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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
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 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: 512-310-6559
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. / /
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
8, 1997, was approximately $315 million. As of such date, 15,154,600 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 15, 1997,
filed in connection with the Annual Meeting of
Stockholders to be held on October 27, 1997............... III
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 . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . 14
Executive Officers of the Company . . . 14
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . 22
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Disclosure . . . . . . . . . . . . . . 22
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 . . . . . . . . 23
Signatures. . . . . . . . . . . . . . . 24
NOTE ON INCORPORATION BY REFERENCE
Throughout this report, various information and data are incorporated by
reference to portions of the Company's 1997 Proxy Statement. Any reference
in this report to disclosures in the Company's 1997 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
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 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"). The Company was reincorporated in
Delaware prior to the Initial Public Offering 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 69.3%) 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 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 several hours.
3
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
25 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.
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. In addition, the
demand for semiconductor devices from traditional markets such as personal
computers, cellular telephones, pagers, automobiles, medical products,
household appliances and other electronic consumer products is growing
significantly as semiconductor content in electronic systems increases and as
these products expand into new market segments.
4
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 some "5X" reduction steppers
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 25
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 beam 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 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 beam 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 over 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.
5
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 Corporation 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 six patents covering various aspects of pellicle technology,
with three patents pending. To assure a backup supply, the Company purchases
approximately 20% to 30% of the pellicles it uses to manufacture photomasks
from Micro Lithography, Inc. and 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. Additionally, the Company has
announced plans to build a manufacturing facility on a to be identified
"greenfield" site near Portland, Oregon. In Europe, the Company's
manufacturing facilities are located in Rousset, France and Hamburg, Germany
and it is constructing a third photomask manufacturing facility on a
"greenfield" site in Hamilton, Scotland. In Asia, the Company currently
operates a manufacturing facility in Ichon, Republic of Korea ("Korea") and
is participating in the operation of a facility with its joint venture
partner in Shanghai, Peoples Republic of China ("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. 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 a global
leader 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 24% of the Company's sales in fiscal 1997 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 Hamilton, 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 78% from
fiscal 1995 to fiscal 1997. 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 has expanded its Asian operations to
China. As part of a joint venture, the Company is participating in the
operation of a Shanghai, China manufacturing facility which began producing
photomasks in fiscal 1997. The Company is a majority owner of this joint
venture.
6
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 wholly-owned 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 1997, the Company's largest customer, SGS-Thomson accounted
for approximately 12% of the Company's sales. The Company's largest 6
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 "Risk Factors."
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. and, to a lesser extent,
with other smaller independent photomask suppliers. In Europe, the Company
competes primarily with Compugraphics International Limited and Photronics.
In Asia, the Company primarily competes with Dai Nippon Printing, Hoya
Corporation, 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. In addition, captive photomasks
operations can, and sometimes do, sell into the merchant market.
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, along with Advanced Micro Devices, Micron Technology and
Motorola, has begun operation of a joint venture for advanced photomask
technology development and pilot line fabrication of leading edge photomasks.
The venture, a limited liability company called the DPI Reticle Technology
Center, L.L.C. ("RTC"), is located in a fully equipped, free-standing
facility next to the photomasks manufacturing site the Company operates in
Round Rock, Texas.
7
The Company, independently and through its participation in the RTC,
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.
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.
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 0.35 micron semiconductor lithography. This technology is providing the
platform for the development of manufacturing technologies consistent with
0.25 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."
8
PATENTS, COPYRIGHTS, TRADEMARKS AND LICENSES
INTELLECTUAL PROPERTY
The Company believes that the success of its business depends primarily
on its proprietary technology, information, 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 twelve 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, 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, 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, 1997, the Company had approximately 1,500 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 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.
9
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 or a customer, 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.
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 1997, the Company's largest 6 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.
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 10 to
14 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.
10
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.
SIGNIFICANT INTERNATIONAL OPERATIONS
Approximately 44% of the Company's sales in fiscal 1997 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 operation of a manufacturing facility in
Shanghai, China as part of a joint venture arrangement with the Shanghai
Institute of Metallurgy and is constructing a photomask manufacturing
facility on a "greenfield" site in Hamilton, 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 prior to the Initial Public Offering do not reflect any hedging
activities. Effective with the completion of the Initial Public Offering,
the Company monitors its exchange rate exposure and attempts to reduce such
exposure by hedging. In 1997, the Company entered into Korean Won forward
contracts designed to reduce such exposure. There can be no assurance that
such forward contracts or any other hedging activity 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.
11
CONTROL BY AND RELATIONSHIP WITH DUPONT
DuPont, through DCEO, owns approximately 69.3% 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 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 has been 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.
12
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 the Company's wholly-owned operations is ISO-9002 qualified. The
Company believes that its facilities are adequate and suitable for their
respective uses. The table below presents certain information (as of June
30, 1997) relating to the Company's principal manufacturing and support
facilities.
FLOOR SPACE TYPE OF
LOCATION SQUARE FEET INTEREST USE
-------- ----------- -------- ---
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
Round Rock, Texas 17,000 Owned Research
Round Rock, Texas 17,000 Leased Administration
Round Rock, Texas (under construction) Owned Administration
EUROPE
Rousset, France 24,000 Leased Photomasks
Hamburg, Germany 22,000 Leased Photomasks
Hamilton, Scotland (under construction) Owned Photomasks
ASIA
Ichon, Korea 102,000 Owned Photomasks
Shanghai, China 16,000 Jointly Owned Photomasks
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) 310-6559.
