-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WtnE7sD31ZR12hxDALaKB0qhD+sWibfh/KUralzeHbGUx92ulARPQUMbvQ2xlQYi KvWvtS0JIkLVlPKhayQmYg== 0000950137-01-000634.txt : 20010223 0000950137-01-000634.hdr.sgml : 20010223 ACCESSION NUMBER: 0000950137-01-000634 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CABOT MICROELECTRONICS CORP CENTRAL INDEX KEY: 0001102934 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-30205 FILM NUMBER: 1542355 BUSINESS ADDRESS: STREET 1: 870 NORTH COMMONS DRIVE CITY: AURORA STATE: IL ZIP: 60504 BUSINESS PHONE: 6303756631 10-Q 1 c59982e10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 000-30205 CABOT MICROELECTRONICS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-4324765 (State of Incorporation) (I.R.S. Employer Identification No.) 870 NORTH COMMONS DRIVE 60504 AURORA, ILLINOIS (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (630) 375-6631 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- As of January 31, 2001 the Company had 23,833,015 shares of Common Stock, par value $0.001 per share, outstanding. 2 CABOT MICROELECTRONICS CORPORATION INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Statements of Income Three Months Ended December 31, 2000 and 1999........................................ 3 Pro Forma Statements of Income Three Months Ended December 31, 2000 and 1999........................................ 4 Balance Sheets December 31, 2000 and September 30, 2000............................................. 5 Statements of Cash Flows Three Months Ended December 31, 2000 and 1999........................................ 6 Notes to Financial Statements............................................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................ 21 Item 6. Exhibits and Reports on Form 8-K......................................................... 21
3 PART I. FINANCIAL INFORMATION ITEM 1. CABOT MICROELECTRONICS CORPORATION STATEMENTS OF INCOME (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED DECEMBER 31 2000 1999 ------------- ------------ Revenue ................................................... $ 68,616 $ 35,046 Cost of goods sold ......................................... 32,563 16,310 ------------- ------------ Gross profit....................................... 36,053 18,736 Operating expenses: Research and development................................. 6,538 4,576 Selling and marketing.................................... 2,269 1,357 General and administrative............................... 5,147 3,575 Amortization of goodwill and other intangibles........... 179 180 ------------- ------------ Total operating expenses.............................. 14,133 9,688 ------------- ------------ Operating income............................................ 21,920 9,048 Other income ............................................... 437 - ------------- ------------ Income before income taxes.................................. 22,357 9,048 Provision for income taxes.................................. 7,918 3,300 ------------- ------------ Net income............................................ $ 14,439 $ 5,748 ============= ============ Basic net income per share.................................. $ 0.61 $ 0.30 ============= ============ Weighted average basic shares outstanding................... 23,608 18,990 ============= ============ Diluted net income per share................................ $ 0.59 $ 0.30 ============= ============ Weighted average diluted shares outstanding................. 24,290 18,990 ============= ============
The accompanying notes are an integral part of these financial statements. 3 4 CABOT MICROELECTRONICS CORPORATION PRO FORMA STATEMENTS OF INCOME (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED DECEMBER 31 2000 1999 (A) ------------- ------------ Revenue ................................................... $ 68,616 $ 34,804 Cost of goods sold ......................................... 32,563 17,372 ------------- ------------ Gross profit....................................... 36,053 17,432 Operating expenses: Research and development................................. 6,538 4,576 Selling and marketing.................................... 2,269 1,357 General and administrative .............................. 5,147 3,575 Amortization of goodwill and other intangibles........... 179 180 ----------- ------------ Total operating expenses........................... 14,133 9,688 ----------- ------------ Operating income............................................ 21,920 7,744 Other income (expense) ..................................... 437 (316) ----------- ------------ Income before income taxes.................................. 22,357 7,428 Provision for income taxes ................................. 7,918 2,709 ----------- ------------ Net income......................................... $ 14,439 $ 4,719 =========== ============ Basic net income per share ................................. $ 0.61 $ 0.25 =========== ============ Weighted average basic shares outstanding .................. 23,608 18,990 =========== ============ Diluted net income per share ............................... $ 0.59 $ 0.25 =========== ============ Weighted average diluted shares outstanding ................ 24,290 18,990 =========== ============
(a) Reflects the revenue and cost of goods sold which would have resulted had our dispersion services agreement and fumed metal oxide supply agreement with Cabot Corporation been in effect. Also includes interest expense which would have been incurred on the borrowings necessary to finance a dividend to Cabot Corporation. The accompanying notes are an integral part of these pro forma financial statements. 4 5 CABOT MICROELECTRONICS CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30, 2000 2000 ---------------- -------------- (UNAUDITED) ASSETS: Current assets: Cash and cash equivalents...................................................... $ 15,227 $ 9,971 Accounts receivable, less allowance for doubtful accounts of $430 at December 31, 2000 and $233 at September 30, 2000.............................................. 43,445 30,595 Inventories.................................................................... 14,730 14,014 Prepaid expenses and other current assets...................................... 2,575 2,752 Deferred income taxes.......................................................... 2,339 1,721 ---------------- -------------- Total current assets..................................................... 78,316 59,053 Property, plant and equipment, net................................................ 75,814 71,873 Goodwill, net..................................................................... 1,257 1,328 Other intangible assets, net...................................................... 1,891 2,002 Deferred income taxes............................................................. 1,282 1,271 Other assets...................................................................... 484 579 ---------------- -------------- Total assets............................................................. $ 159,044 $ 136,106 ================ ============== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable............................................................... $ 9,789 $ 11,646 Accrued expenses and other current liabilities................................. 14,220 12,554 Income taxes payable........................................................... 7,832 - ---------------- -------------- Total current liabilities................................................ 31,841 24,200 Long-term debt................................................................. 3,500 3,500 Deferred income taxes.......................................................... 160 160 Deferred compensation.......................................................... 650 684 ---------------- -------------- Total liabilities........................................................ 36,151 28,544 Commitments and contingencies Stockholders' equity: Common stock: Authorized: 200,000,000 shares, $0.001 par value Issued and outstanding: 23,644,936 shares at December 31, 2000 and 23,590,293 at September 30, 2000 ........................................... $ 24 $ 24 Capital in excess of par value of common stock................................. 90,734 88,290 Retained earnings.............................................................. 32,977 18,538 Accumulated other comprehensive income (loss).................................. (534) 792 Unearned compensation.......................................................... (308) (82) ----------------- --------------- Total stockholders' equity............................................... 122,893 107,562 ---------------- -------------- Total liabilities and stockholders' equity............................... $ 159,044 $ 136,106 ================ ==============
The accompanying notes are an integral part of these financial statements. 5 6 CABOT MICROELECTRONICS CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 2000 1999 --------------- --------------- Cash flows from operating activities: Net Income................................................................... $ 14,439 $ 5,748 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................. 1,815 932 Noncash compensation expense.............................................. 568 275 Provision for inventory writedown......................................... 350 - Stock option income tax benefits.......................................... 555 - Deferred income tax (benefit) expense..................................... (629) 52 (Gain) on disposal of property, plant and equipment........................................................... - (5) Changes in operating assets and liabilities: Accounts receivable....................................................... (13,671) (2,547) Inventories............................................................... (641) (3,353) Prepaid expenses and other current assets................................. 20 (482) Other noncurrent assets................................................... 95 - Accounts payable.......................................................... (1,679) 219 Accrued expenses and other current liabilities............................ 2,153 (596) Income taxes payable...................................................... 7,819 - Deferred compensation........................................................... (34) 106 --------------- --------------- Net cash provided by operating activities....................................... 11,160 349 Cash flows from investing activities: Additions to property, plant and equipment................................... (6,906) (7,196) Proceeds from the sale of property, plant, and equipment.......................................................... 2 6 -------------- --------------- Net cash used by investing activities........................................... (6,904) (7,190) -------------- --------------- Cash flows from financing activities: Net proceeds from issuance of stock.......................................... 776 - Net capital contributed by Cabot Corporation................................. - 6,922 -------------- --------------- Net cash provided by financing activities....................................... 776 6,922 -------------- --------------- Effect of exchange rate changes on cash......................................... 224 (16) -------------- ---------------- Increase in cash................................................................ 5,256 65 Cash and cash equivalents at beginning of period................................ 9,971 38 -------------- --------------- Cash and cash equivalents at end of period...................................... $ 15,227 $ 103 ============== ===============
The accompanying notes are an integral part of these financial statements. 6 7 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. BACKGROUND AND BASIS OF PRESENTATION We are the leading supplier of high performance polishing slurries used in the manufacture of the most advanced integrated circuit ("IC") devices, within a process called chemical mechanical planarization ("CMP"). We believe that we supply approximately 80% of the slurries sold to IC device manufacturers worldwide. CMP is a polishing process used by IC device manufacturers to planarize many of the multiple layers of material that are built upon silicon wafers to produce advanced devices. The unaudited financial statements have been prepared by Cabot Microelectronics Corporation ("Cabot Microelectronics", "the Company", "us", "we", or "our"), pursuant to the rules of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States of America. In the opinion of management, these unaudited financial statements include all adjustments necessary for the fair presentation of Cabot Microelectronics' financial position, results of operations and cash flows for the three months ended December 31, 2000 and December 31, 1999. Our financial statements reflect the historical results of operations, financial position and cash flows of Cabot Microelectronics, which prior to the initial public offering and spin-off discussed in Note 2, operated as a division and subsidiary (incorporated October, 1999) of Cabot Corporation ("Cabot"). The results of operations for the three months ended December 31, 2000 may not be indicative of the results to be expected for the fiscal year ending September 30, 2001. These financial statements should be read in conjunction with the financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2000. We operate predominantly in one industry segment - the development, manufacture, and sale of CMP slurries. Certain reclassifications of prior fiscal year amounts have been made to conform with the current period presentation. The balance sheets have been prepared using the historical basis of accounting and include all of the assets and liabilities specifically identifiable to Cabot Microelectronics. The statements of income include all revenue and costs attributable to Cabot Microelectronics. For the three months ended December 31, 1999, the statements of income include an allocation from Cabot Corporation of employee benefits and costs of shared services (including legal, finance, human resources, information systems, corporate office, and safety, health and environmental expenses). These costs were allocated to Cabot Microelectronics based on criteria that management believes to be equitable, such as Cabot Microelectronics' revenue, headcount, or actual utilization in proportion to Cabot Corporation's revenue, headcount, or actual utilization. Management believes this provides a reasonable estimate of the costs attributable to Cabot Microelectronics. For the three months ended December 31, 1999, such allocated costs amounted to $1,487. Allocated costs may not necessarily be indicative of the costs that would have been incurred by Cabot Microelectronics on a stand-alone basis. 2. SEPARATION FROM CABOT CORPORATION In July 1999, Cabot Corporation announced its plans to create an independent publicly-traded company, Cabot Microelectronics, comprised of its Microelectronics Materials Division. Cabot Microelectronics, which was incorporated in October 1999, completed its initial public offering in April 2000 ("initial public offering"), receiving net proceeds of $82,765, after deducting underwriting commissions and offering expenses, from the sale of 4,600,000 shares of common stock. Following the completion of the initial public offering, Cabot Corporation owned approximately 80.5% of Cabot Microelectronics' outstanding common stock. Cabot Microelectronics paid Cabot Corporation aggregate dividends of $81,300 of which $17,000 was paid from borrowings under a term credit facility prior to the initial public offering and $64,300 was paid with proceeds from the initial public offering. On September 29, 2000, Cabot Corporation effected the spin-off ("spin-off"), of Cabot Microelectronics by distributing 0.280473721 shares of Cabot Microelectronics common stock as a dividend on each outstanding share of Cabot Corporation common stock outstanding on September 13, 2000, or an aggregate of 18,989,744 shares of Cabot Microelectronics common stock. 7 8 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3. NET INCOME PER SHARE Basic and diluted net income per share for the three months ended December 31, 1999 have been calculated using the pro forma 18,989,744 shares that were owned by Cabot Corporation prior to the closing of the initial public offering. These shares take into consideration a 18,989,744 to 1 stock split which occurred subsequent to March 31, 2000, but prior to the completion of the initial public offering. 4. DERIVATIVES In the first quarter of fiscal 2001, Cabot Microelectronics adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The adoption of SFAS 133 resulted in a reduction to comprehensive income for the three months ended December 31, 2000 of $160. This was attributable to unrealized losses on derivatives designated as cash flow hedges which were entered into to hedge commitments involving construction contracts associated with our Geino, Japan expansion. We will reclassify gains and losses associated with cash flow hedges into earnings in the same period or periods in which related assets affect earnings. There were no other significant derivatives as of December 31, 2000. The adoption of SFAS 133 did not have a material impact on the Company's operations or financial position. 5. COMPREHENSIVE INCOME The components of comprehensive income are as follows (in thousands):
THREE MONTHS ENDED DECEMBER 31, 2000 1999 ------------- ----------- Net Income....................................... $ 14,439 $ 5,748 Other comprehensive income: Net unrealized loss on derivative instruments (160) - Foreign currency translation adjustment..... (1,166) 34 ------------- ----------- Total comprehensive income....................... $ 13,113 $ 5,782 ============ ===========
6. INVENTORIES Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2000 2000 ------------ ------------- Raw materials................................................................... $ 10,104 $ 9,139 Work in process................................................................. - 28 Finished goods.................................................................. 4,626 4,847 ------------ ---------- Total........................................................................... $ 14,730 $ 14,014 ============ ==========
8 9 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 7. LONG-TERM DEBT At December 31, 2000 debt was comprised of an unsecured term loan in the amount of $3,500 funded on the basis of the State of Illinois State Treasurer's Economic Program which is due on June 1, 2005 and incurs interest at an annual rate of 6.37%. We originally borrowed $17,000 under a term credit facility and paid the proceeds of this borrowing to Cabot Corporation as a dividend. The original debt was comprised of a term loan in the amount of $13,500 and the $3,500 term loan referred to above. During the third quarter of 2000, Cabot Microelectronics repaid the $13,500 term loan and subsequent to June 30, 2000, this term loan was converted to a revolving line of credit of $8,500 described below. We also have a $25,000 unsecured revolving credit facility which terminates in March 29, 2003. Interest is incurred at either the institution's base rate or the LIBOR rate plus an applicable margin. We also have a $8,500 revolving line of credit which terminates in June 1, 2003. Interest is incurred at either the institution's base rate or the Eurodollar rate plus an applicable margin. Loans under both facilities will be used primarily for general corporate purposes, including working capital and capital expenditures. No amounts were outstanding under either line of credit at December 31, 2000 or September 30, 2000. 8. CONTINGENCIES In June 1998, one of our major competitors, Rodel Inc., filed a lawsuit against Cabot Corporation in the United States District Court for the District of Delaware entitled Rodel, Inc. v. Cabot Corporation (Civil Action No. 98-352). In this lawsuit, Rodel has requested a jury trial and is seeking a permanent injunction and an award of compensatory, punitive, and other damages relating to allegations that Cabot Corporation is infringing United States Patent No. 4,959,113 (entitled "Method and Composition for Polishing Metal Surfaces"), which is owned by an affiliate of Rodel. We refer to this patent as the Roberts patent and this lawsuit as the Roberts lawsuit. Cabot Corporation filed an answer and counterclaim seeking dismissal of the Roberts lawsuit with prejudice, a judgment that Cabot Corporation is not infringing the Roberts patent and/or that the Roberts patent is invalid, and other relief. Cabot Corporation subsequently filed a motion for summary judgment that the Roberts patent is invalid because all of the claims contained in the patent were not sufficiently different under applicable patent law from subject matter contained in previously granted patents, specifically United States Patents Nos. 4,705,566, 4,956,015 and 4,929,257, each of which is owned by a third party not affiliated with Rodel or us. This motion was denied on September 30, 1999 based on the court's finding that there were genuine issues of material fact to be determined at trial. After the ruling on the summary judgment motion, Rodel filed a request for reexamination of the Roberts patent with the United States Patent and Trademark Office (PTO), which was granted on November 12, 1999. On March 28, 2000 the court issued an order staying the Roberts action, which presently is in the discovery stage, pending completion of the reexamination of the Roberts patent by the PTO. While to our knowledge, as of January 31, 2001, the reexamination of the Roberts patent still has not been completed, in December, 2000 the PTO issued a notice of intent to issue a reexamination certificate for the Roberts patent. In light of the reexamination, on September 29, 2000, the court denied the parties' respective motions to amend and dismiss, with leave to refile subsequent to completion of the reexamination. In April 1999, Rodel commenced a second lawsuit against Cabot Corporation in the United States District Court for the District of Delaware entitled Rodel, Inc. v. Cabot Corporation (Civil Action No. 99-256). In this lawsuit, Rodel has requested a jury trial and is seeking a permanent injunction and an award of compensatory, punitive, and other damages relating to allegations that Cabot Corporation is infringing two other patents owned by an affiliate of Rodel. These two patents are United States Patent No. 5,391,258 (entitled "Compositions and Methods for Polishing") and United States Patent No. 5,476,606 (entitled "Compositions and Methods for Polishing"). We refer to these patents as the Brancaleoni patents and this lawsuit as the Brancaleoni lawsuit. Cabot Corporation has filed an answer and counterclaim to the complaint seeking dismissal of the complaint with prejudice, a judgment that Cabot Corporation is not infringing the Brancaleoni patents and/or that the Brancaleoni patents are invalid, and other relief. On September 29, 2000, the court denied Cabot Corporation's motion to dismiss, and granted Rodel's leave to amend the Brancaleoni lawsuit to add Rodel's affiliate that owns the Brancaleoni patents, Rodel Holdings, Inc. ("Rodel Holdings"), as a plaintiff. On October 24, 2000, Rodel and Rodel Holdings filed an amended complaint that added 9 10 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Rodel Holdings as a plaintiff to the Brancaleoni lawsuit. On November 6, 2000, Cabot Corporation filed its answer and counterclaim seeking a judgement that Cabot Corporation is not infringing the Brancaleoni patents and/or that the Brancaleoni patents are invalid, and other relief. The Brancaleoni lawsuit is presently in the discovery stage. On January 18, 2001, the court amended its scheduling order and set June 15, 2001 for completion of discovery, October 25, 2001 for a final pretrial conference, and February, 2002 for the commencement of trial. In the Roberts lawsuit, the only product that Rodel to date has alleged infringes the Roberts patent is our W2000 slurry, which is used to polish tungsten and which currently accounts for a significant portion of our total revenue. In the Brancaleoni lawsuit, Rodel and Rodel Holdings have not alleged that any specific product infringes the Brancaleoni patents; instead, Rodel and Rodel Holdings allege that our United States Patent No. 5,858,813 (entitled "Chemical Mechanical Polishing Slurry for Metal Layers and Films" and which relates to a CMP polishing slurry for metal surfaces including, among other things, aluminum and copper) is evidence that Cabot Corporation is infringing the Brancaleoni patents through the manufacture and sales of unspecified products. At this stage, we cannot predict whether or to what extent Rodel and/or Rodel Holdings will make specific infringement claims with respect to any of our products other than W2000 in these or any future proceedings. It is possible that Rodel and/or Rodel Holdings will claim that many of our products infringe its patents. Although Cabot Corporation is the only named defendant in these lawsuits, the defense of which we have assumed and now are controlling, we have agreed to indemnify Cabot Corporation for any and all losses and expenses arising out of this litigation as well as any other litigation arising out of our business. While we believe there are meritorious defenses to the pending actions and intend to defend them vigorously, these defenses may not be successful. If Rodel (and/or Rodel Holdings) prevails in either of these cases, we may have to pay damages and, in the future, may be prohibited from producing any products found to infringe or required to pay Rodel (and/or Rodel Holdings) royalty and licensing fees with respect to sales of those products. It is not possible to estimate the amount of a probable loss, if any, that might result from this matter. Accordingly, no provision has been made in our financial statements. 9. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the SEC released Statement of Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. Cabot Microelectronics Corporation is required to be in conformity with the provisions of SAB 101 no later than July 1, 2001 and we do not expect a material change in our financial condition or results of operations as a result of the adoption of SAB 101. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this Form 10-Q are forward-looking. In particular, the statements herein regarding industry prospects, our future results of operations or financial position and statements preceded by, followed by or that include the words "intends", "estimates", "plans", "believes", "expects", "anticipates", "should", "could", or similar expressions, are forward-looking statements. Forward-looking statements reflect our current expectations and are inherently uncertain. Our actual results may differ significantly from our expectations. We assume no obligation to update this forward-looking information. The section entitled "Factors Affecting Future Operating Results" describes some, but not all, of the factors that could cause these differences. This section, "Management's Discussion and Analysis of Financial Condition and Results of Operations", should be read in conjunction with 10 11 the financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2000. OVERVIEW Prior to our initial public offering on April 4, 2000, we operated as a division of Cabot Corporation, a global chemical manufacturing company based in Boston, Massachusetts. On September 29, 2000, Cabot Corporation effected the spin-off of Cabot Microelectronics Corporation by distributing 0.280473721 shares of our common stock as a dividend on each outstanding share of Cabot Corporation common stock outstanding on September 13, 2000, or an aggregate of 18,989,744 shares of our common stock. We are the leading supplier of high performance polishing slurries used in the manufacture of the most advanced IC devices, through a process called CMP. We believe that we supply approximately 80% of the slurries sold to IC device manufacturers worldwide. CMP is a polishing process used by IC device manufacturers to planarize many of the multiple layers of material that are built upon silicon wafers to produce advanced devices. Planarization is a polishing process that levels and smooths, and removes the excess material from, the surfaces of these layers. CMP slurries are liquids containing engineered abrasives and proprietary chemicals that facilitate and enhance this polishing process. CMP enables IC device manufacturers in producing smaller, faster and more complex IC devices with fewer defects. We believe CMP will become increasingly important in the future as manufacturers seek to further shrink the size of these devices and improve their performance. Most of our CMP slurries are used to polish insulating layers and the tungsten plugs that go through the insulating layers and connect the multiple wiring layers of IC devices. We are developing and selling new slurries used to polish copper, a new metal used in wiring layers of IC device fabrication. Also, we have developed and have begun sales of new CMP slurries designed for polishing several components in hard disk drives, specifically rigid disks and magnetic heads. We continue to develop slurries for additional new applications. In addition, we have recently begun producing and selling polishing pads used in the CMP process. BASIS OF PRESENTATION The following "Management's Discussion of Results of Operations" contains unaudited pro forma results which reflect adjustments to our historical results of operations for the three months ended December 31, 1999 to give effect to various transactions as if those transactions had been consummated as of the periods presented. We historically sold various dispersion products to Cabot Corporation at our cost of manufacturing. We entered into a dispersion services agreement with Cabot Corporation, which became effective upon the completion of our initial public offering, under which we provide dispersion products to Cabot Corporation at our cost plus a standard margin. Under this agreement, Cabot Corporation supplies us with the fumed metal oxide raw materials for these dispersions at no cost to us, which should reduce both our cost of goods sold and revenue for these dispersions. In addition, we historically purchased fumed metal oxides, critical raw materials for our slurries, from Cabot Corporation at their budgeted standard cost. We entered into a fumed metal oxide supply agreement with Cabot Corporation, which became effective on April 4, 2000 under which we purchase fumed metal oxides at a contractually agreed upon price. The agreement provides for fixed price increases each year and other price increases if Cabot Corporation's cost of producing fumed metal oxides increases. We believe the assumptions used provide a reasonable basis for presenting the significant effects directly attributable to these agreements. The unaudited pro forma results of income are not necessarily indicative of the results that would have been reported had such events actually occurred on the dates specified, nor are they indicative of our future results. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2000 VERSUS THREE MONTHS ENDED DECEMBER 31, 1999 REVENUE Total revenue was $68.6 million for the three months ended December 31, 2000, which represented a 96%, or $33.6 million, increase from the three months ended December 31, 1999. Of this increase, $28.1 million was due to a 80% increase in volume 11 12 and $5.5 million was due to increased weighted average selling prices. The volume growth was driven mainly by the increased use of CMP slurries in the manufacture of IC devices. COST OF GOODS SOLD Total cost of goods sold was $32.6 million for the three months ended December 31, 2000, which represented an increase of 100% or $16.3 million from the three months ended December 31, 1999. Of this increase, $13.1 million was due to higher sales volume and $3.2 million was due to higher weighted average costs per gallon. These higher costs resulted from improved quality requirements, higher raw material costs resulted from the fumed metal oxide supply agreement with Cabot Corporation, and higher manufacturing and distribution costs associated with our increased activities in the Asia Pacific region. Total cost of goods sold of $32.6 million for the three months ended December 31, 2000 increased 87% or 15.2 million over costs of goods sold on a pro forma basis for the three months ended December 31, 1999. Pro forma cost of goods sold represents results had our dispersion services agreement and fumed metal oxide supply agreement with Cabot Corporation been in effect. GROSS PROFIT Our gross profit as a percentage of net revenue was 52.5% for the three months ended December 31, 2000 as compared to 53.5% for the three months ended December 31, 1999. The decrease in gross profit resulted primarily from higher raw material costs resulting from the fumed metal oxide supply agreement with Cabot Corporation, and higher manufacturing and distribution costs associated with our increased activities in the Asia Pacific region. On a pro forma basis, gross margin for the three months ended December 31, 1999 would have been 50.1% of net revenue. RESEARCH AND DEVELOPMENT Research and development expenses were $6.5 million in the three months ended December 31, 2000, which represented an increase of 43%, or $2.0 million, from the three months ended December 31, 1999. Of this increase, $1.1 million was due to costs associated with higher staffing levels and $0.2 million of increased depreciation relating to clean room equipment. Various other increases of $0.9 million were offset by the absence of $0.2 million in R&D allocations from Cabot Corporation. Key activities during the three months ended December 31, 2000 involved the continued development of new and enhanced slurry products, new CMP polishing pad technology and advanced particle technology. SELLING AND MARKETING Selling and marketing expenses were $2.3 million in the three months ended December 31, 2000, which represented an increase of 67%, or $0.9 million, for the three months ended December 31, 1999. The increase was primarily due to the hiring of customer support personnel in our North America and Asia Pacific regions. GENERAL AND ADMINISTRATIVE General and administrative expenses were $5.1 million in the three months ended December 31, 2000, which represented an increase of 44%, or $1.6 million, from the three months ended December 31, 1999. The increase resulted from an additional $1.3 million of personnel related costs due to increased staffing needed to support the general growth of the business and $0.2 million in continued support regarding the separation of our information technology from Cabot Corporation. Other increases of $0.7 million were partially offset by the absence of $0.6 million in corporate allocations from Cabot Corporation as Cabot Microelectronics established its own corporate departments. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles was $0.2 million in the three months ended December 31, 2000 and the three months ended December 31, 1999 and related to goodwill and other intangible assets associated with the acquisition of selected distributor assets from a third party in 1995. PROVISION FOR INCOME TAXES 12 13 The effective tax rate on income from operations was 35% in the three months ended December 31, 2000 and 36% for the three months ended December 31, 1999. The slight decrease in the effective tax rate was mainly driven by a greater percentage of export sales resulting in increased foreign sales corporation deductions. NET INCOME Net income was $14.4 million in the three months ended December 31, 2000, which represented an increase of 151%, or $8.7 million, from the three months ended December 31, 1999 as a result of the factors discussed above. Net income for the three months ended December 31, 2000 increased 206%, or 9.7 million, from pro forma net income for the three months ended December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES We had cash flows from operating activities of $11.2 million in the three months ended December 31, 2000 and $0.3 million in the three months ended December 31, 1999. Our cash provided by operating activities for the three months ended December 31, 2000 originated from net income from operations of $14.4 million plus non-cash items of $2.7 million, offset by a net increase in working capital of $5.9 million. Our principal capital requirements have been to fund working capital requirements and additions to property, plant and equipment that support the expansion of our business. In the three months ended December 31, 2000, cash flows used in investing activities were $6.9 million, primarily due to the expansion of our Geino, Japan manufacturing facility and the purchase of research and development equipment. In the three months ended December 31, 1999, cash flows used in investing activities were $7.2 million primarily due to the construction of our Aurora, Illinois manufacturing building, the purchase of land in Korea for a new distribution facility and the purchase of research and development equipment. Cash flows from financing activities of $0.8 million for the three months ended December 31, 2000 resulted from the issuance of common stock upon the exercise of stock options. Cash flows from financing activities for the three months ended December 31, 1999 were $6.9 million and resulted from capital contributions from Cabot Corporation. We have a $25 million unsecured revolving credit facility which terminates in March 29, 2003. Interest is incurred at either the institution's base rate or the LIBOR rate plus an applicable margin. We also have a $8.5 million revolving line of credit which terminates in June 1, 2003. Interest is incurred at either the institution's base rate or the Eurodollar rate plus an applicable margin. Loans under both facilities will be used primarily for general corporate purposes, including working capital and capital expenditures. No amounts were outstanding under either line of credit at December 31, 2000 or September 30, 2000. We believe that cash generated by our operations and borrowings under our revolving credit facility will be sufficient to fund our operations and expected capital expenditures for the next 24 months. However, we plan to expand our business and continue to improve our technology and, to do so, we may be required to raise additional funds in the future through public or private equity or debt financing, strategic relationships or other arrangements. FACTORS AFFECTING FUTURE OPERATING RESULTS RISKS RELATING TO OUR BUSINESS HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A SEPARATE COMPANY. The historical financial information we have presented may not reflect what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone entity during the period presented and may not be indicative of what our results of operations, financial position and cash flows will be in the future. As a result, information to evaluate our business is limited. This is because: 13 14 o when we were a division of Cabot Corporation, Cabot provided us with various services and allocated expenses for these services to us in amounts that may not have been the same as the expenses we would have incurred had we performed or acquired these services ourselves; o we have changed our fumed metal oxide supply and dispersion services arrangements with Cabot Corporation and the prices we are paying under our new arrangements are higher than the prices we paid in the past; and o the historical financial information for the periods prior to our initial public offering does not reflect other events and changes that are occurring or will occur as a result of our separation from Cabot Corporation, including the establishment of our capital structure, the incurrence of debt and changes in our expenses as a result of new employee, tax and other structures and matters. WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP CONSUMPTION Our business is substantially dependent on a single class of products, CMP slurries, which historically has accounted for almost all of our revenue. Our business would suffer if these products became obsolete or if consumption of these products decreased. Our success depends on our ability to keep pace with technological changes and advances in the semiconductor industry and to adapt and improve our products in response to evolving customer needs and industry trends. Since its inception, the semiconductor industry has experienced rapid technological changes and advances in the design, manufacture, performance and application of IC devices and these changes and advances are expected to continue in the future. One or more developments in the semiconductor industry may render our products obsolete or less important to the IC device manufacturing process, including: o increased competition from new or existing producers of CMP slurries, including the introduction of new or substitute products; o a shift toward reduced consumption or reuse of slurries; o advances in CMP technology that make it possible to perform planarization without a slurry. Any of the foregoing developments could cause a decline in the CMP slurry market in general or seriously harm our business, financial condition and results of operations in particular. A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE OF THEM AS CUSTOMERS Our customer base is concentrated among a limited number of large customers. One or more of these principal customers may stop buying CMP slurries from us or may substantially reduce the quantity of CMP slurries they purchase from us. Any cancellation, deferral or significant reduction in CMP slurries sold to these principal customers or a significant number of smaller customers could seriously harm our business, financial condition and results of operations. For the three months ended December 31, 2000, our five largest customers accounted for approximately 56% of our revenue, with Marketech, Intel and Metron accounting for approximately 24%, 13% and 8% of our revenue, respectively. For the three months ended December 31, 1999, our five largest customers accounted for approximately 53% of our revenue, with Marketech, Intel and Takasago accounting for approximately 15%, 14% and 11% of our revenue, respectively. Marketech, Takasago and Metron are distributors. The increase in the percentage of our total revenue attributable to sales to Marketech resulted primarily from increased demand and manufacturing capacity in the Asia Pacific region. IF WE LOSE PENDING OR FUTURE INTELLECTUAL PROPERTY LAWSUITS RELATING TO OUR BUSINESS, WE COULD BE LIABLE FOR SIGNIFICANT DAMAGES AND LEGAL EXPENSES AND COULD BE ENJOINED FROM MANUFACTURING OUR SLURRY PRODUCTS 14 15 Cabot Corporation is currently the subject of two lawsuits against it involving infringement claims relating to our business. If Cabot Corporation or we were to lose these or future lawsuits, we could be liable for significant damages and legal expenses and could be enjoined from manufacturing our slurry products. Although Cabot Corporation is the only named defendant in these lawsuits, the defense of which we have assumed and are now controlling, we have agreed to indemnify Cabot Corporation for any and all losses and expenses arising out of this litigation as well as any other litigation arising out of our business. See "Footnote 8. - Contingencies", under PART I, Item 1 - Notes to Financial Statements in this Quarterly Report on Form 10-Q for further discussion. In addition, we may be subject to future infringement claims by Rodel or others with respect to our products and processes. These claims, even if they are without merit, could be expensive and time consuming to defend and if we were to lose any future infringement claims we could be subject to injunctions, damages and/or royalty or licensing agreements. Royalty or licensing agreements, if required as a result of any pending or future claims, may not be available to us on acceptable terms or at all. Moreover, from time to time we agree to indemnify certain of our customers for losses the customers may incur as a result of intellectual property claims brought against them arising out of their purchase or use of our products. ANY PROBLEM OR INTERRUPTION IN OUR SUPPLY FROM CABOT CORPORATION OF FUMED METAL OXIDES, OUR MOST IMPORTANT RAW MATERIALS, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY AFFECT OUR SALES Fumed metal oxides are the primary raw materials we use in many of our CMP slurries. Our business would suffer from any problem or interruption in our supply of fumed metal oxides. Cabot Corporation is currently our exclusive supplier of certain fumed metal oxides. We have entered into a fumed metal oxide supply agreement with Cabot Corporation, which became effective upon completion of our initial public offering, and under which Cabot continues to be our exclusive supplier of certain fumed metal oxides for our current slurry products. Our continued supply of fumed metal oxides from Cabot Corporation is subject to a number of risks, including: o the destruction of one of Cabot's fumed metal oxides manufacturing facilities, particularly its Tuscola facility, or its distribution infrastructure; o a work stoppage or strike by Cabot employees who manufacture fumed metal oxides; o the failure of Cabot to provide fumed metal oxides of the requisite quality for production of our various CMP slurries; o the failure of essential fumed metal oxides manufacturing equipment at a Cabot plant; o the failure or shortage of supply of raw materials to Cabot; o contractual amendments and disputes with Cabot, including those relating to the fumed metal oxide supply agreement; and o our required quantities may exceed the amount Cabot is obligated to supply under the agreements. Any of these factors could interfere with our ability to produce our CMP slurries in the quantities and of the quality required by our customers and in accordance with their delivery schedules. It may also be difficult to secure alternative sources of fumed metal oxides in the event Cabot Corporation encounters supply problems. In addition, if we change the supplier or type of fumed metal oxides we use to make our CMP slurries or are required to purchase them from a different Cabot Corporation manufacturing facility, our customers might be forced to requalify our CMP slurries for their manufacturing processes and products. The requalification process would likely take a significant amount of time to complete, during which our sales of CMP slurries to these customers could be interrupted or reduced. We have also specifically engineered our slurry chemistries with the fumed metal oxides currently used in the production of our CMP products. A change in the fumed metal oxides we use to make our slurry products could require us to modify our 15 16 chemistries. This modification may involve a significant amount of time and cost to complete and therefore have an adverse effect on our business and sales. OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS DEVELOP SUPERIOR SLURRY PRODUCTS OR OFFER BETTER PRICING TERMS OR SERVICE, OR IF ANY OF OUR MAJOR CUSTOMERS DEVELOP IN-HOUSE SLURRY MANUFACTURING CAPABILITY Increased competition from current CMP slurry manufacturers, new entrants to the CMP slurry market or a decision by any of our major customers to produce slurry products in-house could seriously harm our business and results of operations. We are aware of only five other manufacturers of CMP slurries currently selling to IC device manufacturers. Opportunities exist for companies with sufficient financial or technological resources to emerge as potential competitors by developing their own CMP slurry products. Some of our major customers, and some potential customers, currently manufacture slurries in-house and others have the financial and technological capability to do so. The existence or threat of increased competition and in-house production could limit or reduce the prices we are able to charge for our slurry products. In addition, our competitors may have or obtain intellectual property rights which may restrict our ability to market our existing products and/or to innovate and develop new products. OUR INABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT PERSONNEL OR TECHNICAL EMPLOYEES COULD CAUSE OUR BUSINESS TO SUFFER If we fail to recruit and retain the necessary management personnel, our business and our ability to maintain existing and obtain new customers, develop new products and provide acceptable levels of customer service could suffer. The success of our business is also heavily dependent on the leadership of our key management personnel, all of whom are employees-at-will. We have no key man insurance on any of our personnel. The loss of any number of our key management personnel could harm our business and results of operations. Our success also depends on our ability to recruit, retain and motivate technical personnel for our research and development activities. Competition for qualified personnel, particularly those with significant experience in the CMP and IC device industries, is intense, and we may not be able to successfully recruit, train or retain these employees. BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING PADS AND SLURRIES FOR CMP POLISHING OF THE MAGNETIC HEADS IN HARD DISK DRIVES, EXPANSION OF OUR BUSINESS INTO THESE AREAS AND APPLICATIONS MAY NOT BE SUCCESSFUL An element of our strategy is to leverage our current customer relationships and technological expertise to expand our business into new product areas and applications, including manufacturing CMP polishing pads and slurries for CMP polishing of the magnetic heads in hard disk drives. We have had limited experience in developing and marketing these products, particularly polishing pads, which involve technologies and production processes that are new to us. We or the suppliers of the raw materials that we use to make our polishing pads may not be able to solve any technological or production problems that we or they may encounter. In addition, if we or these suppliers are unable to keep pace with technological or other developments in the design and production of polishing pads, we will probably not be competitive in the polishing pad market For these reasons, the expansion of our business into these new product areas or applications may not be successful. BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS Protection of intellectual property is particularly important in our industry because CMP slurry manufacturers develop complex and technical formulas for CMP slurries which are proprietary in nature and differentiate their products from those of competitors. Our intellectual property is important to our success and ability to compete. