UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
Commission file number 0-20839
DUPONT PHOTOMASKS, INC.
(Exact name of registrant as specified in our charter)
Delaware |
|
74-2238819 |
(State or Other Jurisdiction |
|
(I.R.S. Employer |
|
|
|
131 Old
Settlers Boulevard |
||
(Address of Principal Executive Offices) |
||
|
||
Registrants telephone number, including area code: (512) 310-6500 |
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
As of February 10, 2003, there were 18,060,913 shares of the registrants common stock, $.01 par value, outstanding.
TABLE OF CONTENTS
|
|||
|
|||
|
|
|
|
|
|
||
|
|
Consolidated Balance Sheet at June 30, 2002 and December 31, 2002 (unaudited) |
|
|
|
Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended December 31, 2001 and 2002 |
|
|
|
||
|
|
||
|
|
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
||
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
||
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|
||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
Exhibit 10.29 Certification of Chief Executive Officer and Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, adopted per Section 906 of the Sarbanes-Oxley Act of 2002 |
||
|
|
|
|
|
Exhibit 11 Earnings (Loss) Per Share Computation. |
||
2
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
(Dollars in thousands, except share data)
(unaudited)
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2001 |
|
2002 |
|
2001 |
|
2002 |
|
||||
Revenue, net |
|
$ |
86,625 |
|
$ |
80,969 |
|
$ |
164,086 |
|
$ |
165,209 |
|
Cost of goods sold |
|
67,422 |
|
71,000 |
|
134,686 |
|
141,734 |
|
||||
Selling, general and administrative expense |
|
10,107 |
|
10,415 |
|
19,567 |
|
20,335 |
|
||||
Research and development expense |
|
6,868 |
|
7,592 |
|
13,328 |
|
15,166 |
|
||||
Special charges |
|
|
|
12,507 |
|
|
|
12,507 |
|
||||
Operating income (loss) |
|
2,228 |
|
(20,545 |
) |
(3,495 |
) |
(24,533 |
) |
||||
Income (loss) on warrants, net |
|
863 |
|
|
|
(238 |
) |
|
|
||||
Other income, net |
|
176 |
|
236 |
|
1,496 |
|
110 |
|
||||
Income (loss) before income taxes and minority interest |
|
3,267 |
|
(20,309 |
) |
(2,237 |
) |
(24,423 |
) |
||||
Provision for (benefit from) income taxes |
|
507 |
|
1,769 |
|
(3,613 |
) |
1,358 |
|
||||
Income (loss) before minority interest |
|
2,760 |
|
(22,078 |
) |
1,376 |
|
(25,781 |
) |
||||
Minority interest in income of joint ventures |
|
(2,393 |
) |
(939 |
) |
(3,992 |
) |
(2,731 |
) |
||||
Net income (loss) |
|
$ |
367 |
|
$ |
(23,017 |
) |
$ |
(2,616 |
) |
$ |
(28,512 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings (loss) per share |
|
$ |
0.02 |
|
$ |
(1.28 |
) |
$ |
(0.15 |
) |
$ |
(1.59 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding |
|
17,854,578 |
|
17,993,994 |
|
17,844,930 |
|
17,982,365 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings (loss) per share |
|
$ |
0.02 |
|
$ |
(1.28 |
) |
$ |
(0.15 |
) |
$ |
(1.59 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding |
|
18,055,338 |
|
17,993,994 |
|
17,844,930 |
|
17,982,365 |
|
The accompanying notes are an integral part of this statement.
3
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
(Dollars in thousands, except share data)
|
|
June 30, |
|
December 31, |
|
||
|
|
|
|
(unaudited) |
|
||
ASSETS |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
138,918 |
|
$ |
161,973 |
|
Accounts receivable, trade, net |
|
62,498 |
|
55,296 |
|
||
Accounts receivable, related parties |
|
4,013 |
|
2,035 |
|
||
Inventories, net |
|
11,633 |
|
12,776 |
|
||
Deferred income taxes |
|
5,416 |
|
3,900 |
|
||
Prepaid expenses and other current assets |
|
15,521 |
|
8,050 |
|
||
Total current assets |
|
237,999 |
|
244,030 |
|
||
Assets held for sale |
|
4,870 |
|
5,087 |
|
||
Property and equipment, net |
|
457,277 |
|
436,523 |
|
||
Accounts receivable, related parties |
|
1,164 |
|
1,118 |
|
||
Deferred income taxes |
|
38,241 |
|
26,731 |
|
||
Other assets, net |
|
33,244 |
|
34,220 |
|
||
Total assets |
|
$ |
772,795 |
|
$ |
747,709 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Accounts payable, trade |
|
$ |
51,376 |
|
$ |
47,191 |
|
Accounts payable, related parties |
|
5,163 |
|
10,043 |
|
||
Short-term borrowings |
|
11,795 |
|
11,789 |
|
||
Income taxes payable |
|
4,056 |
|
|
|
||
Other accrued liabilities |
|
55,283 |
|
50,671 |
|
||
Total current liabilities |
|
127,673 |
|
119,694 |
|
||
Long-term borrowings |
|
2,864 |
|
2,246 |
|
||
Long-term convertible notes |
|
100,000 |
|
100,000 |
|
||
Deferred income taxes |
|
25,830 |
|
33,285 |
|
||
Other liabilities |
|
3,121 |
|
3,354 |
|
||
Minority interest in net assets of joint ventures |
|
43,644 |
|
46,480 |
|
||
Total liabilities |
|
303,132 |
|
305,059 |
|
||
Commitments and contingencies (see notes) |
|
|
|
|
|
||
Stockholders equity: |
|
|
|
|
|
||
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and outstanding |
|
|
|
|
|
||
Common stock, $.01 par value; 100,000,000 shares authorized; 17,927,294 and 17,995,587 issued and outstanding, respectively |
|
179 |
|
180 |
|
||
Additional paid-in capital |
|
314,430 |
|
315,928 |
|
||
Retained earnings |
|
155,054 |
|
126,542 |
|
||
Total stockholders equity |
|
469,663 |
|
442,650 |
|
||
Total liabilities and stockholders equity |
|
$ |
772,795 |
|
$ |
747,709 |
|
The accompanying notes are an integral part of this statement.
