warrants, net                                                              |   | —                               |   | 238 |   |
| Minority interest in income of joint ventures                                      |   | 2,475                                |   | 3,992 |   |
| Deferred income tax expense (benefit)                                              |   | 5,954                                |   | (4,702 | ) |
| Other                                                                              |   | 515                                  |   | (90 | ) |
| Cash provided by (used in) changes in assets and  liabilities:                     |   |                                 |   |   |   |
| Accounts receivable, trade, net                                                    |   | (15,802                              | )      | (2,346 | ) |
| Accounts receivable, related parties                                               |   | (544                                 | )      | (1,388 | ) |
| Inventories, net                                                                   |   | (2,579                               | )      | 2,726 |   |
| Prepaid expenses and other current assets                                          |   | 5,142                                |   | (4,514 | ) |
| Accounts payable, trade                                                            |   | (24,138                              | )      | (13,408 | ) |
| Accounts payable, related parties                                                  |   | 79                                   |   | (2,242 | ) |
| Other accrued liabilities                                                          |   | 4,220                                |   | 7,601 |   |
| Other liabilities                                                                  |   | 22,500                               |   | — |   |
| Net cash provided by operating activities                                          |   | 57,829                               |   | 28,069 |   |
| Cash flows from investing activities:                                              |   |                                 |   |   |   |
| Purchases of property and equipment                                                |   | (55,334                              | )      | (68,644 | ) |
| Proceeds from sale of property and equipment                                       |   | 10                                   |   | 2,669 |   |
| Proceeds from sale of warrants and investments                                     |   | —                               |   | 1,573 |   |
| Net cash used in investing activities                                              |   | (55,324                              | )      | (64,402 | ) |
| Cash flows from financing activities:                                              |   |                                 |   |   |   |
| Proceeds from borrowings                                                           |   | 1,289                                |   | 7,670 |   |
| Payments of borrowings                                                             |   | (2,057                               | )      | (2,564 | ) |
| 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                       |   | 1,419                                |   | 1,712 |   |
| Proceeds from issuance of common stock, net                                        |   | 103,814                              |   | — |   |
| Net cash provided by financing activities                                          |   | 52,065                               |   | 6,818 |   |
| Effect of exchange rate changes on cash                                            |   | (684                                 | )      | (214 | ) |
| Net increase (decrease) in cash and cash equivalents                               |   | 53,886                               |   | (29,729 | ) |
| Cash and cash equivalents at beginning of period                                   |   | 42,203                               |   | 138,590 |   |
| Cash and cash equivalents at end of period                                         |   | $                                    | 96,089 |   | $ | 108,861 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |   |                                 |   |   |   |
| Cash paid for:                                                                     |   |                                 |   |   |   |
| Interest                                                                           |   | $                                    | 525    |   | $ | 274 |   |
| Taxes                                                                              |   | $                                    | 1,423  |   | $ | 231 |   |

 

Theaccompanying notes are an integral part of this statement.

 

**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

 

**(Dollars in thousands)**

 
|                                               |   | **Common Stock** |   | **Addi-  tional  Paid-In** |   | **Retained** |   | **Accumulated****OtherCompre-  hensive** |   | **Total****Stock-holders’** |    |
|----------------------------------------------------|--------|------------------|--------|----------------------------|--------|--------------|--------|------------------------------------------|--------|----------------------------------|---------|
|                                               |   | **Shares**       |   | **Amount**                 |   | **Capital**  |   | **Earnings**                             |   | **Income**                       |    | **Equity** |   |
|                                               |   |             |   |                       |   |         |   |                                     |   |                             |    |   |   |
| 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                       |   | —           |   | —                     |   | 77           |   | —                                   |   | —                           |    | 77 |   |
| Issuance of common stockunder employee  plans      |   | 50,829           |   | 1                          |   | 1,711        |   | —                                   |   | —                           |    | 1,712 |   |
| Net loss                                           |   | —           |   | —                     |   | —       |   | (2,616                                   | )      | —                           |    | (2,616 | ) |
|                                               |   |             |   |                       |   |         |   |                                     |   |                             |    |   |   |
| Balance at December 31, 2001 (unaudited)           |   | 17,857,726       |   | $                          | 179    |         | $      | 312,551                                  |   | $                                | 144,723 |   | $ | — |   | $ | 457,453 |   |

 

Theaccompanying notes are an integral part of this statement.