The research facility in Round Rock is leased to the RTC and contains
primarily RTC manufacturing equipment leased by the RTC from a third party.
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.
13
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 $1 million in each of fiscal
1998, 1999 and 2000. In addition, the Company expects to incur expenses
relating to environmental matters of approximately $300,000 in each of fiscal
1998, 1999 and 2000. 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
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 is 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 8, 1997, of the Company's
executive officers, each of whom has been an executive officer since December
21, 1995 except Mr. Launder and Mr. Lynn who became executive officers on
October 1, 1996 and March 1, 1997.
AGE
---
Chief Executive Officer:
J. Michael Hardinger (1) . . . . . . . . . . . . . . . . . . . . 50
Other Executive Officers:
Preston M. Adcox, President and Chief Operating Officer . . . . 54
Gerard Cognie, Executive Vice President--European Operations . . 52
David S. Gino, Executive Vice President--Finance and Chief
Financial Officer . . . . . . . . . . . . . . . . . . . . . 39
Arthur W. Launder, Executive Vice President-North American
Photomask Operations. . . . . . . . . . . . . . . . . . . . 58
John M. Lynn, Executive Vice President, General Counsel and
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . 39
Kenneth A. Rygler, Executive Vice President--Worldwide
Marketing and Strategic Planning . . . . . . . . . . . . . 53
- --------------
(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. Mr. Hardinger is also a member of the
Texas Commerce Bank Austin Advisory Board of Directors.
14
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 had global responsibility for
DuPont's photomask operations until 1996. 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 and the Chairman of the Board of DuPont Photomasks (France) S.A. He
joined DuPont in 1968 and from 1988 to 1996 served as the Director of DuPont's
European photomask operations and from 1985 to 1996 served as the Director of
Electronics for DuPont France.
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 management
positions with DuPont's semiconductor materials, imaging systems and printing
and publishing businesses.
ARTHUR W. LAUNDER. Mr. Launder is Executive Vice President-North American
Photomask Operations. He joined the Company in 1996 after serving as President
of ASM America, Inc. Prior to joining ASM America, Inc. in 1994, he had been
President and Chief Operating Officer of Photronics, Inc. from 1987 to 1994 and
Senior Vice President and General Manager of Micro Mask, Inc. from 1983 to 1987.
JOHN M. LYNN. Mr. Lynn is Executive Vice President and General Counsel of the
Company. He also serves as Corporate Secretary. He joined DuPont in 1980 as a
chemical engineer and then, after a departure for law school, rejoined DuPont as
a lawyer in 1985. He held a number of legal advisory positions with DuPont
prior to joining the Company in 1996.
KENNETH A. RYGLER. Mr. Rygler is Executive Vice President--Worldwide Marketing
and Strategic Planning 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 appointed annually by the Board of
Directors in accordance with the Company's Bylaws.
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 96 at September
8, 1997.
The high and low sales prices of Company stock for each quarterly period
since June 14, 1996, the first trading day after the Initial Public Offering,
are set forth in the table below.
HIGH LOW
---- ---
YEAR ENDING JUNE 30, 1996
Fourth Quarter $23.50 $19.25
YEAR ENDING JUNE 30, 1997
First Quarter $29.25 $17.87
Second Quarter $47.50 $26.75
Third Quarter $63.00 $36.25
Fourth Quarter $59.50 $36.75
YEAR ENDING JUNE 30, 1998
First Quarter (through September 8, 1997) $69.50 $46.75
15
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, except per share amounts)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Sales . . . . . . . . . . . $118,896 $134,548 $161,514 $213,415 $261,185
Income (loss) before
extraordinary item . . . . (37,558) (10,865) 4,119 26,904 36,762
Net income (loss) . . . . . (37,558) (10,865) 4,119 26,904 59,004
Earnings per share before
extraordinary item . . . . 2.36
Earnings per share . . . . 3.79
Total assets . . . . . . . 176,953 160,901 171,701 227,893 291,579
Borrowings . . . . . . . . 3,731 8,090 7,225 10,778 12,318
DuPont master notes . . . . 142,841 140,846 125,570
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 ("DuPont"). 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 unaudited pro forma income statement 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 income statement
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.
16
INCOME STATEMENT
(Percent of sales)
FOR THE YEARS ENDED JUNE 30,
----------------------------
PRO FORMA
---------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
Sales . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . 72.5 65.0 64.5 61.5
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . 13.5 11.8 12.3 12.1
Research and development expense . . . . . 5.4 4.3 3.9 4.7
Other operating expense . . . . . . . . . . 2.2 1.6 1.4 1.1
------ ------ ------ ------
Operating profit . . . . . . . . . . . . . 6.4 17.3 17.9 20.6
Interest (income) expense . . . . . . . . . 4.2 3.3 (0.8)
Exchange (gain) loss . . . . . . . . . . . (0.3) 0.4 0.3 0.3
------ ------ ------ ------
Income before income taxes, minority
interest and extraordinary item. . . . . 2.5 13.6 17.6 21.1
Provision for income taxes . . . . . . . . 1.3 6.2 7.4
------ ------ ------ ------
Income before minority interest and
extraordinary item. . . . . . . . . . . . 2.5 12.3 11.4 13.7
Minority interest in loss of majority owned
joint venture. . . . . . . . . . . . . . (0.3) (0.3) (0.4)
------ ------ ------ ------
Income before extraordinary item . . . . . 2.5 12.6 11.7 14.1
Extraordinary item . . . . . . . . . . . . (8.5)
------ ------ ------ ------
Net income . . . . . . . . . . . . . . 2.5% 12.6% 11.7% 22.6%
------ ------ ------ ------
------ ------ ------ ------
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. Since that time, however, growth in the photomask
market has resumed.