4
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
|
|
Six Months Ended |
|
||||
|
|
2001 |
|
2002 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net loss |
|
$ |
(2,616 |
) |
$ |
(28,512 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
44,741 |
|
49,443 |
|
||
Special charges |
|
|
|
12,507 |
|
||
Tax benefit from employee stock options |
|
77 |
|
|
|
||
Loss on warrants, net |
|
238 |
|
|
|
||
Minority interest in income of joint ventures |
|
3,992 |
|
2,731 |
|
||
Deferred income tax (benefit) provision |
|
(4,702 |
) |
2,048 |
|
||
Other |
|
(90 |
) |
(308 |
) |
||
Cash provided by (used in) changes in assets and liabilities: |
|
|
|
|
|
||
Accounts receivable, trade, net |
|
(2,346 |
) |
2,217 |
|
||
Accounts receivable, related parties |
|
(1,388 |
) |
1,978 |
|
||
Inventories, net |
|
2,726 |
|
(1,143 |
) |
||
Prepaid expenses and other current assets |
|
(4,514 |
) |
26,270 |
|
||
Accounts payable, trade |
|
(13,408 |
) |
(3,958 |
) |
||
Accounts payable, related parties |
|
(2,242 |
) |
862 |
|
||
Other accrued liabilities |
|
7,601 |
|
(8,228 |
) |
||
Other assets, net |
|
|
|
(2,180 |
) |
||
Net cash provided by operating activities |
|
28,069 |
|
53,727 |
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Purchases of property and equipment |
|
(68,644 |
) |
(32,082 |
) |
||
Proceeds from sale of property and equipment |
|
2,669 |
|
1,975 |
|
||
Proceeds from sale of warrants and investments |
|
1,573 |
|
105 |
|
||
Purchases of investments |
|
|
|
(1,983 |
) |
||
Net cash used in investing activities |
|
(64,402 |
) |
(31,985 |
) |
||
Cash flows from financing activities: |
|
|
|
|
|
||
Proceeds from borrowings |
|
7,670 |
|
2,006 |
|
||
Payments of borrowings |
|
(2,564 |
) |
(2,779 |
) |
||
Proceeds from issuance of common stock under employee plans |
|
1,712 |
|
1,499 |
|
||
Net cash provided by financing activities |
|
6,818 |
|
726 |
|
||
Effect of exchange rate changes on cash |
|
(214 |
) |
587 |
|
||
Net (decrease) increase in cash and cash equivalents |
|
(29,729 |
) |
23,055 |
|
||
Cash and cash equivalents at beginning of period |
|
138,590 |
|
138,918 |
|
||
Cash and cash equivalents at end of period |
|
$ |
108,861 |
|
$ |
161,973 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
||
Cash paid (received) for: |
|
|
|
|
|
||
Interest |
|
$ |
274 |
|
$ |
279 |
|
Income taxes |
|
$ |
231 |
|
$ |
(20,849 |
) |
The accompanying notes are an integral part of this statement.
5
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Dollars in thousands)
|
|
|
|
Additional |
|
Retained |
|
Total |
|
||||||
Shares |
|
Amount |
|||||||||||||
Balance at June 30, 2001 |
|
17,806,897 |
|
$ |
178 |
|
$ |
310,763 |
|
$ |
151,024 |
|
$ |
461,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contribution of capital |
|
|
|
|
|
357 |
|
|
|
357 |
|
||||
Issuance of common stock under employee plans |
|
120,397 |
|
1 |
|
3,310 |
|
|
|
3,311 |
|
||||
Net income |
|
|
|
|
|
|
|
4,030 |
|
4,030 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at June 30, 2002 |
|
17,927,294 |
|
179 |
|
314,430 |
|
155,054 |
|
469,663 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Issuance of common stock under employee plans |
|
68,293 |
|
1 |
|
1,498 |
|
|
|
1,499 |
|
||||
Net loss |
|
|
|
|
|
|
|
(28,512 |
) |
(28,512 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at December 31, 2002 (unaudited) |
|
17,995,587 |
|
$ |
180 |
|
$ |
315,928 |
|
$ |
126,542 |
|
$ |
442,650 |
|
The accompanying notes are an integral part of this statement.
6
DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(unaudited)
1. Basis of Presentation
The interim consolidated financial statements presented in this report include the accounts of DuPont Photomasks, Inc. and our controlled and wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. All adjustments have been made to the accompanying interim consolidated financial statements which are, in the opinion of our management, necessary for a fair presentation of our operating results and include all adjustments of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC. It is recommended that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2002. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year. Certain reclassifications have been made in the prior period financial statements to conform with the current period presentation.
2. 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. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Accumulated depreciation was $364,005 at June 30, 2002 and $406,925 at December 31, 2002. Assets held for sale relate to the Gresham, Oregon facility and certain other equipment. We are actively marketing these assets and will sell the assets after appropriate evaluation of all proposals.
3. New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Under SFAS No. 146, a liability for a cost that is associated with an exit or disposal activity must be recognized at fair value in the period the liability is incurred. SFAS No. 146 nullifies the guidance of the Emerging Issues Task Force, or EITF, Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). We are currently evaluating the impact of SFAS No. 146, but do not expect that its adoption will have a material adverse impact on either our current results of operations or financial position. We will adopt SFAS No. 146 for events initiated subsequent to December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure an Amendment of FASB Statement No. 123. SFAS No. 148 amends certain provisions of SFAS No. 123 and is effective for financial statements for fiscal years ending after December 15, 2002. We are currently assessing the impact of adoption of SFAS No. 148.
In November 2002, the FASB issued Financial Interpretation Number, or FIN, 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Certain provisions of FIN 45 are effective December 15, 2002; others are effective December 31, 2002. All provisions are to be handled prospectively. We have adopted FIN 45 during the three months ended December 31, 2002. It had no impact on our results of operations or financial position.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 with regard to consolidation of variable interest entities and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. We are currently assessing the impact of adoption of FIN 46.
7
4. Derivative Instruments and Hedging Activities
Forward foreign exchange contracts are utilized to mitigate the risks associated with currency fluctuations on certain balance sheet exposures, and are, therefore, held primarily for purposes other than trading. These foreign exchange contracts do not qualify for hedge accounting under SFAS No. 133. Unrealized gains and losses resulting from the impact of currency exchange rate movements on forward foreign exchange contracts used to offset certain non-U.S. dollar denominated assets and liabilities are recognized as other income or expense in the period in which the exchange rates change. These gains and losses are intended to offset the foreign currency gains and losses on the underlying exposures being hedged. The aggregate fair value of our forward foreign exchange contracts outstanding was $16,810 as of December 31, 2002 with an unrealized loss recorded in other income, net in the consolidated income statement of $146 for the quarter and six months ended December 31, 2002. These instruments may involve elements of credit and market risk in excess of the amounts recognized in the financial statements. We monitor our positions and the credit quality of counterparties, consisting of major financial institutions, and do not anticipate nonperformance by any counterparty.
5. Earnings Per Share
Basic earnings per share, or EPS, is computed by dividing net income (loss) by the weighted number of common shares outstanding during each period. Diluted EPS is computed by dividing net income (loss) after adjustments for the dilutive effect of the convertible notes by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. Common share equivalents include stock options and assume conversion of the convertible notes. The number of common share equivalents outstanding relating to stock options is computed using the treasury stock method while the number of common share equivalents relating to the convertible notes is computed using the if converted method.
The reconciliation of the amounts used to calculate the basic EPS and diluted EPS is as follows:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2001 |
|
2002 |
|
2001 |
|
2002 |
|
||||
Net income (loss) for the period basic |
|
$ |
367 |
|
$ |
(23,017 |
) |
$ |
(2,616 |
) |
$ |
(28,512 |
) |
Dilutive effect of convertible notes |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) for the period diluted |
|
$ |
367 |
|
$ |
(23,017 |
) |
$ |
(2,616 |
) |
$ |
(28,512 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding basic |
|
17,854,578 |
|
17,993,994 |
|
17,844,930 |
|
17,982,365 |
|
||||
Plus: Common share equivalents |
|
200,760 |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding dilutive |
|
18,055,338 |
|
17,993,994 |
|
17,844,930 |
|
17,982,365 |
|
Stock options to acquire 2,828,444 and 4,392,116 shares for the three months ended December 31, 2001 and 2002, respectively, were not included in common share equivalents because the effect of including these stock options would have been anti-dilutive. Stock options to acquire 3,710,633 and 4,392,116 shares for the six months ended December 31, 2001 and 2002, respectively, were not included in common share equivalents because the effect of including these stock options would have been anti-dilutive. For the three and six months ended December 31, 2001 and 2002, 941,088 shares for the effect of the convertible notes were not included in the computations of diluted EPS because the effect of including the convertible notes would have been anti-dilutive. These options and the convertible notes may become dilutive in the future.
