-----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, AYurRSUxFKkCt2KvDOoYLz98Vaq5TEYj/uG9b5KgZIJwX7L1DZnl/fXBuvKIfAAX 5MCKKU/pI0ysGPtkZ6vTpg== 0000950137-04-003748.txt : 20040507 0000950137-04-003748.hdr.sgml : 20040507 20040507171206 ACCESSION NUMBER: 0000950137-04-003748 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CABOT MICROELECTRONICS CORP CENTRAL INDEX KEY: 0001102934 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] 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: 04790104 BUSINESS ADDRESS: STREET 1: 870 NORTH COMMONS DRIVE CITY: AURORA STATE: IL ZIP: 60504 BUSINESS PHONE: 6303755461 MAIL ADDRESS: STREET 1: 870 N COMMONS DR CITY: AURORA STATE: IL ZIP: 60504 10-Q 1 c84500e10vq.txt QUARTERLY REPORT UNITED STATES 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 MARCH 31, 2004 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 ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 ). YES x NO ---- ---- As of April 30, 2004 the Company had 24,818,602 shares of Common Stock, par value $0.001 per share, outstanding. CABOT MICROELECTRONICS CORPORATION INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income Three and Six Months Ended March 31, 2004 and 2003................................... 3 Consolidated Balance Sheets March 31, 2004 and September 30, 2003................................................ 4 Consolidated Statements of Cash Flows Six Months Ended March 31, 2004 and 2003............................................. 5 Notes to Consolidated Financial Statements............................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 21 Item 4. Controls and Procedures.................................................................. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................ 22 Item 4. Submission of Matters to a Vote of Security Holders...................................... 22 Item 5. Other Information........................................................................ 23 Item 6. Exhibits and Reports on Form 8-K......................................................... 23 Signatures............................................................................... 24
PART I. FINANCIAL INFORMATION ITEM 1. CABOT MICROELECTRONICS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 2004 2003 2004 2003 ---- ---- ---- ---- Revenue ................................................... $ 73,515 $ 62,201 $ 149,794 $ 119,474 Cost of goods sold ......................................... 37,366 31,786 76,392 59,451 ------------- ------------ ----------- ----------- Gross profit....................................... 36,149 30,415 73,402 60,023 Operating expenses: Research and development................................. 11,143 9,609 21,866 18,244 Selling and marketing.................................... 4,363 2,554 8,146 5,132 General and administrative............................... 5,749 4,595 10,873 8,963 Amortization of intangibles.............................. 85 85 170 170 ------------- ------------ ----------- ----------- Total operating expenses.............................. 21,340 16,843 41,055 32,509 ------------- ------------ ----------- ----------- Operating income............................................ 14,809 13,572 32,347 27,514 Other income (expense), net................................. (86) 43 (50) 38 ------------- ------------ ----------- ----------- Income before income taxes.................................. 14,723 13,615 32,297 27,552 Provision for income taxes.................................. 5,006 4,561 10,982 9,230 ------------- ------------ ----------- ----------- Net income............................................ $ 9,717 $ 9,054 $ 21,315 $ 18,322 ============= ============ =========== =========== Basic earnings per share.................................... $ 0.39 $ 0.37 $ 0.86 $ 0.75 ============= ============ =========== =========== Weighted average basic shares outstanding................... 24,785 24,346 24,761 24,325 ============= ============ =========== =========== Diluted earnings per share.................................. $ 0.39 $ 0.37 $ 0.85 $ 0.75 ============= ============ =========== =========== Weighted average diluted shares outstanding................. 24,926 24,593 24,935 24,589 ============= ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 CABOT MICROELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, SEPTEMBER 30, 2004 2003 ---- ---- ASSETS Current assets: Cash and cash equivalents...................................................... $ 140,264 $ 111,318 Accounts receivable, less allowance for doubtful accounts of $580 at March 31, 2004 and $585 at September 30, 2003.............................................. 38,452 37,564 Inventories.................................................................... 23,861 23,814 Prepaid expenses and other current assets...................................... 5,902 4,010 Deferred income taxes.......................................................... 2,525 2,406 ---------------- -------------- Total current assets..................................................... 211,004 179,112 Property, plant and equipment, net................................................ 129,799 133,695 Goodwill ......................................................................... 1,373 1,373 Other intangible assets, net...................................................... 425 595 Other long-term assets............................................................ 862 842 ---------------- -------------- Total assets............................................................. $ 343,463 $ 315,617 ================ ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................................... $ 14,398 $ 12,521 Capital lease obligations...................................................... 1,591 1,716 Accrued expenses and other current liabilities................................. 12,141 14,679 ---------------- -------------- Total current liabilities................................................ 28,130 28,916 Capital lease obligations......................................................... 6,835 7,452 Deferred income taxes............................................................. 6,148 5,384 Deferred compensation and other long-term liabilities............................. 2,521 2,092 ---------------- -------------- Total liabilities........................................................ 43,634 43,844 Commitments and contingencies (Note 8) Stockholders' equity: Common stock: Authorized: 200,000,000 shares, $0.001 par value Issued and outstanding: 24,813,063 shares at March 31, 2004 and 24,712,740 at September 30, 2003 ........................................... $ 25 $ 25 Capital in excess of par value of common stock................................. 135,171 131,913 Retained earnings.............................................................. 160,173 138,858 Accumulated other comprehensive income......................................... 4,651 1,187 Unearned compensation.......................................................... (191) (210) ---------------- -------------- Total stockholders' equity............................................... 299,829 271,773 ---------------- -------------- Total liabilities and stockholders' equity............................... $ 343,463 $ 315,617 ================ ==============
The accompanying notes are an integral part of these consolidated financial statements. 4 CABOT MICROELECTRONICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, --------- 2004 2003 ---- ---- Cash flows from operating activities: Net income................................................................... $ 21,315 $ 18,322 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................. 8,554 7,512 Noncash compensation expense and non-employee stock options............... 29 (17) Provision for inventory writedown......................................... (348) 1,511 Provision for doubtful accounts........................................... 7 22 Stock option income tax benefits.......................................... 834 1,147 Deferred income taxes..................................................... 646 (217) Unrealized foreign exchange gain.......................................... (1,148) (466) (Gain) loss on disposal of property, plant and equipment ................. (5) 21 Other..................................................................... (18) 351 Changes in operating assets and liabilities: Accounts receivable....................................................... 827 (1,744) Inventories............................................................... 1,186 (2,154) Prepaid expenses and other assets......................................... (339) 101 Accounts payable, accrued liabilities and other current liabilities....... (1,481) (2,477) Income taxes payable, deferred compensation and other noncurrent liabilities (871) 536 -------------- -------------- Net cash provided by operating activities....................................... 29,188 22,448 Cash flows from investing activities: Additions to property, plant and equipment................................... (2,408) (4,714) Proceeds from the sale of property, plant and equipment...................... 13 1,770 -------------- -------------- Net cash used in investing activities........................................... (2,395) (2,944) -------------- -------------- Cash flows from financing activities: Prepayment of long-term debt................................................. - (3,500) Net proceeds from issuance of stock.......................................... 2,440 2,635 Principal payments under capital lease obligations........................... (400) (363) --------------- --------------- Net cash provided by (used in) financing activities............................. 2,040 (1,228) -------------- --------------- Effect of exchange rate changes on cash......................................... 113 5 -------------- -------------- Increase in cash................................................................ 28,946 18,281 Cash and cash equivalents at beginning of period................................ 111,318 69,605 -------------- -------------- Cash and cash equivalents at end of period...................................... $ 140,264 $ 87,886 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 5 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. BACKGROUND AND BASIS OF PRESENTATION We believe we are the leading supplier of high-performance polishing slurries used in the manufacture of the most advanced integrated circuit ("IC") devices within the semiconductor industry, in a process called chemical mechanical planarization ("CMP"). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers, and is a necessary step in the production of advanced ICs. Planarization is a polishing process that uses CMP slurries and pads to level, smooth and remove excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP pads are typically flat engineered "disks" that help distribute and transport the slurry to the surface of the wafer and across the wafer. Cabot Microelectronics, which was incorporated in October 1999 and formed from the assets of a division of Cabot Corporation, completed its initial public offering in April 2000. In September 2000 we became wholly independent upon Cabot Corporation's spin-off of its remaining ownership ("spin-off") in our company by its distribution of 0.280473721 shares of Cabot Microelectronics common stock as a dividend on each share of Cabot Corporation common stock. The unaudited consolidated 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 consolidated financial statements include all adjustments necessary for the fair presentation of Cabot Microelectronics' financial position as of March 31, 2004, cash flows for the six months ended March 31, 2004 and March 31, 2003 and results of operations for the three and six months ended March 31, 2004 and March 31, 2003. The results of operations for the three and six months ended March 31, 2004 may not be indicative of the results to be expected for the fiscal year ending September 30, 2004. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2003. We operate predominantly in one industry segment - - the development, manufacture, and sale of CMP slurries. The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated. 2. STOCK-BASED COMPENSATION In December 2002 we adopted the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 148 and SFAS 123, we continue to apply the accounting provisions of Accounting Principles Board ("APB") Opinion Number 25, "Accounting for Stock Issued to Employees", and related interpretations, with regard to the measurement of compensation cost for options granted under our Equity Incentive Plan and shares issued under our Employee Stock Purchase Plan. No employee compensation expense has been recorded as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had expense been recognized using the fair value method described in 6 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) (UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) SFAS 123, using the Black-Scholes option-pricing model, we would have reported the following results of operations:
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported.......................... $ 9,717 $ 9,054 $ 21,315 $ 18,322 Deduct: total stock-based compensation expense determined under the fair value method, net of tax.................... (5,096) (4,326) (9,625) (7,996) ----------- ----------- ------------ ----------- Pro forma net income............................. 4,621 4,728 11,690 10,326 =========== =========== ============ =========== Earnings per share: Basic - as reported......................... $ 0.39 $ 0.37 $ 0.86 $ 0.75 =========== =========== ============ =========== Basic - pro forma........................... $ 0.19 $ 0.19 $ 0.47 $ 0.42 =========== =========== ============ =========== Diluted - as reported....................... $ 0.39 $ 0.37 $ 0.85 $ 0.75 =========== =========== ============ =========== Diluted - pro forma......................... $ 0.19 $ 0.19 $ 0.47 $ 0.42 =========== =========== ============ ===========
3. EARNINGS 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 computations. Basic and diluted earnings per share were calculated as follows:
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 2004 2003 2004 2003 ---- ---- ---- ---- Numerator: Earnings available to common shares.............. $ 9,717 $ 9,054 $ 21,315 $ 18,322 =========== =========== ============ =========== Denominator: Weighted average common shares................... 24,785,052 24,346,172 24,761,317 24,325,392 (Denominator for basic calculation) Weighted average effect of dilutive securities: Stock-based compensation ................... 140,707 247,176 173,446 263,130 ----------- ----------- ------------ ----------- Diluted weighted average common shares........... 24,925,759 24,593,348 24,934,763 24,588,522 =========== =========== ============ =========== (Denominator for diluted calculation) Earnings per share: Basic............................................ $ 0.39 $ 0.37 $ 0.86 $ 0.75 =========== =========== ============ =========== Diluted.......................................... $ 0.39 $ 0.37 $ 0.85 $ 0.75 =========== =========== ============ ===========