 

**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**(unaudited)**

 

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

 

                The interim consolidatedfinancial statements presented herein include the accounts of DuPontPhotomasks, Inc. and our majority-owned, majority-controlled and wholly-ownedsubsidiaries. All significant intercompany transactions and accounts have beeneliminated in consolidation. These interim consolidated financial statementshave been prepared by us, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission, or SEC. All adjustments have beenmade to the accompanying interim consolidated financial statements which are,in the opinion of our management, necessary for a fair presentation of ouroperating results and include all adjustments of a normal recurring nature.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations.  It isrecommended that these interim consolidated financial statements be read inconjunction with the consolidated financial statements and the notes theretoincluded in our Annual Report on Form 10-K for the year ended June 30,2001.  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires the use of estimates and assumptions bymanagement in determining the reported amounts of assets and liabilities,disclosures of contingent liabilities at the date of the financial statements,and the reported amounts of revenues and expenses during the period.  Actual results could differ from thoseestimates.  The results of operationsfor any interim period are not necessarily indicative of the results ofoperations for the entire year. Certain reclassifications have been made in theprior period financial statements to conform with the current periodpresentation.

 

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

 

                Property and equipment arestated at cost and are depreciated using the straight-line method over theestimated useful lives of the assets. Leasehold improvements are depreciated using the straight-line methodover the shorter of the estimated useful lives of the assets or the remainingduration of the lease.  Accumulateddepreciation was $317,861 at June 30, 2001 and $343,440 at December 31, 2001.

 

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

 

                In July 2001, the FinancialAccounting Standards Board, or FASB, issued Statement of Financial AccountingStandard, or 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.  We are currently evaluatingthe impact of SFAS No. 142 on our future results of operations and financialposition.  We must adopt SFAS No. 142 byJuly 1, 2002.

 

                In June 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143supersedes 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 theretirement of long-lived assets that result from the acquisition, construction,development and/or the normal operation of a long-lived asset.  We are currently evaluating the impact ofSFAS No. 143 on our future results of operations and financial position.  We must adopt SFAS No. 143 by July 1, 2002.

 

                In October 2001, the FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”SFAS No. 144 supersedes previous guidance for financial accounting andreporting for the impairment or disposal of long-lived assets and for segmentsof a business to be disposed of.  We arecurrently evaluating the impact of SFAS No. 144 on our future results ofoperations and financial position.  Wemust adopt SFAS No. 144 by July 1, 2002.

 

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

 

Forwardforeign exchange contracts are utilized to mitigate the risks associated withcurrency fluctuations on certain international revenue and balance sheetexposures, and are, therefore, held primarily for purposes other than trading.These foreign exchange contracts do not qualify for hedge accounting under SFASNo. 133, as amended.  Unrealized gainsand losses resulting from the impact of currency exchange rate movements onforward foreign exchange contracts designated to offset certain non-U.S. dollardenominated assets and liabilities are recognized as other income or expense inthe period in which the exchange rates change. They offset the foreign currency gains and losses on the underlyingexposures being hedged. The aggregate fair value of our forward foreignexchange contracts outstanding was $19,240 with an unrealized gain recorded inthe consolidated income statement of $131 as of and during the quarter and sixmonths ended December 31, 2001. These instruments may involve elements ofcredit and market risk in excess of the amounts recognized in the financialstatements.  We monitor our positionsand the credit quality of counter-parties, consisting primarily of majorfinancial institutions, and do not anticipate nonperformance by anycounter-party.

 

Duringthe six months ended December 31, 2001, we sold all of the warrants to purchasesecurities of a strategic partner resulting in a realized loss using thespecific identification costing method of $238 in the accompanying consolidatedincome statement.

 

## **5.**  EarningsPer Share

 

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

 

The reconciliation of the amountsused to calculate basic EPS and diluted EPS are as follows:

 

|                                                |   | **Three Months Ended****December 31,** |   | **Six Months Ended****December 31,** |   |
|-----------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                |   | **2000**                               |   | **2001**                             |   | **2000** |   | **2001** |   |
|                                                |   |                                   |   |                                 |   |   |   |   |   |
| Net income — basic                             |   | $                                      | 11,764 |                                 | $      | 367 |   | $ | 21,927 |   | $ | (2,616 | ) |
| Dilutive effect of convertible notes                |   | 91                                     |   | —                               |   | 183 |   | — |   |
|                                                |   |                                   |   |                                 |   |   |   |   |   |
| Net income — diluted                           |   | $                                      | 11,855 |                                 | $      | 367 |   | $ | 22,110 |   | $ | (2,616 | ) |
|                                                |   |                                   |   |                                 |   |   |   |   |   |
| Weighted average shares outstanding — basic    |   | 17,271,186                             |   | 17,854,578                           |   | 17,085,303 |   | 17,844,930 |   |
| Plus: Common share equivalents                      |   | 1,441,639                              |   | 200,760                              |   | 1,564,295 |   | — |   |
| Weighted average shares outstanding — dilutive |   | 18,712,825                             |   | 18,055,338                           |   | 18,649,598 |   | 17,844,930 |   |