6. Comprehensive Income
We have adopted SFAS No. 130, Reporting Comprehensive Income. Our comprehensive income is comprised of net loss and unrealized gains and losses on certain investments in debt and equity securities. We had no items of comprehensive income other than net loss for the six months ended December 31, 2001 and 2002.
8
7. Segment Information
In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, segment information is as follows:
|
|
North
|
|
Europe |
|
Asia |
|
Eliminations |
|
Total |
|
|||||
Three Months Ended December 31, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue, net |
|
$ |
43,500 |
|
$ |
14,714 |
|
$ |
28,411 |
|
$ |
|
|
$ |
86,625 |
|
Transfers between geographic segments |
|
6,653 |
|
775 |
|
7,629 |
|
(15,057 |
) |
|
|
|||||
|
|
$ |
50,153 |
|
$ |
15,489 |
|
$ |
36,040 |
|
$ |
(15,057 |
) |
$ |
86,625 |
|
Net (loss) income |
|
$ |
(9,812 |
) |
$ |
1,424 |
|
$ |
8,755 |
|
$ |
|
|
$ |
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Six Months Ended December 31, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue, net |
|
$ |
82,963 |
|
$ |
28,589 |
|
$ |
52,534 |
|
$ |
|
|
$ |
164,086 |
|
Transfers between geographic segments |
|
12,044 |
|
992 |
|
14,926 |
|
(27,962 |
) |
|
|
|||||
|
|
$ |
95,007 |
|
$ |
29,581 |
|
$ |
67,460 |
|
$ |
(27,962 |
) |
$ |
164,086 |
|
Net (loss) income |
|
$ |
(12,558 |
) |
$ |
(4,844 |
) |
$ |
14,786 |
|
$ |
|
|
$ |
(2,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
June 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Identifiable assets |
|
$ |
338,314 |
|
$ |
102,883 |
|
$ |
331,598 |
|
$ |
|
|
$ |
772,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Three Months Ended December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue, net |
|
$ |
38,609 |
|
$ |
15,877 |
|
$ |
26,483 |
|
$ |
|
|
$ |
80,969 |
|
Transfers between geographic segments |
|
1,690 |
|
227 |
|
5,479 |
|
(7,396 |
) |
|
|
|||||
|
|
$ |
40,299 |
|
$ |
16,104 |
|
$ |
31,962 |
|
$ |
(7,396 |
) |
$ |
80,969 |
|
Net (loss) income |
|
$ |
(16,493 |
) |
$ |
(12,286 |
) |
$ |
5,762 |
|
$ |
|
|
$ |
(23,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Six Months Ended December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue, net |
|
$ |
77,948 |
|
$ |
29,873 |
|
$ |
57,388 |
|
$ |
|
|
$ |
165,209 |
|
Transfers between geographic segments |
|
3,331 |
|
270 |
|
10,302 |
|
(13,903 |
) |
|
|
|||||
|
|
$ |
81,279 |
|
$ |
30,143 |
|
$ |
67,690 |
|
$ |
(13,903 |
) |
$ |
165,209 |
|
Net (loss) income |
|
$ |
(28,441 |
) |
$ |
(15,044 |
) |
$ |
14,973 |
|
$ |
|
|
$ |
(28,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Identifiable assets |
|
$ |
288,840 |
|
$ |
96,958 |
|
$ |
361,911 |
|
$ |
|
|
$ |
747,709 |
|
Products are transferred between geographic areas on a basis intended to approximate the market value of such products.
8. Provision For (Benefit From) Income Taxes
The provision for income taxes differs from the benefit amount computed by applying the federal statutory rate of 35 percent to consolidated loss before income taxes and minority interest as a result of our reduced tax rates in certain Asian jurisdictions, our inability to record deferred tax benefits for net operating losses generated in certain tax jurisdictions and our need to place a valuation allowance on certain other deferred tax assets as discussed below.
During the six months ended December 31, 2002, we recorded valuation allowances against our net deferred tax assets in the U.S. and in Europe (primarily related to net operating loss carryforwards). The restructuring in Germany (see note 9 below), also resulted in a charge for a valuation allowance of $1,812 during the three months ended December 31, 2002. The valuation allowances were recorded under the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an assessment of positive and negative evidence when determining the need for a valuation allowance. Historical evidence, such as the operating results in the U.S. and Europe during the most recent three-year period, is weighted more heavily in this assessment as compared to future expected results because of the uncertainty of actually achieving forecasted results. Our cumulative U.S. losses and European losses in the most recent three-year period represent sufficient negative evidence to require a valuation allowance against our U.S. and European net deferred tax assets. We intend to maintain valuation allowances until sufficient positive evidence exists to support their reversal.
Additionally, we received an income tax refund of $18,636 by carrying U.S. net operating losses back to prior years.
9
9. Special Charges
During the three months ended December 31, 2002, we recorded pre-tax special charges totaling $12,507 related to our decision to consolidate certain facilities and the related employee severance costs, facility closure costs and equipment lease termination costs. These special charges were the result of programs that were implemented to reduce costs, improve productivity and enhance customer service.
In Europe, we plan to streamline our operations by consolidating photomask production in Rousset, France and Hamburg, Germany into our manufacturing facility in Corbeil, France resulting in the decommissioning of several production lines and the relocation of other equipment within our global network. As a result of the decommissioning of certain assets, we recorded an impairment charge related to assets to be sold, and recorded $217 as assets held for sale. The Rousset and Hamburg facilities will continue to serve as regional centers for technical and sales support. These initiatives are expected to reduce the global workforce by approximately 8 percent, or 140 positions, primarily in manufacturing, once fully implemented. Our consolidation plans for our facilities in Europe are subject to compliance with local laws and regulations, including consultations and negotiations with the relevant works councils. The special charges exclude severance and other employee related costs that may be incurred and reported in future periods as a result of those negotiations. We plan to vacate the leased manufacturing facility in Hamburg and complete the consolidation initiatives in Europe within approximately 10 months. The special charges recorded in Europe in the three months that ended December 31, 2002 totaled $6,307.
In the United States, we modified and extended our DPI Reticle Technology Center, LLC, or RTC, research and development joint venture agreement through June 2004. As part of this modification and extension, we integrated our employees from the RTC into our Round Rock, Texas commercial production facility and terminated approximately 2 percent of our global workforce, or 30 positions, primarily in manufacturing. Also, in connection with this modification and extension of the RTC joint venture agreement, the RTC terminated a majority of its equipment leases. Our share of the RTC equipment lease termination costs was $3,782. Additionally, we recorded a charge for asset impairments at our Round Rock facility. The integration and consolidation initiatives in the United States were completed as of December 31, 2002 and resulted in special charges in the three months that ended December 31, 2002 of $6,200.