7 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 4. COMPREHENSIVE INCOME The components of comprehensive income are as follows:
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, ----------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Income....................................... $ 9,717 $ 9,054 $ 21,315 $ 18,322 Other comprehensive income: Net unrealized gain on derivative instruments ......................... 9 8 18 17 Foreign currency translation adjustment..... 1,225 179 3,446 1,313 ------------ ----------- ----------- ---------- Total comprehensive income....................... $ 10,951 $ 9,241 $ 24,779 $ 19,652 ============ =========== =========== ==========
5. INVENTORIES Inventories consisted of the following:
MARCH 31, SEPTEMBER 30, 2004 2003 ---- ---- Raw materials........................... $ 13,218 $ 13,327 Work in process......................... 1,231 1,110 Finished goods.......................... 9,412 9,377 ----------- ----------- Total................................... $ 23,861 $ 23,814 =========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill of $1,373, as of March 31, 2004, was unchanged from our fiscal year ended September 30, 2003. The components of intangible assets are as follows:
MARCH 31, 2004 SEPTEMBER 30, 2003 ----------------------------- ----------------------------- GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------ ------------ ------ ------------ Trade secrets and know-how............................... $ 2,550 $ 2,231 $ 2,550 $ 2,105 Distribution rights, customer lists and other............ 1,000 894 1,000 850 ------------ ----------- ------------ ----------- Total intangible assets............................... 3,550 3,125 3,550 2,955 ------------ ----------- ------------ -----------
Amortization expense of intangible assets was $85 and $170 for the three and six months ended March 31, 2004, respectively. Estimated future amortization expense for the remaining six months of fiscal year 2004 is $170 and $255 for the full fiscal year 2005. 8 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following:
MARCH 31, SEPTEMBER 30, 2004 2003 ---- ---- Raw materials accruals.................. $ 812 $ 2,305 Accrued compensation.................... 6,566 7,743 Warranty accrual........................ 841 836 Fixed asset accrual..................... 139 579 Other................................... 3,783 3,216 ----------- ----------- Total................................... $ 12,141 $ 14,679 =========== ===========
8. CONTINGENCIES LEGAL PROCEEDINGS We periodically become subject to legal proceedings in the ordinary course of business. We are not currently involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations, or cash flows. PRODUCT WARRANTIES We record warranty expense in cost of goods sold in the period in which the warranty claims are incurred. We calculate our warranty reserve shown below using historical experience and any known conditions or circumstances, and we perform periodic reviews of our warranty reserve requirements and make appropriate adjustments to the reserve as necessary. Our warranty obligation is affected primarily by product that does not meet specifications or performance requirements and any related costs of addressing such matters. Our warranty reserve requirements increased during the first six months of fiscal 2004 as follows: Balance as of September 30, 2003........ $ 836 Net change.............................. 5 ----------- Balance as of March 31, 2004............ $ 841 ===========
INDEMNIFICATION DISCLOSURE In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Generally, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain intellectual property rights and, in certain circumstances, specified environmental matters. These terms are common in the industry in which we conduct business. In each of these circumstances, payment by us is subject to certain monetary and other limitations and is conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular agreement, which typically allow us to challenge the other party's claims. 9 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) We evaluate estimated losses for such indemnifications under SFAS No. 5, "Accounting for Contingencies" as interpreted by FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and as of March 31, 2004, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of a material obligation is probable. 9. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88, and 106, and a Revision of FASB Statement No. 132" ("SFAS 132 (revised 2003)") which revises employers' disclosures about pension plans and other postretirement benefits plans including additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, 88, and 106. The adoption of SFAS No. 132 (revised 2003) did not impact our consolidated financial position, results of operations or cash flow. In December 2003, the Staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104") which supercedes Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issue Task Force Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" ("the FAQ") issued with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition". Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 reflects the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not impact our consolidated financial position, results of operations or cash flow. 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 statements included elsewhere in this Form 10-Q, include "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 consolidated financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2003. 10 SECOND FISCAL QUARTER OVERVIEW We believe we are the leading supplier of high-performance polishing slurries used in the manufacture of the most advanced integrated circuit ("IC") devices within the semiconductor industry, in a process called chemical mechanical planarization ("CMP"). We develop, produce and sell CMP slurries for polishing copper, tungsten and oxide in IC devices, and also for polishing magnetic heads and the coating on disks in hard disk drives. We are currently operating as a value-added reseller of CMP polishing pads produced by a third party and are also developing our own pad technologies. Total revenue for our second fiscal quarter was $73.5 million, down 3.6% from the previous fiscal quarter, but up 18.2% compared to the same quarter in the last fiscal year. Sales volumes were up slightly from the prior quarter, but our average selling price decreased by 5.3% from the prior quarter, causing the revenue reduction. Approximately half of the average selling price decrease was due to a lower priced product mix, and approximately half was due to selective price reductions. In the second fiscal quarters of 2002 and 2003 we also experienced price reductions from the prior quarter, and we believe that, to date, pricing pressure has been particularly concentrated around a new calendar year. Net income of $9.7 million for the quarter was down by 16.2% from last quarter due to lower revenue and higher operating costs, and up 7.3% compared to the same quarter in the last fiscal year due to higher revenue but also higher operating costs. We believe there are three CMP industry trends that are currently impacting our business. First, we believe that rapid incorporation of CMP technology and growth of the CMP industry, combined with our customers' desires to gain purchasing leverage and lower their cost of ownership, have led to much greater competitive activity. Second, as CMP technology has become more advanced, we believe that CMP technical solutions have become more complicated, and leading edge technologies often require customization by customer, tool set and process integration approach. Third, as CMP technology has matured, we believe that semiconductor manufacturers' processes have become highly sensitive to CMP slurries, and customers now demand a very high level of consistency in CMP slurry products. Beyond product consistency, we believe that product quality requirements have also increased dramatically as IC feature sizes have continued to shrink, resulting in higher costs. We believe that these three trends have adversely impacted our margins, and going forward we expect our gross margin as a percentage of revenue to be 48%, plus or minus 2%. This is a reduction from our prior forecast for gross margin of 50% of revenue, plus or minus 2%. As we face the challenges associated with these trends, we intend to continue to focus on three key fundamentals: continuing to operate as the premium value slurry provider, innovating to differentiate ourselves through technology; leveraging our substantial existing global manufacturing and supply chain infrastructure to achieve the product quality and consistency required by our customers, while capturing economies and efficiencies we believe are accessible through our significant scale; and, continuing our focus on customer relationships. During the quarter, we entered into a fumed silica supply agreement with Cabot Corporation, which replaces the original fumed metal oxide agreement with respect to fumed silica, and accordingly amended our fumed metal oxide agreement with respect to its fumed silica terms such that the agreement now only applies to fumed alumina and runs through its original term of June 2005. This fumed silica supply agreement provides for improved supply assurance, reduces our risk to rising raw material costs and incorporates increased quality performance measures and requirements that support our initiative to increase product quality and consistency. This agreement has an initial six-year term, which expires in December 2009 and will automatically renew unless either party gives certain notice of non-renewal. The contract provides for the cost of fumed silica to increase approximately 4% over the initial six-year term of the fumed silica supply agreement, and in some circumstances is subject to certain inflation adjustments and certain shared cost savings adjustments resulting from our joint efforts. 11 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2004 VERSUS THREE MONTHS ENDED MARCH 31, 2003 REVENUE Total revenue was $73.5 million for the three months ended March 31, 2004, which represented an 18.2%, or $11.3 million, increase from the three months ended March 31, 2003. Of this increase, $11.9 million was due to an increase in sales volume which was partially offset by a $0.6 million reduction in weighted average selling prices. Our average selling price decreased due to selective price reductions granted to certain customers, partially offset by benefits of a higher priced product mix and foreign exchange fluctuation. Revenue for the three months ended March 31, 2004 would have been $1.2 million lower had the Japanese Yen and Euro average exchange rate for the quarter held constant with the prior year's second fiscal quarter average. COST OF GOODS SOLD Total cost of goods sold was $37.4 million for the three months ended March 31, 2004, which represented an increase of 17.6% or $5.6 million from the three months ended March 31, 2003. Of this increase, $6.1 million was due to an increase in volume which was partially offset by a $0.5 million reduction in costs, primarily due to improvements in our manufacturing yields and lower product costs compared to the year ago quarter. Fumed metal oxides, both fumed silica and fumed alumina, are significant raw materials we use in many of our CMP slurries. From the time of our initial public offering in April 2000 to January 2004, we purchased fumed silica and fumed alumina under a fumed metal oxide agreement with Cabot Corporation that was due to expire June 2005. In January 2004 we entered into a fumed silica supply agreement with Cabot Corporation, which replaces the original fumed metal oxide agreement with respect to fumed silica, and accordingly amended our fumed metal oxide agreement with respect to its fumed silica terms such that the agreement now only applies to fumed alumina and runs through its original term of June 2005. This fumed silica supply agreement provides for improved supply assurance, reduces our risk to rising raw material costs and incorporates increased quality performance measures and requirements that support our initiative to increase product quality and consistency. This agreement has an initial six-year term, which expires in December 2009 and will automatically renew unless either party gives certain notice of non-renewal. The contract provides for the cost of fumed silica to increase approximately 4% over the initial six-year term of the fumed silica supply agreement, and in some circumstances is subject to certain inflation adjustments and certain shared cost savings adjustments resulting from our joint efforts. In addition, since December 2001, we have operated under a fumed alumina supply agreement with Cabot Corporation under which Cabot Corporation expanded its capacity for the manufacture of fumed alumina and we have the first right to all this expanded 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, its capital costs for expanding its capacity, an agreed upon rate of return on investment and incentive payments if they produce more than a certain amount per year that meets our specifications. Our need for additional quantities or different kinds of key raw materials in the future has required and will continue to require that we enter into new supply arrangements with third parties. Future arrangements may result in costs which are different from those in the existing agreements. GROSS PROFIT Our gross profit as a percentage of total revenue was 49.2% for the three months ended March 31, 2004 as compared to 48.9% for the three months ended March 31, 2003. The increase in gross profit expressed as a percentage of total revenue resulted primarily from the sales volume increase, a higher valued product mix and improved manufacturing yields, partially offset by 12 lower average selling prices. We continue to experience increasing competition and pricing pressure, along with increasing costs to support the higher product quality and advanced technology requirements of our customers. For these reasons, we expect our gross profit as a percentage of total revenue in the future to be in the range of 48%, plus or minus 2%. This is a reduction from our previous expectations of gross profit of 50% of revenue, plus or minus 2%. RESEARCH AND DEVELOPMENT Research and development expenses were $11.1 million in the three months ended March 31, 2004, which represented an increase of 16.0%, or $1.5 million, from the three months ended March 31, 2003. Research and development expense increased $0.6 million due to increased staffing, $0.4 million due to higher supplies and $0.4 million due to higher depreciation related to the purchase of equipment for our CMP polishing and metrology clean room. R&D efforts were mainly related to new and enhanced CMP products including slurry products for copper applications, new CMP polishing pad technology and advanced chemistry and particle technology. SELLING AND MARKETING Selling and marketing expenses were $4.4 million in the three months ended March 31, 2004, which represented an increase of 70.8%, or $1.8 million, from the three months ended March 31, 2003. The increase resulted primarily from our increased customer support initiatives, including our transition to selling direct to customers in Europe, Singapore, Malaysia and Japan, rather than through a distributor. Contributing to the increase were higher staffing costs of $0.7 million, higher customer support costs of $0.4 million, $0.3 million in separation costs for certain employees, including an executive, and increased technical and marketing support of $0.2 million. GENERAL AND ADMINISTRATIVE General and administrative expenses were $5.7 million in the three months ended March 31, 2004, which represented an increase of 25.1%, or $1.2 million, from the three months ended March 31, 2003. The increase resulted primarily from $0.5 million in higher staffing costs, $0.2 million in separation costs for an executive and higher insurance premiums of $0.1 million. AMORTIZATION OF INTANGIBLES Amortization of intangibles was $0.1 million for both the three months ended March 31, 2004 and 2003. OTHER INCOME (EXPENSE), NET Other expense was $0.1 million for the three months ended March 31, 2004 as compared to negligible other income for the three months ended March 31, 2003. Compared to the prior year, foreign exchange losses increased by $0.3 million and were partially offset by higher interest income. PROVISION FOR INCOME TAXES Our effective income tax rate was 34.0% for the three months ended March 31, 2004 and 33.5% for the three months ended March 31, 2003. The increase in the effective tax rate was due to the anticipated June 2004 expiration of current United States tax legislation related to research and experimentation credits and the decreased impact of these credits in relation to higher taxable income compared to the prior year. We expect our income tax rate for full fiscal year 2004 to be 34.0%. 