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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-20839
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DUPONT PHOTOMASKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2238819
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
100 TEXAS AVENUE
ROUND ROCK, TEXAS 78664
(Address of principal executive offices)
Registrant's telephone number, including area code: 512-388-8859
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the NASDAQ National Market):
Title of Each Class
Common stock ($.01 par value)
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of voting stock held by nonaffiliates of the
registrant (excludes outstanding shares beneficially owned by directors and
officers and shares held by E.I. du Pont de Nemours and Company) as of September
17, 1996, was approximately $121 million. As of such date, 15,100,000 shares of
the registrant's common stock, $.01 par value, were outstanding.
Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):
INCORPORATED BY
REFERENCE IN PART NO.
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The Company's Proxy Statement, dated September 26, 1996, filed in connection with the Annual
Meeting of Stockholders to be held on October 28, 1996..................................... III
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DUPONT PHOTOMASKS, INC.
The terms "DPI" or the "Company" as used herein refer to DuPont Photomasks,
Inc. and its consolidated subsidiaries, as the context may indicate.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................................ 3
Item 2. Properties.......................................................................... 13
Item 3. Legal Proceedings................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................. 15
Executive Officers of the Company................................................... 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................................... 16
Item 6. Selected Financial Data............................................................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 17
Item 8. Financial Statements and Supplementary Data......................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Disclosure.......... 23
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 23
Item 11. Executive Compensation.............................................................. 23
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 23
Item 13. Certain Relationships and Related Transactions...................................... 23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 24
Signatures.......................................................................... 25
NOTE ON INCORPORATION BY REFERENCE
Throughout this report, various information and data are incorporated by
reference to portions of the Company's 1996 Proxy Statement. Any reference in
this report to disclosures in the Company's 1996 Proxy Statement shall
constitute incorporation by reference of that specific material into this Form
10-K.
2
The discussion in this document contains analysis or trends and other forward
looking statements within the meaning of Section of 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements involve management assumptions and are subject to
risks and uncertainties, including those discussed under "Business--Risk
Factors" below.
PART I
ITEM 1. BUSINESS
THE COMPANY
Prior to the Company's initial public offering on June 13, 1996 (the
"Initial Public Offering"), the Company was a wholly-owned subsidiary of E. I.
du Pont de Nemours and Company ("DuPont"). DuPont entered the photomask market
in 1986. DuPont's strategy focused on establishing a global presence that would
enable it to respond to the needs of multinational semiconductor manufacturers.
As part of this strategy, DuPont (i) purchased assets of numerous captive
photomask operations, (ii) acquired merchant photomask companies, (iii)
constructed its own "greenfield" manufacturing sites in Round Rock, Texas and
Ichon, Republic of Korea ("Korea"), and (iv) established a majority owned joint
venture in Shanghai, Peoples Republic of China ("China") to construct a new
photomask manufacturing facility.
Based on worldwide sales, the Company is one of the largest photomask
manufacturers in the world. The Company sells its products to approximately 200
customers in 20 different countries. Essentially all of the Company's sales are
to customers in the semiconductor manufacturing industry.
Photomasks are high-purity quartz or glass plates containing precision
images of integrated circuits and are used as masters by semiconductor
manufacturers to optically transfer these images onto semiconductor wafers. The
Company manufactures a broad range of photomasks based on customer-supplied
design data. The Company also manufacturers photoblanks and pellicles, the
principal components of photomasks, principally for internal consumption. The
Company operates globally with established manufacturing facilities in North
America, Europe, and Asia.
Prior to the Initial Public Offering, the Company was reincorporated in
Delaware and non-U. S. operations were realigned so that these operations would
be conducted by wholly-owned subsidiaries of DPI. Upon completion of the Initial
Public Offering, DuPont, through its wholly-owned subsidiary DuPont Chemical and
Energy Operations, Inc. ("DCEO"), owned 10,500,000 shares (approximately 69.5%)
of the Company's common stock. As a result, DuPont has sufficient voting power
to control the direction and policies of the Company, including any merger,
consolidation or sale of all or substantially all of the assets of the Company,
to elect the members of the Board of Directors of the Company, and to prevent or
cause a change in control of the Company.
Historically, the Company has derived certain tangible and intangible
benefits from being a subsidiary of DuPont. Upon completion of the Initial
Public Offering, the relationship between the Company and DuPont has been
defined pursuant to several transitional agreements. These agreements will
continue to provide the Company with certain benefits for a limited time.
INDUSTRY BACKGROUND
The market for photomasks is primarily comprised of semiconductor
manufacturers in North America, Europe and Asia. Growth in the photomask market
has not always correlated with increases in semiconductor sales, since demand
for photomasks is driven principally by new semiconductor designs rather than
sales. While growth in semiconductor manufacturing and new semiconductor designs
generated demand for new photomasks from the mid-1980's through the early
1990's, the Company believes that this underlying growth was offset by
semiconductor and photomask design and manufacturing efficiencies. First,
cost-effective and powerful workstations and CAD tools enabled integrated
circuit designers to perfect semiconductor designs through computer simulation,
thereby significantly reducing the need to
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produce numerous iterations of photomasks. Second, ultra-thin protective covers
called pellicles began to be widely used in the mid-1980's to protect photomask
surfaces from contamination, thereby prolonging the life of photomasks. Third,
the need for backup photomask sets was significantly reduced by improved
production cycle time that enabled lead times for replacement photomasks to fall
from several days to 24 hours.
Photomask manufacturers increased production capacity significantly in the
mid-1980's, failing to anticipate the offsetting effect of these efficiencies on
the growing underlying demand for new photomasks. The resulting excess capacity
created a competitive environment that led to depressed prices. The excess
capacity was further exacerbated by the advent of reduction photolithography in
the mid-1980's. Reduction photolithography, which allowed the use of photomasks
with features five times larger than the image being etched onto the
semiconductor wafer, resulted in a significant relaxation of photomask
specifications and, consequently, extended the life of existing photomask
technology and manufacturing facilities.
Partly as a result of the excess capacity and depressed prices caused by the
factors described above, the merchant photomask market in the United States and
Europe began in 1985 to consolidate as a number of merchant suppliers acquired
other merchant photomask manufacturers. Concurrent with this consolidation
trend, semiconductor manufacturers began to divest their captive photomask
operations by selling such operations to independent photomask merchants.
Consequently, the share of the market served by the remaining independent
merchants has increased significantly. The Company believes that the
consolidation of photomask manufacturers was primarily caused by the significant
capital requirements and competitive pricing pressures of the photomask market
as a whole as well as the poor financial performance of some merchant suppliers.
The number of significant independent manufacturers in North America and Europe
decreased from approximately 14 in the mid-1980's to 5 in 1994. The Company
believes that, in addition to excess capacity and competitive pricing, the other
cause of the divestiture trend was the emergence of reliable independent
photomask manufacturers, such as the Company, enabling semiconductor
manufacturers to divest or limit new investment in their photomask facilities.
The Company believes that the impact of CAD efficiencies, mask
pelliclization, reduced cycle time and reduction photolithography technology
that negatively affected photomask industry growth throughout the mid-1980's and
the early 1990's has largely dissipated, and consequently, prices for photomasks
have stabilized. As a result, the Company expects that growth in semiconductor
design activity and demand will drive current photomask industry growth without
the offsetting influences that previously existed. The following factors are
expected to be particularly important:
CUSTOMIZATION OF SEMICONDUCTOR DESIGNS. Increasing demand for
semiconductors including application specific integrated circuits (ASICs),
application specific standard products (ASSPs), embedded microcontrollers and a
growing variety of memory products has generated demand for photomasks as each
new type of semiconductor device requires additional new photomasks.
INCREASING DEVICE COMPLEXITY. As the complexity of semiconductor devices
has increased in response to continued efforts to improve the functionality of
these devices through greater transistor densities and smaller feature sizes,
the number of photomasks used in the manufacture of a single integrated circuit
has also increased. For example, the number of photomasks typically required for
the manufacture of microprocessors in 1991 was 14 as compared to 22 photomasks
for the current most advanced generation of microprocessors.
DECREASING SIZE OF SEMICONDUCTOR DESIGNS. The semiconductor industry's
growth is driven by its ability to produce smaller and more powerful
semiconductor chips at lower costs. Development of increasingly small design
features is likely to generate increased demand for high-value, advanced
photomasks that can accurately and reliably replicate intricate design features.
4
NEW WAFER FABRICATION FACILITIES. Semiconductor manufacturers have
announced plans to increase investment in new state-of-the-art wafer fabrication
facilities and upgrades of existing facilities. New wafer fabrication facilities
are likely to utilize improved lithography equipment which typically increases
demand for technologically advanced photomasks.
PROLIFERATION OF SEMICONDUCTOR APPLICATIONS. Semiconductor devices of all
types are continuing to proliferate into new products, including cellular
telephones, pagers, automobiles, medical products, household appliances and
other electronic consumer products. In addition, the demand for semiconductor
devices from traditional markets such as personal computers is growing
significantly as semiconductor content in electronic systems increases and as
personal computers expand into new market segments such as home use.
The Company believes that certain of these trends are changing the nature of
the photomask industry and its importance in the semiconductor manufacturing
process. Photomasks are reemerging as a critical and enabling technology in the
semiconductor manufacturing process, and the photomask market is expected to
experience greater growth as a result. Semiconductor design rules have recently
advanced so that even "5X" reduction ratios require photomasks with submicron
features. Future semiconductor devices are expected to require features below
the resolution limit of existing photolithography equipment. Advanced photomask
technologies such as phase shift and optical proximity correction masks can
extend the optical resolution of existing photolithography equipment, thereby
delaying the significant investment required for new semiconductor manufacturing
equipment. In addition, as semiconductor line widths become as small as the
wavelength of the illumination sources in optical lithography, the semiconductor
manufacturing process becomes increasingly dependent on high-precision
photomasks with tighter specifications and tolerances. Future generations of
wafer lithography equipment are expected to increase the need for high precision
photomasks, thereby further increasing demand for advanced photomasks that have
tighter specifications. All of these changes in the semiconductor industry are
increasing the already important role of photomasks and driving the need for the
continuing development of advanced photomasks. See "Risk Factors."
PRODUCTS AND TECHNOLOGY
PHOTOMASKS
Photomasks are high-purity quartz or glass plates containing precision,
microscopic images of integrated circuits that are used as masters (equivalent
to "negatives" in a photographic process) to optically transfer such microscopic
images of circuit patterns onto semiconductor wafers during the fabrication of
semiconductor integrated circuits and discrete devices. In producing a
semiconductor, a photomask is usually placed in a photolithography tool, called
a stepper, to make numerous reproductions of the pattern image on semiconductor
wafers. This reproduction is typically accomplished by transferring light
through the photomask onto a photoresist that was spin-coated onto the surface
of the semiconductor wafer. The areas of the photoresist that have been exposed
to light are then dissolved by chemical developers and subjected to further
processing, such as etching, ion implantation and metal deposition. Successive
steps of lithography, deposition and processing gradually create the multiple
layers of conducting, semiconducting and insulating patterns that make up the
millions of transistors found in a modern semiconductor device.
Photomasks are manufactured by the Company in accordance with semiconductor
design data provided on a confidential basis by its customers. The final design
of each integrated circuit results in a set of precise individual circuit
patterns to be imaged onto a series of typically 10 to 22 separate photomask
levels. The complete set of patterned photomasks is required to manufacture the
customer's integrated circuit design. Upon receipt of a customer's circuit
design, the Company converts the design to pattern data, which are used to
control an electron or laser beam that exposes the circuit pattern onto a thin
layer of photosensitive polymer, called a photoresist, covering the opaque
chrome layer of the photoblank. The exposed areas are dissolved by chemical
developers, and the thin chrome layer of the photoblank is etched
5
to replicate the customer design pattern on the photomask. Subsequently, the
photomask is inspected for defects, its critical dimensions are confirmed and
any defects are repaired. Pellicles are then mounted onto the masks, and the
masks are delivered to the customer.
The Company manufactures a broad range of photomasks for varying customer
applications, including applications requiring the use of leading edge
photomasks. The Company manufactures these products using multiple production
techniques, including electron beam and laser exposure as well as lower cost
optical exposure techniques.