The Company's sales increased from $161.5 million in 1995 to $261.2
million in 1997. The increase of over 61% was primarily the result of an
accelerating trend in the semiconductor industry toward semiconductor device
customization, which generates demand for new photomasks, semiconductor
device 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 continued to be internationally diverse. North
American sales constituted approximately 56% of the Company's sales in 1995
and 1997, while sales in Europe and Asia accounted for approximately 26% and
18% of sales in 1995 and 24% and 20% in 1997. Sales in North America grew
approximately 62% from 1995 to 1997 from $90.1 million to $145.6 million.
Sales in Europe grew approximately 50% from 1995 to 1997 from $42.0 million
to $63.0 million. Sales in Asia grew approximately 78% from 1995 to 1997
from $29.5 million to $52.6 million. 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 1995 to 1997, costs
associated with manufacturing remained relatively unchanged and the Company's
operating profit over the period benefited. The Company anticipates that
operating costs will increase as it adds capacity to position itself for
future growth.
17
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
SALES
Sales are comprised primarily of photomask sales to semiconductor
manufacturers. Sales increased 22.4% from $213.4 million in 1996 to $261.2
million in 1997. Sales in North America, Europe and Asia increased from
$121.6 million, $52.9 million and $38.9 million in 1996 to $145.6 million,
$63.0 million and $52.6 million in 1997. 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.
COST OF GOODS SOLD
Cost of goods sold consists of material, labor, depreciation and
overhead. Cost of goods sold increased 15.7% from $138.8 million in 1996 to
$160.6 million in 1997 resulting primarily from higher costs associated with
increased sales. As a percentage of sales, cost of goods sold decreased from
65.0% in 1996 to 61.5% in 1997. 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
includes fees incurred by the Company under administrative services
agreements with DuPont and certain DuPont subsidiaries ("Administrative
Service Agreements"). Selling, general and administrative expense as a
percentage of sales increased from 11.8% in 1996 to 12.1% in 1997. Selling,
general and administrative expense increased 25.6% from $25.2 million in 1996
to $31.6 million in 1997. The increases were due largely to increases in
selling expenses corresponding to increased sales and increases in incentive
compensation expenses corresponding to increases in earnings.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of employee costs,
cost of material consumed, depreciation, engineering related costs and the
Company's allocated share of DuPont's central research and development.
These allocations were $1.1 million in 1996. Such allocations terminated
December 31, 1995. Since that date, the Company has received services from
DuPont central research and development pursuant to a research, development
and consulting agreement with DuPont.
Research and development expense, excluding DuPont allocations,
increased from $8.1 million in 1996 to $12.4 million in 1997. As a
percentage of sales, research and development expense increased slightly
compared to the prior year. The increases reflect pre-operating losses from
the Company's joint venture participation, with Advance Micro Devices, Micron
Technology and Motorola, in a limited liability company called the DPI
Reticle Technology Center, L.L.C. ("RTC") which was formed to develop
advanced photomask technology and pilot line fabricate leading edge
photomasks. The Company believes that, through its participation in the RTC,
it will be able to help meet the future technology needs of the semiconductor
industry for advanced photomasks. There can be no assurance that the RTC
will yield results that are favorable to the Company.
18
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. 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 pre-operating losses related to new facilities
and 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. Also, as the Company adds capacity to position itself for future
growth, it will incur additional pre-operating losses related to new
facilities. Other operating expense decreased from $3.4 million in 1996 to
$2.8 million in 1997.
INTEREST (INCOME) EXPENSE
Interest expense was $7.1 million in 1996 and interest income was $2.1
million in 1997. The primary source of interest expense in 1996 was 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. Interest income results from short-term
investment of the Company's cash balances.
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 loss
was $0.9 million in 1996 and $0.8 million in 1997. The loss is primarily due
to fluctuations of the U.S. Dollar against the German Mark, French Franc and
Korean Won. Exchange (gain) loss is net of the impact of hedging activities
designed to reduce exchange rate exposure.
PROVISION FOR INCOME TAXES
Prior to the Initial Public Offering, tax expense was 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 prior to the Initial Public Offering were
included in consolidated tax returns filed by DuPont and the tax benefit of
prior year losses was realized by DuPont. Since the Initial Public Offering,
tax expense has been determined in accordance with FAS 109 and approximates
the U.S. statutory rate.
MINORITY INTEREST IN LOSS OF MAJORITY OWNED JOINT VENTURE
The minority interest impact of the Company's joint venture in China was
($0.7 million) in 1996 compared to ($0.9 million) in 1997, reflecting
increased pre-operating losses from, and partner funding of, the joint
venture.
EXTRAORDINARY ITEM
In January 1997, the Company sold its entire investment in Etec Systems,
Inc. common stock. Aggregate net proceeds from the sale of $39.2 million
will be used in operations. The Company realized a $34.2 million gain on the
sale. The related provision for income taxes was $12.0 million.
19
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
SALES
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") 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 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
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 includes fees
incurred by the Company under Administrative Service Agreements. 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.