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as employee and third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could seriously harm our business. 16 17 Policing the unauthorized use of our intellectual property is difficult, and the steps we have taken may not detect or prevent the misappropriation or unauthorized use of our technologies. In addition, other parties may independently develop or otherwise acquire the same or substantially equivalent technologies to ours. WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS We currently have operations and a large customer base outside the United States. For fiscal 2000, approximately 56% of our revenue was generated by sales to customers outside the United States compared to 46% in the prior year. For the three months ended December 31, 2000, approximately 63% of our revenue was generated by sales to customers outside the United States. We encounter potential risks in doing business in foreign countries, including: o the difficulty of enforcing agreements and collecting receivables through some foreign legal systems; o foreign customers may have longer payment cycles than customers in the United States; o tax rates in some foreign countries may exceed those of the United States and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions; o general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries; o the difficulties associated with managing a large organization spread throughout various countries; and o the difficulty in enforcing intellectual property rights in some foreign countries. As we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS As a result of our international operations, we expect to generate an increasing portion of our revenue and incur a significant portion of our expenses in currencies other than U.S. dollars. To the extent we are unable to match revenue received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any foreign currency could have a negative impact on our financial condition or results of operations. The financial condition and results of operations of some of our operating entities are reported in various foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies will have a negative impact on our reported revenue and operating profits. OUR ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED AND THIS MAY LIMIT OUR ABILITY TO EXPAND OUR BUSINESS AND IMPROVE OUR TECHNOLOGY We plan to expand our business and continue to improve our technology. To do so we may be required to raise additional funds in the future through public or private equity or debt financing, strategic relationships or other arrangements. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our financial condition or results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve restrictive covenants. RISKS RELATING TO OUR SEPARATION FROM CABOT CORPORATION 17 18 WE CURRENTLY USE CABOT CORPORATION'S INFORMATION TECHNOLOGY SERVICES AND SYSTEMS AND OUR ABILITY TO SATISFY OUR CUSTOMERS AND OPERATE OUR BUSINESS WILL SUFFER IF WE DO NOT IMPLEMENT A NEW COST EFFECTIVE INFRASTRUCTURE TO SUPPORT OUR EXPANDING BUSINESS NEEDS We currently use duplicated versions of Cabot Corporation's systems to support our operations, including systems covering order processing, inventory management, shipping and accounting. Many of these systems were not optimized for our business processes. We have initiated a project to implement new systems to replace the duplicated versions of Cabot's systems within the next 12 to 18 months. We may not be successful in implementing these systems and transitioning data from the duplicated versions of Cabot's systems to our new systems. We continue to rely upon the network infrastructure provided and maintained by Cabot. We are in the process of migrating to our own network infrastructure the maintenance of which we intend to outsource to a third party. We may experience network interruptions related to either the current Cabot network infrastructure or the migration to our new network infrastructure maintained by a third party. Any failure or significant downtime in Cabot Corporation's or our own network or information systems could prevent us from taking customer orders, shipping products or billing customers and could harm our business. In addition, our network and information systems require the services of employees with extensive knowledge of these information systems and the business environment in which we operate. To successfully implement and operate our systems, we must be able to attract and retain a significant number of highly skilled employees. If we fail to attract and retain the highly skilled personnel required to implement, maintain, and operate our information systems, our business could suffer. A NUMBER OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO DIRECTORS OR EXECUTIVE OFFICERS OF CABOT CORPORATION OR OWN CABOT CORPORATION STOCK Three members of our board of directors are directors and/or executive officers of Cabot Corporation. Our directors who are also directors and/or executive officers of Cabot Corporation have obligations to both companies and may have conflicts of interest with respect to matters involving or affecting us, such as acquisitions and other corporate opportunities that may be suitable for both us and Cabot, as well as related party transactions and intercompany agreements between us and Cabot such as our fumed metal oxide and dispersion services agreements. In addition, a number of our directors and executive officers own Cabot stock and options on Cabot stock they acquired as employees of Cabot. This ownership could create, or appear to create, potential conflicts of interest when these directors and officers are faced with decisions that could have different implications for our company and Cabot. WE MAY HAVE CONFLICTS WITH CABOT CORPORATION WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS We may have conflicts with Cabot Corporation that we cannot resolve and, even if we are able to do so, the resolution of these conflicts may not be as favorable as if we were dealing with a party with whom we had never been affiliated. Cabot continues to be our exclusive supplier of certain fumed metal oxides for our existing slurries under a fumed metal oxide supply agreement between Cabot and our company. These agreements were made in the context of an affiliated relationship and were negotiated in the overall context of our separation from Cabot. The prices and other terms under these agreements may be less favorable to us than what we could have obtained in arm's-length negotiations with unaffiliated third parties for similar services or under similar leases. It is particularly difficult to assess whether the price for fumed metal oxides provided under our fumed metal oxide supply agreement with Cabot is the same as or different from the price we could have obtained in arm's-length negotiations with an unaffiliated third party in light of the long-term nature of the contract, the volumes provided for under the agreement and our particular quality requirements. Conflicts of interest may arise between Cabot Corporation and us in a number of areas relating to our past and ongoing relationships, including: o the terms of our fumed metal oxide supply agreement and other interim and ongoing agreements with Cabot; 18 19 o the nature, quality and pricing of transitional services Cabot has agreed to provide us; o business opportunities that may be attractive to both Cabot and us; o litigation, labor, tax, employee benefit and other matters arising from our separation from Cabot; and o the incurrence of debt and major business combinations by us. WE FACE RISKS ASSOCIATED WITH BEING A MEMBER OF CABOT CORPORATION'S CONSOLIDATED GROUP FOR FEDERAL INCOME TAX PURPOSES For the period in which Cabot Corporation continued to own 50% or greater of the vote and value of our capital stock, we will be included in Cabot's consolidated group for federal income tax purposes. Under a tax sharing agreement with Cabot, we will pay Cabot the amount of federal, state and local income taxes we would be required to pay to the relevant taxing authorities if we were a separate taxpayer not included in Cabot's consolidated or combined returns. In addition, by virtue of its controlling ownership and the tax sharing agreement for the period of time up to September 29, 2000, Cabot will effectively control substantially all of our tax decisions for that time period. Under the tax sharing agreement, Cabot will have sole authority to respond to and conduct all tax proceedings including tax audits relating to Cabot consolidated or combined income tax returns in which we are included. Moreover, notwithstanding the tax sharing agreement, federal law provides that each member of a consolidated group is liable for the group's entire tax obligation. Thus, to the extent Cabot or other members of the group fail to make any federal income tax payments required of them by law, we could be liable for the shortfall. Similar principles may apply for state income tax purposes in many states. IF THE SPIN-OFF IS NOT TAX-FREE, WE COULD BE LIABLE TO CABOT CORPORATION FOR THE RESULTING TAXES On September 29, 2000, Cabot Corporation effected the spin-off of Cabot Microelectronics by distributing 0.280473721 shares of our common stock as a dividend on each outstanding share of Cabot Corporation common stock outstanding on September 13, 2000, or an aggregate of 18,989,744 shares of our common stock. We have agreed to indemnify Cabot Corporation in the event the spin-off is not tax-free to Cabot as a result of various actions taken by or with respect to us or our failure to take various actions, all as set forth in our tax sharing agreement with Cabot. We may not be able to control some of the events that could trigger this liability. In particular, any acquisition of us by a third party within two years of the spin-off could result in the spin-off becoming a taxable transaction and give rise to our obligation to indemnify Cabot for any resulting tax liability. RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK THE MARKET PRICE MAY FLUCTUATE WIDELY AND RAPIDLY The market price of our common stock could fluctuate significantly as a result of: o economic and stock market conditions generally and specifically as they may impact participants in the semiconductor industry; o changes in financial estimates and recommendations by securities analysts following our stock; o earnings and other announcements by, and changes in market evaluations of, participants in the semiconductor industry; o changes in business or regulatory conditions affecting participants in the semiconductor industry; o announcements or implementation by us or our competitors of technological innovations or new products; and o trading volume of our common stock. 19 20 The securities of many companies have experienced extreme price and volume fluctuations in recent years, often unrelated to the companies' operating performance. Specifically, market prices for securities of technology related companies have frequently reached elevated levels, often following their initial public offerings. These levels may not be sustainable and may not bear any relationship to these companies' operating performances. In the past, following periods of volatility in the market price of a company's securities, stockholders have often instituted securities class action litigation against the company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, have a negative impact on our business, results of operations and financial condition. ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS, OUR RIGHTS PLAN AND DELAWARE GENERAL CORPORATION LAW MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK, DISCOURAGE THIRD PARTIES FROM MAKING A BID FOR OUR COMPANY OR REDUCE ANY PREMIUMS PAID TO OUR STOCKHOLDERS FOR THEIR COMMON STOCK Our certificate of incorporation, our bylaws, our rights plan and various provisions of the Delaware General Corporation Law may make it more difficult to effect a change in control of our company. Our certificate of incorporation, our by-laws, our rights plan and the various provisions of Delaware General Corporation Law may adversely affect the price of our common stock, discourage third parties from making a bid for our company or reduce any premiums paid to our stockholders for their common stock. For example, we have amended our certificate of incorporation to authorize our board of directors to issue up to 20 million shares of blank check preferred stock and to attach special rights and preferences to this preferred stock. The issuance of this preferred stock may make it more difficult for a third party to acquire control of us. We also amended our certificate of incorporation to provide for the division of our board of directors into three classes as nearly equal in size as possible with staggered three-year terms. This classification of our board of directors could have the effect of making it more difficult for a third party to acquire our company, or of discouraging a third party from acquiring control of our company. In addition, the rights issued to our stockholders under our rights plan may make it more difficult or expensive for another person or entity to acquire control of us without the consent of our board of directors. We have adopted change-in-control arrangements covering our executive officers and are in the process of adopting similar arrangements for other key employees. These arrangements provide for a cash severance payment, continued medical benefits and other ancillary payments and benefits upon some terminations of a covered employee's employment following a change in control. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT We conduct business operations outside of the United States through our foreign operations. Our foreign operations maintain their accounting records in their local currencies. Consequently, period to period comparability of results of operations is affected by fluctuations in exchange rates. The primary currencies to which we have exposure are the Japanese Yen and the British Pound. Our exposure to foreign currency exchange risks has not been significant because a significant portion of our foreign sales are denominated in U.S. dollars. As foreign markets become a more significant portion of our business, we have begun to enter into forward contracts in an effort to manage foreign currency exchange exposure. Less than 10% of our revenue is transacted in currencies other than the U.S. dollar. We currently do not enter into forward exchange contracts for speculative or trading purposes. MARKET RISK AND SENSITIVITY ANALYSIS FOREIGN EXCHANGE RATE RISK We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates. As of December 31, 2000, the analysis demonstrated that such market movements would not have a material adverse effect on our financial position, results of operations or cash flows over a one year period. Actual gains and losses in the future may differ materially from this analysis based on changes in the timing and amount of foreign currency rate movements and our actual exposures. We believe that our exposure to foreign currency exchange rate risk at December 31, 2000 was not material. 20 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Legal proceedings are discussed in "Footnote 8. - Contingencies", under PART I, Item 1 - Notes to Financial Statements and such discussion is incorporated herein by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibit numbers in the following list correspond to the number assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.25* General Release, Waiver and Covenant Not To Sue. 10.26 Amended and Restated Credit Agreement, between Cabot Microelectronics Corporation and LaSalle Bank National Association, dated July 5, 2000. 10.27 First Amendment to Amended and Restated Credit Agreement, between Cabot Microelectronics Corporation and LaSalle Bank National Association, dated August 24, 2000.
* Management contract, or compensatory plan or arrangement. (b) Reports on Form 8-K In a report dated October 6, 2000, Cabot Microelectronics reported under Item 5. "Other Events" and Item 7. "Financial Statements and Exhibits" that on September 29, 2000 Cabot Corporation effected the spin-off of Cabot Microelectronics by distributing .280473721 shares of Cabot Microelectronics common stock as a dividend on each 21 22 outstanding share of Cabot common stock outstanding on September 13, 2000, or an aggregate of 18,989,744 shares of Cabot Microelectronics common stock. In connection with the spin-off, the Board of Directors of Cabot Microelectronics amended the company's rights plan to clarify certain of its provisions. SIGNATURES Pursuant to the requirements 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. CABOT MICROELECTRONICS CORPORATION Date: February 14, 2001 /s/ MATTHEW NEVILLE --------------------------------------------- Matthew Neville President and Chief Executive Officer, Director [Principal Executive Officer] Date: February 14, 2001 /s/ DANIEL S. WOBBY --------------------------------------------- Daniel S. Wobby Corporate Controller [Principal Accounting Officer]
22 EX-10.25 2 c59982ex10-25.txt GENERAL RELEASE, WAIVER & COVENANT NOT TO SUE 1 GENERAL RELEASE, WAIVER AND COVENANT NOT TO SUE This GENERAL RELEASE, WAIVER AND COVENANT NOT TO SUE ("Agreement"), is made and entered into on this _______ day of _______________, 2000, ("Execution Date") by William C. McCarthy, hereinafter referred to as "you," and Cabot Microelectronics Corporation, hereinafter referred to as "CMC", on behalf of themselves, their heirs, successors and assigns. WHEREAS, your employment with CMC is terminated as of January 31, 2001 ("Termination Date"); WHEREAS, you agree that you are entering into this Agreement voluntarily and have been advised to consult an attorney prior to signing it; WHEREAS, you agree that the cash, stock options and other consideration provided pursuant to this Agreement is adequate consideration for the mutual terms, covenants and conditions of it, therefore, the parties do hereby agree as follows: 1. PURPOSE OF AGREEMENT. The parties have entered into this Agreement to release and to effect a full and final settlement of any and all claims you may have against CMC, including the officers, directors, employees and benefit plans of CMC (collectively "CMC"), and Cabot Corporation, including the officers, directors, employees, and benefit plans of Cabot Corporation (collectively "Cabot Corporation"). This settlement includes all claims against CMC and Cabot Corporation based upon any cause of action you now have or may have in the future arising from any facts or circumstances existing on or prior to the effective date of this Agreement, including but not limited to claims for personal injury, emotional distress, costs and/or attorney's fees. 2. DENIAL OF LIABILITY. This Agreement is not to be construed as an admission of liability on the part of any party hereto or to any other party. The parties expressly deny liability for any claims asserted or which could have been asserted against them, and enter into this Agreement for the sole purpose of avoiding litigation with respect to any disputed claims which are or could be asserted. 3. CONSIDERATION. Upon the Execution of this Agreement and as soon as practical after the expiration of the seven-day revocation period referenced below, CMC will: a. Pay to you, the sum of two-hundred-ninety-one-thousand-two-hundred- ninety-dollars ($291,290) (comprised of one-hundred-eighty-thousand- two-hundred-dollars ($180,200) of one year base salary, plus eighty-one-thousand-ninety dollars ($81,090) of FY00 Short Term Incentive at forty-five percent (45%), plus thirty- Page 1 of 6 -- Cabot Microelectronics Corporation Confidential ______, _____ 2 thousand dollars ($30,000) of relocation assistance), the total sum of which, less appropriate taxes and deductions, to be paid to you as a resident of Texas assuming you have established a legal residence there by the Execution Date, in two equal installments (i) upon the expiration of the seven-day revocation period referenced in Section 6. Right to Revoke, of this Agreement, and (ii) on April 15, 2001; b. Amend your Grant Agreement pursuant to the Cabot Microelectronics Corporation 2000 Equity Incentive Plan ("Plan") for Non-Qualified Stock Options with a Grant Date of April 4, 2000 ("Grant Agreement"), to allow the vesting, and your exercise of, those twelve-thousand (12,000) CMC non-qualified stock Options that are scheduled to vest on April 4, 2001, and those twelve-thousand (12,000) CMC non-qualified stock Options that are scheduled to vest on April 4, 2002, according to the terms and conditions of the Grant Agreement and the Plan, according to the vesting schedule and dates of April 4, 2001, and April 4, 2002, respectively, and expiring two years from the Execution Date of this Agreement, and providing for the Change in Control provisions authorized under the Plan; if you fail to exercise these Options within such time-frame, or violate the terms of this Agreement, such Options are immediately terminated, rescinded, cancelled and become unexercisable immediately. Pursuant to the Grant Agreement and Plan, the Options previously vested are exercisable only pursuant to the Grant Agreement and Plan. Participation in, and eligibility for, all other CMC and Cabot Corporation benefits, stock option or restricted stock awards, and/or deferred compensation plans, including but not limited to the Short Term Incentive and Long Term Incentive Plans, are terminated as of your Termination Date; c. Make available to you outplacement services worth up to fifteen-thousand-dollars ($15,000), to be provided by the outplacement firm of Drake, Beem and Morin, or another firm as mutually agreed upon by us, and used within eighteen (18) months of the Execution Date of this Agreement; d. Allow you to retain your Personal Data Assistant ("Palm Pilot"), and directly related equipment; e. Provide reimbursement for travel expenses not to exceed five-hundred-dollars ($500) per trip, for up to, but not exceeding three (3) trips, for orthodontics appointments in Illinois; f. Provide eligibility for coverage of sale of your home at 1834 Fargo Boulevard, Geneva, Illinois, pursuant to the chapter "Selling Your Home" of CMC's existing Relocation Assistance Handbook for Transferring Cabot Microelectronics Corporation Employees, Domestic United States & Canada, dated May 1, 2000. Such consideration under this Agreement shall constitute full and final settlement and satisfaction of all of your claims, whether for damages or otherwise. No consideration shall Page 2 of 6 -- Cabot Microelectronics Confidential ______, _____ 3 be provided to you for any other claims, demands, or causes of action, whether known or unknown, and you agree you will not receive or be eligible for any other consideration in any form. To the extent it is determined that federal or state taxes are due on any part of these proceeds, such taxes and any related penalty or interest charges shall be solely your responsibility. 