 

                The dilution impact ofoutstanding stock options to acquire 1,118,380 shares and 2,828,444 shares forthe quarter ended December 31, 2000 and December 31, 2001, respectively, werenot included in common share equivalents because the effect of including thesestock options would have been anti-dilutive. The dilution impact of outstandingstock options to acquire 733,053 shares and 3,710,633 shares for the six monthsended December 31, 2000 and December 31, 2001, respectively, were not includedin common share equivalents because the effect of including these stock optionswould have been anti-dilutive.  Theseshares may become dilutive in the future.

 

# **6.**  ComprehensiveIncome

 

                Our comprehensive income iscomprised of net income and unrealized gains and losses on certain investmentsin debt and equity securities. The components of comprehensive income, net oftax, are as follows:

 

|                                                                           |   | **Three Months Ended****December 31,** |   | **Six Months Ended****December 31,** |   |
|--------------------------------------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
|                                                                           |   | **2000**                                    |   | **2001**                                  |   | **2000** |   | **2001** |   |
|                                                                           |   |                                        |   |                                      |   |   |   |   |   |
| Net income (loss)                                                              |   | $                                           | 11,764 |                                      | $      | 367 |   | $ | 21,927 |   | $ | (2,616 | ) |
| Other comprehensive income:                                                    |   |                                        |   |                                      |   |   |   |   |   |
| Unrealized gain on investments, net of tax of $1,223  and $5,341, respectively |   | 1,915                                       |   | —                                    |   | 8,355 |   | — |   |
|                                                                           |   |                                        |   |                                      |   |   |   |   |   |
| Total comprehensive income                                                     |   | $                                           | 13,679 |                                      | $      | 367 |   | $ | 30,282 |   | $ | (2,616 | ) |

# ** **

# **7.  **SegmentInformation

 

Segmentinformation is as follows:

|                                    |   | **North America** |    | **Europe** |   | **Asia** |   | **Eliminations** |    | **Total** |   |
|-----------------------------------------|--------|-------------------|---------|------------|--------|----------|--------|------------------|---------|-----------|--------|
|                                    |   |              |    |       |   |     |   |             |    |      |   |
| **Six  Months Ended December 31, 2000** |   |              |    |       |   |     |   |             |    |      |   |
| Revenue, net                            |   | $                 | 122,733 |       | $      | 41,371   |   | $                | 42,990  |      | $      | — |   | $ | 207,094 |   |
| Transfers  between geographic segments  |   | 11,281            |    | 6,719      |   | 12,722   |   | (30,722          | )       | —    |   |
|                                    |   | $                 | 134,014 |       | $      | 48,090   |   | $                | 55,712  |      | $      | (30,722 | ) | $ | 207,094 |   |
| Net income                              |   | $                 | 6,737   |       | $      | 6,443    |   | $                | 8,747   |      | $      | — |   | $ | 21,927 |   |
|                                    |   |              |    |       |   |     |   |             |    |      |   |
| **June 30, 2001**                       |   |              |    |       |   |     |   |             |    |      |   |
| Identifiable  assets                    |   | $                 | 366,832 |       | $      | 113,944  |   | $                | 286,676 |      | $      | — |   | $ | 767,452 |   |
|                                    |   |              |    |       |   |     |   |             |    |      |   |
| **Six  Months Ended December 31, 2001** |   |              |    |       |   |     |   |             |    |      |   |
| Revenue, net                            |   | $                 | 82,963  |       | $      | 28,589   |   | $                | 52,534  |      | $      | — |   | $ | 164,086 |   |
| Transfers  between geographic segments  |   | 12,044            |    | 992        |   | 14,926   |   | (27,962          | )       | —    |   |
|                                    |   | $                 | 95,007  |       | $      | 29,581   |   | $                | 67,460  |      | $      | (27,962 | ) | $ | 164,086 |   |
| Net income  (loss)                      |   | $                 | (12,558 | )          | $      | (4,844   | )      | $                | 14,786  |      | $      | — |   | $ | (2,616 | ) |
|                                    |   |              |    |       |   |     |   |             |    |      |   |
| **December  31, 2001**                  |   |              |    |       |   |     |   |             |    |      |   |
| Identifiable  assets                    |   | $                 | 333,720 |       | $      | 112,143  |   | $                | 310,157 |      | $      | — |   | $ | 756,020 |   |