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 a research, development and consulting agreement 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.
OTHER OPERATING EXPENSE
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.
20
EXCHANGE (GAIN) LOSS
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $34.5 million at June 30, 1996 and
$66.1 million at June 30, 1997. The increase in working capital for the year
ended June 30, 1997 is due principally to higher cash balances. Cash and
cash equivalents were $8.4 million at June 30, 1995, $20.2 million at June
30, 1996 and $51.4 million at June 30, 1997. The increase in 1996 was
primarily due to the Company retaining a portion of the net proceeds of the
Initial Public Offering. The increase in 1997 was primarily due to the
Company retaining a portion of the cash generated from operations and the
cash proceeds from the sale of the Company's investment in Etec Systems, Inc.
common stock. The Company's ongoing cash requirements will be for capital
expenditures, research and product development and working capital.
Cash provided by operations was $29.0 million in 1995, $50.4 million in
1996 and $41.7 million in 1997. The Company believes that cash provided by
operations will be the Company's primary source of liquidity. Cash used in
investing activities was $18.6 million in 1995, $29.4 million in 1996 and
$11.8 million in 1997. The Company's most significant use of cash for
investing activities was capital expenditures and acquisitions. The Company
expects capital expenditures in 1998 will be approximately $70 million. The
capital expenditures for 1998 will be used primarily to expand the Company's
manufacturing capacity and advance the Company's technical capability. Cash
used in financing activities was $7.0 million in 1995 and $8.5 million in
1996 and cash provided by financing activities was $2.5 million in 1997.
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.
The Company and DuPont have entered into a credit agreement pursuant to
which DuPont has agreed to provide a credit facility to the Company in an
aggregate amount of $100.0 million. The Credit Agreement has a term of 48
months and any loans thereunder will bear interest at LIBOR plus 25 basis
points. At the Company's option, advances under the Credit Agreement are
convertible into term loans with maturities up to seven years. The credit
facility will serve as a back-up to cash from operations. To date, there
have been no borrowings under the credit facility. 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.
OTHER MATTERS
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
21
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 prior to the
Initial Public Offering do not reflect any hedging activities. Effective with
the completion of the Initial Public Offering, the Company monitors its exchange
rate exposure and attempts to reduce such exposure by hedging. In 1997, the
Company entered into Korean Won forward contracts designed to reduce such
exposure. There can be no assurance that such forward contracts or any other
hedging activity 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 unaudited pro forma income statement 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 several transitional agreements, 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. Net
income, after an increase in the provision for income taxes, would have
decreased by $1.8 million for 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
PAGE(S)
---------
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . F-1
Income Statement for the Three Years Ended June 30, 1997 . . . . . . . F-2
Balance Sheet at June 30, 1996 and 1997. . . . . . . . . . . . . . . . F-3
Statement of Cash Flows for the Three Years Ended June 30, 1997. . . . F-4
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-5 to 15
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 15, 1997, filed in connection with the Annual Meeting of Stockholders
to
22
be held October 27, 1997. 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 . . . . . . . . . . . . . 10 to 15
Director Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 15
Employment Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 15
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
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 22
2. Financial statement schedules--see Index to Financial Statements
on page 22
3. Exhibits--see Index to Exhibits on page 26
(B) Reports on Form 8-K
Form 8-K, dated June 10, 1997, filed in connection with the Company's
announced new production facility to be located in the Portland,
Oregon area of the United States.
23
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 12, 1997 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
---- ----- ----
/s/ J. MICHAEL HARDINGER
- ----------------------------- Chairman of the Board and September 12, 1997
J. Michael Hardinger Chief Executive Officer
(Principal Executive Officer)
/s/ PRESTON M. ADCOX
- ----------------------------- President and Chief Operating
Preston M. Adcox Officer September 12, 1997
/s/ DAVID S. GINO
- ----------------------------- Executive Vice President-- September 12, 1997
David S. Gino Finance and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
/s/ JOHN L. DOYLE
- ----------------------------- Director September 12, 1997
John L. Doyle
/s/ JOHN C. HODGSON
- ----------------------------- Director September 12, 1997
John C. Hodgson
/s/ CHARLES O. HOLLIDAY, JR.
- ----------------------------- Director September 12, 1997
Charles O. Holliday, Jr.