4. RELEASE BY YOU. In consideration of this Agreement and the consideration provided hereunder, you, for yourself and on behalf of your heirs, executor, administrator, successors and assigns, (hereinafter in this paragraph referred to as the "Releasors"), hereby release, acquit, and forever discharge CMC and Cabot Corporation, and their respective officers, employees, directors and benefits plans (hereafter in this Agreement referred to as the "Releasees"), of and from any and all actions, causes of action, claims, demands, rights, damages, costs, expenses, and liabilities of any nature whatsoever (including indemnity), whether now or heretofore known or unknown, accrued or unaccrued, or alleged or not alleged as of the Execution Date, including but not limited to those which are based upon, exist on account of, or in any way arise out of: (a) Any and all acts, omissions or activities of the above-named Releasees occurring on or prior to the date of this Agreement, including those in any way connected, directly or indirectly, with your employment, and the claims defined in subparagraph (b), below; (b) Any and all claims alleged or to be alleged, including but not limited to claims under the Age Discrimination in Employment Act, 29 U.S.C. ss. 621, et seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C.ss. 2000e, et seq., the Illinois Human Rights Act, 735 ILCS 5/1-101, et seq., and any other claims arising under laws pertaining to breach of contract, wrongful discharge or any other federal, state or local laws relating in any way to employment, and claims of any of the parties against any Releasees based upon any cause of action they now have or may have in the future arising from any facts or circumstances existing on or prior to the effective date of this Agreement, including but not limited to all claims for costs or attorney's fees. This Release shall not apply to claims, demands, actions or causes of action arising out of the performance or non-performance by any person of any term, covenant or condition of this Agreement. You affirm and acknowledge that: 1) you have been advised by CMC to consult with an attorney about the terms of this Agreement before signing it; 2) you have been given a reasonable period of time to consider this Agreement and to decide whether to sign it; 3) you have read and understand this Agreement; and 4) you voluntarily enter into and execute it of your own free will with full knowledge of it terms and conditions. 5. ENFORCEMENT OF SETTLEMENT AGREEMENT. In any action brought to enforce or rescind this Agreement, the District Court for the Northern District of Illinois, Eastern Page 3 of 6 -- Cabot Microelectronics Confidential ______, _____ 4 Division, shall have jurisdiction and venue with respect to each party hereto. This Agreement may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action at law or proceeding at equity, or any private or public judicial or non-judicial proceeding instituted, prosecuted, maintained or continued in breach hereof. You agree and affirm that you have not and will never institute, maintain or participate in, or in any way aid in the institution or prosecution of, any claim, action or proceeding of any kind against CMC or Cabot Corporation or the other Releasees, including but not limited to, claims related to your employment with CMC or Cabot Corporation or the termination of that employment. If you violate this Agreement by suing CMC or Cabot Corporation or the other Releasees, you agree that you will pay all costs and expenses of defending against the suit incurred by CMC or Cabot Corporation or the other Releasees, including reasonable attorneys' fees, and all further costs and fees, including attorneys' fees, incurred in connection with collection. 6. RIGHT TO REVOKE. You have at least twenty-one (21) days (commencing with November 8, 2000), within which to consider this Agreement, however, you may execute this Agreement before that time, but in no event prior to your Termination Date, and you certify, by such execution, that you knowingly and voluntarily waived the right to the full 21 days with no pressure by CMC to do so. If you do not execute this Agreement by the end of the 21 day period or your Termination Date, whichever is later (unless you have voluntarily waived the right to the full 21 days as described herein), you will not be eligible for the consideration specified in Section 3. Also, you may revoke this Agreement within seven days of its Execution Date (_________), by sending written notice to J. Michael Jenkins, Vice President of Human Resources of CMC. If you revoke this Agreement, you will not receive the cash payment, stock options or other consideration specified herein. Your termination of employment as of the Termination Date is and will be unaffected by any revocation of, or failure to execute, this Agreement by you. 7. ATTORNEYS' FEES. In any action brought to enforce or rescind this Agreement or any document required hereby, the prevailing party shall be entitled to the recovery of a reasonable attorneys' fee and reasonably incurred costs of litigation. 8. CONSTRUCTION OF AGREEMENT AND RELATED DOCUMENTS. This Agreement and the documents required hereby shall be construed in accordance with the laws of the State of Illinois. 9. INTEGRATION. This Agreement signed by the parties hereto, constitute the final written expression of the parties and is a complete and exclusive statement of those terms and conditions. Each of the parties acknowledges that no representations or promises not expressly contained in this Agreement and the documents required hereby have been made by any party or by the agents or representatives of any party. 10. NO DISPARAGEMENT. You agree not to make disparaging, malicious, or otherwise negative comments about CMC, Cabot Corporation, and/or its or their personnel, Page 4 of 6 -- Cabot Microelectronics Confidential ______, _____ 5 officers, directors, products, services, practices or policies. CMC agrees that it will not make disparaging, malicious or otherwise negative comments about you to any third party, and that its comments relating to your separation of employment will be limited to stating that you have returned to retirement and no longer work for CMC; you agree that your comments relating to your separation of employment will be limited to stating that you have returned to retirement and no longer work for CMC. 11. CONFIDENTIAL/PROPRIETARY INFORMATION. You agree to return to CMC all proprietary/confidential information and personal and intellectual property of CMC and/or Cabot Corporation and to not disclose to any third party or use CMC's or Cabot Corporation's proprietary/confidential information. You affirm and agree that your obligations pursuant to the Cabot Microelectronics Corporation Employee Confidentiality, Intellectual Property and Non-Competition Agreement for Employees in Arizona, Colorado, Illinois, Massachusetts, and Texas signed on September 8, 2000 ("Non-Compete Agreement"), including but not limited to those to protect all CMC proprietary/confidential information from disclosure and use, and to uphold your non-compete/non-solicit obligations in section 3 of the Non-Compete Agreement, and the Non-Compete Agreement itself remain in full force and effect independent from your obligations under this Agreement, but that to the extent necessary the consideration stated in Section 3 of this Agreement also constitutes additional consideration for your obligations under the Non-Compete Agreement, which are restated, affirmed by you, and incorporated into this Agreement by reference. 12. RESIGNATION AS OFFICER. You agree to resign your position as an Officer of CMC (Vice President and Chief Financial Officer, Treasurer, and Assistant Secretary), effective as of your Termination Date, by written notice to the Board of Directors of CMC, in the form and at the time designated by CMC. 13. CONFIDENTIALITY. You agree that, except for disclosures specifically required by law or specifically required to enforce any of the terms of this Agreement or the documents required thereby, the terms and conditions of this Agreement as well as the payment terms and amount of the settlement as set forth herein shall not be disclosed to nor discussed in any manner, including oral, written, electronic, digital or otherwise, with any person not a party to this Agreement other than your spouse or your attorneys or tax return preparers, each of whom must themselves respect the confidentiality hereof. In addition, neither you nor your spouse, or any other party within your reasonable control shall make any statement of any kind, i.e., oral, written, electronic, digital or otherwise, to the public or news media with respect to the substance or conclusion of your employment with CMC and this Agreement. 14. COUNTERPART ORIGINALS. This Agreement may be executed in multiple counterpart originals and shall have the same force and effect as if all signatures appeared on the same original. Page 5 of 6 -- Cabot Microelectronics Confidential ______, _____ 6 15. FURTHER DOCUMENTATION. To the extent applicable, the parties shall execute such other and further documents as may be reasonably necessary to carry out the terms and conditions of this Agreement. 16. SEVERABILITY. It is the intent of the parties that each and every provision in this Agreement be enforced. To the extent any provision is held unenforceable, such unenforceability shall not render the remaining terms hereof unenforceable. IN WITNESS WHEREOF, the parties hereto have executed counterpart originals of this Agreement as of the date entered above. CABOT MICROELECTRONICS CORPORATION BY:_______________ BY: _________________________________ WILLIAM C. MCCARTHY Matthew Neville President and Chief Executive Officer THIS AGREEMENT INCLUDES A RELEASE OF ALL CLAIMS, WHETHER KNOWN OR UNKNOWN, INCLUDING ANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. YOU ARE ADVISED TO CONSULT AN ATTORNEY PRIOR TO SIGNING IT. Page 6 of 6 -- Cabot Microelectronics Confidential ______, _____ EX-10.26 3 c59982ex10-26.txt AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.26 AMENDED AND RESTATED CREDIT AGREEMENT dated as of July 5, 2000, between CABOT MICROELECTRONICS CORPORATION and LASALLE BANK NATIONAL ASSOCIATION 2 TABLE OF CONTENTS
Page SECTION 1: INTERPRETATION........................................................1 1.1 Definitions.....................................................1 1.2 Computation of Time Periods.....................................9 1.3 Accounting Terms................................................9 1.4 Headings and References.........................................9 1.5 Construction....................................................9 SECTION 2: CREDIT................................................................9 2.1 Term Loan A.....................................................9 2.2 Revolving Loan Commitment......................................10 2.3 Borrowing Procedures...........................................10 2.4 Various Types of Loans.........................................10 2.5 Conversion and Continuation Procedures.........................10 SECTION 3: INTEREST; FEES.......................................................11 3.1 Interest Rates.................................................11 3.2 Interest Payment Dates.........................................12 3.3 Setting and Notice of Eurodollar Rates.........................12 3.4 Computation of Interest........................................12 SECTION 4: PREPAYMENTS; COMMITMENT REDUCTIONS...................................12 4.1 Optional Prepayments...........................................12 4.2 Mandatory Prepayments..........................................12 4.3 Reductions in Revolving Commitment.............................12 SECTION 5: MAKING OF PAYMENTS; SETOFF; TAXES....................................12 5.1 Making of Payments.............................................12 5.2 Application of Certain Payments................................13 5.3 Due Date Extension.............................................13 5.4 Setoff.........................................................13 5.5 Taxes..........................................................13 SECTION 6: INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS.............14 6.1 Increased Costs................................................14 6.2 Basis for Determining Interest Rate Inadequate or Unfair.......15 6.3 Changes in Law Rendering Eurodollar Loans Unlawful.............15 6.4 Funding Losses.................................................15 6.5 Right of Lender to Fund through Other Offices..................15 6.6 Discretion of Lender as to Manner of Funding...................16 6.7 Conclusiveness of Statements; Survival of Provisions...........16 SECTION 7: REPRESENTATIONS AND WARRANTIES.......................................16 7.1 Organization...................................................16 7.2 Authorization; No Conflict.....................................16
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7.3 Validity and Binding Nature....................................16 7.4 Financial Condition............................................17 7.5 No Material Adverse Change.....................................17 7.6 Litigation and Contingent Liabilities..........................17 7.7 Taxes..........................................................17 7.8 Information....................................................17 7.9 Solvency.......................................................18 7.10 No Default.....................................................18 7.11 Use of Proceeds................................................18 7.12 Subsidiaries...................................................18 7.13 Ownership of Properties; Liens.................................18 7.14 Intellectual Property..........................................18 7.15 Insurance......................................................18 7.16 Investment Company Act; Public Utility Holding Company Act.....18 7.17 Regulation U...................................................18 7.18 Securities Matters.............................................19 7.19 Pension and Welfare Plans......................................19 7.20 Environmental Matters..........................................19 7.21 Labor Matters..................................................20 7.22 Year 2000 Issues...............................................20 7.23 Survival of Warranties.........................................20 SECTION 8: COVENANTS............................................................21 8.1 Reports, Certificates and Other Information....................21 8.2 Maintenance of Existence.......................................23 8.3 Compliance with Laws; Payment of Taxes and Liabilities.........23 8.4 Maintenance of Insurance.......................................23 8.5 Books, Records and Inspections.................................23 8.6 Financial Covenants............................................23 8.7 Limitations on Indebtedness....................................24 8.8 Liens..........................................................24 8.9 Mergers, Consolidations, Sales.................................25 8.10 Inconsistent Agreements; Negative Pledge.......................25 8.11 Advances and Other Investments.................................26 8.12 Restricted Payments............................................26 8.13 Transactions with Affiliates...................................27 8.14 Restriction of Amendments to Revolving Credit Facility.........27 8.15 Compliance with STEP...........................................27 8.16 Use of Proceeds................................................27 8.17 Employee Benefit Plans.........................................27 8.18 Environmental Matters..........................................27 8.19 Further Assurances.............................................28 SECTION 9: EFFECTIVENESS; CONDITIONS OF LENDING.................................28 9.1 Initial Loans; Amendment and Restatement.......................28 9.2 Subsequent Loans...............................................28
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SECTION 10: EVENTS OF DEFAULT AND THEIR EFFECT..................................29 10.1 Events of Default..............................................29 10.2 Effect of Event of Default.....................................30 SECTION 11: GENERAL.............................................................31 11.1 Waiver; Amendments.............................................31 11.2 Notices........................................................31 11.3 Costs, Expenses and Taxes......................................31 11.4 Governing Law; Severability....................................31 11.5 Counterparts...................................................32 11.6 Successors and Assigns.........................................32 11.7 Indemnification by the Borrower................................32 11.8 Forum Selection and Consent to Jurisdiction....................32 11.9 Waiver of Jury Trial...........................................33 11.10 Amendment and Restatement......................................33
iii 5 EXHIBITS EXHIBIT A Form of Note EXHIBIT B Form of Compliance Certificate EXHIBIT C Form of Solvency Certificate SCHEDULES SCHEDULE 7.6 Litigation and Contingent Liabilities SCHEDULE 7.14 Intellectual Property SCHEDULE 7.15 Insurance SCHEDULE 7.19 Pension and Welfare Plans SCHEDULE 7.20 Environmental Matters SCHEDULE 8.7 Existing Indebtedness SCHEDULE 8.8 Existing Liens SCHEDULE 8.13 Transactions with Affiliates SCHEDULE 11.2 Addresses for Notices iv 6 AMENDED AND RESTATED CREDIT AGREEMENT This Amended and Restated Credit Agreement, dated as of July 5, 2000 (this "Agreement"), is between Cabot Microelectronics Corporation, a Delaware corporation (the "Borrower"), and LaSalle Bank National Association, a national banking association (the "Lender"). PRELIMINARY STATEMENTS: 1. The Borrower and the Lender are party to the Credit Agreement dated as of March 29, 2000 (as amended, supplemented or otherwise modified from time to time, the "Existing Credit Agreement"), under which the Lender made certain term loans to the Borrower, which loans and extensions of credit are evidenced by, among other things, the Term Note B dated as of March 29, 2000 (the "Existing Note"), made by the Borrower in favor of the Lender in the original principal amount of $13,500,000. 2. The Borrower has requested that the Lender amend and restate the Existing Credit Agreement to, among other things, convert the term loan evidenced by the Existing Note into a revolving line of credit and reduce such revolving line of credit to $8,500,000. 3. The Lender has agreed to provide such a credit facility on the terms and subject to the conditions set forth in this Agreement. AGREEMENT: In consideration of the premises and the mutual agreements herein contained, the Borrower and the Lender hereby agree as follows: SECTION 1: INTERPRETATION 1.1 Definitions. When used in this Agreement the following terms have the indicated meanings: Affiliate of any Person means (i) any other Person that, directly or indirectly, controls or is controlled by or is under common control with such Person and (ii) any officer or director of such Person. A Person shall be deemed to be "controlled by" any other Person if such Person possesses, directly or indirectly, power to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Unless the context otherwise requires, each reference to an Affiliate in this Agreement is a reference to an Affiliate of the Borrower. Agreement has the meaning set forth in the Preamble. 