 

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

 

# **8.  **DeferredIncome Taxes

 

Duringthe current fiscal year, we have recorded deferred income tax benefitsassociated with our operating loss for the six months ended December 31, 2001.Realizability of all recorded tax assets is dependent primarily on futuretaxable income. We believe that sufficient future taxable income will begenerated in order to utilize the future tax benefits and that these tax assetsare realizable, although there can be no assurance that this will be the case.

 

# **9.  **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 DPI Reticle TechnologyCenter amounting to approximately $12,000. Such leases are generally for four years and provide for payments not inexcess of current market.

 

                We are subject to litigation inthe normal course of business. We believe the effect, if any, of an unfavorablesettlement of such litigation would not have a material adverse impact on ourfinancial position, results of operations, cash flows or liquidity.

 

                Our operations and our ownership of real property aresubject to various environmental laws and regulations that govern, among 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 and Company, or DuPont, has agreed to indemnifyus for any environmental contamination present on our manufacturing sites atJune 13, 1996, the date of our initial public offering, or present at any suchsite due to the generation, use, treatment, storage, release, emission,discharge or disposal of hazardous waste or hazardous materials before suchdate. The Environmental Protection Agency is reviewing a groundwater contaminationissue at our Danbury, Connecticut site under voluntary corrective action. Anysuch contamination is believed to be offsite or historical, and, if that is thecase, any environmental liabilities would be covered by the indemnificationagreement with DuPont.

 

**Item 2.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

                The following discussion andanalysis of the financial condition and results of operations should be read inconjunction with our consolidated financial statements and related notesthereto.  References to years are tofiscal years ended June 30.  Results forinterim periods are not necessarily indicative of results for the full year.

 

# **Overview**

 

                Based on worldwide sales, webelieve we are one of the largest photomask manufacturers in the world. We sellour products to over 300 customers in over 20 different countries. Essentiallyall of our sales are to customers in the semiconductor manufacturing industry.We manufacture a broad range of photomasks based on customer–supplieddesign data. We also manufacture photoblanks and pellicles, the principalcomponents of photomasks, primarily for internal consumption. We operateglobally with established manufacturing facilities in North America, Europe andAsia.

 

                We believe that over thelong-term demand for photomasks in the semiconductor manufacturing process willincrease due to the following trends:

 

 

### **•         Proliferationof semiconductor applications;**

### **•         Customizationof semiconductor designs;**

### **•         Increasingsemiconductor device complexity;**

### **•         Decreasingsize of semiconductor designs; and**

### **•         Shorterproduct lifecycles.**

 

 

                These trends have increased theimportance of photomask technology in the semiconductor manufacturing process.The current downturn in the semiconductor industry has decreased demand forphotomask products, especially at the trailing edge.

 

                Photomask manufacturingoperations are capital intensive. Accordingly, at a given threshold ofmanufacturing capacity, a high proportion of our operating costs are fixed andremain relatively constant as sales volume increases or decreases. To theextent that we have underutilized production capacity, operating profitincreases or decreases significantly as sales volume increases or decreases.

 

**Results of Operations**

 

*                Revenue,net.*  Revenue, net is comprisedprimarily of photomask revenues to semiconductor manufacturers.  Revenue, net decreased 18.7 percent from$106.6 million in the quarter ended December 31, 2000 to$86.6 million in the quarter ended December 31, 2001. Revenue, netdecreased 20.8 percent from $207.1 million in the six months endedDecember 31, 2000 to $164.1 million in the six months ended December 31,2001.  Revenue, net produced in NorthAmerica and Europe decreased from $122.7 million and $41.4 million,respectively, in the six months ended December 31, 2000 to $83.0 million and$28.6 million, respectively, in the six months ended December 31, 2001.  Revenue, net produced in Asia increased from$43.0 million in the six months ended December 31, 2000 to $52.5 million in thesix months ended December 31, 2001.  Wehave experienced a falloff in unit demand at the trailing edge from the quarterand six months ended December 31, 2000 to the quarter and six months endedDecember 31, 2001.  Additionally ourstrategic partners with internal photomask operations have significantlyreduced outsourcing, 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 during the quarter and six months ended December31, 2001 compared with the quarter and six months ended December 31, 2000,respectively.  We continue to experiencean increase in demand for advanced photomasks, those with design technology of0.18 micron and below, which for the quarter and six months ended December 31,2001, represented approximately 35 percent of our revenues. This shift indemand reflects what we believe to be a continued trend toward higherutilization of complex semiconductor devices with finer line widths.

