-----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, GiCUXA5lN7iglswQ8TFWAqm2cDyMIvPBRgZz/b1w6KR++ZIHe7/lCnFwvpAfNGxi VEMVQaUR+ETz1zyKDbIcdA== 0000950137-02-000605.txt : 20020414 0000950137-02-000605.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950137-02-000605 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020212 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: 364324765 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30205 FILM NUMBER: 02536917 BUSINESS ADDRESS: STREET 1: 870 NORTH COMMONS DRIVE CITY: AURORA STATE: IL ZIP: 60504 BUSINESS PHONE: 6303756631 10-Q 1 c67408e10-q.txt QUARTERLY REPORT 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, 2001 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, 2002 the Company had 24,156,067 shares of Common Stock, par value $0.001 per share, outstanding. CABOT MICROELECTRONICS CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Statements of Income Three Months Ended December 31, 2001 and 2000...... 3 Balance Sheets December 31, 2001 and September 30, 2001........... 4 Statements of Cash Flows Three Months Ended December 31, 2001 and 2000...... 5 Notes to Financial Statements.......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 11 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 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, 2001 2000 ---- ---- Revenue ............................................... $ 51,004 $ 68,616 Cost of goods sold .................................... 23,746 32,563 -------- -------- Gross profit ................................. 27,258 36,053 Operating expenses: Research and development ........................... 6,947 6,538 Selling and marketing .............................. 2,358 2,269 General and administrative ......................... 3,884 5,147 Amortization of goodwill and other intangibles ..... 90 179 -------- -------- Total operating expenses ........................ 13,279 14,133 -------- -------- Operating income ...................................... 13,979 21,920 Other income (expense), net ........................... (317) 437 -------- -------- Income before income taxes ............................ 13,662 22,357 Provision for income taxes ............................ 4,645 7,918 -------- -------- Net income ...................................... $ 9,017 $ 14,439 ======== ======== Basic net income per share ............................ $ 0.37 $ 0.61 ======== ======== Weighted average basic shares outstanding ............. 24,096 23,608 ======== ======== Diluted net income per share .......................... $ 0.37 $ 0.59 ======== ======== Weighted average diluted shares outstanding ........... 24,532 24,290 ======== ======== The accompanying notes are an integral part of these financial statements. 3 CABOT MICROELECTRONICS CORPORATION BALANCE SHEETS (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30, 2001 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents ............................................... $ 58,374 $ 47,677 Accounts receivable, less allowance for doubtful accounts of $819 at December 31, 2001 and $1,014 at September 30, 2001 ..................................... 19,899 26,735 Inventories ............................................................. 16,944 16,806 Prepaid expenses and other current assets ............................... 1,781 1,742 Deferred income taxes ................................................... 3,915 3,494 --------- --------- Total current assets .............................................. 100,913 96,454 Property, plant and equipment, net ......................................... 111,189 97,426 Goodwill ................................................................... 1,326 1,045 Other intangible assets, net ............................................... 1,191 1,562 Deferred income taxes and other assets ..................................... 97 194 --------- --------- Total assets ...................................................... $ 214,716 $ 196,681 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ $ 13,714 $ 13,557 Capital lease obligation ................................................ 1,221 - Accrued expenses, income taxes payable and other current liabilities .... 13,341 12,809 --------- --------- Total current liabilities ......................................... 28,276 26,366 Long-term debt .......................................................... 3,500 3,500 Capital lease obligation ................................................ 8,555 - Deferred income taxes ................................................... 174 268 Deferred compensation and other long term liabilities ................... 391 260 --------- --------- Total liabilities ................................................. 40,896 30,394 Commitments and contingencies (Note 10) Stockholders' equity: Common stock: Authorized: 200,000,000 shares, $0.001 par value Issued and outstanding: 24,111,941 shares at December 31, 2001 and 24,079,997 at September 30, 2001 ..................................... $ 24 $ 24 Capital in excess of par value of common stock .......................... 108,662 107,335 Retained earnings ....................................................... 69,457 60,440 Accumulated other comprehensive loss .................................... (4,058) (1,191) Unearned compensation ................................................... (265) (321) --------- --------- Total stockholders' equity ........................................ 173,820 166,287 --------- --------- Total liabilities and stockholders' equity ........................ $ 214,716 $ 196,681 ========= =========
The accompanying notes are an integral part of these financial statements. 4 CABOT MICROELECTRONICS CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, ------------ 2001 2000 ---- ---- Cash flows from operating activities: Net Income ........................................................................ $ 9,017 $ 14,439 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................................. 2,464 1,815 Noncash compensation expense and non-employee stock options .................... 85 568 Provision for inventory writedown .............................................. 473 350 Provision for doubtful accounts ................................................ (195) - Stock option income tax benefits ............................................... 562 555 Deferred income tax benefits ................................................... (515) (629) Changes in operating assets and liabilities: Accounts receivable ............................................................ 6,192 (13,671) Inventories .................................................................... (220) (641) Prepaid expenses and other assets .............................................. (2) 115 Accounts payable, accrued liabilities and other current liabilities ............ (1,304) 474 Income taxes payable, deferred compensation and other noncurrent liabilities ... 2,452 7,785 -------- -------- Net cash provided by operating activities ............................................ 19,009 11,160 Cash flows from investing activities: Additions to property, plant and equipment ........................................ (8,993) (6,906) Proceeds from the sale of property, plant and equipment ........................... - 2 -------- -------- Net cash used in investing activities ................................................ (8,993) (6,904) -------- -------- Cash flows from financing activities: Net proceeds from issuance of stock ............................................... 722 776 -------- -------- Net cash provided by financing activities ............................................ 722 776 -------- -------- Effect of exchange rate changes on cash .............................................. (41) 224 -------- -------- Increase in cash ..................................................................... 10,697 5,256 Cash and cash equivalents at beginning of period ..................................... 47,677 9,971 -------- -------- Cash and cash equivalents at end of period ........................................... $ 58,374 $ 15,227 ======== ========
The accompanying notes are an integral part of these financial statements. 5 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 as of December 31, 2001, cash flows for the three months ended December 31, 2001 and December 31, 2000 and results of operations for the three months ended December 31, 2001 and December 31, 2000. The results of operations for the three months ended December 31, 2001 may not be indicative of the results to be expected for the fiscal year ending September 30, 2002. 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, 2001. We operate predominantly in one industry segment - the development, manufacture, and sale of CMP slurries. 2. SEPARATION FROM CABOT CORPORATION In July 1999, Cabot Corporation ("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 share of Cabot Corporation common stock outstanding on September 13, 2000, or an aggregate of 18,989,744 shares of Cabot Microelectronics common stock. 6 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3. NET INCOME PER SHARE Statement of Financial Accounting Standards No. 128 "Earnings per Share", requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share ("net income per share") computations. Basic and diluted net income per share were calculated as follows: THREE MONTHS ENDED DECEMBER 31, 2001 2000 ---- ---- Numerator: Income available to common shares ............. $ 9,017 $ 14,439 =========== =========== Denominator: Weighted average common shares ................ 24,095,558 23,607,845 (Denominator for basic calculation) Weighted average effect of dilutive securities: Stock based compensation .................... 436,820 682,094 ----------- ----------- Diluted weighted average common shares ........ 24,532,378 24,289,939 (Denominator for diluted calculation) =========== =========== Net income per share: Basic ......................................... $ 0.37 $ 0.61 =========== =========== Diluted ....................................... $ 0.37 $ 0.59 =========== =========== 4. COMPREHENSIVE INCOME The components of comprehensive income are as follows: THREE MONTHS ENDED DECEMBER 31, 2001 2000 ---- ---- Net Income ....................................... $ 9,017 $ 14,439 Other comprehensive income: Net unrealized gain (loss) on derivative instruments ............................... 6 (160) Foreign currency translation adjustment ..... (2,873) (1,166) -------- -------- Total comprehensive income ....................... $ 6,150 $ 13,113 ======== ======== 7 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 5. INVENTORIES Inventories consisted of the following: DECEMBER 31, SEPTEMBER 30, 2001 2001 ---- ---- Raw materials........................... $ 11,186 $ 11,981 Work in process......................... 60 42 Finished goods.......................... 5,698 4,783 ----------- ----------- Total................................... $ 16,944 $ 16,806 =========== =========== 6. CAPITALIZED SOFTWARE We are currently developing and commencing implementation of a new global business system to replace Cabot Corporation's duplicated systems. We have capitalized costs related to this internal use software project in accordance with AICPA Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". In the three months ended December 31, 2001, we capitalized internal costs of $276 and since the associated project has not been placed in service as of that date, no depreciation expense was recognized in the first quarter of fiscal 2002. 7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES Accrued expenses, income taxes payable and other current liabilities consisted of the following: DECEMBER 31, SEPTEMBER 30, 2001 2001 ---- ---- Accrued compensation.................... $ 5,606 $ 8,220 Warranty accrual........................ 1,476 1,255 Taxes payable........................... 3,411 697 Other................................... 2,848 2,637 ----------- ----------- Total................................... $ 13,341 $ 12,809 =========== =========== 8. LONG-TERM DEBT At December 31, 2001 long-term debt was comprised of an unsecured term loan in the amount of $3,500 funded on the basis of the Illinois State Treasurer's Economic Program. This loan is due on April 3, 2005 and incurs interest at an annual rate of 6.37% until April 3, 2002 and 1.75% plus 70% of the three year treasury rate thereafter. On July 10, 2001 we entered into a $75,000 unsecured revolving credit and term loan facility with a group of commercial banks. Under this agreement, which terminates July 10, 2004, interest accrues on any outstanding balance at either the institution's base rate or the eurodollar rate plus an applicable margin. A non-use fee also accrues. Loans under this facility are anticipated to be used primarily for general corporate purposes, including working capital and capital expenditures. The credit agreement also contains various covenants. No amounts are currently outstanding under this credit facility and we are currently in compliance with the covenants. 8 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 9. CAPITAL LEASE OBLIGATIONS On December 12, 2001 we entered into a fumed alumina supply agreement with Cabot Corporation under which we agreed to pay Cabot Corporation for the expansion of a fumed alumina manufacturing facility in Tuscola, Illinois. The payments for the facility have been treated as a capital lease for accounting purposes and the present value of the minimum quarterly payments resulted in a $9,776 lease obligation and related leased asset. The agreement has an overall ten year term, which expires in 2011, but we can choose not to renew the agreement subject to certain terms and conditions and the payment of certain costs, after five years. 10. 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. 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. The reexamination certificate was issued by the PTO on March 13, 2001. On May 11, 2001, Cabot Corporation filed a motion for summary judgment dismissing the case on the grounds that no case or controversy remains given the reexamined patent. As of January 31, 2002, the case remains stayed. 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 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 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. 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. On June 15, 2001, discovery closed as scheduled and on October 23, 2001, the court denied Rodel's motion to extend and expand discovery. On November 2, 2001, the 9 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) court denied Rodel's motion to add Cabot Microelectronics as a party to the case. On September 28, 2001, Cabot Corporation filed three motions for summary judgement that the Brancaleoni patents are, respectively, invalid, unenforceable due to Rodel's inequitable conduct (denied as moot without ruling on the merits on October 26, 2001) and that no infringement exists. On the same day, Rodel filed a partial summary judgement motion on infringement. Given these motions and other matters before the court, the court has postponed the pre-trial conference without having set a new schedule for it or for trial as of January 31, 2002. 