A summary of the special charges is shown below:
|
|
Asset |
|
Employee |
|
Lease |
|
Total |
|
||||
Quarter ended December 31, 2002 charges |
|
$ |
8,754 |
|
$ |
1,527 |
|
$ |
2,226 |
|
$ |
12,507 |
|
Utilized as of December 31, 2002 |
|
(3,816 |
) |
(322 |
) |
|
|
(4,138 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Remaining liability at December 31, 2002 |
|
$ |
4,938 |
|
$ |
1,205 |
|
$ |
2,226 |
|
$ |
8,369 |
|
We expect the accrued liability will be completely paid out by December 31, 2003.
10. Warranties
Provision is made for an estimate of product warranty claims based on historical experience and is recorded as an increase to cost of goods sold.
Changes in our warranty liability were as follows:
|
|
Balance at |
|
Accruals
for |
|
Settlements |
|
Balance at |
|
||||
Six Months ended December 31, 2002 |
|
$ |
250 |
|
$ |
546 |
|
$ |
(546 |
) |
$ |
250 |
|
11. Commitments and Contingencies
We have various purchase commitments incidental to the normal course of business, including non-refundable deposits to purchase equipment. In the aggregate, such commitments are not at prices in excess of current market.
We guarantee a portion of certain equipment leases of the RTC. Our portion of the future minimum lease payments of the RTC
10
aggregated approximately $3,800 as of December 31, 2002. We are also committed to fund approximately 25 percent of the costs related to the maintenance and overhead of the leased equipment through June 2004.
We, along with Infineon and AMD, have established joint ventures in Dresden, Germany to conduct leading edge photomask research and pilot manufacturing. The ventures consist of the Advanced Mask Technology Center GmbH & Co. KG, or AMTC, and the Maskhouse Building Administration GmbH & Co. KG, or BAC. The AMTC will conduct photomask research and pilot manufacturing. The BAC is the owner of a state-of-the-art photomask research and manufacturing facility that is currently under construction. We will lease approximately 50 percent of the facility from the BAC for advanced photomask manufacturing and the remainder will be leased by the AMTC. Both leases will be for 10-year terms. In addition, we are committed to funding a portion of the operating cash requirements of the AMTC under the research and development reimbursement and capacity utilization obligations. We expect our portion to be approximately 33 percent during the next year and to vary between approximately 22 percent to 26 percent thereafter.
We have also guaranteed one-third of the BACs 75.0 million Euro ($78,113 at December 31, 2002) construction bridge loan, which had 40.2 million Euro ($41,851 at December 31, 2002) outstanding at December 31, 2002. The construction bridge loan provides for interest at Euribor plus 1.5 percent over the term of the loan. The maturity date is the earlier of the initial draw down under the term loan discussed below or June 2003. Each of the partners of the joint venture executed guarantees for one-third of the total outstanding debt, up to 25.0 million Euro ($26,038 at December 31, 2002) and certain additional costs as defined in the loan agreement for as long as any obligation remains outstanding on the loan. We will be required to honor our guarantee if the BAC fails to make timely payments under the bridge loan; breaches certain financial covenants; fails to construct the facility as planned; becomes insolvent; or in any other way defaults under the loan agreement. We will also be required to honor our guarantee if any of the owners of the BAC breach certain terms of the joint venture agreement, become insolvent or cease doing business, experience a material adverse change affecting their obligations under the guarantee, fail to pay their respective indebtedness in excess of 50.0 million Euro ($52,075 at December 31, 2002), or otherwise experience an event constituting a default under the loan agreement.
In December 2002, the BAC executed a 75.0 million Euro ($78,113 at December 31, 2002) term loan agreement for the repayment of the construction bridge loan. There was no outstanding balance on this loan at December 31, 2002. The term loan provides for interest at Euribor plus 1.5 percent over the term of the loan. Repayment of the loan is scheduled for approximately equal quarterly payments beginning in the quarter following the first utilization date and continuing through June 2012. Each of the partners of the joint venture executed guarantees for one-third of the total outstanding debt, or 25.0 million Euro ($26,038 at December 31, 2002) and certain additional costs as defined in the loan agreement until the occupancy of the building and rental payments begin. Thereafter, we have no guarantee related to the term loan unless the lenders become liable to return monies received in payment of the indebtedness as a result of any bankruptcy, composition or similar proceedings affecting the BAC. We will be required to honor our guarantee if the BAC fails to make timely payments under the term loan; breaches certain financial covenants; becomes insolvent; or in any other way defaults under the loan agreement. We will also be required to honor our guarantee if any of the owners of the BAC breach certain terms of the joint venture agreement, become insolvent or cease doing business, experience a material adverse change affecting their obligations under the guarantee, fail to pay their respective indebtedness in excess of 50.0 million Euro ($52,075 at December 31, 2002), or otherwise experience an event constituting a default under the loan agreement.
Also in December 2002, the AMTC executed a 120.0 million Euro ($124,980 at December 31, 2002) revolving credit loan for the purchase of equipment. There was no outstanding balance on this loan at December 31, 2002. The loan provides for interest at Euribor plus 1.2 percent over the term of the loan. Repayment of each revolving credit loan must be made on its maturity date. The maturity date of the revolving credit loan is the earlier of December 2007 or the termination of the joint venture agreement resulting from a change in ownership for the AMTC. Each of the partners of the joint venture executed guarantees for 32.0 million Euro ($33,328 at December 31, 2002) and certain additional costs as defined in the loan agreement for as long as any obligation remains outstanding on the loan. We will be required to honor our guarantee if the AMTC fails to make timely payments under the revolving credit loan; breaches certain financial covenants; becomes insolvent; or in any other way defaults under the loan agreement. We will also be required to honor our guarantee if any of the owners of the AMTC breach certain terms of the joint venture agreement, become insolvent or cease doing business, experience a material adverse change affecting their obligations under the guarantee, fail to pay their respective indebtedness in excess of 50.0 million Euro ($52,075 at December 31, 2002), or otherwise experience an event constituting a default under the loan agreement.
We have established a profit sharing plan with the BindKey employees, which will be paid out over the next four years, based on BindKeys after-tax net income. Subject to future milestones, the employees may earn as much as $165,000, which will be expensed in the period earned.
In May 2002, we entered into an agreement to acquire photomask production equipment from Infineons internal photomask manufacturing operations in Munich, Germany and become Infineons strategic photomask supplier. In consideration for the acquisition of certain photomask production assets and the agreement to supply Infineon with photomasks over the 10-year term of the agreement, we will pay Infineon $53,500 over a seven-year period ending in March 2009.
We are subject to litigation in the normal course of business. We believe the effect, if any, of an unfavorable resolution of such
11
litigation would not have a material adverse impact on our financial position, results of operations, cash flows or liquidity.
Our operations and our ownership of real property are subject to various 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 wastes. Compliance with such laws and regulations requires that we incur capital expenditures and operating costs in connection with our 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 such liabilities may be joint and several with other parties. More stringent environmental laws and regulations may be enacted in the future, which may require us to expend additional amounts on environmental compliance or may require modifications to our operations. Although we are unable to predict the extent of our future liability with respect to any environmental matters, we believe, based upon current information, that environmental liabilities will not be material to our financial position or results of operations. E.I. duPont de Nemours & Company, or DuPont, has agreed to indemnify us for any environmental contamination present on our manufacturing sites at June 13, 1996, the date of our initial public offering, or present at any such site due to the generation, use, treatment, storage, release, emission, discharge or disposal of hazardous waste or hazardous materials before such date. The Environmental Protection Agency is reviewing a groundwater contamination issue at our Danbury, Connecticut site under voluntary corrective action. Any such contamination is believed to be offsite or historical, and, if that is the case, any environmental liabilities would be covered by the indemnification agreement with DuPont.