                Forthe quarter ending March 31, 2002, we expect revenue to be in the range of$77.0 million to $87.0 million.

 

*                Cost of Goods Sold.*  Cost of goods sold consists of materials,labor, depreciation and overhead.  Costof goods sold decreased 2.1 percent from $68.9 million to $67.4 millionfor the three months ended December 31, 2000 and 2001, respectively, andincreased 0.6 percent from $133.9 million to $134.7 million for the six monthsended December 31, 2000 and 2001, respectively.  The decrease for the three months ended December 31, 2000 and2001 resulted primarily from decreased production volumes and benefits realizedfrom our cost reduction program and the overall efficiencies gained through theglobal reorganization of our manufacturing organization implemented in thequarter ended June 30, 2001.  Theincrease for the six months ended December 31, 2000 and 2001 resulted primarilyfrom increased depreciation costs of approximately $5.7 million partiallyoffset by benefits realized from our cost reduction program and the overallefficiencies gained through the global reorganization of our manufacturingorganization implemented in the quarter ended June 30, 2001.  Gross profit decreased from 35.4 percent inthe quarter ended December 31, 2000 to 22.2 percent for the quarter endedDecember 31, 2001 and from 35.4 percent in the six months ended December 31,2000 to 17.9 percent for the six months ended December 31, 2001.  The decrease in gross profit was due tolower production volumes and our high proportion of fixed costs.  We anticipate that, unless revenues increasein the short term, gross margin rates will continue to be under pressure due tothe effect of our fixed costs.

 

*                Selling,General and Administrative Expense.* Selling, general and administrative expense includes salaries of salesand administrative personnel, marketing expense, general and administrativeexpense and product distribution expense. Selling, general and administrativeexpense decreased 24.2 percent from $13.3 million for the quarter endedDecember 31, 2000 to $10.1 million for the quarter ended December 31,2001. Selling, general and administrative expense decreased 22.8 percent from$25.4 million for the six months ended December 31, 2000 to$19.6 million for the six months ended December 31, 2001.  The decreases for both the quarter and the sixmonths ended December 31, 2001 were primarily a result of the cost containmentprocedures implemented in the quarter ended June 30, 2001.  Selling, general and administrative expenseas a percentage of revenue, net decreased from 12.2 percent for the six monthsended December 31, 2000 to 11.9 percent for the six months ended December 31,2001 as a result of the cost containment procedures implemented in the quarterended June 30, 2001 partially offset by lower revenues.

 

*                Researchand Development Expense.*  Researchand development expense consists primarily of employee costs, cost of materialconsumed, depreciation, engineering related costs and our share of costs of theDPI Reticle Technology Center, or RTC, our joint venture with Advanced MicroDevices, Micron Technology and Motorola, whose primary focus is to developadvanced photomask technology and manufacture leading edge photomasks.  Research and development expense decreased13.3 percent from $7.9 million for the quarter ended December 31, 2000 to $6.9million for the quarter ended December 31, 2001. Research and developmentexpense decreased 14.5 percent from $15.6 million for the six months endedDecember 31, 2000 to $13.3 million for the six months ended December 31, 2001.The decreases in both the quarter and six months ended December 31, 2001 wereprimarily as a result of the cost containment procedures implemented in thequarter ended June 30, 2001 and synergies realized by virtue of the recentreorganization of our technical group. Research and development expense as a percentage of revenue, netincreased from 7.5 percent for the six months ended December 31, 2000 to 8.1percent for the six months ended December 31, 2001.  The increase was due primarily to lower revenues.  We continue to focus on research anddevelopment in all of our advanced production facilities and in the RTC. Webelieve that, because of our continued focus on research and development, wewill be able to help meet the future technology needs of the semiconductorindustry for advanced photomasks.