/s/ PETER G. KEHOE
- ----------------------------- Director September 12, 1997
Peter G. Kehoe
24
NAME TITLE DATE
---- ----- ----
/s/ GARY W. PANKONIEN
- ----------------------------- Director September 12, 1997
Gary W. Pankonien
/s/ JOHN C. SARGENT
- ----------------------------- Director September 12, 1997
John C. Sargent
/s/ MARSHALL C. TURNER
- ----------------------------- Director September 12, 1997
Marshall C. Turner
/s/ SUSAN A. VLADUCHICK
- ----------------------------- Director September 12, 1997
Susan A. Vladuchick
25
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 Amended Bonus Plan, as adopted by the Company's Board of
Directors on October 28, 1996
10.4 Company's Amended and Restated Non-employee Directors Stock Option Plan
as adopted by the Company's Board of Directors on June 9, 1997
10.5 Company's Amended and Restated Stock Performance Plan as adopted by the
Company's Board of Directors on June 9, 1997
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 Amended Credit Agreement between the Company and DuPont Chemical and
Energy Operations, Inc. dated as of August 1, 1997
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*
10.15 Company's 1997 Stock Option and Restricted Stock Plan as adopted by the
Company's Board of Directors on June 9, 1997
11 Statement re Computation of Per Share Earnings
21 List of principal subsidiaries of the Company
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
26
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 income
statement and statement of cash flows present fairly, in all material
respects, the financial position of DuPont Photomasks, Inc. and its
subsidiaries at June 30, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, 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
Austin, Texas
July 29, 1997
F-1
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
INCOME STATEMENT
YEAR ENDED JUNE 30,
-------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
---------
1995 1996 1996 (NOTE 1) 1997
---- ---- ------------- ----
(UNAUDITED)
Sales . . . . . . . . . . . . . . . $161,514 $213,415 $213,415 $261,185
Cost of goods sold . . . . . . . . 117,022 138,796 137,615 160,564
Selling, general and
administrative expense . . . . 21,803 25,167 26,229 31,611
Research and development
expense . . . . . . . . . . . 8,777 9,162 8,290 12,372
Other operating expense . . . . . . 3,490 3,404 3,126 2,755
-------- -------- ---------- ----------
Operating profit . . . . . . . . . 10,422 36,886 38,155 53,883
Interest (income) expense . . . . . 6,957 7,078 62 (2,080)
Exchange (gain) loss . . . . . . . (493) 886 590 796
-------- -------- ---------- ----------
Income before income taxes, minority
interest and extraordinary
item . . . . . . . . . . . . . 3,958 28,922 37,503 55,167
Provision for income taxes . . . . 2,678 13,126 19,308
-------- -------- ---------- ----------
Income before minority interest and
extraordinary item . . . . . . 3,958 26,244 24,377 35,859
Minority interest in loss of
majority owned joint
venture . . . . . . . . . . . (161) (660) (660) (903)
-------- -------- ---------- ----------
Income before extraordinary
item . . . . . . . . . . . . . 4,119 26,904 25,037 36,762
Extraordinary item . . . . . . . . (22,242)
-------- -------- ---------- ----------
Net income . . . . . . . . . . . . $4,119 $26,904 $25,037 $59,004
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Earnings per share before
extraordinary item . . . . . . $1.65 $2.36
Extraordinary item . . . . . . . . (1.43)
---------- ----------
Earnings per share . . . . . . . . $1.65 $3.79
---------- ----------
---------- ----------
Weighted average shares
outstanding . . . . . . . . . 15,194,913 15,562,522
---------- ----------
---------- ----------
The accompanying notes are an integral part of this statement.
F-2
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
BALANCE SHEET
ASSETS
JUNE 30,
--------
1996 1997
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PAR VALUE AMOUNTS)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 20,179 $ 51,351
Accounts receivable, trade . . . . . . . . . . . . . 32,293 38,973
Accounts receivable, related parties . . . . . . . . 4,726 3,670
Inventories . . . . . . . . . . . . . . . . . . . . 10,227 15,651
Deferred income taxes . . . . . . . . . . . . . . . 1,543 3,351
Prepaid expenses and other current assets . . . . . 3,238 8,711
-------- --------
Total current assets . . . . . . . . . . . . . 72,206 121,707
-------- --------
Property and equipment . . . . . . . . . . . . . . . . . 123,048 162,310
Accounts receivable, related parties . . . . . . . . . . 1,928 1,746
Deferred income taxes . . . . . . . . . . . . . . . . . . 3,245 2,386
Other assets . . . . . . . . . . . . . . . . . . . . . . 27,466 3,430
-------- --------
Total assets . . . . . . . . . . . . . . . . . $227,893 $291,579
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade . . . . . . . . . . . . . . $ 10,382 $ 27,207
Accounts payable, related parties . . . . . . . . . 5,885 4,889
Short-term borrowings . . . . . . . . . . . . . . . 1,454 1,845
Income taxes payable . . . . . . . . . . . . . . . . 2,333 1,295
Other accrued liabilities . . . . . . . . . . . . . 17,694 20,389
-------- --------
Total current liabilities . . . . . . . . . . . 37,748 55,625
-------- --------
Long-term borrowings . . . . . . . . . . . . . . . . . . 9,324 10,473
Deferred income taxes . . . . . . . . . . . . . . . . . . 11,588 6,300
Other liabilities . . . . . . . . . . . . . . . . . . . . 3,747 2,597
Minority interest in net assets of majority owned joint
venture . . . . . . . . . . . . . . . . . . . . . . 872 687
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares
authorized; 15,100,000 and 15,104,568 issued
and outstanding . . . . . . . . . . . . . . . . 151 151
Additional paid-in capital . . . . . . . . . . . . . 152,880 156,742
Unrealized holding gain . . . . . . . . . . . . . . 11,583
Retained earnings . . . . . . . . . . . . . . . . . 59,004
-------- --------
Total liabilities and stockholders' equity . . $227,893 $291,579
-------- --------
-------- --------
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,
(DOLLARS IN THOUSANDS)
----------------------
1995 1996 1997
---- ---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,119 $ 26,904 $ 59,004
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization . . . . . . . . . . . . . . 25,543 26,882 26,593
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (2,028) (494)
Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . (34,219)
Cash provided (used) by changes in assets and liabilities
Accounts receivable. . . . . . . . . . . . . . . . . . . (1,471) (7,706) (6,945)
Inventories. . . . . . . . . . . . . . . . . . . . . . . (296) (3,399) (5,444)
Prepaid expenses and other current assets . . . . . . . 2,253 (1,021) (5,038)
Accounts payable . . . . . . . . . . . . . . . . . . . . (2,360) (4,190) 2,470
Other accrued liabilities. . . . . . . . . . . . . . . . 1,201 14,989 5,814
-------- -------- --------
Net cash provided by operating activities. . . . . . . . 29,031 50,431 41,741