13 NET INCOME Net income was $9.7 million for the three months ended March 31, 2004, which represented an increase of 7.3%, or $0.7 million, from the three months ended March 31, 2003 as a result of the factors discussed above. SIX MONTHS ENDED MARCH 31, 2004 VERSUS SIX MONTHS ENDED MARCH 31, 2003 REVENUE Total revenue was $149.8 million for the six months ended March 31, 2004, which represented a 25.4%, or $30.3 million, increase from the six months ended March 31, 2003. Of this increase, $29.3 million was due to an increase in sales volume and $1.0 million was due to an increase in weighted average selling prices from both an improved sales mix and favorable foreign exchange rate changes, which more than offset selective price reductions that were granted to certain customers. Total revenue for the six months ended March 31, 2004 would have been $2.7 million lower had the average exchange rates for the Japanese Yen and Euro during the six month period held constant with the prior year's six month average. COST OF GOODS SOLD Total cost of goods sold was $76.4 million for the six months ended March 31, 2004, which represented an increase of 28.5%, or $16.9 million, from the six months ended March 31, 2003. Approximately $14.6 million of this increase was due to higher sales volumes and $2.4 million was associated with higher average costs due to product mix, higher fixed manufacturing costs and higher costs from lower yields associated with meeting customer requirements for higher product performance. GROSS PROFIT Our gross profit as a percentage of total revenue was 49.0% for the six months ended March 31, 2004 as compared to 50.2% for the six months ended March 31, 2003. The decrease in gross profit expressed as a percentage of total revenue resulted primarily from increased costs associated with meeting customer requirements for higher product performance that was partially offset by an increase in weighted average selling prices. RESEARCH AND DEVELOPMENT Research and development expense was $21.9 million for the six months ended March 31, 2004, which represented an increase of 19.9%, or $3.6 million from the six months ended March 31, 2003. Research and development expense increased $1.7 million due to higher staffing costs, $0.6 million due to higher technical service and consulting fees, $0.7 million due to higher supplies and $0.5 million due to higher depreciation related to the purchase of equipment for our CMP polishing and metrology clean room. R&D efforts were mainly related to new and enhanced CMP products including slurry products for copper applications, new CMP polishing pad technology and advanced chemistry and particle technology. SELLING AND MARKETING Selling and marketing expenses were $8.1 million in the six months ended March 31, 2004, which represented an increase of 58.7%, or $3.0 million, from the six months ended March 31, 2003. The increase resulted primarily from our increased customer support initiatives, including our transition to selling direct to customers in Europe, Singapore, Malaysia and Japan, rather than through a distributor. Contributing to the increase were higher staffing costs of $1.3 million, higher customer support costs of $0.5 million, increased consulting fees of $0.5 million and $0.3 million in separation costs for certain employees, including an executive. 14 GENERAL AND ADMINISTRATIVE General and administrative expenses were $10.9 million in the six months ended March 31, 2004, which represented an increase of 21.3%, or $1.9 million, from the six months ended March 31, 2003. The increase resulted from $0.9 million in higher staffing costs, $0.3 million due to higher insurance premiums, $0.3 million of increased professional fees and $0.2 million in separation costs for an executive. AMORTIZATION OF INTANGIBLES Amortization of intangibles was $0.2 million for both the six months ended March 31, 2004 and 2003. OTHER INCOME (EXPENSE), NET Other income (expense), net was negligible for both the six months ended March 31, 2004 and 2003. Compared to the prior year, foreign exchange losses increased by $0.3 million, which was partially offset by decreased interest expense due to the February 2003 prepayment of our entire $3.5 million unsecured term loan and increased interest income. PROVISION FOR INCOME TAXES Our effective income tax rate was 34.0% in the six months ended March 31, 2004 and 33.5 % for the six months ended March 31, 2003. The increase in the effective tax rate was due to the anticipated June 2004 expiration of current United States tax legislation related to research and experimentation credits and the decreased impact of these credits in relation to higher taxable income compared to the prior year. NET INCOME Net income was $21.3 million in the six months ended March 31, 2004, which represented an increase of 16.3%, or $3.0 million, from the six months ended March 31, 2003 as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES We had cash flows from operating activities of $29.2 million in the six months ended March 31, 2004 and $22.4 million in the six months ended March 31, 2003. Our cash provided by operating activities for the six months ended March 31, 2004 originated from net income from operations of $21.3 million and non-cash items of $8.6 million, which were partially offset by a net increase in working capital of $0.7 million. In the six months ended March 31, 2004, capital spending was $2.4 million, primarily due to the purchase of production-related equipment to be used in our Aurora, Illinois facilities and equipment for our CMP polishing and metrology clean room. Full fiscal year 2004 capital spending is anticipated to be approximately $17.0 million, down $5.0 million from our previously planned spending level of $22.0 million due to slower than expected spending on clean room equipment. In the six months ended March 31, 2003, capital spending was $4.7 million, primarily due to the purchase of production-related equipment to be used in our Aurora, Illinois facilities, and for metrology tools to support increased polishing capacity in our clean room. In addition, we received cash of approximately $1.8 million from the January 2003 sale of our distribution center and land in Ansung, South Korea. 15 Cash flows from financing activities were $2.0 million in the six months ended March 31, 2004. Cash provided from financing activities resulted from the issuance of common stock associated with the exercise of stock options and the Employee Stock Purchase Plan, which was partially offset by principal payments made under capital lease obligations. In the six months ended March 31, 2003 we used $1.2 million of cash to fund financing activities. On February 6, 2003, we prepaid the entire $3.5 million unsecured term loan that had been funded on the basis of the Illinois State Treasurer's Economic Program, which had been due on April 3, 2005 and had incurred interest at an annual rate of 4.68%. We also made principal payments under capital lease obligations. Cash used for these purposes was partially offset by funds received from the issuance of common stock for the exercise of stock options and the Employee Stock Purchase Plan. We believe that cash generated by our operations and available borrowings under our 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. OFF-BALANCE SHEET ARRANGEMENTS At March 31, 2004 and September 30, 2003, 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. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following summarizes our contractual obligations at March 31, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
CONTRACTUAL OBLIGATIONS LESS THAN 1-3 4-5 AFTER 5 (IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS ----- --------- ----- ----- ----- Capital lease obligations.......................... $ 8.4 $ 1.6 $ 2.9 $ 2.3 $ 1.6 Operating leases .................................. 0.7 0.3 0.3 0.1 0.0 Purchase obligations .............................. 49.6 28.7 14.9 3.4 2.6 Other long-term liabilities ....................... 2.5 0.0 1.1 0.0 1.4 ------- --------- -------- -------- -------- Total contractual obligations...................... $ 61.2 $ 30.6 $ 19.2 $ 5.8 $ 5.6 ======= ========= ======== ======== ========
CAPITAL LEASE OBLIGATIONS Since December 2001 we have operated under a fumed alumina supply agreement with Cabot Corporation, under which Cabot Corporation expanded its capacity in Tuscola, Illinois for the manufacture of fumed alumina. Payments by us with respect to 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 approximately $0.3 million resulted in a $9.8 million lease obligation and $9.8 million related leased asset. The agreement has an initial five-year term, which expires in 2006, but we can choose to renew the agreement for another five-year term, which would expire in 2011. We also can choose to not renew the agreement subject to certain terms and conditions and the payment of certain costs, after the initial five-year term. In January 2002 we entered into a CMP tool and polishing consumables transfer agreement with a third party under which we agreed to transfer polishing consumables to this entity in return for a CMP polishing tool. The polishing tool has been treated as a capital lease and the aggregate fair market value of the polishing consumables resulted in a $2.0 million lease obligation. The term of the agreement is approximately three years, expiring in November 2004. 16 OPERATING LEASES 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. PURCHASE OBLIGATIONS Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services. In the fourth quarter of fiscal 2003, we recorded a $2.0 million liability for a raw material supply agreement for a polishing pad technology that was previously under development, but is no longer being pursued. Our total obligation with respect to this agreement is $2.2 million, of which $1.1 million is recorded in current liabilities and shown in the preceding table under purchase obligations and $1.1 million is included in other long-term liabilities, which are discussed below. From the time of our initial public offering in April 2000 to January 2004, we purchased fumed silica and fumed alumina under a fumed metal oxide agreement with Cabot Corporation that was due to expire June 2005. Under this agreement, we were obligated to purchase at least 90% of our six-month volume forecast of fumed silica from Cabot Corporation and were obligated to pay for the shortfall if we purchased less than that amount. In January 2004 we entered into a fumed silica supply agreement with Cabot Corporation, which replaces the original fumed metal oxide agreement with respect to fumed silica, and accordingly amended our fumed metal oxide agreement with respect to its fumed silica terms such that the agreement now only applies to fumed alumina through its original term of June 2005. Under the fumed silica supply agreement, we continue to be obligated to purchase at least 90% of our six-month volume forecast and to pay for the shortfall if we purchase less than that amount. This agreement has an initial six-year term, which expires in December 2009 and will automatically renew unless either party gives certain notice of non-renewal. We currently anticipate meeting minimum forecasted purchase volume requirements. Also, under our fumed alumina supply agreement with Cabot Corporation we are obligated to pay certain fixed, capital and variable costs through December 2006. This agreement has an initial five-year term, but we can choose to renew the agreement for another five-year term, which would expire in December 2011. If we do not renew the agreement, we will become subject to certain terms and conditions and the payment of certain costs. Purchase obligations include $20.5 million of contractual commitments based upon our anticipated renewal of the agreement through December 2011. We have an agreement with a toll manufacturer pursuant to which the manufacturer performs 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 manufacturer's 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. Purchase obligations related to this agreement are $10.1 million, which include a termination payment if the agreement is not renewed. We expect to renew the agreement at the end of the initial term. We have a distribution agreement with an existing supplier of polishing pads to the semiconductor industry pursuant to which the supplier sells product to us for our resale to end users. The initial term of the contract runs through September 2007 and we are required to make certain agreed-upon payments in order to maintain the agreement. Purchase obligations include $1.8 million of contractual commitments related to this agreement. We have the ability to cancel the agreement at any time with no cancellation fee. In June 2003 we entered into a technology licensing and co-marketing agreement with a semiconductor equipment manufacturer under which we plan to develop, manufacture and sell polishing pads utilizing endpoint detection window technology licensed from the manufacturer for use on the manufacturer's equipment. Under this agreement, we are obligated to supply this manufacturer with free polishing pads, up to an agreed upon dollar amount, for particular uses over a seven year period. We currently estimate our total cost associated with these products will be $2.0 million over the remaining period. Also included in purchase obligations is $0.5 million related to certain marketing and technical support services, which was paid in April 2004. We are also obligated to supply the equipment manufacturer with polishing pads, up to an agreed upon dollar amount over the seven year period, which the manufacturer will purchase from us at our cost. 17 We will also pay a royalty to the equipment manufacturer and, in certain circumstances, to another party to whom we are a sub-licensee under our agreement, based upon net revenue earned with respect to commercial sales of polishing pads covered under the agreement. The agreement's term lasts as long as the patents on the technology subject to the license agreement remain valid and enforceable. OTHER LONG-TERM LIABILITIES Other long-term liabilities include the $1.1 million long-term portion of the purchase obligation discussed above, that we recorded for a raw material supply agreement for a polishing pad technology that was previously under development, but is no longer being pursued. Also included is $1.4 million for pension and deferred compensation obligations. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88, and 106, and a Revision of FASB Statement No. 132" ("SFAS 132 (revised 2003)") which revises employers' disclosures about pension plans and other postretirement benefits plans including additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, 88, and 106. The adoption of SFAS No. 132 (revised 2003) did not impact our consolidated financial position, results of operations or cash flow. In December 2003, the Staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104") which supercedes Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issue Task Force Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" ("the FAQ") issued with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition". Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 reflects the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not impact our consolidated financial position, results of operations or cash flow. 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 and application of IC devices and these changes and advances, including 300 mm wafers, are expected to continue in the future. Developments in the semiconductor industry could render our products obsolete or less important to the IC device manufacturing process. 18 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. They also hold considerable purchasing power, which can impact the pricing, and terms of sale of our products. 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, of which one is a distributor, accounted for approximately 54% of our revenue for the six months ended March 31, 2004. For the six months ended March 31, 2003 our five largest customers, of which two were distributors, accounted for approximately 62% of our revenue. In June 2003, we completed our transition to selling directly to customers in Europe, Singapore and Malaysia who previously had been serviced through one of these distributors. ANY PROBLEM OR INTERRUPTION IN SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, INCLUDING FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY AFFECT OUR SALES Fumed metal oxides, both fumed silica and fumed alumina, are significant 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 or other key raw materials. We operate under three raw material supply agreements with Cabot Corporation, one of which for the supply of fumed silica and two of which for the supply of fumed alumina. Under these agreements, Cabot Corporation continues to be our primary supplier of particular amounts and types of fumed alumina and fumed silica. We believe it would be difficult to secure alternative sources of fumed metal oxides in the event Cabot Corporation or another supplier becomes unable to supply us with sufficient quantities of fumed metal oxides which meet the quality and technical specifications required by our customers. In addition, contractual amendments to the existing agreements with, or non-performance by, Cabot Corporation or another supplier, could adversely affect us as well. Also, if we change the supplier or type of key raw materials such as fumed metal oxides we use to make our existing CMP slurries or are required to purchase them from a different manufacturer or manufacturing facility, whether Cabot Corporation or another party, or otherwise modify our products, in certain circumstances our customers might have to requalify our CMP slurries for their manufacturing processes and products. The requalification process could take a significant amount of time to complete, possibly interrupting or reducing our sales of CMP slurries to these customers. 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 OR INCREASE IN-HOUSE SLURRY MANUFACTURING CAPABILITY Competition from current CMP slurry manufacturers, new entrants to the CMP slurry market or a decision by any of our major customers to produce, or increase the production of slurry products in-house could seriously harm our business and results of operations. Competition has increased from other existing providers of CMP slurries and opportunities exist for other companies with sufficient financial or technological resources to emerge as potential competitors by developing their own CMP slurry products. Increased competition and additional in-house production has and may continue to impact the prices we are able to charge for our slurry products as well as our overall business. We may also face competition arising from significant changes in technology, such as the development of polishing pads containing abrasives and emerging technologies such as electrochemical mechanical planarization ("ECMP"). In addition, our competitors could have or obtain intellectual property rights which could restrict our ability to market our existing products and/or to innovate and develop new products. 19 BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING PADS AND BECAUSE PRICING HAS BECOME INCREASINGLY COMPETITIVE, EXPANSION OF OUR BUSINESS INTO THIS AREA MAY NOT BE SUCCESSFUL An element of our strategy has been to leverage our current customer relationships and technological expertise to expand our business into new product areas and applications, including manufacturing and distributing CMP polishing pads. We have had limited experience in developing, manufacturing and marketing these products, which involve technologies and production processes that are relatively new to us. Further, we, our suppliers of the raw materials that we use to develop our polishing pads, or our provider of pads for whom we act as value-added reseller, may not be able to produce products that satisfy our customers' needs or may be unable to keep pace with technological or other developments in the design and production of polishing pads. In addition, under our value-added reseller model, our suppliers may not be able to produce and we may not be able to sell pads at prices that are competitive and provide a positive contribution to our business. Also, our competitors may have or obtain intellectual property rights which could restrict our ability to market our existing products and/or to innovate and develop new products. WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS We currently have operations and a large customer base outside the United States. Approximately 68% of our revenue was generated by sales to customers outside the United States for our fiscal year ended 2003. For the six months ended March 31, 2004, approximately 73% of our revenue was generated by sales to customers outside the United States. We encounter risks in doing business in certain foreign countries, including but 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. In June 2003 we completed our transition to selling directly to customers in Europe, Singapore and Malaysia who previously had been serviced through a third party distributor. Selling directly may increase our risk of conducting business in foreign countries. BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN OR PROTECT 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. OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER If we fail to attract and retain the necessary managerial, technical and customer support personnel, our business and our ability to maintain existing and obtain new customers, develop new products and provide acceptable levels of customer service could suffer. Competition for qualified personnel, particularly those with significant experience in the CMP and IC device industries, is intense. The loss of services of key employees could harm our business and results of operations. DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS Our business is affected by current economic and industry conditions and it is extremely difficult to predict sales of our products given uncertainties in these factors. For example, our quarterly revenue trends in fiscal years 2001 through 2003 were affected by the global economic slowdown and weakening in demand for electronic systems, coupled with higher than normal 20 chip inventories. While the semiconductor industry is now recovering from the prolonged downturn, any further declines or lack of improvement in current economic and industry conditions could continue to adversely affect our business. RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY The market price of our common stock has and could continue to 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 who follow 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, our competitors, or our customers of technological innovations, new products or different business strategies; and trading volume of our common stock. ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND OUR RIGHTS PLAN MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID FOR OUR COMPANY 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. For example, our amended certificate of incorporation authorizes 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. Also our amended certificate of incorporation provides for the division of our board of directors into three classes as nearly equal in size as possible with staggered three-year terms. 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. 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, to a lesser extent, the British Pound and the Euro. From time to time we enter into forward contracts in an effort to manage foreign currency exchange exposure. However, we may be unable to hedge these exposures completely. Approximately 17% of our revenue is transacted in currencies other than the U.S. dollar. We do not currently enter into forward exchange contracts or other derivative instruments for speculative or trading purposes. MARKET RISK AND SENSITIVITY ANALYSIS OF FOREIGN EXCHANGE RATE RISK We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates. As of March 31, 2004, the analysis demonstrated that such market movements would not have a material adverse effect on our consolidated 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. 21 ITEM 4. CONTROLS AND PROCEDURES Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to make known to them in a timely fashion material information related to the Company required to be filed in this report. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls between the date of their evaluation and the filing of this report. While we believe the present design of our disclosure controls and procedures is effective to make known to our senior management in a timely fashion all material information concerning our business, we will continue to improve the design and effectiveness of our disclosure controls and procedures to the extent necessary in the future to provide our senior management with timely access to such material information, and to correct any deficiencies that we may discover in the future. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not currently involved in any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of stockholders of Cabot Microelectronics held on March 9, 2004, the following proposals were approved: Proposal I - Election of two directors, each for a term of three years
Number of Votes For Election Number of Votes Withheld ---------------------------- ------------------------ Juan Enriquez-Cabot 23,412,240 299,423 H. Laurance Fuller 23,198,274 513,389
Proposal II - Ratification of the election of William P. Noglows to the board of directors A proposal to ratify the election of William P. Noglows was approved with 23,406,833 shares cast for, 263,090 shares cast against, and 41,740 shares abstaining. Proposal III - Ratification of the selection of PricewaterhouseCoopers LLP as the company's independent auditors for fiscal 2004 A proposal to ratify the selection of PricewaterhouseCoopers LLP as the company's independent auditors for fiscal 2004 was approved with 23,147,781 shares cast for, 540,285 shares cast against, and 23,597 shares abstaining. Proposal IV - Approval of our Second Amended and Restated 2000 Equity Incentive Plan A proposal to approve our Second Amended and Restated 2000 Equity Incentive Plan was approved with 15,537,783 shares cast for, 4,672,245 shares cast against, and 185,732 shares abstaining. In addition, there were 3,315,903 broker non-votes. 22 ITEM 5. OTHER INFORMATION Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing to investors the non-audit services approved by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our independent auditor. Non-audit services are defined in the law as services other than those provided in connection with an audit or a review of the financial statements of the Company. During the quarter covered by this filing our Audit Committee approved or reaffirmed approval of the following non-audit services performed by PricewaterhouseCoopers LLP: (1) tax compliance and consultations related to research and experimentation tax credits; (2) tax compliance and consultations related to our foreign operations; and (3) tax consultations with respect to our Equity Incentive Plan and other compensation plans. 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 ------ ----------- 10.40 Amendment No. 2 to Fumed Metal Oxide Agreement, between Cabot Microelectronics Corporation and Cabot Corporation. 10.41 Amendment No. 3 to Fumed Metal Oxide Agreement, between Cabot Microelectronics Corporation and Cabot Corporation. 10.42 Fumed Silica Supply Agreement (confidential treatment applied for).+ 10.43 General Release, Waiver and Covenant Not to Sue.* 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. + 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. * Management contract, or compensatory plan or arrangement.