7 Applicable Margin means, as of any date of determination, a percentage per annum determined by reference to the Level in effect at such time, as set forth below: Applicable Margin: - -------------------------------------------------------------------------------- Level Eurodollar Rate (Reserve Adjusted) - -------------------------------------------------------------------------------- Level I 1.50% - -------------------------------------------------------------------------------- Level II 1.75% - -------------------------------------------------------------------------------- Level III 2.00% - -------------------------------------------------------------------------------- The Applicable Margin shall change on the effective date of any change in the applicable Level. Base Rate means, for any day, the rate of interest in effect for such day as publicly announced from time to time by the Lender at its principal place of business in Chicago, Illinois as its prime, base or equivalent rate of interest (whether or not such rate is actually charged by the Lender), which rate is not necessarily the lowest rate of interest charged by the Lender with respect to commercial loans. Any change in the Base Rate announced by the Lender is effective as of the effective date specified in the public announcement by the Lender of such change. Base Rate Loan means any Loan bearing interest at the Base Rate. Borrower has the meaning set forth in the Preamble. Business Day means any day on which the Lender is open for commercial banking business in Chicago, Illinois and, in the case of a Business Day that relates to a Eurodollar Loan, on which dealings are carried on in the London interbank eurodollar market. Cabot Dividend means the dividends to be declared and paid by the Borrower to Cabot Corporation in an aggregate amount equal to the lesser of (i) the borrowings under the Loans plus the net proceeds of the Borrower's initial public offering and (ii) Cabot's Corporation's estimated tax basis in the Borrower's capital stock as of the completion of the Borrower's initial public offering. Capital Lease means, with respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is or should be accounted for as a capital lease on the balance sheet of such Person. CERCLA means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, any amendments thereto, any regulations promulgated thereunder and any successor statutes or regulations. Change in Control means (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended, a "Controlling Person"), other than Cabot Corporation, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of more than 30% of the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors of the Borrower or (ii) during any period of up to 24 consecutive 2 8 months, commencing before or after the Closing Date, individuals who at the beginning of such 24-month period were directors of the Borrower shall cease for any reason (other than due to death, disability or previously established mandatory retirement) to constitute a majority of the board of directors of the Borrower. Closing Date means the later of (i) March 29, 2000, and (ii) the date that each of the conditions precedent set forth in Section 9 have been satisfied in full, which date will be set forth in the certificate described in Section 9.1(g). Code means the Internal Revenue Code of 1986, any amendments thereto, any regulations promulgated thereunder and any successor statutes or regulations. Consolidated Net Income (or Loss) means, with respect to the Borrower and its Subsidiaries for any period, the net income (or loss) of the Borrower and its Subsidiaries for such period, computed without giving effect to extraordinary losses or extraordinary gains and any related tax effect. Controlled Group means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA. Disposal has the meaning set forth in the definition of "Release". EBITDA means, for any period, (i) Consolidated Net Income (or Loss) for such period plus (ii) to the extent deducted in determining such Consolidated Net Income (or Loss), (a) consolidated gross interest expense (including all commissions, discounts, fees and other charges in connection with standby letters of credit and similar instruments) accrued or paid by the Borrower and its Subsidiaries for such period (including all imputed interest on Capital Leases), determined in accordance with GAAP, (b) provisions for any income or similar taxes paid or accrued by the Borrower and its Subsidiaries, (c) all amounts treated as expenses for depreciation and the amortization of intangibles of any kind and (d) any other non-cash charges minus (iii) non-cash gains received by the Borrower during such period, in each case determined on a consolidated basis in accordance with GAAP. For purposes of this definition, EBITDA shall be calculated for any period by including the actual amount for such period ending on the date of determination, including the EBITDA attributable to any Person acquired pursuant to a Permitted Acquisition occurring during such period on a pro forma basis for the period from the first day of the applicable period through the date of the closing of each such Permitted Acquisition, utilizing (a) where available or required pursuant to the terms of this Agreement, historical audited or reviewed unaudited financial statements obtained from such acquired Person (and prepared by an accounting firm of national recognition or otherwise reasonably acceptable to the Lender), broken down by fiscal quarter using methodology consistent with GAAP or (b) where audited or reviewed financial statements are unavailable and not required pursuant to the terms of this Agreement, unaudited financial statements reviewed internally by the Borrower, broken down by fiscal quarter using methodology consistent with GAAP. 3 9 Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. Environmental Laws means all present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to Environmental Matters. Environmental Matters means any matter arising out of or relating to health and safety, or pollution or protection of the environment or workplace, including, without limitation, any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, release, control or cleanup of any Hazardous Substance. ERISA means the Employee Retirement Income Security Act of 1974, any amendments thereto, any regulations promulgated thereunder and any successor statutes or regulations. Eurocurrency Reserve Percentage means, with respect to any Eurodollar Loan for any Interest Period, a percentage (expressed as a decimal) equal to the daily average during such Interest Period of the percentage in effect on each day of such Interest Period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor), for determining the aggregate maximum reserve requirements applicable to "Eurocurrency Liabilities" pursuant to Regulation D or any other then applicable regulation of such Board of Governors which prescribes reserve requirements applicable to "Eurocurrency Liabilities" as presently defined in Regulation D. Eurodollar Loan means any Loan bearing interest at the Eurodollar Rate (Reserve Adjusted). Eurodollar Office means with respect to the Lender the office or offices of the Lender that shall be making or maintaining the Eurodollar Loans of the Lender hereunder or such other office or offices through which the Lender determines its Eurodollar Rate. A Eurodollar Office of the Lender may be, at the option of the Lender, either a domestic or foreign office. Eurodollar Rate means, with respect to any Eurodollar Loan for any Interest Period, a rate per annum equal to the offered rate for deposits in Dollars for a period equal or comparable to such Interest Period that appears on Telerate Page 3750 as of 11:00 A.M. (London time) three Business Days prior to the first day of such Interest Period. "Telerate Page 3750 " means the display designated as "Page 3750 " on the Telerate Service (or such other page as may replace page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for Dollar deposits). Eurodollar Rate (Reserve Adjusted) means, with respect to any Eurodollar Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) determined pursuant to the following formula: Eurodollar Rate = Eurodollar Rate (Reserve Adjusted) 1-Eurocurrency Reserve Percentage 4 10 Event of Default means any of the events described in Section 10.1. Existing Credit Agreement has the meaning set forth in the first preliminary statement. Existing Note has the meaning set forth in the first preliminary statement. Funded Debt means, as of the date of determination, Indebtedness for borrowed money and with respect to Capital Leases of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination; provided that for purposes of determining compliance with the covenants set forth in Section 8.4, "GAAP" means such accounting principles as in effect on the Closing Date. Hazardous Substance has the meaning set forth in Section 7.20(b). Indebtedness of any Person means, without duplication, (i) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (ii) all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (iii) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (iv) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person, (v) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and banker's acceptances issued for the account of such Person and s (vi) all liabilities of such Person under any agreement, undertaking or arrangement by which such Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to or otherwise to invest in a debtor, or otherwise to assure a creditor against loss) any indebtedness, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. Interest Period means, as to any Eurodollar Loan, the period commencing on the date such loan is borrowed or continued as a Eurodollar Loan and ending on the date one, two, three or six months thereafter as selected by the Borrower pursuant to Section 2.2.1; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; 5 11 (ii) any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) the Borrower may not select an interest period that would extend beyond the Revolving Termination Date or the Termination Date, as the case may be. Lender has the meaning set forth in the Preamble. Level means any of Level I, Level II and Level III. "Level I" means that the Company's Leverage Ratio is less than 1.25 to 1.00 as of the end of the fiscal quarter most recently ended. "Level II" means that the Company's Leverage Ratio is greater than or equal to 1.25 to 1.00 and less than 2.00 to 1.00 as of the end of the fiscal quarter most recently ended. "Level III" means that the Company's Leverage Ratio is greater than or equal to 2.00 to 1.00 as of the end of the fiscal quarter most recently ended. Any change in a Level will be made upon receipt by the Lender of the applicable compliance certificate delivered under Section 8.1(c) and will be effective three Business Days thereafter. Leverage Ratio means the ratio of (i) Funded Debt to (ii) EBITDA. Liabilities means all of the Borrower's liabilities, obligations and indebtedness to the Lender for monetary amounts, whether now or hereafter owing, arising, due or payable under this Agreement and any other Loan Document howsoever evidenced, created, incurred, acquired or owing. Lien means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property. Loan Documents means this Agreement, the Notes and such other documents as the Borrower or any Subsidiary delivers to the Lender pursuant to the terms of this Agreement. Loans means, collectively, Term Loan A and the Revolving Loans. Margin Stock means any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System. Material Adverse Effect means any event that has had or could be reasonably likely to have (i) a material adverse change in, or a material adverse effect upon, the condition (financial or otherwise), operations, assets, business or properties of the Borrower and its Subsidiaries taken as a whole, (ii) a material impairment on the ability of the Borrower or any Subsidiary to perform any of its obligations under any Loan Document or (iii) a material adverse effect upon the legality, validity, binding effect or enforceability against the Borrower or any other Person (other than the Lender) of any Loan Document. Multiemployer Pension Plan means a multiemployer plan, as such term is defined in Section 4001(a)(3) of ERISA, and to which the Borrower or any member of the Controlled Group may have any liability. 6 12 Notes means Term Note A and the Revolving Note. PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. Pension Plan means a "pension plan", as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a Multiemployer Pension Plan), and to which the Borrower or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA. Permitted Acquisitions means the purchase or other acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any Person, so long as (i) the purchase price of which, together with the aggregate purchase price all other purchases and acquisitions consummated after the Closing Date, does not exceed $60,000,000, (ii) the purchase price (payable in anything other than capital stock of the Borrower) of which, together with the aggregate purchase price (payable in anything other than capital stock of the Borrower) all other purchases and acquisitions consummated after the Closing Date, does not exceed $30,000,000, (iii) the Borrower has notified the Lender in writing of such acquisition and such notice gives a reasonably detailed description of the acquisition, (iv) the Borrower has provided the Lender with such other information as the Lender reasonably requests, (v) such acquisition would not subject the Lender to any additional regulatory or third party approvals in connection with the exercise of its rights under this Agreement and the other Loan Documents, (vi) the board of directors and, if required, the shareholders of the Borrower and the Person so acquired have approved the acquisition and such acquisition is otherwise considered "friendly," (vii) to the extent such acquisition is a stock or other equity acquisition, the Person so acquired either guarantees the Liabilities in a manner satisfactory to the Lender or is immediately merged with and into the Borrower or another Person who has guaranteed the Liabilities (with the Borrower or such other Person being the surviving entity), (viii) the Borrower has demonstrated to the satisfaction of the Lender that it is in compliance with the financial covenants and restrictions contained in Section 8.6 both before and immediately after the consummation of such acquisition, (ix) no Event of Default or Unmatured Event of Default has occurred and is continuing or would result from the consummation of such acquisition and (x) the representations and warranties of the Borrower set forth in Section 7 will be true and correct both before and immediately after the consummation of such acquisition. For purposes of this definition, (a) "purchase price" means the aggregate amount of consideration to be paid to the seller upon the consummation of a Permitted Acquisition (including, without limitation, Indebtedness incurred or assumed in connection therewith and the aggregate amount of all potential earn-out payments, but excluding the aggregate amount of such earn-out payments to the extent determined by the post- acquisition performance of the applicable acquired Person) and (b) capital stock of the Borrower will be valued in a manner consistent with the purchase agreement relating to the Permitted Acquisition or, if no such valuation method exists, the average of the fair market value of such capital stock for the ten Business Days immediately preceding the consummation date of the Permitted Acquisition. 7 13 Person means any natural person, corporation, partnership, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity. RCRA means the Resource Conservation and Recovery Act, any amendments thereto, any regulations promulgated thereunder and any successor statutes or regulations. Release has the meaning specified in CERCLA and the term "Disposal" (or "Disposed") has the meaning specified in RCRA; provided that in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply as of the effective date of such amendment; and provided, further that to the extent that the laws of a state wherein any affected property lies establish a meaning for "Release" or "Disposal" which is broader than is specified in either CERCLA or RCRA, such broader meaning shall apply. Responsible Officer means any executive officer of the Borrower, or any other officer of the Borrower designated in writing by the chief executive officer or chief financial officer of the Borrower to the Lender as responsible for overseeing or reviewing compliance with this Agreement or any other Loan Document. Revolving Commitment means an amount equal to $8,500,000 on the Closing Date, as such amount may be reduced under Section 4.3. Revolving Credit Facility means the revolving credit facility provided to the Borrower under a credit agreement to be entered into among the Borrower, certain lending institutions and Fleet National Bank, a national banking association, as agent, or any other revolving credit facility entered into in substitution thereof. Revolving Loans has the meaning set forth in Section 2.2. Revolving Note has the meaning set forth in Section 2.2. Revolving Termination Date means the earliest of (i) June 1, 2003 (unless extended in writing by the Lender and the Borrower), (ii) the date the Liabilities become due and payable under Section 10.2 and (iii) the date the Lender's obligation to make Revolving Loans terminates under Section 10.2. STEP means the State of Illinois' State Treasurer's Economic Program. STEP Rate means a fixed interest rate equal to 1.75% plus (i) until the second anniversary of the Closing Date, 70% of the "two year treasury rate" and (ii) after the second anniversary of the Closing Date and before the Termination Date, 70% of the "three year treasury rate." For purposes of this definition, (a) "two year treasury rate" means the rate for U.S. Treasury Bonds maturing over a two year period announced in the Wall Street Journal or any similar publication on the Closing Date and (b) "three year treasury rate" means the rate for U.S. Treasury Bonds maturing over a three year period announced in the Wall Street Journal or any similar publication on the second anniversary of the Closing Date. 8 14 Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares or other ownership interests as have at least 50% of the ordinary voting power for the election of directors or other managers or such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to a Subsidiary in this Agreement is a reference to a Subsidiary of the Borrower. Term Loan A has the meaning set forth in Section 2.1. Term Note A has the meaning set forth in Section 2.1. Termination Date means the earlier of (i) June 1, 2005 (unless extended in writing by the Lender and the Borrower) and (ii) the date the Liabilities become due and payable under Section 10.2. Unmatured Event of Default means any event that, if it continues uncured, will with lapse of time or the giving of notice or both constitute an Event of Default. Welfare Plan means a "welfare plan", as such term is defined in Section 3(1) of ERISA. 1.2 Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the words "from" or "commencing on" means "from and including" and the words "to," "through," "ending on" and "until" each mean "to but excluding." 1.3 Accounting Terms. Except as otherwise indicated, all accounting terms not specifically defined in this Agreement shall be construed in accordance with, and certificates of compliance with covenants shall be based upon, GAAP. 1.4 Headings and References. Section and other headings are for reference only, and shall not affect the interpretation or meaning of any provision of this Agreement. Any Section or clause references are to this Agreement, unless otherwise specified. References to an annex, schedule or exhibit are, unless otherwise specified, to an Annex, Schedule or Exhibit attached to this Agreement. References in this Agreement and the other Loan Documents or any other agreement include this Agreement and the other Loan Documents and other agreements as the same may be amended, restated, supplemented or otherwise modified from time to time pursuant to the provisions hereof or thereof. A reference to any law, statute or regulation shall mean that law, statute or regulation as it may be amended, supplemented or otherwise modified from time to time, and any successor law, statute or regulation. A reference to a Person includes the successors and assigns of such Person, but such reference shall not increase, decrease or otherwise modify in any way the provisions in this Agreement or any other Loan Document governing the assignment of rights and obligations under or the binding effect of any provision of this Agreement or any other Loan Document. The provisions of this Agreement relating to Subsidiaries shall apply only during such times as the Borrower has one or more Subsidiaries. 1.5 Construction. Each covenant contained in this Agreement shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be 9 15 deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. The term "including" is not limiting and means "including without limitation." SECTION 2: CREDIT 2.1 Term Loan A. Subject to Section 9, on the Closing Date, the Term Loan A made by the Lender under Section 2.1 of the Existing Credit Agreement ("Term Loan A") will continue under this Agreement. On March 29, 2000, the Lender made Term Loan A to the Borrower in the principal amount of $3,500,000. The obligations in connection with Term Loan A are evidenced by and payable in accordance with the terms of a promissory note ("Term Note A") made in favor of the Lender, dated as of March 29, 2000. Term Loan A shall be repaid in full, together with any accrued and unpaid interest thereon, on the Termination Date. Notwithstanding anything in Term Note A or this Agreement to the contrary, the obligations in connection with Term Loan A shall become immediately due and payable as provided in Section 10. No portion of Term Loan A that has been repaid may be reborrowed. 2.2 Revolving Loan Commitment. Subject to Section 9, from time to time after the Closing Date until the Revolving Termination Date, the Lender will make loans on a revolving basis (collectively, the "Revolving Loans") in such aggregate amounts as the Borrower may, from time to time, request up to the Revolving Commitment. The Indebtedness of the Borrower outstanding under the Existing Note will be restructured as Revolving Loans under this Agreement, and the term "Revolving Loans" will for all purposes include all such indebtedness so restructured and any additional Revolving Loans made by the Lender under this Section 2.2. The obligations in connection with the Revolving Loans will be evidenced by and payable in accordance with the terms of a promissory note (the "Revolving Note") made in favor of the Lender, dated as of the Closing Date and in the form of Exhibit A. The Borrower has the right to repay and reborrow any of the Revolving Loans; provided that it is a condition precedent to any reborrowing that as of the date of any reborrowing all of the conditions to borrowing set forth in Section 9.2 have been satisfied or waived. Each advance to the Borrower will, on the day of such advance, be deposited, in immediately available funds, in the Borrower's demand deposit account with the Lender or in such other account as the Borrower may, from time to time, designate. All Revolving Loans shall be repaid in full, together with any accrued and unpaid interest thereon, on the Revolving Termination Date. Notwithstanding anything in the Revolving Note or this Agreement to the contrary, the obligations in connection with the Revolving Loans shall become immediately due and payable as provided in Section 10. 2.3 Borrowing Procedures. The Borrower shall give written notice or telephonic notice (followed immediately by written confirmation thereof) to the Lender of each proposed Revolving Loan not later than (i) in the case of a Base Rate Loan, 11:00 A.M., Chicago time, on the proposed date of such Revolving Loan and (ii) in the case of a Eurodollar Loan, 11:00 A.M., Chicago time, at least three Business Days prior to the proposed date of such Revolving Loan. Each such notice shall be effective upon receipt by the Lender, shall be irrevocable and shall specify the date, amount and type of Revolving Loan and, in the case of a Eurodollar Loan, the initial Interest Period therefor. Each borrowing of a Revolving Loan shall be on a Business Day. 10 16 2.4 Various Types of Loans. Unless eligible for the STEP Rate as described in Section 3.1(i)(a), each Loan shall be either a Base Rate Loan or a Eurodollar Loan (each a "type" of Loan), as the Borrower shall specify on the Closing Date or in a related notice of conversion pursuant to Section 2.5. Eurodollar Loans having the same Interest Period are sometimes called a "group" or collectively "groups". Base Rate Loans and Eurodollar Loans may be outstanding at the same time; provided that (i) not more than seven different groups of Eurodollar Loans shall be outstanding at any one time and (ii) the aggregate principal amount of each group of Eurodollar Loans shall at all times be at least $1,000,000 and an integral multiple of $500,000. 2.5 Conversion and Continuation Procedures. (a) Subject to Section 2.4, the Borrower may, upon irrevocable written notice to the Agent in accordance with Section 2.5(b): (i) elect, as of any Business Day, to convert any Loans (or, in the case of Loans being converted into Eurodollar Loans, any part thereof in an aggregate amount not less than $1,000,000 or a higher integral multiple of $500,000) into Loans of the other type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Eurodollar Loans having Interest Periods expiring on such day (or any part thereof in an aggregate amount not less than $1,000,000 or a higher integral multiple of $500,000) for a new Interest Period. (b) The Borrower shall give written or telephonic (followed immediately by written confirmation thereof) notice to the Lender of each proposed conversion or continuation not later than (i) in the case of conversion into Base Rate Loans, 11:00 A.M., Chicago time, on the proposed date of such conversion and (ii) in the case of conversion into or continuation of Eurodollar Loans, 11:00 A.M., Chicago time, at least three Business Days prior to the proposed date of such conversion or continuation, specifying in each case: (i) the proposed date of conversion or continuation; (ii) the aggregate amount of Loans to be converted or continued; (iii) the type of Loans resulting from the proposed conversion or continuation; and (iv) in the case of conversion into, or continuation of, Eurodollar Loans, the duration of the requested Interest Period therefor. (c) If upon the expiration of any Interest Period applicable to Eurodollar Loans, the Borrower has failed to select timely a new Interest Period to be applicable to such Eurodollar Loans, the Borrower shall be deemed to have elected to convert such Eurodollar Loans into Base Rate Loans effective on the last day of such Interest Period. (d) Any conversion of a Eurodollar Loan on a day other than the last day of an Interest Period therefor shall be subject to Section 6.4. 