PHOTOBLANKS AND PELLICLES
Photomasks are manufactured from photoblanks, which are highly polished
quartz or glass plates coated with ultra-thin layers of chrome and photoresist.
The photomask is protected from particle contamination by an ultra-thin,
frame-mounted transparent film, called a pellicle. The pellicle when mounted on
the photomask creates a sealed contamination-free environment for the photomask
pattern. Because the Company is the only photomask manufacturer that also
manufactures and markets both photoblanks and pellicles, it believes that it has
a competitive advantage in managing the supply, quality and cost of its
principal component materials. Photoblanks and pellicles constitute
approximately 80% of the materials costs associated with photomask production.
Between 70% and 80% of the Company's demand for these critical components is
internally supplied.
The production of photoblanks requires ultra pure chrome deposition on
highly polished and extremely flat quartz or glass substrates. The Company
purchases virgin quartz substrates primarily from Shin Etsu Handotai Co., which
is the world's largest producer of these substrates. In addition, the Company
recycles quartz substrates which have been repolished in order to reduce cost
and dependence on external suppliers. The Company acquires between 20% and 30%
of the photoblanks it uses to manufacture photomasks from Hoya Corp. and others
that serve as a backup to the Company's own production. The quality and
properties of photoblanks strongly affect the yield and quality of photomasks.
Pellicles are produced from nitrocellulose or other polymer solutions that
the Company prepares or purchases. The ultra thin film is typically precision
coated with an anti-reflective layer to improve optical performance
characteristics. Material properties and manufacturing conditions are carefully
tuned to match the pellicle's light transmission properties with the
requirements of the specific semiconductor lithography application. The Company
has introduced proprietary pellicle films that are specifically designed to
withstand the powerful DUV radiation found in the emerging generation of
advanced steppers. In addition, the Company is developing contamination
resistant features for the pellicle frame assembly. The Company holds five
patents covering various aspects of pellicle technology, with two patents
pending. To assure a backup supply, the Company purchases approximately 20% to
30% of the pellicles it uses to manufacture photomasks from several other
suppliers. See "Risk Factors."
GLOBAL MANUFACTURING AND OPERATIONS
Since 1991, DPI has operated globally with established manufacturing
facilities in North America, Europe and Asia. In North America, the Company
operates photomask manufacturing facilities in Round Rock, Texas; Santa Clara,
California; and Kokomo, Indiana. In Europe, the Company's manufacturing
facilities are located in Rousset, France and Hamburg, Germany, and it is
planning to construct a third photomask manufacturing facility on a "greenfield"
site near Glasgow, Scotland. In Asia, the Company currently operates a
manufacturing facility in Ichon, Korea and is participating in the construction
of a facility with its joint venture partner in Shanghai, China. The Company
believes that its global presence is important for meeting the supply needs of
multi-national customers as it facilitates the Company's ability to supply
quality products to its customers' worldwide locations on a timely basis. Close
proximity to customers is important because of rapid delivery requirements and
the need for frequent personal interactions. As a result, each manufacturing
facility primarily supplies local semiconductor manufacturers.
6
Moreover, each of the Company's manufacturing facilities is connected by a data
transmission network, which allows these facilities to transfer confidential
customer design data and manufacturing instructions rapidly and coordinate
manufacturing responsibility with the Company's other facilities. By being able
to transfer information throughout the world with this network, the Company is
able to optimize capacity utilization, thereby lowering production costs while
providing effective customer service on a local level. In addition, a trend is
developing whereby semiconductor manufacturers in certain regions are beginning
to specialize in certain technologies. For example, semiconductor manufacturers
in Korea are rapidly assuming global leadership in DRAMS. Because of its global
network, the Company believes that it is well positioned to flexibly manage its
capacity, enabling it to use all its manufacturing facilities in order to take
advantage of regional opportunities.
Approximately 25% of the Company's sales in fiscal 1996 were in Europe.
Through its manufacturing facilities in Germany and France, the Company supplies
photomasks to the major European semiconductor manufacturers. In addition,
through its planned facility in Glasgow, Scotland, the Company will be able to
serve numerous semiconductor customers of DPI that have established, or are
planning to establish, manufacturing operations in the United Kingdom and the
Republic of Ireland. In addition, this facility will also serve customers in
other European countries.
The Company's photomask sales in Asia have grown approximately 79% from
fiscal 1994 to fiscal 1996. The Company supplies photomasks to semiconductor
manufacturers principally in Korea through its facility in Ichon, Korea. This
facility also serves customers located in Japan, Hong Kong, Taiwan and
Singapore. In addition, the Company is expanding its Asian operations to China.
As part of a joint venture, the Company is participating in the construction of
a manufacturing facility, which it expects will begin producing photomasks in
fiscal 1997. The Company is a majority owner of this joint venture.
The photomask market in Japan is estimated to have been approximately 50% of
the worldwide market over the last five years. The Japanese market is
predominantly served by captive Japanese suppliers and three significant local
independent suppliers. The Company is beginning to serve semiconductor
manufacturers in Japan through its facility in Ichon, Korea.
Each of the Company's manufacturing sites is ISO-9002 qualified. The Company
manufactures photomasks in clean rooms designed to provide a contamination-free,
temperature and humidity controlled environment. These clean rooms are similar
to those used in the manufacture of semiconductors. The Company's historical
emphasis on product research and development has carried over to process
technology and has resulted in the development of production facilities equipped
with state-of-the-art manufacturing equipment. See "Risk Factors."
CUSTOMERS
The Company is the principal photomask supplier of many of the leading
global semiconductor manufacturers. Essentially, all the Company's sales are to
customers in the semiconductor manufacturing industry.
In fiscal 1996, the Company's two largest customers, Motorola and
SGS-Thomson, in the aggregate, accounted for approximately 25% of the Company's
sales and individually each accounted for over 10% of the Company's sales. The
Company's largest 10 customers, in the aggregate, accounted for more than half
of sales.
The Company has entered into multi-year, non-exclusive supply agreements
with some of its customers, including Lucent Technologies, Motorola, Philips and
SGS-Thomson. Each agreement is separately negotiated and therefore specific
terms vary. See Note 2 to the Notes to Financial Statements. See "Risk Factors."
7
COMPETITION
The photomask industry is highly competitive, and most of the Company's
customers utilize more than one photomask supplier. Because of its global
presence, the Company competes with different independent manufacturers in each
local geographic region in which it operates. In North America, the Company
competes primarily with Photronics, Inc. ("Photronics") and, to a lesser extent,
with other smaller independent photomask suppliers. In Europe, the Company
competes primarily with Compugraphics International Limited and Photronics and
in Asia, the Company primarily competes with Dai Nippon Printing, Hoya Corp.,
Taiwan Mask Corporation and Toppan. The Company expects that some of its
competitors will expand operations to international markets in order to better
meet the needs of international customers and take advantage of new growth
opportunities. For example, Photronics has, among other undertakings, made
certain acquisitions in Europe and has recently opened a manufacturing facility
in Singapore. The Company expects to face continued competition from these and
other suppliers in the future, including P.K. Ltd. (formerly Anam S&T Co. Ltd.)
in Korea.
On time delivery of defect-free photomasks at competitive prices
historically has been the important competitive factor in the industry. The
Company believes that with the increasing importance of leading edge photomask
technology in the semiconductor manufacturing process, the ability to
manufacture these advanced photomasks will also be an important competitive
factor. The Company also believes that its ability to develop the most advanced
photomasks provides a more cost effective alternative to the formation of
captive operations, which require significant capital investments and operating
costs to develop the requisite manufacturing expertise. See "Risk Factors."
RESEARCH AND DEVELOPMENT
The photomask industry has been and is expected to continue to be
characterized by rapid technological change. In order to remain competitive, the
Company expects that it will be required to anticipate, respond to and utilize
changing technologies.
The Company intends to continue to invest in research and development in
order to ensure its technological capabilities. The Company is focusing its
research and development in three areas: (i) the enhancement of existing
products by improving manufacturing techniques and technologies; (ii) the
development of leading edge photomask products such as phase shift masks, masks
with optical proximity correction and advanced specification masks; and (iii)
the development of advanced materials needed for the manufacture of leading edge
photomasks. In addition, the Company is currently negotiating an agreement with
three other companies that, if consummated, would result in the formation of a
joint venture to develop advanced photomask fabrication technologies.
The Company has developed advanced photomask products for customers using
leading edge lithography technologies in three categories: (i) masks with
extremely tight specifications, (ii) phase shift masks and (iii) masks with
optical proximity correction. Advanced specification photomasks permit the
customer to use a variety of lithography technologies since the high quality and
tight tolerances of the photomask permit greater flexibility in the
semiconductor manufacturing process. Phase shift masks and masks with optical
proximity correction typically require extremely tight specifications coupled
with additional unique characteristics. Phase shift masks are photomasks that
alter the phase of the light passing through the photomask permitting improved
depth of focus and resolution on the wafer. Optical proximity correction masks
are photomasks with submicron features that help minimize optical distortions on
the wafer and therefore permit improved image fidelity. The demand for these
products has grown during the past two years as customers search for cost
effective, less capital intensive methods for improving current semiconductor
fabrication yields and shrinking feature sizes. All three of these product
categories provide opportunities for semiconductor manufacturers to produce more
advanced products with existing lithography equipment. Therefore, these advanced
photomasks are expected by the Company to enable semiconductor manufacturers to
delay significant capital investment in new generation steppers.
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The Company is enhancing its existing products through worldwide integrated
engineering, capital investment for improved capability and beta testing of
leading edge equipment. Product enhancements in the past led to the development
of technology currently used to produce photomasks compatible with 0.5 micron
semiconductor lithography. This technology is providing the platform for the
development of manufacturing technologies consistent with 0.35 micron
semiconductor lithography at high yields and rapid cycle time. The Company has
been a leader in the development of leading edge photomasks products, such as
phase shift, optical proximity and advanced specification masks. In addition to
its internal development efforts, the Company has participated in several
development programs supported by SEMATECH Inc. in the United States and the
Joint European Submicron Strategic Initiative in Europe with respect to advanced
products. The Company's research and development of photomask component
materials is also responding to the technology demands of semiconductor
manufacturers through the development of improved materials needed to produce
advanced photomasks. Recent examples of such materials developments include low
stress chrome blanks, pellicles with contamination-control features and
attenuated embedded chrome blanks for phase shift masks.
The Company has established a research and development group that consists
of trained and experienced personnel. The capabilities of this group have been
augmented by its access to DuPont's corporate science and engineering resources.
There are certain elements of DuPont's material science expertise and its
analytical capabilities that are relevant to photomask research and development.
The Company will continue to have access to DuPont's corporate science and
engineering for a period of five years pursuant to a research, development and
consulting agreement between the Company and DuPont, which will provide the
Company with a supplement to its core research and development program. See
"Risk Factors."
PATENTS, COPYRIGHTS, TRADEMARKS AND LICENSES
INTELLECTUAL PROPERTY
The Company believes that the success of its business depends primarily on
its proprietary technology, information and processes and know-how, rather than
on patents or trademarks. Much of the Company's proprietary information and
technology relating to manufacturing processes is not patented and may not be
patentable. Certain aspects of the Company's photoblanks and pellicles
technologies are, however, protected by ten patents or patent applications. They
include product patents for certain types of attenuated, embedded phase shift
blanks and DUV pellicles. While the Company considers its patents to be valuable
assets, it does not believe that its competitive position is dependent on patent
protection or that its operations are dependent on any individual patent. The
Company believes instead that the success of its business depends primarily on
its ability to maintain lead time in developing its proprietary technology,
information and processes and know-how. Nevertheless, the Company attempts to
protect its intellectual property rights with respect to its products and
manufacturing processes through patents, trademarks and trade secrets when
appropriate as part of its ongoing research, development and manufacturing
activities. The Company also relies on non-disclosure agreements with employees
and vendors to protect its proprietary processes.