 

                *Gain* (*Loss) on Warrants, net*.During the quarter ended December 31, 2001, we realized gains of $0.9 millionon the sale of all remaining warrants. For the six months ended December 31, 2001, we realized losses of $0.2million.

 

*                OtherIncome, net.*  Other income,net includes interest income, interest expense and exchange gains andlosses.  Other income, net was$1.0 million for the quarter ended December 31, 2000 and $0.2 million forthe quarter ended December 31, 2001. The decrease is primarily due to nominally higher exchange lossescombined with lower interest income as a result of lower interest rates.  Other income, net was $1.3 million for thesix months ended December 31, 2000 and $1.5 million in the six months endedDecember 31, 2001.  The increase isprimarily due to lower interest expense as a result of the refinancing oflong-term debt in July 2000 partially offset by a nominal decrease in exchangegains.

*                Provisionfor (Benefit from) Income Taxes.* Our tax expense is based on the statutory rates in effect in thecountries in which we operate. Certain of our operations in Asia are subject tovarious tax holidays which expire in whole or in part during fiscal years 2003through 2010.  Certain tax holidays maybe extended if specific conditions are met. Our effective tax rate was 28 percent and 58 percent for the quartersended December 31, 2000 and 2001, respectively.  Our effective tax rate varied from the maximum statutory rateprimarily because of shifts in the geographic distribution of earnings andlosses between high and low tax rate countries.

 

                During the current fiscal year,we have recorded deferred income tax benefits associated with our operatingloss for the six months ended December 31, 2001. Realizability of all recordedtax assets is dependent primarily on future taxable income. We believe thatsufficient future taxable income will be generated in order to utilize thefuture tax benefits and that these tax assets are realizable, although therecan be no assurance that this will be the case.

 

                *Minority Interest in Income of JointVentures.*  The minorityinterest impact of our joint ventures was $1.1 million for the quarter endedDecember 31, 2000 and $2.4 million for the quarter ended December 31,2001.  The minority interest impact ofour joint ventures was $2.5 million for the six months ended December 31, 2000and $4.0 million for the six months ended December 31, 2001.  Minority interest income reflects ourpartners’ share of the joint venture operations.  Minority interest income increased primarily because of higherrevenue volumes and improved profitability of our joint ventures in Asia.

 

## **Liquidity and CapitalResources**

 

                Our working capital was $139.2million at June 30, 2001 and $92.3 million at December 31, 2001. Thedecrease in working capital was primarily due to a reduction of cash and cashequivalents of $29.7 million, a decrease in current deferred income tax assetsof $8.0 million, net additional short-term borrowings of $4.9 million andincreased other current liabilities of $5.1 million.  Cash and cash equivalents were $138.6 million at June 30,2001 and $108.9 million at December 31, 2001. Cash provided by operating activities of $28.1 million for the sixmonths ended December 31, 2001 was principally composed of adjustments to thenet loss of $2.6 million for depreciation and amortization of $44.7 offset bynet reductions of current assets and liabilities of approximately $13.6million.

 

                Cash used in investingactivities was $55.3 million and $64.4 million for the six months endedDecember 31, 2000 and 2001, respectively. Cash used for capital expenditures was $55.3 million and$68.6 million for the six months ended December 31, 2000 and 2001, respectively.  Management expects capital expenditures forthe remainder of fiscal year 2002 to be approximately $35.0 million with afuture capital expenditure rate of spending of approximately 20 to 35 percentof sales.  Capital expenditures havebeen and will be used primarily to advance our technical capability.  In addition, we may in the future pursueadditional acquisitions of businesses, products and technologies, or enter intoother joint venture arrangements that could complement or expand our business.  Any material acquisition or joint venture couldresult in a decrease to our working capital depending on the amount, timing andnature of the consideration to be paid.

 

                Cash provided by financing activities was$52.1 million and $6.8 million for the six months ended December 31, 2000 and 2001, respectively.  For the sixmonths ended December 31, 2001, netshort-term borrowings increased $4.9 million primarily as a result of workingcapital requirements in Asia. Additionally, our employees purchased $1.7 million of common stock underour employee plans.

 

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

 

**Other****Matters**

 

                In July 2001, the FinancialAccounting Standards Board, or FASB, issued Statement of Financial AccountingStandard, or 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.  We are currently evaluatingthe impact of SFAS No. 142 on our future results of operations and financialposition.  We must adopt SFAS No. 142 byJuly 1, 2002.