11 17 SECTION 3: INTEREST; FEES 3.1 Interest Rates. The Borrower promises to pay interest on the unpaid principal amount of the Loans for the period commencing on the Closing Date until the Loans are paid in full as follows: (i) with respect to Term Loan A, (a) so long as the Borrower remains eligible to receive funds from STEP and so long as funds in an amount at least equal to the then outstanding principal amount of the Term Loan remain on deposit with the Lender at the interest rates contemplated by STEP on the Closing Date for purposes of funding the Borrower under STEP, at the STEP Rate or (b) during any period of Term Loan A that the Borrower is ineligible, as determined by the State of Illinois' State Treasurer's Economic Program, to receive funds from STEP or the State of Illinois ceases to maintain funds on deposit with the Lender in the amounts and at the rates contemplated by clause (i) (a) above for purposes of funding the Borrower under STEP, at the rate set forth for Revolving Loans in clause (ii) below; (ii) with respect to Revolving Loans, (a) for each Revolving Loan that is a Base Rate Loan, at a rate per annum equal to the Base Rate from time to time in effect and (b) for each Revolving Loan that is a Eurodollar Loan, at a rate per annum equal to the sum of the Eurodollar Rate (Reserve Adjusted) from time to time in effect plus the Applicable Margin; provided that at any time an Event of Default exists the interest rate applicable to the Loans shall be increased by 2.00%. 3.2 Interest Payment Dates. Accrued interest on Term Loan A (to the extent calculated at the STEP Rate) and each Base Rate Loan shall be payable in arrears on the last Business Day of each calendar quarter and at the Revolving Termination Date or the Termination Date, as the case may be. Accrued interest on each Eurodollar Loan shall be payable on the last day of each Interest Period relating to such Loan (and, in the case of a Eurodollar Loan with a six-month Interest Period, on the three-month anniversary of the first day of such Interest Period) and at the Revolving Termination Date or the Termination Date, as the case may be. After the Revolving Termination Date or the Termination Date, as the case may be, accrued interest on all Loans shall be payable on demand. 3.3 Setting and Notice of Eurodollar Rates. The applicable Eurodollar Rate for each Interest Period shall be determined by the Lender. Each determination of the applicable Eurodollar Rate by the Lender shall be conclusive and binding upon the Borrower in the absence of demonstrable error. The Lender shall upon written request of the Borrower deliver to the Borrower a statement showing the computations used by the Lender in determining any applicable Eurodollar Rate hereunder. 3.4 Computation of Interest. All computations of interest shall be computed for the actual number of days elapsed on the basis of a year of 360 days. The applicable interest rate for each Base Rate Loan shall change simultaneously with each change in the Base Rate. 12 18 SECTION 4: PREPAYMENTS; COMMITMENT REDUCTIONS 4.1 Optional Prepayments. The Borrower may from time to time prepay the Loans in whole or in part; provided that the Borrower shall give the Lender notice thereof not later than 11:00 A.M., Chicago time, on the day of such prepayment (which shall be a Business Day), specifying the Loans to be prepaid and the date and amount of prepayment. Subject to Sections 2.2, 4.3 and 9.2, all amounts prepaid under this Section 4.1 may be reborrowed. 4.2 Mandatory Prepayments. If on any day the Revolving Loans exceed the Revolving Commitment, the Borrower shall immediately prepay Revolving Loans in an amount sufficient to eliminate such excess. 4.3 Reductions in Revolving Commitment. The Borrower may from time to time reduce the amount of the Revolving Commitment in whole or in part; provided that the Borrower shall give the Lender three Business Days notice thereof and on the effective date of such reduction, the Borrower shall make any prepayment required by Section 4.2. SECTION 5: MAKING OF PAYMENTS; SETOFF; TAXES 5.1 Making of Payments. All payments on the Liabilities (including any costs and expenses arising under Section 6) shall be made by the Borrower to the Lender in immediately available funds at the office specified by the Lender not later than 11:00 A.M., Chicago time, on the date due; and funds received after that hour shall be deemed to have been received by the Lender on the next following Business Day. 5.2 Application of Certain Payments. Each payment of principal shall be applied to the Loans as the Borrower shall direct by notice to be received by the Lender on or before the date of such payment or, in the absence of such notice, as the Lender shall determine in its discretion. After an Event of Default has occurred and is continuing, the Lender may apply any payments as the Lender shall determine in its sole discretion. 5.3 Due Date Extension. If any payment on the Liabilities falls due on a day that is not a Business Day, then such due date shall be extended to the immediately following Business Day (unless, in the case of a Eurodollar Loan, such immediately following Business Day is the first Business Day of a calendar month, in which case such date shall be the immediately preceding Business Day) and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension. 5.4 Setoff. The Borrower agrees that the Lender has all rights of set-off and bankers' lien provided by applicable law, and in addition thereto, the Borrower agrees that at any time any Event of Default exists, the Lender may apply to the payment of any obligations of the Borrower hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter with the Lender. 5.5 Taxes. All payments of principal of and interest on the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges 13 19 of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by the Lender's net income or receipts (all nonexcluded items being called "Taxes"). If any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will: (i) pay directly to the relevant authority the full amount required to be so withheld or deducted; (ii) promptly forward to the Lender an official receipt or other documentation satisfactory to the Lender evidencing such payment to such authority; and (iii) pay to the Lender such additional amount or amounts as is necessary to ensure that the net amount actually received by the Lender will equal the full amount the Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Lender with respect to any payment received by the Lender hereunder, the Lender may pay such Taxes and the Borrower will promptly pay such additional amounts (including any penalty, interest and expense) as is necessary so that the net amount received by the Lender after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount the Lender would have received had such Taxes not been asserted. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Lender the required receipts or other required documentary evidence, the Borrower shall indemnify the Lender for any incremental Taxes, interest or penalties that may become payable by the Lender as a result of any such failure. SECTION 6: INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS 6.1 Increased Costs. (a) If, after the Closing Date, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender (or any Eurodollar Office of the Lender) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject the Lender (or any Eurodollar Office of the Lender) to any tax, duty or other charge with respect to the Eurodollar Loans, the Notes or the Lender's obligation to make Eurodollar Loans, or shall change the basis of taxation of payments to the Lender of the principal of or interest on the Eurodollar Loans or any other amounts due under this Agreement in respect of the Eurodollar Loans or the Lender's obligation to make Eurodollar Loans (except for changes in the rate of tax on the overall net income of the Lender or its Eurodollar Office imposed by the jurisdiction in which the Lender's principal executive office or Eurodollar Office is located); (ii) shall impose, modify or deem applicable any reserve (including any reserve imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve 14 20 included in the determination of interest rates pursuant to Section 3), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by the Lender (or any Eurodollar Office of the Lender); or (iii) shall impose on the Lender (or its Eurodollar Office) any other condition affecting the Eurodollar Loans, the Notes or the Lender's obligation to make Eurodollar Loans; and the result of any of the foregoing is to increase the cost to or to impose a cost on the Lender (or any Eurodollar Office of the Lender) of making or maintaining any Eurodollar Loan, or to reduce the amount of any sum received or receivable by the Lender (or its Eurodollar Office) under this Agreement or under any Note, then upon demand by the Lender, the Borrower shall pay directly to the Lender such additional amount as will compensate the Lender for such increased cost or such reduction. (b) If the Lender shall determine that the adoption or phase-in of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender or any Person controlling the Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Lender's or such controlling Person's capital as a consequence of the Lender's obligations hereunder to a level below that which the Lender or such controlling Person could have achieved but for such adoption, change or compliance (taking into consideration the Lender's or such controlling Person's policies with respect to capital adequacy) by an amount deemed by the Lender or such controlling Person to be material, then from time to time, upon demand by the Lender, the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender or such controlling Person for such reduction. 6.2 Basis for Determining Interest Rate Inadequate or Unfair. If with respect to any Interest Period: (i) deposits in Dollars (in the applicable amounts) are not being offered to the Lender in the interbank eurodollar market for such Interest Period, or the Lender otherwise determines (which determination, if made in good faith, shall be binding and conclusive on the Borrower) that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the applicable Eurodollar Rate; or (ii) the Eurodollar Rate (Reserve Adjusted) as determined by the Lender will not adequately and fairly reflect the cost to the Lender of maintaining or funding such Eurodollar Loans for such Interest Period or that the making or funding of Eurodollar Loans has become impracticable as a result of an event occurring after the date of this Agreement; then the Lender shall promptly notify the other parties thereof and, so long as such circumstances shall continue, (a) the Lender shall be under no obligation to make Eurodollar Loans and (b) on the 15 21 last day of the current Interest Period for each Eurodollar Loan, such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. 6.3 Changes in Law Rendering Eurodollar Loans Unlawful. If any change in (including the adoption of any new) applicable law or regulation, or any change in the interpretation of applicable law or regulation by any governmental or other regulatory body charged with the administration thereof, should make it (or in the good faith judgment of the Lender cause a substantial question as to whether it is) unlawful for the Lender to make, maintain or fund Eurodollar Loans, then the Lender shall promptly notify the Borrower and, so long as such circumstances shall continue, (i) the Lender shall have no obligation to make or convert into Eurodollar Loans and (ii) on the last day of the current Interest Period for each Eurodollar Loan of the Lender (or, in any event, on such earlier date as may be required by the relevant law, regulation or interpretation), such Eurodollar Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. 6.4 Funding Losses. The Borrower hereby agrees that upon demand by the Lender, the Borrower will indemnify the Lender against any net loss or expense that the Lender may sustain or incur (including any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund or maintain any Eurodollar Loan) as a result of any payment or prepayment of any Eurodollar Loan (including any conversion of any such Eurodollar Loan into a Base Rate Loan) on a date other than the last day of an Interest Period for such Loan. For this purpose, all notices to the Lender pursuant to this Agreement shall be deemed to be irrevocable. 6.5 Right of Lender to Fund through Other Offices. The Lender may, if it so elects, fulfill its commitment as to any Eurodollar Loan by causing a foreign branch or affiliate of the Lender to make such Loan; provided that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by the Lender and the obligation of the Borrower to repay such Loan shall nevertheless be to the Lender and shall be deemed held by it, to the extent of such Loan, for the account of such branch or affiliate. 6.6 Discretion of Lender as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, the Lender shall be entitled to fund and maintain its funding of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if the Lender had actually funded and maintained each Eurodollar Loan during each Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. 6.7 Conclusiveness of Statements; Survival of Provisions. Determinations and statements of the Lender pursuant to Section 6.1, 6.2, 6.3 or 6.4 shall be conclusive absent manifest error. The Lender may use reasonable averaging and attribution methods in determining compensation under Sections 6.1 and 6.4, and the provisions of such Sections shall survive repayment of the Loans, cancellation of the Notes and any termination of this Agreement. 16 22 SECTION 7: REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement and to induce the Lender to make the Loans, the Borrower represents and warrants to the Lender as follows: 7.1 Organization. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Borrower is in good standing and is duly qualified to do business in the States of California, Colorado, Illinois, Indiana and Texas, the Commonwealth of Massachusetts and each other jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure so to qualify would not have a Material Adverse Effect. 7.2 Authorization; No Conflict. The Borrower is duly authorized to execute and deliver each Loan Document to which it is a party, the Borrower is duly authorized to borrow monies under this Agreement and the Borrower is and will continue to be duly authorized to perform its obligations under each Loan Document to which it is a party. The execution, delivery and performance by the Borrower of this Agreement and of each Loan Document to which it is a party, and the borrowings by the Borrower under this Agreement, do not and will not (i) require any consent or approval of any governmental agency or authority that has not been obtained or (ii) conflict with (a) any provision of law, (b) the articles of incorporation or by-laws of the Borrower, (c) any material agreement binding upon the Borrower or its properties or assets or (d) any court or administrative order or decree applicable to the Borrower, and do not and will not require, or result in, the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. 7.3 Validity and Binding Nature. Each of this Agreement and each other Loan Document to which the Borrower is a party is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. 7.4 Financial Condition. The audited financial statements of the Borrower as of and for the fiscal years ended September 30, 1998, and September 30, 1999, and unaudited financial statements of the Borrower for the portion of fiscal year 2000 up to and including December 31, 1999, copies of which have been furnished prior to the Closing Date to the Lender, fairly present in all material respects the assets, liabilities, revenues, expenses and cash flows of the Borrower as of the dates thereof and the results of operations for the periods covered thereby. The Borrower has no liability or unusual or long-term commitment that might have a Material Adverse Effect and that is not reflected in the financial statements referred to above. 7.5 No Material Adverse Change. Since September 30, 1999, there has been no event that has had or could be reasonably likely to have a Material Adverse Effect. 7.6 Litigation and Contingent Liabilities. Except as set forth in Schedule 7.6, no litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to the Borrower's knowledge, threatened against the Borrower or any Subsidiary which might reasonably be expected to have a Material Adverse Effect. There are no injunctions or temporary restraining orders (either pending or, to the Borrower's knowledge, threatened) that would prohibit the making of Loans. Other than any liability incident to such 17 23 litigation or proceedings, neither the Borrower nor any Subsidiary has any contingent liabilities not listed on Schedule 7.6 or permitted by Section 8.7. 7.7 Taxes. The Borrower has filed, has caused to be filed or has been included in all tax returns (federal, state, local, foreign and other material tax returns) required to be filed by or on behalf of the Borrower and has paid or caused to be paid all taxes and other governmental charges due for the periods covered thereby, including interest and penalties, other than any such taxes or charges (i) for which a timely and proper extension has been obtained and (ii) that are being contested in good faith and by proper proceedings and as to which appropriate reserves (in the reasonable judgment of the Lender) are being maintained, unless and until any Lien resulting therefrom attaches to its property and becomes enforceable against its other creditors. The reserves for taxes reflected on the balance sheets of the Borrower submitted to the Lender in accordance with the terms of Section 8.1 will be adequate in amount in accordance with GAAP for the payment of all liabilities for all taxes (whether or not disputed) of the Borrower accrued through the date of such balance sheet. 7.8 Information. All information heretofore or contemporaneously with this Agreement furnished in writing by the Borrower to the Lender for purposes of or in connection with this Agreement and the transactions contemplated by this Agreement is, and all written information hereafter furnished by or on behalf of the Borrower or any Subsidiary to the Lender pursuant to this Agreement or any other Loan Document or in connection with this Agreement will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Lender that any projections and forecasts provided by the Borrower are based on good faith estimates and assumptions believed by the Borrower to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results). 7.9 Solvency. On the Closing Date, and immediately prior to and after giving effect to the issuance of the Loans and the use of the proceeds thereof, (i) the Borrower's assets will exceed its liabilities and (ii) the Borrower will be solvent, will be able to pay its debts as they mature, will own property with fair saleable value greater than the amount required to pay its debts and will have capital sufficient to carry on its business as then constituted. 7.10 No Default. No Event of Default or Unmatured Event of Default exists or would result from the incurring by the Borrower of any Indebtedness under this Agreement or under any other Loan Document. No contract or other agreement to which the Borrower or any Subsidiary is a party has been terminated or breached by the Borrower or any Subsidiary if such termination or breach could have a Material Adverse Effect. 7.11 Use of Proceeds. The Borrower will apply the proceeds of the Loans under this Agreement to (i) partially finance the construction of a manufacturing and distribution center in Aurora, Illinois and (ii) make the Cabot Dividend. 7.12 Subsidiaries. The Borrower has no Subsidiaries. 18 24 7.13 Ownership of Properties; Liens. Except as permitted pursuant to Section 8.8, each of the Borrower and each Subsidiary owns good title to all of its personal properties and assets, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like). 7.14 Intellectual Property. Except as set forth in Schedule 7.14, the Borrower and each of its Subsidiaries owns and possesses or has a license or other right to use all such patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the business of the Borrower and its Subsidiaries as conducted on the Closing Date, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect. 7.15 Insurance. Set forth on Schedule 7.15 is a complete and accurate summary of the property and casualty insurance program of the Borrower and its Subsidiaries as of the Closing Date (including the names of all insurers, policy numbers, expiration dates, amounts and types of coverage, annual premiums, exclusions, deductibles, self-insured retention and a description in reasonable detail of any self-insurance program, retrospective rating plan, fronting arrangement or other risk assumption arrangement involving the Borrower or any Subsidiary). 7.16 Investment Company Act; Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940. Neither the Borrower nor any Subsidiary is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935. 7.17 Regulation U. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. 7.18 Securities Matters. The making of the Loans, the application of the proceeds and repayment thereof by the Borrower and the consummation of the transactions contemplated by this Agreement and the other Loan Documents will not violate any provision of any federal or state securities statutes, rules or regulations, or any order issued by the Securities and Exchange Commission (collectively, the "Securities Laws"). The Borrower agrees to indemnify the Lender and hold the Lender harmless from the claims of any Persons in connection with any of the Securities Laws and relating to the making of the Loans or the transactions contemplated by this Agreement and the other Loan Documents. 