CORPORATE TRADENAME AND TRADEMARK AGREEMENT
The Company and DuPont have entered into a corporate tradename and trademark
agreement dated as of May 16, 1996 (the "Corporate Tradename Agreement"),
whereby DuPont will license to the Company (i) use of the tradename "DuPont" as
part of the Company's name and (ii) use of the trademark DuPont in Oval as part
of the Company's corporate logotype. DuPont may terminate the Corporate
Tradename Agreement upon 90 days written notice in the event that: (i) DuPont
and/or its affiliates cease to hold 51% of the total outstanding Common Stock of
DPI; (ii) DPI purports to assign or otherwise transfer the Corporate Tradename
Agreement without DuPont's written consent; or (iii) DPI uses the tradename
"DuPont" other than under the terms of the Corporate Tradename Agreement. In
addition,
9
DuPont may terminate the Corporate Tradename Agreement upon 90 days written
notice for any reason after January 1, 2000. Upon termination of the Corporate
Tradename Agreement, DPI will be obligated to: (i) change its name so that the
tradename "DuPont" is omitted therefrom; (ii) cease to use the tradename
"DuPont" or any similar tradename as part of its corporate name or in any other
manner whatsoever; and (iii) cease to use the DuPont in Oval trademark. See
"Risk Factors."
EMPLOYEES
As of June 30, 1996, the Company had approximately 1,225 employees
worldwide, of whom approximately 10% have engineering or technical degrees.
The Company has no employees who are represented by a union. The Company's
German subsidiary, however, is subject to German law, which binds it, as a
member of a selected industry group, to agreements reached by industry
management and employee representatives. The Company believes that it has a good
relationship with its employees. See "Risk Factors."
RISK FACTORS
The Company's business is subject to various risks and uncertainties. The
following factors should be carefully considered in reading this report.
CAPITAL INTENSIVE INDUSTRY
Due to the capital intensive nature of photomask manufacturing operations,
at a given threshold of manufacturing capacity, a high proportion of the
Company's operating costs remain relatively constant as sales volume increases
or decreases. To the extent the Company has under-utilized production capacity,
operating profit increases or decreases significantly as sales volume increases
or decreases. The Company has, for the most part, fully utilized its existing
capacity and anticipates that operating costs will increase as it adds capacity
to position itself for future growth. A decrease in capacity utilization could
have a material adverse effect on the Company's results of operations.
RAPID TECHNOLOGICAL CHANGE
The photomask industry is characterized by rapid technological change and
new product introduction and enhancements that require photomask manufacturers
to make significant and ongoing capital investments. In particular, as
semiconductor pattern sizes continue to decrease, the demand for more
technologically advanced photomasks is likely to increase. The Company believes
it must continue to enhance its existing products and to develop and manufacture
new products and upgrades with improved capabilities. The Company's inability to
anticipate, respond to or utilize changing technologies could have a material
adverse effect on the Company's results of operations. Also, there can be no
assurance that additional research and development investments by the Company
will result in any technological innovations.
Technological advances achieved by a competitor, leading to the commercial
availability of alternate methods of transferring circuit designs onto
semiconductor wafers without the use of photomasks, including direct write
lithography, could have a material adverse effect on the Company's results of
operations or financial position. An alternative to photomasks lithography is
direct-write lithography, which writes the circuit pattern directly onto the
semiconductor wafer without the use of a photomask. The direct-write method
generates patterns onto a wafer slowly and therefore is not currently useful for
high-volume, commercial device manufacturing. A significant advance in this
technology, however, would have a material adverse effect on the Company's
business and results of operations.
10
RELATIONSHIP WITH AND DEPENDENCE ON SEMICONDUCTOR INDUSTRY
Substantially all the Company's sales are derived from semiconductor
manufacturers. Growth in the demand for semiconductors does not necessarily lead
to an increase in the demand for photomasks. Changes in semiconductor designs or
applications, such as a reduction in customization, increased standardization or
other technological and manufacturing advances, could reduce demand for
photomasks even if the demand for semiconductors increases. Technological and
manufacturing advances in the semiconductor industry could have a material
adverse effect on the demand for photomasks.
In addition, contractions or downturns in the semiconductor industry could
lead to a decrease in the demand for photomasks. The semiconductor industry is
highly cyclical and has been subject to significant economic downturns at
various times. Future downturns in the semiconductor industry could have a
material adverse effect on the Company's results of operations.
CONCENTRATION OF CUSTOMERS
In fiscal 1996, the Company's largest 10 customers, in the aggregate,
accounted for more than half of sales. All these customers are in the
semiconductor industry. The loss of, or a significant reduction of orders from,
any of these customers could have a material adverse effect on the Company's
results of operations. See Note 4 to the Notes to Financial Statements.
CONCENTRATION OF AND DEPENDENCE ON SUPPLIERS
The Company relies on a limited number of photomask equipment manufacturers
to develop and supply the equipment used in the photomask manufacturing process.
There are currently lead times of approximately 9 to 18 months between the order
and the delivery of certain photomask imaging and inspection equipment,
including electron beam and laser beam photomask imaging systems. There can be
no assurance that the equipment manufacturers will successfully develop or
deliver on a timely basis such imaging and inspection equipment. Failure to
develop on a timely basis such equipment could have a material adverse effect on
the Company's business or results of operations.
In addition, the Company does not have long term supply agreements with any
of its raw materials suppliers, and it has historically relied primarily on one
supplier for the quartz plates used in the manufacture of photoblanks, which are
a key component in the manufacture of photomasks. Any disruption in the
Company's supply relationships or any delays in the shipment of supplies or
equipment, particularly the supply of quartz plates, could result in delays or
reductions in the product shipments by the Company or increases in product costs
that could have a material adverse effect on the Company's operating results in
any given period. In the event of such disruption, there can be no assurance
that the Company can develop alternative sources within reasonable time frames,
or if developed, that such sources would provide such supplies or equipment at
prices comparable with those charged by the Company's suppliers prior to such
disruption.
COMPETITION; REVERSAL OF CONSOLIDATION TREND
The Company competes with a limited number of captive photomask operations
when such operations have excess capacity. Beginning in the mid-1980's, a trend
developed toward the divestiture or closing of captive photomask operations by
semiconductor manufacturers. There can be no assurance that this trend will
continue or that it will not reverse, thereby increasing competition and
reducing the demand for photomasks produced by independent photomask suppliers
like the Company. In particular, as photomasks continue to reemerge as a
critical and enabling technology in the semiconductor manufacturing process,
there can be no assurance that semiconductor manufacturers will not form new
captive operations to ensure that their photomask needs are met, particularly
for advanced and leading edge photomasks.
11
SIGNIFICANT INTERNATIONAL OPERATIONS
Approximately 43% of the Company's sales in fiscal 1996 were derived from
sales in non-U.S. markets. The Company expects sales from non-U.S. markets to
continue to represent a significant portion of total sales. The Company operates
three manufacturing facilities as well as sales and technical support service
centers in Europe and Asia. In addition, DPI is currently participating in the
construction of a manufacturing facility in Shanghai, China as part of a joint
venture arrangement with the Shanghai Institute of Metallurgy and intends to
construct a photomask manufacturing facility on a greenfield site near Glasgow,
Scotland.
Non-U.S. operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuation in
the relative value of currencies, and restrictive governmental actions. Changes
in the relative value of currencies occur from time to time and may, in certain
instances, have a material effect on the Company's results of operations. The
financial statements reflect remeasurement of items denominated in non-U.S.
currencies to U.S. Dollars, the Company's functional currency. Exchange gains or
losses are included in income in the period in which they occur. Prior to the
Initial Public Offering, DuPont managed the Company's exposure to fluctuations
in currency exchange rates as part of its overall management of exchange rate
exposure. No separate hedging of the Company's exchange rate exposure was
undertaken. Accordingly, the financial statements do not reflect any hedging
activities. However, the Company plans to independently monitor its exchange
rate exposure and attempt to reduce such exposure in the future by hedging.
Subsequent to June 30, 1996, the Company entered into a forward contract
designed to reduce such exposure. There can be no assurance that such forward
contract will be adequate to eliminate, or even mitigate, the impact of the
Company's exchange rate exposure. The risks associated with non-U.S. operations
have not, to date, had a material adverse impact on the Company's liquidity and
results of operations. There can, however, be no assurance that such risks will
not have a material adverse impact on the Company's liquidity and results of
operations in the future.
DEPENDENCE ON MANAGEMENT AND TECHNICAL PERSONNEL
The Company's future success depends upon, in part, qualified managerial,
engineering and technical personnel, as well as the Company's ability to
continue to attract and retain additional personnel. The Company's inability to
attract and retain additional qualified personnel could have a material adverse
effect on the Company's results of operations.
CONTROL BY AND RELATIONSHIP WITH DUPONT
Upon completion of the Initial Public Offering, DuPont, through DCEO, owns
approximately 69.5% of the outstanding Common Stock of the Company. As a result,
DuPont has sufficient voting power to control the direction and policies of the
Company, including any merger, consolidation or sale of all or substantially all
of the assets of the Company, to elect the members of the Board of Directors of
the Company, and to prevent or cause a change in control of the Company. DuPont
has advised the Company that it expects to reduce its ownership interest in the
Company over time subject to prevailing market and other conditions.
Historically, the Company has derived certain tangible and intangible
benefits from being a subsidiary of DuPont. The current relationship between the
Company and DuPont is defined pursuant to several transitional agreements. While
these agreements will continue to provide the Company with certain benefits, the
Company is only entitled to the ongoing assistance of DuPont for a limited time
and it may not enjoy benefits from its relationship with DuPont beyond the term
of the agreements, including benefits derived from DuPont's reputation, research
and development, supply of raw materials, trade names and trademarks and credit
support. There can be no assurance that the Company upon termination of such
12
assistance from DuPont will be able to provide adequately such services
internally or obtain favorable arrangements from third parties to replace such
services.
NO INDEPENDENT OPERATING HISTORY PRIOR TO THE OFFERING
Prior to the Initial Public Offering, the Company was a wholly-owned
subsidiary of DuPont, and had no independent operating history. Since the
Initial Public Offering, the Company is developing financial, management,
administrative, research and other resources previously provided by DuPont,
which are necessary to operate successfully as an independent public company.
Although the Company and DuPont have entered into several agreements that are,
in part, intended to ease the Company's transition to an independent public
company, there can be no assurance that the Company will be able to develop
these resources.
INTELLECTUAL PROPERTY
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar processes. In addition, there can be no assurance
that third parties will not claim that the Company's current or future products
infringe on their proprietary rights. Any such claim, with or without merit,
could result in costly litigation or might require the Company to enter into
licensing agreements.
FLUCTUATIONS IN QUARTERLY AND ANNUAL EARNINGS
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could adversely affect sales or profitability or lead to
significant variability of operating results. These factors include the volume
and timing of orders shipped. Since the Company's business is characterized by
short term orders and shipment schedules without a significant backlog for
products, substantially all of the Company's sales in any quarter are dependent
upon orders received during that quarter, which limits the Company's ability to
respond to a changing business environment. In addition, changes in the mix of
products sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to meet increasing demand
and delivery schedules, fluctuation in manufacturing yields, fluctuations in
currency exchange rates, cyclical semiconductor industry conditions, the
Company's access to advanced process technologies and the timing and extent of
product and process development costs could also affect operating results.
Moreover, the Company is limited in its ability to reduce costs quickly in
response to any revenue shortfalls due to the need to make ongoing and
significant capital investments. As a result of the foregoing and other factors,
there can be no assurance that the Company will not experience material adverse
fluctuations in future operating results on a quarterly or annual basis. Results
of operations in any period therefore should not be considered indicative of the
results to be expected for any future period.
CHANGES IN GOVERNMENTAL LAWS AND REGULATIONS
The Company is subject to numerous governmental laws and regulations,
including, for example, environmental, tax and occupational safety and health.
Changes in these laws and regulations may have a material adverse effect on the
Company's financial position and results of operations.
ITEM 2. PROPERTIES
FACILITIES
The Company conducts manufacturing operations throughout the world. Each of
these operations is ISO-9002 qualified. The Company believes that its facilities
are adequate and suitable for their respective
13
uses. The table below presents certain information (as of June 30, 1996)
relating to the Company's principal manufacturing and support facilities.