(b) Reports on Form 8-K In a report dated January 22, 2004, Cabot Microelectronics reported under Item 7. "Financial Statements and Exhibits" and Item 12. "Results of Operations and Financial Condition" that on January 22, 2004 Cabot Microelectronics reported financial results for its first fiscal quarter ended December 31, 2003. 23 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: May 7, 2004 /s/ WILLIAM S. JOHNSON ------------------------------------------ William S. Johnson Vice President and Chief Financial Officer [Principal Financial Officer] Date: May 7, 2004 /s/ THOMAS S. ROMAN ------------------------------------------ Thomas S. Roman Corporate Controller [Principal Accounting Officer] 24 EX-10.40 2 c84500exv10w40.txt AMENDMENT #2 TO FUMED METAL OXIDE AGREEMENT EXHIBIT 10.40 AMENDMENT NO. 2 TO FUMED METAL OXIDE SUPPLY AGREEMENT (Extension of Time for Non-Renewal Notice) This agreement is made and executed as of December 17, 2003 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 December 11, 2001 by Amendment No. 1 (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 in negotiations to enter into a Fumed Silica Supply Agreement (the "Fumed Silica Agreement") as to the supply by Cabot to CMC of Fumed Silica; and WHEREAS, CMC and Cabot wish to amend the Agreement to extend the period for non-renewal; NOW THEREFORE, the Parties do hereby agree as follows: 1. Section 1 of the Agreement is hereby amended to read in its entirety as follows: "This Agreement shall commence on the date of the initial public offering by CMC of shares of CMC common stock, and shall continue until June 30, 2005 (the "Initial Term"). Unless either party shall give a notice of non renewal prior to February 1, 2004, this Agreement shall continue after the Initial Term until terminated by either party by a written notice of termination, which shall terminate this Agreement effective on the first June 30 or December 31 more than 18 months after the date such notice is delivered. The Initial Term, together with any continuations, are referred to herein as the "Term". Each year of the Term beginning on the effective date or an anniversary thereof is referred to herein as a "Term Year", including the stub period, if any, between the last anniversary of the effective date and the end of the Term." 2. 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: Eduardo Cordeiro Title: Vice President CABOT MICROELECTRONICS CORPORATION By_________________________ Duly Authorized Name: Daniel J. Pike Title: Vice President EX-10.41 3 c84500exv10w41.txt AMENDMENT #3 TO FUMED METAL OXIDE AGREEMENT EXHIBIT 10.41 AMENDMENT NO. 3 TO FUMED METAL OXIDE SUPPLY AGREEMENT (Removal of Fumed Silica from Agreement) This agreement is made and executed as of January 16, 2004 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 December 11, 2001 and December 17, 2003 by Amendments Numbered 1 and 2 respectively (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 Silica Supply Agreement (the "Fumed Silica Agreement") as to the supply by Cabot to CMC of Fumed Silica; and WHEREAS, CMC and Cabot desire that such Fumed Silica Agreement is the sole undertaking and agreement of the parties with respect to the supply by Cabot to CMC of Fumed Silica; and WHEREAS, CMC and Cabot wish to amend the Agreement as to Fumed Silica to remove, and make null and void, the applicability of the Agreement, and all terms under the Agreement related to, Fumed Silica; WHEREAS, Cabot wishes to give notice of nonrenewal to CMC, pursuant to Section 1 of the Agreement. NOW THEREFORE, the Parties do hereby agree as follows: 1. Section 2.1(a) of the Agreement is hereby amended to read in its entirety as follows: "(a) Subject to the terms and conditions of this Agreement, during the Term, Cabot shall provide to CMC, and CMC shall purchase from Cabot, the Products (as defined below) in such quantities as specified by CMC, subject to Sections 2.3 through 2.5 below. "Products" means: (i) the fumed alumina of the grades and meeting the product specifications set forth on Schedule B hereto (the "Fumed Alumina" or the "Fumed Metal Oxides"), which shall conform to the specifications, formulae and processes set forth on Schedule B hereto. 2. Any and all references to "Fumed Silica" and "Schedule A" in the Agreement are hereby deleted and are null and void. 3. The Agreement shall expire on its terms on June 30, 2005. The parties hereby acknowledge and agree that this Amendment No. 3 shall serve as well as the notice of nonrenewal contemplated in Section 1 of the Agreement. 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: Eduardo C. Cordeiro Title: Vice President CABOT MICROELECTRONICS CORPORATION By_________________________ Duly Authorized Name: Daniel J. Pike Title: Vice President EX-10.42 4 c84500exv10w42.txt FUMED SILICA SUPPLY AGREEMENT EXHIBIT 10.42 CONFIDENTIAL TREATMENT FUMED SILICA SUPPLY AGREEMENT This FUMED SILICA SUPPLY AGREEMENT (this "Agreement"), executed and effective as of the 16th day of January, 2004, is between Cabot Corporation ("Cabot"), a Delaware corporation, and Cabot Microelectronics Corporation ("CMC"), a Delaware corporation. With respect to the supply by Cabot to CMC of Fumed Silica (defined below), this Agreement replaces and supercedes the parties' agreement regarding Fumed Silica pursuant to the Fumed Metal Oxide Supply Agreement executed on January 20, 2000 as amended on December 12, 2001 and December 17, 2003 by and between Cabot and CMC (together, the "FMO Supply Agreement"). 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 with respect to the supply by Cabot to CMC of Fumed Alumina, whether under the FMO Supply Agreement or that certain Fumed Alumina Supply Agreement by and between the Parties executed December 12, 2001 (the "Unit C Agreement"). WHEREAS, CMC desires to continue to purchase certain fumed silica products from Cabot for an additional period beyond the initially contemplated expiration of June 30, 2005 of the Original FMO Supply Agreement pursuant to the terms of this Agreement; and WHEREAS, Cabot desires to continue to provide such fumed silica products to CMC pursuant to the terms of this Agreement; and WHEREAS, Cabot continues to provide and CMC continues to purchase certain fumed alumina products pursuant to the terms of the FMO Supply Agreement and the Unit C Agreement, unaffected by the terms of this Agreement; and, WHEREAS, both parties desire that their sole undertaking and agreement with respect to fumed silica be replaced with and governed by this Agreement and not by the FMO Supply Agreement, and are simultaneously herewith entering into an Amendment No. 3 to Fumed Metal Oxide Supply Agreement to such effect; NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. TERM OF THIS AGREEMENT (a) This Agreement shall commence as of the date hereof, and shall continue until December 31, 2009 (the "First Term"). Unless either party shall give a notice of non-renewal prior to June 30, 2008, this Agreement shall continue after the First Term until terminated by either party by a written notice of termination, which shall terminate this Agreement effective on the first June 30 or December 31 more than 18 months after the date such notice is delivered. The First Term, together with any continuations, are referred to herein as the "Term". Each year of the Term beginning on the effective date or an anniversary thereof is referred to herein as a "Term Year", CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 1 OF 18 CONFIDENTIAL TREATMENT including the stub period, if any, between the last anniversary of the effective date and the end of the Term. SECTION 2. PRODUCTS 2.1 Purchase and Sale. (a) Subject to the terms and conditions of this Agreement, during the Term, Cabot shall provide to CMC, and CMC shall purchase from Cabot, the Fumed Silica (as defined below) in such quantities as specified by CMC, subject to Sections 2.3 through 3.3 below. "Fumed Silica" means: the fumed silica of the grades and meeting the product specifications set forth on Schedules A.1 hereto, with respect to fumed silica to be produced by Cabot at its Tuscola, Illinois facility and of the grades and meeting the product specifications set forth in Schedules A.2 hereto, with respect to fumed silica produced by Cabot at its Barry, Wales facility (taken together, Schedules A.1 and A.2 are hereinafter referred to collectively as the "Specifications"). (b) Subject to the provisions of Section 8.7 below, any amendment to the Specifications shall require the prior written consent of both CMC and Cabot. Except as provided in Section 8.3 or otherwise in this Agreement or otherwise agreed to by Cabot, any increase in costs incurred by Cabot in manufacturing the Fumed Silica to comply with changes requested by CMC to the Specifications, or changes necessary to comply with changes to the Specifications to manufacturing processes or otherwise, shall be paid by CMC. If such costs are removed or otherwise cease to be incurred by Cabot, then CMC will no longer be obligated to pay such costs to Cabot, and Cabot will notify CMC within ten (10) business days of the cessation of such costs. If such costs are reduced, then CMC will only be obligated to pay such reduced costs and Cabot will notify CMC within ten (10) business days of the reduction of such costs. 2.2 Forecasts. CMC shall provide Cabot with forecasts (the "Forecasts") of the quantities of Fumed Silica that CMC expects to purchase from Cabot (the "Forecasted Quantities"). The Forecasts shall identify by grade, the Forecasted Quantities and the Cabot facility or facilities that will produce and deliver to CMC such Forecasted Quantities (including the volume to be made at each plant). CMC shall provide the following Forecasts to Cabot: (a) not more than sixty (60) but not less than thirty (30) days prior to each January 1, April 1, July 1 and October 1 during the Term, a Forecast indicating the Forecasted Quantity for each month of the calendar quarter commencing on such January 1, April 1, July 1 and October 1 (the "Quarterly Forecast"); provided, however, that in such Quarterly Forecast, the Forecasted Quantity for any month may not exceed the Forecasted Quantity for the previous month by more than 20%; (b) not more than sixty (60) but not less than thirty (30) days prior to each July 1 and January 1 during the Term, a semi-annual Forecast indicating the Forecasted Quantity for the six (6) month period commencing on such July 1 and January 1 (the "Six Month Forecast"); CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 2 OF 18 CONFIDENTIAL TREATMENT (c) not more than sixty (60) but not less than thirty (30) days prior to each July 1, a one (1) year Forecast indicating the Forecasted Quantity for the calendar year commencing on the following July 1 (the "Annual Forecast"); and (d) on or around each July 1, an eighteen (18) month Forecast indicating the Forecasted Quantity for the eighteen month period commencing on the following July 1 (the "18 Month Forecast"); provided, however, that CMC shall provide Cabot with a revised eighteen (18) Month Forecast for the remainder of the eighteen (18) month period covered by the last 18 Month Forecast as soon reasonably practicable after CMC becomes aware of any material changes to such 18 Month Forecast. For the purposes of this Agreement, Forecasts delivered by CMC to Cabot after the execution hereof shall, upon the effectiveness of this Agreement, be deemed to have been delivered hereunder. With respect to planned shutdowns of Cabot's manufacturing facilities, the parties shall work together and cooperate with each other regarding necessary adjustments to forecasts and delivery schedules hereunder. 2.3 Cabot's Maximum Supply Obligations. (a) The obligation of Cabot to supply Fumed Silica to CMC under this Agreement shall be subject to each of the following maximum volume limitations: (i) the maximum annual volume of Fumed Silica from Cabot's Tuscola, Illinois facility (the "Tuscola Plant") shall be [ ] pounds per Term Year. In addition to the foregoing, the maximum monthly volume of Fumed Silica from the Tuscola Plant for any given month shall be up to [ ] pounds per month provided that the total of such monthly volumes does not exceed [ ] pounds per Term Year from the Tuscola Plant; and, (ii) the maximum annual volume of Fumed Silica from Cabot's Barry, Wales facility (the "Barry Plant") shall be [ ] pounds per Term Year. In addition to the foregoing, the maximum monthly volume of Fumed Silica from the Barry Plant shall be [ ] pounds per month provided that the total of such monthly volumes does not exceed [ ] pounds per Term Year from the Barry Plant. In clarification of the above Section 2.3(a), any volumes of Fumed Silica supplied by Cabot under the Dispersions Services Agreement, by and between the Parties, dated January 20, 2000 and amended as of December 17, 2003, shall not be considered in calculating the maximum volumes of Fumed Silica Cabot is obligated to supply hereunder. (b) In addition to, but not in derogation of the volume limitations set forth in 2.3(a) above, in the event that CMC orders volumes of Fumed Silica from Cabot in excess of Forecasted Quantities, Cabot shall not be obligated to supply to CMC such Fumed Silica in excess of the following volumes: CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 3 OF 18 CONFIDENTIAL TREATMENT (i) for any calendar quarter and any plant, [ ] of the volumes of Fumed Silica for such plant set forth in CMC's Quarterly Forecast; (ii) for any calendar half year (beginning on or after July 1, 2004) and for any plant, [ ] of the volumes of Fumed Silica for such plant set forth in CMC's Sixth Month Forecast; and (iii) for any year beginning January 1, 2005 and for any plant, [ ] of the volumes of Fumed Silica for such plant set forth in CMC's Annual Forecast. (c) The maximum supply obligations set forth in Sections 2.3(a) and (b) are referred to herein as the "Maximum Volumes". If CMC shall request volumes of Fumed Silica in excess of the Maximum Volumes described in Sections 2.3(a) and (b) 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. Within five (5) business days of CMC's request for Excess Volumes in any of the forecasts or orders for Excess Volumes, which orders if filled CMC agrees to purchase, Cabot shall notify CMC of whether it will supply such Excess Volumes to CMC. 2.4 Minimum Volumes. (a) CMC shall be obligated to purchase from Cabot during each six month period covered by a Six Month Forecast a "Minimum Volume," meaning at least 90% of the aggregate volumes of Fumed Silica forecasted to be purchased by CMC as set forth in each Six Month Forecast. Cabot and CMC recognize that damages for CMC's failure to purchase Minimum Volumes would be difficult to ascertain and prove. Cabot and CMC agree that if, during any six month period CMC fails to purchase from Cabot the Minimum Volume of Fumed Silica for such six month period, CMC shall pay to Cabot liquidated damages in an amount equal to the product obtained by multiplying (i) the difference (in pounds) between (x) the applicable Minimum Volume and (y) the amount of Fumed Silica actually purchased by CMC during the relevant six month period times. (ii) [ ] Cabot and CMC agree that such liquidated damages are the sole and exclusive remedy for CMC's failure to purchase Minimum Volumes. Cabot and CMC further agree that such liquidated damages represent a reasonable estimate of Cabot's damages and do not constitute a penalty. CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 4 OF 18 CONFIDENTIAL TREATMENT SECTION 3. EXCLUSIVITY; RESALE AND