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, while the court has limited the scope of the Brancaleoni lawsuit, 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 at present, 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. Also, while the court has ruled that we cannot be added as a party to the Brancaleoni lawsuit, we at some point could be added as a named defendant in these or other lawsuits. While we believe there are meritorious defenses to the pending actions and intend to continue 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. We do not believe a loss is probable, nor can we estimate the amount of loss, if any, that might result from this matter. Accordingly, no loss provision has been made in our financial statements for any of these matters. 11. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also defines the criteria for identifying intangible assets for recognition apart from goodwill. SFAS 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. This statement requires that intangible assets with finite useful lives be amortized and intangible assets with indefinite lives and goodwill no longer be amortized, but instead tested for impairment at least annually. Effective October 1, 2001, we adopted SFAS 141 and SFAS 142 which resulted in the reclassification of a portion of intangible assets regarding workforce in place to goodwill. We determined that the resulting unamortized goodwill balance of $1,326 was not impaired. In accordance with the statement, we ceased amortizing goodwill and will perform impairment tests at least annually. The adoption of these statements reduced amortization expense by $89, and had no impact on diluted earnings per share, for the three months ended December 31, 2001. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We do not expect the adoption of SFAS 143 to have a significant impact on our financial position or results of operations. 10 CABOT MICROELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which is effective for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" while retaining many of the provisions of that statement. SFAS 144 also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting for the Impairment or Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB No. 30") for segments of a business to be disposed of. We do not expect the adoption of SFAS 144 to have a significant impact on our financial position or results of operations. 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", as well as disclosures included elsewhere in this Form 10-Q, 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 or general economic prospects or trends, 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 the financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2001. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The following "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as disclosures included elsewhere in this Form 10-Q, are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an on-going basis, we evaluate the estimates used, including those related to product returns, bad debts, inventories, impairments of tangible and intangible assets, income taxes, warranty obligations, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve more significant judgments and estimates used in the preparation of the consolidated financial statements. 11 We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We provide for the estimated cost of product returns based upon historical experience and any known conditions or circumstances. Our warranty obligation is affected primarily by product that does not meet specification and any related costs of addressing such matters. Should actual incidences of product not meeting specification differ from our estimates, revisions to the estimated warranty liability may be required. We value inventory at the lower of cost or market and write down the value of inventory for estimated obsolescence or unmarketable inventory. An inventory reserve is maintained based upon a historical percentage of actual inventory written off and for known conditions and circumstances. Should actual product marketability be affected by conditions that are less favorable than those projected by management, revisions to the estimated inventory reserve may be required. Also, the purchase cost of one of our key raw materials changes significantly based on the total quantity of in-specification product purchased in a given year. We determine the amount charged to cost of goods sold for this raw material based on the expected average cost over the entire fiscal year using our current full year forecast of purchases. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2001 VERSUS THREE MONTHS ENDED DECEMBER 31, 2000 REVENUE Total revenue was $51.0 million for the three months ended December 31, 2001, which represented a 25.7%, or $17.6 million, decrease from the three months ended December 31, 2000. Of this decrease, $18.2 million was due to a reduction in sales volume which was partially offset by a $0.6 million increase in weighted average selling prices resulting from a change in product sales mix. Additionally, revenue would have been $0.9 million higher had the Japanese Yen average exchange rate for the quarter held constant with the prior year's first fiscal quarter average. Compared to the record-breaking revenue level experienced in the first quarter of fiscal 2001, revenue decreased primarily due to the downturn in the semiconductor industry and weak global economic conditions. Although revenue in each of our past three quarters has remained relatively flat, given the continued weakness in the industry and overall economic conditions, it is difficult to predict our future revenue trends. COST OF GOODS SOLD Total cost of goods sold was $23.7 million for the three months ended December 31, 2001, which represented a decrease of 27.1% or $8.8 million from the three months ended December 31, 2000. This decrease was primarily due to lower volumes as compared to the prior year. With respect to the key raw materials used to make our products, we expect that the cost of fumed silica used in the manufacture of CMP slurries will continue to increase according to the terms of our existing fumed metal oxide agreement with Cabot Corporation, which provides for a fixed annual increase in the price of silica of 2.0% of the initial price and additional increases if Cabot Corporation's raw material costs increase. Also, in order to meet our needs for fumed alumina given the anticipated growth in sales of fumed alumina based slurries, in December 2001, we entered into a fumed alumina supply agreement with Cabot Corporation and an amendment to the fumed metal oxide agreement with respect to its fumed alumina terms. Under this fumed alumina supply agreement, Cabot Corporation has expanded its capacity for the manufacture of fumed alumina and we have the first right to all this capacity. The agreement provides that the price Cabot Corporation charges us for fumed alumina is based on all of its fixed and variable costs for producing the fumed alumina, plus its capital costs for expanding its capacity, plus an agreed upon rate of return on investment, plus incentive payments if they produce more than a certain amount that meets our specifications per year. The terms of this agreement, along with those contained in the amendment to the fumed metal oxide agreement, are retroactive to October 2001 and our average cost per pound for alumina is higher than paid previously under the original fumed metal oxide agreement. Had we paid this higher average cost per pound for all fumed 12 alumina purchased in the first quarter of fiscal 2001, cost of goods sold in that quarter would have increased by approximately $0.3 million. Our need for additional quantities of fumed metal oxides in the future will require that we enter into new supply arrangements that could result in costs which are higher than those in existing agreements. GROSS PROFIT Our gross profit as a percentage of net revenue was 53.4% for the three months ended December 31, 2001 as compared to 52.5% for the three months ended December 31, 2000. The increase in gross profit resulted primarily from production efficiencies and improved product sales mix. RESEARCH AND DEVELOPMENT Research and development expenses were $6.9 million in the three months ended December 31, 2001, which represented an increase of 6.3%, or $0.4 million, from the three months ended December 31, 2000. The majority of this increase was due to higher consumable supplies and higher staffing levels to support our continued investments in research and development. Key activities during the three months ended December 31, 2001 involved the continued development of new and enhanced slurry products including products for copper applications, new CMP polishing pad technology and advanced particle technology. We continue to invest in our research and development capabilities and expect costs to rise as we add additional personnel and complete construction of a new research and development facility in Aurora, Illinois. This facility, which is expected to be completed by April 2002, will feature a state-of-the-art Class 1 clean room and advanced equipment for slurry and pad product development. The cost of this facility and equipment is approximately $31 million of which approximately $22 million will be spent in fiscal year 2002. We believe this investment will provide us with leading edge polishing and metrology capabilities to support the technology advancements being made by our customers. SELLING AND MARKETING Selling and marketing expenses of $2.4 million in the three months ended December 31, 2001 were essentially flat with the three months ended December 31, 2000. GENERAL AND ADMINISTRATIVE General and administrative expenses were $3.9 million in the three months ended December 31, 2001, which represented a decrease of 24.5%, or $1.3 million, from the three months ended December 31, 2000. The December 31, 2000 quarter included higher amounts of up-front costs related to the large staffing ramp which occurred last year and $0.7 million of costs related to an executive leaving the business. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles was $0.1 million in the three months ended December 31, 2001 compared to $0.2 million for the three months ended December 31, 2000. The reduction of approximately $0.1 million occurred as we adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", effective October 1, 2001, which required the amortization of goodwill to be discontinued and that goodwill be instead tested for impairment at least annually. Amortization expense in fiscal 2002 is expected to decrease by approximately $0.4 million due to the discontinuation of goodwill amortization. 13 OTHER INCOME (EXPENSE) Other expense was $0.3 million for the three months ended December 31, 2001, compared to other income of $0.4 million, from the three months ended December 31, 2000. This is primarily due to a payment of $0.3 million to Cabot Corporation to reimburse them for certain capital improvements made to a facility used to supply us with material. These capital improvements are no longer in service. Interest expense also increased by approximately $0.2 million due to the capital lease treatment of the fumed alumina facility payments. PROVISION FOR INCOME TAXES The effective income tax rate was 34.0% for the three months ended December 31, 2001 and 35.4% for the three months ended December 31, 2000. The decrease in the effective tax rate was mainly driven by an increase in tax credits from expanded research and experimentation activities and increased impact of these credits in relation to a lower taxable income base. NET INCOME Net income was $9.0 million for the three months ended December 31, 2001, which represented a decrease of 37.6%, or $5.4 million, from the three months ended December 31, 2000 as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES We had cash flows from operating activities of $19.0 million in the three months ended December 31, 2001 and $11.2 million in the three months ended December 31, 2000. Our cash provided by operating activities for the three months ended December 31, 2001 originated from net income from operations of $9.0 million, non-cash items of $2.9 million and a net decrease in working capital of $7.1 million primarily from a decrease in customer receivables. Receivables decreased as a result of lower revenue and the early receipt of a payment from a major customer. Our principal funding requirements have been for additions to property, plant and equipment that support the expansion of our business and technological capability. In the three months ended December 31, 2001, capital spending was $9.0 million, primarily due to the construction of our new research and development facility in Aurora, Illinois. We also purchased additional production-related equipment to be used in Aurora, Illinois and invested in the development and implementation of our stand alone business information systems. Full fiscal year 2002 capital spending is anticipated to be approximately $45.0 million. In the three months ended December 31, 2000, capital spending was $6.9 million, primarily due to the expansion of our Geino, Japan manufacturing facility and the purchase of research and development equipment. Cash flows from financing activities of $0.7 million and $0.8 million for the three months ended December 31, 2001 and 2000, respectively resulted from the issuance of common stock upon the exercise of stock options. At December 31, 2001 debt was comprised of an unsecured term loan in the amount of $3.5 million funded on the basis of the Illinois State Treasurer's Economic Program. The interest rate is 6.37% and the loan is due April 3, 2005. On July 10, 2001, we entered into a $75.0 million unsecured revolving credit and term loan facility with a group of commercial banks which terminates on July 10, 2004. Under this agreement, interest accrues on any outstanding balance at either the institution's base rate or the eurodollar rate plus an applicable margin. A non-use fee also accrues. Loans under this facility are anticipated to be used primarily for general corporate purposes, including working capital and capital expenditures. The credit agreement contains various covenants. No amounts are currently outstanding under the credit facility and we are currently in compliance with the covenants. On December 12, 2001 we entered into a fumed alumina supply agreement with Cabot Corporation. Under this agreement, Cabot Corporation expanded its capacity in Tuscola, Illinois for the manufacture of fumed alumina. Payments by us for capital costs for the facility have been treated as a capital lease for accounting purposes and the present value of the minimum quarterly payments of 14 approximately $0.3 million resulted in a $9.8 million lease obligation and related leased asset. The agreement has an overall ten year term, which expires in 2011, but we can choose not to renew the agreement subject to certain terms and conditions and the payment of certain costs, after five years. Capital lease payments to Cabot Corporation will commence in the second quarter of fiscal 2002. We believe that cash generated by our operations and available borrowings under our term loan and revolving credit facility will be sufficient to fund our operations and expected capital expenditures for the foreseeable future. 