TYPE OF
LOCATION FLOOR SPACE SQUARE FEET INTEREST PRODUCTS
- ---------------------------------------------- ----------------------- -------------- --------------
NORTH AMERICA
Round Rock, Texas 54,000 Owned Photomasks
Santa Clara, California 38,000 Leased Photomasks
Kokomo, Indiana 42,000 Owned Photomasks
Poughkeepsie, New York 23,000 Owned Photoblanks
Danbury, Connecticut 55,000 Owned Pellicles
EUROPE
Rousset, France 24,000 Leased Photomasks
Hamburg, Germany 22,000 Leased Photomasks
ASIA
Ichon, Korea 102,000 Owned Photomasks
Shanghai, China (under construction) Jointly Owned Photomasks
The facility in Round Rock, Texas not only operates as a manufacturing
facility but also is the Company's primary research and development center. The
Company owns most of the manufacturing equipment at its facilities. The
executive offices of the Company are located at 100 Texas Avenue, Round Rock,
Texas 78664, and its telephone number is (512) 388-8859.
Facilities and property located in Santa Clara and Hamburg are leased under
leases that expire in 2001 and October 2022, respectively. The facility at
Rousset is leased under a lease that expires in April 1998 at which point the
Company has an option to take ownership of the facility upon payment of taxes
and expenses relating to the conveyance. The Company also maintains customer
service data centers in leased facilities in Beaverton, Oregon and Dallas,
Texas.
The Company's Santa Clara facility is in a seismically active area. Although
the Company has obtained business interruption insurance, a major catastrophe
(such as an earthquake or other natural disaster) at any of its sites could
result in a prolonged interruption of the Company's North American business.
ENVIRONMENTAL MATTERS
The operations of the Company and its ownership of real property are subject
to federal, state, local and foreign environmental laws and regulations that
govern, among other things, the discharge of pollutants into the air and water
and the handling, use, storage, disposal and clean-up of solid and hazardous
waste. Compliance with such laws and regulations requires the Company to incur
capital expenditures and operating costs in connection with its ongoing
operations. In addition, such laws and regulations may impose liabilities on
owners and operators of businesses and real property without regard to fault and
may be joint and several with other parties. The Company estimates that capital
expenditures relating to environmental matters will be approximately $260,000 in
each of fiscal 1997, 1998 and 1999. In addition, the Company expects to incur
expenses relating to environmental matters of approximately $1 million in each
of fiscal 1997, 1998 and 1999. More stringent environmental laws and regulations
may be enacted in the future, which may require the Company to expend additional
amounts on environmental compliance or may require modifications in the
Company's operations. Although the Company is unable to predict the extent of
its future liability with respect to any environmental matters, the Company
believes, based upon current information, that environmental liabilities will
not be material to its financial condition or results of operations. With
respect to any environmental contamination present on the Company's
manufacturing sites at the time of the Initial Public Offering or present at any
such site as a result of the Company's manufacturing operations due to the
generation, use, treatment, storage, or disposal of
14
hazardous waste or hazardous materials prior to the date of the Initial Public
Offering, the Company will be indemnified by DuPont pursuant to an agreement
between DuPont and the Company effective the date of the Initial Public
Offering. The Company will be solely responsible for any environmental
liabilities resulting from its operations following the consummation of its
Initial Public Offering.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list, as of September 17, 1996, of the Company's
executive officers, each of whom has been an executive officer since December
21, 1995.
AGE
---
Chief Executive Officer:
J. Michael Hardinger (1)........................................................................ 49
Other Executive Officers:
Preston M. Adcox, President and Chief Operating Officer......................................... 53
Gerard Cognie, Executive Vice President--European Operations.................................... 51
David S. Gino, Executive Vice President--Finance and Chief Financial Officer.................... 38
Van H. Leichliter, Executive Vice President, General Counsel and Secretary...................... 52
Kenneth A. Rygler, Executive Vice President--Marketing and Sales................................ 52
- ------------------------
(1) Member of the Board of Directors.
J. MICHAEL HARDINGER. Mr. Hardinger is Chairman of the Board of Directors
and Chief Executive Officer of the Company, positions he assumed as a part of
the global realignment of the photomask business. He joined DuPont in 1970 and
has served in a number of management positions with DuPont, including Vice
President and General Manager of DuPont's Acrylics and Consumer Products
Business from 1990 until 1993. He was Vice President--DuPont Corporate Sourcing
prior to assuming his position with the Company.
PRESTON M. ADCOX. Mr. Adcox is President and Chief Operating Officer of the
Company. He joined DuPont in 1967 and has held a number of manufacturing and
technology management positions. He became a Managing Director in DuPont's
Semiconductor Materials Business in 1988 and has had global responsibility for
DuPont's photomask operations since that time. He was a member of the Board of
Directors of Etec Systems Inc. from 1990 to early 1995. Since 1988, he has
served on the Board of Directors of Semi-Sematech, an organization representing
U.S. equipment and material suppliers to the semiconductor manufacturing
industry.
GERARD COGNIE. Mr. Cognie is Executive Vice President--European Operations
of the Company. He joined DuPont in 1968 and since 1988 has served as the
Director of Photomask Europe and the Chairman of the Board of DuPont Photomask
(France). He has also served as the Director of Electronics for DuPont France
since 1985.
DAVID S. GINO. Mr. Gino is Executive Vice President, Finance and Chief
Financial Officer of the Company. He joined DuPont in 1987 after serving as
Chief Financial Officer and Controller of Master Images, Inc. until it was
acquired by DuPont in 1987. He has held a number of financial and business
15
management positions with DuPont's semiconductor materials, imaging systems and
printing and publishing businesses.
VAN H. LEICHLITER. Mr. Leichliter is Executive Vice President and General
Counsel of the Company. He also serves as Corporate Secretary. He joined DuPont
in 1970 as a commercial lawyer and he has held a number of legal advisory
positions with DuPont.
KENNETH A. RYGLER. Mr. Rygler is Executive Vice President--Marketing and
Sales of the Company. He joined DuPont in 1964 and held numerous sales,
marketing, planning and business development management positions.
The Company's executive officers are elected or appointed for an indefinite
term, and until their successors are elected or appointed.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the NASDAQ National Market under the
symbol "DPMI". The number of record holders of common stock was 77 at September
17, 1996.
The high and low sales prices of Company stock for the period from June 14,
1996, the first trading day after the Initial Public Offering, to June 30, 1996
were $23.50 and $19.25, respectively.
Since June 13, 1996, the Company has not paid any dividends. The Company
currently intends to retain its earnings to finance future growth and therefore
does not anticipate paying any cash dividends in the foreseeable future. The
declaration and payment of dividends, if any, will be subject to the discretion
of the Company's Board of Directors and will depend on the Company's earnings,
capital requirements, financial condition, statutory restrictions and other
factors deemed to be relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Review
(Dollars in thousands)
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
Sales...................................... $ 119,522 $ 118,896 $ 134,548 $ 161,514 $ 213,415
Net income (loss).......................... (35,429) (37,558) (10,865) 4,119 26,904
Total assets............................... 185,298 176,953 160,901 171,701 227,893
Borrowings................................. 35,533 3,731 8,090 7,225 10,778
DuPont master notes........................ 136,786 142,841 140,846 125,570 --
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the financial statements of the
Company and the related notes thereto. Prior to the Company's Initial Public
Offering on June 13, 1996, it was a wholly-owned subsidiary of E.I. duPont de
Nemours and Company. Therefore, the Company's historical results are not
necessarily indicative of the results that would have been achieved if the
Company had been independent and may not be an accurate indication of future
results.
The pro forma statement of operations estimates the effects of certain
events associated with the Initial Public Offering as if such events had taken
place on July 1, 1995. The unaudited pro forma statement of operations does not
purport to represent what the results of operations of the Company would
actually have been had certain events in fact occurred on July 1, 1995 or to
project the results of operations of the Company for any future period.
Results of Operations
(Percent of sales)
FOR THE YEARS ENDED JUNE 30,
--------------------------------------------
PRO FORMA
1994 1995 1996 1996
--------- --------- --------- -----------
Sales.............................................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................................. 79.9 72.5 65.0 64.5
Selling, general and administrative expense........................ 15.4 13.5 11.8 12.3
Research and development expense--net.............................. 6.0 5.4 4.3 3.9
Other operating expense--net....................................... 2.2 2.2 1.6 1.4
--------- --------- --------- -----
Operating profit (loss)............................................ (3.5) 6.4 17.3 17.9
Interest expense................................................... 4.3 4.2 3.3
Exchange (gain) loss............................................... 0.2 (0.3) 0.4 0.3
--------- --------- --------- -----
Income (loss) before income taxes and minority interest............ (8.0) 2.5 13.6 17.6
Provision for income taxes......................................... 1.3 6.2
--------- --------- --------- -----
Income (loss) before minority interest............................. (8.0) 2.5 12.3 11.4
Minority interest in loss of majority owned joint venture.......... (0.3) (0.3)
--------- --------- --------- -----
Net income (loss)................................................ (8.0)% 2.5% 12.6% 11.7%
--------- --------- --------- -----
--------- --------- --------- -----
GENERAL
During the early 1990's, the photomask market was relatively flat. While
growth in semiconductor manufacturing and new semiconductor designs generated
demand for new photomasks throughout this period, the Company believes that this
underlying growth was offset by advances in semiconductor and photomask design
and production methods that reduced the number of photomasks required to
manufacture a semiconductor device. The Company believes that weak market
conditions during this period contributed to the poor financial performance of
several merchant photomask manufacturers, including the Company, which had net
losses of $10.9 million in 1994. Since that time, however, growth in the
photomask market has resumed.
The Company's sales increased from $134.5 million in 1994 to $213.4 million
in 1996. The increase of over 58% was primarily the result of an accelerating
trend in the semiconductor industry toward semiconductor device customization,
which generates demand for new photomasks, semiconductor device
17
complexity, which increases the value and number of photomask layers needed to
produce a semiconductor device and the proliferation of semiconductor devices
into new products and markets.
The Company's sales have continued to diversify internationally. North
American sales constituted approximately 61% of the Company's sales in 1994
compared to 57% in 1996, while sales in Europe and Asia accounted for
approximately 23% and 16% of sales in 1994 compared to 25% and 18% in 1996.
Sales in Europe grew approximately 70% from 1994 to 1996 from $31.1 million to
$52.9 million. The increase in European sales was primarily attributable to
increased business from certain of the Company's major customers. Sales in Asia
grew approximately 79% from 1994 to 1996 from $21.7 million to $38.9 million.
The increase in Asian sales was primarily attributable to growth experienced by
semiconductor manufacturers in Korea. The Company expects sales in non-U.S.
markets to continue to represent a significant portion of sales.
Due to the capital intensive nature of photomask manufacturing operations,
at a given threshold of manufacturing capacity, a high proportion of the
Company's operating costs remain relatively constant as sales volume increases
or decreases. To the extent that the Company has under-utilized production
capacity, operating profit increases or decreases significantly as sales volume
increases or decreases. In the early 1990's, the Company had excess capacity.
Therefore, as sales increased from 1994 to 1996, costs associated with
manufacturing remained relatively unchanged and the Company's operating profit
over the period benefited. The Company has, for the most part, fully utilized
its existing capacity and anticipates that operating costs will increase as it
adds capacity to position itself for future growth.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
SALES
Sales are comprised primarily of photomask sales to semiconductor
manufacturers. Sales increased 32.1% from $161.5 million in 1995 to $213.4
million in 1996. Sales in North America, Europe and Asia increased from $90.1
million, $42.0 million and $29.5 million in 1995 to $121.6 million, $52.9
million and $38.9 million in 1996. A continued increase in the demand for
advanced photomasks, which have higher average selling prices, was a primary
contributor to the increase in sales during this period. This shift in demand
reflects a trend toward higher utilization of complex semiconductor devices with
finer linewidths. The increase in sales during this period also reflects the
overall increase in demand for photomasks. In addition, approximately $13
million of photomask sales to Lucent Technologies ("Lucent", formerly AT&T) were
generated during 1996 under a five-year supply agreement executed in connection
with the April 1995 purchase of selected photomask manufacturing equipment from
an affiliate of AT&T. Under the terms of the supply agreement, Lucent has agreed
to purchase certain minimum quantities of photomasks from the Company.