-------- -------- --------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . (14,853) (24,294) (51,057)
Payments for acquisitions . . . . . . . . . . . . . . . . (4,000) (6,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 272 920
Proceeds from sale of investment . . . . . . . . . . . . . 39,219
-------- -------- --------
Net cash used in investing activities. . . . . . . . . . (18,581) (29,374) (11,838)
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) in borrowings . . . . . . . . . . . . (1,591) (1,666) 2,394
Net proceeds from issuance of common stock . . . . . . . . 72,066 61
Net cash paid to DuPont . . . . . . . . . . . . . . . . . (5,432) (78,908)
-------- -------- --------
Net cash (used in) provided by financing activities. . . (7,023) (8,508) 2,455
-------- -------- --------
Effect of exchange rate changes on cash. . . . . . . . . . . 1,061 (782) (1,186)
-------- -------- --------
Net increase in cash and cash equivalents. . . . . . . . . . 4,488 11,767 31,172
Cash and cash equivalents at beginning of year . . . . . . . 3,924 8,412 20,179
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . $ 8,412 $ 20,179 $ 51,351
-------- -------- --------
-------- -------- --------
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"). 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. 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 prior to the IPO 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
prior to the IPO, 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. 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.
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 are stated at cost and are
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.
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over their estimated useful lives. Net intangible assets, primarily
supply agreements, were $3,883 and $2,750 at June 30, 1996 and 1997 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.
F-5
PENSIONS, OTHER POST RETIREMENT BENEFITS AND PROFIT SHARING: 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 provided for the Company to contribute three to five percent of
an employee's compensation into a participant directed investment account.
Effective July 1, 1997, the Company eliminated the defined contribution
retirement plan and implemented a profit sharing plan covering substantially all
of the active U.S. employees.
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. Certain non-U.S. employees are covered by separate
profit sharing plans.
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
has been recognized as an offset to research and development expense. The
Company participates in a joint venture for advanced photomask development and
pilot line fabrication of leading edge photomasks.
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 tax expense were determined and allocated to the
Company by applying the separate taxpayer approach outlined in FAS 109.
Deferred income taxes at June 30, 1996 differ from amounts allocated to the
Company under the separate taxpayer approach. The difference arises from the
fact that, since the IPO, the Company's tax return has not been 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, have been
eliminated, reflecting the fact that these losses were previously utilized by
DuPont in its consolidated returns. In addition, deferred income taxes were
established related to the Realignment.
The Company's operations in Korea operate under a government granted tax
exemption which expires in 2003.
PRO FORMA INFORMATION (UNAUDITED): The pro forma income statement 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 income statement 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 with DuPont and certain DuPont subsidiaries
("Administrative Service Agreements")) and employees to perform these functions.
F-6
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 Service 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 a research, development and consulting agreement with DuPont)
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 Service Agreements) and employees to perform these functions.
Pro forma interest expense reflects a $7,016 reduction of cost resulting
from the elimination of interest expense relating to the Company's master notes
with DuPont.
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 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 1997 presentation.
2. ACQUISITIONS
On April 7, 1995, the Company purchased, from an affiliate of 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"). 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.
F-7
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. Prior to the
IPO, the costs of these functions and services were directly charged and/or
allocated to the photomask business using methods that DuPont management
believes were 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 $13,106 for the year ended June 30, 1995 and $7,251 for the period July 1,
1995 to December 31, 1995. Effective January 1, 1996, the Company entered
several transitional agreements 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 and $3,944 for the year ended June 30, 1997. Amounts charged and
allocated to the Company for functions and services provided by DuPont are
principally included in general and administrative expense.
The Company owned 1,025,640 shares of Etec Systems, Inc. ("Etec") common
stock until January 1997. Etec is the Company's principal supplier of electron
beam and laser beam systems. 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 was reported as a separate component of stockholders' equity, net of tax
liabilities. In January 1997, the Company sold the entire investment.
Aggregate net proceeds from the sale of $39,219 will be used in operations. The
Company realized a $34,219 gain on the sale. The related provision for income
taxes was $11,977.
Accounts receivable, related parties includes receivables from employees of
the Company of $2,149 (Current $221, Non-Current $1,928) and $1,836 (Current
$90, Non-Current $1,746) at June 30, 1996 and 1997 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 and the Administrative Service Agreements. Sales to related parties,
principally various DuPont entities who serve as resellers for the Company, were
$6,368, $8,214 and $8,764 for the years ended June 30, 1995, 1996 and 1997.
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 amounts payable under Administrative Service
Agreements. In August 1996, the Company paid $1,785 in settlement of certain
amount payable to DuPont at June 30, 1996 and DuPont contributed $3,745 of its
remaining outstanding receivable to the Company as an equity contribution.
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 year
ended June 30, 1995 and, in the aggregate, these four customers represented
approximately forty-two percent of sales in the year. 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. One of the Company's
customers represented approximately twelve percent of sales in the year ended
June 30, 1997.