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. DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS At December 31, 2001 and 2000, we did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements. In addition to our long-term debt and capital lease obligations previously discussed, we lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable operating leases, most of which expire within ten years and may be renewed by us. We also have a long-term agreement with a supplier to purchase materials for a product line under development. As of December 31, 2001, we are obligated to purchase, subject to the supplier's ability to deliver, $3.9 million of materials over the remaining term of the agreement, which expires in June, 2005, and to reimburse the supplier for all approved research and development costs related to the materials. The supplier will repay these research and development reimbursements when our material purchases from them reach certain agreed-upon levels. Additionally, we have an agreement with Davies Imperial Coatings, Inc. ("Davies") pursuant to which Davies will perform certain agreed-upon dispersion services. We have agreed to purchase minimum amounts of services per year and to invest approximately $0.2 million per year in capital improvements or other expenditures to maintain capacity at the Davies dispersion facility. The initial term of the agreement expires in October 2004, with automatic one-year renewals, and contains a 90-day cancellation clause executable by either party. At December 31, 2001, we have total contractual cash obligations (which include long-term debt, capital and operating lease obligations, and the aforementioned unconditional purchase and other long-term obligations) of $18.6 million, of which $2.4 million is due within one year. Total cash obligations due between one and three years, four and five years, and beyond five years are $9.9 million, $2.1 million and $4.2 million, respectively. We also operate under a fumed metal oxide agreement with Cabot Corporation for the purchase of two key raw materials, one of which we are obligated to purchase at least 90% of our six-month volume forecast and must pay the difference if we purchase less than that amount. We have not included purchase commitments under this agreement in total contractual cash obligations as we currently anticipate meeting minimum forecasted purchase volume requirements. FACTORS AFFECTING FUTURE OPERATING RESULTS RISKS RELATING TO OUR BUSINESS 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 15 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. 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. Our five largest customers accounted for approximately 57% and 56% of our revenue for the three months ended December 31, 2001 and 2000, respectively. DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY A FURTHER DECLINE IN WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS Our business is affected by current economic and industry trends and it is extremely difficult to predict sales of our products given uncertainties in these factors. As occurred during fiscal 2001, the global economic slowdown and weakening in demand for electronic systems, coupled with higher than normal chip inventories, affected our quarterly revenue trends. Further declines in current economic and industry conditions could adversely affect our business. 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 Cabot Corporation is currently the defendant in two lawsuits against it by Rodel 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 at present, 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. 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, primarily fumed silica but also fumed alumina, 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. We entered into a fumed metal oxide agreement with Cabot Corporation, which became effective upon completion of our initial public offering in April, 2000, and under which, according to certain terms and conditions, including those in our new fumed alumina supply agreement with Cabot Corporation that we entered into in December 2001, Cabot Corporation continues to be our exclusive supplier of certain fumed metal oxides for our slurry products produced as of the date of the initial public offering with respect to fumed silica and as of the effective 16 date of the new fumed alumina supply agreement with respect to fumed alumina. We have been purchasing fumed alumina from Cabot Corporation under the fumed metal oxide agreement. In order to meet our anticipated needs for fumed alumina, in December, 2001 we entered into a fumed alumina supply agreement with Cabot Corporation and an amendment to the fumed metal oxide agreement with respect to fumed alumina. Under the fumed alumina supply agreement, Cabot Corporation has expanded its capacity for the manufacture of fumed alumina to which we have first right to all capacity from the expansion and under the amended fumed metal oxide agreement we now have first right, subject to certain terms and conditions, to the capacity from that facility. We face the risk of significant increases in the price of fumed metal oxides as Cabot Corporation's cost of production increases. It may be difficult to secure alternative sources of fumed metal oxides in the event Cabot Corporation is unable to supply us with sufficient quantities of fumed metal oxides which meet the quality required by our customers' supply needs and technical specifications, or encounters supply problems, including but not limited to any related to quality, functionality of equipment, natural disasters, work stoppages or raw material availability. In addition, contractual amendments to the existing agreements with, or non-performance by, Cabot Corporation, may adversely affect us as well. 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 manufacturer or manufacturing facility, whether Cabot Corporation or another party, 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 chemistries. This modification may involve a significant amount of time and cost to complete and therefore could 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, OFFER BETTER PRICING TERMS OR SERVICE, OBTAIN CERTAIN INTELLECTUAL PROPERTY RIGHTS 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. 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. BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING PADS, EXPANSION OF OUR BUSINESS INTO THIS AREA 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. We have had limited experience in developing and marketing these products 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. 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. For these reasons, the expansion of our business into CMP polishing pads may not be successful. 17 BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY PROTECT OR OBTAIN IT COULD SERIOUSLY HARM OUR BUSINESS Protection of intellectual property is particularly important in our industry because CMP slurry and pad manufacturers develop complex and technical formulas for CMP products 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. 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 2001, approximately 62% of our revenue was generated by sales to customers outside the United States. For the three months ended December 31, 2001, approximately 66% of our revenue was generated by sales to customers outside the United States. We encounter risks in doing business in foreign countries. These risks include, but are not limited to, adverse changes in economic and political conditions, as well as the difficulty in enforceability of business and customer contracts and agreements, including protection of intellectual property rights. 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. This may require funds in excess of those generated from operating activities and from those available under existing credit facilities. Therefore, 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 WE CURRENTLY USE CABOT CORPORATION'S INFORMATION TECHNOLOGY SERVICES AND SYSTEMS AND OUR ABILITY TO SATISFY OUR CUSTOMERS AND OPERATE OUR BUSINESS MAY SUFFER IF WE DO NOT IMPLEMENT A NEW 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 undertaken a project to develop and implement new systems to replace the duplicated versions of Cabot Corporation's systems. We may not be successful in implementing these systems and transitioning data from the duplicated versions of Cabot Corporation's systems to our new systems. We continue to rely upon the network infrastructure provided and maintained by Cabot Corporation. 18 CERTAIN OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO DIRECTORS OR EXECUTIVE OFFICERS OF CABOT CORPORATION OR OWN CABOT CORPORATION STOCK Two members of our board of directors are directors and/or executive officers of Cabot Corporation (prior to May, 2001, three members were and one member resigned from our board in July, 2001). The two remaining 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 Corporation, as well as related party transactions and agreements between us and Cabot Corporation such as our fumed metal oxide, fumed alumina supply, and dispersion services agreements. One of these two directors' term of service on our board expires at our annual meeting to be held in March 2002, and he is not standing for reelection. The other director has announced his intention to resign from our board sometime in the second calendar quarter of 2002. In addition, a number of our directors and executive officers own Cabot Corporation stock and options on Cabot Corporation stock they acquired as employees of Cabot Corporation. 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 Corporation. WE MAY HAVE CONFLICTS WITH CABOT CORPORATION WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS Conflicts of interest may arise between Cabot Corporation and us in a number of areas relating 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. For example, Cabot Corporation continues to be our exclusive supplier, subject to certain terms and conditions, of certain fumed metal oxides in certain amounts for our slurry products produced as of the date of our initial public offering under a fumed metal oxide agreement between Cabot Corporation and our company and as of December, 2001 under a fumed alumina supply agreement. These and other agreements were made or structured in the context of an affiliated relationship and generally were negotiated in the overall context of our separation from Cabot Corporation. 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 agreements. It is particularly difficult to assess whether the price for fumed metal oxides provided under our fumed metal oxide supply agreement, and its December, 2001 amendment with respect to fumed alumina, or for fumed alumina under our fumed alumina supply agreement or other arrangements with Cabot Corporation 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. 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 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 Corporation 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 Corporation. 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 Corporation for any resulting tax liability. 19 RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY The market price of our common stock could fluctuate significantly as a result of factors such as: economic and stock market conditions generally and specifically as they may impact participants in the semiconductor industry; changes in financial estimates and recommendations by securities analysts following our stock; earnings and other announcements by, and changes in market evaluations of, us or participants in the semiconductor industry; changes in business or regulatory conditions affecting us or participants in the semiconductor industry; announcements or implementation by us or our competitors of technological innovations or new products; and trading volume of our common stock. 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 a 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 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 other key employees. These arrangements provide for a cash severance payment, continued medical benefits and other ancillary payments and benefits upon termination 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. From time to time we enter into forward contracts in an effort to manage foreign 20 currency exchange exposure. Approximately 16% of our revenue is transacted in currencies other than the U.S. dollar. We do not currently 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, 2001, 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, 2001 was not material. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Legal proceedings are discussed in "Footnote 10. - 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 10.30 2001 Deposit Share Agreement* 10.31 Amendment No.1 to Fumed Metal Oxide Supply Agreement (confidential treatment applied for)** 10.32 Fumed Alumina Supply Agreement (confidential treatment applied for)** * Management contract, or compensatory plan or arrangement. ** This Exhibit has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by brackets. (b) Reports on Form 8-K No report on Form 8-K was filed by the Company during the three months ended December 31, 2001. 21 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 12, 2002 /s/ MARTIN M. ELLEN ------------------------------------------ Martin M. Ellen Vice President and Chief Financial Officer [Principal Financial Officer] Date: February 12, 2002 /s/ DANIEL S. WOBBY ------------------------------------------ Daniel S. Wobby Corporate Controller [Principal Accounting Officer] 22 EX-10.30 3 c67408ex10-30.txt 2001 DEPOSIT SHARE AGREEMENT EXHIBIT 10.30 [CABOT MICROELECTRONICS CORPORATION LOGO] AMENDED AND RESTATED CABOT MICROELECTRONICS CORPORATION 2000 EQUITY INCENTIVE PLAN 2001 DEPOSIT SHARE AGREEMENT THIS DEPOSIT SHARE AGREEMENT (the "Agreement") is made and entered into this ______________ day of ______________, 2001, (the "Effective Date") by and between Cabot Microelectronics Corporation (the "Company") and __________________________ (the "Participant"). STATEMENT OF PURPOSE The Company has adopted the Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (the "Plan") for the benefit of its eligible employees. The Participant is an employee of the Company who is eligible to participate under the Plan, and who desires to participate in the Plan pursuant to the terms and conditions of this Agreement, the Plan Restricted Stock Agreement-2001 Deposit Share Award (the "Award Agreement"), and the Plan. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Participant hereby agree as follows: 1. Election to Participate. The Participant hereby elects to participate in the Plan by means of his/her execution of this Agreement. 2. Bonus Income. The Participant hereby elects to pay to the Company, via personal check or other means acceptable to the Company on or by the Effective Date, the following portion of his/her annual bonus amount that was paid to the Participant on December 14, 2001: ================================================================================ $ (the "Elected Bonus Amount"). - --------------------------------------------- ================================================================================ Any election made hereunder will be a one-time election and will not remain in effect for subsequent annual bonus payments. The amount of election shall not be less than $1,000. 3. Deposit Share Awards. The Company will convert the Elected Bonus Amount to shares of Company common stock (the "Deposit Shares") issued to the Participant under the Plan at the Fair Market Value of such stock on December 28, 2001, and will retain such shares subject to the terms of this Agreement, the Award Agreement and the Plan. Such shares shall remain on deposit with the Company through December 28, 2004 (the three year anniversary of December 28, 2001)(the "Distribution Date"). On December 28, 2001, assuming Participant's satisfaction of the terms of Section 2 of this Agreement, the Company will award to the Participant the number of shares of Company common stock equal to fifty percent (50%) of the number of Deposit Shares (the "Award Shares") pursuant to the terms and restrictions of this Agreement, the Award Agreement and the Plan. Subject to the terms of this Agreement, the Award Agreement and the Plan, the Deposit Shares will be returned on the Distribution Date and the Participant's Award Shares shall become fully transferable on such date, December 28, 2004, (the three year anniversary of December 28, 2001) (the "Vesting Date"), assuming that the Deposit Shares have remained on deposit with the Company through such date, Participant remains an employee of the Company, and complies with the terms of the Award Agreement and Plan. All Deposit Shares will be returned to the Participant in the case of termination of employment. The Committee has the exclusive authority to elect to accelerate distributions and vesting. Each Participant shall have the right to designate one or more beneficiaries to receive a distribution in the event of the Participant's death by filing with the Company a Beneficiary Designation Form. The designated beneficiary or beneficiaries may be changed by a Participant at any time prior to the Participant's death by the execution and delivery of a new Beneficiary Designation Form. If no beneficiary has been designated, or if no designated beneficiary survives the Participant, distributions will be made to the Participant's estate. -2- 4. Withdrawal of Deposit Shares. The Participant may request a Deposit Share withdrawal at any time, however, such withdrawal prior to the Vesting Date will result in the forfeiture of the Award Shares. 5. Incorporation of the Plan by Reference. The Plan, as it now exists and as it may be amended hereafter, and the Award Agreement are incorporated herein and made a part of this Agreement. When used herein, the terms which are defined in the Plan shall have the meaning given them in the Plan. The Participant, or if applicable the Participant's beneficiary, shall have the only right to receive benefits determined in accordance with the Plan and this Agreement. The Committee has the exclusive authority to interpret and apply the provisions of the Plan, this Agreement, and the Award Agreement. Any interpretation of this Agreement by the Committee and any decision made by it with respect to the Agreement are final and binding on all persons. To the extent that there is any conflict between the terms of this Agreement, the Award Agreement or the Plan, the Plan shall govern. Capitalized terms used herein will have the same meaning as under the Plan, unless stated otherwise. 6. Assignment and Alienation of Benefits. The right of each Participant to any amount, benefit or payment hereunder will not, to the extent permitted by law, be subject in any manner to attachment or other legal process for the debts of that Participant; and no amount, benefit or payment will be subject to anticipation, alienation, sale, transfer, assignment or encumbrance except by will, by the laws of descent and distribution, or by a Participant election to satisfy a property settlement agreement pursuant to a divorce. 7. Waiver of Priority The Participant hereby expressly waives any priority he/she may have under any state or federal law with respect to any claims he/she may have against the Company under the Plan beyond the rights he/she would have as a general creditor of the Company. 8. Governing Law. This Agreement shall be construed under the laws of the State of Illinois. IN WITNESS WHEREOF, the Company and the Participant have caused this instrument to be executed as of the day and year first above written. PARTICIPANT CABOT MICROELECTRONICS CORPORATION By: - --------------------------- ------------------------------------ Title: ------------------------- -3- EX-10.31 4 c67408ex10-31.txt AMENDMENT #1 TO FUMED METAL OXIDE SUPPLY AGREEMENT EXHIBIT 10.31 The omitted portions indicated by brackets have been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2, promulgated under the Securities Exchange Act of 1934, as amended. AMENDMENT NO. 1 TO FUMED METAL OXIDE SUPPLY AGREEMENT (Pilot Plant Fumed Alumina) This agreement is made and executed as of December 12, 2001 by and between Cabot Corporation, a Delaware corporation ("Cabot"), and Cabot Microelectronics Corporation, a Delaware corporation ("CMC"), and supplements and amends the Fumed Metal Oxide Supply Agreement executed on January 20, 2000 (as amended hereby, the "Agreement") between Cabot and CMC. Capitalized terms used herein without definition and defined in the Agreement shall have the same meanings as defined in the Agreement. Except as explicitly amended hereby, nothing herein shall amend or modify the Agreement. RECITALS WHEREAS, CMC and Cabot are simultaneously herewith entering into a Fumed Alumina Supply Agreement (the "Unit C Agreement") as to the supply by Cabot to CMC of fumed alumina produced at Cabot's newly constructed commercial production unit at its facilities in Tuscola, Illinois; and WHEREAS, CMC and Cabot wish to amend the Agreement as to Fumed Alumina produced from the Tuscola Pilot Plant and purchased by CMC under the Agreement; NOW THEREFORE, the Parties do hereby agree as follows: 1. Section 2.3(c) of the Agreement is hereby amended to read in its entirety as follows: "(c) The maximum supply obligations set forth in Section 2.3(a) and (b) are referred herein to the "Maximum Volumes". If CMC shall request volumes of Fumed Silica in excess of the Maximum Volumes described above, Cabot shall use commercially reasonable efforts to supply such volumes ("Excess Volumes"); provided that Cabot shall not be obligated to breach its contractual obligations with other customers or to take any actions which it deems detrimental to its business, in order to supply CMC with Excess Volumes. If CMC shall order volumes of Fumed Alumina from the Tuscola Pilot Plant in excess of the Maximum Volumes described above, Cabot shall use commercially reasonable efforts to supply such volumes ("Excess FA Volumes") from the Tuscola Pilot Plant and Cabot shall first offer CMC all Fumed Alumina produced from the Tuscola Pilot Plant consistent with such Excess FA Volumes; provided that Cabot shall not be obligated to breach its contractual obligations with other -1- customers to the extent Cabot has made such arrangements consistent with the Fumed Alumina Forecasts described in Section 2.2." 2. Section 2.3 of the Agreement is hereby amended to add a new Section 2.3(d) to read in its entirety as follows: "(d) Nothwithstanding anything to the contrary, Cabot's maximum supply obligation as to Fumed Alumina set forth in Section 2.3(a) and Cabot's obligations as to Excess FA Volumes set forth in Section 2.3(c) are each subject to Cabot's obligations under the Unit C Agreement to supply Substitute Fumed Alumina (as defined therein) - that is, Cabot shall not be in breach of its obligations under Sections 2.1(a), 2.3(a) and 2.3(c) to the extent and amount it is obligated to supply Fumed Alumina from the Tuscola Pilot Plant as Substitute Fumed Alumina under the Unit C Agreement." 3. Section 2.4 of the Agreement is hereby amended to designate the current sole paragraph as Section 2.4(a) and to add the following at the end as a new Section 2.4(b): "(b) CMC shall be obligated to purchase from Cabot during each fourth calendar quarter commencing July 1 during each year of the Term, at least [ ]% of the average of the quantities of Fumed Alumina purchased under this Agreement by CMC for each of the prior 3 calendar quarters." 4. Section 3.1(c) of the Agreement is hereby amended to read in its entirety as follows: "(c) Fumed Alumina Price. The price for Fumed Alumina from the Tuscola Pilot Plant purchased under this Agreement through September 30, 2001 shall be equal to [ ] per pound. The price for Fumed Alumina from the Tuscola Pilot Plant purchased under this Agreement after September 30, 2001, and not provided by Cabot under the Unit C Agreement as Substitute Fumed Alumina (as defined in the Unit C Agreement), shall be determined as follows: (i) for the first [ ] pounds of Fumed Alumina so purchased during each of the 12 months ended September 30, 2002, September 30, 2003 and September 30, 2004, respectively, the price shall be equal to [ ] per pound; and for all amounts over [ ] pounds of Fumed Alumina so purchased during such 12 month periods, the price shall equal [ ] per pound; and (ii)for the first [ ] pounds of Fumed Alumina so purchased during the 9 months ended June 30, 2005, the price shall be equal to [ ] per pound; and for all amounts over [ ] pounds of Fumed Alumina so purchased during such 9 month period, the price shall equal [ ] per pound; It is acknowledged that Fumed Alumina (A) purchased hereunder by CMC that does not meet the warranty set forth in Section 5.1 (unless waived by CMC) and is returned to Cabot in saleable condition or (B) supplied hereunder without charge to CMC -2- as a product replacement under Section 5.2, shall not be counted in determining the amount of pounds purchased under the foregoing clauses (i) and (ii). 4. Except as amended hereby the Agreement is ratified and confirmed in all respects. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument and delivered by their respective duly authorized representatives as of the date first set forth above. CABOT CORPORATION By --------------------------------- Duly Authorized Name: Title: CABOT MICROELECTRONICS CORPORATION By --------------------------------- Duly Authorized Name: Title: -3- EX-10.32 5 c67408ex10-32.txt FUMED ALUMINA SUPPLY AGREEMENT Exhibit 10.32 The omitted portions indicated by brackets have been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2, promulgated under the Securities Exchange Act of 1934, as amended. FUMED ALUMINA SUPPLY AGREEMENT This Fumed Alumina Supply Agreement ("Agreement") is made and is effective as of this twelfth (12th) day of December, 2001 (the "Effective Date") by and between Cabot Corporation, a Delaware corporation ("Cabot") and Cabot Microelectronics Corporation, a Delaware corporation ("CMC"). Cabot and CMC hereinafter are each sometimes referred to individually as a "Party" and collectively as the "Parties." The Parties agree that except as otherwise explicitly stated herein, nothing in this Agreement amends or modifies, or is intended to amend or modify, any of the terms or conditions of, or the rights, duties or obligations of either of the Parties under, that certain Fumed Metal Oxide Supply Agreement by and between the Parties executed January 20, 2000 ("FMO Agreement"). RECITALS WHEREAS, CMC is a producer, manufacturer and supplier of slurries ("Slurries") used in chemical mechanical polishing, a polishing process used in the manufacturing of integrated circuit and other devices, and possesses certain proprietary technology for the production of such Slurries; WHEREAS, fumed alumina is a chemical used in the production of Slurries, and CMC desires to have Cabot provide CMC certain fumed alumina and Cabot desires to provide certain fumed alumina to CMC; WHEREAS, Cabot is a producer, manufacturer and supplier of fumed metal oxides, including without limitation fumed alumina, and possesses certain proprietary technology for the production of such fumed metal oxides; WHEREAS, pursuant to the FMO Agreement CMC currently purchases from Cabot fumed alumina produced at Cabot's pilot plant in Tuscola, Illinois, USA (the "Tuscola Pilot Plant"), which CMC uses in the production of Slurries; and WHEREAS, Cabot has constructed, and owns, and will operate and maintain a commercial production unit at its production facilities in Tuscola, Illinois, USA ("Tuscola Unit C") for the primary purpose of producing fumed alumina to be sold by Cabot to CMC and purchased by CMC from Cabot subject to the terms of this Agreement. NOW THEREFORE, the Parties do hereby agree as follows: CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 1 of 27 __________, __________ 1. TUSCOLA UNIT C AND TUSCOLA PILOT PLANT 1.1 Tuscola Unit C. (a) Cabot owns and has had designed and constructed, and shall operate and maintain, Tuscola Unit C which initially has been designed to produce fumed alumina ("Unit C Fumed Alumina"), all of which so produced during the Term of this Agreement will be provided by Cabot to, and, subject to CMC's orders, accepted by CMC for CMC's purchase, except as may be otherwise provided in this Agreement. (b) For the purposes of this Agreement, "InSpec Fumed Alumina" shall mean Unit C Fumed Alumina or Substitute Fumed Alumina (as defined in Section 1.3) that conforms to the specifications set forth in Section 3 and Exhibit A to this Agreement, and "OQ Fumed Alumina" shall mean all Unit C Fumed Alumina other than InSpec Fumed Alumina. Before shipment to CMC, Cabot agrees to identify and inform CMC of all Unit C Fumed Alumina that Cabot has then determined as OQ Fumed Alumina. For purposes of this Agreement, "Unit C Total Annual Design Amount" shall mean [] lbs (plus the total annual design amount of any Unit C Capacity Expansion as provided in 1.1(e) below other than a Unit C Capacity Expansion for Cabot's use as provided in clause (iii) of such section). For purposes of this Agreement, "Unit C Maximum Capacity Rate" shall mean [] lbs per month plus the maximum capacity rate of any Unit C Capacity Expansion as provided