NON-COMPETE 3.1 Exclusivity; Exception Thereto. (a) CMC shall purchase from Cabot all of the Fumed Silica necessary to produce the products produced by CMC on the effective date of this Agreement, but only up to the total of the Maximum Volumes. This obligation shall continue even if CMC's purchase of Fumed Silica falls below [ ] pounds in any two consecutive six month periods commencing on January 1 and July 1, respectively. With respect to products developed and produced by CMC after the effective date of this Agreement, CMC shall not be obligated to purchase from Cabot any of the fumed silica necessary to produce such products. (b) During the Term of this Agreement, Cabot shall not knowingly, without CMC's prior written consent, directly or indirectly, sell any Fumed Silica to any person or entity other than CMC for use in the production of any goods or products that compete with any CMP (chemical mechanical polishing) consumable goods and products produced by CMC, provided, however, that CMC continues to purchase at least [ ] pounds of Fumed Silica during any two consecutive six month period commencing on January 1 and July 1, respectively, during the Term of this Agreement. In the event that CMC's purchases fall below such amount in any such two consecutive six month period commencing on January 1 and July 1, respectively, Cabot may sell for the remaining duration of this Agreement any Fumed Silica to any person or entity for use in the production of any goods or products that compete with CMP consumable goods and products produced by CMC. Concurrent with this, if Cabot sells such Fumed Silica to any person or entity at a price less than the Base Price at which CMC is purchasing the Fumed Silica under this Agreement, Cabot shall contemporaneously offer to sell Fumed Silica to CMC and CMC shall immediately become eligible to purchase Fumed Silica under this Agreement at a "Most Favored Nations" price. For purposes of the foregoing sentence, Most Favored Nations ("MFN") price shall mean the lowest price Cabot charges its other CMP customers during the same time for Fumed Silica that is of similar or greater quality and similar or greater specifications of the Fumed Silica purchased by CMC hereunder (except for any sales to the United States Government.) (c) Notwithstanding Section 3.1(a) above, in the event CMC requests a change to a Specification for the Fumed Silica, which change is necessary in order to achieve a material performance difference in CMC's end product(s) and Cabot is not able or is unwilling to modify such Specification, CMC shall have the right to obtain such modified product from any third party, subject to any intellectual property rights Cabot may have. (d) Notwithstanding Section 3.1(a) above, in the event that Cabot fails to supply CMC with its requirements for Fumed Silica for any reason, CMC shall have the right to obtain such Fumed Silica from any third party, subject to any intellectual property rights Cabot may have. 3.2 Resale Prohibition. The parties intend and agree that the Fumed Silica being sold hereunder to CMC is being sold solely for the use by CMC and its subsidiaries in manufacturing their products. Accordingly, CMC and its subsidiaries are prohibited from reselling any Fumed Silica purchased hereunder. However, in the event CMC determines, in good faith, that the Fumed CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 5 OF 18 CONFIDENTIAL TREATMENT Silica supplied hereunder, which otherwise meet the Specifications, but which are not fit for CMC's use in the manufacture of CMP slurries, CMC shall have the right to resell such Fumed Silica, provided, CMC first offers Cabot the option to purchase such Fumed Silica back from CMC at a price which is the lower of (i) the price paid by CMC to Cabot for such material, or (ii) the price at which CMC will resell such material. Notwithstanding the foregoing, Cabot shall be obligated to repurchase up to [ ] pounds of Fumed Silica at the Base Price during each and every Term Year of this Agreement should CMC decide it desires to sell such material for any reason. 3.3 Cabot's Non-Compete Agreement. During the Term of this Agreement, Cabot agrees to not knowingly directly compete with CMC in the use, production and/or sale of any product that contain any fumed silica products and that competes with any chemical mechanical polishing consumable product produced by CMC during the Term of this Agreement. SECTION 4. MANUFACTURING STABILITY PROCESS 4.1 Establishment of Cabot's [ ]. Cabot shall establish a [ ] produced for delivery to CMC under this Agreement and acting in good faith determine, prior to shipping, [ ] [ ] 4.2 [ ] [ ] SECTION 5. PRICING 5.1 Prices. Cabot shall sell the Fumed Silica to CMC in accordance with the following prices (the "Prices"): (a) Fumed Silica Price. Except as may be provided for under Section 3.1(b) above in the case of a Most Favored Nations price or under Section 5.1(b) below in the case of an Inflation Adjustment, the price for Fumed Silica, whether Maximum Volumes or Excess Volumes, shall be equal to the Base Price as defined in Table 1 below for each Term Year. The Base Price for Term Year 1 shall commence on the Effective Date of this Agreement and the Base Price for each Term Year subsequent to Term Year 1 shall be effective commencing on the first day of each subsequent Term Year starting with January 16, 2005. The price of Fumed Silica to be purchased shall be determined by the date the order therefor is placed with Cabot, with respect to all volumes specified therein to be delivered within 90 days after the date such order is placed, and by the date specified for delivery, with respect to all volumes specified for delivery thereafter. CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 6 OF 18 CONFIDENTIAL TREATMENT TABLE 1
Term Year Price ($/lb) - --------- ------------ 1 [ ] 2 [ ] 3 [ ] 4 [ ] 5 [ ] 6 [ ] 7 [ ]
(b) Inflation Adjustment. Starting with the second Term Year, and at the commencement of each and every Term Year thereafter, if the percentage increase in the annual Producer Price Index (PPI) for Total Manufacturing Industries as reported by the Bureau of Labor and Statistics for the preceding calendar year relative to the year prior to the preceding calendar year (hereafter referred to as the "Inflation Factor") exceeds [ ] ("Threshold Inflation Level"), the Base Price for each such and subsequent Term Year will be increased by the following formula (hereafter referred to as the "Inflation Adjustment"): [ ] times (a) the Base Price for each such Term Year times the difference between (a) the Inflation Factor and (b) [ ]; provided, however, that in no event will an Inflation Adjustment be applied in any case of Most Favored Nations pricing pursuant to Section 3.1(b) above. 5.2 Cost Savings. Cabot and CMC acknowledge that it is their intention to decrease the costs associated with manufacturing the Fumed Silica, and to share any cost savings resulting from joint efforts equally between them. Cabot and CMC agree to discuss, from time to time, ways to jointly decrease such costs. If a change is approved by CMC under Section 6 of the Specifications, and such change results in cost savings to Cabot, the parties agree to share such cost savings on a [ ], or as otherwise agreed in writing by the parties. SECTION 6. ORDERS, SHIPPING, DELIVERY AND PAYMENT 6.1 Orders for Fumed Silica shall be issued by CMC from time to time. Each order shall specify the date(s) the products are to be delivered, which date(s) shall be not less than ten (10) business days after the date the order is received by Cabot. For purposes of applying 2.3 and 2.4 only, each volume of Fumed Silica shall be deemed to be in the month specified for its shipment in CMC's order; and if no date is specified, then in the month following the month in which the order therefor is issued by CMC. 6.2 All sales of Fumed Silica under this agreement are made F.O.B. Cabot's point of shipment. CMC shall be responsible for all transportation costs and title and risk of loss shall pass to CMC upon delivery to carrier. CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 7 OF 18 CONFIDENTIAL TREATMENT 6.3 All Fumed Silica shall be prepared by Cabot for delivery to CMC, as the case may be, including the necessary dunnage, to prevent damage during the normal course of transportation. 6.4 Cabot shall invoice CMC for the Fumed Silica delivered to CMC during each month by the fifteenth (15th) calendar day of the following month. Cabot shall deliver such invoices to CMC by regular U.S. mail, or other methods such as express U.S. mail, overnight courier or other means, if mutually acceptable. 6.5 CMC shall pay each such invoice within fifteen (15) calendar days of receipt thereof. Such payment shall be made by check or wire transfer in readily available same day or next day funds denominated in United States dollars. If payment is to be made by wire transfer, CMC shall request and Cabot shall provide to CMC, wire transfer instructions. SECTION 7. WARRANTIES AND REMEDIES 7.1 Warranty as to Fumed Silica. Cabot represents and warrants to CMC that, when shipped to CMC, the Fumed Silica will conform in all respects to the Specifications then in effect. 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 THE FUMED SILICA, WHETHER USED ALONE OR IN COMBINATION WITH OTHER SUBSTANCES, EVEN IF THE PURPOSES OR USES OF SUCH FUMED SILICA ARE KNOWN BY CABOT. MOREOVER, CABOT DOES NOT REPRESENT OR WARRANT FITNESS FOR ANY PARTICULAR PURPOSE THE FUMED SILICA [ ]. Cabot also represents and warrants that such Fumed Silica delivered pursuant to this Agreement is free and clear of all liens, claims, and encumbrances and is conveyed with good title to CMC. 7.2 Limitation on Remedies. EXCEPT IN RESPECT TO OBLIGATIONS UNDER SECTION 12.11 HEREOF, IN NO EVENT SHALL CABOT BE RESPONSIBLE OR LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING AS A RESULT OF ANY BREACH OF WARRANTY IN RESPECT OF ANY FUMED SILICA UNDER THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 7.3 Remedies for Failure to Meet Specifications for Fumed Silica. Subject to Section 7.2 and Section 7.4, if at the time CMC takes delivery of any Fumed Silica which does not conform in all respects to the Specifications in effect at the time of its manufacture, Cabot agrees to replace such Fumed Silica with Fumed Silica that conforms to such Specifications. Cabot shall not be obligated to replace any such non-conforming Fumed Silica if such nonconformance was caused by CMC's failure to store such Fumed Silica in accordance with Section 8.15 hereof. Subject to the following sentence, CMC shall not be obligated to accept or pay for Fumed Silica that does not conform to the Specifications in effect at the time of its manufacture but shall be deemed to have irrevocably accepted such Fumed Silica if, after twelve months from the date of its delivery, CMC has not notified Cabot that such Fumed Silica does not meet the Specifications. CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 8 OF 18 CONFIDENTIAL TREATMENT 7.4 Remedies for Failure to Meet [ ] Notwithstanding Section 7.3 or anything else in this Agreement to the contrary, if any Fumed Silica was produced without compliance to [ ], such non-compliance will be deemed an [ ] (a) For all [ ]. Cabot shall not be obligated to [ ] if CMC failed to store such Fumed Silica in accordance with Section 8.15 hereof. (b) [ ]. (c) For each Term Year, the [ ]. In addition, in no event shall Cabot have any obligation pursuant to Sections 7.4(a) and 7.4(b) for any Fumed Silica identified more than twelve months after the date of delivery of such Fumed Silica. 7.5 Limitations. EXCEPT IN RESPECT OF OBLIGATIONS UNDER SECTION 12.11 HEREOF, IN NO EVENT SHALL CMC BE RESPONSIBLE OR LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 8. MANUFACTURING REQUIREMENTS 8.1 General Quality System Requirements. Cabot shall maintain a Quality Management System that is either registered to, or is compliant with, a known quality standard, such as ISO-9001. 8.2 Corrective and Preventative Action Responsiveness. Cabot shall apply corrective and preventive actions in accordance with Cabot's approved quality system procedures. It is the expectation that Cabot will [ ]. (a) Closure of complaints as issued by CMC to Cabot shall be completed upon review and joint agreement between CMC and Cabot of the proposed corrective and preventive actions from Cabot. (b) Cabot shall provide resources that it deems reasonably sufficient to [ ], when appropriate. (c) CMC will provide relevant information to Cabot (when available and possible) to support Cabot's investigation of complaints issued by CMC. (d) Cabot will respond to a complaint from CMC within the following time frames: (i) Cabot will acknowledge all complaints within [ ]. (ii) Cabot will put in place [ ]. If containment actions cannot be put in place within [ ], Cabot will apply commercially reasonable efforts to implement containment actions as soon as possible. CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 9 OF 18 CONFIDENTIAL TREATMENT (iii) [ ] - The [ ] shall be investigated by Cabot and commercially reasonable efforts shall be made by Cabot to identify the [ ] within [ ]. A report shall be provided to CMC summarizing the results of the investigation (including a list of [ ]) within [ ]. Cabot is required to validate the [ ], but this may come at a later date depending on [ ]. If the issue is a particularly difficult one, and Cabot demonstrates appropriate action towards finding the [ ] format, this deadline may be considered met without a [ ]. (iv) A [ ] shall be developed and followed by Cabot and communicated to CMC within [ ]. [ ]. In most circumstances, [ ] should be in place by the end of the [ ]. It is the responsibility of the CMC Quality Engineer/Commodity Managers to determine if the difficulty of the problem is such to warrant implementation [ ]. (v) In the event of a particularly difficult problem, the timelines provided in (i)-(iv) above shall be extended to accommodate an appropriate [ ]. CMC will consider that Cabot has met the required timelines, if appropriate written communication has been received in the required time window and that written communication takes place on regular intervals until the [ ]. 8.3 [ ]. The parties will meet [ ]. Cabot will devote the appropriate level of resources and make good faith efforts required [ ] specifically related to the manufacture of Fumed Silica for CMC. 8.4 Cabot [ ] 8.5 Quality Control Document. Cabot shall manufacture the Fumed Silica according to a documented [ ], and any changes to it must be made using Cabot's approved quality system change control process in accordance with the CMC Management of Change requirements set forth in the Specifications hereto. Appropriate Cabot personnel shall be trained in the requirements of the [ ] and the associated procedures, work instructions and test methods. These personnel shall also be re-certified on an established, periodic basis to ensure that [ ], procedures, work instructions and test methods are followed correctly. 