7.19 Pension and Welfare Plans. (a) Except as set forth in Schedule 7.19, during the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement, (i) no steps have been taken to terminate any Pension Plan and (ii) no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which could result in the incurrence by the Borrower of any material liability, fine or penalty. The Borrower has no contingent liability with respect to any post-retirement benefit under a Welfare 19 25 Plan, other than liability for continuation coverage described in Part 6 of Subtitle B of Title I of ERISA. (b) Except as set forth in Schedule 7.19, all contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by the Borrower or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; neither the Borrower nor any member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan, received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, might result in a withdrawal or partial withdrawal from any such plan; and neither the Borrower nor any member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent. 7.2 Environmental Matters. (a) To the best of the Borrower's knowledge, neither the Borrower nor any Subsidiary, nor any operator of the Borrower's or any Subsidiary's properties, is in violation, or alleged violation, of any judgment, decree, order, law, permit, license, rule or regulation pertaining to environmental matters, including those arising under RCRA, CERCLA, the Superfund Amendments and Reauthorization Act of 1986 or any other Environmental Law which might reasonably be expected to have a Material Adverse Effect. (b) Except for matters arising which would, individually, be expected to have a Material Adverse Effect, neither the Borrower nor any Subsidiary has received notice from any third party, including any federal, state or local governmental authority (i) that any one of them has been identified by the United States Environmental Protection Agency as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B, (ii) that any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous substance as defined by 42 U.S.C. ss.9601(14), any pollutant or contaminant as defined by 42 U.S.C. ss.9601(33) or any toxic substance, oil or hazardous material or other chemical or substance regulated by any Environmental Law (all of the foregoing, "Hazardous Substances"), which any one of them has generated, transported or disposed of has been found at any site at which a federal, state or local agency or other third party has conducted a remedial investigation, removal or other response action pursuant to any Environmental Law, (iii) that the Borrower or any Subsidiary must conduct a remedial investigation, removal, response action or other activity pursuant to any Environmental Law or (iv) of any Environmental Claim. (c) Except as set forth on Schedule 7.20, (i) no portion of any real property or other assets of the Borrower or any Subsidiary has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance in all material respects with applicable Environmental Laws, (ii) in the course of any activities conducted by the Borrower, any Subsidiary or the operators of any real property of the Borrower or any Subsidiary, no Hazardous Substances have been generated or are being used on such properties except in accordance in all material 20 26 respects with applicable Environmental Laws, (iii) there have been no Releases or threatened Releases of Hazardous Substances on, upon, into or from any real property or other assets of the Borrower or any Subsidiary, which might reasonably be expected to have a Material Adverse Effect, (iv) there have been no Releases on, upon, from or into any real property in the vicinity of any real property or other assets of the Borrower or any Subsidiary which, through soil or groundwater contamination, may have come to be located on, and which might reasonably be expected to have a Material Adverse Effect and (v) any Hazardous Substances generated by the Borrower and its Subsidiaries have been transported offsite only by properly licensed carriers and delivered only to treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are operating in compliance in all material respects with such permits and applicable Environmental Laws. 7.21 Labor Matters. Neither the Borrower nor any Subsidiary is subject to any labor or collective bargaining agreement. There are no existing or threatened strikes, lockouts or other labor disputes involving the Borrower or any Subsidiary that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Borrower and its Subsidiaries are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters. 7.22 Year 2000 Issues. The computer systems in the Borrower's business are capable of the following before, during or after January 1, 2000 ("Year 2000 Compliant"): (i) handling date information involving all and any dates before, during and/or after January 1, 2000, including accepting input, providing output and performing date calculations in whole or in part; (ii) operating accurately without interruption on and in respect of any and all dates before, during and/or after January 1, 2000 and without any change in performance; (iii) responding to and processing two digit year input without creating any ambiguity as to the century; and (iv) storing and providing date input information without creating any ambiguity as to the century. 7.2 Survival of Warranties. All representations contained in this Agreement and the other Loan Documents survive the execution and delivery of this Agreement. SECTION 8: COVENANTS Until the Termination Date and thereafter until all Liabilities of the Borrower are paid in full, the Borrower agrees that it will: 8.1 Reports, Certificates and Other Information. Furnish to the Lender: (a) promptly when available and in any event within 120 days after the close of each fiscal year (i) a copy of the annual audit report of the Borrower and its Subsidiaries for such fiscal year, including therein consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal year and consolidated statements of earnings and cash flow of the Borrower and its Subsidiaries for such fiscal year, audited by an accounting firm reasonably acceptable to the Lender and (ii) consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal year and a consolidating statement of earnings for the Borrower and its Subsidiaries for such fiscal year, together with a comparison of the preceding fiscal year, certified by a Responsible Officer of the Borrower; 21 27 (b) promptly when available and in any event within 45 days after the end of each fiscal quarter (except the last fiscal quarter) of each fiscal year, consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal quarter, together with consolidated statements of earnings for such fiscal quarter and for the period beginning with the first day of such fiscal year end ending on the last day of such fiscal quarter, together with a comparison with the corresponding period of the previous fiscal year, certified by a Responsible Officer of the Borrower; (c) contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 8.1(a) and each set of quarterly statements pursuant to Section 8.1(b), so long as any Liabilities are outstanding at such time, a duly completed compliance certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such quarterly statement and signed by a Responsible Officer of the Borrower, containing a computation of each of the financial ratios and restrictions set forth in Section 8.6 and to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it; (d) promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of any Affiliate of the Borrower filed with the Securities and Exchange Commission (the "SEC"); copies of all registration statements of any Affiliate of the Borrower filed with the SEC (other than on Form S-8); and copies of all proxy statements or other communications made to security holders generally (in each case only to the extent such reports or filings include or incorporate the financial results of the Borrower or any Subsidiary); (e) promptly upon becoming aware of any of the following, written notice describing the same and the steps being taken by the Borrower or the Subsidiary affected thereby with respect thereto: (i) the occurrence of an Event of Default or an Unmatured Event of Default; (ii) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Borrower to the Lender that has been instituted or, to the knowledge of the Borrower, is threatened against the Borrower or any Subsidiary or to which any of the properties of any thereof is subject that might reasonably be expected to have a Material Adverse Effect; (iii) the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Borrower furnish 22 28 a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), or any material increase in the contingent liability of the Borrower with respect to any post-retirement Welfare Plan benefit, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent; (iv) any cancellation or material change in any insurance maintained by the Borrower or any Subsidiary; or (v) any event (including (a) any violation of any Environmental Law or the assertion of any Environmental Claim or (b) the enactment or effectiveness of any law, rule or regulation) which might reasonably be expected to have a Material Adverse Effect; (f) promptly upon the request of the Lender, copies of all detailed financial and management reports submitted to the Borrower by independent auditors in connection with each annual or interim audit made by such auditors of the books of the Borrower; (g) promptly from time to time, copies of any notices (including, without limitation, notices of default or acceleration) received from any holder or trustee of, under or with respect to any Indebtedness; and (h) from time to time such other information concerning the Borrower, its Subsidiaries and its Affiliates, as the Lender may reasonably request. 8.2 Maintenance of Existence. Maintain and preserve, and cause each Subsidiary to maintain and preserve, (i) its existence and good standing in the jurisdiction of its organization and (ii) its qualification and good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary (except in those instances in which the failure to be qualified or in good standing could not have a Material Adverse Effect). 8.3 Compliance with Laws; Payment of Taxes and Liabilities. (i) Comply, and cause each Subsidiary to comply, in all material respects with all applicable laws (including Environmental Laws), rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect and (ii) pay, and cause each Subsidiary to pay, prior to delinquency, all taxes and other governmental charges against it or any of its property, as well as claims of any kind which, if unpaid, might become a Lien on any of its property; provided that the foregoing shall not require the Borrower or any Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate 23 29 proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP. 8.4 Maintenance of Insurance. Maintain, and cause each Subsidiary to maintain, with responsible insurance companies, such insurance as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities (including business interruption insurance), as is customarily maintained by companies similarly situated, but which shall insure against all risks and liabilities of the type identified on Schedule 7.15 and shall have insured amounts no less than, and deductibles no higher than, those set forth on such schedule; and, upon request of the Lender, furnish to the Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Borrower and its Subsidiaries. 8.5 Books, Records and Inspections. Keep, and cause each Subsidiary to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP. The Borrower shall permit, and cause each Subsidiary to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), the Lender or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and the Borrower authorizes such independent auditors to discuss such financial matters with the Lender or any representative thereof), and to examine (and, at the expense of the Borrower or the applicable Subsidiary, photocopy extracts from) any of its books or other records. 8.6 Financial Covenants. (i) Not permit the ratio of (a) the sum of (i) the Borrower's investments described in Sections 8.11(ii) and 8.11(iii), plus (ii) the Borrower's right to payment for goods sold or leased or for services rendered, whether or not evidenced by an instrument or chattel paper and whether or not yet earned by performance, in each case to the extent classified as current assets under GAAP, to (b) current liabilities (as determined according to GAAP) plus all outstanding revolving loans under the Revolving Credit Facility to be, on a consolidated basis, less than 1.25 to 1.00 at any time. (ii) Not permit its Leverage Ratio to be greater than 2.25 to 1.00 at any time, as measured on the last day of each fiscal quarter of the Borrower on a consolidated basis for the four consecutive fiscal quarters most recently ended. (iii) Not permit the ratio of (a) the sum of (1) Consolidated Net Income (or Loss) for such period plus (2) to the extent deducted in determining such Consolidated Net Income (or Loss), (A) consolidated gross interest expense (including all commissions, discounts, fees and other charges in connection with standby letters of credit and similar instruments) accrued or paid by the Borrower and its Subsidiaries for such period (including all imputed interest on Capital Leases), determined in accordance with GAAP and (B) provisions for any income or similar taxes paid or accrued by the Borrower and its Subsidiaries minus (3) non-cash gains received by the Borrower during such period, in each case determined on a consolidated basis in accordance with GAAP, to (b) the consolidated gross interest expense (including all 24 30 commissions, discounts, fees and other charges in connection with standby letters of credit and similar instruments) accrued or paid by the Borrower and its Subsidiaries (including all imputed interest on Capital Leases), determined in accordance with GAAP, to be less than 3.00 to 1.00, as measured on the last day of each fiscal quarter of the Borrower on a consolidated basis for the four consecutive fiscal quarters most recently ended. (iv) Not permit Consolidated Net Income (or Loss) of the Borrower and its Subsidiaries to be greater than (a) for any fiscal quarter, ($7,500,000) and (b) for any two consecutive fiscal quarters, ($10,000,000); it being understood that, by way of example, ($2,000,000) is greater than ($1,000,000). 8.7 Limitations on Indebtedness. Not, and not permit any Subsidiary to, create, incur, assume or suffer to exist any Indebtedness, except: (i) obligations in respect of the Loans; (ii) (a) Indebtedness incurred in connection with the acquisition after the Closing Date of any real or personal property by the Borrower or such Subsidiary or under any Capital Lease; provided that the aggregate principal amount of such Indebtedness shall not exceed $5,000,000 outstanding at any time, (b) unsecured Indebtedness incurred under the Revolving Credit Facility; provided that the aggregate principal amount of such Indebtedness shall not exceed $25,000,000 outstanding at any time and (c) Indebtedness incurred or assumed in connection with Permitted Acquisitions; (iii) Indebtedness of Subsidiaries owed to the Borrower and unsecured Indebtedness of the Borrower to owed to Subsidiaries; and (iv) Indebtedness listed on Schedule 8.7. 8.8 Liens. Not, and not permit any Subsidiary to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature (whether now owned or hereafter acquired), except: (i) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves in accordance with GAAP; (ii) Liens arising in the ordinary course of business (such as (i) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by law and (ii) Liens incurred in connection with worker's compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or being contested in good faith by appropriate proceedings and not involving any deposits or advances or borrowed money or 25 31 the deferred purchase price of property or services and, in each case, for which it maintains adequate reserves in accordance with GAAP; (iii) (i) Liens arising in connection with Capital Leases (and attaching only to the property being leased), (ii) Liens existing on property at the time of the acquisition thereof by the Borrower or any Subsidiary (and not created in contemplation of such acquisition) and (iii) Liens that constitute purchase money security interests on any property securing debt incurred for the purpose of financing all or any part of the cost of acquiring such property; provided that any such Lien attaches to such property within 60 days of the acquisition thereof and such Lien attaches solely to the property so acquired; (iv) attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding $5,000,000 arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (v) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of the Borrower or any Subsidiary; and (vi) Liens identified on Schedule 8.8. 8.9 Mergers, Consolidations, Sales. Will not, and not permit any Subsidiary to, be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person, or sell, transfer, convey or lease any of its assets other than (i) sales in the ordinary course of business of obsolete, damaged or worn-out equipment and inventory and (ii) Permitted Acquisitions. 8.1 Inconsistent Agreements; Negative Pledge. Not, and not permit any Subsidiary to, enter into any agreement containing any provision which would (i) be violated or breached by any borrowing of a Loan under this Agreement or by the performance by the Borrower or any Subsidiary of any of its obligations under this Agreement or under any other Loan Document, (ii) prohibit the Borrower or any Subsidiary from granting to the Lender a Lien on any of its assets (except in connection with the Revolving Credit Facility) or (iii) create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (a) pay dividends or make other distributions on its capital stock owned by the Borrower or any other Subsidiary, or pay any Indebtedness owed to the Borrower or any other Subsidiary, (b) make loans or advances to the Borrower or (c) transfer any of its assets or properties to the Borrower. 8.11 Advances and Other Investments. Not, and not permit any Subsidiary to, make, incur, assume or suffer to exist any investment in another Person, whether by acquisition of any debt or equity security, by making any loan or advance or by becoming obligated with respect to Indebtedness in respect of obligations of such other Person, except (without duplication) the following: 26 32 (i) Permitted Acquisitions; (ii) (a) any evidence of Indebtedness, maturing not more than one year after such time, issued or guaranteed by the United States Government (or, in the case of foreign operations, any country that is a member of the OECD) or any agency of the foregoing, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by the Lender or its Affiliates) rated at least A-l by Standard & Poor's Ratings Group or P-l by Moody's Investors Service, Inc., (c) any certificate of deposit (or time deposits represented by such certificates of deposit) or banker's acceptance, maturing not more than one year after such time, or overnight federal funds transactions that are issued or sold by the Lender or its Affiliates or by a commercial banking institution that is a member of the Federal Reserve System (or, in the case of foreign operations, a commercial banking institution organized under the laws of a country that is a member of the OECD) and has a combined capital and surplus and undivided profits of not less than $500,000,000 or (d) any repurchase agreement entered into with the Lender (or other commercial banking institution of the stature referred to in clause (c) above) which (1) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) above and (2) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of the Lender (or other commercial banking institution) thereunder; (iii) bank deposits and balances in the ordinary course of business; and (iv) investments in securities of account debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such account debtors. 8.12 Restricted Payments. Not, and not permit any Subsidiary to, without the prior written consent of the Lender, (i) issue any equity securities of the Borrower or any Subsidiary in an offering of equity securities registered under the Securities Act of 1933, (ii) make any distribution to any of its shareholders, (iii) pay any management fees or similar fees to Cabot Corporation or any Affiliate thereof or (iv) set aside funds for any of the foregoing, in each case other than (a) issuance of equity securities of the Borrower in connection with the initial public offering of such securities, (b) advances to its employees in connection with expense reimbursements in the ordinary course of business, (c) management fees to Cabot Corporation or any Affiliate thereof under the management agreement among such parties as in effect on the Closing Date, (d) dividends or distributions to the Borrower's shareholders in an amount, determined in the aggregate for all such dividends or distributions made in any fiscal year, not to exceed 50% of the Borrower's Consolidated Net Income (or Loss) calculated on a cumulative basis from the Closing Date through and including the date of any such dividend or distribution and (e) the Cabot Dividend. 8.13 Transactions with Affiliates. Except as set forth in Schedule 8.13, not, and not permit any Subsidiary to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates (other than the Borrower and its Subsidiaries) which is on 27 33 terms which are less favorable than are obtainable from any Person which is not one of its Affiliates. 8.14 Restriction of Amendments to Revolving Credit Facility. Not amend or otherwise modify, or waive any rights under, any agreement or instrument relating to the Revolving Credit Facility if any such amendment, modification or waiver would (i) increase the rate of interest (other than with respect to the application of a default rate of interest), the fees (other than in respect of amendment and waiver fees charged in the ordinary course of business) or any prepayment premiums payable with respect to the Revolving Credit Facility, (ii) add or change any covenants or events of default in a manner materially more restrictive to the Borrower or any Subsidiary, (iii) impose any express restrictions on the Borrower's ability to make payments on the Liabilities or (iv) would give the agent or lenders under the Revolving Credit Facility an express Lien on the assets of the Borrower or any Subsidiary. 8.1 Compliance with STEP. Use its reasonable efforts to comply with the requirements of STEP and maintain its eligibility to participate in STEP. 8.16 Use of Proceeds. Use the proceeds of the Loans solely to (i) partially finance the construction of a manufacturing and distribution center in Aurora, Illinois and (ii) make the Cabot Dividend; and not use or permit any proceeds of any Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying" any Margin Stock. 8.1 Employee Benefit Plans. Maintain, and cause each Subsidiary to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations. 8.18 Environmental Matters. (a) If any Release or Disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of the Borrower or any Subsidiary, the Borrower shall, or shall cause the applicable Subsidiary to, cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply in all material respects with all Environmental Laws and to preserve the value of such real property or other assets. Without limiting the generality of the foregoing, the Borrower shall, and shall cause each Subsidiary to, comply in all material respects with any valid federal or state judicial or administrative order requiring the performance at any real property of the Borrower or any Subsidiary of activities in response to the Release or threatened Release of a Hazardous Substance. (b) To the extent that the transportation of "hazardous waste" as defined by RCRA is permitted by this Agreement, the Borrower shall, and shall cause its Subsidiaries to, dispose of such hazardous waste only at licensed disposal facilities operating in compliance with Environmental Laws. 8.1 Further Assurances. Take, and cause each Subsidiary to take, such actions as are necessary, or as the Lender may reasonably request. 