in 1.1(e) below other than a Unit C Capacity Expansion for Cabot's use as provided in clause (iii) of such section. (c) For the purposes of this Agreement, "Tuscola Unit C Production Capacity" shall mean (i) for the period ending September 30, 2002, [] lbs per year of InSpec Fumed Alumina (plus [] percent ([]%) of the total annual design amount of any Unit C Capacity Expansion as provided in 1.1(e) below other than a Unit C Capacity Expansion for Cabot's use as provided in clause (iii) of such section) and (ii) for the period beginning October 1, 2002, [] lbs per year of InSpec Fumed Alumina (plus [] percent ([]%) of the total annual design amount of any Unit C Capacity Expansion as provided in 1.1(e) below other than a Unit C Capacity Expansion for Cabot's use as provided in clause (iii) of such section), all of which so produced during the Term of this Agreement will be provided by Cabot to, and, subject to CMC's orders, accepted by, CMC for CMC's purchase, except as may be otherwise provided in this Agreement. (d) During the term of this Agreement, Cabot shall use all commercially reasonable efforts to produce InSpec Fumed Alumina in an amount no less than Tuscola Unit C Production Capacity. Notwithstanding anything to the contrary in this Agreement, Cabot agrees to use all commercially reasonable efforts so that no less than [] percent ([]%) of the Unit C Fumed Alumina that it manufactures in Tuscola Unit C will be InSpec Fumed Alumina, and no more than [] percent ([]%) of the Unit C Fumed Alumina that it manufactures in Tuscola Unit C will be OQ Fumed Alumina. If, in any given calendar month of the Term of this Agreement, less than [] percent ([]%) of the Unit C Fumed Alumina produced by Tuscola Unit C is InSpec Fumed Alumina, and such is not the direct result of Force Majeure events as described in Section 8.10 of this Agreement, or directly caused by the CMC [] (as defined in Section 1.9), as independently verified by CMC or Cabot and mutually agreed upon by the Parties, Cabot shall use all commercially reasonable efforts to return and maintain the quality of Tuscola Unit C's total monthly production of Unit C Fumed Alumina to no less than [] percent ([]%) of InSpec Fumed Alumina. CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 2 of 27 __________, __________ (e) In the event that, because of a request from CMC or otherwise, either Party desires to expand the production capacity of Tuscola Unit C (through debottlenecking, load rate increases, or otherwise) during the term of this Agreement, and upon analysis, such expansion is both possible and commercially reasonable (a "Unit C Capacity Expansion"), Cabot shall promptly notify CMC of Cabot's analysis and initial estimate of costs and schedule of such a Unit C Capacity Expansion, and CMC shall have the right to the additional Unit C Fumed Alumina resulting from such Unit C Capacity Expansion during the Term of this Agreement, or as otherwise agreed to by the parties. For any such Unit C Capacity Expansion requested by CMC, CMC shall thereafter notify Cabot, within thirty (30) days of its receipt of such Cabot notice, of CMC's decision, at its sole discretion, to proceed or not to proceed with such a Unit C Capacity Expansion, and if CMC decides to proceed with such Unit C Capacity Expansion, its agreement to include the additional Unit C Fumed Alumina resulting from such Unit C Capacity Expansion under the terms of this Agreement, and its agreement to compensate Cabot for the capital and related costs required to complete the Unit C Capacity Expansion as provided in Schedule 1, Paragraph II.3. For any such Unit C Capacity Expansion not requested by CMC, CMC shall thereafter notify Cabot, within thirty (30) days of its receipt of such Cabot notice, of CMC's election, at its sole discretion, of one of the following: (i) CMC's decision not to consent to such a Unit C Capacity Expansion; (ii) CMC's consent to proceed with such Capacity Expansion and its agreement to include the additional Unit C Fumed Alumina resulting from such Unit C Capacity Expansion under the terms of this Agreement and its agreement to compensate Cabot for the capital and related costs required to complete the Unit C Capacity Expansion as provided in Schedule 1, Paragraph II.3; or (iii) CMC's consent to such Unit C Capacity Expansion for Cabot's use, provided that Cabot does not use any additional Unit C Fumed Alumina resulting from the Unit C Capacity Expansion for a Competitive Use (as defined in this Agreement) or sell any such additional Unit C Fumed Alumina to any Competitor (as defined in this Agreement) as provided in Section 1.6, and agreement not to include the additional Unit C Fumed Alumina resulting from such a Unit C Capacity Expansion under the terms of this Agreement (in which event CMC shall not be responsible to compensate Cabot for the capital required to complete such expansion). 1.2 Source. Except as otherwise agreed to by the parties or as provided in Sections 1.3 and 1.4, all Fumed Alumina to be provided to CMC by Cabot and purchased by CMC from Cabot under this Agreement shall be produced by Cabot and only at Tuscola Unit C. 1.3 Tuscola Pilot Plant. Notwithstanding Section 1.2, if and only if in any given calendar month during the Term of this Agreement but prior to July 1, 2005: (i) Cabot at Tuscola Unit C is unable to meet CMC's supply requirements for Fumed Alumina (as defined in Section 1.7) for such month or (ii) CMC cannot meet its customers' performance requirements for Fumed Alumina using Unit C Fumed Alumina, then to the extent (and only to the extent) of any FA Shortfall (as defined in Section 1.4), Fumed Alumina to be provided to CMC under this Agreement shall be produced by Cabot at the Tuscola Pilot Plant (the "Substitute Fumed Alumina") and the terms of this Agreement shall govern the purchase and sale of any such Substitute Fumed Alumina, including without limitation the provisions of Section 5 and Schedule 1, Paragraph I.2. For purposes of the foregoing sentence, unless expressly waived in writing by CMC, only Substitute Fumed Alumina that is InSpec Fumed Alumina shall be be used to cover any FA Shortfall. For purposes of Section 1.4, unless expressly waived in writing by CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 3 of 27 __________, __________ CMC, only Substitute Fumed Alumina that is InSpec Fumed Alumina shall be used in calculating the Total FA Shortfall and the Total Annual FA Shortfall (as each is defined in Section 1.4). Except to the extent of any Excess OQ Alumina as provided in Section 3.3(b), the price of Substitute Fumed Alumina produced at the Tuscola Pilot Plant and supplied by Cabot to CMC to cover any FA Shortfall shall be determined by using the Variable Costs Rate (as set forth in Schedule 1, Paragraph I.2). The price of Fumed Alumina produced at the Tuscola Pilot Plant and supplied by Cabot to CMC, prior to July 1, 2005, other than Substitute Fumed Alumina, shall be the then prevailing price of Fumed Alumina from the Tuscola Pilot Plant under the FMO Agreement as then in effect at the time of sale and shall be provided under the terms of the FMO Agreement. Substitute Fumed Alumina supplied pursuant to this Agreement shall be limited only to the amount of Fumed Alumina reasonably needed by CMC to fill such customers' orders or supply requirements and all other Fumed Alumina shall be produced by Tuscola Unit C. For the purposes of this Agreement, all Unit C Fumed Alumina produced at Tuscola Unit C as well as any Substitute Fumed Alumina produced at the Tuscola Pilot Plant pursuant to this Section 1.3 and this Agreement shall be included within the definition of "Fumed Alumina". If, by June 30, 2005, Cabot and CMC do not have an agreement for supply of Fumed Alumina from a Cabot unit other than Tuscola Unit C or the Tuscola Pilot Plant, or CMC is unable to qualify with its customers Fumed Alumina from a Cabot unit other than Tuscola Unit C or the Tuscola Pilot Plant, then subsequent to June 30, 2005 through the termination date of this Agreement, to the extent (and only to the extent) of any FA Shortfall, Cabot will supply to CMC Substitute Fumed Alumina under the terms and conditions of this Agreement, including the Variable Cost Rate price referenced above, subject to the following conditions: CMC will reimburse Cabot for expenditures for only the actual replacement of process equipment and physical infrastructure in the Tuscola Pilot Plant that is not shared with other Cabot units ("Tuscola Pilot Plant Fumed Alumina Process Equipment"), provided that such Tuscola Pilot Plant Fumed Alumina Process Equipment is purchased between July 1, 2005 and the termination date of this Agreement, and Fumed Alumina is not being produced by Cabot in the Tuscola Pilot Plant for other Cabot customers at the time of Cabot's expenditure for Tuscola Pilot Plant Fumed Alumina Process Equipment; provided however, that (i) in the event Cabot produces Fumed Alumina in the Tuscola Pilot Plant for other Cabot customers or Cabot's internal use within the twelve (12) months following such Cabot expenditure, Cabot shall reimburse CMC for CMC's reimbursement under this Section, and, (ii) CMC's obligation to reimburse Cabot for expenditures for only the actual replacement of Tuscola Pilot Plant Fumed Alumina Process Equipment between July 1, 2005 and the termination date of this Agreement will not exceed the expenditures made by Cabot for only the actual replacement of Tuscola Pilot Plant Fumed Alumina Process Equipment between June 1, 2000 and June 30, 2005. 1.4 Third-Party Manufacture; Certain Shortfalls. (a) Notwithstanding Section 1.2, Cabot shall take all commercially reasonable efforts, except as limited below, to assist CMC in securing supply of InSpec Fumed Alumina from a third party (subject in all events to Cabot's intellectual property rights) if and only if: (i) Tuscola Unit C and the Tuscola Pilot Plant are both unable and/or have failed to meet CMC's supply requirements of Unit C Fumed Alumina for [] (except to the extent directly caused by the CMC [] (as defined in Section 1.9), as independently verified by CMC or Cabot and mutually agreed upon by the Parties); or (ii) in the case of an event described in Section 8.10 (entitled "Force Majeure") and as a result of such Force Majeure events Cabot will not likely be able to meet CMC's supply requirements for each of the next CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 4 of 27 __________, __________ three (3) consecutive calendar months; provided, however, that for both clauses (i) and (ii), in the case of Tuscola Unit C, such requirements for each such months did not or do not exceed [] of the Tuscola Unit C Production Capacity and, in the case of the Tuscola Pilot Plant, such requirements do not exceed Cabot's Maximum Supply Obligation (as defined in the FMO Agreement). In any such circumstances, Cabot shall not be responsible or required to take any such effort as to amounts needed by CMC in excess of the Total FA Shortfall (as defined below). For purposes of this Agreement the "FA Shortfall" for a calendar month shall equal the difference between (i) the lesser of (A) [] ([]) of Tuscola Unit C Production Capacity and (B) the amount of Unit C Fumed Alumina ordered by CMC for such calendar month minus (ii) the amount of InSpec Fumed Alumina available from Tuscola Unit C (if >[]). (b) In the event CMC experiences a Total FA Shortfall (as defined below) for [] (but not for reasons of Force Majeure events or because of CMC [], as independently verified by CMC or Cabot and mutually agreed upon by the Parties), CMC's monthly payments for Fixed Costs and quarterly payments for Initial Capital Costs, Replacement Capital Costs and Additional Capital Costs ("Quarterly Payments") shall be pro-rated for the Total FA Shortfall as follows: Monthly Fixed Costs payments during the Total FA Shortfall shall equal []: where the Total FA Shortfall for any calendar month is the difference between the lesser of ([] of the Tuscola Unit C Production Capacity or the amount of Unit C Fumed Alumina ordered by CMC for said month) and the InSpec Fumed Alumina available from Tuscola Unit C (plus any Substitute Fumed Alumina supplied by Cabot) for said month (provided that the Total FA Shortfall cannot be less than []). Quarterly Payments during the FA Shortfall shall equal []: where the Total FA Shortfall for any calendar quarter is the difference between the lesser of ([] of the Tuscola Unit C Production Capacity or the amount of Unit C Fumed Alumina ordered by CMC for said quarter) and InSpec Fumed Alumina available from Tuscola Unit C (plus any Substitute Fumed Alumina supplied by Cabot) for said quarter (provided that the Total FA Shortfall cannot be less than []). (c) For purposes of this Section 1.4(c) and Schedule 1, Paragraph IV, a "Contract Year" shall be defined as October 1 through the following September 30 of the Term so that the initial Contract Year shall be the 12 month period ending September 30, 2002. For purposes of this Section 1.4(c), the "Total Annual FA Shortfall" for a particular Contract Year shall equal (x) the difference between the lesser of (the Tuscola Unit C Production Capacity for such Contract Year or the amount of Unit C Fumed Alumina ordered by CMC for said Contract Year) and the InSpec Fumed Alumina available from Tuscola Unit C (plus any Substitute Fumed Alumina supplied by Cabot) for said Contract Year plus (y) any Total FA Shortfall during such Contract Year for which a pro-ration has been or is being made under Section 1.4(b) above (provided that the Total Annual FA Shortfall cannot be less than []). For purposes of determining the Total Annual FA Shortfall for the initial Contract Year (the 12 months ended September 30, 2002), (i) the amount of Unit C Fumed Alumina (plus any Substitute Fumed Alumina) accepted by CMC from Cabot between October 1, 2001 and the Effective Date shall be deemed Unit C Fumed CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 5 of 27 __________, __________ Alumina ordered by CMC in the initial Contract Year and shall be deemed InSpec Fumed Alumina available from Tuscola Unit C for said initial Contract Year. In the event there exists a Total Annual FA Shortfall at the end of any full Contract Year (but not for reasons of Force Majeure events, or because of CMC [] as independently verified by CMC or Cabot and mutually agreed upon by the Parties), Cabot shall, subject to the limitations set forth herein, [], credit CMC's account hereunder within thirty (30) days of the end of such Contract Year an amount determined as follows: the lesser of [] Where: [] ---------------------- # but not for reasons of Force Majeure events nor because of CMC [] (as independently verified by CMC or Cabot and mutually agreed upon by the Parties). 