COST OF GOODS SOLD
Cost of goods sold consists of material, labor, depreciation and overhead.
Cost of goods sold increased 18.6% from $117.0 million in 1995 to $138.8 million
in 1996 resulting primarily from higher costs associated with increased sales.
As a percentage of sales, cost of goods sold decreased from 72.5% in 1995 to
65.0% in 1996. The decrease was primarily due to continued improvements in
capacity utilization including increased use of internally sourced photoblanks
and pellicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense includes salaries of sales
personnel, marketing expense, general and administrative expense and product
distribution expense. Prior to January 1, 1996, general and administrative
expense principally included allocated costs for services provided by
centralized DuPont organizations. These allocated costs are not necessarily
indicative of the costs that would have been incurred if the Company had been
independent. Since January 1, 1996, general and administrative expense
18
includes fees incurred by the Company under Administrative Service Agreements
with DuPont. Selling, general and administrative expense as a percentage of
sales declined from 13.5% in 1995 to 11.8% in 1996. Selling, general and
administrative expense increased 15.4% from $21.8 million in 1995 to $25.2
million in 1996. The increase was due largely to increases in selling expenses
corresponding to increased sales. One of the Company's challenges is attracting
and retaining qualified personnel. Accordingly, the Company is currently
evaluating its compensation structure vis-a-vis its competitors and anticipates
that selling, general and administrative expense may increase in order for the
Company's compensation structure to remain competitive.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of employee costs, cost
of material consumed, depreciation of equipment, engineering related costs and
the Company's allocated share of DuPont's central research and development.
These allocations were $2.0 million and $1.1 million in 1995 and 1996. Such
allocations terminated December 31, 1995. Prospectively, the Company will
receive services from DuPont central research and development pursuant to
Administrative Service Agreements with DuPont. Research and development expense,
excluding DuPont allocations, increased from $6.8 million in 1995 to $8.1
million in 1996. However, as a percentage of sales, research and development
expense declined slightly compared to the prior year, reflecting increased
sales. Research and development expense is net of funds the Company received
from customers, industry groups such as SEMATECH Inc. and the Joint European
Submicron Strategic Initiative, and government sources in the amount of $0.5
million and $0.2 million in 1995 and 1996. The Company anticipates that research
and development expense will continue to increase in absolute terms in the
future reflecting the Company's strategy of advancing its technological
leadership. However, there can be no assurance that such expenditures will
enable the Company to develop new technologies or to maintain its technological
leadership.
OTHER OPERATING EXPENSE
Other operating expense consists primarily of costs not directly related to
the manufacture of the Company's products. Historically, a significant portion
of this item has been the expense associated with the early retirement of
equipment resulting from technological obsolescence. The photomask industry is
characterized by rapid technological change and new product introductions and
enhancements which may, in the future, result in additional technological
obsolescence. The timing and amounts of these retirements are uncertain and
difficult to predict. Other operating expense decreased from $3.5 million in
1995 to $3.4 million in 1996.
INTEREST EXPENSE
Interest expense was essentially flat at approximately $7 million for both
1995 and 1996. The primary source of interest expense has been the Company's
master note arrangements with DuPont. On June 28, 1996, DuPont contributed the
$90.5 million balance outstanding on the master notes to the Company as a
capital contribution. Therefore, the Company expects interest expense will be
significantly lower in 1997.
EXCHANGE (GAIN) LOSS
Exchange (gain) loss consists of gains and losses resulting from the
remeasurement of the Company's accounts denominated in non-U.S. currencies into
U.S. Dollars, which is the Company's functional currency. Exchange gain was $0.5
million in 1995 compared to an exchange loss of $0.9 million in 1996. The loss
in 1996 was primarily attributable to the fluctuation of the U.S. Dollar against
the German Mark, French Franc and Korean Won.
19
PROVISION FOR INCOME TAXES
Tax expense has been determined and allocated to the Company by applying the
separate taxpayer approach outlined in FAS 109. Under this approach, the Company
had net operating loss carryforwards in the U.S. and Europe some of which became
fully utilized during the year ended June 30, 1996. The Company's operations in
Korea are subject to a government granted tax exemption. The Company will
continue to enjoy the full benefits of the tax exemption in Korea until 2001 and
a partial benefit thereafter until the tax exemption terminates in 2003. In
actuality, the Company's results were included in consolidated tax returns filed
by DuPont and the tax benefit of prior year losses was realized by DuPont.
MINORITY INTEREST IN LOSS OF MAJORITY OWNED JOINT VENTURE
The minority interest impact of the Company's joint venture in China was
($0.2 million) in 1995 compared to ($0.7 million) in 1996, reflecting increased
pre-operating losses from, and partner funding of, the joint venture.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
SALES
Sales increased 20.0% from $134.5 million in 1994 to $161.5 million in 1995.
Sales in North America, Europe and Asia increased from $81.7 million, $31.1
million and $21.7 million in 1994 to $90.1 million, $42.0 million and $29.5
million in 1995. In addition to a general increase in demand for most types of
photomasks, the increase in sales reflects a shift in demand toward the
Company's advanced photomasks, which have higher average selling prices. This
shift in demand reflects a trend toward higher utilization of complex
semiconductor devices with finer linewidths.
COST OF GOODS SOLD
Cost of goods sold increased from $107.5 million in 1994 to $117.0 million
in 1995. However, as a percentage of sales, cost of goods sold decreased from
79.9% in 1994 to 72.5% in 1995. The improvement primarily reflects the Company's
improved capacity utilization. In addition, the Company increased the proportion
of internally sourced photoblanks and pellicles used in its photomask
manufacturing which improved capacity utilization in the manufacture of these
materials. Cost of goods sold was also lower due to reduced depreciation and
amortization costs of $2.5 million as equipment and intangibles associated with
acquisitions in the late 1980's became fully depreciated and amortized. The
Company does not anticipate that benefits from decreased depreciation and
amortization costs will recur in the near future as the Company invests in new
capacity to meet anticipated growth in photomask demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased as a percentage of
sales from 15.4% in 1994 to 13.5% in 1995. The decrease resulted primarily from
greater efficiencies associated with sales volume increases. Selling, general
and administrative expense increased from $20.8 million in 1994 to $21.8 million
in 1995.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense, excluding DuPont allocations of $2.4
million and $2.0 million in 1994 and 1995, increased from $5.7 million in 1994
to $6.8 million in 1995, reflecting the Company's continuing focus on developing
advanced photomasks. However, as a percentage of sales, research and development
expense declined slightly compared to the prior year, reflecting increased
sales. Research and development expense is net of funds the Company received
from customers, industry groups and governmental sources in the amount of $1.6
million and $0.5 million for 1994 and 1995.
20
OTHER OPERATING EXPENSE
Other operating expense for 1994 was $2.9 million compared to $3.5 million
in 1995. The increase was due largely to pre-production costs associated with
the Company's joint venture in Shanghai, China.
INTEREST EXPENSE
The Company's interest expense increased from $5.8 million in 1994 to $7.0
million in 1995, reflecting higher interest rates.
EXCHANGE (GAIN) LOSS
The Company incurred a $0.3 million exchange loss in 1994 compared to a $0.5
million exchange gain in 1995 primarily due to fluctuations of the U.S. Dollar
compared to the German Mark and French Franc.
PROVISION FOR INCOME TAXES
The Company has no provision for income taxes due to net operating losses in
the U.S. and Europe and the government granted tax exemption in Korea.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $16.4 million at June 30, 1995 and $34.5
million at June 30, 1996. The increase in working capital for the year ended
June 30, 1996 resulted principally from higher cash balances related to the
Company's withdrawal from DuPont's centralized cash management system and
retention of a portion of the cash proceeds from the Company's Initial Public
Offering.
Cash provided by operations was $12.4 million in 1994, $29.0 million in 1995
and $50.4 million in 1996. These increases were primarily the result of higher
sales and resultant net income. The Company believes that cash provided by
operations will be the Company's primary source of liquidity. Cash used in
investing activities was $11.7 million in 1994, $18.6 million in 1995 and $29.4
million in 1996. The Company's most significant use of cash for investing
activities was capital expenditures and acquisitions. Cash used in financing
activities was $2.9 million in 1994, $7.0 million in 1995 and $8.5 million in
1996. Prior to the Company's Initial Public Offering, it participated in
DuPont's centralized cash management system whereby substantially all of the net
cash generated by the Company was transferred, principally via the master notes,
to DuPont.
Cash and cash equivalents were $3.9 million at June 30, 1994, $8.4 million
at June 30, 1995 and $20.2 million at June 30, 1996. The increase in 1996 was
primarily due to the Company retaining a portion of the net proceeds of the
Initial Public Offering which the Company intends to use for general corporate
purposes including capital expenditures and working capital. The Company's
ongoing cash requirements will be for capital expenditures, research and product
development and working capital. The Company expects capital expenditures in
1997 will be approximately $42 million. The capital expenditures for 1997 will
be used primarily to expand the Company's manufacturing capacity and advance the
Company's technical capability.
The Company and DuPont have entered into a two-year credit agreement
effective as of January 1, 1996 pursuant to which DuPont has agreed to provide a
revolving credit/working capital facility to the Company in an aggregate amount
of $30.0 million. The credit facility will serve as a back-up to cash from
operations. There can be no assurance that alternative sources of financing will
be available upon the expiration of such facility or that alternative sources of
funding will be available if the Company's borrowing requirements exceed the
facility. The credit agreement contains, among other things, covenants
restricting the Company's ability to incur additional debt. In addition, there
can be no assurance that, even if funding is available, the terms thereof will
be attractive to the Company.
21
OTHER MATTERS
The Company is currently negotiating an agreement with other companies that,
if consummated, would result in the formation of a limited liability company
that would develop advanced photomask fabrication technologies. The Company
believes that, through its participation, it will be able to help meet the
future technology needs of the semiconductor industry for advanced photomasks.
There can be no assurance that final agreements will be executed or, if
executed, the resultant limited liability company will yield results that are
favorable to the Company.
Non-U.S. operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuation in
the relative value of currencies and restrictive governmental actions. Changes
in the relative value of currencies occur from time to time and may, in certain
instances, have a material effect on the Company's results of operations. The
financial statements reflect remeasurement of items denominated in non-U.S.
currencies to U.S. Dollars, the Company's functional currency. Exchange gains or
losses are included in income in the period in which they occur. Prior to the
Initial Public Offering, DuPont managed the Company's exposure to fluctuations
in currency exchange rates as part of its overall management of exchange rate
exposure. No separate hedging of the Company's exchange rate exposure was
undertaken. Accordingly, the financial statements do not reflect any hedging
activities. However, the Company plans to independently monitor its exchange
rate exposure and attempt to reduce such exposure in the future by hedging.
Subsequent to June 30, 1996, the Company entered into a forward contract
designed to reduce such exposure. There can be no assurance that such forward
contract will be adequate to eliminate, or even mitigate, the impact of the
Company's exchange rate exposure. The risks associated with non-U.S. operations
have not, to date, had a material adverse impact on the Company's liquidity and
results of operations. There can, however, be no assurance that such risks will
not have a material adverse impact on the Company's liquidity and results of
operations in the future.
Inflation impacts the Company through increases in the cost of labor,
services and raw materials. In general, these increases have been mitigated by
periodic increases in the prices of the Company's products.