 

                In June 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143supersedes 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 theretirement of long-lived assets that result from the acquisition, construction,development and/or the normal operation of a long-lived asset.  We are currently evaluating the impact ofSFAS No. 143 on our future results of operations and financial position.  We must adopt SFAS No. 143 by July 1, 2002.

 

In October 2001, theFASB 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 evaluating the impact of SFAS No. 144 on ourfuture results of operations and financial position.  We must adopt SFAS No. 144 by July 1, 2002.

 

## **ForwardLooking Statements**

### ** **

### **                Thisreport contains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934, that involve a number of risks and uncertainties.  Such forward-looking statements may concerngrowth and future operating results, forecasts, projections, pricing pressures,potential acquisitions and joint ventures, new manufacturing facilities,capital expenditures, the global economic climate, management change, newproducts and product enhancements, the future importance of photomasktechnology, the demand for products, competitive factors, research anddevelopment activities and expenditures, strategic relationships with thirdparties, liquidity, financing and the company’s strategy. Such forward-lookingstatements are generally accompanied by words such as “intend,” “may,” “plan,”“expect,” “believe,” “should,” “would,” “could,” “anticipate,” or other wordsthat convey uncertainty of future events or outcomes.  Although we believe that the expectations reflected in suchforward-looking statements are reasonable, such forward-looking statements aresubject to risks and uncertainties that could cause actual results to differmaterially from these expectations. Such risks and uncertainties include, without limitation, the following:**

### ** **

| **•** |   | **The  current downturn in the semiconductor industry could lead to a decrease in  the demand for our photomask products.   The semiconductor industry is highly cyclical and has been subject to  significant economic downturns at various times**; |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** |   | **Our financial results may vary significantly from quarter  to quarter or we may fail to meet investor expectations, which would  negatively impact the price of our stock;**                                                                             |
| **•** |   | **The  photomask industry is capital intensive.   We may be unable to fund significant capital expenditures to expand  our operations and to enhance our manufacturing capability in order to keep  pace with rapidly changing technologies;**        |
| **•** |   | **We  have significant fixed costs.  Our  operating results could be adversely affected by under-utilized production  capacity;**                                                                                                                     |

###  

| **•** |   | **Macroeconomics  effects on the semiconductor industry;**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** |   | **Our  company must be able to respond to rapid technology changes within the  semiconductor industry.  We may be  unable to enhance our existing products and to develop and manufacture new  products and upgrades with improved capabilities to satisfy anticipated  demand for more technologically advanced photomasks;**                                                                                                                                                                                                                                      |
| **•** |   | **We  may not remain competitive and increased competition could seriously harm our  business;**                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **•** |   | **If  a fundamental change in our business were to occur, we cannot assure you that  we will have sufficient funds to pay the redemption price for all the notes  tendered by the holders of the subordinated convertible notes, although DuPont  would be required to pay the redemption price under its guarantee.  In that case, our failure to redeem  tendered notes 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 may enter into from time to time.;** |
| **•** |   | **E.I.  duPont de Nemours & Company has influence on all stockholder votes;**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **•** |   | **Our  success depends, in part, upon key managerial, engineering and technical  personnel as well as our ability to continue to attract and retain additional  personnel and integrate new personnel into key positions; and**                                                                                                                                                                                                                                                                                                                                          |
| **•** |   | **Other  risks indicated in our other filings with the Securities and Exchange  Commission, including but not limited to those factors which are fully discussed under the caption “Risk Factors” in  our Annual Report on Form 10-K filed with the SEC on September 17, 2001 and  Form 10-Q dated October 29, 2001.**                                                                                                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

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

 

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

 

**Item 3.**

 

# **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

# ** **

# **                Market risks relating to ouroperations result primarily from changes in interest rates and changes inforeign currency exchange rates.  As ofDecember 31, 2001, we had $100.0 million in non-interest bearing convertiblenotes and approximately $14.5 million in interest bearing debt of whichapproximately $11.3 million was short-term debt. As a result, changes in theinterest rate market would change the estimated fair value of our long-termdebt. We believe that a 10 percent change in the interest rate would not have amaterial effect on our business, financial condition, results of operations orcash flows.**