1.5 Notice. Cabot agrees to notify CMC, in writing, within five business days of Cabot becoming aware of any actual or likely inability to supply, potential shortages or interruptions of the supply of Unit C Fumed Alumina to CMC. 1.6 Production and Permitted Production from Tuscola Unit C. (a) Except as provided in this Section 1.6 (that is, during Permitted Production), during the Term of this Agreement, all Unit C Fumed Alumina shall be supplied to CMC. This shall include all Unit C Fumed Alumina produced as a result of capacity expansions to Tuscola Unit C as provided in Section 1.1(e). (b) Notwithstanding the foregoing, if the Parties agree in writing, Cabot may produce Unit C Fumed Alumina or other fumed alumina at Tuscola Unit C, or any Cabot product based on Fumed Alumina and produced there, (collectively or each, "Non-CMC Unit C Fumed Alumina") which need not be made available by Cabot to CMC, provided it is for: (i) the internal use of such Non-CMC Unit C Fumed Alumina by Cabot or its controlled subsidiaries, provided such internal use does not constitute a Competitive Use; or (ii) for sale by Cabot to a third party, provided that Cabot knows (or should know) that the ultimate use is not a Competitive Use and provided Cabot has complied with Section 1.6(e) below (as to Competitors) (each a "Permitted Production"). As used herein, (x) "Competitor" shall mean any party that produces any product that competes with any chemical mechanical polishing consumable product produced by CMC during the term of this Agreement and that it is listed on Exhibit E attached, which list may be updated periodically throughout the Term of this Agreement by CMC by written notice to Cabot and (y) "Competitive Use" shall mean the production of any product that competes with any chemical mechanical polishing consumable product produced by CMC during the Term of this Agreement. Cabot also agrees that it will not use Fumed Alumina produced at the Tuscola Pilot Plant for a Competitive Use while Cabot is obligated to provide to CMC Fumed Alumina produced at the Tuscola Pilot Plant (i) under this Agreement or (ii) under the FMO Agreement, except subsequent to a change in control of CMC. (c) In the event that CMC or Cabot becomes aware of any third party using Non-CMC Unit C Fumed Alumina for any Competitive Use or any third party reselling any Non- CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 6 of 27 __________, __________ CMC Unit C Fumed Alumina to a Competitor, such Party shall notify the other Party immediately of such use or resale. In such an event, Cabot shall not continue to sell or deliver any Non-CMC Unit C Fumed Alumina to such third party. (d) CMC will not be required to purchase from Cabot, and Cabot will not be required to sell to CMC, any Non-CMC Unit C Fumed Alumina produced during a Permitted Production (including any Non-CMC Unit C Fumed Alumina produced during the transition between the production of CMC Unit C Fumed Alumina and Non-CMC Fumed Alumina) and Non-CMC Unit C Fumed Alumina produced during a Permitted Production will be stored at Cabot's facility, and CMC will not be responsible for any Variable Costs for any Permitted Production. Cabot shall be responsible for all Variable Costs (as defined in Schedule 1 attached hereto and made a part hereof) for each Permitted Production. As reimbursement to CMC for Fixed Costs (as defined in Schedule I) for each Permitted Production, Cabot will pay to CMC, [] percent ([]%) of the Fixed Costs for Tuscola Unit C, calculated during the period of such Permitted Production. As reimbursement for Capital Costs (as defined in Schedule 1) for each Permitted Production, Cabot will pay to CMC [] percent ([]%) of the Initial Capital Costs calculated during the period of such Permitted Production. (e) Cabot may sell Non-CMC Unit C Fumed Alumina to the third parties listed in Exhibit E, which list may be updated periodically throughout the Term of this Agreement by CMC by written notice to Cabot, to this Agreement only for use by the divisions of such third parties listed in Exhibit E only as long as Cabot has verified (to be evidenced by Cabot's receipt of a representation letter or similar writing to such effect, a copy of which Cabot will provide contemporaneously to CMC) that such Non-CMC Unit C Fumed Alumina will not be used for any Competitive Use. 1.7 During the Term of this Agreement, unless stated otherwise in this Agreement, CMC shall be obligated to purchase from Cabot all fumed alumina of the type set forth on Exhibit A hereto ("Fumed Alumina") necessary to produce the products produced by CMC on or before the Effective Date of this Agreement, but only up to the total of [] as of the Effective Date of this Agreement. Notwithstanding this obligation, CMC shall have the right to obtain Fumed Alumina from any third party in the event that Cabot fails to or is unwilling to supply CMC with its requirements for Fumed Alumina for any reason determined in good faith by CMC (including quality, whether or not with respect to InSpec Fumed Alumina, supply constraints, or a request by CMC to change a specification for Fumed Alumina that Cabot is unable or unwilling to meet), subject to CMC's obligations under Section 8.12 (entitled "Confidentiality") and to all and any intellectual property rights Cabot may have. In addition, CMC shall not be obligated to purchase from Cabot any Fumed Alumina with respect to products developed and produced by CMC after the Effective Date of this Agreement. This Section 1.7 is the exclusive statement of CMC's obligation in this regard with respect to Fumed Alumina, whether from Tuscola Unit C or the Tuscola Pilot Plant, and replaces and governs CMC's obligations under Section 2.5 of the FMO Agreement to purchase Fumed Alumina from Cabot. 1.8 Resale of Unit C Fumed Alumina. The parties intend and agree that Unit C Fumed Alumina purchased by CMC under this Agreement is purchased primarily for the use by CMC and its subsidiaries and affiliates in producing their products, and CMC does not intend to CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 7 of 27 __________, __________ resell Unit C Fumed Alumina or Substitute Fumed Alumina purchased from Cabot under this Agreement, provided, however, that in the event CMC in good faith determines that certain Unit C Fumed Alumina or Substitute Fumed Alumina is not fit for CMC's use, CMC shall have the right to resell such Unit C Fumed Alumina or Substitute Fumed Alumina, provided that CMC first offers Cabot the option to purchase such Unit C Fumed Alumina or Substitute Fumed Alumina according to the following: The purchase price to be paid by Cabot for any such Unit C Fumed Alumina or Substitute Fumed Alumina purchased by Cabot under this Section 1.8 shall be the sum of: (i) the amount of the Variable Costs (as defined in Schedule 1, Paragraph I.2) for such Unit C Fumed Alumina or Substitute Fumed Alumina (determined by the Variable Costs previously paid by CMC to Cabot for such Unit C Fumed Alumina or Substitute Fumed Alumina); (ii) [] percent ([]%) of the Fixed Costs (as defined in Schedule 1, Paragraph I.1) for Tuscola Unit C, for the month in which such Unit C Fumed Alumina or Substitute Fumed Alumina was produced times (x) the amount in pounds of such Unit C Fumed Alumina or Substitute Fumed Alumina purchased by Cabot hereunder divided by (y) [] of the Unit C Total Annual Design Amount unless Cabot supplies less than [] of the Tuscola Unit C Production Capacity for such month and CMC has ordered more than [] of the Tuscola Unit C Production Capacity for such month, in which case such amount will be divided by (z) the lesser of ([] of the Unit C Total Annual Design Amount or the Unit C Fumed Alumina and Substitute Fumed Alumina supplied by Cabot during such month); (iii) [] per pound ($[]/lb.) of the amount so purchased by Cabot (in respect of the Testing Costs described in Schedule 1, Paragraph I.3) and (iv) [] percent ([]%) of the Initial Capital Costs (as defined in Schedule 1, Paragraph II.1) for the quarter in which such Unit C Fumed Alumina or Substitute Fumed Alumina was produced times (x) the amount in pounds of such Unit C Fumed Alumina or Substitute Fumed Alumina purchased by Cabot hereunder divided by (y) [] of the Unit C Total Annual Design Amount unless Cabot supplies less than [] of the Tuscola Unit C Production Capacity for such quarter and CMC has ordered more than [] of the Tuscola Unit C Production Capacity for such quarter, in which case such amount will be divided by (z) the lesser of ([] of the Unit C Total Annual Design Amount or the Unit C Fumed Alumina and Substitute Fumed Alumina supplied by Cabot during such quarter). Cabot may use any such Unit C Fumed Alumina or Substitute Fumed Alumina purchased by Cabot from CMC under this Section 1.8, provided Cabot knows (or should know) that the ultimate use is not a Competitive Use and provided that Cabot has complied with Section 1.6 (as to Competitors). Cabot may sell any such Unit C Fumed Alumina or Substitute Fumed Alumina purchased by Cabot under this Section 1.8 to any third party, provided Cabot knows (or should know) that the ultimate use is not a Competitive Use and provided that Cabot has complied with Section 1.6 (as to Competitor). All such Unit C Fumed Alumina or Substitute Fumed Alumina resold to Cabot under this Section 1.8 shall be F.O.B. CMC's primary fumed alumina warehouse. Cabot must exercise such option to purchase such Unit C Fumed Alumina from CMC pursuant to the terms of this Section 1.8 by notifying CMC in writing within ten (10) days of being offered the first option to purchase any such Unit C Fumed Alumina from CMC under this Section 1.8; if Cabot has not so exercised its option under this Section, then CMC may resell such Unit C Fumed Alumina or Substitute Fumed Alumina to third parties for applications other than Inkjet Media Coatings. 1.9 []. In the event CMC desires to purchase from its own source of, and to provide Cabot with, [] ("CMC []") for use in Tuscola Unit C for the production of Unit C Fumed Alumina to be purchased by CMC under this Agreement, the following shall apply: (i) only [] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 8 of 27 __________, __________ which meets Cabot's specifications for [] as set forth in Exhibit B to this Agreement (as amended from time to time by written notice from Cabot and mutual agreement by CMC) to reflect the specifications Cabot uses for its purchases of [] for use in Tuscola Unit C (except for that [] used for Permitted Production by Cabot); (ii) written notice of such intended supply and use is given by CMC to Cabot not less than ninety (90) days from the estimated date of supply; and (iii) prior to any use of CMC [] in commercial production, Cabot and CMC shall have conducted at least one trial of such CMC [] so that it can be qualified as an appropriate source for the production of Unit C Fumed Alumina.Cabot shall use such CMC [] so provided for such purpose. Cabot shall not be obligated to pay CMC for any CMC []. CMC will not be obligated to pay Cabot for any CMC [] supplied by CMC for the manufacture of Unit C Fumed Alumina and costs for such CMC [], and the costs for Cabot [] for which the CMC [] is being substituted, will not be included in the Variable Costs for which CMC is responsible under Schedule 1. 1.10 Operation Date. The first date of Tuscola Unit C's continuous operation at Tuscola Unit C Production Capacity (defined as one week of operation during which Tuscola Unit C operates at an annualized production rate of no less than [] lbs per year of InSpec Fumed Alumina) shall be referred to herein as the "Operation Date." The Parties both agree that the Operation Date occurred on September 21, 2001. 1.11 Risk of Loss and Insurance. Cabot is and shall be the sole owner of Tuscola Unit C and any Tuscola Unit C Capacity Expansions. Risk of damage or loss for whatever reason for Tuscola Unit C and any Initial Capital Asset, Replacement Capital Asset or Additional Capital Asset (as each are defined in Schedule 1, collectively "Capital Assets") shall be borne by Cabot. During the Term of this Agreement, Cabot shall maintain the following levels of the following types of insurance: A. Workers' Compensation and Employers' Liability 1. Coverage "A" - Statutory State of Illinois 2. Coverage "B" - Employers' Liability Limit $500,000 each person, $1,000,000 each accident B. Comprehensive General Liability - One or more policies with aggregate limits of liability of $2,000,000 Combined Single Limit Per Occurrence. 2. SALE AND PURCHASE 2.1 Sale and Purchase. Pursuant to and subject to the terms and conditions of this Agreement, Cabot will manufacture, produce, deliver and sell to CMC such quantities of Unit C Fumed Alumina as CMC may order, and will be obligated to fill CMC's orders, in accordance with this Agreement. Subject to and pursuant to the terms and conditions of this Agreement, CMC agrees to purchase and accept all Unit C Fumed Alumina produced by Cabot pursuant to orders from CMC under this Agreement. Except as specifically provided hereunder, or in the case of a Permitted Production, Cabot agrees to manufacture, produce, deliver and sell Unit C Fumed Alumina only to CMC. CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 9 of 27 __________, __________ 2.2 Quantity. (a) Forecasts. In order for Cabot to utilize Tuscola Unit C efficiently, CMC shall provide to Cabot non-binding forecasts of CMC's projected volume of needed Unit C Fumed Alumina from Tuscola Unit C, on which Cabot will base its preparations for the operations of Tuscola Unit C. Such forecasts will be provided in the manner and form required under the FMO Agreement. (b) Good Faith. CMC's forecasts under this Agreement shall reflect its good faith expectations of its requirements of Unit C Fumed Alumina, and the Unit C Maximum Capacity Rate, and CMC shall act in a commercially reasonable manner to schedule orders consistent with its forecasts for Unit C Fumed Alumina and to allow Permitted Production, if possible. 2.3 Orders. Orders for Unit C Fumed Alumina shall be issued by CMC from time to time, and shall specify the date(s) the Unit C Fumed Alumina is to be delivered to CMC, which date shall not be less than ten (10) business days prior to the date the order is received by Cabot, and shall be consistent with the Tuscola Unit C Production Capacity and the Unit C Maximum Capacity Rate. 2.4 Delivery; Packaging; Title and Risk of Loss. (a) Cabot will package all Unit C Fumed Alumina and Substitute Fumed Alumina in accordance with the shipping requirements set forth in Exhibit A to this Agreement. All Unit C Fumed Alumina and Substitute Fumed Alumina delivered to CMC shall be F.O.B. Cabot's point of shipment. CMC shall be responsible for all transportation costs (and all warehousing costs for storage at CMC's request) and title and risk of loss or damage shall pass to CMC upon delivery to carrier. (b) Cabot agrees to take commercially reasonable efforts to deliver Unit C Fumed Alumina and Substitute Fumed Alumina within mutually agreed upon tolerances of applicable delivery dates, but shall deliver Unit C Fumed Alumina and Substitute Fumed Alumina no later than the delivery date requested by CMC on each order consistent with Section 2.3. 