F-8
5. INVENTORIES
Inventories consist of the following:
JUNE 30,
--------
1996 1997
---- ----
Raw materials and supplies . . . . . . . . . . . $ 7,006 $13,122
Work-in-process . . . . . . . . . . . . . . . . . 785 902
Finished product . . . . . . . . . . . . . . . . 2,436 1,627
------- -------
Inventories . . . . . . . . . . . . . . . . . . . $10,227 $15,651
------- -------
------- -------
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED JUNE 30,
USEFUL --------
LIVES 1996 1997
----- ---- ----
Construction-in-progress . . . . . $ 21,829 $ 30,873
Land . . . . . . . . . . . . . . . 5,328 5,627
Buildings . . . . . . . . . . . . . 10 to 20 years 50,701 51,899
Equipment . . . . . . . . . . . . . 3 to 7 years 206,739 259,114
--------- ---------
284,597 347,513
Less: accumulated depreciation . (161,549) (185,203)
--------- ---------
Property and equipment . . . . . . $ 123,048 $ 162,310
--------- ---------
--------- ---------
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
JUNE 30,
--------
1996 1997
---- ----
Accrued vacation pay . . . . . . . . . . . . . . . . $ 3,185 $ 3,454
Accrued compensation and benefits . . . . . . . . . . 5,761 11,815
Lucent supply agreement . . . . . . . . . . . . . . . 1,500
Other . . . . . . . . . . . . . . . . . . . . . . . . 7,248 5,120
------- -------
Other accrued liabilities . . . . . . . . . . . . . $17,694 $20,389
------- -------
------- -------
F-9
8. BORROWINGS
Borrowings consist of the following:
JUNE 30,
--------
1996 1997
---- ----
Non-interest bearing notes payable to customers
due 1997 . . . . . . . . . . . . . . . . . . . $ 560
Capital lease obligations . . . . . . . . . . . . 5,889 $ 5,073
6% bank borrowings due 2000 through 2007 . . . . 2,500 4,500
10% bank borrowings due 1997 through 2001 . . . . 1,829 2,745
------- -------
10,778 12,318
Less: short-term borrowings . . . . . . . . . (1,454) (1,845)
------- -------
Long-term borrowings . . . . . . . . . . . . . . $ 9,324 $10,473
------- -------
------- -------
9. LEASES
Minimum lease payments for years ending June 30 are as follows:
CAPITAL OPERATING
LEASES LEASES
------ ------
1998 . . . . . . . . . . . . . . . . . . . . . $ 789 $ 433
1999 . . . . . . . . . . . . . . . . . . . . . 744 349
2000 . . . . . . . . . . . . . . . . . . . . . 744 305
2001 . . . . . . . . . . . . . . . . . . . . . 744 304
2002 . . . . . . . . . . . . . . . . . . . . . 744 51
Thereafter. . . . . . . . . . . . . . . . . . . 3,190
------- ------
Minimum lease payments . . . . . . . . . . . 6,955 $1,442
------- ------
------
Less: interest . . . . . . . . . . . . . . (1,882)
-------
Present value of minimum lease payments . . . . $ 5,073
-------
-------
10. MASTER NOTES AND CREDIT AGREEMENT
Interest expense includes amounts paid to DuPont under the master notes of
$6,898 and $7,016 for the years ended June 30, 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 (the "Credit
Agreement") pursuant to which DCEO has agreed to provide a credit facility to
the Company in an aggregate amount of $100,000. The Credit Agreement has a term
of 48 months and any loans thereunder will bear interest at LIBOR plus 25 basis
points. At the Company's option, advances under the Credit Agreement are
convertible into term loans with maturities up to seven years. The amounts
loaned under the Credit Agreement are unsecured 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.
F-10
11. STOCKHOLDERS' EQUITY
Stockholders' equity at June 30 is as follows:
ADDITIONAL UNREALIZED
COMMON PAID-IN HOLDING RETAINED
STOCK CAPITAL GAIN EARNINGS
----- ------- ---- --------
Realignment and contribution of capital . . $105 $ 80,860
Issuance of common stock . . . . . . . . . 46 72,020
Unrealized holding gain . . . . . . . . . . $ 11,583
---- -------- --------
Balance at June 30, 1996. . . . . . . . . 151 152,880 11,583
Contribution of capital . . . . . . . . . . 3,745
Issuance of common stock . . . . . . . . . 117
Unrealized holding gain . . . . . . . . . . 10,659
Sale of investment . . . . . . . . . . . . (22,242)
Net income . . . . . . . . . . . . . . . . $59,004
---- -------- -------- -------
Balance at June 30, 1997. . . . . . . . . $151 $156,742 $ -- $59,004
---- -------- -------- -------
---- -------- -------- -------
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. Generally, 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:
1996 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- ----- --------- -----
Balance at beginning of year . . . . 953,784 $17.00
Options granted. . . . . . . . . . . 953,784 $17.00 86,976 $29.21
Options forfeited. . . . . . . . . . (46,640) $17.00
Options exercised. . . . . . . . . . (3,576) $17.00
------- -------
Balance at end of year . . . . . . . 953,784 $17.00 990,544 $18.07
------- -------
------- -------
Exercisable at end of year . . . . . 223,210 $17.00
------- -------
------- -------
Additional information related to stock options at June 30, 1997 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE LIFE NUMBER EXERCISE
EXERCISE PRICE RANGE OF SHARES PRICE (YEARS) OF SHARES PRICE
-------------------- --------- ----- ------- --------- -----
$17.00 to $18.50 . . . . . 946,812 $17.07 9.0 223,210 $17.00
$25.87 to $35.56 . . . . . 17,698 $31.65 9.3
$37.28 to $53.19 . . . . . 26,034 $45.34 9.7
F-11