DISCUSSION OF PRO FORMA
The pro forma statement of operations estimates the effects that the Initial
Public Offering, various realignment transactions and the following would have
had on the Company's results of operations had they occurred as of July 1, 1995:
(i) the discontinuance of DuPont's postretirement benefits and replacement of
DuPont's defined benefit pension plan with the Company's defined contribution
pension plan; (ii) the elimination of DuPont allocated overhead expenses that
are not expected to be incurred by the Company following the Initial Public
Offering; (iii) the cost of services to be provided by third parties or DuPont,
pursuant to Administrative Service Agreements with DuPont and its subsidiaries,
and additional employees assumed to be hired by the Company to replace those
services previously provided by DuPont; and (iv) recognition of expenses
relating to the Company's stock performance plan. The principal effect of these
adjustments would have been a decrease in costs of goods sold of $1.2 million
for 1996. In addition, selling, general and administrative expense would have
increased by $1.1 million for 1996 and research and development expense would
have decreased $0.9 million for 1996. As a result of these adjustments,
operating profit would have increased by $1.3 million for 1996. Furthermore,
elimination of the master notes would have decreased interest expense by $7.0
million for 1996. Consequently, net income (offset by an increase in the
provision for income taxes) would have decreased by $1.8 million for 1996.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
PAGE(S)
-----------
Report of Independent Accountants.......................................................... F-1
Statement of Operations for the Three Years Ended June 30, 1996............................ F-2
Balance Sheet at June 30, 1995 and 1996.................................................... F-3
Statement of Cash Flow for the Three Years Ended June 30, 1996............................. F-4
Notes to Financial Statements.............................................................. F-5 to 16
All Schedules are omitted because they are not applicable or the required
information is shown in the Financial Statements or Notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Information with respect to the following Items is incorporated by reference
to the pages indicated in the Company's Proxy Statement, dated September 26,
1996, filed in connection with the Annual Meeting of Stockholders to be held
October 28, 1996. However, information regarding executive officers is contained
in Part I of this report (page 15) pursuant to General Instruction G of this
Form.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PAGE(S)
---------
Election of Directors........................................................................ 3 to 5
Compliance With Section 16(a) of the Exchange Act............................................ 10
ITEM 11. EXECUTIVE COMPENSATION
PAGE(S)
---------
Executive Compensation and Other Information................................................. 13 to 15
Director Compensation........................................................................ 15 to 16
Employment Contracts......................................................................... 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PAGE(S)
---------
Beneficial Ownership of Securities........................................................... 1 to 2
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PAGE(S)
---------
Transactions and Relationship Between the Company and DuPont................................. 5 to 10
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following financial statements, financial statement schedules and
exhibits are filed as a part of this Report:
1. Financial statements--see Index to Financial Statements on page 23
2. Financial statement schedules--see Index to Financial Statements on
page 23
3. Exhibits--see Index to Exhibits on page 27
(B) Reports on Form 8-K--None.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 25, 1996 DUPONT PHOTOMASKS, INC.
(Registrant)
By: /s/ DAVID S. GINO
-----------------------------------
David S. Gino
EXECUTIVE VICE PRESIDENT--FINANCE
AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
- ----------------------------------- ----------------------- ------------------
Chairman of the Board
/s/ J. MICHAEL HARDINGER and Chief Executive
- ----------------------------------- Officer September 25, 1996
J. Michael Hardinger (Principal Executive
Officer)
/s/ PRESTON M. ADCOX
- ----------------------------------- President and Chief September 25, 1996
Preston M. Adcox Operating Officer
Executive Vice
President-- Finance
/s/ DAVID S. GINO and Chief Financial
- ----------------------------------- Officer September 25, 1996
David S. Gino (Principal Financial
and Accounting
Officer)
/s/ JOHN L. DOYLE
- ----------------------------------- Director September 25, 1996
John L. Doyle
/s/ JOHN C. HODGSON
- ----------------------------------- Director September 25, 1996
John C. Hodgson
/s/ CHARLES O. HOLLIDAY, JR.
- ----------------------------------- Director September 25, 1996
Charles O. Holliday, Jr.
/s/ PETER G. KEHOE
- ----------------------------------- Director September 25, 1996
Peter G. Kehoe
25
NAME TITLE DATE
- ----------------------------------- ----------------------- ------------------
/s/ GARY W. PANKONIEN
- ----------------------------------- Director September 25, 1996
Gary W. Pankonien
/s/ JOHN C. SARGENT
- ----------------------------------- Director September 25, 1996
John C. Sargent
/s/ MARSHALL C. TURNER
- ----------------------------------- Director September 25, 1996
Marshall C. Turner
/s/ SUSAN A. VLADUCHICK
- ----------------------------------- Director September 25, 1996
Susan A. Vladuchick
26
INDEX TO EXHIBITS
An asterisk below indicates an exhibit previously filed with the Securities
and Exchange Commission as an exhibit to Registrant's Registration Statement on
Form S-1, Registration No. 333-3386 (the "IPO Registration Statement"), such
exhibit being incorporated by reference. Unless otherwise indicated, the number
of the exhibit below is also the number of such exhibit in the IPO Registration
Statement.
EXHIBIT
NUMBER
- -----------
3.1 Certificate of Incorporation of the Company, as amended and restated on April 3, 1996*
3.2 Bylaws of the Company, as amended on December 31, 1995*
4.1 Specimen Certificate for Common Stock*
10.1 Transitional Administrative Services Agreement between the Company and E. I. du Pont de Nemours and
Company dated as of January 1, 1996*
10.2 Environmental Indemnification Agreement between the Company and E. I. du Pont de Nemours dated April 30,
1996*
10.3 Company's Bonus Plan, as adopted by the Company's Board of Directors on March 26, 1996*
10.4 Company's Non-employee Directors Stock Option Plan as adopted by the Company's Board of Directors on
March 26, 1996*
10.5 Company's Stock Performance Plan as adopted by the Company's Board of Directors on March 26, 1996*
10.6 Company's Founders Stock Option Plan, as adopted by the Company's Board of Directors on March 26, 1996*
10.7 Registration Rights Agreement between the Company and DuPont Chemical and Energy Operations, Inc. dated
as of December 31, 1995*
10.8 Tax Indemnification Agreement among the Company, DuPont Chemical and Energy Operations, Inc. and E. I.
du Pont de Nemours and Company dated May 14, 1996*
10.9 Credit Agreement between the Company and DuPont Chemical and Energy Operations, Inc. dated as of January
1, 1996*
10.10 Letter Agreement between J. M. Hardinger and E. I. du Pont de Nemours and Company dated as of September
21, 1995*
10.11 Research, Development and Consulting Agreement between the Company and E. I. du Pont de Nemours and
Company dated as of January 1, 1996*
10.12 Business Transfer Agreement between DuPont Korea, Ltd. and DuPont Photomasks Korea, Ltd. dated December
22, 1995*
10.13 Form of Indemnification Agreement between the Company and its Directors and Officers*
10.14 Corporate Tradename and Trademark Agreement between the Company and E. I. du Pont de Nemours and Company
dated May 16, 1996*
21 List of principal subsidiaries of the Company*
27 Financial Data Schedule
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Dupont Photomasks, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and of cash flows present fairly, in all material respects, the
financial position of DuPont Photomasks, Inc. and its subsidiaries at June 30,
1995 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
August 12, 1996
F-1
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
STATEMENT OF OPERATIONS
PRO FORMA
FOR THE YEAR
YEAR ENDED JUNE 30, ENDED JUNE
---------------------------------- 30, 1996
1994 1995 1996 (NOTE 1)
---------- ---------- ---------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales.......................................................... $ 134,548 $ 161,514 $ 213,415 $ 213,415
Cost of goods sold............................................. 107,456 117,022 138,796 137,615
Selling, general and administrative expense.................... 20,750 21,803 25,167 26,229
Research and development expense--net.......................... 8,131 8,777 9,162 8,290
Other operating expense--net................................... 2,940 3,490 3,404 3,126
---------- ---------- ---------- ------------
Operating profit (loss)........................................ (4,729) 10,422 36,886 38,155
Interest expense............................................... 5,814 6,957 7,078 62
Exchange (gain) loss........................................... 322 (493) 886 590
---------- ---------- ---------- ------------
Income (loss) before income taxes and minority interest........ (10,865) 3,958 28,922 37,503
Provision for income taxes..................................... 2,678 13,126
---------- ---------- ---------- ------------
Income (loss) before minority interest......................... (10,865) 3,958 26,244 24,377
Minority interest in loss of majority owned joint venture...... (161) (660) (660)
---------- ---------- ---------- ------------
Net income (loss).............................................. $ (10,865) $ 4,119 $ 26,904 $ 25,037
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Pro forma earnings per share (unaudited)....................... 1.65
------------
------------
Pro forma weighted average shares outstanding (unaudited)...... 15,194,913
------------
------------
The accompanying notes are an integral part of this statement.
F-2
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
BALANCE SHEET
ASSETS
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS,
EXCEPT PAR VALUE
AMOUNTS)
Current assets:
Cash and cash equivalents..................................... $ 8,412 $ 20,179
Accounts receivable, trade--net............................... 27,696 32,293
Accounts receivable, related parties.......................... 1,846 4,726
Inventories................................................... 6,830 10,227
Deferred income taxes......................................... 1,543
Prepaid expenses and other current assets..................... 1,958 3,238
--------- ---------
Total current assets........................................ 46,742 72,206
--------- ---------
Property and equipment--net................................... 113,124 123,048
Accounts receivable, related parties.......................... 1,405 1,928
Deferred income taxes......................................... 3,245
Other assets.................................................. 10,430 27,466
--------- ---------
Total assets................................................ $ 171,701 $ 227,893
--------- ---------
--------- ---------
LIABILITIES, DUPONT MASTER NOTES AND OWNER'S
NET INVESTMENT/STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade....................................... $ 2,923 $ 8,376
Accounts payable, related parties............................. 8,076 5,885
Accounts payable, other....................................... 7,255 2,006
Short-term borrowings......................................... 2,960 1,454
Income taxes payable.......................................... 2,333
Other accrued liabilities..................................... 9,123 17,694
--------- ---------
Total current liabilities................................... 30,337 37,748
--------- ---------
Long-term borrowings............................................ 4,265 9,324
Deferred income taxes........................................... 11,588
Other liabilities............................................... 5,958 3,747
Minority interest in net assets of majority owned joint
venture....................................................... 489 872
DuPont master notes............................................. 125,570
Commitments and contingencies
Owner's net investment.......................................... 5,082
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized;
15,100,000 issued and outstanding........................... 151
Additional paid-in capital.................................... 152,880
Unrealized holding gain....................................... 11,583
--------- ---------
Total liabilities, DuPont master notes and owner's net
investment/ stockholders' equity.......................... $ 171,701 $ 227,893
--------- ---------
--------- ---------
The accompanying notes are an integral part of this statement.
F-3
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)........................................................... $ (10,865) $ 4,119 $ 26,904
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization............................................... 28,497 25,543 26,882
(Increase) decrease in operating assets..................................... (5,724) 486 (12,126)
Increase (decrease) in operating liabilities................................ 133 (1,159) 10,799
Other....................................................................... 311 42 (2,028)
---------- ---------- ----------
Net cash provided by operating activities................................. 12,352 29,031 50,431
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures........................................................ (4,953) (14,853) (24,294)
Payments for acquisitions................................................... (7,109) (4,000) (6,000)
Other....................................................................... 378 272 920
---------- ---------- ----------
Net cash used in investing activities..................................... (11,684) (18,581) (29,374)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in borrowings........................................... 1,354 (1,591) (1,666)
Net proceeds from issuance of common stock.................................. 72,066
Cash paid to DuPont--net.................................................... (4,234) (5,432) (78,908)
---------- ---------- ----------
Net cash used in financing activities..................................... (2,880) (7,023) (8,508)
---------- ---------- ----------
Effect of exchange rate changes on cash....................................... 269 1,061 (782)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... (1,943) 4,488 11,767
Cash and cash equivalents at beginning of year................................ 5,867 3,924 8,412
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 3,924 $ 8,412 $ 20,179
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of this statement.
F-4
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements include the
accounts of DuPont Photomasks, Inc. and its subsidiaries (the Company). All
significant intercompany balances and transactions have been eliminated. The
Company's principal business is the manufacture and sale of photomasks,
high-purity quartz or glass plates containing precision microscopic images of
integrated circuits, to semiconductor manufacturers.