3. TECHNICAL SPECIFICATIONS 3.1 Specifications. Except as otherwise provided in this Agreement, Cabot shall comply with the manufacturing, packaging, handling and shipping requirements for Unit C Fumed Alumina and Substitute Fumed Alumina, whether InSpec Fumed Alumina or OQ Fumed Alumina (with the exception of manufacturing requirements for OQ Fumed Alumina), as set forth in Exhibit A attached, and that the InSpec Fumed Alumina it provides will meet the specifications set forth in Exhibit A. Cabot shall provide to CMC all certificates and other documents as set forth in Exhibit A in a timely manner. 3.2 Testing. Cabot agrees to comply with the sampling and testing requirements set forth in Exhibit A to this Agreement. CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 10 of 27 __________, __________ 3.3 Nonconforming Product. (a) Notice. Upon delivery of each shipment of Unit C Fumed Alumina to CMC, Cabot must give notice to CMC of any OQ Fumed Alumina delivered in such shipment. (b) Replacement. Upon receipt by CMC of a notice of OQ Fumed Alumina from Cabot, at CMC's request, Cabot shall provide to CMC InSpec Fumed Alumina as a replacement to the OQ Fumed Alumina in accordance with this Agreement. To the extent an FA Shortfall is caused by Cabot producing OQ Fumed Alumina in excess of [] percent ([]%) for calendar months through September 30, 2002 and in excess of [] ([]%) for calendar months beginning October 1, 2002, of the Unit C Fumed Alumina that has been manufactured for such period (but not for reasons of Force Majeure events or because of CMC [], as independently verified by CMC or Cabot and mutually agreed upon by the Parties), then Cabot will provide CMC with an amount of Substitute Fumed Alumina equal to the Excess OQ Alumina produced at no cost to CMC. CMC shall make available to Cabot an equivalent amount of OQ Fumed Alumina at no cost to Cabot. "Excess OQ Alumina" is defined as (i) the amount of OQ Fumed Alumina produced during the month (but not for reasons of Force Majeure events or because of CMC [], as independently verified by CMC or Cabot and mutually agreed upon by the Parties) minus (ii) (A) [] for calendar month through September 30, 2002 and [] for calendar months beginning October, 1, 2002 times (B) the lesser of (x) CMC's orders for the month or (y) [] of the Tuscola Unit C Production Capacity (provided that the amount of Excess OQ Alumina can not be less than []). 3.4 Material Safety Data Sheets. Cabot agrees to label Unit C Fumed Alumina as provided by applicable law and to provide CMC with current copies of Material Safety Data Sheets ("MSDS") for the Unit C Fumed Alumina. CMC agrees to provide its employees and contractors who store, handle or are exposed to the Unit C Fumed Alumina with copies and/or access to such MSDS. 4. PRICES AND PAYMENTS 4.1 Price. CMC shall pay to Cabot the quarterly and monthly payments and fees set forth on Schedule 1, as adjusted from time to time. CMC shall not owe to Cabot and shall not be responsible for payment of any costs except as specified in Schedule 1. Other than the amounts specified in Schedule 1, CMC shall not be obligated to make any payments, expenditures or reimbursements to Cabot under this Agreement for Unit C Fumed Alumina, other than the amounts under Section 2.4, 4.4, and 6.1(b). 4.2 Invoicing. Monthly and quarterly invoices from Cabot will be delivered to CMC no later than 15 days prior to the date that they become due, and will include the following itemized detail, consistent with those terms included in Schedule 1: [] 4.3 Method of Payment. Payments shall be made by CMC to Cabot according to the schedule below commencing for the calendar month following the month in which the Operation CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 11 of 27 __________, __________ Date occurs (that is, October 2001) and for the quarter-ended for the quarter following the quarter in which the Operation Date occurs (that is, for the quarter beginning October 1, 2001). Fixed Costs and Variable Costs shall be pro-rated for the calendar month in which the Operation Date occurs. Such payments, as well as any payments Cabot is obligated to make to CMC under this Agreement, shall be made by check, wire transfer or, in the case of payment by Cabot, credit in readily available same day or next day funds denominated in United States dollars. Payments will not be made by CMC to Cabot without receipt of invoices with the itemized detail required by Section 4.2. If payment is to be made by wire transfer, the receiving party shall provide the other with wire transfer instructions. [] 4.4 Taxes, Charges, & Duties. All applicable sales and other taxes and other charges such as duties, customs, tariffs, imports and government imposed surcharges, and freight (if applicable) that are directly attributable to CMC as a result of the transactions specified under this Agreement shall be for the account of CMC and shall be stated separately on Cabot's invoices to CMC. CMC shall not be responsible for payment of any interest or penalties in connection with said taxes not directly caused by CMC, and CMC has the right, but not the obligation, to protest the validity or amount of any tax. The foregoing notwithstanding, CMC shall not be responsible for taxes not directly related to the transactions specified under this Agreement (including but not limited to Cabot's income, franchise or property taxes) or other taxes not directly related to the Unit C Fumed Alumina, unless specified in Schedule 1. CMC shall not be separately responsible, and Cabot will not separately charge CMC for, taxes and other charges that are specified as Fixed or other Costs in Schedule 1 for which CMC is responsible under this Agreement. 5. LIMITED WARRANTIES AND REMEDIES; PATENT INDEMNIFICATION 5.1 Warranties as to Unit C Fumed Alumina. Cabot hereby represents and warrants to CMC that, when shipped to CMC, the InSpec Fumed Alumina, whether Unit C Fumed Alumina or Substitute Fumed Alumina, will conform in all respects to the specifications then in effect and as then set forth in the materials specified in Exhibit A of this Agreement. Notwithstanding anything to the contrary, Cabot makes no representation or warranty as to OQ Fumed Alumina, which is sold "AS IS". CABOT MAKES NO OTHER REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER MATTER WITH RESPECT TO ANY UNIT C FUMED ALUMINA OR SUBSTITUTE FUMED ALUMINA, WHETHER USED ALONE OR IN COMBINATION WITH OTHER SUBSTANCES, EVEN IF THE PURPOSES OR USES OF SUCH UNIT C FUMED ALUMINA OR SUBSTITUTE FUMED ALUMINA ARE KNOWN BY CABOT. Cabot also represents and warrants that such Fumed Alumina delivered pursuant to this Agreement is free and clear of all liens, claims and encumbrances and is conveyed with good title to CMC. 5.2 Remedies. EXCEPT IN RESPECT OF OBLIGATIONS UNDER SECTION 8.12 AND EXCEPT TO THE EXTENT RESULTING FROM FRAUD, GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT, IN NO EVENT SHALL EITHER PARTY BE CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 12 of 27 __________, __________ RESPONSIBLE OR LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS OR LOSS OF OPPORTUNITIES, ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 5.3 Patent Infringement. (a) Subject to Section 5.2, Cabot shall defend, indemnify and hold CMC, its officers, directors, employees, successors and permitted assigns (collectively, the "CMC Indemnified Parties") harmless from and against any damages, liabilities, fines, penalties, costs and expenses (including reasonable attorneys' fees) incurred by the CMC Indemnified Parties in the defense of any suit or legal proceeding against the CMC Indemnified Parties, insofar as the same are based on a claim that Unit C Fumed Alumina or Substitute Fumed Alumina furnished under this Agreement, except as excluded below, in itself constitutes an infringement of any United States or European patent, provided that the CMC Indemnified Parties have given Cabot (A) prompt written notice of all facts which it knows or should know that might be the basis of such an infringement claim and (B) prompt written notice of any such infringement claim and the institution of such suit or proceeding, and that the CMC Indemnified Parties provide Cabot with all necessary authority, information, and reasonable assistance to enable Cabot to control, settle or defend the same at Cabot's option. In the event Cabot is so responsible under this Section 5.3(a), the Parties agree that: (1) Cabot and CMC shall work together to discuss viable and commercially reasonable alternatives for assuring continued supply to CMC of Unit C Fumed Alumina or Substitute Fumed Alumina; and (2) Cabot and CMC shall mutually agree, at Cabot's expense, to have Cabot take one or more (in parallel or sequentially) of the following options: (x) procure for Cabot or CMC, as the case may be, the right to continue using Unit C Fumed Alumina or Substitute Fumed Alumina (in the event that the Parties determine it is more practical for CMC to obtain such right, at Cabot's expense, then CMC will cooperate in doing so); (y) modify the same so that it becomes noninfringing; or (z) replace it with noninfringing Fumed Alumina. In the event that Cabot is unable to achieve either alternative (x), (y) or (z), Cabot may terminate this Agreement without further liability to CMC (in which case CMC shall not be liable for the Remaining Capital Costs as defined in Section 6.1 or any other costs or amounts, other than for Schedule 1 payments through the date of such termination). This Section 5.3 states Cabot's entire obligation and liability with respect to intellectual property infringement claims. Notwithstanding the foregoing, Cabot does not assume any obligation or liability with respect to (i) any use of products by CMC or its affiliates or their customers (or other CMC Indemnified Party), including without limitation use of products alone or in combination with other substances or components or (ii) products furnished, or methods used by Cabot, in accordance with specifications or instructions furnished by or prescribed by CMC. (b) If Cabot is enjoined from supplying Unit C Fumed Alumina or Substitute Fumed Alumina, or CMC is enjoined from purchasing or using Unit C Fumed Alumina or Substitute Fumed Alumina, or if Cabot determines in good faith that it is unable or unwilling to supply Unit C Fumed Alumina or Substitute Fumed Alumina because such Fumed Alumina or its use may infringe a patent or constitute a misappropriation of a trade secret, then Cabot shall have the right to suspend supplying the affected Fumed Alumina to CMC without incurring any liability under this Agreement. In the event that (i) such injunction results from a claim for which Cabot is responsible under Section 5.3(a) or (ii) such determination relates to an infringement or possible infringement for which CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 13 of 27 __________, __________ Cabot is responsible under Section 5.3(a), then the Parties agree that: (1) Cabot and CMC shall work together to discuss viable and commercially reasonable alternatives for assuring continued supply to CMC of Unit C Fumed Alumina or Substitute Fumed Alumina; and (2) Cabot and CMC shall mutually agree, at Cabot's expense, to have Cabot take one or more (in parallel or sequentially) of the following options: (x) procure for Cabot or CMC, as the case may be, the right to continue using Unit C Fumed Alumina or Substitute Fumed Alumina (in the event that the Parties determine it is more practical for CMC to obtain such right, at Cabot's expense, then CMC will cooperate in doing so ; (y) modify the same so that it becomes noninfringing; or (z) replace it with noninfringing Fumed Alumina. In the event that Cabot is unable to achieve either alternative (x), (y) or (z), Cabot may suspend supplying Unit C Fumed Alumina or Substitute Fumed Alumina to CMC or terminate this Agreement without further liability to CMC (in which case CMC shall not be liable for the Remaining Capital Costs as defined in Section 6.1 or any other costs or amounts, other than for Schedule 1 payments through the date of such termination). (c) Subject to Section 5.2, CMC shall defend, indemnify and hold Cabot, its officers, directors, employees, successors and permitted assigns (collectively, the "Cabot Indemnified Parties") harmless from and against any damages, liabilities, fines, penalties, costs and expenses (including reasonable attorneys' fees) incurred by the Cabot Indemnified Parties in the defense of any suit or legal proceeding against the Cabot Indemnified Parties insofar as the same are based on claim of infringement or alleged infringement of any United States or European Patent with respect to (i) any use of Unit C Fumed Alumina or Substitute Fumed Alumina by CMC or its affiliates or their customers (or other CMC Indemnified Party), including without limitation use of Unit C Fumed Alumina or Substitute Fumed Alumina alone or in combination with other substances or components or (ii) Unit C Fumed Alumina or Substitute Fumed Alumina furnished, or methods used by Cabot, in accordance with specifications or instructions furnished by or prescribed by CMC, provided that the Cabot Indemnified Parties have given CMC (A) prompt written notice of all facts which it knows or should know that might be the basis of such an infringement claim and (B) prompt written notice of any such infringement claim and the institution of such suit or proceeding, and that the Cabot Indemnified Parties provide CMC with all necessary authority, information, and reasonable assistance to enable CMC to control, settle or defend the same at CMC's option. This Section 5.3 states CMC's entire obligation and liability with respect to intellectual property infringement claims. 