12
MANAGEMENTS
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 our consolidated financial statements and related notes thereto. References to years are to fiscal years ended June 30. Results for interim periods are not necessarily indicative of results for the full year.
Overview
Based on worldwide revenue, we are one of the largest photomask manufacturers in the world. We sell our products to over 300 customers and customer sites in over 17 different countries. Essentially all of our sales are to customers in the semiconductor manufacturing industry. We manufacture a broad range of photomasks based on customer-supplied design data. We also manufacture pellicles, primarily for internal consumption. Pellicles are one of the principal components of photomasks, and protect the photomask from particle contamination. We operate globally with established manufacturing facilities in North America, Europe and Asia.
We believe that, over the long-term, the market for photomasks in the semiconductor manufacturing process will increase due to the following trends:
Proliferation of semiconductor applications;
Customization of semiconductor designs;
Increasing semiconductor device complexity; and
Decreasing size of semiconductor designs.
These trends have increased the importance of photomask technology in the semiconductor manufacturing process. As a result of these trends, coupled with our acquisitions of captive photomask operations, our annual revenue increased at an average annual compounded rate of 9 percent from 1999 to 2002.
Photomask manufacturing operations are capital intensive. Accordingly, at a given threshold of manufacturing capacity, a high proportion of our operating costs are fixed and remain relatively constant as sales volume increases or decreases. To the extent that we have under-utilized production capacity, operating profit increases or decreases disproportionately as sales volume increases or decreases.
Results of Operations
Revenue, net. Revenue, net is comprised primarily of photomask sales to semiconductor manufacturers. Revenue, net decreased 6.5 percent from $86.6 million in the three months ended December 31, 2001 to $81.0 million in the three months ended December 31, 2002. Revenue, net increased 0.7 percent from $164.1 million in the six months ended December 31, 2001 to $165.2 million in the six months ended December 31, 2002. Revenue, net produced in North America decreased from $83.0 million in the six months ended December 31, 2001 to $77.9 million in the six months ended December 31, 2002 while revenue, net produced in Europe and Asia increased from $28.6 million and $52.5 million, respectively, in the six months ended December 31, 2001 as compared to $29.9 million and $57.4 million, respectively, in the six months ended December 31, 2002. We experienced an increase in unit demand from the three months and six months ended December 31, 2001 as compared to the three months and six months ended December 31, 2002, respectively. Overall average selling prices decreased from the three months and six months ended December 31, 2001 to the three months and six months ended December 31, 2002, respectively. Given the recent photomask demand pattern and our customers forecasts, we expect revenues to be between $77.0 million and $85.0 million for the three months ending March 31, 2003.
Cost of Goods Sold. Cost of goods sold consists of materials, labor, depreciation and overhead. Cost of goods sold increased 5.3 percent from $67.4 million to $71.0 million for the three months ended December 31, 2001 and 2002, respectively. Cost of goods sold increased 5.2 percent from $134.7 million to $141.7 million for the six months ended December 31, 2001 and 2002, respectively. The increases were primarily as a result of increased units, increased costs associated with customer qualifications at advanced nodes and increased depreciation expense from new equipment. Gross profit margin decreased from 22.2 percent for the three months ended December 31, 2001 to 12.3 percent for the three months ended December 31, 2002. Gross profit margin decreased from 17.9 percent for the six months ended December 31, 2001 to 14.2 percent for the six months ended December 31, 2002. The decreases in gross profit margin resulted primarily from increased costs associated with customer qualifications at advanced nodes and increased depreciation. We expect that gross profit margins will experience near term pressure primarily as a result of the transition of certain assets and related employees of the RTC into our Round Rock facility, the start-up costs for our Dresden, Germany manufacturing facility and consolidation costs in Europe.
13
Selling, General and Administrative Expense. Selling, general and administrative expense includes salaries of sales and administrative personnel, marketing expense, general and administrative expense and product distribution expense. Selling, general and administrative expense increased 3.0 percent from $10.1 million for the three months ended December 31, 2001 to $10.4 million for the three months ended December 31, 2002. Selling, general and administrative expense as a percentage of revenue increased from 11.7 percent for the three months ended December 31, 2001 to 12.9 percent for the three months ended December 31, 2002. Selling, general and administrative expense increased 3.9 percent from $19.6 million for the six months ended December 31, 2001 to $20.3 million for the six months ended December 31, 2002. Selling, general and administrative expense as a percentage of revenue increased from 11.9 percent for the six months ended December 31, 2001 to 12.3 percent for the six months ended December 31, 2002. The increases in selling, general and administrative expense as a percentage of revenue were primarily a result of the staffing of BindKey and the initial staffing of the Dresden facility. We expect selling, general and administrative expense will be at or near the current levels in the three months ending March 31, 2003.
Research and Development Expense. Research and development expense consists primarily of employee costs, cost of consumed materials, depreciation, engineering related costs and our share of costs of the RTC and AMTC. Research and development expense increased 10.5 percent from $6.9 million for the three months ended December 31, 2001 to $7.6 million for the three months ended December 31, 2002. As a percentage of revenue it increased from 7.9 percent for the three months ended September 30, 2001 to 9.4 percent for the three months ended December 31, 2002. BindKeys electronic design automation, or EDA, software development expenses and startup expenses of the AMTC contributed to the increase. Research and development expense increased 13.8 percent from $13.3 million for the six months ended December 31, 2001 to $15.2 million for the six months ended December 31, 2002. As a percentage of revenue it increased from 8.1 percent for the six months ended December 31, 2001 to 9.2 percent for the six months ended December 31, 2002. We believe that, because of our continued focus on research and development and through collaboration with our customers on joint development projects, we will be able to help meet the future technology needs of the semiconductor industry for advanced photomasks. We expect that research and development expense will be at or near the current levels in the three months ending March 31, 2003.
Special Charges. During the three months ended December 31, 2002, we recorded pre-tax special charges totaling $12.5 million related to our decision to consolidate certain facilities and the related employee severance costs, facility closure costs and equipment lease termination costs. These special charges were the result of programs implemented to reduce costs, improve productivity and enhance customer service.
In Europe, we plan to streamline our operations by consolidating photomask production in Rousset, France and Hamburg, Germany into our manufacturing facility in Corbeil, France resulting in the decommissioning of several production lines and the relocation of other equipment within our global network. As a result of the decommissioning of certain assets, we recorded an impairment charge related to assets to be sold, and recorded $0.2 million as assets held for sale. The Rousset and Hamburg facilities will continue to serve as regional centers for technical and sales support. These initiatives are expected to reduce the global workforce by approximately 8 percent, or 140 positions, primarily in manufacturing, once fully implemented. Our consolidation plans for our facilities in Europe are subject to compliance with local laws and regulations, including consultations and negotiations with the relevant works councils. The special charges exclude severance and other employee related costs that may be incurred and reported in future periods as a result of those negotiations. We plan to vacate the leased manufacturing facility in Hamburg and complete the consolidation initiatives in Europe within approximately 10 months. The special charges recorded in Europe in the three months ended December 31, 2002 totaled $6.3 million.