# ** **

# **                *Foreign Currency Exposure*.   Non-U.S. operations are subject to certainrisks inherent in conducting business abroad, including price and currencyexchange controls, fluctuation in the relative value of currencies andrestrictive governmental actions. Changes in the relative value of currenciesoccur from time to time and may, in certain instances, have a material effecton our results of operations.  Anyexchange rate fluctuations can affect our margins since we may have imbalancesbetween some foreign currency denominated revenues and expenses, and we may beunable to hedge them completely.**  Our financial statements reflect remeasurement of itemsdenominated in non-U.S. currencies to U.S. dollars, our functional currency.Exchange gains or losses are included in income in the period in which theyoccur. We monitor our exchange rate exposure and attempt to reduce suchexposure by hedging. We have entered into forward contracts in currencies ofthe countries in which we conduct business in order to reduce suchexposure.  At December 31, 2001, thefair value of our forward foreign exchange contracts outstanding was $19.2million with an unrealized gain recorded in the consolidated income statementof $0.1 million as of and during the quarter and six months ended December 31,2001. These instruments may involve elements of credit and market risk inexcess of the amounts recognized in the financial statements.  We monitor our positions and the creditquality of counter-parties, consisting primarily of major financialinstitutions, and do not anticipate nonperformance by any counter-party.  There can be no assurance that such forwardcontracts or any other hedging activity will be available or adequate toeliminate, or even mitigate, the impact of our exchange rate exposure. Therecan be no assurance that such risks will not have a material adverse impact onour liquidity and results of operations in the future.

 

**PART II**

 

## **Item1. Legal Proceedings**

 

                We are not currently involved in any material legalproceedings.

 

**Item 2. Changes in Securities**

 

**               **None

 

**Item 3. Defaults Upon Senior Securities**

 

                Notapplicable

 

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

 

                                                The Company’s Annual Meeting of Stockholderswas held October 30, 2001 (the “Annual Meeting”).  At the Annual Meeting, (i) the Company elected Class II directorsto the Board of Directors to serve until our 2004 annual meeting or until theirsuccessors are elected and qualified, subject to their death, resignation orremoval, (ii) the selection of PricewaterhouseCoopers LLP as the Company’sindependent accountants for the year ended June 30, 2002 was ratified and (iii)the adoption of an amendment to our 1997 stock option and restricted stock planto increase the number of shares of our common stock authorized for issuanceunder the plan by 2,500,000 shares was ratified.  Votes cast at the Annual Meeting are as follows:

 

| **(i)** | **Election of Class II Directiors** |   | **FOR**    |   | **WITHHELD** |   |
|---------|-------------------------------------|--------|------------|--------|--------------|--------|
|    |                                |   |       |   |         |   |
|    | Preston M. Adcox                    |   | 11,793,319 |   | 4,102,691    |   |
|    | Robert J. Boehlke                   |   | 13,360,070 |   | 2,535,940    |   |
|    | Isabella C.M. Cunningham            |   | 13,360,001 |   | 2,536,009    |   |
|    | Susan Vladuchick Sam                |   | 13,359,760 |   | 2,536,250    |   |

 

| **(ii)** | **Ratification of the selection of  PricewaterhouseCoopers LLP** |   |
|----------|------------------------------------------------------------------|--------|

 

|   |   | **FOR**    |   | **AGAINST** |   | **ABSTAIN** |   | **NON-VOTE** |   |
|--------|--------|------------|--------|-------------|--------|-------------|--------|--------------|--------|
|   |   | 15,691,529 |   | 202,966     |   | 1,515       |   | 0            |   |

 

| **(iii)** | **Adoption of  the amendment of our 1997 stock option and restricted stock plan** |   |
|-----------|-----------------------------------------------------------------------------------|--------|

 

|   |   | **FOR**   |   | **AGAINST** |   | **ABSTAIN** |   | **NON-VOTE** |   |
|--------|--------|-----------|--------|-------------|--------|-------------|--------|--------------|--------|
|   |   | 7,929,128 |   | 5,592,489   |   | 140,918     |   | 2,233,475    |   |

 

**Item 5. OtherInformation**

 

                None

 

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

 

                (A) Exhibits

 

                                (11)Statement re Earnings Per Share Computation

 

                (B) Reportson Form 8–K

 

                                None

 

**SIGNATURES**

 

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

 
|                                                                                                              | Dupont Photomasks, Inc. |
|-------------------------------------------------------------------------------------------------------------------|------------------------------|
|                                                                                                              | (Registrant)                 |
|                                                                                                              |                         |   |
|                 Date: February 7, 2002 |                         | /s/ Satish Rishi |
|                                                                                                              |                         | Satish Rishi*Executive Vice President — Finance**and Chief Financial Officer**(Principal Financial Officer)* |
|                                                                                                              |                         |   |