A summary of restricted stock grant activity is as follows:
1996 1997
---- ----
MARKET VALUE MARKET VALUE
NUMBER OF SHARES PER SHARE NUMBER OF SHARES PER SHARE
---------------- --------- ---------------- ---------
Balance at beginning of
year . . . . . . . . . . . 94,913 $17.00
Restricted stock granted . . . 94,913 $17.00 4,744 $18.50 to $45.88
Restricted stock forfeited . . (9,605) $17.00
Restricted stock issued . . . (992) $17.00
------ ------
Balance at end of year . . . . 94,913 $17.00 89,060 $17.54
------ ------
------ ------
At June 30, 1997, there were 3,338,336 shares reserved for future grants
under existing stock performance plans. The Company applies APB 25 and its
related interpretations in accounting for its stock performance plans. The
weighted average fair values of stock options granted in 1996 and 1997 were
$9.41 and $16.16. The weighted average fair values were determined using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 6.5%, no dividend yield, expected term of five years and
volatility of 58%. Had compensation cost been determined based on the fair
value of stock option awards at the date of grant, net income (earnings per
share) would have been $26,904 and $57,456 ($3.73) in 1996 and 1997. In
February 1997, the Financial Accounting Standards Board issued FAS 128 which
the Company will adopt in December 1997. Basic and diluted earnings per
share, as defined in FAS 128, would have been $3.91 and $3.79 for 1997.
13. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED JUNE 30,
-------------------
1995 1996 1997
------- ------- -------
Current:
Federal . . . . . . . . . . . . . . $10,706 $25,819
State . . . . . . . . . . . . . . . 1,738 787
Non-U.S. . . . . . . . . . . . . . . $ 1,554 4,572 4,679
Deferred:
Federal . . . . . . . . . . . . . . (10,706) (1,039)
State . . . . . . . . . . . . . . . (1,738) (59)
Non-U.S. . . . . . . . . . . . . . . (1,554) (1,894) 1,098
------- ------- -------
Provision for income taxes . . . . . . $ -- $ 2,678 $31,285
------- ------- -------
------- ------- -------
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,
-------------------
1995 1996 1997
------- ------- -------
Tax at 35% statutory federal tax rate . . . $1,385 $10,123 $31,285
Higher effective tax rate on non-U.S.
operations . . . . . . . . . . . . . . . 485 2,657 2,158
Tax exemption . . . . . . . . . . . . . . . (2,340) (3,081) (4,809)
Change in valuation allowance . . . . . . . 574 (7,808) (243)
State taxes, net of federal . . . . . . . . (161) 586 633
Other . . . . . . . . . . . . . . . . . . . 57 201 2,261
------- ------- -------
Provision for income taxes . . . . . . . . $ -- $ 2,678 $31,285
------- ------- -------
------- ------- -------
F-12
Deferred tax assets (liabilities) consist of the following:
JUNE 30,
1997
----
Deferred tax assets:
Inventories . . . . . . . . . . . . . . . . $ 953
Depreciation . . . . . . . . . . . . . . . 3,071
Accrued liabilities . . . . . . . . . . . . 1,955
Other . . . . . . . . . . . . . . . . . . . 466
--------
Deferred tax assets . . . . . . . . . . . 6,445
--------
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . (3,805)
Other . . . . . . . . . . . . . . . . . . . (3,203)
--------
Deferred tax liabilities . . . . . . . . . (7,008)
--------
Deferred income taxes . . . . . . . . . . $ (563)
--------
--------
Prior to the IPO, 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 and $256 at
June 30, 1996 and 1997. The Company has a capital loss carryforward of
$18,513 arising from the Realignment. Benefit from this carryforward, if and
when realized, is payable to DuPont under the tax indemnification agreement.
F-13
14. GEOGRAPHIC INFORMATION
The Company operates within a single industry segment. Geographic
information as of and for the years ended June 30, 1995, 1996 and 1997 is as
follows:
UNITED ASIA
STATES EUROPE PACIFIC TOTAL
-------- ------- ------- --------
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
1997
Sales . . . . . . . . . . . . . . . . . . . $145,621 $62,988 $52,576 $261,185
Transfers between geographic areas. . . . . 21,973 1,019 649
-------- ------- ------- --------
167,594 64,007 53,225 261,185
-------- ------- ------- --------
-------- ------- ------- --------
Net income . . . . . . . . . . . . . . . . 38,836 9,037 11,131 59,004
Identifiable assets . . . . . . . . . . . . 151,293 50,877 89,409 291,579
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.
15. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments incident to the normal course
of business including non-refundable deposits to purchase equipment aggregating
$12,679 at June 30, 1997. 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.
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16. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the years ended June 30, 1996 and
1997 is as follows:
QUARTER
----------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
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
1997
Sales . . . . . . . . . . . . . . . . . $64,244 $64,260 $62,760 $69,921
Operating profit . . . . . . . . . . . 13,740 13,962 13,920 12,261
Income before extraordinary item . . . 9,015 9,433 9,722 8,592
Net income . . . . . . . . . . . . . . 9,015 9,433 31,964 8,592
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