8.6 [ ] Cabot shall establish a plan to employ [ ] processes for all Fumed Silica characteristics referenced on the [ ] processes, including [ ], will be implemented and documented in [ ] for the Fumed Silica. Upon request by CMC, Cabot will be responsible for sending to CMC on a [ ] for Fumed Silica manufactured for CMC in production units qualified by CMC. These [ ] will include [ ] for all Fumed Silica manufactured for CMC during the specified time frame (including that Fumed Silica which is manufactured for but not shipped to CMC). 8.7 Specification Revision. (a) If either Cabot or CMC determines in good faith that a [ ] in the manufacture of Fumed Silica which is in Cabot's [ ] [ ] the Fumed Silica supplied to CMC (hereafter CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 10 OF 18 CONFIDENTIAL TREATMENT identified as a [ ] or [ ]), the [ ] will be added to the Specifications as a [ ]; provided, however, that CMC agrees to pay any costs associated with such changes which are [ ] pursuant to Section 8.3 above, except to the extent that Cabot is responsible for such costs pursuant to Section 2.1(b) above. The specification limits for the [ ] will be established based [ ] (b) In addition, [ ]of each calendar year, starting on March 1, 2004, based on (a) the [ ], with assignable [ ] removed if corrective actions in place and validated or (b) [ ]. In the case of [ ] [ ]. In the case [ ] specifications for these parameters will be set [ ] after implementation of [ ] for each parameter for the preceding [ ] 8.8 [ ]. Cabot must calculate [ ] Calculations will be performed following the procedures outlined in the Cabot document "Guidelines for Statistical Data Analysis." [ ] Cabot will share the [ ] upon request by CMC. In addition [ ] may necessitate an increased frequency for review and revision of [ ] 8.9 Definition of [ ]. Cabot must calculate [ ] as described in Section 8.8 above. In the case of [ ] is defined using the following criteria: (a) [ ] (b) Unless otherwise agreed to by Cabot and CMC, Cabot shall apply [ ] with CMC [ ]. [ ] 8.10 [ ] for all measurements on at least [ ] basis. The results of the [ ] will be supplied to CMC. Cabot will make commercially reasonable efforts to ensure that all test methods listed in Section 3.0 of the Specifications have [ ]. For those test methods that do [ ] Cabot shall put in place an [ ] 8.11 [ ] Cabot shall establish a [ ] program which ensures that written procedures are established for the [ ] and how to verify that the activity was completed correctly. Cabot shall train and retrain [ ] personnel on such procedures prior to performing such [ ] in accordance with Cabot's documented Process Safety Management (PSM) guidelines, the OSHA 9000 Guidelines and/or ISO 9001/2000 requirements (depending on Cabot location). Cabot shall also ensure that any and all [ ] 8.12 Quality Reporting Requirements. For every lot of material released to CMC, [ ] Cabot shall provide to CMC review at CMC's request [ ] Cabot shall provide [ ] summaries to CMC and document all actions taken, including an [ ]. All proprietary and confidential information provided by Cabot to CMC under this Section 8.12 shall be deemed to be Cabot Confidential Information and subject to the provisions of Section CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 11 OF 18 CONFIDENTIAL TREATMENT 12.11 hereof, whether so marked or not. 8.13 [ ] Requirements. Cabot shall keep [ ] manufactured for CMC in an amount sufficient to [ ] commencing with the production of the [ ] 8.14 Record Retention. All records that describe the manufacture of, or provide traceability for, the manufacture, testing, storage, shipping and handling of Fumed Silica manufactured for CMC will be retained for a minimum [ ] 8.15 Storage, Handling, Shipping and Shelf Life Requirements. Prior to shipment to CMC, Cabot must store the Fumed Silica under conditions that protect it from damage and exposure to [ ] Fumed Silica must have a [ ], provided CMC stores the Fumed Silica in its [ ] With respect to each lot of Fumed Silica delivered to CMC, Cabot shall provide and append to the contractual documentation for such lot a Certificate of Analysis (COA). [ ] Upon written request of CMC and to the extent reasonably possible, Cabot will provide CMC with such information regarding [ ] used for the production of the Fumed Silica. 8.16 CMC Access; CMC Audits. During the Term of this Agreement and subject to the Confidentiality provisions of Section 12.11 hereof, Cabot agrees to allow CMC personnel reasonable access to all technical, quality and production information related to the manufacture of the Fumed Silica (whether or not such Fumed Silica is delivered to CMC). Cabot agrees to allow an independent certified public accounting firm reasonable access to its records during normal business hours for the sole purpose of verification that Cabot is meeting its obligations pursuant to Section 3.1 with respect to MFN pricing, provided that such independent certified public accounting firm agrees to be bound by certain confidentiality provisions Cabot shall require in doing such verification. In addition, Cabot agrees to allow CMC personnel reasonable access during normal business hours to those Cabot production units qualified by CMC for supply of Fumed Silica. CMC shall have the right on a periodic or case-by-case basis, during usual business hours, to perform on-site audits of the quality management system regarding the Fumed Silica and the associated quality system documents, including but not limited to [ ], and personnel training documentation, with appropriate notice and Cabot's approval. CMC will report the results of each audit within one week of the audit completion. Any such on-site audit shall be subject to such confidentiality standards and safeguards of know-how and other intellectual property as Cabot may impose. CMC is willing to audit Cabot's subcontractors at Cabot's request. In the case of quality related incident (an excursion), CMC may require to audit Cabot's facilities on short notice. Cabot will use commercially reasonable efforts to accommodate CMC's requests in these cases. 8.17 [ ] Requirements. Cabot will make commercially reasonable efforts to use [ ] If Cabot is required to use [ ] in the manufacture of Fumed Silica for CMC, Cabot will provide CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 12 OF 18 CONFIDENTIAL TREATMENT CMC as much notice as possible and will identify to CMC those lots of Fumed Silica that are manufactured with such MTCS. SECTION 9. SAFETY REQUIREMENTS 9.1 Cabot agrees to label the Fumed Silica as provided by applicable law and to provide CMC with current copies of Material Safety Data Sheets ("MSDS") for the Fumed Silica. 9.2 Cabot shall comply with all applicable federal, state and local codes and regulations regarding packaging, labeling, transportation, storage and handling of the Fumed Silica. 9.3 Cabot represents that the Fumed Silica are listed on the current Toxic Substances Control Act (TSCA) inventory of the United States Environmental Protection Agency. SECTION 10. PATENT INDEMNITIES 10.1 Patent Infringement. (a) Subject to Section 7.2, 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 the Fumed Silica 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 10.1(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 Fumed Silica; 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 Fumed Silica (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 Silica. 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 any costs or amounts other than for payment for any Fumed Silica purchased by CMC through the date of such termination). This Section 10.1 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 Fumed Silica 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 Fumed Silica, or CMC is enjoined from purchasing CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 13 OF 18 CONFIDENTIAL TREATMENT or using, or if Cabot determines in good faith that it is unable or unwilling to supply Fumed Silica because such Fumed Silica 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 Silica 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 10.1(a) or (ii) such determination relates to an infringement or possible infringement for which Cabot is responsible under Section 10.1(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 Fumed Silica; 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 Fumed Silica (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 Silica. In the event that Cabot is unable to achieve either alternative (x), (y) or (z), Cabot may suspend supplying Fumed Silica to CMC or terminate this Agreement without further liability to CMC (in which case CMC shall not be liable for any costs or amounts other than for payment for any Fumed Silica purchased by CMC through the date of such termination). (c) Subject to Section 7.2, 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 Fumed Silica by CMC or its affiliates or their customers (or other CMC Indemnified Party), including without limitation use of Fumed Silica alone or in combination with other substances or components or (ii) Fumed Silica 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 10.1 states CMC's entire obligation and liability with respect to intellectual property infringement claims. SECTION 11. 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 11. Any such writing will be duly given upon delivery, if delivered by hand, facsimile transmission or mail, to the following addresses: CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 14 OF 18 CONFIDENTIAL TREATMENT If to Cabot: Cabot Corporation Business and Technical Center Billerica, MA 01821 Attn: Fumed Metal Oxide Product Line Manager Telecopier: 978-670-8095 With a copy to: Cabot Corporation Two Seaport Lane Boston, MA 02210 Attn: Law Department Telecopier: 617-342-6256 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. SECTION 12. GENERAL 12.1 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. 12.2 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 CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 15 OF 18 CONFIDENTIAL TREATMENT 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. 12.3 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. 12.4 Counterparts. This Agreement may be executed in counterparts. 12.5 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. 12.6 Entire Agreement. This Agreement contains the full and complete undertaking and agreement between the parties hereto with respect to the sale of fumed silica 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. 12.7 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. 12.8 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 12.8. In addition, Cabot may make arrangements for the production and sale of Fumed Silica 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 Silica hereunder to be made by a subsidiary, 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 Fumed Silica pursuant to any such arrangement shall be governed by the terms of this Agreement. 12.9 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. 12.10 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, acts of terrorism, blockades, insurrections, riots, epidemics, restraints or requirements of any government or government agency, civil disturbances, explosions, CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 16 OF 18 CONFIDENTIAL TREATMENT 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. 12.11 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 the performance of this Agreement or any other written agreement between them), 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, except for proprietary and confidential information provided by Cabot to CMC pursuant to Section 8.12 hereof which proprietary and confidential information shall be deemed to be Confidential Information for purposes of this Section whether or not such information is so marked. 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: (a) is already known to the receiving party from a source other than the disclosing party as evidenced by competent proof thereof; or (b) 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 (c) 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 (d) 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 (e) is independently developed by employees or consultants of the receiving party without use of or reference to the disclosing party's Confidential Information; or (f) is approved for release by written authorization of the disclosing party 12.12 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 venturers, 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. CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 17 OF 18 CONFIDENTIAL TREATMENT IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a sealed instrument and have delivered this Agreement as of the day and year first above written. CABOT CORPORATION By: _____________________________ Name: Eduardo E. Cordeiro Title: Vice President CABOT MICROLELECTRONICS CORPORATION By: _____________________________ Name: Daniel J. Pike Title: Vice President CABOT MICROELECTRONICS CORPORATION CONFIDENTIAL - CABOT CORPORATION CONFIDENTIAL _________, _________ PAGE 18 OF 18 EX-10.43 5 c84500exv10w43.txt GENERAL RELEASE, WAIVER AND COVENANT NOT TO SUE EXHIBIT 10.43 GENERAL RELEASE, WAIVER AND COVENANT NOT TO SUE This GENERAL RELEASE, WAIVER AND COVENANT NOT TO SUE ("Agreement"), is made and entered into on this 29th day of February, 2004, ("Execution Date") by Jeffrey Michael Jenkins (SSN ###-##-####), residing at 2770 Ginger Woods Drive, Aurora, Illinois, hereinafter referred to as "you," and Cabot Microelectronics Corporation, hereinafter referred to as "CMC", on behalf of themselves, their heirs, successors and assigns. WHEREAS, your employment with CMC is terminated as of FEBRUARY 29, 2004 ("Termination Date"); WHEREAS, you agree that you are entering into this Agreement voluntarily and have been advised to consult an attorney prior to signing it; WHEREAS, you agree that the cash and other consideration provided pursuant to this Agreement is adequate consideration for the mutual terms, covenants and conditions of it, therefore, the parties do hereby agree as follows: 1. PURPOSE OF AGREEMENT. The parties have entered into this Agreement to release and to effect a full and final settlement of any and all claims you may have against CMC, including the officers, directors, employees and benefit plans of CMC (collectively "CMC"). This settlement includes all claims against CMC based upon any cause of action you now have or may have in the future arising from any facts or circumstances existing on or prior to the effective date of this Agreement, including but not limited to claims for personal injury, emotional distress, costs and/or attorney's fees. 2. DENIAL OF LIABILITY. This Agreement is not to be construed as an admission of liability on the part of any party hereto or to any other party. The parties expressly deny liability for any claims asserted or which could have been asserted against them, and enter into this Agreement for the sole purpose of avoiding litigation with respect to any disputed claims which are or could be asserted. 