In the United States, we modified and extended our DPI Reticle Technology Center, LLC, or RTC, research and development joint venture agreement through June 2004. As part of this modification and extension, we integrated our employees from the RTC into our Round Rock, Texas commercial production facility and terminated approximately 2 percent of our global workforce, or 30 positions, primarily in manufacturing. Also, in connection with the modification and extension of the RTC joint venture agreement, the RTC terminated a majority of its equipment leases. Our share of the RTC equipment lease termination costs was $3.8 million. Additionally, we recorded a charge for asset impairments at our Round Rock facility. The integration and consolidation initiatives in the United States were completed as of December 31, 2002 and resulted in special charges in the three months that ended December 31, 2002 of $6.2 million.
14
A summary of the special charges is shown below:
|
|
Asset |
|
Employee |
|
Lease |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Quarter ended December 31, 2002 charges |
|
$ |
8.8 |
|
$ |
1.5 |
|
$ |
2.2 |
|
$ |
12.5 |
|
Utilized as of December 31, 2002 |
|
(3.8 |
) |
(0.3 |
) |
|
|
(4.1 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Remaining liability at December 31, 2002 |
|
$ |
5.0 |
|
$ |
1.2 |
|
$ |
2.2 |
|
$ |
8.4 |
|
We expect the accrued liability will be completely paid out by December 31, 2003.
Income (Loss) on Warrants, net. During the three months and six months ended December 31, 2001, we recognized realized gains of $0.9 million and realized losses of $0.2 million, respectively, upon the exercise of warrants of a strategic partner and sale of the underlying securities. There were no such holdings in the three months and six months ended December 31, 2002.
Other Income, net. Other income, net includes interest expense, interest income and exchange gains and losses. Other income, net was unchanged at $0.2 million for the three months ended December 31, 2001 and 2002. Other income, net was $1.5 million and $0.1 million for the six months ended December 31, 2001 and 2002, respectively. The decrease was primarily due to lower interest income reflecting lower interest rates and exchange losses from foreign currency movements.
Provision For (Benefit From) Income Taxes. The provision for income taxes differs from the benefit amount computed by applying the federal statutory rate of 35 percent to consolidated loss before income taxes and minority interest as a result of our reduced tax rates in certain Asian jurisdictions, our inability to record deferred tax benefits for net operating losses generated in certain tax jurisdictions and our need to place a valuation allowance on certain other deferred tax assets as discussed below.
During the six months ended December 31, 2002, we recorded valuation allowances against our net deferred tax assets in the U.S. and Europe (primarily related to net operating loss carryforwards). The restructuring in Germany also resulted in a charge for a valuation allowance of $1.8 million during the three months ended December 31, 2002. The valuation allowances were recorded under the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an assessment of positive and negative evidence when determining the need for a valuation allowance. Historical evidence, such as the operating results in the U.S. and Europe during the most recent three-year period, is weighted more heavily in this assessment as compared to future expected results because of the uncertainty of actually achieving forecasted results. Our cumulative U.S. losses and European losses in the most recent three-year period represent sufficient negative evidence to require a valuation allowance against our U.S. and European net deferred tax assets. We intend to maintain valuation allowances until sufficient positive evidence exists to support their reversal.
Additionally, we received an income tax refund of $18.6 million by carrying U.S. net operating losses back to prior years.
Minority Interest in Income of Joint Ventures. The minority interest impact of our joint ventures was $2.4 million for the three months ended December 31, 2001 and $0.9 million for the three months ended December 31, 2002. The minority interest impact of our joint ventures was $4.0 million for the six months ended December 31, 2001 and $2.7 million for the six months ended December 31, 2002. The decreases were a result of a reduction in the tapeout of new designs at one major customer. Minority interest in income of joint ventures reflects our partners share of the earnings of our consolidated joint venture operations.
Liquidity and Capital Resources
Our working capital was $110.3 million at June 30, 2002 and $124.3 million at December 31, 2002. The increase in working capital was primarily due to our operating cash flows. Cash and cash equivalents were $138.9 million at June 30, 2002 and $162.0 million at December 31, 2002. Cash provided by operating activities of $53.7 million for the six months ended December 31, 2002 was primarily a result of our net loss adjusted for non-cash charges and the receipt of an income tax refund of approximately $18.6 million.
Cash used in investing activities was $64.4 million and $32.0 million for the six months ended December 31, 2001 and 2002, respectively. Cash used for capital expenditures was $68.6 million and $32.1 million for the six months ended December 31, 2001 and 2002, respectively. We also made a $2.0 million capital contribution to the BAC in the six months ended December 31, 2002. Management expects capital expenditures for fiscal 2003 to be approximately $60.0 million. Capital expenditures have been and will be used primarily to expand and to advance our manufacturing and technical capabilities. In addition, we may in the future pursue additional acquisitions of businesses, products and technologies, or enter into other joint venture arrangements that could complement
15
or expand our business. Any material acquisition or joint venture could result in a decrease to our working capital depending on the amount, timing and nature of the consideration to be paid.
Cash provided by financing activities was $6.8 million and $0.7 million for the six months ended December 31, 2001 and 2002, respectively. For the six months ended December 31, 2002, our employees purchased $1.5 million of common stock under our employee plans.
Our ongoing cash requirements will be for capital expenditures, acquisitions, research and development and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements for at least the next 12 months. Thereafter, based on our current operating plans, we may require external financing from time to time to fund our capital expenditure requirements. There can be no assurance that alternative sources of financing will be available if our capital requirements exceed cash flow from operations. There can be no assurance that we will be able to obtain any additional financing required to fund our capital needs on reasonable terms, or at all.
The following summarizes our contractual cash obligations as of December 31, 2002 (in millions):
|
|
|
|
Payments Due for the Periods ending December 31, |
|
|||||||||||
|
|
Total |
|
Year |
|
Two Years |
|
Two Years |
|
Beyond |
|
|||||
Long-term debt |
|
$ |
111.1 |
|
$ |
10.7 |
|
$ |
100.0 |
|
$ |
0.4 |
|
$ |
|
|
Capital lease obligations |
|
2.9 |
|
0.9 |
|
0.6 |
|
0.3 |
|
1.1 |
|
|||||
Operating leases |
|
14.0 |
|
3.4 |
|
3.5 |
|
2.7 |
|
4.4 |
|
|||||
Other long-term obligations |
|
3.4 |
|
|
|
|
|
|
|
3.4 |
|
|||||
Total contractual cash obligations |
|
$ |
131.4 |
|
$ |
15.0 |
|
$ |
104.1 |
|
$ |
3.4 |
|
$ |
8.9 |
|
The following summarizes our other commercial commitments as of December 31, 2002 (in millions):
|
|
|
|
Amount of Commitment Expiration by Periods Ending |
|
|||||||||||
|
|
Total |
|
Year |
|
Two Years |
|
Two Years |
|
Beyond |
|
|||||
Guarantees |
|
$ |
17.8 |
|
$ |
17.8 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Other commercial commitments |
|
81.6 |
|
28.1 |
|
23.9 |
|
26.1 |
|
3.5 |
|
|||||
Total commercial commitments |
|
$ |
99.4 |
|
$ |
45.9 |
|
$ |
23.9 |
|
$ |
26.1 |
|
$ |
3.5 |
|
Guarantees include our portion of certain equipment leases of the RTC with future minimum lease payments aggregating approximately $3.8 million as of December 31, 2002. We have also guaranteed one-third of the BACs 75.0 million Euro ($78.1 million at December 31, 2002) construction bridge loan, which had 40.2 million Euro ($41.9 million at December 31, 2002) outstanding at December 31, 2002. During December 2002, the BAC and AMTC executed a loan agreement that included a term loan of 75.0 million Euro ($78.1 million at December 31, 2002) and a revolving credit loan of 120.0 million Euro ($125.0 million). As of December 31, 2002, there were no outstanding balances under either loan. The term loan will be used to repay the construction bridge loan and the revolving credit loan will be used for equipment acquisitions. We expect the term loan to be funded in the fourth quarter of fiscal 2003. We have guaranteed one-third of the term loan until the BAC building is occupied and lease payments begin. We have guaranteed 32.0 million Euro ($33.3 million at December 31, 2002) of the revolving credit loan. Each of these guarantees include certain other costs as defined in the loan agreement. We will be required to honor our guarantees upon the occurrence of an event of default as defined in the loan agreement.