Prior to the Company's initial public offering (the IPO) on June 13, 1996,
the Company was a wholly-owned subsidiary of E.I. duPont de Nemours and Company
(DuPont). At June 30, 1996, DuPont, through its wholly-owned subsidiary, DuPont
Chemical and Energy Operations, Inc. (DCEO), owns 10,500,000 shares of the
Company's common stock. On the IPO date, 4,000,000 shares of the Company's
common stock were sold to the public. An additional 600,000 shares of common
stock were sold to the public on June 14, 1996 pursuant to an over-allotment
option. Retained earnings are shown assuming that the IPO occurred on June 30,
1996, the Company's year end.
DuPont's photomask business was realigned (the Realignment) during the year
preceding the IPO so that photomask operations in Germany, France, the Republic
of Korea (Korea) and the Peoples Republic of China (China) which were previously
owned by various DuPont subsidiaries are owned by wholly-owned subsidiaries of
the Company. In this context, prior to the Realignment, no direct ownership
relationship existed. Therefore, DuPont's net investment is shown in lieu of
stockholders' equity at June 30, 1995. Income and expenses related to the
Realignment have been eliminated and are not presented in the financial
statements.
The historical financial statements of the Company have been derived from
the accounting records of DuPont and reflect all sales and costs directly
attributable to DuPont's photomask business during the periods presented as well
as certain charges and allocations from DuPont which were based primarily on
usage. For purposes of the historical financial statements, charges and
allocations between the Company and DuPont are deemed to have been settled in
the period in which they originated.
REVENUE RECOGNITION: Sales and related costs of goods sold are included in
income when goods are shipped to the customer except in locations where local
law requires customer acceptance prior to transfer of ownership. In these
locations, sales and related costs of goods sold are included in income when
goods are accepted by the customer. Provision is made for estimated sales
returns.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly liquid
investments with original maturities of three months or less. Prior to the IPO,
the Company participated in DuPont's centralized cash management system whereby
substantially all of the net cash generated by the Company was transferred,
principally via the master notes, to DuPont.
INVENTORIES: Inventories are valued at the lower of cost or market, with
cost being determined using the average cost method.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and is
depreciated using the straight-line method over the estimated useful lives of
the assets. The gross value of property and equipment and related accumulated
depreciation are eliminated at the date of disposal and the resulting gain or
loss is included in income. Maintenance and repairs are charged to operations;
replacements and betterments are capitalized.
F-5
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over their estimated useful lives. Net intangible assets, primarily
supply agreements, were $5,193 and $3,883 at June 30, 1995 and 1996 and are
included in other assets. The future economic benefit of long-lived assets is
reviewed periodically through an undiscounted cash flow analysis to determine if
an impairment has occurred.
PENSIONS AND OTHER POST RETIREMENT BENEFITS: Through June 30, 1996, the
Company's active U.S. employees were covered by DuPont defined benefit pension
and other postretirement benefit plans. The cost of these plans was determined
and allocated on an actuarial basis in accordance with Statement of Financial
Accounting Standards No. (FAS) 87 and FAS 106 and is principally included in
cost of goods sold. Effective July 1, 1996, the Company eliminated the DuPont
plans and implemented a defined contribution retirement plan covering
substantially all of the active U.S. employees. The defined contribution
retirement plan provides for the Company to contribute three to five percent of
an employee's compensation into a participant directed investment account.
Pension coverage for non-U.S. employees is provided through separate plans.
Obligations under these plans are systematically provided for principally by
establishing book reserves.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred. The Company is party to certain contracts which provide for partial
funding of its research and development costs. Funding under these contracts of
$1,625, $451 and $155 in the years ended June 30, 1994, 1995 and 1996 has been
recognized as an offset to research and development expense.
NON-U.S. CURRENCIES: The Company has determined that the U.S. Dollar is the
functional currency of its worldwide operations. Accounts denominated in
non-U.S. currencies are remeasured into U.S. Dollars and the resulting exchange
gains and losses are included in income in the period they occur.
INCOME TAXES: The Company accounts for income taxes using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, all expected future events are considered other than
enactments of changes in tax laws or rates. Valuation allowances are established
as necessary to reduce deferred tax assets to their expected realizable value.
Prior to the IPO, the taxable income (loss) of the Company was included in
the consolidated tax returns of the DuPont entities of which it was a part. As
such, separate income tax returns were not prepared or filed for the Company.
Deferred income taxes and related tax expense were determined and allocated to
the Company by applying the separate taxpayer approach outlined in FAS 109.
Deferred taxes at June 30, 1996 differ from amounts allocated to the Company
under the separate taxpayer approach. The difference arises from the fact that,
following the IPO, the Company's tax return will not be consolidated with
DuPont. As a result, deferred tax assets arising from net operating losses prior
to the IPO date, deemed to be carried forward and available to offset future tax
liabilities under the separate taxpayer approach, are eliminated, reflecting the
fact that these losses were previously utilized by DuPont in its consolidated
returns. In addition, deferred taxes were established related to the
Realignment.
F-6
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's operations in Korea operate under a government granted tax
exemption which expires in 2003.
PRO FORMA INFORMATION (UNAUDITED): The pro forma statement of operations
for the year ended June 30, 1996 has been prepared by the Company to illustrate
the estimated effects of the IPO, the Realignment and the related transactions
described below as if they had occurred July 1, 1995. The pro forma statement of
operations does not purport to represent what the results of operations would
actually have been if the IPO, the Realignment and the related transactions had
in fact occurred July 1, 1995 or to project what the results of operations will
be for any future period.
Pro forma cost of goods sold reflects a $1,181 reduction of cost resulting
from (i) changes in employee benefit plans implemented in conjunction with the
IPO and (ii) the elimination of DuPont allocated expenses partially offset by
the addition of contracted services (including services contracted under
Administrative Services Agreements) and employees to perform these functions.
Pro forma selling, general and administrative expense reflects a net $1,062
increase in cost resulting from (i) changes in employee benefit plans
implemented in conjunction with the IPO, (ii) the elimination of DuPont
allocated expenses offset by the addition of contracted services (including
services contracted under Administrative Services Agreements) and employees to
perform these functions and (iii) compensation expense resulting from restricted
stock grants under a stock performance plan.
Pro forma research and development expense reflects an $872 reduction of
cost resulting from (i) changes in employee benefit plans implemented in
conjunction with the IPO and (ii) the elimination of DuPont allocated expenses
partially offset by the addition of contracted services (including services
contracted under Administrative Services Agreements) and employees to perform
these functions.
Pro forma other operating expense reflects a $278 reduction of cost
resulting from the elimination of DuPont allocated expenses partially offset by
the addition of contracted services (including services contracted under
Administrative Services Agreements) and employees to perform these functions.
Pro forma interest expense reflects a $7,016 reduction of cost resulting
from the elimination of the master notes interest expense.
Pro forma exchange (gain) loss reflects a $296 gain resulting from the
elimination of certain non-U.S. currency balances as a result of the
Realignment.
The pro forma provision for income taxes reflects a $10,448 increase in cost
resulting principally from the elimination of deferred tax benefits associated
with prior period losses that were deemed to be available to reduce tax expense
allocated to the Company under the separate taxpayer approach in FAS 109, but
which, in actuality, were utilized by DuPont in its consolidated tax returns.
Pro forma earnings per share was computed based on 15,194,913 shares
outstanding, reflecting the effects of the Realignment, the IPO and the dilutive
effect of grants under the Company's stock performance plans.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions, based upon all known facts and circumstances, that
affect the reported amounts of assets and liabilities, disclosure of contingent
F-7
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS: Certain prior year balances have been reclassified to
conform to the 1996 presentation.
2. ACQUISITIONS
On February 1, 1993, the Company purchased, from an affiliate of Philips
Electronics N.V. (Philips), selected photomask manufacturing equipment at
Philips' captive photomask manufacturing facility located in Hamburg, Germany
and entered into a five-year supply agreement with Philips Semiconductors
International B.V. Consideration for the equipment was $9,292 and consideration
for the supply agreement was $1,808. Under the terms of the supply agreement,
Philips agreed to purchase certain minimum quantities of photomasks from the
Company each year during the term of the agreement or to refund a portion of the
purchase price if such minimum quantities of photomasks were not purchased
during a given year. The supply agreement also calls for the Company to grant
price discounts to Philips in the event that purchases by Philips during a given
year exceed specified limits. Through June 30, 1996, the Company had received
$810 from Philips due to its failure to purchase specified minimum amounts.
These payments were applied to reduce the carrying amount assigned to the supply
agreement at the date of acquisition.
On April 7, 1995, the Company purchased, from an affiliate of AT&T Corp.
(AT&T), selected photomask manufacturing equipment at AT&T's captive photomask
manufacturing facility located in Allentown, Pennsylvania and entered into a
five-year supply agreement with Lucent Technologies (Lucent, formerly AT&T).
Consideration for the equipment was $10,000, and consideration for the supply
agreement was $5,000. Under the terms of the supply agreement, Lucent agreed to
purchase certain minimum quantities of photomasks from the Company each year
during the term of the agreement or to refund a portion of the purchase price if
such minimum quantities were not purchased during a given year. The supply
agreement also calls for the Company to grant price discounts to Lucent in the
event that purchases by Lucent during a given year exceed specified limits.
3. RELATED PARTY TRANSACTIONS
The financial statements include significant transactions with other DuPont
business units involving functions and services (such as cash management, tax
administration, accounting, legal and data processing) that were provided by
centralized DuPont organizations outside the photomask business. The costs of
these functions and services have been directly charged and/or allocated to the
photomask business using methods that DuPont management believes are reasonable.
Such charges and allocations are not necessarily indicative of the costs that
would have been incurred if the Company had been a separate entity. Amounts
charged and allocated for these functions and services were $12,518 and $13,106
for the years ended June 30, 1994 and 1995 and $7,251 for the period July 1,
1995 to December 31, 1995. Effective January 1, 1996, the Company entered into
Administrative Service Agreements with DuPont and certain DuPont subsidiaries
which set forth services to be provided to the Company and the fees to be paid
by the Company for such services. Charges to the Company under these agreements
were $1,661 for the period January 1, 1996 to June 30, 1996. Amounts charged and
allocated to the Company for functions and services provided by DuPont are
principally included in general and administrative expense.
F-8
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company owns 1,025,640 shares of Etec Systems, Inc. (Etec) common stock.
Etec is the Company's principal supplier of electron beam and laser beam
systems. At June 30, 1995, the $5,000 original investment in Etec was reflected
at the lower of cost or market and was included in other assets. In October
1995, Etec completed an initial public offering of its common stock. At June 30,
1996, the investment in Etec was classified as an available for sale security
and the $22,820 estimated fair value (based on the June 28, 1996 closing market
price of Etec common stock) of this investment was included in other assets. The
associated unrealized holding gain is reported as a separate component of
stockholders' equity, net of tax liabilities. Purchases of equipment and
equipment maintenance services from Etec were $8,500, $6,175 and $13,850 for the
years ended June 30, 1994, 1995 and 1996. In conjunction with Etec's recent
secondary public offering, the Company has agreed to hold its investment until
February 1997.
Accounts receivable, related parties includes receivables from employees of
the Company of $1,445 (Current $40, Non-Current $1,405) and $2,149 (Current
$221, Non-Current $1,928) at June 30, 1995 and 1996 which relate principally to
housing and automobile loans to non-U.S. employees. The remainder represents
receivables for goods sold to various DuPont entities and other related parties
and amounts due to the Company under the tax indemnification agreement with
DuPont. Sales to related parties, principally various DuPont entities, were
$4,051, $6,368 and $8,214 for the years ended June 30, 1994, 1995 and 1996.
Accounts payable, related parties represents payables to DuPont for payroll
and benefits and vendor payments paid by DuPont on behalf of the Company and
billed on a one-month-lag basis and, at June 30, 1996, includes amounts payable
under Administrative Service Agreements.
4. ACCOUNTS RECEIVABLE, TRADE
Essentially all of the Company's sales are to customers in the semiconductor
manufacturing industry. The Company assesses the financial strength of its
customers prior to extending credit in order to reduce the risk of loss as the
Company generally does not require collateral. Four of the Company's customers
each represented more than ten percent of sales in the years ended June 30, 1994
and 1995 and, in the aggregate, these four customers represented approximately
forty-two percent of sales in these years. Accounts receivable from these four
customers totalled $8,422 at June 30, 1995. Two of the Company's customers each
represented more than ten percent of sales in the year ended June 30, 1996 and,
in the aggregate, these two customers represented approximately twenty-five
percent of sales in the year. Accounts receivable from these two customers
totalled $9,366 at June 30, 1996.