3. CONSIDERATION. Upon the Execution of this Agreement and after the expiration of the seven (7) day revocation period referenced below, CMC will: (a) Pay to you, the sum of two-hundred-four-thousand United States dollars ($204,000 US) the total sum of which, less appropriate taxes and deductions, to be paid to you in twelve equal installments as follows: (i) March 31, 2004; (ii) April 30, 2004; (iii) May 31, 2004; (iv) June 30, 2004; (v) July 31, 2004; (vi) August 31, 2004; (vii) September 30, 2004; (viii) October 31, 2004; (ix) November 30, 2004; (x) December 31, 2004; (xi) January 31, 2005; and, (xii) February 28, 2005. In the event of your death prior to all twelve (12) Page 1 of 6 - Cabot Microelectronics Corporation Confidential payments being made, CMC will make any and all remaining payments to your surviving heirs. In the event of a change in control of CMC occurring prior to all twelve (12) payments being made, CMC will make any and all remaining payments to you in a lump sum at such time. (b) Make available to you outplacement services worth up to fifteen-thousand United States dollars ($15,000.00 US), to be provided by the outplacement firm of Drake, Beem and Morin, or another firm as mutually agreed upon by us, and used within eighteen (18) months of the Execution Date of this Agreement; (c) Make available to you relocation assistance, pursuant to the terms of CMC's standard relocation policy, up to a maximum of thirty-thousand United States dollars ($30,000.00 US), to be used within eighteen (18) months of the Execution Date of this Agreement; (d) Make available to you home resale assistance, pursuant to the terms of CMC's standard home resale assistance policy, for the sale of your home at 2770 Ginger Woods Drive, Aurora, Illinois; (e) Give to you at no charge your CMC-provided Personal Data Assistant and any directly related equipment; (f) Provide a letter of reference from CMC, written by CMC. Such consideration under this Agreement, as well as the payment already made to you by CMC on December 15, 2003 of a Short Term Bonus for Fiscal Year 2003 in the amount of ninety-thousand-dollars ($90,000), shall constitute full and final settlement and satisfaction of any and all claims, demands, or causes of action, whether known or unknown, whether for damages or otherwise. No other consideration shall be provided to you for any reason and you agree you will not receive or be eligible for any other consideration in any form. To the extent it is determined that federal or state taxes are due on any part of these proceeds, such taxes and any related penalty or interest charges shall be solely your responsibility. Any and all non-qualified stock options ("NQSO's") granted to you pursuant to the Amended and Restated 2000 Equity Incentive Plan and relevant Grant Agreements for such NQSO's previously vested are exercisable only pursuant to the respective Grant Agreements and Plan. Participation in, and/or eligibility for, all other CMC benefits, stock option or restricted stock awards, and/or deferred compensation plans, including but not limited to the Short Term Incentive program, are terminated as of your Termination Date. The Change in Control Severance Protection Agreement executed by you on November 10, 2000 is hereby terminated and you agree that Section 1.1(iii) of such agreement applies to your termination and that Page 2 of 6 - Cabot Microelectronics Corporation Confidential you are not eligible for any benefits or payments pursuant to such agreement. Any director's and officer's liability insurance carried by CMC will apply to you as a past officer in a manner similar to that provided for other past officers of CMC. 4. RELEASE BY YOU. In consideration of this Agreement and the consideration provided hereunder, you, for yourself and on behalf of your heirs, executor, administrator, successors and assigns, (hereinafter in this paragraph referred to as the "Releasors"), hereby release, acquit, and forever discharge CMC and its respective officers, employees, directors and benefits plans (hereafter in this Agreement collectively referred to as the "Releasees"), of and from any and all actions, causes of action, claims, demands, rights, damages, costs, expenses, and liabilities of any nature whatsoever (including indemnity), whether now or heretofore known or unknown, accrued or unaccrued, or alleged or not alleged as of the Execution Date, including but not limited to those which are based upon, exist on account of, or in any way arise out of: (a) Any and all acts, omissions or activities of the above-named Releasees occurring on or prior to the Execution Date of this Agreement, including those in any way connected, directly or indirectly, with your employment, and the claims defined in subparagraph (b), below; (b) Any and all claims alleged or to be alleged, including but not limited to claims under the Age Discrimination in Employment Act, 29 U.S.C. Section 621, et seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000e, et seq., the Illinois Human Rights Act, 735 ILCS 5/1-101, et seq., and any other claims arising under laws pertaining to breach of contract, wrongful discharge or any other federal, state or local laws relating in any way to employment, and claims of any of the parties against any Releasees based upon any cause of action they now have or may have in the future arising from any facts or circumstances existing on or prior to the effective date of this Agreement, including but not limited to all claims for costs or attorney's fees. This Release shall not apply to claims, demands, actions or causes of action arising out of the performance or non-performance by any person of any term, covenant or condition of this Agreement. You affirm and acknowledge that: 1) you have been advised by CMC to consult with an attorney about the terms of this Agreement before signing it; 2) you have been given a reasonable period of time to consider this Agreement and to decide whether to sign it; 3) you have read and understand this Agreement; and 4) you voluntarily enter into and execute it of your own free will with full knowledge of its terms and conditions. Page 3 of 6 - Cabot Microelectronics Corporation Confidential 5. ENFORCEMENT OF SETTLEMENT AGREEMENT. In any action brought to enforce or rescind this Agreement, the District Court for the Northern District of Illinois, Eastern Division, shall have jurisdiction and venue with respect to each party hereto. This Agreement may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action at law or proceeding at equity, or any private or public judicial or non-judicial proceeding instituted, prosecuted, maintained or continued in breach hereof. You agree and affirm that you have not and will never institute, maintain or participate in, or in any way aid in the institution or prosecution of, any claim, action or proceeding of any kind against CMC or the other Releasees, including but not limited to, claims related to your employment with CMC or the termination of that employment. If you violate this Agreement by suing CMC or the other Releasees, you agree that you will pay all costs and expenses of defending against the suit incurred by CMC or the other Releasees, including reasonable attorneys' fees, and all further costs and fees, including attorneys' fees, incurred in connection with collection. 6. RIGHT TO REVOKE. You have at least twenty-one (21) calendar days measured from the day this Agreement is presented to you (until JANUARY 26, 2004), to consider this Agreement, however, you may execute this Agreement before that time, and you certify, by such execution, that you knowingly and voluntarily waived the right to the full 21 days with no pressure by CMC to do so. If you do not execute this Agreement by the Termination Date, you will not be eligible for the consideration specified in Section 3 of this Agreement. Also, you may revoke this Agreement within seven (7) days of its Execution Date, by sending written notice to H. Carol Bernstein, Vice President, Secretary and General Counsel at CMC. If you revoke this Agreement, you will not receive the cash payment or other consideration specified herein. Your termination of employment as of the Termination Date is and will be unaffected by any revocation of, or failure to execute, this Agreement by you. 7. ATTORNEYS' FEES. In any action brought to enforce or rescind this Agreement or any document required hereby, the prevailing party shall be entitled to the recovery of a reasonable attorneys' fee and reasonably incurred costs of litigation. 8. CONSTRUCTION OF AGREEMENT AND RELATED DOCUMENTS. This Agreement and the documents required hereby shall be construed in accordance with the laws of the State of Illinois. 9. INTEGRATION. This Agreement signed by the parties hereto, constitutes the final written expression of the parties and is a complete and exclusive statement of those terms and conditions. Each of the parties acknowledges that no representations or promises not expressly contained in this Agreement and the Page 4 of 6 - Cabot Microelectronics Corporation Confidential documents required hereby have been made by any party or by the agents or representatives of any party. 10. NO DISPARAGEMENT. You agree not to make disparaging, malicious, or otherwise negative comments about CMC and/or its personnel, officers, directors, products, services, vendors and vendor personnel, customers and customer personnel, other related third parties, practices or policies. CMC agrees not to make disparaging, malicious or otherwise negative comments about you to any third party. 11. CONFIDENTIAL/PROPRIETARY INFORMATION. You agree to return to CMC all proprietary/confidential information and personal and intellectual property of CMC and to not disclose to any third party or use CMC's proprietary/confidential information. You affirm and agree that your obligations pursuant to the Cabot Microelectronics Corporation Employee Confidentiality, Intellectual Property and Non-Competition Agreement for Employees in Arizona, Colorado, Illinois, Massachusetts, and Texas you signed on September 7, 2000 ("Confidentiality Agreement"), including but not limited to those to protect all CMC proprietary/confidential information from disclosure and use, and the Confidentiality Agreement itself remain in full force and effect independent from your obligations under this Agreement. 12. NON COMPETITION/NON SOLICITATION. You specifically agree that as part of the consideration for this Agreement, for twelve (12) months after your Termination Date (or such shorter period as CMC may agree to), you will not, anywhere CMC does business as of your Termination Date, directly or indirectly, alone or as a partner, office, director, employee, consultant or greater than five percent stockholder: (1) engage in the development, manufacture, or sale of chemical mechanical polishing ("CMP") slurries or pads or other fine finish polishing products or services for use in polishing integrated circuits, rigid disks, magnetic heads or MEMS (the "Business"); (2) solicit or do any Business with any customer of CMC with whom you had contact during your employment at CMC to the extent such activity is competitive to CMC; or (3) solicit, interfere with or endeavor to entice away any employee of CMC (such provision does not prohibit your responding to inquiries from current CMC employees about potential employment opportunities, but it does prohibit you from initiating solicitation of a CMC employee and any involvement in the recruitment of a CMC employee following an initial inquiry from the CMC employee). You will not be restricted from being employed by either Rohm and Haas Company or E.I. DuPont Nemours as long as your employment responsibilities are completely unrelated to the Business. 13. CONFIDENTIALITY. You agree that, except for disclosures specifically required by law or specifically required to enforce any of the terms of this Agreement or the documents required thereby, the terms and conditions of this Page 5 of 6 - Cabot Microelectronics Corporation Confidential Agreement as well as the payment terms and amount of the settlement as set forth herein shall not be disclosed to nor discussed in any manner, including oral, written, electronic, digital or otherwise, with any person not a party to this Agreement other than your spouse or your attorneys or tax return preparers, each of whom must themselves respect the confidentiality hereof. In addition, neither you nor your spouse, or any other party within your reasonable control shall make any statement of any kind, i.e., oral, written, electronic, digital or otherwise, to any third party, the public or news media with respect to the substance or conclusion of your employment with CMC, this Agreement, and any matters related to the substance of your work for CMC, including anything related to the services provided by, employees of CMC or vendors of CMC and their personnel. 14. COUNTERPART ORIGINALS. This Agreement may be executed in multiple counterpart originals and shall have the same force and effect as if all signatures appeared on the same original. 15. FURTHER DOCUMENTATION. To the extent applicable, the parties shall execute such other and further documents as may be reasonably necessary to carry out the terms and conditions of this Agreement. 16. SEVERABILITY. It is the intent of the parties that each and every provision in this Agreement be enforced. To the extent any provision is held unenforceable, such unenforceability shall not render the remaining terms hereof unenforceable. IN WITNESS WHEREOF, the parties hereto have executed counterpart originals of this Agreement as of the date entered above. CABOT MICROELECTRONICS CORPORATION BY:__________________ BY: __________________________ _____________________ H. Carol Bernstein Vice President, Secretary and General Counsel THIS AGREEMENT INCLUDES A RELEASE OF ALL CLAIMS, WHETHER KNOWN OR UNKNOWN, INCLUDING ANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. YOU ARE ADVISED TO CONSULT AN ATTORNEY PRIOR TO SIGNING IT. Page 6 of 6 - Cabot Microelectronics Corporation Confidential EX-31.1 6 c84500exv31w1.txt 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, William P. Noglows, Chief Executive Officer of Cabot Microelectronics Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cabot Microelectronics Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986); (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ WILLIAM P. NOGLOWS --------------------------- William P. Noglows Chief Executive Officer EX-31.2 7 c84500exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, William S. Johnson, Chief Financial Officer of Cabot Microelectronics Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cabot Microelectronics Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986); (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ WILLIAM S. JOHNSON --------------------------- William S. Johnson Chief Financial Officer EX-32.1 8 c84500exv32w1.txt SECTION 906 CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Cabot Microelectronics Corporation (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 7, 2004 /s/ WILLIAM P. NOGLOWS --------------------------- William P. Noglows Chief Executive Officer Date: May 7, 2004 /s/ WILLIAM S. JOHNSON --------------------------- William S. Johnson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----