Other commercial commitments include our equipment purchase commitments to Infineon of approximately $28.1 million payable through December 2006 and our approximately $53.5 million long-term supply contract and equipment purchase commitment with Infineon that requires payments through March 2009. We may, at our discretion, pay approximately $30.2 million of the commitments to Infineon in shares of our common stock. The number of shares required to satisfy this commitment will be based on the fair value of our common stock at the time of payment.
In addition to the commitments in the tables above, we are also committed to fund approximately 25 percent of the costs related to the maintenance and overhead of the leased equipment of the RTC through June 2004. Additionally, we are committed to fund a portion of the operating cash requirements of the AMTC. We expect our portion to be approximately 33 percent in the next year and to vary between approximately 22 percent to 26 percent thereafter. We will lease approximately 50 percent of the BACs photomask research and manufacturing facility for a term of 10 years.
We have also established a profit sharing plan with the BindKey employees, which will be paid out over the next four years, based on BindKeys after-tax net income. Subject to future milestones, the employees may earn as much as $165.0 million, which will be expensed in the period earned.
16
Critical Accounting Policies
Our critical accounting policies are as follows:
Revenue recognition
Product revenue is recognized when both title and risk of loss transfers to the customer, provided that no significant obligations remain. Discounts and rebates are recorded as a reduction of revenue during the period they are earned by the customer. Provision is made for an estimate of product returns based on historical experience and is recorded as a reduction in revenue. Customarily, our shipping terms are FOB shipping point; however, our final terms depend upon the negotiations with our customers.
Estimating allowances, specifically sales returns, the allowance for doubtful accounts and allowance for excess and obsolete inventory
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.
We must make estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.
Similarly, we must make estimates of the uncollectability of our accounts receivable. We consider trends of historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If circumstances change or if our original estimates are otherwise incorrect, we may have to reduce our estimates of the recoverability of amounts due us by a material amount.
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based on assumptions on future demands and market conditions. If actual market conditions are materially less favorable than those projected by management, or if our estimates of market value are later determined to have been materially incorrect, additional inventory writedowns may be required.
Valuation of intangible and other long-lived assets
We assess the impairment of identifiable intangibles, other long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following:
Significant underperformance relative to expected historical or projected future operating results;
Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
Significant negative industry or economic trends; and
Our market capitalization relative to net book value.
When it is determined that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the measurement of any impairment is determined and the carrying value is reduced as appropriate.
Accounting for income taxes
We are required to consider our income taxes in each of the tax jurisdictions in which we operate in computing our effective income tax rate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. Further, the actual annual amount of taxable income in each tax jurisdiction may differ from the estimates we use to compute the effective tax rate during our first, second and third quarters. Additionally, we evaluate the recoverability of the deferred tax assets from future taxable income and establish valuation
17
allowances if recovery is not more likely than not. Our income tax provision in the consolidated income statement is impacted by changes in the valuation allowance. This process is complex and involves significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
Consolidation
The consolidated financial statements presented herein include the accounts of DuPont Photomasks, Inc. and our controlled and wholly-owned subsidiaries. All significant intercompany transactions and accounts are eliminated in consolidation. Entities that are not controlled but on which we can exercise significant influence are recorded under the equity method of accounting.
Other Matters
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Under SFAS No. 146, a liability for a cost that is associated with an exit or disposal activity must be recognized at fair value in the period the liability is incurred. SFAS No. 146 nullifies the guidance of EITF, Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). We are currently evaluating the impact of SFAS No. 146, but do not expect that its adoption will have a material adverse impact on either our current results of operations or financial position. We will adopt SFAS No. 146 for events initiated subsequent to December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure an Amendment of FASB Statement No. 123. SFAS No. 148 amends certain provisions of SFAS No. 123 and is effective for financial statements for fiscal years ending after December 15, 2002. We are currently assessing the impact of adoption of SFAS No. 148.
In November 2002, the FASB issued FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Certain provisions of FIN 45 are effective December 15, 2002; others are effective December 31, 2002. All provisions are to be handled prospectively. We have adopted FIN 45 as of December 31, 2002. It had no impact on our results of operation or financial position.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 with regard to consolidation of variable interest entities and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. We are currently assessing the impact of adoption of FIN 46.
Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve a number of risks and uncertainties. Such forward-looking statements are generally accompanied by words such as intend, may, plan, expect, believe, should, would, could, anticipate, or other words that convey uncertainty of future events or outcomes. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. Such risks and uncertainties include, without limitation, the following:
The current downturn in the semiconductor industry could lead to a decrease in the demand for our photomask products;
The semiconductor industry is highly cyclical and has been subject to significant economic downturns at various times;
Our financial results may vary significantly from quarter to quarter or we may fail to meet investor expectations, which would negatively impact the price of our stock;
We may be unable to fund significant capital expenditures to expand our operations and to enhance our manufacturing capability in order to keep pace with rapidly changing technologies;
Our operating results could be adversely affected by under-utilized production capacity;
Macroeconomic conditions may have effects on the semiconductor industry;
We may be unable to enhance our existing products and to develop and manufacture new products and upgrades with improved capabilities to satisfy anticipated demand for more technologically advanced photomasks;
Rapid technological change could render our products obsolete or our manufacturing processes ineffective;
We may not remain competitive and increased competition could seriously harm our business;
If a fundamental change in our business were to occur the holders of the convertible subordinated notes would have the right to require us to redeem those notes, and we cannot assure you that we will have sufficient funds to pay the
18
redemption price for all the notes tendered by the holders of the subordinated convertible notes, although DuPont would be required to pay the redemption price under its guarantee. In that case, our failure to redeem tendered notes would constitute an event of default under the indenture for the notes, and may constitute a default under the terms of other indebtedness that we may enter into from time to time;
We may be unable to successfully develop or market our EDA software;
DuPont has influence on all stockholder votes;
Our success depends, in part, upon key managerial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel and integrate new personnel into key positions; and
Other risks indicated in our other filings with the Securities and Exchange Commission, including but not limited to those factors which are fully discussed under the caption Risk Factors in our Annual Report on Form 10-K filed with the SEC on September 10, 2002.