6. TERM AND TERMINATION 6.1 Term. (a) This Agreement shall be effective as of the Effective Date and shall continue for a period of five (5) years from such date ("Initial Term"). Thereafter, CMC may renew this Agreement for an additional five (5) year period ("Renewal Term") as provided in paragraph (b) of this Section 6.1. Unless terminated earlier as provided in Section 6.2, the "Term" shall mean the Initial Term and, if applicable, the Renewal Term. (b) No less than twelve (12) months prior to the end of the Initial Term, CMC will notify Cabot in writing of either its election to renew this Agreement or its election not to renew this Agreement as of the end of the Initial Term. Cabot will confirm to CMC in writing within ten (10) days following the twelve (12) months prior to the end of the Initial Term its understanding of CMC's election to renew or not to renew this CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 14 of 27 __________, __________ Agreement, or alternatively, of CMC's failure to provide Cabot with notice of its election to renew or not to renew this Agreement. Failure by CMC to notify Cabot in writing of its election to renew this Agreement no later than eleven (11) months prior to the end of the Initial Term, shall be deemed an election by CMC not to renew this Agreement, provided that Cabot has given CMC the notice set forth in the preceding sentence. In the event that CMC does not elect to renew this Agreement after its Initial Term, CMC will pay to Cabot the Remaining Capital Costs which shall be due and payable within ninety (90) days after the last day of the Initial Term. CMC will only be responsible for payment of the Remaining Capital Costs to Cabot in the event that this Agreement terminates upon expiration of the Initial Term. As used herein, "Remaining Capital Costs" shall mean the present value of the remaining twenty (20) quarterly payments for Initial Capital Costs, discounted at the quarterly rate of []% and calculated at the end of the Initial Term, plus any unreimbursed Replacement Capital Costs and any unreimbursed Additional Capital Costs (as defined on Schedule 1, Paragraph II.3) (c) In the event that this Agreement terminates upon expiration of the Initial Term under this Section 6.1, and Cabot operates Tuscola Unit C for any purpose and at any time during the period of three (3) years following such termination of this Agreement, Cabot will reimburse CMC for the Initial Capital Costs according to the formula below, beginning with the first quarter of such Cabot production on Tuscola Unit C and ending no later than the tenth anniversary of the end of the Initial Term: Quarterly Reimbursement = [] Where: [] Cabot shall make such Quarterly Reimbursement payment to CMC within thirty (30) days of the end of the applicable quarter. To the extent any sums under this Agreement are due and owing by CMC to Cabot following this Agreement's termination, Cabot may deduct such sums from any Quarterly Reimbursement it owes to CMC hereunder. (d) Except in the event this Agreement terminates upon expiration of the Renewal Term, in the event that this Agreement terminates for any reason other than upon expiration of the Initial Term under Section 6.1 (which is addressed in 6.1 (c) above) and Cabot operates Tuscola Unit C for any purpose and at any time during the period of three (3) years following such termination of this Agreement, Cabot will reimburse CMC for Initial Capital Costs according to the formula below, beginning with the first quarter of such Cabot production on Tuscola Unit C and ending on either (I) the 40th quarter after the first quarter of such Cabot production or (II) the fifteenth anniversary of the Effective Date of this Agreement, whichever comes first: Quarterly Reimbursement = [] Where: [] Provided, however, that the sum of Cabot's Quarterly Reimbursements to CMC will not exceed the sum of the quarterly payments for Initial Capital Costs made or owed by CMC to Cabot prior to termination of this Agreement. CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 15 of 27 __________, __________ Cabot shall make such Quarterly Reimbursement payment to CMC within thirty (30) days of the end of the applicable quarter. To the extent any sums under this Agreement are due and owing by CMC to Cabot following this Agreement's termination, Cabot may deduct such sums from any Quarterly Reimbursement it owes to CMC hereunder. 6.2 Termination for Material Default. If either Party materially defaults in the performance of any material term, condition or covenant of this Agreement and such default shall not have been remedied, or steps initiated to remedy the same to the other Party's reasonable satisfaction, within one (1) month after receipt of written notice thereof to the defaulting Party from the other Party detailing such default and its intent to terminate this Agreement, then the Party not in default may terminate this Agreement. In the case of termination by CMC under this Section 6.2 for material default by Cabot, CMC will not be liable for the Remaining Capital Costs, or other costs, other than for Schedule 1 payments that are due and owing through the date of termination. For purposes of this Section 6.2, among other things, Cabot's failure to deliver InSpec Fumed Alumina in accordance with its obligations under this Agreement for six (6) or more consecutive calendar months shall be deemed a material default of a material term of this Agreement, provided, however, that CMC has ordered Unit C Fumed Alumina during each of such months. 6.3 Rights and Obligations on Expiration or Termination. The provisions of Sections 5, 6, and 8 of this Agreement shall survive the termination or expiration of this Agreement. In addition, any rights of Cabot to, and obligations of CMC to make, payments accrued through the date of such termination, as well as obligations of the Parties under firm orders for purchase and delivery of Unit C Fumed Alumina at the time of such termination shall remain in effect after the termination or expiration of this Agreement. 7. CONSENTS; NOTICES Unless otherwise set forth herein, whenever any notice, consent or approval is to be given in this Agreement, it must be in writing and delivered in accordance with the provisions of this Section 7. Any such writing will be duly given upon delivery, if delivered by hand, facsimile transmission or mail, to the following addresses: If to Cabot: Cabot Corporation Business and Technical Center Billerica, MA 01821 Attn: Strategic Business Unit Manager, CMP Business Telcopier: 978-670-8095 With a copy to: Cabot Corporation Two Seaport Lane, Suite 1300 Boston, MA 02210 Attn: Law Department Telecopier: 617-342-6039 CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 16 of 27 __________, __________ If to CMC: Cabot Microelectronics Corporation 870 North Commons Drive Aurora, IL 60504 Attn: Vice President of Operations Telecopier: 630-375-5596 With a copy to: Cabot Microelectronics Corporation 870 North Commons Drive Aurora, IL 60504 Attn: General Counsel Telecopier: 630-499-2644 or to such other address as may be designated in writing by any of the parties from time to time in accordance herewith. 8. GENERAL 8.1 Severability. If any provision of this Agreement shall be found to be invalid or unenforceable, then such provision or provisions shall not invalidate or in any way affect the enforceability of the remainder of this Agreement and such provision or provisions shall be curtailed and limited to the extent necessary to bring the Agreement within any legal requirement and the parties shall negotiate in good faith with respect to an equitable modification of the provision or application thereof held to be invalid. 8.2 Modification; Waivers. Except as expressly provided herein, this Agreement may be modified or amended only with the written consent of each party hereto. Neither party hereto shall be released from its obligations hereunder without the written consent of the other party. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term, but any such waiver shall be effective only if in a writing signed by the party against which such waiver is to be asserted. Except as otherwise specifically provided herein, no delay on the part of either party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 8.3 Succession. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and other legal representatives and, to the extent that any assignment hereof is permitted hereunder, their assignees. 8.4 Counterparts. This Agreement may be executed in counterparts. 8.5 Further Assurances. Each party agrees to provide any additional documents and take any such further action as may be reasonably requested by the other party in order to carry out the purpose and intent of this Agreement. CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 17 of 27 __________, __________ 8.6 Entire Agreement. This Agreement contains the full and complete undertaking and agreement between the parties hereto with respect to the sale of Unit C Fumed Alumina and Substitute Fumed Alumina by Cabot to CMC, and supersedes all other agreements between Cabot and CMC, whether written or oral, except any confidentiality agreements between the parties, which shall, to the extent such agreements do not contradict the terms of this Agreement, continue in effect. 8.7 Headings. The headings of the sections and other subdivisions of this Agreement are for convenient reference only. They shall not be used in any way to govern, limit, modify, construe this Agreement or any part or provision thereof nor otherwise be given any legal effect. 8.8 Assignees and Third Parties. This Agreement may not be assigned by either party without the prior written consent of the other party and any attempted assignment without such consent shall be null and void; provided, however, that Cabot may assign this Agreement to a subsidiary or affiliated company. A change of control of either Party will not be deemed to be an assignment in violation of this Section 8.8. In addition, Cabot may make arrangements for the production and sale of Unit C Fumed Alumina required hereunder to be manufactured and sold by a subsidiary or an affiliate, including but not limited to Cabot Carbon Ltd. Such arrangements may take the form of an assignment of certain rights and obligations hereunder or a subcontract of certain obligations hereunder. Similarly, CMC may make arrangements for the purchase of Fumed Alumina hereunder to be made by a subsidiary or affiliate, including but not limited to Cabot Microelectronics International Corporation. Such arrangements may take the form of an assignment of certain rights and obligations hereunder. However, all sales of Unit C Fumed Alumina or Substitute Fumed Alumina pursuant to any such arrangement shall be governed by the terms of this Agreement. 8.9 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of Delaware, without giving effect to principles of conflicts or choice of laws of Delaware or of any other jurisdiction. 8.10 Force Majeure. Each of the parties hereto shall be excused from delays in performing or from failure to perform hereunder to the extent that such delays or failures result from causes beyond the reasonable control of such party, including, but not limited to, forces of nature, acts of God, strikes, lockouts, wars, blockades, insurrections, riots, epidemics, restraints or requirements of any government or government agency, civil disturbances, explosions, breakage or accident to machinery or lines of pipe, unavailability of raw material or supplies, strandings, perils of the sea, the binding order of any court or governmental authority which has been resisted in good faith by all reasonable means, and other cause, whether of the kind enumerated or otherwise, not reasonably within the control of the party claiming suspension. Failure to prevent or settle any strike shall not be considered to be a matter within the control of the party claiming suspension. However, in order to be excused from delay or failure to perform, such party must act diligently to remedy the cause of such delay or failure. 8.11 CMC reserves the right, upon reasonable prior written notice to Cabot, to be given Cabot production, cost and quality records for Tuscola Unit C solely in order to verify Cabot's compliance with its obligations under this Agreement. CMC shall also have the third party audit rights under Schedule 1, Paragraph IV. CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 18 of 27 __________, __________ 8.12 Confidentiality. Each of Cabot and CMC agree to keep confidential and not disclose, and shall cause their respective subsidiaries and affiliates to keep confidential and not disclose, to any party or use for any purpose (other than for the performance of this Agreement or the Master FMO Agreement), any proprietary or other confidential information of the other party which is received pursuant to this Agreement ("Confidential Information"). Confidential Information shall be subject to the restrictions of this paragraph only if it is marked as confidential or proprietary or, if not disclosed in tangible form, the disclosing party notifies the recipient of its confidential or proprietary nature prior to its disclosure. For purposes of this Agreement, Confidential Information of a party does not include, and a party and a party's subsidiaries and affiliates will have no obligations under this provision with respect to, any information of the other party or any subsidiary or affiliate of the other party (the other party and subsidiaries and affiliates of the other party being referred to as the "receiving party") which: (i) is already known to the receiving party from a source other than the disclosing party as evidenced by competent proof thereof; or (ii) is or becomes publicly known through no wrongful act of the receiving party (in which event the receiving party's obligations under this Agreement in respect thereto shall terminate on the date such information enters the public domain); or (iii) is rightfully received by the receiving party from a third party without violation of any obligations of confidentiality owed by the third party to the disclosing party; or (iv) is disclosed by the disclosing party to a third party without restrictions on the third party's right to use or disclose such information; or (v) is independently developed by employees or consultants of the receiving party without use of or reference to the disclosing party's Confidential Information; or (vi) is approved for release by written authorization of the disclosing party 8.13 Independent Contractors. CMC and Cabot are each independent contractors. Nothing herein contained shall be construed to place CMC and Cabot in the relationship of principal and agent, master and servant, partners, or joint ventures, and, except as otherwise set forth in this Agreement, neither party shall have, expressly or by implication, the power to represent itself as having any authority to make contracts in the name of or binding upon the other, or to obligate or bind the other in any manner whatsoever. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date first set forth above. CABOT CORPORATION By ______________________________________ Title:____________________________________ CABOT MICROELECTRONICS CORPORATION By ______________________________________ Title:____________________________________ CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 19 of 27 __________, __________ SCHEDULE 1 [5 pages have been omitted pursuant to a request for confidential treatment under Rule 24b-2, promulgated under the Securities Exchange Act of 1934, as amended.] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 20 of 27 __________, __________ EXHIBIT A [9 pages have been omitted pursuant to a request for confidential treatment under Rule 24b-2, promulgated under the Securities Exchange Act of 1934, as amended.] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 21 of 27 __________, __________ EXHIBIT B [] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 22 of 27 __________, __________ EXHIBIT C [] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 23 of 27 __________, __________ EXHIBIT D [] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 24 of 27 __________, __________ EXHIBIT E [] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 25 of 27 __________, __________ EXHIBIT F [] CABOT MICROELECTRONICS CORPORATION - CABOT CORPORATION CONFIDENTIAL Page 26 of 27 __________, __________ -----END PRIVACY-ENHANCED MESSAGE-----