5. INVENTORIES
Inventories consist of the following:
JUNE 30,
--------------------
1995 1996
--------- ---------
Raw materials and supplies......................................................... $ 4,598 $ 7,006
Work-in-process.................................................................... 380 785
Finished product................................................................... 1,852 2,436
--------- ---------
Inventories........................................................................ $ 6,830 $ 10,227
--------- ---------
--------- ---------
F-9
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED JUNE 30,
USEFUL ------------------------
LIVES 1995 1996
---------------- ----------- -----------
Construction-in-progress.................................... $ 23,644 $ 21,829
Land........................................................ 5,341 5,328
Buildings................................................... 10 to 20 years 49,654 50,701
Equipment................................................... 3 to 7 years 172,555 206,739
----------- -----------
Property and equipment.................................... 251,194 284,597
Less: accumulated depreciation.......................... (138,070) (161,549)
----------- -----------
Property and equipment--net................................. $ 113,124 $ 123,048
----------- -----------
----------- -----------
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
JUNE 30,
--------------------
1995 1996
--------- ---------
Accrued vacation pay............................................................... $ 2,827 $ 3,185
Other accrued compensation and benefits............................................ 2,417 5,761
Lucent supply agreement............................................................ 1,500 1,500
Accrued purchase commitments....................................................... 3,480
Other.............................................................................. 2,379 3,768
--------- ---------
Other accrued liabilities...................................................... $ 9,123 $ 17,694
--------- ---------
--------- ---------
8. BORROWINGS
Borrowings consist of the following:
JUNE 30,
--------------------
1995 1996
--------- ---------
Non-interest bearing notes payable to customers due 1997........................... $ 2,921 $ 560
Capital lease obligations.......................................................... 4,192 5,889
6% bank borrowings due 1999 through 2001........................................... 112 2,500
15% bank borrowings due 1997 through 2001.......................................... 1,829
--------- ---------
Borrowings....................................................................... 7,225 10,778
Less: short-term borrowings.................................................... (2,960) (1,454)
--------- ---------
Long-term borrowings............................................................... $ 4,265 $ 9,324
--------- ---------
--------- ---------
F-10
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. LEASES
Minimum lease payments for years ending June 30 are as follows:
CAPITAL OPERATING
LEASES LEASES
--------- -----------
1997.............................................................................. $ 1,132 $ 285
1998.............................................................................. 845 61
1999.............................................................................. 845 29
2000.............................................................................. 845 5
2001.............................................................................. 845
Thereafter........................................................................ 4,001
--------- -----
Minimum lease payments.......................................................... 8,513 $ 380
--------- -----
-----
Less: interest................................................................ (2,624)
---------
Present value of minimum lease payments........................................... $ 5,889
---------
---------
10. MASTER NOTES AND CREDIT AGREEMENT
Interest expense includes amounts paid to DuPont under the master notes of
$5,134, $6,898 and $7,016 for the years ended June 30, 1994, 1995 and 1996. The
interest rate charged on the notes was generally equivalent to the rate DuPont
paid for its commercial paper borrowings. In conjunction with the IPO, DuPont,
on June 28, 1996, contributed the $90,453 balance outstanding on the master
notes to the Company as a capital contribution.
The Company and DCEO have entered into a credit agreement effective as of
January 1, 1996 (the Credit Agreement), pursuant to which DCEO has agreed to
provide a revolving/working capital facility (the Credit Facility) to the
Company in an aggregate amount of $30,000. The Credit Facility has a term of 24
months, and any loans thereunder will bear interest at the six-month LIBOR plus
50 basis points. The amounts loaned under the Credit Agreement are secured by
certain assets of the Company's and the Credit Agreement contains various
representations, covenants and events of default typical for financings of a
similar size and nature. No amounts have been borrowed or are outstanding under
the Credit Agreement.
11. STOCKHOLDERS' EQUITY
Stockholders' equity at June 30 is as follows:
ADDITIONAL UNREALIZED
COMMON PAID-IN HOLDING
STOCK CAPITAL GAIN
----------- ---------- -----------
Owner's net investment, realignment and contribution of capital...... $ 105 $ 80,814
Issuance of common stock--net........................................ 46 72,066
Unrealized holding gain.............................................. $ 11,583
----- ---------- -----------
Balance at June 30, 1996........................................... $ 151 $ 152,880 $ 11,583
----- ---------- -----------
----- ---------- -----------
F-11
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. STOCK PERFORMANCE PLANS
The Company has several stock performance plans whereby options to purchase
shares of common stock or shares of restricted stock have been or can be granted
to directors, officers and employees. Option exercise prices are equal to the
fair market value at the date of grant. Restricted stock grants do not require
the payment of any cash consideration by the recipient. Matters such as vesting
periods and expirations are determined on a plan-by-plan or grant-by-grant
basis. A summary of stock option activity is as follows:
EXERCISE
SHARES PRICE
---------- -------------
Options granted.............................................................. 953,784 $ 17.00
---------- ------
Balance at June 30, 1996................................................... 953,784 $ 17.00
---------- ------
---------- ------
A summary of restricted stock grant activity is as follows:
MARKET VALUE
SHARES PER SHARE
--------- -------------
Restricted stock granted....................................................... 94,913 $ 17.00
--------- ------
Balance at June 30, 1996..................................................... 94,913 $ 17.00
--------- ------
--------- ------
Of the performance plan grants outstanding at June 30, 1996, none were
exercisable. At June 30, 1996, there were 951,303 shares reserved for future
grants under existing plans of which 205,087 may be subject to restricted stock
grants. The Company does not plan to adopt the measurement principles of FAS 123
but will make the required disclosures in its 1997 financial statements.
13. PENSION AND OTHER POST RETIREMENT BENEFIT COSTS
Pension cost for U.S. employees allocated from DuPont was $1,192, $1,074 and
$1,532 for the years ended June 30, 1994, 1995 and 1996. Other postretirement
benefit cost for U.S. employees allocated from DuPont was $754, $688 and $739
for the years ended June 30, 1994, 1995 and 1996. Pension cost for non-U.S.
employees was $186, $206 and $174 for the years ended June 30, 1994, 1995 and
1996.
14. PROVISION FOR INCOME TAXES
Throughout the period covered by the financial statements, DuPont utilized
various tax planning strategies and elections to minimize its total income tax
expense. It is not practicable to identify the effects of these strategies and
elections on the results of operations of the Company.
In conjunction with the IPO, the Company, DuPont and DCEO entered into a tax
indemnification agreement pursuant to which the Company will make payments to
DuPont and/or DuPont will make payments to the Company, as appropriate, of taxes
payable or receivable at the IPO date. The amount due from DuPont under the tax
indemnification agreement was $2,073 at June 30, 1996. The Company has a capital
loss carry forward of $18,513 arising from the Realignment. Benefit from this
carry forward, if and when realized, is payable to DuPont under the tax
indemnification agreement.
F-12
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. PROVISION FOR INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
YEAR ENDED JUNE 30,
--------------------------------
1994 1995 1996
--------- --------- ----------
Current:
Federal............................................................. $ 10,706
State............................................................... 1,738
Non-U.S............................................................. $ 1,554 4,572
Deferred:
Federal............................................................. (10,706)
State............................................................... (1,738)
Non-U.S............................................................. (1,554) (1,894)
--------- --------- ----------
Provision for income taxes............................................ $ -- $ -- 2,678
--------- --------- ----------
--------- --------- ----------
The provision for income taxes differs from the amount computed by applying
the federal statutory rate as a result of the following:
YEAR ENDED JUNE 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Tax at 35% statutory federal tax rate................................... $ (3,803) $ 1,385 $ 10,123
Higher (lower) effective tax rate on non-U.S. operations................ (129) 485 2,657
Tax exemption........................................................... (962) (2,340) (3,081)
Changes in valuation allowance.......................................... 5,193 574 (7,808)
State taxes, net of federal............................................. (347) (161) 586
Other................................................................... 48 57 201
--------- --------- ---------
Provision for income taxes.............................................. $ -- $ -- $ 2,678
--------- --------- ---------
--------- --------- ---------
F-13
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. PROVISION FOR INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities), which differ from amounts allocated to
the Company under the separate taxpayer approach utilized for periods prior to
the IPO, consist of the following:
JUNE 30,
1996
----------
Deferred tax assets:
Inventories........................................................... $ 236
Depreciation.......................................................... 3,245
Accrued liabilities................................................... 1,036
Other................................................................. 514
----------
Deferred tax assets................................................. 5,031
----------
Deferred tax liabilities:
Depreciation.......................................................... (4,874)
Unrealized holding gain............................................... (6,237)
Other................................................................. (477)
----------
Deferred tax liabilities............................................ (11,588)
----------
Valuation allowance..................................................... (243)
----------
Deferred taxes...................................................... $ (6,800)
----------
----------
F-14
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
15. GEOGRAPHIC INFORMATION
The Company operates within a single industry segment. Geographic
information as of and for the years ended June 30, 1994, 1995 and 1996 is as
follows:
UNITED ASIA
STATES EUROPE PACIFIC TOTAL
---------- --------- --------- ----------
1994
Sales.................................................... $ 81,749 $ 31,135 $ 21,664 $ 134,548
Transfers between geographic areas....................... 7,397 838
---------- --------- --------- ----------
89,146 31,973 21,664 134,548
---------- --------- --------- ----------
---------- --------- --------- ----------
Net income (loss)........................................ (10,631) (2,825) 2,692 (10,865)
Identifiable assets...................................... 82,948 31,755 46,198 160,901
1995
Sales.................................................... $ 90,095 $ 41,958 $ 29,461 $ 161,514
Transfers between geographic areas....................... 9,710 4,130 187
---------- --------- --------- ----------
99,805 46,088 29,648 161,514
---------- --------- --------- ----------
---------- --------- --------- ----------
Net income (loss)........................................ (5,518) 3,426 6,167 4,119
Identifiable assets...................................... 84,107 37,685 49,909 171,701
1996
Sales.................................................... $ 121,620 $ 52,910 $ 38,885 $ 213,415
Transfers between geographic areas....................... 14,613 2,278 79
---------- --------- --------- ----------
136,233 55,188 38,964 213,415
---------- --------- --------- ----------
---------- --------- --------- ----------
Net income............................................... 14,987 7,154 4,479 26,904
Identifiable assets...................................... 126,540 36,214 65,139 227,893
Sales outside the United States of products manufactured in and exported
from the United States are not significant. Products are transferred between
geographic areas on a basis intended to approximate the market value of such
products. For the years ended June 30, 1995 and 1996, Asia Pacific operations
include pre-production costs for the Company's joint venture in China; no
commercial operations were conducted in China during these periods.
16. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments incident to the normal course
of business including non-refundable deposits to purchase equipment aggregating
$6,890 at June 30, 1996. In the aggregate, such commitments are not at prices in
excess of current market. The Company is subject to litigation in the normal
course of business. Management believes the effect, if any, of an unfavorable
settlement of such litigation would not have a material adverse effect on the
financial position, results of operations, cash flows or liquidity of the
Company.
F-15
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
17. UNAUDITED SUBSEQUENT EVENTS
In August, 1996, the Company paid $1,785 in settlement of certain amounts
payable to DuPont at June 30, 1996 and DuPont contributed $3,692 of its
remaining outstanding receivable to the Company as an equity contribution.
18. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the years ended June 30, 1995 and
1996 is as follows:
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1995
Sales....................................................... $ 38,715 $ 37,617 $ 40,338 $ 44,844
Operating profit............................................ 2,922 1,241 2,043 4,216
Net income (loss)........................................... 1,276 (276) 710 2,409
1996
Sales....................................................... $ 46,039 $ 50,279 $ 55,874 $ 61,223
Operating profit............................................ 4,887 8,748 11,502 11,749
Net income.................................................. 2,426 6,564 9,412 8,502
F-16