These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements.
The forward-looking statements are made as of the release date hereof, and we disclaim any intention or obligation to update or revise any forward-looking statements or to update the reasons why the actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.
19
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. As of December 31, 2002, we had $100.0 million in non-interest bearing convertible notes and approximately $14.0 million in interest bearing debt of which approximately $11.8 million was short-term debt. As a result, changes in the interest rate market would change the estimated fair value of our long-term debt. We believe that a 10 percent change in interest rates would not have a material effect on our business, financial condition, results of operations or cash flows.
Foreign currency exposures are primarily due to non-U.S. operations which 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 our results of operations. Any exchange rate fluctuations can affect our margins since we may have imbalances between some foreign currency denominated revenues and expenses. Our financial statements reflect remeasurement of items denominated in non-U.S. currencies to U.S. dollars, our functional currency. Exchange gains or losses are included in income in the period in which they occur. We monitor our exchange rate exposure and attempt to reduce such exposure by hedging. We have entered into forward contracts in currencies of the countries in which we conduct business in order to reduce such exposure. Therefore, these contracts are held primarily for purposes other than trading. At December 31, 2002, the fair value of our forward foreign exchange contracts outstanding was $16.8 million with an unrealized loss recorded in the consolidated income statement of $0.1 million for the three and six months ended December 31, 2002. These instruments may involve elements of credit and market risk in excess of the amounts recognized in the financial statements. We believe that a ten percent change in exchange rates would not have a material effect on our business, financial condition, results of operations or cash flows. We monitor our positions and the credit quality of counter-parties, consisting primarily of major financial institutions, and do not anticipate nonperformance by any counterparty, although nonperformance could occur. There can be no assurance that such forward contracts or any other hedging activity will be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. There can be no assurance that such risks will not have a material adverse impact on our liquidity and results of operations in the future.
Financial Risk Management
Our international revenues are subject to inherent risks, including fluctuations in local economies; difficulties in staffing and managing foreign operations; greater difficulty in accounts receivable collection; costs and risks of localizing products for foreign countries; unexpected changes in regulatory requirements, tariffs and other trade barriers; difficulties in the repatriation of earnings; and burdens of complying with a wide variety of foreign laws. Some of our sales outside of North America are denominated in local currencies, and accordingly, we are subject to the risks associated with fluctuations in currency rates. In general, increases in the value of the dollar against foreign currencies decrease the U.S. dollar value of foreign sales requiring us either to increase our price in the local currency, which could render our product prices noncompetitive, or to suffer reduced revenues and gross margins as measured in U.S. dollars. Our foreign currency hedging program is not designed to hedge the margin risks associated with foreign exchange rate changes. Our hedging is comprised of foreign currency forward exchange contracts utilized to mitigate the risks associated with foreign currency fluctuations on certain balance sheet exposures. However, the hedging program will not eliminate all of our foreign exchange risks.
The marketplace for our products dictates that we maintain inventories. Therefore, inventory obsolescence is a risk for us due to frequent engineering changes, shifting customer demand, the emergence of new industry standards and rapid technological advances including the introduction by our competitors or us of products embodying new technology. While we maintain valuation allowances for excess and obsolete inventory and management continues to monitor the adequacy of such valuation allowances, there can be no assurance that such valuation allowances will be sufficient.
As of December 31, 2002, we had outstanding foreign short-term debt totaling approximately $11.8 million. At December 31, 2002, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.
At December 31, 2002 we had $100.0 million of subordinated convertible debt outstanding. The notes are due in July 2004, with no stated interest, are convertible at any time into shares of our common stock at a conversion price of $106.26 per share, are unconditionally guaranteed by DuPont and are not callable by us. In the event of a fundamental change in our company, each holder of notes will have the right to require us to redeem, in cash, any or all of such holders notes at a price equal to 100 percent of the
20
principal amount to be redeemed. A fundamental change generally is any transaction in which all or substantially all of our common stock is exchanged for, converted into, acquired for or constitutes the right to receive, consideration which is not all or substantially all common stock listed on a national securities exchange or approved for quotation on the NASDAQ National Market. If a fundamental change were to occur, we cannot assure you that we will have sufficient funds to pay the redemption price for all the notes tendered by the holders, although DuPont would be required to pay the redemption price under its guarantee and would then be subrogated to the noteholders rights against us. In that case, our failure to redeem tendered notes would constitute an event of default under the indenture for the notes, and may constitute a default under the terms of other indebtedness that we may enter into from time to time.
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and our chief financial officer, based on their evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of our filing of this quarterly report on Form 10-Q, or the Evaluation Date, believe that, as of the Evaluation Date, our disclosure controls and procedures were effective.
Changes in Internal Controls
There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation.
We are not currently involved in any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Companys Annual Meeting of Stockholders was held October 29, 2002 (the Annual Meeting). At the Annual Meeting, (i) the Company elected Class III directors to the Board of Directors to serve until our 2005 annual meeting or until their successors are elected and qualified, subject to their death, resignation or removal, and (ii) the selection of PricewaterhouseCoopers LLP as the Companys independent accountants for the year ended June 30, 2003 was ratified. Votes cast at the Annual Meeting are as follows:
(i) Election of Class III Directors |
|
|
|
|
|
|
|
|
|
|
|
FOR |
|
WITHHELD |
Peter Kirlin |
|
14,910,876 |
|
1,114,974 |
John C. Sargent |
|
15,326,521 |
|
699,329 |
Marshall C. Turner |
|
15,171,122 |
|
854,728 |
(ii) Ratification of the selection of PricewaterhouseCoopers LLP |
|
|
||||||||||
|
|
|
||||||||||
|
|
FOR |
|
AGAINST |
|
ABSTAIN |
|
NON-VOTE |
|
|
||
|
|
15,451,275 |
|
569,583 |
|
4,992 |
|
0 |
|
|
||
21
None
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits |
|
|
|
|
|
|
|
|
(10.29) |
|
Certification of Chief Executive Officer and Certification of Chief Financial Officer pursuant to 18 U.S.C. Section1350, adopted per Section 906 of the Sarbanes-Oxley Act of 2002 |
|
(11) |
|
Statement re Earnings (Loss) Per Share Computation |
|
|
|
|
(B) Reports on Form 8-K |
|||
|
|
|
|
|
None |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Dupont Photomasks, Inc. |
||
|
(Registrant) |
||
|
|
||
|
|
|
|
Date: February 13, 2003 |
By: |
/s/ SATISH RISHI |
|
|
|
Satish Rishi |
|
|
|
Executive
Vice President Finance |
22
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
DUPONT PHOTOMASKS, INC.
CERTIFICATION
1. I have reviewed this quarterly report on Form 10-Q of DuPont Photomasks, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
6. The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 |
|
|
|
|
|
/s/ PETER S. KIRLIN |
|
Peter S. Kirlin |
|
Chief Executive Officer |
23
CERTIFICATION
OF
CHIEF FINANCIAL OFFICER
DUPONT PHOTOMASKS, INC.
CERTIFICATION
1. I have reviewed this quarterly report on Form 10-Q of DuPont Photomasks, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
6. The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 |
|
|
|
|
|
/s/ SATISH RISHI |
|
Satish Rishi |
|
Chief Financial Officer |
24