28 34 SECTION 9: EFFECTIVENESS; CONDITIONS OF LENDING The obligation of the Lender to make any Loan and amend and restate the Existing Credit Agreement is subject to the following conditions precedent: 9.1 Initial Loans; Amendment and Restatement. The obligation of the Lender to make the initial Loans and to amend and restate the Existing Credit Agreement is, in addition to the conditions precedent specified in Section 9.2, subject to the conditions precedent that the Lender shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to the Lender), in form and substance satisfactory to the Lender: (a) each Loan Document; (b) a certificate signed by a Responsible Officer of the Borrower on behalf of the Borrower dated as of the Closing Date with respect to the following: (i) affirming the matters set forth in Section 9.2 as of the Closing Date; (ii) stating that there has been no change in the certified copies of the Borrower's articles of incorporation and by-laws delivered to the Lender in connection with the Existing Credit Agreement; and (iii) stating that the officers authorized to sign the Existing Credit Agreement are the same officers authorized to sign the Loan Documents and that the Lender may rely on the sample of the true signature of each such officer provided in connection with the Existing Credit Agreement (it being understood that the Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein); (c) certified copies of all documents evidencing any necessary corporate or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Borrower of the documents referred to in this Section 9.1; (d) a solvency certificate, substantially in the form of Exhibit C, executed by a Responsible Officer of the Borrower executed on behalf of such officer; 9.2 Subsequent Loans. The obligation of the Lender to make each Loan is subject to the following further conditions precedent that: (a) Compliance with Representations and Warranties, No Default. Both before and after giving effect to the making of the Loans the following statements shall be true and correct: (i) the representations and warranties of the Borrower set forth in this Agreement and the other Loan Documents shall be true and correct in all material respects with the same effect as if then made (except to the extent stated to relate to a 29 35 specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and (ii) no Event of Default or Unmatured Event of Default shall have then occurred and be continuing. (b) Compliance with STEP. The Borrower will provide the Lender with evidence satisfactory to the Lender that the Borrower qualifies for STEP and the State of Illinois has deposited an amount equal to the original principal amount of Term Loan A with the Lender at an interest rate equal to the STEP rate in effect on the Closing Date. (c) Confirmatory Certificate. If requested by the Lender, the Lender shall have received a certificate dated the date of such requested Loan and signed by a Responsible Officer as to the matters set out in Sections 9.2(a) and 9.2(b) (it being understood that each request by the Borrower for the making of a Loan shall be deemed to constitute a warranty by the Borrower that the conditions precedent set forth in Sections 9.2(a) and 9.2(b) will be satisfied at the time of the making of such Loan), together with such other documents as the Lender may reasonably request in support thereof. SECTION 10: EVENTS OF DEFAULT AND THEIR EFFECT 10. Events of Default. Each of the following shall constitute an Event of Default under this Agreement: (a) default in the payment of any principal or interest on the Loans when such principal and interest is due or declared due (whether by scheduled maturity, acceleration, demand or otherwise) or other Liabilities remain unpaid for five Business Days after notice to the Borrower; (b) any default shall occur under the terms applicable to any indebtedness of the Borrower or any Subsidiary in an aggregate amount (for all such indebtedness so affected) exceeding $5,000,000 and such default shall (i) consist of the failure to pay such indebtedness when due, whether by acceleration or otherwise or (ii) accelerate the maturity of such indebtedness or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such indebtedness to become due and payable prior to its expressed maturity; (c) the Borrower or any Subsidiary becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or the Borrower or any Subsidiary applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for the Borrower or such Subsidiary or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for the Borrower or any Subsidiary or for a substantial part of the property of any thereof and is not discharged within 30 days; or the bankruptcy, reorganization, debt arrangement, or other case or proceeding under the bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in 30 36 respect of the Borrower or any Subsidiary, and if such case or proceeding is not commenced by the Borrower or such Subsidiary, it is consented to or acquiesced in by the Borrower or such Subsidiary, or remains for 30 days undismissed; or the Borrower or any Subsidiary takes any action to authorize, or in furtherance of, any of the foregoing; (d) failure by the Borrower to comply with or to perform any covenant (i) under Sections 8.2, 8.3, 8.4 and 8.17 and such failure remains unremedied for ten days after the earlier of (A) the Borrower's knowledge of such failure or (B) written notice of such failure by the Lender to the Borrower or (ii) under any other Section of this Agreement or any other Loan Document; (e) any representation and warranty made by the Borrower herein or any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by the Borrower to the Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified; (f) final judgments which exceed an aggregate of $5,000,000 shall be rendered against the Borrower or any Subsidiary and shall not have been paid, discharged or vacated or had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments; (g) (i) institution of any steps by the Borrower or any other Person to terminate a Pension Plan if as a result of such termination the Borrower could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $5,000,000, (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA or (iii) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that the Borrower and the Controlled Group have incurred on the date of such withdrawal) exceeds $5,000,000; or (h) a Change in Control shall occur. 10.2 Effect of Event of Default. If any Event of Default described in Section 10.1(c) shall occur, the Loans (if they have not theretofore terminated) shall immediately terminate and all obligations hereunder shall become immediately due and payable and the Lender shall have no further obligation to make Revolving Loans, all without presentment, demand, protest or notice of any kind; and, if any other Event of Default shall occur and be continuing, the Lender may declare the Loans (if they have not theretofore terminated) to be terminated or declare all obligations hereunder to be due and payable, whereupon the Loans (if they have not theretofore terminated) shall immediately terminate and all obligations hereunder shall become immediately due and payable and the Lender may terminate its obligation to make Revolving Loans, all without presentment, demand, 31 37 protest or notice of any kind. The Lender shall promptly advise the Borrower of any such declaration, but failure to do so shall not impair the effect of such declaration. SECTION 11: GENERAL 11.1 Waiver; Amendments. No delay on the part of the Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or any Note shall in any event be effective unless the same shall be in writing and signed and delivered by the Lender and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 11.2 Notices. All notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on Schedule 11.2 or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. 11.3 Costs, Expenses and Taxes. The Borrower agrees to pay on demand all reasonable out-of-pocket costs and expenses of the Lender (including the reasonable fees and charges of counsel for the Lender and of local counsel, if any, who may be retained by said counsel) in connection with the preparation, execution, syndication, delivery and administration of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendments, supplements or waivers to any Loan Documents), and all reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees, court costs and other legal expenses and allocated costs of staff counsel) incurred by the Lender in connection with the enforcement of this Agreement, the other Loan Documents or any such other documents. In addition, the Borrower agrees to pay, and to save the Lender harmless from all liability for, any stamp or other taxes (excluding income taxes and franchise taxes based on net income) that may be payable in connection with the execution and delivery of this Agreement, the borrowings hereunder, the issuance of the Notes or the execution and delivery of any other Loan Document or any other document provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided for in this Section 11.3 shall survive repayment of the Loans and any termination of this Agreement. 11.4 Governing Law; Severability. This Agreement shall be a contract made under and governed by the internal laws of the State of Illinois. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All obligations of the Borrower and rights of the Lender expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. 32 38 11.5 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. 11.6 Successors and Assigns. This Agreement shall be binding upon the Borrower, the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and the successors and assigns of the Lender. If the Lender transfers or assigns any portion of its rights under this Agreement to any Person then the Lender must transfer such corresponding portion of STEP deposits made by the State of Illinois Treasury Department to such assignee or transferee. 11.7 Indemnification by the Borrower. In consideration of the execution and delivery of this Agreement by the Lender and the agreement to make the Loans under this Agreement, the Borrower hereby agrees to indemnify, exonerate and hold the Lender and each of the officers, directors, employees, Affiliates and agents of the Lender (each a "Lender Party") free and harmless from and against any and all actions, causes of action, suits, losses, liabilities, damages and expenses, including reasonable attorneys' fees and charges and allocated costs of staff counsel (collectively, the "Indemnified Liabilities"), incurred by the Lender Parties or any of them as a result of, or arising out of, or relating to (i) any tender offer, merger, purchase of stock, purchase of assets (including, without limitation, the Acquisition) or other similar transaction financed or proposed to be financed in whole or in part, directly or indirectly, with the proceeds of any of the Loans, (ii) the use, handling, release, emission, discharge, transportation, storage, treatment or disposal of any hazardous substance at any property owned or leased by the Borrower or any Subsidiary, (iii) any violation of any Environmental Laws with respect to conditions at any property owned or leased by the Borrower or any Subsidiary or the operations conducted thereon, (iv) the investigation, cleanup or remediation of offsite locations at which the Borrower or any Subsidiary or their respective predecessors are alleged to have directly or indirectly disposed of hazardous substances or (v) the execution, delivery, performance or enforcement of this Agreement or any other Loan Document by any of the Lender Parties, except for any such Indemnified Liabilities arising on account of any the Lender Party's gross negligence or willful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. Nothing set forth above shall be construed to relieve the Lender Party from any obligation it may have under this Agreement. All obligations provided for in this Section 11.7 shall survive repayment of the Loans, any foreclosure under, or any modification, release or discharge of any or all of the Loan Documents and any termination of this Agreement. 11.8 FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION 33 39 AS SET FORTH ABOVE. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS. 11.9 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, THE NOTES, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR THAT MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 11.10 Amendment and Restatement. This Agreement amends, restates and supersedes in full the terms and provisions of the Existing Credit Agreement. The execution and delivery of this Agreement and the other Loan Documents are not intended and should not be construed (i) to deem the Borrower to have repaid or otherwise discharged any amount of principal of or interest on the Existing Note or any other obligation under the Existing Credit Agreement or (ii) to effect a novation or otherwise to release the obligations and liabilities under, or extinguish such obligations and liabilities evidenced by, the Existing Note or the Existing Credit Agreement. Promptly after the Closing Date, the Lender will mark the Existing Note "superseded" and return it to the Borrower. [The remainder of this page intentionally is left blank.] 34 40 Delivered at Chicago, Illinois, as of the day and year first above written. CABOT MICROELECTRONICS CORPORATION By --------------------------------- Title: LASALLE BANK NATIONAL ASSOCIATION By --------------------------------- Title: First Vice President 41 SCHEDULE 11.2 ADDRESSES FOR NOTICES BORROWER Cabot Microelectronics Corporation 870 Commons Drive Aurora, Illinois 60504 Attention: Telephone: Facsimile: LENDER Jeffrey A. Raider LaSalle Bank National Association 135 South LaSalle Street Chicago, Illinois 60603 Telephone: (312) 904-2766 Facsimile: (312) 904-6546 42 EXHIBIT A FORM OF NOTE [date] $[amount] Chicago, Illinois The undersigned, Cabot Microelectronics Corporation, a Delaware corporation (the "Borrower"), for value received, promises to pay to the order of LaSalle Bank National Association, a national banking association (the "Lender"), at the office of the Lender in Chicago, Illinois, in immediately available funds the principal amount of $[amount], such principal amount to be payable on the dates set forth in the Credit Agreement dated as of March 29, 2000 (as amended or otherwise modified from time to time, the "Credit Agreement"), between the Borrower and the Lender. The Borrower further promises to pay interest on the unpaid principal amount evidenced by this promissory note (this "Note") from the date of this Note until such indebtedness is paid in full, payable at the rates and at the times set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Credit Agreement, to which reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. This Note is made under and governed by the internal laws of the State of Illinois without regard to the conflict provisions thereof. CABOT MICROELECTRONICS CORPORATION By --------------------------------- Title: A-1 43 EXHIBIT B FORM OF COMPLIANCE CERTIFICATE Reference is made to the Credit Agreement dated as of March 29, 2000 (as amended or otherwise modified from time to time, the "Credit Agreement"), between Cabot Microelectronics Corporation, a Delaware corporation (the "Borrower"), and LaSalle Bank National Association, a national banking association (the "Lender"). Capitalized terms used in this certificate and not otherwise defined have the meanings assigned to such terms in the Credit Agreement. The undersigned certifies to the Lender that he or she is a duly elected, qualified and acting Responsible Officer of the Borrower and further certifies as follows: 1. Reports. Enclosed herewith is a copy of the [annual audited/quarterly report] of the Borrower as at _____________ (the "Computation Date"), which report fairly presents in all material respects the financial condition and results of operations [(subject to normal year-end adjustments)] of the Borrower as of the Computation Date and has been prepared in accordance with GAAP consistently applied. 2. Financial Tests. The Borrower hereby certifies and warrants to you that the attached Schedule I contains the true and correct computations required to establish whether the Borrower is in compliance with each of the financial covenants and restrictions set forth in Section 8.6 of the Credit Agreement. 3. No Event of Default or Unmatured Event of Default. The Borrower hereby certifies that no Event of Default or Unmatured Event of Default has occurred and is continuing[, except: describe the nature of each Event of Default or Unmatured Event of Default, the period of existence thereof and the action taken or proposed to be taken with respect thereto]. Dated: ------------ CABOT MICROELECTRONICS CORPORATION By: -------------------------------- Title: B-1 44 SCHEDULE 1 Schedule 1 to Compliance Certificate dated as of: A. SECTION 8.6(a) - QUICK RATIO: 1. Cash and Cash Equivalents ______________ 2. Accounts Receivable ______________ 3. Item A1 plus item A2 ______________ 4. Current Liabilities (including outstanding revolving loans under the Revolving Credit Facility) ______________ 5. Item A3 divided by item A4 (not to be less than 1.25 to 1.00) ______________ B. SECTION 8.6(b) - LEVERAGE RATIO: 1. Funded Debt ______________ 2. Consolidated Net Income (or Loss) ______________ 3. Interest Expense ______________ 4. Taxes ______________ 5. Depreciation ______________ 6. Amortization ______________ 7. Non-cash charges ______________ 8. Items B2 through and including B7 ______________ 9. Non-Cash Gains ______________ 10. Item B8 minus item B9 ______________ 11. Item B1 divided by item B10 (not to be greater than 2.25 to 1.00) ______________ 1 45 C. SECTION 8.6(c) - INTEREST COVERAGE RATIO: 1. Item B10 (above) minus items B5 and B6 and B7 (above) ______________ 2. Item C1 divided by item B3 (above) (not to be less than 3.00 to 1.00) ______________ D. SECTION 8.6(d) - CONSOLIDATED NET INCOME (OR LOSS): 1. Consolidated Net Income (or Loss) (last quarter) (not to be greater than ($7,500,000)) ______________ 2. Consolidated Net Income (or Loss) (penultimate quarter) ______________ 3. Item D1 plus item D2 (not to be greater than ($10,000,000)) ______________ 2 46 EXHIBIT C FORM OF SOLVENCY CERTIFICATE Reference is made to the Credit Agreement dated as of March 29, 2000 (as amended or otherwise modified from time to time, the "Credit Agreement"), between Cabot Microelectronics Corporation, a Delaware corporation (the "Borrower"), and LaSalle Bank National Association, a national banking association (the "Lender"). Capitalized terms used in this certificate and not otherwise defined have the meanings assigned to such terms in the Credit Agreement. The undersigned certifies to the Lender that he or she is a duly elected, qualified and acting Responsible Officer of the Borrower and further certifies as follows: 1. The Borrower has furnished the undersigned with a true, complete and executed copy of the Credit Agreement as in effect on the date of this certificate, and the undersigned has reviewed the Credit Agreement in its entirety. 2. The undersigned is familiar with all of the Borrower's business and financial affairs, including, without limitation, all of the matters described in this certificate. 3. As of the date of this certificate, the Borrower is "solvent," and the Borrower's incurrence of its obligations under the Credit Agreement will not render the Borrower insolvent. For purposes of this certificate, a corporation is "solvent" if: (a) its assets exceed its liabilities; (b) it is able to pay its debts as they mature; (c) it owns property with fair salable value (including intangible assets) greater than the amount required to pay its debts; and (d) it has capital sufficient to carry on its business as then constituted. Dated: CABOT MICROELECTRONICS CORPORATION ------------ By: -------------------------------- Title: C-0 EX-10.27 4 c59982ex10-27.txt 1ST AMENDMENT TO AMENDED & RESTATED CREDIT AGMT. 1 EXHIBIT 10.27 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This First Amendment to Amended and Restated Credit Agreement, made as of August __, 2000 (this "Amendment"), is between Cabot Microelectronics Corporation, a Delaware corporation, as borrower (the "Borrower"), and LaSalle Bank National Association, a national banking association (the "Lender"). Capitalized terms used in this Amendment and not otherwise defined have the meanings assigned to such terms in the Credit Agreement (as defined below). PRELIMINARY STATEMENTS: 1. The Borrower and the Lender are parties to the Amended and Restated Credit Agreement dated as of July 5, 2000 (as such agreement may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). 2. The Borrower and the Lender have agreed to amend the Credit Agreement to, among other things, modify the financial covenants contained therein, all on the terms and subject to the conditions of this Amendment. AGREEMENT: In consideration of the mutual agreements contained in this Amendment and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties to this Amendment agree as follows: SECTION 1. AMENDMENT TO CREDIT AGREEMENT On the date this Amendment becomes effective, after satisfaction by the Borrower of each of the conditions set forth in Section 4 (the "Effective Date"), Section 8.6(i) of the Credit Agreement is amended by deleting such section in its entirety and replacing it as follows: (i) Not permit the ratio of (a) the sum of (i) the Borrower's investments described in Sections 8.11(ii) and 8.11(iii), plus (ii) the Borrower's right to payment for goods sold or leased or for services rendered, whether or not evidenced by an instrument or chattel paper and whether or not yet earned by performance, in each case to the extent classified as current assets under GAAP, to (b) current liabilities (as determined according to GAAP) to be, on a consolidated basis, less than 1.25 to 1.00 at any time. SECTION 2. REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Amendment, the Borrower represents and warrants to the Lender that: 2 2.1 Due Authorization; Authority; No Conflicts; Enforceability. The execution, delivery and performance by the Borrower of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental, regulatory or other approvals (if any are required), and do not and will not contravene or conflict with any provision of (i) any law, (ii) any judgment, decree or order or (iii) its articles of incorporation or by-laws, and do not and will not contravene or conflict with, or cause any lien to arise under, any provision of any agreement or instrument binding upon the Borrower or upon any of its property. This Amendment and the Credit Agreement, as amended by this Amendment, are the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. 2.2 No Default; Representations and Warranties. As of the Effective Date, (i) no Event of Default or Unmatured Event of Default has occurred and is continuing and (ii) the representations and warranties of the Borrower contained in the Credit Agreement are true and correct. SECTION 3. CONDITIONS TO EFFECTIVENESS The obligation of the Lender to make the amendments contemplated by this Amendment, and the effectiveness thereof, are subject to the following: 3.1 Representations and Warranties. The representations and warranties of the Borrower contained in this Amendment are true and correct as of the Effective Date. 3.2 Documents. The Lender has received all of the following, each duly executed and dated as of the Effective Date (or such other date as is satisfactory to the Lender) in form and substance satisfactory to the Lender: (a) this Amendment; (b) copies of all documents evidencing any necessary corporate action, consents and governmental approvals, if any, with respect to this Amendment or any other document provided for under this Amendment; and (c) such other documents as the Lender may reasonably request. SECTION 4. MISCELLANEOUS 4.1 Captions. The recitals to this Amendment (except for definitions) and the section captions used in this Amendment are for convenience only, and do not affect the construction of this Amendment. 4.2 Governing Law; Severability. THIS AMENDMENT IS A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. Wherever possible, each provision of this Amendment will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment is prohibited by or invalid under such law, such provision will be ineffective to the extent of such prohibition or -2- 3 invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. 4.3 Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart will be deemed to be an original, but all such counterparts together constitute but one and the same Amendment. 4.4 Successors and Assigns. This Amendment is binding upon the Borrower, the Lender and their respective successors and assigns, and inures to the sole benefit of the Borrower, the Lender and their successors and assigns. The Borrower has no right to assign its rights or delegate its duties under this Amendment. 4.5 References. From and after the Effective Date, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, and each reference in the Credit Agreement or any other Loan Document to the Credit Agreement or to any term, condition or provision contained "thereunder," "thereof," "therein," or words of like import, means and be a reference to the Credit Agreement (or such term, condition or provision, as applicable) as amended, supplemented, restated or otherwise modified by this Amendment. 4.6 Continued Effectiveness. Notwithstanding anything contained in this Amendment, the terms of this Amendment are not intended to and do not serve to effect a novation as to the Credit Agreement. The parties to this Amendment expressly do not intend to extinguish the Credit Agreement. Instead, it is the express intention of the parties to this Amendment to reaffirm the indebtedness created under the Credit Agreement. The Credit Agreement remains in full force and effect and the terms and provisions of the Credit Agreement are ratified and confirmed. 4.7 Costs, Expenses and Taxes. The Borrower affirms and acknowledges that Section 11.3 of the Credit Agreement applies to this Amendment and the transactions and agreements and documents contemplated under this Amendment. * * * -3- 4 Delivered at Chicago, Illinois, as of the day and year first above written. CABOT MICROELECTRONICS CORPORATION By: ------------------------------- Title: LASALLE BANK NATIONAL ASSOCIATION By: ------------------------------- First Vice President -----END PRIVACY-ENHANCED MESSAGE-----